SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549


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

~~FOR THE QUARTERLY PERIOD ENDED September 30, 2017~~


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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.01 par value per share	LII	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ~~[X]~~☒ No ~~[ ]~~☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ~~[X]~~☒ No ~~[ ]~~☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated ~~filer”,~~filer,” “accelerated ~~filer” and~~filer,” “smaller reporting ~~company”~~company,” and “emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ~~[ ]~~ ☐ No ~~[X]~~☒

As of ~~October 19, 2017,~~April 13, 2020, the number of shares outstanding of the registrant’s common stock, par value ~~$.01~~$0.01 per share, was ~~41,773,840.~~

LENNOX INTERNATIONAL INC.

FORM 10-Q

For the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020

INDEX


				Page
			~~Page~~
Part I	Financial Information
		Item 1. Financial Statements
		Consolidated Balance Sheets - ~~September 30, 2017~~March 31, 2020 (Unaudited) and December 31, ~~2016~~2019		1
		Consolidated Statements of Operations (Unaudited) - Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019		2
		Consolidated Statements of Comprehensive Income (Unaudited) ~~- Three and Nine~~-Three Months Ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019		3
		Consolidated Statements of Stockholders' Deficit (Unaudited) - Three Months Ended March 31, 2020 and 2019		4
		Consolidated Statements of Cash Flows (Unaudited) - ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019		45
		Notes to Consolidated Financial Statements (Unaudited)		56
		Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		2921
		Item 3. Quantitative and Qualitative Disclosures About Market Risk		3928
		Item 4. Controls and Procedures		3928
Part II		Other Information
		Item 1. Legal Proceedings		3928
		Item 1A. Risk Factors		3928
		Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		4029
		Item 6. Exhibits		4130

Part I - Financial Information

Item 1. Financial Statements

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Balance Sheets

(Amounts in millions, except shares and par values) As of September 30, 2017 As of December 31, 2016
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 60.7
$ 50.2
Accounts and notes receivable, net of allowances of $6.9 and $6.7 in 2017 and 2016, respectively 598.1
469.8
Inventories, net 530.9
418.5
Other assets 80.9
67.4
Total current assets 1,270.6
1,005.9
Property, plant and equipment, net of accumulated depreciation of $767.8 and $717.2 in 2017 and 2016, respectively 374.6
361.4
Goodwill 200.6
195.1
Deferred income taxes 143.3
136.7
Other assets, net 66.6
61.2
Total assets $ 2,055.7
$ 1,760.3

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Short-term debt $ 326.0
$ 52.4
Current maturities of long-term debt 22.4
200.1
Accounts payable 394.5
361.2
Accrued expenses 278.4
265.9
Income taxes payable 2.4
9.0
Total current liabilities 1,023.7
888.6
Long-term debt 775.7
615.7
Post-retirement benefits, other than pensions 1.9
2.8
Pensions 90.2
87.5
Other liabilities 131.7
127.7
Total liabilities 2,023.2
1,722.3
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, 87,170,197 shares issued 0.9
0.9
Additional paid-in capital 1,048.0
1,046.2
Retained earnings 1,554.4
1,353.0
Accumulated other comprehensive loss (157.0 ) (195.1 )
Treasury stock, at cost, 45,401,841 shares and 44,195,250 shares as of September 30, 2017 and December 31, 2016, respectively (2,414.2 ) (2,167.4 )
Noncontrolling interests 0.4
0.4
Total stockholders’ equity 32.5
38.0
Total liabilities and stockholders' equity $ 2,055.7
$ 1,760.3
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Balance Sheets


(Amounts in millions, except shares and par values)	As of March 31, 2020		As of December 31, 2019
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	39.1	$	37.3
Short-term investments	3.7		2.9
Accounts and notes receivable, net of allowances of $7.0 and $6.1 in 2020 and 2019, respectively	492.7		477.8
Inventories, net	611.8		544.1

Other assets	77.8		58.8
Total current assets	1,225.1		1,120.9
Property, plant and equipment, net of accumulated depreciation of $836.5 and $824.3 in 2020 and 2019, respectively	442.1		445.4
Right-of-use assets from operating leases	183.2		181.6
Goodwill	186.5		186.5
Deferred income taxes	16.3		21.5
Other assets, net	75.2		79.0
Total assets	$	2,128.4	$	2,034.9

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities:

Current maturities of long-term debt	$	252.3	$	321.9
Current operating lease liabilities	52.2		52.7
Accounts payable	355.0		372.4
Accrued expenses	235.1		255.7


Total current liabilities	894.6		1,002.7
Long-term debt	1,189.9		849.3
Long-term operating lease liabilities	133.2		131.0

Pensions	89.8		87.4
Other liabilities	139.2		134.7
Total liabilities	2,446.7		2,205.1
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $0.01 par value, 25,000,000 shares authorized, no shares issued or outstanding	—		—
Common stock, $0.01 par value, 200,000,000 shares authorized, 87,170,197 shares issued	0.9		0.9
Additional paid-in capital	1,095.2		1,093.5
Retained earnings	2,130.9		2,148.7
Accumulated other comprehensive loss	(133.1)		(103.8)
Treasury stock, at cost, 48,918,495 shares and 48,575,901 shares for 2020 and 2019, respectively	(3,412.2)		(3,309.5)
Total stockholders' deficit	(318.3)		(170.2)
Total liabilities and stockholders' deficit	$	2,128.4	$	2,034.9

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

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)

(Amounts in millions, except per share data) For the Three Months Ended September 30, For the Nine Months Ended September 30,
2017 2016 2017 2016
Net sales $ 1,052.3
$ 1,010.0
$ 2,947.9
$ 2,744.4
Cost of goods sold 738.6
699.7
2,082.4
1,935.5
Gross profit 313.7
310.3
865.5
808.9
Operating Expenses:
Selling, general and administrative expenses 158.7
156.5
479.6
456.2
Losses and other expenses, net 3.0
0.7
8.5
5.5
Restructuring charges 1.9
0.6
2.1
1.2
Income from equity method investments (4.5 ) (4.4 ) (15.5 ) (15.3 )
Operating income 154.6
156.9
390.8
361.3
Interest expense, net 7.6
7.0
23.3
19.6
Other income, net —
—
(0.2 ) (0.2 )
Income from continuing operations before income taxes 147.0
149.9
367.7
341.9
Provision for income taxes 43.0
48.2
103.8
104.0
Income from continuing operations 104.0
101.7
263.9
237.9
Discontinued Operations:
Loss from discontinued operations before income taxes (0.8 ) —
(2.3 ) (0.9 )
Benefit from income taxes (0.3 ) —
(0.9 ) (0.3 )
Loss from discontinued operations (0.5 ) —
(1.4 ) (0.6 )
Net income $ 103.5
$ 101.7
$ 262.5
$ 237.3

Earnings per share – Basic:
Income from continuing operations $ 2.48
$ 2.35
$ 6.23
$ 5.46
Loss from discontinued operations (0.01 ) —
(0.03 ) (0.01 )
Net income $ 2.47
$ 2.35
$ 6.20
$ 5.45
Earnings per share – Diluted:
Income from continuing operations $ 2.45
$ 2.33
$ 6.15
$ 5.39
Loss from discontinued operations (0.01 ) —
(0.03 ) (0.01 )
Net income $ 2.44
$ 2.33
$ 6.12
$ 5.38

Weighted Average Number of Shares Outstanding - Basic 41.9
43.2
42.3
43.6
Weighted Average Number of Shares Outstanding - Diluted 42.4
43.7
42.9
44.2

Cash dividends declared per share $ 0.51
$ 0.43
$ 1.45
$ 1.22
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)


(Amounts in millions, except per share data)	For the Three Months Ended March 31,
	2020		2019
Net sales	$	723.8	$	790.3
Cost of goods sold	558.1		588.7
Gross profit	165.7		201.6
Operating Expenses:
Selling, general and administrative expenses	131.1		145.8
(Gains) losses and other expenses, net	(1.0)		1.1
Restructuring charges	0.5		0.5
Loss on sale of business	—		8.5

Insurance proceeds for lost profits	—		(39.5)
Loss (gain) from natural disaster, net of insurance recoveries	1.6		(6.9)
Income from equity method investments	(2.9)		(2.6)
Operating income	36.4		94.7

Interest expense, net	8.7		10.9
Other expense (income), net	1.2		0.8
Income from continuing operations before income taxes	26.5		83.0
Provision for income taxes	14.0		13.6
Income from continuing operations	12.5		69.4
Discontinued Operations:
Loss from discontinued operations before income taxes	—		(0.1)
Income tax benefit	(0.4)		—
Income (loss) from discontinued operations	0.4		(0.1)
Net income	$	12.9	$	69.3

Earnings per share – Basic:
Income from continuing operations	$	0.33	$	1.75
Income from discontinued operations	0.01		—
Net income	$	0.34	$	1.75
Earnings per share – Diluted:
Income from continuing operations	$	0.32	$	1.73
Income from discontinued operations	0.01		—
Net income	$	0.33	$	1.73

Weighted Average Number of Shares Outstanding - Basic	38.4		39.7
Weighted Average Number of Shares Outstanding - Diluted	38.7		40.1

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

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)

(Amounts in millions) For the Three Months Ended September 30, For the Nine Months Ended September 30,
2017 2016 2017 2016
Net income $ 103.5
$ 101.7
$ 262.5
$ 237.3
Other comprehensive income:

Foreign currency translation adjustments 10.2
(3.1 ) 39.4
11.3
Net change in pension and post-retirement liabilities (2.7 ) (0.4 ) (8.1 ) (4.5 )
Reclassification of pension and post-retirement benefit losses into earnings 1.8
1.6
5.5
4.8
Change in fair value of available-for-sale marketable equity securities 0.1
(1.2 ) 0.2
(1.8 )
Net change in fair value of cash flow hedges 3.4
2.0
10.5
1.4
Reclassification of cash flow hedge (gains) losses into earnings (3.5 ) 2.4
(9.4 ) 10.6
Other comprehensive income before income taxes 9.3
1.3
38.1
21.8
Income tax benefit (expense) 0.1
(1.7 ) —
(4.1 )
Other comprehensive income, net of tax 9.4
(0.4 ) 38.1
17.7
Comprehensive income $ 112.9
$ 101.3
$ 300.6
$ 255.0
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)


(Amounts in millions)	For the Three Months Ended March 31,
	2020		2019
Net income	$	12.9	$	69.3
Other comprehensive income:
Foreign currency translation adjustments	(20.3)		0.5
Reclassification of foreign currency translation adjustments into earnings	—		2.1
Net change in pension and post-retirement liabilities	(0.8)		(2.3)
Reclassification of pension and post-retirement benefit losses into earnings	1.5		2.0


Net change in fair value of cash flow hedges	(14.6)		6.2
Reclassification of cash flow hedge losses into earnings	1.2		2.4
Other comprehensive (loss) income before income taxes	(33.0)		10.9
Income tax expense (benefit)	3.7		(2.3)
Other comprehensive (loss) income, net of tax	(29.3)		8.6
Comprehensive (loss) income	$	(16.4)	$	77.9

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

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)

(Amounts in millions) For the Nine Months Ended September 30,
2017 2016
Cash flows from operating activities:
Net income $ 262.5
$ 237.3
Adjustments to reconcile net income to net cash provided by operating activities:
Income from equity method investments (15.5 ) (15.3 )
Dividends from affiliates 7.8
3.9
Restructuring charges (gains), net of cash paid 1.0
(0.8 )
Provision for bad debts 3.2
3.4
Unrealized gains on derivative contracts (0.7 ) (2.2 )
Stock-based compensation expense 18.8
24.8
Depreciation and amortization 48.1
43.4
Deferred income taxes (3.9 ) (2.6 )
Pension expense 4.1
4.7
Pension contributions (1.4 ) (52.5 )
Other items, net 1.0
0.4
Changes in assets and liabilities, net of effects of divestitures:
Accounts and notes receivable (118.3 ) (146.2 )
Inventories (102.6 ) (49.9 )
Other current assets (7.3 ) (6.6 )
Accounts payable 31.0
56.4
Accrued expenses 7.6
40.7
Income taxes payable and receivable (9.9 ) (15.0 )
Other 3.5
3.0
Net cash provided by operating activities 129.0
126.9
Cash flows from investing activities:
Proceeds from the disposal of property, plant and equipment 0.2
—
Purchases of property, plant and equipment (60.5 ) (59.4 )
Net cash used in investing activities (60.3 ) (59.4 )
Cash flows from financing activities:
Short-term borrowings, net (1.4 ) (2.1 )
Asset securitization borrowings 275.0
145.0
Asset securitization payments —
(20.0 )
Long-term debt payments (200.8 ) (30.9 )
Borrowings from credit facility 1,883.0
1,715.0
Payments on credit facility (1,701.0 ) (1,493.0 )
Payments of deferred financing costs —
(0.9 )
Proceeds from employee stock purchases 2.3
1.9
Repurchases of common stock (250.0 ) (300.0 )
Repurchases of common stock to satisfy employee withholding tax obligations (16.0 ) (26.3 )
Cash dividends paid (58.4 ) (50.5 )
Net cash used in financing activities (67.3 ) (61.8 )
Increase in cash and cash equivalents 1.4
5.7
Effect of exchange rates on cash and cash equivalents 9.1
3.2
Cash and cash equivalents, beginning of period 50.2
38.9
Cash and cash equivalents, end of period $ 60.7
$ 47.8

Supplemental disclosures of cash flow information:
Interest paid $ 22.5
$ 17.0
Income taxes paid (net of refunds) $ 115.5
$ 120.9
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

For the Three months ended March 31, 2020 and 2019 (Unaudited)

(In millions, except per share data)


	Common Stock Issued		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock at Cost						Total Stockholders' (Deficit) Equity
(For the three months ended March 31, 2020)																Shares	Amount
Balance as of December 31, 2019	$	0.9	$	1,093.5	$	2,148.7	$	(103.8)	$	48.6	$	(3,309.5)	$	(170.2)
Cumulative effect adjustment upon adoption of new accounting standard (ASU 2016-13)	—		—		(1.3)		—		—		—		(1.3)
Net income	—		—		12.9		—		—		—		12.9
Dividends, $0.77 per share	—		—		(29.4)		—		—		—		(29.4)
Foreign currency translation adjustments	—		—		—		(20.3)		—		—		(20.3)
Pension and post-retirement liability changes, net of tax expense of $0.2	—		—		—		0.6		—		—		0.6

Stock-based compensation expense	—		3.7		—		—		—		—		3.7
Change in cash flow hedges, net of tax benefit of $3.9	—		—		—		(9.6)		—		—		(9.6)
Treasury shares reissued for common stock	—		(2.0)		—		—		(0.1)		2.8		0.8
Treasury stock purchases	—		—		—		—		0.4		(105.5)		(105.5)
Balance as of March 31, 2020	$	0.9	$	1,095.2	$	2,130.9	$	(133.1)	48.9		$	(3,412.2)	$	(318.3)


	Common Stock Issued		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock at Cost						Total Stockholders' (Deficit) Equity
(For the three months ended March 31, 2019)																Shares	Amount
Balance as of December 31, 2018	$	0.9	$	1,078.8	$	1,855.0	$	(188.8)	$	47.3	$	(2,895.5)	$	(149.6)
Cumulative effect adjustment upon adoption of new accounting standard (ASC 842)	—		—		(0.3)		—		—		—		(0.3)
Net income	—		—		69.3		—		—		—		69.3
Dividends, $0.64 per share	—		—		(25.3)		—		—		—		(25.3)
Foreign currency translation adjustments	—		—		—		2.6		—		—		2.6
Pension and post-retirement liability changes	—		—		—		(0.2)		—		—		(0.2)
Stock-based compensation expense	—		5.2		—		—		—		—		5.2
Change in cash flow hedges, net of tax expense of $2.3	—		—		—		6.2		—		—		6.2
Treasury shares reissued for common stock	—		(4.6)		—		—		(0.2)		5.4		0.8

Treasury stock purchases	—		—		—		—		0.5		(113.5)		(113.5)

Balance as of March 31, 2019	$	0.9	$	1,079.4	$	1,898.7	$	(180.2)	47.6		$	(3,003.6)	$	(204.8)

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

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)


(Amounts in millions)	For the Three Months Ended March 31,
	2020		2019
Cash flows from operating activities:
Net income	$	12.9	$	69.3

Adjustments to reconcile net income to net cash used in operating activities:
Loss on sale of business	—		8.5



Insurance recoveries received for property damage incurred from natural disaster	—		(6.9)
Income from equity method investments	(2.9)		(2.6)


Restructuring charges, net of cash paid	0.1		0.3
Provision for bad debts	1.2		1.6
Unrealized losses (gains) on derivative contracts	1.5		(0.6)
Stock-based compensation expense	3.7		5.2
Depreciation and amortization	19.0		18.2
Deferred income taxes	8.8		15.5
Pension expense	2.7		2.0
Pension contributions	(0.6)		(2.5)
Other items, net	0.2		0.2
Changes in assets and liabilities, net of effects of divestitures:
Accounts and notes receivable	(18.7)		(62.7)
Inventories	(71.0)		(120.9)
Other current assets	(0.7)		4.5
Accounts payable	(8.7)		(1.7)
Accrued expenses	(33.0)		(35.0)
Income taxes payable / receivable	(17.3)		(34.1)
Leases, net	0.1		0.5
Other, net	3.9		0.2


Net cash used in operating activities	(98.8)		(141.0)
Cash flows from investing activities:

Proceeds from the disposal of property, plant and equipment	0.1		0.3
Purchases of property, plant and equipment	(24.7)		(37.2)
Net proceeds from sale of business	—		43.6
Purchases of short-term investments	(1.1)		—
Insurance recoveries received for property damage incurred from natural disaster	—		6.9
Net cash (used in) provided by investing activities	(25.7)		13.6
Cash flows from financing activities:



Asset securitization payments	(70.0)		(43.5)
Long-term debt borrowings	—		3.3
Long-term debt payments	(2.6)		(31.7)
Borrowings from credit facility	682.5		844.5
Payments on credit facility	(342.5)		(525.5)

Proceeds from employee stock purchases	0.8		0.8
Repurchases of common stock	(100.0)		(100.0)
Repurchases of common stock to satisfy employee withholding tax obligations	(5.5)		(13.5)
Cash dividends paid	(29.7)		(25.5)
Net cash provided by financing activities	133.0		108.9
Increase (decrease) in cash and cash equivalents	8.5		(18.5)
Effect of exchange rates on cash and cash equivalents	(6.7)		3.9
Cash and cash equivalents, beginning of period	37.3		46.3
Cash and cash equivalents, end of period	$	39.1	$	31.7

Supplemental disclosures of cash flow information:
Interest paid	$	6.8	$	8.4
Income taxes paid (net of refunds)	$	21.3	$	32.0
Insurance recoveries received	$	—	$	76.0

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

LENNOX INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. General:

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

Basis of Presentation

The accompanying unaudited Consolidated Balance Sheet as of ~~September 30, 2017,~~March 31, 2020, the accompanying unaudited Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~,2019, the accompanying unaudited Consolidated Statements of Comprehensive Income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~,2019, the accompanying unaudited Consolidated Statements of Stockholders' Deficit for the three months ended March 31, 2020 and 2019, and the accompanying unaudited Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,2017~~March 31, 2020 and ~~2016~~2019 should be read in conjunction with our audited consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~.2019. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The accompanying consolidated financial statements contain all material adjustments, consisting principally of normal recurring adjustments, necessary for a fair presentation of our financial position, results of operations and cash flows. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to applicable rules and regulations, although we believe 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.

Use of Estimates

The preparation of financial statements requires us to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the valuation of accounts receivable, inventories, goodwill, intangible assets and other long-lived assets, contingencies, guarantee obligations, indemnifications, and assumptions used in the calculation of income taxes, pension and post-retirement medical benefits, self-insurance and warranty reserves, and stock-based compensation, among others. These estimates and assumptions are based on our best estimates and judgment.

We evaluate these estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. We believe these estimates and assumptions to be reasonable under the circumstances and will adjust such estimates and assumptions when facts and circumstances dictate. Volatile equity, foreign currency and commodity markets combine to increase the uncertainty inherent in such estimates and assumptions. Future events and their effects cannot be determined with precision and actual results could differ significantly from these estimates. Changes in these estimates will be reflected in the financial statements in future periods.

Impact of COVID-19 Pandemic

A novel strain of coronavirus (“COVID-19”) surfaced in late 2019 and has spread around the world, including to the United States. In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has disrupted our business operations and caused a significant unfavorable impact on our results of operations.

In response to the COVID-19 pandemic, various national, state, and local governments where we, our suppliers, and our customers operate have issued decrees prohibiting certain businesses from continuing to operate and certain classes of workers from reporting to work. Those decrees have resulted in supply chain disruption and higher employee absenteeism in our factories. Additionally, certain of our manufacturing facilities have experienced a short-term suspension of operations for COVID-19 employee health concerns.

We anticipate potential supply chain disruptions, employee absenteeism and short-term suspensions of manufacturing facilities related to the COVID-19 pandemic that could unfavorably impact our business. Although these disruptions are expected to be temporary, there is significant uncertainty around the duration and overall impact to our business operations. We believe it is possible that the impact of the COVID-19 pandemic could have a material adverse effect on the results of our operations, financial position and cash flows as of and for the year ended December 31, 2020.

Recently Adopted Accounting Guidance

~~On March 30,~~In June 2016, the FASB issued ASU No. 2016-13, Financial ~~Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, Compensation—Stock Compensation~~Instruments – Credit Losses (Topic ~~718)~~326): ~~Improvements~~Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to ~~Employee Share-Based Payment Accounting, which changes~~estimate credit losses. ASU 2016-13 is effective for SEC filers for interim and annual periods beginning after December 15, 2019. We adopted ASU 2016-13 using the ~~accounting~~modified retrospective method for ~~certain aspects of share-based payments to employees. The new guidance requires entities to record~~ all ~~tax effects related to share-based payments~~financial assets measured at ~~settlement or expiration through the income statement and the excess tax benefit~~amortized cost. Results for periods after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported under previously applicable accounting standards. We recorded ~~when it arises, subject~~a $1.3 million net decrease to normal valuation allowance considerations. This is in comparison to the prior requirement that these excess tax benefits be recognized in additional paid-in capital. The new guidance also requires excess tax benefits to be classified along with other income tax cash flowsretained earnings as ~~an operating activity in the statement~~ of ~~cash flows rather than, as previously required, a financing activity.~~

~~We have adopted ASU 2016-09 effective~~ January 1, ~~2017 on a prospective basis where permitted by the new standard. As a result of this adoption:~~

~~We recognized discrete tax benefits of $1.5 million and $9.6 million in the income taxes line item of our consolidated statements of operations~~2020 for the ~~three~~cumulative effect of adopting ASU 2016-13.

In January 2017, the FASB issued ASU No. 2017-04, Intangible - Goodwill and ~~nine months ended September 30, 2017 respectively, related to excess tax benefits upon vesting or settlement in that period.~~

~~We elected to adopt~~Other (Topic 350): Simplifying the ~~cash flow presentation~~Test for Goodwill Impairment. ASU 2017-04 eliminates step two of the ~~excess tax benefits retrospectively where these benefits are classified along~~goodwill impairment test and specifies that goodwill impairment should be measured by comparing the fair value of a reporting unit with ~~other income tax cash flows as operating cash flows.~~

~~We have elected to continue to estimate the number of stock-based awards expected to vest, rather than electing to account for forfeitures as they occur to determine~~its carrying amount. Additionally, the amount of ~~compensation cost~~goodwill allocated to ~~be recognized in~~ each ~~period.~~

We excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of our diluted earnings per share for the three and nine months ended September 30, 2017.

~~Reclassifications~~

~~Certain amounts have been reclassified from the prior year presentation to conform to the current year presentation.~~

~~2. Inventories:~~

~~The components of inventories are as follows (in millions):~~

As of September 30, 2017 As of December 31, 2016
Finished goods $ 369.1
$ 287.2
Work in process 8.6
5.1
Raw materials and parts 209.4
183.4
Subtotal 587.1
475.7
Excess of current cost over last-in, first-out cost (56.2 ) (57.2 )
Total inventories, net $ 530.9
$ 418.5

~~3. Goodwill:~~

~~The changes in the~~reporting unit with a zero or negative carrying amount of net assets should be disclosed. ASU 2017-04 is effective for annual or interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019. The adoption of ASU 2017-04 did not have a material impact on our consolidated results of operations, cash flow, and statement of financial position.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Internal-Use Software (Topic 350-40): Customer’s Accounting for ~~the first nine months~~Implementation Costs incurred in a Cloud Computing Arrangement That is a Service Contract. ASU 2018-15 provides guidance to determine how implementation costs associated with cloud computing arrangements that are incurred to develop or obtain internal-use software should be capitalized or expensed as incurred. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019. The adoption of ~~2017, in total~~ASU 2018-15 did not have a material impact on our consolidated results of operations, cash flow, and ~~by segment, are summarized in the table below (in millions):~~statement of financial position.

2. Reportable Business Segments:

Balance at December 31, 2016 Changes in foreign currency translation rates Balance at September 30, 2017
Residential Heating & Cooling $ 26.1
$ —
$ 26.1
Commercial Heating & Cooling 60.1
1.8
61.9
Refrigeration 108.9
3.7
112.6
Total Goodwill $ 195.1

$ 5.5
$ 200.6

We ~~perform our annual goodwill impairment test~~operate in the fourth quarter of each year. We continue to monitor our reporting units for indicators of impairment throughout the year to determine if a change in facts or circumstances warrants a re-evaluation of our goodwill. In the current year, we have noted no indicators of impairment of our reporting units.

~~4. Derivatives:~~

~~Objectives and Strategies for Using Derivative Instruments~~

~~Commodity Price Risk -~~ We utilize a cash flow hedging program to mitigate our exposure to volatility in the prices of metal commodities used in our production processes. Our hedging program includes the use of futures contracts to lock in prices, and as a result, we are subject to derivative losses should the metal commodity prices decrease and gains should the prices increase. We utilize a dollar cost averaging strategy so that a higher percentage of commodity price exposures are hedged near-term and lower percentages hedged at future dates. This strategy allows for protection against near-term price volatility while allowing us to adjust to market price movements over time.

~~Interest Rate Risk -~~ A portion of our debt bears interest at variable rates, and as a result, we are subject to variability in the cash paid for interest. To mitigate a portion of that risk, we may choose to engage in an interest rate swap hedging strategy to eliminate the variability of interest payment cash flows. We are not currently hedged against interest rate risk.

~~Foreign Currency Risk -~~ Foreign currency exchange rate movements create a degree of risk by affecting the U.S. dollar value of assets and liabilities arising in foreign currencies. We seek to mitigate the impact of currency exchange rate movements on certain short-term transactions by periodically entering into foreign currency forward contracts.

~~Cash Flow Hedges~~

We have commodity futures contracts and foreign exchange forward contracts designated as cash flow hedges that are scheduled to mature through February 2019 and December 2018, respectively. Unrealized gains or losses from our cash flow hedges are included in Accumulated other comprehensive loss (“AOCL”) and are expected to be reclassified into earnings within the next 18 months based on the prices3 reportable business segments of the ~~commodities~~heating, ventilation, air conditioning and ~~foreign currencies at~~refrigeration (“HVACR”) industry. Our segments are organized primarily by the ~~settlement dates. We recorded the following amounts in AOCL related to our cash flow hedges (in millions):~~

As of September 30, 2017 As of December 31, 2016
Unrealized (gains) losses on unsettled contracts $ (9.9 ) $ (8.9 )
Income tax expense 3.6
3.3
Gains included in AOCL, net of tax ⁽¹⁾
$ (6.3 ) $ (5.6 )

⁽¹⁾ ~~Assuming commodity and foreign currency prices remain constant, we expect to reclassify $6.1 million of derivative gains into earnings within the next 12 months.~~

~~We had the following outstanding commodity futures contracts designated as cash flow hedges (in millions of pounds):~~

As of September 30, 2017 As of December 31, 2016
Copper 18.9
30.4

~~We had the following outstanding foreign exchange forward contracts designated as cash flow hedges (in millions):~~

As of September 30, 2017 As of December 31, 2016
Notional Amounts (in local currency):
Mexican Peso 69.8
310.1
Canadian Dollar 83.1
24.9

~~Derivatives not Designated as Cash Flow Hedges~~

For commodity derivatives not designated as cash flow hedges, we follow the same hedging strategy as derivatives designated as cash flow hedges, except that we elect not to designate them as cash flow hedges at the inceptionnature of the ~~arrangement. We had the following outstanding commodity futures contracts not designated as cash flow hedges (in millions of pounds):~~

As of September 30, 2017 As of December 31, 2016
Copper 1.8
2.4
Aluminum 1.9
2.6

~~We also had the following outstanding foreign currency forward contracts not designated as cash flow hedges (in millions):~~

As of September 30, 2017 As of December 31, 2016
Notional Amounts (in local currency):
Chinese Yuan
52.3
10.5
Mexican Peso 35.7
64.5
Euro 60.7
46.9
Canadian Dollar 31.0
—
British Pound 4.9
1.3
Singapore Dollar
6.5
—
Australian Dollar 40.0
—
New Zealand Dollar 6.5
—
Indian Rupee 169.4
584.6

~~Information about the Locations~~products and ~~Amounts of Derivative Instruments~~

services we provide. The following ~~tables provide the locations and amounts of derivative fair values in the Consolidated Balance Sheets and derivative gains and losses in the Consolidated Statements of Operations (in millions):~~table describes each segment:

Segment

Product or Services

Markets Served

Geographic Areas

Residential Heating & Cooling

Furnaces, air conditioners, heat pumps, packaged heating and cooling systems, indoor air quality equipment, comfort control products, replacement parts and supplies

Residential Replacement;
Residential New Construction

United States
Canada

Commercial Heating & Cooling

Unitary heating and air conditioning equipment, applied systems, controls, installation and service of commercial heating and cooling equipment, and variable refrigerant flow commercial products

Light Commercial

United States
Canada

Refrigeration

Condensing units, unit coolers, fluid coolers, air cooled condensers, air handlers, process chillers, controls, and compressorized racks

Light Commercial;
Food Preservation;
Non-Food/Industrial

United States
Canada
Europe

Fair Values of Derivative Instruments ⁽¹⁾
Derivatives Designated as Hedging Instruments Derivatives Not Designated as Hedging Instruments
As of September 30, 2017 As of December 31, 2016 As of September 30, 2017 As of December 31, 2016
Current Assets:
Other Assets
Commodity futures contracts $ 9.7
$ 8.7
$ 1.0
$ 0.7
Foreign currency forward contracts 0.4
0.5
0.2
0.2
Non-Current Assets:
Other Assets, net
Commodity futures contracts 0.3
1.9
—
0.2
Total Assets $ 10.4
$ 11.1
$ 1.2
$ 1.1
Current Liabilities:
Accrued Expenses
Foreign currency forward contracts $ 0.4
$ 0.8
$ 1.5
$ 3.2
Total Liabilities $ 0.4
$ 0.8
$ 1.5
$ 3.2

⁽¹⁾ ~~All derivative instruments are classified~~We use segment profit or loss as ~~Level 2 within~~ the ~~fair value hierarchy. See Note 15 for more information.~~

Derivatives Designated as Cash Flow Hedges For the Three Months Ended September 30, For the Nine Months Ended September 30,
2017 2016 2017 2016
Amount of (Gain)/Loss reclassified from AOCL into Income (effective portion) ⁽¹⁾
$ (3.5 ) $ 2.4
$ (9.4 ) $ 10.6
Amount of (Gain)/Loss recognized in Net income (ineffective portion) ⁽²⁾
$ (0.1 ) $ (0.5 ) $ 1.1
$ (0.4 )

Derivatives Not Designated as Hedging Instruments For the Three Months Ended September 30, For the Nine Months Ended September 30,
2017 2016 2017 2016
Amount of (Gain)/Loss Recognized in Net Income:
Commodity futures contracts ⁽²⁾
$ (0.2 ) $ (0.3 ) $ (1.3 ) $ (0.2 )
Foreign currency forward contracts ⁽²⁾
(0.4 ) 0.4
(4.3 ) 0.3
$ (0.6 ) $ 0.1
$ (5.6 ) $ 0.1

⁽¹⁾ ~~The (gain)/~~primary measure of profitability to evaluate operating performance and to allocate capital resources. We define segment profit or loss ~~was recorded in Cost of goods sold~~as a segment’s income or loss from continuing operations before income taxes included in the accompanying Consolidated Statements of ~~Operations.~~Operations, excluding certain items. The reconciliation in the table below details the items excluded.

⁽²⁾ ~~The (gain)/loss was recorded in Losses~~

provided to employees throughout LII. We record these share-based awards as corporate costs because they are determined at the discretion of the Board of Directors and based on the historical practice of doing so for internal reporting purposes.

Any intercompany sales and associated profit (and any other ~~expenses, net~~intercompany items) are eliminated from segment results. There were no significant intercompany eliminations for the periods presented.

Segment Data

Net sales and segment profit (loss) for each segment, along with a reconciliation of segment profit (loss) to Operating income, are shown below (in millions):


	For the Three Months Ended March 31,
	2020		2019
Net sales
Residential Heating & Cooling	$	442.1	$	465.6
Commercial Heating & Cooling	178.4		173.3
Refrigeration	103.3		151.4
	$	723.8	$	790.3

Segment profit (loss) ⁽¹⁾
Residential Heating & Cooling	$	32.5	$	86.7
Commercial Heating & Cooling	18.7		15.1
Refrigeration	0.7		8.4
Corporate and other	(14.3)		(12.1)
Total segment profit	37.6		98.1
Reconciliation to Operating income:


Loss on sale of business	—		8.5

Loss (gain) from natural disaster, net of insurance recoveries	1.6		(6.9)

Items in (Gains) losses and other expenses, net that are excluded from segment profit (loss) ⁽¹⁾	(0.9)		1.3
Restructuring charges	0.5		0.5
Operating income	$	36.4	$	94.7

⁽¹⁾We define segment profit (loss) as a segment's operating income included in the accompanying Consolidated Statements of ~~Operations.~~Operations, excluding:

•The following items in (Gains) losses and other expenses, net:

◦Net change in unrealized losses (gains) on unsettled futures contracts,

5.◦Special legal contingency charges,

◦Asbestos-related litigation,

◦Environmental liabilities,

◦Other items, net,

•Loss on sale of business,

•Loss (gain) from natural disaster, net of insurance recoveries; and,

•Restructuring charges.

3. Earnings Per Share:

Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share are computed by dividing net income by the sum of the weighted-average number of shares and the number of equivalent shares assumed outstanding, if dilutive, under our stock-based compensation plans.

The computations of basic and diluted earnings per share for Income ~~Taxes:~~from continuing operations were as follows (in millions, except per share data):


	For the Three Months Ended March 31,
	2020		2019
Net income	$	12.9	$	69.3
Exclude: (Income) loss from discontinued operations	(0.4)		0.1
Income from continuing operations	$	12.5	$	69.4

Weighted-average shares outstanding – basic	38.4		39.7
Add: Potential effect of dilutive securities attributable to stock-based payments	0.3		0.4
Weighted-average shares outstanding – diluted	38.7		40.1

Earnings per share – Basic:
Income from continuing operations	$	0.33	$	1.75
Income from discontinued operations	0.01		—
Net income	$	0.34	$	1.75

Earnings per share – Diluted:
Income from continuing operations	$	0.32	$	1.73
Income from discontinued operations	0.01		—
Net income	$	0.33	$	1.73

~~As of September 30, 2017, we had no unrecognized tax benefits.~~

~~We are currently under examination for our U.S. federal income taxes under the Internal Revenue Service's Compliance Assurance Program for 2017, 2016~~The following stock appreciation rights and ~~2015 and are subject to examination by numerous other taxing authorities~~restricted stock units were outstanding but not included in the ~~U.S. and in jurisdictions~~diluted earnings per share calculation because the assumed exercise of such ~~as Australia, Belgium, France, Canada, and Germany. We are generally no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by taxing authorities~~rights would have been anti-dilutive (in millions, except for ~~years prior to 2011.~~per share data):


	For the Three Months Ended March 31,
	2020	2019
Weighted-average number of shares	0.3	0.1
Price per share	$214.63 - $270.83	$	214.63

Since January 1, 2017, numerous states and the District of Columbia have enacted legislation effective for tax years beginning on or after January 1, 2017, including changes to tax rates. The impact of these changes is immaterial.

On March 30, 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which changes the accounting for certain aspects of share-based payments to employees. The new guidance requires entities to record all tax effects related to share-based payments at settlement or expiration through the income statement and the excess tax benefit to be recorded when it arises, subject to normal valuation allowance considerations. The new guidance also requires excess tax benefits to be classified along with other income tax cash flows as an operating activity in the statement of cash flows rather than, as previously required, a financing activity. We recognized discrete tax benefits of $1.5 million and $9.6 million in the income taxes line item of our Consolidated Statements of Operations for the three and nine months ended September 30, 2017, respectively, related to excess tax benefits upon vesting or settlement in those periods.

6.4. Commitments and Contingencies:

Leases

We determine if an arrangement is a lease at inception. Operating leases are included in our Consolidated Balance Sheets as Right-of-use assets from operating leases, Current operating lease liabilities and Long-term operating lease liabilities. Finance leases are included in Property, plant and equipment, Current maturities of long-term debt and Long-term debt in our Consolidated Balance Sheets. We do not recognize a right-of-use asset and lease liability for leases with a term of 12 months or less. We do not separate non-lease components from lease components to which they relate and have accounted for the combined lease and non-lease components as a single lease component

Many of our lease agreements contain renewal options; however, we do not recognize right-of-use assets or lease liabilities for renewal periods unless it is determined that we are reasonably certain of renewing the lease at inception or when a triggering

event occurs. Some of our lease agreements contain rent escalation clauses (including index-based escalations), rent holidays, capital improvement funding or other lease concessions. We recognize our minimum rental expense on a straight-line basis based on the fixed components of a lease arrangement. We amortize this expense over the term of the lease beginning with the date of initial possession, which is the date we enter the leased space and begin to make improvements in preparation for its intended use. Variable lease components represent amounts that are not fixed in nature and are not tied to an index or rate, and are recognized as incurred.

Under certain of our third-party service agreements, we control a specific space or underlying asset used in providing the service by the third-party service provider. These arrangements meet the definition under ASC 842 and therefore are accounted for under ASC 842.

In determining our right-of-use assets and lease liabilities, we apply a discount rate to the minimum lease payments within each lease agreement. ASC 842 requires us to use the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. When we cannot readily determine the discount rate implicit in the lease agreement, we utilize our incremental borrowing rate. To estimate our specific incremental borrowing rates over various tenors (ranging from 1-year through 30-years), a comparable market yield curve consistent with our credit quality was calibrated to our publicly outstanding debt instruments.

We lease certain real and personal property under non-cancelable operating leases. Approximately 75% of our right-of-use assets and lease liabilities relate to our leases of real estate with the remaining amounts relating to our leases of IT equipment, fleet vehicles and manufacturing and distribution equipment.

Product Warranties and Product Related Contingencies

We ~~offer~~provide warranties to customers for some of our products and record liabilities for the estimated future warranty-related costs based on failure rates, cost experience and other factors. We periodically review the assumptions used to determine the product warranty liabilities and will adjust the liabilities in future periods for changes in assumptions, as necessary.

Liabilities for estimated product warranty costs related to continuing operations are included in the following captions on the accompanying Consolidated Balance Sheets (in millions):


	As of March 31, 2020		As of December 31, 2019
Accrued expenses	$	37.8	$	38.2
Other liabilities	76.3		74.6
Total warranty liability	$	114.1	$	112.8

As of September 30, 2017 As of December 31, 2016
Accrued expenses $ 34.9
$ 30.0
Other liabilities 72.7
71.1
Total warranty liability $ 107.6
$ 101.1

The changes in product warranty liabilities related to continuing operations for the ~~nine~~three months ended ~~September 30,2017~~March 31, 2020 were as follows (in millions):



Total warranty liability as of December 31, 2019	$	112.8
Warranty claims paid	(5.9)
Changes resulting from issuance of new warranties	8.4
Changes in estimates associated with pre-existing liabilities	(0.7)
Changes in foreign currency translation rates and other	(0.5)

Total warranty liability as of March 31, 2020	$	114.1

Total warranty liability as of December 31, 2016 $ 101.1
Warranty claims paid (21.6 )
Changes resulting from issuance of new warranties 32.2
Changes in estimates associated with pre-existing liabilities (4.7 )
Changes in foreign currency translation rates and other 0.6
Total warranty liability as of September 30, 2017 $ 107.6

We have incurred, and will likely continue to incur, product costs not covered by insurance or our suppliers’ warranties, which are not included in the tables immediately above. Also, to satisfy our customers and protect our brands, we have repaired or replaced installed products experiencing quality-related issues, and will likely continue such repairs and replacements. Liabilities for such quality related issues are not material.

During the second quarter of 2017, we identified a product quality issue in a defective vendor-supplied component affecting a product line in the Residential Heating & Cooling segment. This defect has been isolated, the vendor is supplying corrected components, and we are manufacturing product with the corrected components. We have also implemented a program for our dealers to install corrected components in the field. We recorded an expense of $0.5 million and $5.7 million for the three and nine months ended September 30, 2017, respectively, relating to estimated repair costs. The expense related to this product quality issue has been classified in Cost of goods sold in the Consolidated Statements of Operations and the related liability is included in Accrued expenses on the Consolidated Balance Sheet.

Litigation

We are involved in a number of claims and lawsuits incident to the operation of our businesses. Insurance coverages are maintained and estimated costs are recorded for such claims and lawsuits, including costs to settle claims and lawsuits, based on experience involving similar matters and specific facts known.

Some of these claims and lawsuits allege personal injury or health problems resulting from exposure to asbestos that was integrated into certain of our products. We have never manufactured asbestos and have not incorporated asbestos-containing components into our products for several decades. A substantial majority of these asbestos-related claims have been covered by insurance or other forms of indemnity or have been dismissed without payment. The remainder of our closed cases have been resolved for amounts that are not material, individually or in the aggregate. Our defense costs for asbestos-related claims are generally covered by ~~insurance; however,~~insurance. However, our insurance coverage for settlements and judgments for asbestos-related claims varies depending on several factors and are subject to policy ~~limits, so we~~limits. We may have greater financial exposure for future settlements and judgments. ~~For~~The following table summarizes the ~~nine months ended September 30, 2017 and 2016, expense for asbestos-related litigation was $3.9 million and $2.3 million, respectively,~~expenses, net of probable insurance recoveries, for known and future asbestos-related litigation ~~and is~~ recorded in ~~Losses~~(Gains) losses and other expenses, net in the Consolidated Statements of Operations. ~~For the three months ended September 30, 2017 and 2016, expense for asbestos-related litigation was $1.5 million and $0.4 million, respectively, net of probable insurance recoveries.~~


	For the Three Months Ended March 31,
	2020		2019
(Gain) expense for asbestos-related litigation, net	$	(1.7)	$	1.4

In October 2016, we self-reported to the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) an alleged payment in the amount of 30,000 rubles (approximately US $475) to a Russian customs broker or official. Under the oversight of our Audit Committee, we initiated an investigation into this matter with the assistance of external legal counsel and external forensic accountants.The scope of the investigation was later expanded to include our operations in Poland and Ukraine. The investigation raised questions regarding possible irregularities with respect to non-compliance with customs documents and procedures related to these operations. We continue to fully cooperate with the SEC and the DOJ regarding this matter. We do not anticipate any material adverse effect on our business or financial condition as a result of this matter.

It is management's opinion that none of these claims or lawsuits or any threatened litigation will have a material adverse effect on our financial condition, results of operations or cash flows. Claims and lawsuits, however, involve uncertainties and it is possible that their eventual outcome could adversely affect our results of operations for a particular period.

Marshalltown Tornado and Recovery

On July 19, 2018, our manufacturing facility in Marshalltown, Iowa was severely damaged by a tornado. Insurance covered the repair or replacement of our assets that suffered damage or loss, and business interruption costs, including lost profits, and reimbursement for other expenses and costs that have been incurred relating to the damages and losses suffered. These costs and insurance recoveries are shown in Insurance proceeds for lost profits and Loss (gain) from natural disaster, net of insurance recoveries in the Consolidated Statements of Operations.

In December 2019, we reached a final settlement with our insurance carriers for a total cumulative insurance recovery of $367.5 million for the losses we incurred and will incur from the tornado. All recoveries related to the final settlement were received in 2018 and 2019.

The following table summarizes the Gain from insurance recoveries, net of losses incurred:


(Amounts in millions)	For the Three months Ended March 31,
	2020		2019
Insurance recoveries received	$	—	$	76.0

Less losses and expenses incurred:
Site clean-up and remediation	—		17.1
Factory inefficiencies due to lower productivity	—		4.0


Other	1.6		8.5
Total losses and expenses	$	1.6	$	29.6

Presentation in the Consolidated Statements of Operations:
Loss (gain) from natural disaster, net of insurance recoveries	1.6		(6.9)
Insurance proceeds for lost profits	—		(39.5)

5. Stock Repurchases:

Our Board of Directors have authorized a total of $3 billion to repurchase shares of our common stock (collectively referred to as the "Share Repurchase Plans"), including a $500 million share repurchase authorization in December 2019. Under this program, we may repurchase shares from time to time in open market transactions and in privately negotiated transactions based on business, market, applicable legal requirements and other considerations. The repurchase program does not require the repurchase of a specific number of shares and may be terminated at any time. As of March 31, 2020, $446 million of shares may be repurchased under the Share Repurchase Plans.

On February 13, 2020, we entered into a Fixed Dollar Accelerated Share Repurchase Transaction (the "ASR Agreement") with Bank of America, to effect an accelerated stock buyback of the Company's common stock. Under the ASR Agreement, we paid Bank of America $100.0 million and Bank of America delivered to us common stock representing approximately 85% of the shares expected to be purchased under the ASR Agreement. The ASR was completed in March 2020 and Bank of America delivered a total of 0.4 million shares of common stock repurchased under this ASR Agreement.

We also repurchased shares for $5.5 million during the three months ended March 31, 2020 from employees who tendered their shares to satisfy minimum tax withholding obligations upon the vesting and exercise of stock-based compensation awards.

6. Divestitures:

During the first quarter of 2019, we obtained Board of Directors' approval and signed an agreement with EPTA S.p.A., a private Italian company, for the sale of our Kysor Warren business. The sale was completed on March 29, 2019 and the following table summarizes the net loss recognized in connection with this divestiture. There were no gains or losses on the sale of this business for the three months ended March 31, 2020.


(Amounts in millions)	For the Year Ended December 31, 2019
Cash received from the buyer	$	49.0
Net assets sold	(52.0)
AOCI reclassification adjustments, primarily foreign currency translation	(2.1)
Direct costs to sell	(5.5)

Loss on sale of business	$	(10.6)

7. Restructuring Charges:

We record restructuring charges associated with management-approved restructuring plans when we reorganize or remove duplicative headcount or infrastructure within our businesses. Restructuring charges include severance costs to eliminate a specified number of employees, infrastructure charges to vacate facilities and consolidate operations, contract cancellation costs, accelerated depreciation for impaired assets and other related activities. The timing of associated cash payments is dependent upon the type of restructuring charge and can extend over a multi-year period. Restructuring charges are not included in our calculation of segment profit (loss), as more fully explained in Note 2.

Restructuring Activities in 2020

Information regarding the restructuring charges for all ongoing activities is presented in the following table (in millions):


	Incurred in 2020		Incurred to Date		Total Expected to be Incurred
Severance and related expense	$	0.1	$	1.4	$	1.4
Asset write-offs and accelerated depreciation	0.1		1.7		1.7

Lease termination	—		1.1		1.1
Other	0.3		0.9		1.6
Total restructuring charges	$	0.5	$	5.1	$	5.8

While restructuring charges are excluded from our calculation of segment profit (loss), the table below presents the restructuring charges associated with each segment (in millions):


	Incurred in 2020		Incurred to Date		Total Expected to be Incurred
Residential Heating & Cooling	$	0.2	$	3.1	$	3.1
Commercial Heating & Cooling	0.3		2.0		2.7


Total restructuring charges	$	0.5	$	5.1	$	5.8

8. Revenue Recognition:

The following table disaggregates our revenue by business segment by geography which provides information as to the major source of revenue. See Note 2 for additional information on our reportable business segments and the products and services sold in each segment.


	For the Three Months March 31, 2020
Primary Geographic Markets	Residential Heating & Cooling		Commercial Heating & Cooling		Refrigeration		Consolidated
United States	$	412.4	$	161.1	$	59.5	$	633.0
Canada	29.7		17.1		—		46.8
Other international	—		0.2		43.8		44.0
Total	$	442.1	$	178.4	$	103.3	$	723.8


	For the Three Months Ended March 31, 2019
Primary Geographic Markets	Residential Heating & Cooling		Commercial Heating & Cooling		Refrigeration		Consolidated
United States	$	433.2	$	157.3	$	91.6	$	682.1
Canada	32.4		15.9		0.7		49.0
Other international	—		0.1		59.1		59.2
Total	$	465.6	$	173.3	$	151.4	$	790.3

Residential Heating & Cooling -We manufacture and market a broad range of furnaces, air conditioners, heat pumps, packaged heating and cooling systems, equipment and accessories to improve indoor air quality, comfort control products, replacement parts and supplies and related products for both the residential replacement and new construction markets in North America. These products are sold under various brand names and are sold either through direct sales to a network of independent installing dealers, including through our network of Lennox stores or to independent distributors. For the three months ended March 31, 2020 and 2019, direct sales represented 73% and 72% of revenues, and sales to independent distributors represented the remainder. Given the nature of our business, customer product orders are fulfilled at a point in time and not over a period of time.

Commercial Heating & Cooling - In North America, we manufacture and sell unitary heating and cooling equipment used in light commercial applications, such as low-rise office buildings, restaurants, retail centers, churches and schools. These products are distributed primarily through commercial contractors and directly to national account customers in the planned replacement, emergency replacement and new construction markets. Revenue for the products sold is recognized at a point in time when control transfers to the customer, which is generally at time of shipment. Lennox National Account Services provides installation, service and preventive maintenance for HVAC national account customers in the United States and Canada. Revenue related to service contracts is recognized as the services are performed under the contract based on the relative fair value of the services provided. For the three months ended March 31, 2020 and 2019, equipment sales represented 84% and 83% of revenues and the remainder of our revenue was generated from our service business.

Refrigeration - We manufacture and market equipment for the global commercial refrigeration markets under the Heatcraft Worldwide Refrigeration name. Our products are used in the food retail, food service, cold storage as well as non-food refrigeration markets. We sell these products to distributors, installing contractors, engineering design firms, original equipment manufacturers and end-users. In Europe, we also manufacture and sell unitary heating and cooling products and applied systems. Substantially all segment revenue was related to these types of equipment and systems and is recognized at a point in time when control transfers to the customer, which is generally at time of shipment. Less than 1% of segment revenue relates to services for start-up and commissioning activities.

Variable Consideration - We engage in cooperative advertising, customer rebate, and other miscellaneous programs that result in payments or credits being issued to our customers. We record these customer discounts and incentives as a reduction of sales when the sales are recorded. For certain cooperative advertising programs, we also receive an identifiable benefit (goods or services) in exchange for the consideration given, and, accordingly, record a ratable portion of the expenditure to Selling, general and administrative (“SG&A”) expenses. All other advertising, promotions and marketing costs are expensed as incurred.

Other Judgments and Assumptions - We apply the practical expedient in ASC 606-10-50-14 and do not disclose information about remaining performance obligations that have original expected durations of one year or less. Applying the

practical expedient in ASC 340-40-25-4, we recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less. These costs are included in SG&A expenses. ASC 606-10-32-18 allows us to not adjust the amount of consideration to be received in a contract for any significant financing component if we expect to receive payment within twelve months of transfer of control of goods or services. We have elected this expedient as we expect all consideration to be received in one year or less at contract inception. We have also elected not to provide the remaining performance obligations disclosures related to service contracts in accordance with the practical expedient in ASC 606-10-55-18. We recognize revenue in the amount to which the entity has a right to invoice and have adopted this election to not provide the remaining performance obligations related to service contracts.

Contract Assets - We do not have material amounts of contract assets since revenue is recognized as control of goods is transferred or as services are performed. There are a small number of installation services that may occur over a period of time, but that period of time is generally very short in duration and right of payment does not exist until the installation is completed. Any contract assets that may arise are recorded in Other assets, net in our Consolidated Balance Sheets.

Contract Liabilities - Our contract liabilities consist of advance payments and deferred revenue. Our contract liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. We classify advance payments and deferred revenue as current or noncurrent based on the timing of when we expect to recognize revenue. Generally all contract liabilities are expected to be recognized within one year and are included in Accrued expenses in our Consolidated Balance Sheets. The noncurrent portion of deferred revenue is included in Other liabilities in our Consolidated Balance Sheets.

Net contract assets (liabilities) consisted of the following:


	March 31, 2020		December 31, 2019		$ Change		% Change

Contract liabilities - current	$	(8.5)	$	(8.4)	$	(0.1)	(1.2)	%
Contract liabilities - noncurrent	(5.8)		(5.9)		0.1		1.7	%
Total	$	(14.3)	$	(14.3)	$	—

For the three months ended March 31, 2020 and 2019, we recognized revenue of $1.5 million and $1.1 million related to our contract liabilities at January 1, 2020 and 2019, respectively. Impairment losses recognized in our receivables and contract assets were de minimis in 2020 and 2019.

9. Other Financial Statement Details:

Inventories:

The components of inventories are as follows (in millions):



	As of March 31, 2020		As of December 31, 2019
Finished goods	$	462.1	$	402.9
Work in process	5.7		6.0
Raw materials and parts	207.6		198.8
Subtotal	675.4		607.7
Excess of current cost over last-in, first-out cost	(63.6)		(63.6)
Total inventories, net	$	611.8	$	544.1

Goodwill:

The changes in the carrying amount of goodwill for the first three months of 2020, in total and by segment, are summarized in the table below (in millions):


	Balance at December 31, 2019		Changes in foreign currency translation rates		Balance at March 31, 2020
Residential Heating & Cooling	$	26.1	$	—	$	26.1
Commercial Heating & Cooling	61.1		—		61.1
Refrigeration	99.3		—		99.3
Total Goodwill	$	186.5	$	—	$	186.5

We perform our annual goodwill impairment test in the fourth quarter of each year, and we monitor our reporting units for indicators of impairment throughout the year to determine if a change in facts or circumstances warrants a re-evaluation of our goodwill.

Derivatives:

Objectives and Strategies for Using Derivative Instruments

Commodity Price Risk - We utilize a cash flow hedging program to mitigate our exposure to volatility in the prices of metal commodities used in our production processes. Our hedging program includes the use of futures contracts to lock in prices, and as a result, we are subject to derivative losses should the metal commodity prices decrease and gains should the prices increase. We utilize a dollar cost averaging strategy so that a higher percentage of commodity price exposures are hedged near-term and lower percentages are hedged at future dates. This strategy allows for protection against near-term price volatility while allowing us to adjust to market price movements over time.

Interest Rate Risk - A portion of our debt bears interest at variable rates, and as a result, we are subject to variability in the cash paid for interest. To mitigate a portion of that risk, we may choose to engage in an interest rate swap hedging strategy to eliminate the variability of interest payment cash flows. We are not currently hedged against interest rate risk.

Foreign Currency Risk - Foreign currency exchange rate movements create a degree of risk by affecting the U.S. dollar value of assets and liabilities arising in foreign currencies. We seek to mitigate the impact of currency exchange rate movements on certain short-term transactions by periodically entering into foreign currency forward contracts.

Cash Flow Hedges

We have foreign exchange forward contracts and commodity futures contracts designated as cash flow hedges that are scheduled to mature through January 2021 and August 2021, respectively. Unrealized gains or losses from our cash flow hedges are included in Accumulated other comprehensive loss (“AOCL”) and are expected to be reclassified into earnings within the next 18 months based on the prices of the commodities and foreign currencies at the settlement dates. We recorded the following amounts in AOCL related to our cash flow hedges (in millions):


	As of March 31, 2020		As of December 31, 2019
Unrealized losses on unsettled contracts	$	13.7	$	0.2
Income tax benefit	(4.1)		(0.2)
Losses (gains) included in AOCL, net of tax ⁽¹⁾	$	9.6	$	—

⁽¹⁾ Assuming commodity and foreign currency prices remain constant, we expect to reclassify $7.7 million of derivative losses into earnings within the next 12 months.

Stock-Based Compensation:

We issue various long-term incentive awards, including performance share units, restricted stock units and stock appreciation rights under the Lennox International Inc. 2019 Incentive Plan, as amended and restated. Stock-based compensation expense related to continuing operations is included in Selling, general and administrative expenses in the accompanying Consolidated Statements of Operations as follows (in millions):


	For the Three Months Ended March 31,
	2020		2019
Stock-based compensation expense ⁽¹⁾	$	3.7	$	5.2

⁽¹⁾ All expense was recorded in our Corporate and Other business segment.

10. Pension Benefit Plan:

The components of net periodic benefit cost for pensions benefits were as follows (in millions):


	For the Three Months Ended March 31,
	2020		2019
Service cost	$	1.4	$	1.2
Interest cost	1.8		3.5
Expected return on plan assets	(2.2)		(4.7)

Recognized actuarial loss	1.5		2.0


Net periodic benefit cost	$	2.5	$	2.0

11. Income Taxes:

As of March 31, 2020, we had approximately $3.1 million in total gross unrecognized tax benefits. Of this amount $3.1 million, if recognized, would be recorded through the Consolidated Statements of Operations.

We are currently under examination for our U.S. federal income taxes under the Internal Revenue Service's Compliance Assurance Program for 2019 and are subject to examination by numerous other taxing authorities in the U.S. and in foreign jurisdictions. We are generally no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by taxing authorities for years prior to 2012.

In the first quarter of 2020, we recorded a $7.6 million valuation allowance on certain foreign deferred tax assets. We concluded that it was no longer more likely than not that these foreign tax loss carryforwards would be realized due to the adverse impact of the COVID-19 pandemic on our European manufacturing facilities and the resulting downturn in the related business.

12. Lines of Credit and Financing Arrangements:

The following table summarizes our outstanding debt obligations and their classification in the accompanying Consolidated Balance Sheets (in millions):



	As of March 31, 2020		As of December 31, 2019





Current maturities of long-term debt:
Asset securitization program	$	215.0	$	285.0
Finance lease obligations	8.2		7.8
Domestic credit facility	30.0		30.0

Debt issuance costs	(0.9)		(0.9)
Total current maturities of long-term debt	$	252.3	$	321.9
Long-Term Debt:

Finance lease obligations	26.2		25.9
Domestic credit facility	815.5		475.5
Senior unsecured notes	350.0		350.0
Debt issuance costs	(1.8)		(2.1)
Total long-term debt	$	1,189.9	$	849.3
Total debt	$	1,442.2	$	1,171.2

As of September 30, 2017 As of December 31, 2016
Short-Term Debt:
Asset Securitization Program $ 325.0
$ 50.0
Foreign obligations 1.0
2.4
Total short-term debt $ 326.0
$ 52.4
Current maturities of long-term debt:
Capital lease obligations $ 0.5
$ 0.8
Domestic credit facility 22.5
—
Senior unsecured notes —
200.0
Debt issuance costs (0.6 ) (0.7 )
Total current maturities of long-term debt
$ 22.4
$ 200.1
Long-Term Debt:
Capital lease obligations $ 14.7
$ 15.0
Domestic credit facility 415.5
256.0
Senior unsecured notes 350.0
350.0
Debt issuance costs (4.5 ) (5.3 )
Total long-term debt $ 775.7
$ 615.7
Total debt $ 1,124.1
$ 868.2

Short-Term Debt

Foreign Obligations

Through several of our foreign subsidiaries, we have facilities available to assist in financing seasonal borrowing needs for our foreign locations. We had ~~$1.0 million~~ ~~and $2.4 million of~~0 outstanding foreign obligations ~~outstanding~~ as of ~~September 30, 2017 and~~March 31, 2020 or December 31, ~~2016, respectively, that~~2019 and there were ~~primarily borrowings under non-committed facilities. Proceeds~~0 proceeds and repayments on these facilities ~~were $19.1 million and $28.2 million during~~for the ~~nine~~three months ended ~~September 30, 2017 and 2016, respectively. Repayments on the facilities were $20.5 million and $30.3 million during the nine months ended September 30, 2017 and 2016, respectively.~~March 31, 2020 or March 31, 2019.

Asset Securitization Program

Under the Asset Securitization Program (“ASP”), we are eligible to sell beneficial interests in a portion of our trade accounts receivable to a financial institution for cash. The ASP contains a provision whereby we retain the right to repurchase all of the outstanding beneficial interests transferred. As a result of the repurchase right, the transfer of the receivables under the ASP is not accounted for as a sale. Accordingly, the cash received from the transfer of the beneficial interests in our trade accounts receivable is reflected as secured borrowings in the accompanying Consolidated Balance Sheets and proceeds received are included in Cash flows from financing activities in the accompanying Consolidated Statements of Cash Flows. Our continued involvement with the transferred assets includes servicing, collection and administration of the transferred beneficial interests. The accounts receivable securitized under the ASP are high-quality domestic customer accounts that have not aged significantly. The receivables represented by the retained interest that we service are exposed to the risk of loss for any uncollectible amounts in the pool of receivables ~~sold~~transferred under the ASP. ~~The fair values assigned to~~

We renewed the ~~retained and transferred interests are based on the sold accounts receivable carrying value given the short~~ASP in November 2019, extending its term to ~~maturity~~November 2021 and ~~low credit risk. The sale of~~increasing the beneficial interests in our trade accounts receivable are reflected as secured borrowings in the accompanying Consolidated Balance Sheets and proceeds received are included in Cash flows from financing activities in the accompanying Consolidated Statements of Cash Flows.

~~The ASP provides for a~~ maximum securitization amount to a range ~~from $200.0~~from$250.0 million to ~~$325.0~~$400.0 million, depending on the period. The maximum capacity under the ASP is the lesser of the maximum securitization amount or 100% of the net pool balance less allowances, as defined by the ASP. Eligibility for securitization is limited based on the amount and quality of the qualifying accounts receivable and is calculated monthly. The eligible amounts available and beneficial interests sold were as follows (in millions):


	As of September 30, 2017		As of December 31, 2016			As of March 31, 2020		As of December 31, 2019
Eligible amount available under the ASP on qualified accounts receivable	$	325.0	$	250.0	Eligible amount available under the ASP on qualified accounts receivable	$	215.0	$	320.0
Less: Beneficial interest sold	325.0		50.0
Less: Beneficial interest transferred					Less: Beneficial interest transferred	(215.0)		(285.0)
Remaining amount available	$	—	$	200.0	Remaining amount available	$	—	$	35.0

We pay certain discount fees to use the ASP and to have the facility available to us. These fees relate to both the used and unused portions of the securitization. The used fee is based on the beneficial interest sold and calculated on either the average LIBOR rate or floating commercial paper ~~rates~~rate determined by the purchaser of the beneficial interest, plus a program fee of ~~0.65%~~

0.70%. The average rates as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019 were ~~1.99%~~2.23% and ~~1.66%~~2.51%, respectively. The unused fee is based on ~~102%~~101% of the maximum available amount less the beneficial interest ~~sold~~transferred and is calculated at a ~~0.33% fixed~~ rate ranging between 0.25% and 0.35%, depending on the available borrowings, throughout the term of the agreement. ~~In addition, a 0.05% unused fee is charged on incremental available amounts above $200 million during certain months of the year.~~ We recorded these fees in Interest expense, net in the accompanying Consolidated Statements of Operations.

The ASP contains certain restrictive covenants relating to the quality of our accounts receivable and cross-default provisions with our Sixth Amended and Restated Credit Facility Agreement ("Domestic Credit Facility"), senior unsecured notes and any other indebtedness we may have over $75.0 million. The administrative agent under the ASP is also a participant in our Domestic Credit Facility. The participating financial institutions have investment grade credit ratings. ~~We continue to evaluate their credit ratings and have no reason to believe they will not perform under the ASP.~~ As of ~~September 30, 2017,~~March 31, 2020, we believe we were in compliance with all covenant requirements.

Domestic Credit Facility

On ~~August 30, 2016,~~January 22, 2019, we ~~replaced an earlier credit facility with~~amended our Domestic Credit Facility to provide for a ~~$900.0~~$350.0 million ~~credit facility (the "Domestic~~increase in revolving commitments. The Domestic Credit ~~Facility"), which~~Facility currently consists of a ~~$650.0~~$1,000.0 million unsecured revolving credit facility and a ~~$250.0~~$160.0 million unsecured term loan ~~and~~that matures in August 2021 (the "Maturity Date"). Under our Domestic Credit Facility, we had outstanding borrowings of ~~$438.0~~$845.5 million, of which ~~$220.0~~$160.0 million was the term loan balance, as well as ~~$3.0~~$2.4 million committed to standby letters of credit as of ~~September 30, 2017.~~March 31, 2020. Subject to covenant limitations, ~~$429.0~~$312.1 million was available for future borrowings. The unsecured term loan also matures on the Maturity Date and requires quarterly principal repayments of $7.5 ~~million; however, we made $30.0 million of required principal repayments for 2017 in November 2016.~~million. The revolving credit facility ~~allows up to $100.0 million of letters of credit to be issued and also~~ includes a subfacility for swingline loans of up to $65.0 million. Additionally, at our request and subject to certain conditions, the commitments under the Domestic Credit Facility may be increased by a maximum of $350.0 million as long as existing or new lenders agree to provide such additional commitments.

Our weighted average borrowing rate on the facility was as follows:

As of September 30, 2017 As of December 31, 2016
Weighted average borrowing rate 2.47 % 2.00 %


	As of March 31, 2020		As of December 31, 2019
Weighted average borrowing rate	2.13	%	2.93	%

Our Domestic Credit Facility is guaranteed by certain of our subsidiaries and contains financial covenants relating to leverage and interest coverage. Other covenants contained in the Domestic Credit Facility restrict, among other things, certain mergers, asset dispositions, guarantees, debt, liens, and affiliate transactions. The financial covenants require us to maintain a defined Consolidated Indebtedness to Adjusted EBITDA Ratio and a Cash Flow (defined as EBITDA minus capital expenditures) to Net Interest Expense Ratio. The required ratios under our Domestic Credit Facility are detailed below:



Consolidated Indebtedness to Adjusted EBITDA Ratio no greater than			3.5 : 1.0
Cash Flow to Net Interest Expense Ratio no less than			3.0 : 1.0

Our Domestic Credit Facility contains customary events of default. These events of default include nonpayment of principal or interest, breach of covenants or other restrictions or requirements, default on certain other indebtedness or receivables securitizations (cross default), and bankruptcy. A cross default under our Domestic Credit Facility could occur if:

• We fail to pay any principal or interest when due on any other indebtedness or receivables securitization of at least ~~$75.0 million~~;$75.0 million; or

• We are in default in the performance of, or compliance with any term of any other indebtedness or receivables securitization in an aggregate principal amount of at least ~~$75.0~~$75.0 million or any other condition exists which would give the holders the right to declare such indebtedness due and payable prior to its stated maturity.

Each of our major debt agreements contains provisions by which a default under one agreement causes a default in the others (a "cross default"). If a cross default under the Domestic Credit Facility, our senior unsecured notes, our lease of our corporate headquarters in Richardson, Texas (recorded as an operating lease), or our ASP were to occur, it could have a wider impact on our liquidity than might otherwise occur from a default of a single debt instrument or lease commitment.

If any event of default occurs and is continuing, lenders with a majority of the aggregate commitments may require the administrative agent to terminate our right to borrow under our Domestic Credit Facility and accelerate amounts due under our Domestic Credit Facility (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). As of ~~September 30, 2017,~~March 31, 2020, we believe we were in compliance with all covenant requirements.

Senior Unsecured Notes

We issued $350.0 million of senior unsecured notes in November 2016 (the "Notes") which will mature on November 15, 2023 with interest being paid on May 15 and November 15 at 3.00% per annum semiannually. ~~We also repaid $200.0 million of senior unsecured notes issued in 2010 that matured on May 15, 2017.~~ The Notes are guaranteed, on a senior unsecured basis, by each of our domestic subsidiaries that guarantee indebtedness under our Domestic Credit Facility. The indenture governing the Notes contains covenants that, among other things, limit our ability and the ability of the subsidiary guarantors to: create or incur certain liens; enter into certain sale and leaseback transactions; and enter into certain mergers, consolidations and transfers of substantially all of our assets. The indenture also contains a cross default provision which is triggered if we default on other debt of at least ~~$75.0~~$75.0 million in principal which is then accelerated, and such acceleration is not rescinded within 30 days of the notice date. As of ~~September 30, 2017,~~March 31, 2020, we believe we were in compliance with all covenant requirements.

~~8. Pension and Post-Retirement Benefit Plans:~~

~~The components of net periodic benefit cost were as follows (in millions):~~

For the Three Months Ended September 30,
2017 2016 2017 2016
Pension Benefits Other Benefits
Service cost $ 1.3
$ 1.1
$ —
$ —
Interest cost 3.2
3.8
—
—
Expected return on plan assets (5.3 ) (5.4 ) —
—
Amortization of prior service cost —
0.1
(0.6 ) (0.8 )
Recognized actuarial loss 2.0
1.9
0.4
0.4
Settlements and curtailments —
0.2
—
—
Net periodic benefit cost ⁽¹⁾
$ 1.2

$ 1.7
$ (0.2 ) $ (0.4 )

For the Nine Months Ended September 30,
2017 2016 2017 2016
Pension Benefits Other Benefits
Service cost $ 3.8
$ 3.3
$ —
$ —
Interest cost 9.5
11.5
—
0.1
Expected return on plan assets (16.0 ) (16.2 ) —
—
Amortization of prior service cost 0.1
0.2
(1.8 ) (2.3 )
Recognized actuarial loss 6.1
5.7
1.1
1.1
Settlements and curtailments 0.6
0.2
—
—
Net periodic benefit cost ⁽¹⁾
$ 4.1
$ 4.7
$ (0.7 ) $ (1.1 )

⁽¹⁾ ~~All net periodic benefit cost for the three and nine months ended September 30, 2017 and 2016 related to continuing operations.~~

~~9. Stock-Based Compensation:~~

We issue various long-term incentive awards, including performance share units, restricted stock units and stock appreciation rights under the Lennox International Inc. 2010 Incentive Plan, as amended and restated. Stock-based compensation expense related to continuing operations is included in Selling, general and administrative expenses in the accompanying Consolidated Statements of Operations as follows (in millions):

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2017 2016 2017 2016
Stock-based compensation expense ⁽¹⁾
$ 6.3
$ 9.9
$ 18.8
$ 24.8

⁽¹⁾ ~~All expense was recorded in our Corporate and Other business segment.~~

~~10. Stock Repurchases:~~

Our Board of Directors has authorized a total of $2 billion towards the repurchase of shares of our common stock (collectively referred to as the "Share Repurchase Plans"), including a $550 million share repurchase authorization in 2016. The Share Repurchase Plans authorize open market repurchase transactions and do not have a stated expiration date. As of September 30, 2017, $396 million of shares may yet be repurchased under the Share Repurchase Plans.

On February 9, 2017, the Company entered into a Fixed Dollar Accelerated Share Repurchase Transaction (the “ASR Agreement”) with Morgan Stanley, to effect an accelerated stock buyback of our common stock (the “Common Stock”).

Under the ASR Agreement, on February 9, 2017, we paid Morgan Stanley an initial purchase price of $75 million, and Morgan Stanley delivered to us Common Stock, representing approximately 85% of the shares expected to be purchased under the ASR Agreement. The ASR Agreement was completed in the second quarter and Morgan Stanley delivered additional shares for a total of 0.5 million shares of common stock repurchased as part of this ASR Agreement.

~~On April 28, 2017, we entered into another Fixed Dollar ASR Agreement (the "Second ASR Agreement") with J.P. Morgan Chase Bank to effect an accelerated stock buyback of Common Stock.~~

Under the Second ASR Agreement, on April 28, 2017, we paid J.P. Morgan Chase Bank an initial purchase price of $100 million, and J.P. Morgan Chase Bank delivered to us Common Stock, representing approximately 85% of the shares expected to be purchased under the ASR Agreement. The ASR Agreement was completed in the third quarter and J.P. Morgan Chase Bank delivered additional shares for a total of 0.6 million shares of common stock repurchased as part of this ASR Agreement.

~~On July 27, 2017, we entered into another Fixed Dollar ASR Agreement (the "Third ASR Agreement") with Bank of America to effect an accelerated stock buyback of Common Stock.~~

Under the Third ASR Agreement, on July 27, 2017, we paid Bank of America an initial purchase price of $75 million, and Bank of America delivered to us a total of 0.4 million shares of Common Stock, representing approximately 85% of the shares expected to be purchased under the third ASR Agreement. The third ASR Agreement will be completed in the fourth quarter.

We also repurchased 0.1 million shares for $16.0 million during the nine months ended September 30, 2017 from employees who surrendered their shares to satisfy minimum tax withholding obligations upon the exercise of long-term incentive awards.

~~11.~~13. Comprehensive Income:

The following table provides information on items not reclassified in their entirety from AOCL to Net income in the accompanying Consolidated Statements of Operations (in millions):


	For the Three Months Ended March 31,					Affected Line Item(s) in the Consolidated Statements of Operations
	2020		2019
Gains/(Losses) on cash flow hedges:
Derivatives contracts	$	(1.2)	$	(2.4)	Cost of goods sold and (Gains) losses and other expenses, net
Income tax benefit (expense)	0.3		0.6		Provision for income taxes
Net of tax	$	(0.9)	$	(1.8)

Defined Benefit Plan items:
Pension and post-retirement benefit costs	$	(1.5)	$	(2.0)	Cost of goods sold; Selling, general and administrative expenses

Income tax benefit	0.3		0.5		Provision for income taxes
Net of tax	$	(1.2)	$	(1.5)

Foreign Currency Translation Adjustments:
Foreign currency adjustments on sale of business	$	—	$	(2.1)	Loss on sale of business

Net of tax	$	—	$	(2.1)

Total reclassifications from AOCL	$	(2.1)	$	(5.4)

For the Three Months Ended September 30, For the Nine Months Ended September 30, Affected Line Item(s) in the Consolidated Statements of Operations
2017 2016 2017 2016
Gains/(Losses) on cash flow hedges:
Commodity futures contracts $ 3.5
$ (2.4 ) $ 9.4
$ (10.6 ) Cost of goods sold
Income tax (expense)/benefit (1.3 ) 0.8
(3.4 ) 3.7
Provision for income taxes
Net of tax $ 2.2
$ (1.6 ) $ 6.0
$ (6.9 )

Defined Benefit Plan items:
Pension and post-retirement benefit costs $ (1.8 ) $ (1.6 ) $ (5.5 ) $ (4.8 ) Cost of goods sold; Selling, general and administrative expenses
Income tax benefit 0.7
0.6
2.0
1.7
Provision for income taxes
Net of tax $ (1.1 ) $ (1.0 ) $ (3.5 ) $ (3.1 )

Total reclassifications from AOCL $ 1.1
$ (2.6 ) $ 2.5
$ (10.0 )

The following table provides information on changes in AOCL, by component (net of tax), for the ~~nine~~three months ended ~~September 30,2017~~ ~~(in millions):~~

Gains (Losses) on Cash Flow Hedges Unrealized Gains on Available-for-Sale Securities Defined Benefit Pension Plan Items Foreign Currency Translation Adjustments Total AOCL
Balance as of December 31, 2016 $ 5.6
$ 2.3
$ (130.0 ) $ (73.0 ) $ (195.1 )
Other comprehensive income (loss) before reclassifications 6.7
0.2
(5.7 ) 39.4
40.6
Amounts reclassified from AOCL (6.0 ) —
3.5
—
(2.5 )
Net other comprehensive income (loss) 0.7
0.2
(2.2 ) 39.4
38.1
Balance as of September 30, 2017 $ 6.3
$ 2.5
$ (132.2 ) $ (33.6 ) $ (157.0 )

~~12. Restructuring Charges:~~

We record restructuring charges associated with management-approved restructuring plans when we reorganize or remove duplicative headcount and infrastructure within our businesses. Restructuring charges include severance costs to eliminate a specified number of employees, infrastructure charges to vacate facilities and consolidate operations, contract cancellation costs and other related activities. The timing of associated cash payments is dependent upon the type of restructuring charge and can extend over a multi-year period. Restructuring charges are not included in our calculation of segment profit (loss), as more fully explained in Note 14.

~~Restructuring Activities in 2017~~

~~Information regarding the restructuring charges for all ongoing activities is presented in the following table~~March 31, 2020 (in millions):


	Gains (Losses) on Cash Flow Hedges		Defined Benefit Pension Plan Items		Foreign Currency Translation Adjustments		Total AOCL
Balance as of December 31, 2019	$	—	$	(81.5)	$	(22.3)	$	(103.8)
Other comprehensive loss before reclassifications	(10.5)		(0.6)		(20.3)		(31.4)
Amounts reclassified from AOCL	0.9		1.2		—		2.1
Net other comprehensive (loss) income	(9.6)		0.6		(20.3)		(29.3)
Balance as of March 31, 2020	$	(9.6)	$	(80.9)	$	(42.6)	$	(133.1)

Charges Incurred in 2017 Charges Incurred to Date Total Charges Expected to be Incurred
Severance and related expense $ 1.3
$ 10.6
$ 11.0
Asset write-offs and accelerated depreciation 0.7
3.1
3.1
Lease termination —
0.2
0.2
Other 0.1
3.8
4.1
Total restructuring charges $ 2.1
$ 17.7
$ 18.4

Charges Incurred in 2017 Charges Incurred to Date Total Charges Expected to be Incurred
Residential Heating & Cooling $ 0.5
$ 1.4
$ 1.6
Commercial Heating & Cooling 0.7
1.8
1.9
Refrigeration 0.4
12.3
12.3
Corporate & Other 0.5
2.2
2.6
Total restructuring charges $ 2.1
$ 17.7
$ 18.4

Balance as of
December 31, 2016 Included in
Earnings Cash
Utilization Non-Cash Utilization and Other Balance as of September 30, 2017
Severance and related expense $ —
$ 1.3
$ (0.9 ) $ —
$ 0.4
Asset write-offs and accelerated depreciation —
0.7
(0.1 ) (0.6 ) —
Lease termination —
—
—
—
—
Other —
0.1
(0.1 ) —
—
Total restructuring accruals $ —
$ 2.1
$ (1.1 ) $ (0.6 ) $ 0.4

~~13. Earnings Per Share:~~

~~The computations of basic and diluted earnings per share for Income from continuing operations were as follows (in millions, except per share data):~~

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2017 2016 2017 2016
Net income $ 103.5
$ 101.7
$ 262.5
$ 237.3
Add: Loss from discontinued operations 0.5
—
1.4
0.6
Income from continuing operations $ 104.0
$ 101.7
$ 263.9
$ 237.9

Weighted-average shares outstanding – basic 41.9
43.2
42.3
43.6
Add: Potential effect of dilutive securities attributable to stock-based payments 0.5
0.5
0.6
0.6
Weighted-average shares outstanding – diluted 42.4
43.7
42.9
44.2

Earnings per share – Basic:
Income from continuing operations $ 2.48
$ 2.35
$ 6.23
$ 5.46
Loss from discontinued operations (0.01 ) —
(0.03 ) (0.01 )
Net income $ 2.47
$ 2.35
$ 6.20
$ 5.45

Earnings per share – Diluted:
Income from continuing operations $ 2.45
$ 2.33
$ 6.15
$ 5.39
Loss from discontinued operations (0.01 ) —
(0.03 ) (0.01 )
Net income $ 2.44
$ 2.33
$ 6.12
$ 5.38

The following stock appreciation rights and restricted stock units were outstanding but not included in the diluted earnings per share calculation because the assumed exercise of such rights would have been anti-dilutive (in millions, except for per share data):

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2017 2016 2017 2016
Weighted-average number of shares 0.2
—
0.2
0.2
Price range per share $ 156.94
—
$ 156.94
$124.97-$131.94

14. ~~Reportable Business Segments:~~

~~We operate in~~ ~~three~~ reportable business segments of the heating, ventilation, air conditioning and refrigeration (“HVACR”) industry. Our segments are organized primarily by the nature of the products and services we provide. The following table describes each segment:

~~Residential Replacement;~~

~~Residential New Construction~~

~~Light Commercial;~~

~~Food Preservation;~~

~~Non-Food/Industrial~~

We use segment profit or loss as the primary measure of profitability to evaluate operating performance and to allocate capital resources. We define segment profit or loss as a segment’s income or loss from continuing operations before income taxes included in the accompanying Consolidated Statements of Operations, excluding certain items. The reconciliation in the table below details the items excluded.

Our 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. We record these share-based awards as corporate costs because they are determined at the discretion of the Board of Directors and based on the historical practice of doing so for internal reporting purposes.

~~Any intercompany sales and associated profit (and any other intercompany items) are eliminated from segment results. There were no significant intercompany eliminations for the periods presented.~~

~~Net sales and segment profit (loss) for each segment, along with a reconciliation of segment profit (loss) to Operating income, are shown below (in millions):~~

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2017 2016 2017 2016
Net sales
Residential Heating & Cooling $ 590.5
$ 572.7
$ 1,663.8
$ 1,524.5
Commercial Heating & Cooling 269.4
251.4
723.5
674.7
Refrigeration 192.4
185.9
560.6
545.2
$ 1,052.3
$ 1,010.0
$ 2,947.9
$ 2,744.4

Segment profit (loss) ⁽¹⁾

Residential Heating & Cooling $ 114.7
$ 112.7
$ 297.6
$ 266.9
Commercial Heating & Cooling 50.0
48.9
113.8
110.6
Refrigeration 20.0
22.9
55.7
53.2
Corporate and other (23.7 ) (27.3 ) (58.5 ) (65.7 )
Total segment profit 161.0
157.2
408.6
365.0
Reconciliation to Operating income:
Special product quality adjustments 0.5
—
5.7
(0.4 )
Items in Losses and other expenses, net that are excluded from segment profit (loss) ⁽¹⁾
4.0
(0.3 ) 10.0
2.9
Restructuring charges 1.9
0.6
2.1
1.2
Operating income $ 154.6
$ 156.9
$ 390.8
$ 361.3

⁽¹⁾~~We define segment profit (loss) as a segment's operating income included in the accompanying Consolidated Statements of Operations, excluding:~~

~~Total Assets by Segment~~

~~Except for the seasonal increase in total assets across all reportable segments, there have not been any material changes in the composition of total assets by segment since December 31, 2016.~~

~~15.~~ Fair Value Measurements:

Fair Value Hierarchy

The methodologies used to determine the fair value of our financial assets and liabilities at ~~September 30, 2017~~March 31, 2020 were the same as those used at December 31, ~~2016.~~2019.

Assets and Liabilities Carried at Fair Value on a Recurring Basis

Derivatives were classified as Level 2 and primarily valued using estimated future cash flows based on observed prices from exchange-traded derivatives. We also considered the counterparty's creditworthiness, or our own creditworthiness, as appropriate. Adjustments were recorded to reflect the risk of credit default, however, they were insignificant to the overall value of the derivatives. Refer to Note 49 for more information related to our derivative instruments.

~~Marketable Equity Securities~~

The following table presents the fair value of an investment in marketable equity securities, classified as Level 1 and related to publicly traded stock of a non-U.S. company, recorded in Other assets, net in the accompanying Consolidated Balance Sheets (in millions):

As of September 30, 2017 As of December 31, 2016
Investment in marketable equity securities $ 4.7
$ 4.4

Other Fair Value Disclosures

The carrying amounts of Cash and cash equivalents, Short-term investments, Accounts and notes receivable, net, Accounts payable, and Short-term debt approximate fair value due to the short maturities of these instruments. The carrying amount of our Domestic Credit Facility in Long-term debt also approximates fair value due to its variable-rate characteristics.

The fair value of our senior unsecured notes in Long-term debt, classified as Level 2, was based on the amount of future cash flows using current market rates for debt instruments of similar maturities and credit risk. The following table presents their fair value (in millions):


	As of March 31, 2020		As of December 31, 2019
Senior unsecured notes	$	356.8	$	356.8

15. Subsequent Event:

As of September 30, 2017 As of December 31, 2016
Senior unsecured notes $ 316.9
$ 499.3

~~16. Condensed Consolidating Financial Statements:~~

~~The Company’s senior unsecured notes are unconditionally guaranteed by certain~~Due to the economic impact of the ~~Company’s subsidiaries (the “Guarantor Subsidiaries”) and are not guaranteed by~~COVID-19 pandemic on our ~~other subsidiaries (the “Non-Guarantor Subsidiaries”). The Guarantor Subsidiaries are~~ ~~100%~~ ~~owned, all guarantees are full and unconditional, and all guarantees are joint and several. As a result~~business, we implemented cost reduction actions in April 2020 to realize SG&A savings for the balance of the ~~guarantee arrangements,~~year. In connection with these cost saving actions, we ~~are required~~expect to ~~present~~incur pre-tax charges of approximately $10 million in the ~~following condensed consolidating financial statements.~~second quarter of 2020 related to personnel severance and benefits and facility exit costs.

The condensed consolidating financial statements reflect the investments in subsidiaries of the Company using the equity method of accounting. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. Condensed consolidating financial statements of the Company, its Guarantor Subsidiaries and Non-Guarantor Subsidiaries as of September 30, 2017 and December 31, 2016 and for the three and nine months ended September 30, 2017 and 2016 are shown on the following pages.

~~As of September 30, 2017~~

(Amounts in millions) Parent Guarantor
Subsidiaries Non-Guarantor
Subsidiaries Eliminations Consolidated
ASSETS
Current Assets:
Cash and cash equivalents $ 1.2
$ 22.4
$ 37.1
$ —
$ 60.7
Accounts and notes receivable, net —
35.5
562.6
—
598.1
Inventories, net —
392.2
143.5
(4.8 ) 530.9
Other assets 14.2
34.3
60.7
(28.3 ) 80.9
Total current assets 15.4
484.4
803.9
(33.1 ) 1,270.6
Property, plant and equipment, net —
243.7
135.2
(4.3 ) 374.6
Goodwill —
117.8
65.7
17.1
200.6
Investment in subsidiaries 1,212.8
383.7
—
(1,596.5 ) —
Deferred income taxes 11.0
112.0
32.5
(12.2 ) 143.3
Other assets, net 1.8
42.1
24.1
(1.4 ) 66.6
Intercompany (payables) receivables, net (453.9 ) 461.3
95.1
(102.5 ) —
Total assets $ 787.1
$ 1,845.0
$ 1,156.5
$ (1,732.9 ) $ 2,055.7
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt $ —
$ —
$ 326.0
$ —
$ 326.0
Current maturities of long-term debt 21.9
0.3
0.2
—
22.4
Accounts payable 21.3
252.7
120.5
—
394.5
Accrued expenses 5.7
216.6
56.1
—
278.4
Income taxes (receivable) payable (55.7 ) 60.4
48.5
(50.8 ) 2.4
Total current liabilities (6.8 ) 530.0
551.3
(50.8 ) 1,023.7
Long-term debt 761.1
14.3
0.3
—
775.7
Post-retirement benefits, other than pensions —
1.9
—
—
1.9
Pensions —
77.1
13.1
—
90.2
Other liabilities 0.3
119.9
11.5
—
131.7
Total liabilities 754.6
743.2
576.2
(50.8 ) 2,023.2
Commitments and contingencies

Total stockholders' equity 32.5
1,101.8
580.3
(1,682.1 ) 32.5
Total liabilities and stockholders' equity $ 787.1
$ 1,845.0
$ 1,156.5
$ (1,732.9 ) $ 2,055.7

~~As of December 31, 2016~~

(Amounts in millions) Parent Guarantor
Subsidiaries Non-
Guarantor
Subsidiaries Eliminations Consolidated
ASSETS
Current Assets:
Cash and cash equivalents $ 1.2
$ 17.1
$ 31.9
$ —
$ 50.2
Accounts and notes receivable, net —
30.6
439.2
—
469.8
Inventories, net —
314.7
108.9
(5.1 ) 418.5
Other assets 12.8
48.8
67.5
(61.7 ) 67.4
Total current assets 14.0
411.2
647.5
(66.8 ) 1,005.9
Property, plant and equipment, net —
237.6
123.8
—
361.4
Goodwill —
134.9
60.2
—
195.1
Investment in subsidiaries 1,166.9
524.7
(0.5 ) (1,691.1 ) —
Deferred income taxes 6.8
113.5
31.1
(14.7 ) 136.7
Other assets, net 3.6
40.0
19.0
(1.4 ) 61.2
Intercompany (payables) receivables, net (382.4 ) 375.2
80.4
(73.2 ) —
Total assets $ 808.9
$ 1,837.1
$ 961.5
$ (1,847.2 ) $ 1,760.3
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt $ —
$ —
$ 52.4
$ —
$ 52.4
Current maturities of long-term debt 199.3
0.4
0.4
—
200.1
Accounts payable 18.5
248.5
94.2
—
361.2
Accrued expenses 6.3
206.3
53.3
—
265.9
Income taxes (receivable) payable (54.0 ) 89.8
52.5
(79.3 ) 9.0
Total current liabilities 170.1
545.0
252.8
(79.3 ) 888.6
Long-term debt 600.9
14.5
0.3
—
615.7
Post-retirement benefits, other than pensions —
2.8
—
—
2.8
Pensions —
75.5
12.0
—
87.5
Other liabilities —
119.1
11.1
(2.5 ) 127.7
Total liabilities 771.0
756.9
276.2
(81.8 ) 1,722.3
Commitments and contingencies

Total stockholders' equity 37.9
1,080.2
685.3
(1,765.4 ) 38.0
Total liabilities and stockholders' equity $ 808.9
$ 1,837.1
$ 961.5
$ (1,847.2 ) $ 1,760.3

~~For the Three Months Ended September 30, 2017~~

(Amounts in millions) Parent Guarantor
Subsidiaries Non-Guarantor
Subsidiaries Eliminations Consolidated
Net Sales $ —
$ 905.6
$ 300.0
$ (153.3 ) $ 1,052.3
Cost of goods sold —
644.8
249.0
(155.2 ) 738.6
Gross profit —
260.8
51.0
1.9
313.7
Operating expenses:
Selling, general and administrative expenses —
140.7
18.8
(0.8 ) 158.7
Losses and other expenses, net 0.2
1.9
0.9
—
3.0
Restructuring charges —
1.2
0.7
—
1.9
Income from equity method investments (108.2 ) (21.7 ) (3.5 ) 128.9
(4.5 )
Operating income 108.0
138.7
34.1
(126.2 ) 154.6
Interest expense, net 6.2
(0.6 ) 2.0
—
7.6
Other expense, net —
—
0.2
(0.2 ) —
Income from continuing operations before income taxes 101.8
139.3
31.9
(126.0 ) 147.0
Provision for income tax (benefit) expense (1.7 ) 30.5
13.5
0.7
43.0
Income from continuing operations 103.5
108.8
18.4
(126.7 ) 104.0
Loss from discontinued operations, net of tax —
—
(0.5 ) —
(0.5 )
Net income $ 103.5
$ 108.8
$ 17.9
$ (126.7 ) $ 103.5
Other comprehensive income, net of tax 0.4
2.1
6.9
—
9.4
Comprehensive income (loss) $ 103.9
$ 110.9
$ 24.8
$ (126.7 ) $ 112.9

~~For the Nine Months Ended September 30, 2017~~

(Amounts in millions) Parent Guarantor
Subsidiaries Non-
Guarantor
Subsidiaries Eliminations Consolidated
Net Sales $ —
$ 2,560.6
$ 869.7
$ (482.4 ) $ 2,947.9
Cost of goods sold —
1,830.8
731.1
(479.5 ) 2,082.4
Gross profit —
729.8
138.6
(2.9 ) 865.5
Operating expenses:
Selling, general and administrative expenses —
419.2
61.6
(1.2 ) 479.6
Losses (gains) and other expenses, net 1.1
5.8
1.7
(0.1 ) 8.5
Restructuring charges —
1.3
0.8
—
2.1
Income from equity method investments (277.5 ) (52.0 ) (12.7 ) 326.7
(15.5 )
Operating income 276.4
355.5
87.2
(328.3 ) 390.8
Interest expense, net 20.9
(2.3 ) 4.7
—
23.3
Other expense, net —
—
—
(0.2 ) (0.2 )
Income from continuing operations before income taxes 255.5
357.8
82.5
(328.1 ) 367.7
Provision for income tax (benefit) expense (7.0 ) 84.8
26.2
(0.2 ) 103.8
Income from continuing operations 262.5
273.0
56.3
(327.9 ) 263.9
Loss from discontinued operations, net of tax —
—
(1.4 ) —
(1.4 )
Net income $ 262.5
$ 273.0
$ 54.9
$ (327.9 ) $ 262.5
Other comprehensive income, net of tax $ 0.5
$ 9.7
$ 27.9
$ —
$ 38.1
Comprehensive income (loss) $ 263.0
$ 282.7
$ 82.8
$ (327.9 ) $ 300.6

~~For the Three Months Ended September 30, 2016~~

(Amounts in millions) Parent Guarantor
Subsidiaries Non-
Guarantor
Subsidiaries Eliminations Consolidated
Net Sales $ —
$ 870.5
$ 186.9
$ (47.4 ) $ 1,010.0
Cost of goods sold —
603.4
143.7
(47.4 ) 699.7
Gross profit —
267.1
43.2
—
310.3
Operating expenses:
Selling, general and administrative expenses —
135.9
20.6
—
156.5
(Gains) losses and other expenses, net (1.1 ) 1.1
0.7
—
0.7
Restructuring charges —
0.5
0.1
—
0.6
Income from equity method investments (105.0 ) (10.0 ) (3.2 ) 113.8
(4.4 )
Operating income 106.1
139.6
25.0
(113.8 ) 156.9
Interest expense, net 6.1
(0.5 ) 1.4
—
7.0
Other expense, net —
—
—
—
—
Income from continuing operations before income taxes 100.0
140.1
23.6
(113.8 ) 149.9
Provision for income tax (benefit) expense (1.7 ) 42.3
7.6
—
48.2
Income from continuing operations 101.7
97.8
16.0
(113.8 ) 101.7
Loss from discontinued operations, net of tax —
—
—
—
—
Net income $ 101.7
$ 97.8
$ 16.0
$ (113.8 ) $ 101.7
Other comprehensive income (loss), net of tax 2.7
(0.4 ) (2.3 ) (0.4 ) (0.4 )
Comprehensive income (loss) $ 104.4
$ 97.4
$ 13.7
$ (114.2 ) $ 101.3

~~For the Nine Months Ended September 30, 2016~~

(Amounts in millions) Parent Guarantor
Subsidiaries Non-
Guarantor
Subsidiaries Eliminations Consolidated
Net Sales $ —
$ 2,368.8
$ 514.1
$ (138.5 ) $ 2,744.4
Cost of goods sold —
1,675.6
396.3
(136.4 ) 1,935.5
Gross profit —
693.2
117.8
(2.1 ) 808.9
Operating expenses:
Selling, general and administrative expenses —
394.6
61.6
—
456.2
(Gains) losses and other expenses, net (1.7 ) 4.3
3.0
(0.1 ) 5.5
Restructuring charges (gains) —
1.5
(0.3 ) —
1.2
Income from equity method investments (248.5 ) (19.5 ) (12.4 ) 265.1
(15.3 )
Operating income 250.2
312.3
65.9
(267.1 ) 361.3
Interest expense, net 17.7
(1.5 ) 3.4
—
19.6
Other expense, net —
—
(0.2 ) —
(0.2 )
Income from continuing operations before income taxes 232.5
313.8
62.7
(267.1 ) 341.9
Provision for income tax (benefit) expense (4.9 ) 89.1
20.5
(0.7 ) 104.0
Income from continuing operations 237.4
224.7
42.2
(266.4 ) 237.9
Loss from discontinued operations, net of tax —
—
0.6
—
0.6
Net income $ 237.4
$ 224.7
$ 41.6
$ (266.4 ) $ 237.3
Other comprehensive income, net of tax 7.7
2.0
6.7
1.3
17.7
Comprehensive income (loss) $ 245.1
$ 226.7
$ 48.3
$ (265.1 ) $ 255.0

~~For the Nine Months Ended September 30, 2017~~

~~For the Nine Months Ended September 30, 2016~~

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

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 as of the date such statements were made. All statements, other than statements of historical fact, included in this Quarterly Report on Form 10-Q constitute forward-looking statements, including but not limited to statements identified by forward-looking terminology, such as the words “may,” “will,” “should,” “plan,” “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, ~~2016,~~2019, 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, except as required by law.

We operate in three reportable business segments of the heating, ventilation, air conditioning and refrigeration (“HVACR”) industry. Our reportable segments are Residential Heating & Cooling, Commercial Heating & Cooling, and Refrigeration. For additional information regarding our reportable segments, see Note 142 in the Notes to the Consolidated Financial Statements.

Our fiscal quarterly periods are comprised of approximately 13 weeks, but the number of days per quarter may vary year-over-year. Our quarterly reporting periods usually end on the Saturday closest to the last day of March, June and September. Our fourth quarter and fiscal year ends on December 31, ~~and our interim fiscal quarters are each comprised~~regardless of ~~approximately 13 weeks.~~the day of the week on which December 31 falls. 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 respective calendar quarter.

We sell our products and services through a combination of direct sales, distributors and company-owned parts and supplies stores.The demand for our products and services is seasonal and significantly impacted by the weather. Warmer than normal summer temperatures generate demand for replacement air conditioning and refrigeration products and services, and colder than normal winter temperatures have a similar effect on heating products and services. Conversely, cooler than normal summers and warmer than normal winters depress the demand for HVACR products 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. 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.

The principal elements of cost of goods sold are components, raw materials, factory overhead, labor, estimated warranty costs, and freight and distribution costs. The principal raw materials used in our manufacturing processes are steel, copper and aluminum. In recent years, pricing volatility for these commodities and related components, including the impact of imposed tariffs on the import of certain of our raw materials and components, has impacted us and the HVACR industry in general. We seek to mitigate the impact of volatility in 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.

Impact of COVID-19 Pandemic and the Resulting Changes to our 2020 Financial Outlook

In response to the COVID-19 pandemic various national, state, and local governments where we, our suppliers, and our customers operate have issued decrees prohibiting certain businesses from continuing to operate and certain classes of workers from reporting to work. Those decrees have resulted in supply chain disruption and higher employee absenteeism in our

factories. Additionally, certain of our manufacturing facilities have experienced a short-term suspension of operations for COVID-19 employee health concerns.

During the first quarter of 2020, we incurred charges of approximately $2 million primarily related to inefficiencies at our factories caused by the COVID-19 pandemic. Additionally, due to the adverse impact of the COVID-19 pandemic on our European manufacturing facilities and the resulting downturn in the related business, we recorded an $8 million valuation allowance on certain foreign deferred tax assets as we concluded that it was no longer more likely than not that these foreign tax loss carryforwards would be realized.

We anticipate potential supply chain disruptions, employee absenteeism and short-term suspensions of manufacturing facilities related to the COVID-19 pandemic that could unfavorably impact our business. We also anticipate significant challenges in the remainder of 2020 due to uncertain market conditions. Accordingly, we have revised our financial outlook downward in 2020.

Currently, our view is that the North America unitary HVAC and refrigeration market will be negatively impacted about 20% this year by the pandemic. Therefore, we have reset our financial expectations for the year based on that level of market impact and now expect revenue to be down 11%-17% from last year versus our previous guidance for growth of 4%-8%. We expect Diluted EPS from continuing operations in the range of $7.07 to $8.07 for the year. In April 2020, we implemented cost reduction actions to realize $115 million of SG&A savings for the balance of the year. In connection with these cost saving actions, we expect to incur pre-tax charges of approximately $10 million in the second quarter of 2020 related to personnel severance and benefits and facility exit costs.

We expect our cash generation to remain strong for 2020 as our working capital requirements decline and are projecting approximately $460 million in cash flows from operations for the year. We have reduced our capital expenditure plans for 2020 from $153 million to $120 million. We are rated investment grade by both S&P and Moody’s, and we expect to remain well within our debt covenants. Our bank revolver and asset securitization line do not have to go through renewal again until the latter half of 2021, and our senior notes do not mature until November 2023. Our quarterly dividend plans are unchanged, most recently $0.77 per share, or more than $115 million in total payments for the year. We repurchased $100 million of stock in the first quarter of the $400 million we had planned to repurchase for the year. However, we placed repurchase plans for the second quarter on hold and we will review plans for the third and fourth quarters as the year progresses.

InResults for the ~~third~~first quarter of ~~2017,~~2020 were driven by year over year sales and profit declines in our Residential Heating & Cooling and Refrigeration segments. The Residential Heating & Cooling segment saw a 5% decrease in net sales primarily on lower volumes and unfavorable mix. Their segment profit was down $54 million, including a $40 million decline related to non-recurring insurance recoveries in 2019 for lost profits from the Marshalltown tornado. The Commercial Heating & Cooling segment led our overall operational performance with a 7% increase in net sales and a $1 million increase in segment profit compared to the third quarter of 2016. The primary growth driver for this segment was volume gains. Our Residential Heating & Cooling segment also grew sales in the third quarter of 2017 withhad a 3% increase in net sales and ~~had $2~~a $4 million increase in ~~increased~~ segment profit ~~compared~~driven primarily by favorable mix and sourcing and engingeering-led cost reductions. The Refrigeration segment had a 32% decline in net sales and a $6 million decline in segment profit primarily due to the ~~third quarter~~sale of ~~2016. This segment's profits were up largely due to lower materials costs, higher volumes and favorable price. Sales~~our Kysor Warren business in ~~our Refrigeration segment increased by 3% and segment profit was down $3 million compared to the third quarter of 2016 due primarily to higher commodity prices~~2019 and lower ~~factory productivity.~~volumes.

Financial Highlights

•Net sales ~~increased $42~~decreased $67 million ~~or 4%,~~ to ~~$1,052~~$724 million in the ~~third~~first quarter of ~~2017 compared~~2019 driven by declines in our Residential Heating & Cooling and Refrigeration segments. Approximately half of the decline related to the ~~third quarter~~sale of ~~2016.~~our Kysor Warren business in 2019.

•Operating income in the ~~third~~first quarter of ~~2017~~2020 decreased $2$58 million to ~~$155 million.~~$36 million primarily due to lower volumes, unfavorable mix, and non-recurring insurance recoveries in 2019 for lost profits related to the Marshalltown tornado.

•Net income for the ~~third~~first quarter of ~~2017 increased $2~~2020 decreased $56 million to ~~$104 million, including the benefit of $1.5 million of discrete tax benefits in the third quarter of 2017 related to excess tax benefits from share-based compensation.~~$13 million.

•Diluted earnings per share from continuing operations were ~~$2.45~~$0.32 per share in the ~~third~~first quarter of ~~2017~~2020 compared to ~~$2.33~~$1.73 per share in the ~~third~~first quarter of ~~2016.~~2019.

~~During~~•For the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2020, we returned ~~$58~~$30 million to shareholders through dividend payments and ~~entered into agreements to repurchase $250~~repurchased $100 million of common stock ~~that will be completed in the fourth quarter of 2017.~~through our share repurchase program.

~~Third~~First Quarter of ~~2017~~2020 Compared to ~~Third~~First Quarter of ~~2016~~2019 - Consolidated Results

The following table provides a summary of our financial results, including information presented as a percentage of net sales:

Net sales ~~increased 4%~~declined 8% in the ~~third~~first quarter of ~~2017~~2020 compared to the ~~third~~first quarter of ~~2016, primarily from 3%~~2019, driven by a 4% decline related to the divestiture of our Kysor Warren business in 2019 and a 5% decline in volume, partially offset by a 1% increase in higher ~~sales volumes~~combined price and 1% from favorable foreign currency exchange rates. The Residential Heating & Cooling segment delivered higher volume from additional new construction business. The Commercial Heating & Cooling segment delivered higher volume from our North American equipment business.mix.

Gross profit margin in the ~~third~~first quarter of ~~2017~~2020 decreased ~~to 29.8% compared to 30.7% in the third quarter of 2016. We saw negative margin decreases of 120~~260 basis points ("bps") to 22.9% compared to 25.5% in the first quarter of 2019. We saw margin decreases of 160 bps from lower volumes, 140 bps from factory inefficiencies, and 150 bps from higher ~~commodity prices, 50 bps from~~ other product ~~costs, 50 bps from combined freight and distribution and 10 bps from product warranties.~~costs. Partially offsetting these decreases were margin increases of ~~10 bps from favorable mix and price, 120~~90 bps from lower ~~material~~commodity costs, ~~and 10~~80 bps from ~~favorable foreign currency exchange rates.~~lower tariffs and sourcing and engineering-led cost reductions, and 20 bps from the divestiture of the Kysor Warren business which had lower margins.

Selling, General and Administrative Expenses

Selling, general and administrative expenses or ("SG~~&A, was $159~~&A") declined $15 million to $131 million in the ~~third~~first quarter of ~~2017~~2020 compared to ~~$157~~$146 million in the ~~third~~first quarter of ~~2016, and as~~2019. As a percentage of net sales, SG&A decreased 4030 bps to ~~15.1%.~~18.1% primarily due to a decline in SG&A ~~increased due to wage inflation, increased healthcare costs~~from our divested Kysor Warren business and ~~increased investment in information technology and research and development partially offset by decreases in long-term~~lower incentive ~~compensation.~~compensation costs.

(Gains) Losses and Other Expenses, Net

~~Losses~~(Gains) losses and other expenses, net for the ~~third~~first quarter of ~~2017~~2020 and ~~2016~~2019 included the following (in millions):


	For the Three Months Ended March 31,
	2020		2019
Realized losses on settled future contracts	$	0.1	$	0.1
Foreign currency exchange gains	(0.5)		(0.5)
Loss on disposal of fixed assets	0.1		0.2
Other operating losses	0.2		—
Net change in unrealized losses (gains) on unsettled futures contracts	0.6		(0.4)
Special legal contingency charges	—		0.2
Asbestos-related litigation	(1.7)		1.4
Environmental liabilities	0.2		—
Other items, net	—		0.1
(Gains) losses and other expenses, net (pre-tax)	$	(1.0)	$	1.1

For the Three Months Ended September 30,
2017 2016
Realized (gains) losses on settled future contracts $ (0.5 ) $ 0.3
Foreign currency exchange (gains) losses (0.6 ) 0.5
Loss on disposal of fixed assets 0.1
0.2
Net change in unrealized losses (gains) on unsettled futures contracts 0.2
(1.2 )
Special legal contingency charges 1.5
0.5
Asbestos-related litigation 1.5
0.4
Environmental liabilities 0.5
—
Other items, net 0.3
—
Losses and other expenses, net (pre-tax) $ 3.0
$ 0.7

The net change in unrealized losses (gains) ~~losses~~ on unsettled futures contracts was due to changes in commodity prices relative to the unsettled futures contract prices. For more information on our futures contracts, see Note 49 in the Notes to the Consolidated Financial Statements. For more information on special legal contingency charges and asbestos-related litigation, see Note 64 in the Notes to the Consolidated Financial Statements. The environmental liabilities relate to estimated remediation costs for contamination at some of our facilities.

Restructuring Charges

Restructuring charges were $2approximately $1 million in the ~~third~~first quarter of ~~2017 compared~~2020 and related to ~~$1 million~~activities initiated in ~~2016. The charges~~2019 in ~~2017~~our Commercial Heating & Cooling and ~~2016 were primarily for projects to realign resources and enhance distribution capabilities.~~Residential Heating & Cooling segments. For additional information on our restructuring activities, refer to Note 127 in the Notes to the Consolidated Financial Statements. For additional information on restructuring activities planned in future periods of 2020, refer to Note 15 of the Notes to the Consolidated Financial Statements.

Loss on Sale of Business

We recognized a loss of $8.5 million in the first quarter of 2019 related to the sale of our Kysor Warren business. There were no gains or losses related to this divestiture in the first quarter of 2020. Refer to Note 6 in the Notes to the Consolidated Financial Statements for additional information.

Gains and Losses related to Marshalltown Tornado

On July 19, 2018, our manufacturing facility in Marshalltown, Iowa was severely damaged by a tornado. Insurance covered the repair or replacement of our assets that suffered damage or loss and reimbursement for other expenses and costs that have been incurred relating to the damages and losses suffered. These costs and insurance recoveries are shown in Loss (gain) from natural disaster, net of insurance recoveries in the Consolidated Statements of Operations. Our insurance policies also provided business interruption coverage, including lost profits, related to the losses suffered. These insurance recoveries are shown in Insurance proceeds for lost profits in the Consolidated Statements of Operations.

For the three months ended March 31, 2020, we incurred expenses of $2 million related to damages caused by the tornado, which included site clean up, waste disposal and other restoration costs. See Note 4 in the Notes to the Consolidated Financial Statements for additional information.

Income from Equity Method Investments

We participate in two joint ventures that are engaged in the manufacture and sale of compressors, unit coolers and condensing units. We exert significant influence over these affiliates based upon our ownership, but do not control them due to venture partner participation. Accordingly, these joint ventures have been accounted for under the equity method and their financial position and results of operations are not consolidated. Income from equity method investments of $5$3 million in the ~~third~~first quarter of ~~2017~~2020 was ~~relatively flat when compared~~comparable to the ~~third~~first quarter of ~~2016.~~2019.

Interest Expense, net

Interest expense, net of $8$9 million in the ~~third~~first quarter of ~~2017~~2020 was updown $2 million from $7$11 million ~~as compared to~~in the ~~third~~first quarter of ~~2016~~2019 primarily due to ~~an increase in our average net borrowings.~~lower borrowing costs.

Income Taxes

Our effective tax rate was 52.8% for the first quarter of 2020 compared to 16.4% for the first quarter of 2019. The rate increased primarily due to lower excess tax benefits and the recording of an $8 million valuation allowance on certain foreign deferred tax assets. We concluded that it was no longer more likely than not that these foreign tax loss carryforwards would be realized due to the adverse impact of the COVID-19 pandemic on our European manufacturing facilities and the resulting downturn in the related business.

We expect our annual effective tax rate to be between ~~31%~~21% and ~~32%~~22%, excluding the ~~impact~~impacts of excess tax benefits recorded as a reduction of income taxes under ASU No. 2016-09 ~~in 2017~~ and ~~subsequent years.~~excluding the $8 million valuation allowance.

The effective tax rate was 29% for the three months ended September 30, 2017, after the impact of excess tax benefits, compared to 32% for the three months ended September 30, 2016, which excluded the impact of excess tax benefits. The rate for the third quarter of 2017 is lower as compared to the third quarter of 2016 primarily due to the impact of foreign operations in low tax jurisdictions.

~~Third~~First Quarter of ~~2017~~2020 Compared to ~~Third~~First Quarter of ~~2016~~2019 - Results by Segment

Residential Heating & Cooling

The following table presents our Residential~~Heating & Cooling segment's net sales and profit for the third quarter of 2017 and 2016 (dollars in millions):~~

For the Three Months Ended September 30,
2017 2016 Difference % Change
Net sales $ 590.5
$ 572.7
$ 17.8
3.1 %
Profit $ 114.7
$ 112.7
$ 2.0
1.8 %
% of net sales 19.4 % 19.7 %

~~Net sales increased by 3% in the third quarter of 2017 compared to the third quarter of 2016. Sales volume increased 3%, price increased 1%, and mix was unfavorable by 1%.~~

Segment profit in the third quarter of 2017 increased $2 million compared to the third quarter of 2016 due to $8 million from sourcing and engineering-led cost reductions, $3 million in higher sales volume, $3 million from price and mix combined, $3 million for favorable foreign currency exchange rates, $1 million from factory productivity which includes the addition of a second factory in Mexico, and $1 million from higher income from equity method investments. Partially offsetting these increases was $8 million from higher commodity costs, $3 million from increases in warranty and other product costs, $3 million in distribution investments, and $3 million of SG&A expenses related to investments in research and development, information technology, and other SG&A.

~~Commercial Heating & Cooling~~

~~The following table presents our Commercial Heating & Cooling segment's net sales and profit for the third quarter of 2017 and 2016 (dollars in millions):~~

For the Three Months Ended September 30,
2017 2016 Difference % Change
Net sales $ 269.4
$ 251.4
$ 18.0
7.2 %
Profit $ 50.0
$ 48.9
$ 1.1
2.2 %
% of net sales 18.6 % 19.5 %

~~Net sales increased by 7% in the third quarter of 2017 compared to the third quarter of 2016. Sales volume increased 6% and favorable foreign currency exchange rates contributed 1% growth.~~

Segment profit in the third quarter of 2017 increased $1 million compared to the third quarter of 2016 primarily due to $4 million from higher sales volume, $2 million from sourcing and engineering-led cost reductions, $1 million from lower SG&A expenses, and $1 million from favorable foreign currency exchange rates. Partially offsetting these increases was $3 million from increases in warranty and other product costs, $2 million of higher commodity costs, $1 million in lower factory productivity, and $1 million in distribution investments.

~~Refrigeration~~

~~The following table presents our Refrigeration segment's net sales and profit for the third quarter of 2017 and 2016 (dollars in millions):~~

For the Three Months Ended September 30,
2017 2016 Difference % Change
Net sales $ 192.4
$ 185.9
$ 6.5
3.5 %
Profit $ 20.0
$ 22.9
$ (2.9 ) (12.7 )%
% of net sales 10.4 % 12.3 %

Net sales increased 3% in the third quarter of 2017 compared to the third quarter of 2016. Sales volume increased 2% primarily from our European Commercial Refrigeration and Australian businesses, and favorable foreign currency exchange rates contributed 1% growth.

Segment profit for the third quarter of 2017 decreased $3 million compared to the third quarter of 2016. The decrease was driven by $2 million of lower factory productivity, $2 million in higher SG&A expenses, $2 million of unfavorable price and mix, $1 million in higher commodity costs, and $1 million in freight and distribution investments that were partially offset by higher sourcing and engineering-led cost reductions of $3 million, higher sales volumes of $1 million and decreases in other product costs of $1 million.

~~Corporate and Other~~

Corporate and other expenses decreased $4 million in the third quarter of 2017 compared to the third quarter of 2016 primarily due to lower incentive compensation, partially offset by higher health care expenses and information technology investments.

~~Year-to-Date through September 30, 2017 Compared to Year-to-Date through September 30, 2016 - Consolidated Results~~

~~The following table provides a summary of our financial results, including information presented as a percentage of net sales:~~

For the Nine Months Ended September 30,
Dollars (in millions) Percent
Change
Fav/(Unfav) Percent of Sales
2017 2016 2017 2016
Net sales $ 2,947.9
$ 2,744.4
7.4
100.0 % 100.0 %
Cost of goods sold 2,082.4
1,935.5
(7.6 ) 70.6
70.5
Gross profit 865.5
808.9
7.0
29.4
29.5
Selling, general and administrative expenses 479.6
456.2
(5.1 ) 16.3
16.6
Losses and other expenses, net 8.5
5.5
(54.5 ) 0.3
0.2
Restructuring charges 2.1
1.2
(75.0 ) 0.1
—
Income from equity method investments (15.5 ) (15.3 ) 1.3
(0.5 ) (0.6 )
Operating income $ 390.8
$ 361.3
8.2
13.3 % 13.2 %

~~Net Sales~~

Net sales increased 7% in the first nine months of 2017 compared to the first nine months of 2016 due to a 7% increase in sales volumes. The volume increases were driven by our Residential Heating & Cooling and Commercial Heating & Cooling and Refrigeration segments all capturing additional replacement and new construction business.

~~Gross Profit~~

Gross profit margins in the first nine months of 2017 decreased 10 bps to 29.4% compared to the first nine months of 2016. Our profit margin decreased 70 bps from higher commodity costs, 50 bps from freight and distribution, 20 bps from unfavorable factory productivity and 20 bps related to a product quality issue disclosed in Note 6 in the Notes to the Consolidated Financial Statements. Offsetting these decreases were increases of 100 bps from material cost savings and 50 bps from favorable price and mix combined.

~~Selling, General and Administrative Expenses~~

SG&A was $480 million for the first nine months of 2017 compared to $456 million for the first nine months of 2016, and as a percentage of net sales, decreased 30 bps to 16.3% from 16.6%. SG&A increased due to wage inflation, increased healthcare costs and increased investments in information technology and research and development partially offset by decreases in long-term incentive compensation.

~~Losses and Other Expenses, Net~~

~~Losses and other expenses, net for the first nine months of 2017 and 2016 included the following (in millions):~~

For the Nine Months Ended September 30,
2017 2016
Realized (gains) losses on settled future contracts $ (1.3 ) $ 1.2
Foreign currency exchange (gains) losses (0.3 ) 1.1
Loss on disposal of fixed assets 0.1
0.3
Net change in unrealized losses (gains) on unsettled futures contracts 1.0
(1.9 )
Special legal contingency charges 3.6
0.5
Asbestos-related litigation 3.9
2.3
Environmental liabilities 1.2
1.1
Contractor tax payments —
0.5
Acquisition costs —
0.4
Other items, net 0.3
—
Losses and other expenses, net (pre-tax) $ 8.5
$ 5.5

The net change in unrealized (gains) losses on unsettled futures contracts was due to changes in commodity prices relative to the unsettled futures contract prices. For more information on our futures contracts, see Note 4 in the Notes to the Consolidated Financial Statements. For more information on special legal contingency charges and asbestos-related litigation, see Note 6 in the Notes to the Consolidated Financial Statements. The environmental liabilities relate to estimated remediation costs for contamination at some of our facilities. Contractor tax payments in the first nine months of 2016 relate to a charge for underpaid contractor taxes at one of our non-U.S. subsidiaries.

~~Restructuring Charges~~

Restructuring charges were $2 million in the first nine months of 2017 compared to $1 million in 2016. The charges in 2017 and 2016 were primarily for projects to realign resources and enhance distribution capabilities. For additional information on our restructuring activities, refer to Note 12 in the Notes to the Consolidated Financial Statements.

~~Income from Equity Method Investments~~

We participate in two joint ventures that are engaged in the manufacture and sale of compressors, unit coolers and condensing units. We exert significant influence over these affiliates based upon our ownership, but do not control them due to venture partner participation. Accordingly, these joint ventures have been accounted for under the equity method and their financial position and results of operations are not consolidated. Income from equity method investments of $16 million in the first nine months of 2017 was relatively flat when compared to the first nine months of 2016.

~~Interest Expense, net~~

~~Interest expense, net of $23 million in the first nine months of 2017 increased from $20 million in the first nine months of 2016 due to an increase in our average net borrowings.~~

~~Income Taxes~~

We expect our annual effective tax rate to be between 31% and 32%, excluding the impact of excess tax benefits recorded as a reduction of income taxes under ASU No. 2016-09, in 2017 and subsequent years.

The effective tax rate was 28% for the nine months ended September 30, 2017, after the impact of excess tax benefits, compared to 30% for the nine months ended September 30, 2016, which excluded the impact of excess tax benefits. The rate for the nine months ended September 30, 2017 is lower as compared to the nine months ended September 30, 2016 primarily due to the impact of foreign operations in low tax jurisdictions.

~~Year-to-Date through September 30, 2017 Compared to Year-to-Date through September 30, 2016 - Results by Segment~~

~~Residential Heating & Cooling~~

~~The following table presents our Residential~~Heating & Cooling segment's net sales and profit for the first ~~nine months~~quarter of ~~2017~~2020 and ~~2016~~2019 (dollars in millions):


	For the Three Months Ended March 31,
	2020			2019			Difference		% Change
Net sales	$	442.1		$	465.6		$	(23.5)	(5.0)	%
Profit	$	32.5		$	86.7		$	(54.2)	(62.5)	%
% of net sales	7.4		%	18.6		%

For the Nine Months Ended September 30,
2017 2016 Difference % Change
Net sales $ 1,663.8
$ 1,524.5
$ 139.3
9.1 %
Profit $ 297.6
$ 266.9
$ 30.7
11.5 %
% of net sales 17.9 % 17.5 %

Net sales ~~increased by 9%~~decreased 5% in the first ~~nine months~~quarter of ~~2017~~2020 compared to the first ~~nine months~~quarter of ~~2016.~~2019. Sales ~~volume increased net sales by 8% due to industry growth and market share gains, and the benefits of favorable price~~volumes declined 5% and mix ~~contributed~~was 1%. lower, partially offset by 1% higher price.

Segment profit ~~for~~in the first ~~nine months~~quarter of ~~2017 increased $31~~2020 declined $54 million compared to the first ~~nine months~~quarter of ~~2016~~2019 due to ~~$39~~$40 million of non-recurring insurance proceeds for lost profits in 2019 related to the Marshalltown tornado, $14 million of unfavorable mix, $9 million of higher ~~sales volume, $16~~other product costs, $8 million of factory inefficiencies, and $8 million from lower sales volume. Partially offsetting these declines was $6 million of higher price, $6 million of lower SG&A expense, $6 million of sourcing and engineering-led cost reductions, ~~$10~~$5 million ~~from favorable price and mix, $3 million from favorable foreign currency exchange rates,~~of lower commodities, $1 million ~~in higher factory productivity, $1 million from~~of lower ~~warranty costs~~tariffs on certain Chinese imports, and $1 million from higher income from equity method investments. Partially offsetting these increases was $15 million in SG&A expenses to support investments in technology and research and development and incremental headcount and higher personnel costs, $14 million in higher commodity costs, $9 million in freight and distribution investments, and $2 million in higher other product related costs.of favorable foreign exchange rates.

Commercial Heating & Cooling

The following table presents our Commercial Heating & Cooling segment's net sales and profit for the first ~~nine months~~quarter of ~~2017~~2020 and ~~2016~~2019 (dollars in millions):


	For the Three Months Ended March 31,
	2020			2019			Difference		% Change
Net sales	$	178.4		$	173.3		$	5.1	2.9	%
Profit	$	18.7		$	15.1		$	3.6	23.8	%
% of net sales	10.5		%	8.7		%

For the Nine Months Ended September 30,
2017 2016 Difference % Change
Net sales $ 723.5
$ 674.7
$ 48.8
7.2 %
Profit $ 113.8
$ 110.6
$ 3.2
2.9 %
% of net sales 15.7 % 16.4 %

~~Commercial Heating & Cooling net~~Net sales increased ~~by 7%~~3% in the first ~~nine months~~quarter of ~~2017~~2020 compared to the first ~~nine months~~quarter of ~~2016.~~2019. Sales ~~volume increased 7% primarily due to increases in our North American businesses.~~mix was favorable 4%, partially offset by 1% lower volumes.

Segment profit in the first ~~nine months~~quarter of ~~2017~~2020 increased $3$4 million compared to the first ~~nine months~~quarter of ~~2016~~2019 due to ~~$14~~$2 million ~~from higher sales volume, $5~~of favorable mix, $2 million ~~from~~of sourcing and engineering-led cost reductions, $1 million of lower commodities, and $1 million ~~from favorable foreign currency exchange rates.~~of lower SG&A expense. Partially offsetting these increases was $4$1 million inof lower sales volume and $1 million of higher SG&A expenses, $4 million from increases in other product costs, $3 million in higher commodity costs, $2 million from unfavorable sales mix, $2 million from lower factory productivity, and $2 million in freight and distribution investments.warranty costs.

Refrigeration

The following table presents our Refrigeration segment's net sales and profit for the first ~~nine months~~quarter of ~~2017~~2020 and ~~2016~~2019 (dollars in millions):


	For the Three Months Ended March 31,
	2020			2019			Difference		% Change
Net sales	$	103.3		$	151.4		$	(48.1)	(31.8)	%
Profit	$	0.7		$	8.4		$	(7.7)	(91.7)	%
% of net sales	0.7		%	5.5		%

For the Nine Months Ended September 30,
2017 2016 Difference % Change
Net sales $ 560.6
$ 545.2
$ 15.4
2.8 %
Profit $ 55.7
$ 53.2
$ 2.5
4.7 %
% of net sales 9.9 % 9.8 %

~~Refrigeration net~~Net sales ~~increased 3%~~decreased 32% in the first ~~nine months~~quarter of ~~2017~~2020 compared to the first ~~nine months~~quarter of ~~2016. Sales~~2019. The loss of sales from our divested Kysor Warren business contributed 23%, sales volume ~~increased net sales~~was lower by 2%9%, and ~~favorable~~foreign currency exchange rates were unfavorable by 1%, partially offset by higher combined price and mix ~~contributed~~of 1%.

Segment profit ~~for~~in the first ~~nine months~~quarter of ~~2017 increased $2~~2020 decreased $8 million compared to the first ~~nine months~~quarter of ~~2016~~2019 due to $8$4 million ~~from~~of lower volumes, $5 million of factory inefficiencies, $3 million of higher other product costs, and $2 million of lower sales of refrigerant allocations in Europe. Partially offsetting these decreases was $2 million of lower commodities, $2 million of lower SG&A, $1 million of sourcing and engineering-led cost reductions, ~~$4 million from favorable price and mix, $3 million from lower other product costs, $3 million from higher sales volume,~~ and $1 million ~~from favorable foreign currency exchange rates. Partially offsetting these increases was $10 million in~~of higher ~~SG&A expenses, $4 million in lower factory productivity, $2 million in higher freight and distribution investments, and $1 million in higher commodity costs.~~profit due to the divestiture of the Kysor Warren business.

Corporate and Other

Corporate and other expenses ~~decreased $7~~increased $2 million in the first ~~nine months~~quarter of ~~2017~~2020 compared to the first ~~nine months~~quarter of ~~2016~~2019 primarily due ~~from lower incentive compensation with a partial offset from general wage inflation and~~to $2 million of higher information technology ~~investments.~~investments, and $1 million of unfavorable foreign currency exchange rates, partially offset by $1 million of lower discretionary expenditures.

Liquidity and Capital Resources

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

Statement of Cash Flows

The following table summarizes our cash flow activity for the ~~nine~~three months ended ~~September 30,2017~~March 31, 2020 and ~~2016~~2019 (in millions):


	For the Three Months Ended March 31,
	2020		2019
Net cash used in operating activities	$	(98.8)	$	(141.0)
Net cash (used in) provided by investing activities	(25.7)		13.6
Net cash provided by financing activities	133.0		108.9

For the Nine Months Ended September 30,
2017 2016
Net cash provided by operating activities $ 129.0
$ 126.9
Net cash used in investing activities (60.3 ) (59.4 )
Net cash used in financing activities (67.3 ) (61.8 )

Net Cash Provided by Operating Activities - The net cash ~~provided by~~used in operating activities in the ~~first nine~~three months ~~of 2017~~ended March 31, 2020 and ~~2016~~2019 reflects the seasonal increase in working capital ~~requirements and the increase~~requirements. The decrease in ~~sales~~cash used in ~~2017 as compared to 2016. The increase in net income~~operating activities in the first ~~nine months~~quarter of ~~2017 as~~2020 compared to ~~2016~~the same period in 2019 was ~~offset by increases in~~primarily due to the timing of working capital ~~used to support higher sales.~~payments.

Net Cash ~~Used in~~(Used in) Provided by Investing Activities - Capital expenditures were ~~$61 million and $59~~$25 million in the ~~first nine~~three months ended March, 2020 compared to $37 million in the same period of ~~2017 and 2016, respectively.~~2019. Capital expenditures in ~~2017~~2020 were primarily related to the an expansion of manufacturing capacity and equipment and investments in systems and software to support the overall ~~enterprise, expansion of our manufacturing capacity and equipment, and continued investments in our distribution network.~~enterprise.

Net Cash ~~Used in~~Provided by Financing Activities - Net cash ~~used in~~provided by financing activities ~~increased~~ in the ~~first nine~~three months ~~of 2017 to $67~~ended March 31, 2020 was $133 million as compared to ~~$62~~$109 million in the ~~first nine months~~same period of ~~2016. Cash continues~~2019. This increase is primarily due to ~~be provided by an increase in~~higher net borrowings on our revolving credit facility. We also repurchased $100 million of shares for the three months ended March 31, 2020 and ~~we continue~~returned $30 million to ~~make share repurchases and~~shareholders through dividend payments. During the third quarter of 2017 we settled the $100 million Accelerated Share Repurchase Transaction executed in the second quarter and initiated another $75 million Accelerated Share Repurchase Transaction to be settled in the fourth quarter. For additional information on share repurchases, refer to Note 105 in the Notes to the Consolidated Financial Statements.

Debt Position

The following table details our lines of credit and financing arrangements as of ~~September 30, 2017~~March 31, 2020 (in millions):

Outstanding Borrowings
Short-term debt:
Foreign obligations $ 1.0
Asset Securitization Program ⁽¹⁾
325.0
Total short-term debt $ 326.0
Current maturities of long-term debt:
Capital lease obligations 0.5
Domestic credit facility ⁽²⁾
22.5
Debt issuance costs (0.6 )
Total current maturities of long-term debt $ 22.4
Long-term debt:
Capital lease obligations 14.7
Domestic credit facility ⁽²⁾
415.5
Senior unsecured notes 350.0
Debt issuance costs (4.5 )
Total long-term debt 775.7
Total debt $ 1,124.1


	Outstanding Borrowings





Current maturities of long-term debt:
Asset securitization program ⁽²⁾	$	215.0
Finance lease obligations	8.2
Domestic credit facility⁽¹⁾	30.0

Debt issuance costs	(0.9)
Total current maturities of long-term debt	$	252.3
Long-term debt:

Finance lease obligations	26.2
Domestic credit facility ⁽¹⁾	815.5
Senior unsecured notes	350.0
Debt issuance costs	(1.8)
Total long-term debt	1,189.9
Total debt	$	1,442.2

⁽¹⁾ The available future borrowings on our domestic credit facility are $312.1 million after being reduced by the outstanding borrowings and $2.4 million in outstanding standby letters of credit. We also had $29.6 million in outstanding standby letters of credit outside of the domestic credit facility as of March 31, 2020.

⁽²⁾ The maximum securitization amount ranges from ~~$200.0~~$250.0 million to ~~$325.0~~$400.0 million, depending on the period. The maximum capacity of the ASP is the lesser of the maximum securitization amount or 100% of the net pool balance less reserves, as defined under the ASP. Refer to Note 12 in the Notes to the Consolidated Financial Statements for more information.

⁽²⁾ The available future borrowings on our domestic credit facility are $429.0 million after being reduced by the outstanding borrowings and $3.0 million in outstanding standby letters of credit. We also had $34.7 million in outstanding standby letters of credit outside of the domestic credit facility as of September 30, 2017.

Financial Leverage

We periodically review our capital structure to ensure the appropriate levels of leverage and liquidity. We may access the capital markets, as necessary, based on business needs and to take advantage of favorable interest rate environments or other market conditions. We also evaluate our debt-to-capital and debt-to-EBITDA ratios to determine, among other considerations, the appropriate targets for capital expenditures and share repurchases under our share repurchase programs. Our debt-to-total-capital ratio increased to ~~97.2%~~128.3% at ~~September 30, 2017~~March 31, 2020 from ~~95.8%~~117.0% at December 31, ~~2016.~~2019.

As of ~~September 30, 2017,~~March 31, 2020, our senior credit ratings were Baa3 with a stable outlook, and BBB with a stable outlook, by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Rating Group ("S&P"), respectively. The security ratings are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating. Our goal is to maintain investment grade ratings from Moody's and S&P to help ensure the capital markets remain available to us.

Liquidity

We believe our cash and cash equivalents of ~~$61~~$39 million, future cash generated from operations and available future borrowings are sufficient to fund operations, planned capital expenditures, future contractual obligations, potential share repurchases ~~potential~~and dividends and other needs in the foreseeable future. Included in our cash and cash equivalents of ~~$61~~$39 million as of ~~September 30, 2017~~March 31, 2020 was ~~$37.1~~$20 million of cash held in foreign locations. Our cash held in foreign locations is used for investing and operating activities in those locations, and we generally do not have the need or intent to repatriate those funds to the United States. ~~If we were to repatriate foreign earnings, we would be required to accrue and pay taxes~~An actual repatriation in the ~~United States, less~~future from our non-U.S. subsidiaries could be subject to foreign ~~tax credits, for the amounts that were repatriated.~~withholding taxes and U.S. state taxes.

Our expected capital expenditures for 2017 are $100 million. We also continue to increase shareholder value through dividend payments and our share repurchase programs, with the completion of a $250 million stock repurchase program and the declaration of $58 million of cash dividends in the first nine months of 2017.

Off Balance Sheet Arrangements

~~In addition~~An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which the company has: (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to ~~the credit facilities, promissory notes~~us, or that engages in leasing, hedging or research and ~~leasing commitments described above,~~development arrangements with us. We have no off-balance sheet arrangements that we ~~also lease real estate and machinery and equipment pursuant to operating leases that are not capitalized~~believe may have a material current or future effect on the balance sheet, including high-turnover equipment such as autos and service vehicles and short-lived equipment such as personal computers. Our operating lease commitments have not materially changed since December 31, 2016.our financial condition, liquidity or results of operations.

Commitments, Contingencies and Guarantees

For information regarding our commitments, contingencies and guarantees, see Note 64 in the Notes to the Consolidated Financial Statements.

Recent Accounting Pronouncements

~~On May 28, 2014,~~See Note 1 in the ~~Financial Accounting Standard Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which requires an entity~~Notes to ~~recognize~~ the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for us on January 1, 2018. Early application is not permitted. We have substantially completed our evaluation of the effect that ASU 2014-09 will have on our Consolidated Financial Statements for disclosure of recent accounting pronouncements and ~~related disclosures. We do not expect~~ the ASU to have a material impact on the amount and timing of revenue recognition, but it will require us to enhance our disclosures to provide additional information relating to disaggregated revenue, contract assets and liabilities, and remaining performance obligations. We are currently in the process of preparing these additional disclosures, including updating our internal controls related to the additional data and disclosures to be provided upon adoption of the new standard. We will adopt the new standard using the modified retrospective approach.

~~On February 25, 2016, the FASB issued ASU No. 2016-02,~~ ~~Leases (ASC 842).~~ Lessees will need to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. It will be critical to identify leases embedded in a contract to avoid misstating the lessee’s balance sheet. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. ASU 2016-02 is effective for public companies for annual reporting periods beginning after December 15, 2018, and interim periods within those fiscal years. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting. As a result of the new standard, all of our leases greater than one year in duration will be recognized on our Consolidated Balance Sheets as both operating lease liabilities and right-of-use assets upon adoption of the standard.

~~In August 2016, the FASB issued ASU 2016-15,~~ ~~Classification of Certain Cash Receipts and Cash Payments~~. The amendments in this ASU clarify the classification for eight different types of activities, including debt prepayment and extinguishment costs, proceeds from insurance claims and distributions from equity method investees. For public business entities, the standard is effective for financial statements issued for fiscal years beginning after December 15, 2017. This standard is not expected to have a material impact on our consolidated financial statements.

~~On October 24, 2016, the FASB issued ASU 2016-16,~~ ~~Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory~~. The new ASU eliminates the existing exception from recognition of the tax consequences of intercompany sales of assets other than inventory. Under the new standard, when an asset (other than inventory) is sold from one consolidated entity to another, the tax consequences to the seller will be recognized currently as a component of the current tax provision. The new guidance will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those years. In accordance with the ASU, our previously deferred tax costs and unrecognized deferred tax assets related to intra-entity asset transfers will need to be recognized at the date of transition through a cumulative effect adjustment to opening retained earnings upon adoption of the standard.

~~On March 10, 2017, the FASB issued ASU 2017-07,~~ ~~Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~. ASU 2017-07 changes the income statement presentation of defined benefit plan expense by requiring separation between operating expense (service cost component) and non-operating expense (all other components, including interest cost, amortization of prior service cost, curtailments and settlements, etc.). The operating expense component is reported with similar compensation costs while the non-operating components are reported in Other Income, net. In addition, only the service cost component is eligible for capitalization as part of an asset such as inventory or property, plant and equipment. We do not expect the ASU to have a materialpotential impact on our financial ~~results.~~statements and disclosures.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk affecting LII, see "Quantitative and Qualitative Disclosures About Market Risk" in Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016.~~2019. Our exposure to market risk has not changed materially since December 31, ~~2016.~~2019.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, 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, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of ~~September 30, 2017,~~March 31, 2020, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes ~~during the quarter ended September 30, 2017~~ in our internal control over financial reporting during the first quarter of 2020 that ~~have~~ materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II - Other Information

Item 1. Legal Proceedings

We are involved in a number of claims and lawsuits incident to the operation of our businesses. Insurance coverages are maintained and estimated costs are recorded for such claims and lawsuits. It is management's opinion that none of these claims or lawsuits will have a material adverse effect, individually or in the aggregate, on our financial position, results of operations or cash flows.

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, ~~2016,~~2019, which could materially affect our business, financial condition or results of operations. In the first quarter of 2020, we identified the following additional risk factor:

We Face Risks Related to the Current COVID-19 Pandemic

A novel strain of coronavirus (“COVID-19”) surfaced in late 2019 and has spread around the world, including to the United States. In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has disrupted our business operations and affected our results of operations. The magnitude of the impact of COVID-19 is unpredictable; consequently, the impact it will have on the Company’s future results is uncertain.

Additionally, certain of our manufacturing facilities have experienced a short-term suspension of operations for COVID-19 employee health concerns. There remains a risk of future employee health concerns and we cannot predict whether any of our manufacturing facilities will experience disruptions or how long such disruptions would last.

The impact of the COVID-19 pandemic continues to evolve, and therefore, we cannot predict the full extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted.

There have been no other material changes to our risk factors from those disclosed in our ~~2016~~ Annual Report on Form ~~10-K.~~10-K for the year ended December 31, 2019.

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

In the ~~third~~first quarter of ~~2017,~~2020, we purchased shares of our common stock as follows:


	Total Number of Shares Purchased ⁽¹⁾	Average Price Paid per Share (including fees)		Total Number of Shares Purchased As Part of Publicly Announced Plans	Approximate Dollar Value of Shares that may yet be Purchased under our Share Repurchase Plans (in millions) ⁽²⁾
January 1 through February 1	190	$	245.45	—	$	546.0
February 1 through February 23	353,346	$	242.5	351,763	$	446.0
February 23 through March 31	84,507	$	233.9	60,682	$	446.0
	438,043			412,445

Total Number of Shares Purchased ⁽¹⁾
Average Price Paid per Share (including fees) Total Number of Shares Purchased As Part of Publicly Announced Plans
Approximate Dollar Value of Shares that may yet be Purchased under our Share Repurchase Plans
(in millions) ⁽²⁾
July 1 through July 29 432,400
$ 172.71
432,179
396.0
July 30 through August 26 9,129
173.24
—
396.0
August 26 through September 30 1,628
158.63
—
396.0
443,157
432,179

⁽¹⁾ ~~We repurchased 10,979~~ Includes 25,598 shares of common stock we repurchased in ~~July, August~~January, February and ~~September 2017~~March of 2020 surrendered to LII to satisfy employee tax-withholding obligations in connection with the exercise of long-term incentive awards.

⁽²⁾ After ~~an $75~~$100.0 million ~~payment for Accelerated Share Repurchase Plan (ASR)~~related to repurchases under the ASR Agreement executed in February ~~2017, $100 million payment for an ASR~~2020. The stock repurchases were executed in April 2017 and $75 million payment for an ASR executed in July 2017. Final settlement of the February ASR occurred in the second quarter, final settlement for the April ASR occurred in the third quarter and the final settlement of the July ASR will be in the fourth quarter. The February, April and July ASRs were offered pursuant to a previously announced repurchase plan. See Note 105 in the Notes to the Consolidated Financial Statements for further details.

Item 6. Exhibits



3.1		Restated 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).
3.2		Amended and Restated Bylaws of LII (filed as Exhibit 3.1 to LII’s Current Report on Form 8-K filed on December 16, 2013 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		Indenture, dated as of May 3, 2010, between LII and U.S. Bank National Association, as trustee (filed as Exhibit 4.3 to LII’s Post-Effective Amendment No. 1 to Registration Statement on S-3 (Registration No. 333-155796) filed on May 3, 2010, and incorporated herein by reference).
4.3		Form of ~~First~~ Supplemental Indenture among LII, the guarantors party thereto and U.S. Bank National Association, as trustee (filed as Exhibit 4.11 to LII’s Post-Effective Amendment No. 1 to Registration Statement on S-3 (Registration No. 333-155796) filed on May 3, 2010, and incorporated herein by reference).
4.4		Second Supplemental Indenture dated as of March 28, 2011, among Heatcraft Inc., a Mississippi corporation, Heatcraft Refrigeration Products LLC, a Delaware limited liability company and Advanced Distributor Products LLC, a Delaware limited liability company (the “Guarantors”), LII, and each other existing Guarantor under the Indenture dated as of May 3, 2010, and U.S. Bank National Association as Trustee (filed as Exhibit 4.4 to LII’s Quarterly Report on Form 10-Q filed on April 26, 2011, and incorporated herein by reference).
~~4.5~~	Fourth Supplemental Indenture, dated as of December 10, 2013 among Lennox National Account Services LLC, LGL Australia (US) Inc., Lennox International Inc., each other existing Guarantor under the Indenture, dated as of May 3, 2010, as subsequently supplemented, and U.S. Bank National Association (filed as Exhibit 4.5 to LII's Annual Report on Form 10-K filed on February 13, 2014 and incorporated herein by reference).
~~4.6~~	Fifth Supplemental Indenture, dated as of August 30, 2016 among LGL Europe Holding Co., each other existing Guarantor under the Indenture, dated as of May 3, 2010, as subsequently supplemented, and U.S. Bank National Association (filed as Exhibit 4.6 to LII's Quarterly Report on Form 10-Q filed on October 17, 2016, and incorporated by reference).
~~4.7~~	Sixth Supplemental Indenture, dated as of November 3, 2016, among LII, each other existing Guarantor under the Indenture, dated as of May 3, 2010, as subsequently supplemented, and US Bank National Association, as trustee (filed as Exhibit 4.2 to LII’s Current Report on Form 8-K filed on November 3, , 2016, and incorporated herein by reference).
~~4.8~~4.5		Seventh Supplemental Indenture, dated as of January 23, 2019, among LII Mexico Holdings Ltd., Lennox International Inc., each other existing Guarantor under the Indenture, dated as of May 3, 2010, as subsequently supplemented, and US Bank National Association, as trustee (filed as Exhibit 2.5 to LII's Annual Report on Form 10-K filed on February 19, 2019 and incorporated herein by reference).
4.6		Form of 3.000% Notes due 2023 (filed as Exhibit ~~4.3~~A in Exhibit 4.2 to LII’s Current Report on Form 8-K filed on November 3, 2016, and incorporated herein by reference).
~~10.1~~31.1		~~First Amendment To Sixth Amended and Restated Credit Facility Agreement (filed herewith).~~
~~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 pursuant to 18 U.S.C. Section 1350 (furnished herewith).
101		INS XBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101		SCH Inline XBRL Taxonomy Extension Schema Document
101		CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101		LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101		PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
101		DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
104		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

~~Exhibit No. (101).INS XBRL Instance Document~~

~~Exhibit No. (101).SCH XBRL Taxonomy Extension Schema Document~~

~~Exhibit No. (101).CAL XBRL Taxonomy Extension Calculation Linkbase Document~~

~~Exhibit No. (101).LAB XBRL Taxonomy Extension Label Linkbase Document~~

~~Exhibit No. (101).PRE XBRL Taxonomy Extension Presentation Linkbase Document~~

~~Exhibit No. (101).DEF XBRL Taxonomy Extension Definition Linkbase Document~~

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.

By: /s/ Joseph W. Reitmeier

Joseph W. Reitmeier

Chief Financial Officer

(on behalf of registrant and as principal financial officer)

Date: ~~October 23, 2017~~April 20, 2020

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited)

(Amounts in millions)	For the Nine Months Ended September 30,
	2017			2016
Cash flows from operating activities:
Net income	$	262.5		$	237.3
Adjustments to reconcile net income to net cash provided by operating activities:
Income from equity method investments	(15.5		)	(15.3		)
Dividends from affiliates	7.8			3.9
Restructuring charges (gains), net of cash paid	1.0			(0.8		)
Provision for bad debts	3.2			3.4
Unrealized gains on derivative contracts	(0.7		)	(2.2		)
Stock-based compensation expense	18.8			24.8
Depreciation and amortization	48.1			43.4
Deferred income taxes	(3.9		)	(2.6		)
Pension expense	4.1			4.7
Pension contributions	(1.4		)	(52.5		)
Other items, net	1.0			0.4
Changes in assets and liabilities, net of effects of divestitures:
Accounts and notes receivable	(118.3		)	(146.2		)
Inventories	(102.6		)	(49.9		)
Other current assets	(7.3		)	(6.6		)
Accounts payable	31.0			56.4
Accrued expenses	7.6			40.7
Income taxes payable and receivable	(9.9		)	(15.0		)
Other	3.5			3.0
Net cash provided by operating activities	129.0			126.9
Cash flows from investing activities:
Proceeds from the disposal of property, plant and equipment	0.2			—
Purchases of property, plant and equipment	(60.5		)	(59.4		)
Net cash used in investing activities	(60.3		)	(59.4		)
Cash flows from financing activities:
Short-term borrowings, net	(1.4		)	(2.1		)
Asset securitization borrowings	275.0			145.0
Asset securitization payments	—			(20.0		)
Long-term debt payments	(200.8		)	(30.9		)
Borrowings from credit facility	1,883.0			1,715.0
Payments on credit facility	(1,701.0		)	(1,493.0		)
Payments of deferred financing costs	—			(0.9		)
Proceeds from employee stock purchases	2.3			1.9
Repurchases of common stock	(250.0		)	(300.0		)
Repurchases of common stock to satisfy employee withholding tax obligations	(16.0		)	(26.3		)
Cash dividends paid	(58.4		)	(50.5		)
Net cash used in financing activities	(67.3		)	(61.8		)
Increase in cash and cash equivalents	1.4			5.7
Effect of exchange rates on cash and cash equivalents	9.1			3.2
Cash and cash equivalents, beginning of period	50.2			38.9
Cash and cash equivalents, end of period	$	60.7		$	47.8

Supplemental disclosures of cash flow information:
Interest paid	$	22.5		$	17.0
Income taxes paid (net of refunds)	$	115.5		$	120.9



	Balance at December 31, 2016		Changes in foreign currency translation rates		Balance at September 30, 2017
Residential Heating & Cooling	$	26.1	$	—	$	26.1
Commercial Heating & Cooling	60.1		1.8		61.9
Refrigeration	108.9		3.7		112.6
Total Goodwill	$	195.1	$	5.5	$	200.6



	As of September 30, 2017			As of December 31, 2016
Unrealized (gains) losses on unsettled contracts	$	(9.9	)	$	(8.9	)
Income tax expense	3.6			3.3
Gains included in AOCL, net of tax ⁽¹⁾	$	(6.3	)	$	(5.6	)



	As of September 30, 2017	As of December 31, 2016
Copper	18.9	30.4



	As of September 30, 2017	As of December 31, 2016
Notional Amounts (in local currency):
Mexican Peso	69.8	310.1
Canadian Dollar	83.1	24.9



	Fair Values of Derivative Instruments ⁽¹⁾
	Derivatives Designated as Hedging Instruments				Derivatives Not Designated as Hedging Instruments
	As of September 30, 2017		As of December 31, 2016		As of September 30, 2017		As of December 31, 2016
Current Assets:
Other Assets
Commodity futures contracts	$	9.7	$	8.7	$	1.0	$	0.7
Foreign currency forward contracts	0.4		0.5		0.2		0.2
Non-Current Assets:
Other Assets, net
Commodity futures contracts	0.3		1.9		—		0.2
Total Assets	$	10.4	$	11.1	$	1.2	$	1.1
Current Liabilities:
Accrued Expenses
Foreign currency forward contracts	$	0.4	$	0.8	$	1.5	$	3.2
Total Liabilities	$	0.4	$	0.8	$	1.5	$	3.2



Total warranty liability as of December 31, 2016	$	101.1
Warranty claims paid	(21.6		)
Changes resulting from issuance of new warranties	32.2
Changes in estimates associated with pre-existing liabilities	(4.7		)
Changes in foreign currency translation rates and other	0.6
Total warranty liability as of September 30, 2017	$	107.6



	As of September 30, 2017			As of December 31, 2016
Short-Term Debt:
Asset Securitization Program	$	325.0		$	50.0
Foreign obligations	1.0			2.4
Total short-term debt	$	326.0		$	52.4
Current maturities of long-term debt:
Capital lease obligations	$	0.5		$	0.8
Domestic credit facility	22.5			—
Senior unsecured notes	—			200.0
Debt issuance costs	(0.6		)	(0.7		)
Total current maturities of long-term debt	$	22.4		$	200.1
Long-Term Debt:
Capital lease obligations	$	14.7		$	15.0
Domestic credit facility	415.5			256.0
Senior unsecured notes	350.0			350.0
Debt issuance costs	(4.5		)	(5.3		)
Total long-term debt	$	775.7		$	615.7
Total debt	$	1,124.1		$	868.2



	Gains (Losses) on Cash Flow Hedges			Unrealized Gains on Available-for-Sale Securities		Defined Benefit Pension Plan Items			Foreign Currency Translation Adjustments			Total AOCL
Balance as of December 31, 2016	$	5.6		$	2.3	$	(130.0	)	$	(73.0	)	$	(195.1	)
Other comprehensive income (loss) before reclassifications	6.7			0.2		(5.7		)	39.4			40.6
Amounts reclassified from AOCL	(6.0		)	—		3.5			—			(2.5		)
Net other comprehensive income (loss)	0.7			0.2		(2.2		)	39.4			38.1
Balance as of September 30, 2017	$	6.3		$	2.5	$	(132.2	)	$	(33.6	)	$	(157.0	)



	Charges Incurred in 2017		Charges Incurred to Date		Total Charges Expected to be Incurred
Severance and related expense	$	1.3	$	10.6	$	11.0
Asset write-offs and accelerated depreciation	0.7		3.1		3.1
Lease termination	—		0.2		0.2
Other	0.1		3.8		4.1
Total restructuring charges	$	2.1	$	17.7	$	18.4



	Balance as of December 31, 2016		Included in Earnings		Cash Utilization			Non-Cash Utilization and Other			Balance as of September 30, 2017
Severance and related expense	$	—	$	1.3	$	(0.9	)	$	—		$	0.4
Asset write-offs and accelerated depreciation	—		0.7		(0.1		)	(0.6		)	—
Lease termination	—		—		—			—			—
Other	—		0.1		(0.1		)	—			—
Total restructuring accruals	$	—	$	2.1	$	(1.1	)	$	(0.6	)	$	0.4



~~Segment~~	~~Product or Services~~	~~Markets Served~~	~~Geographic Areas~~
~~Residential Heating & Cooling~~	~~Furnaces, air conditioners, heat pumps, packaged heating and cooling systems, indoor air quality equipment, comfort control products, replacement parts~~	~~Residential Replacement;~~ ~~Residential New Construction~~	~~United States~~ ~~Canada~~
~~Commercial Heating & Cooling~~	~~Unitary heating and air conditioning equipment, applied systems, controls, installation and service of commercial heating and cooling equipment~~	~~Light Commercial~~	~~United States~~ ~~Canada~~ ~~Europe~~ ~~Central America~~
~~Refrigeration~~	~~Condensing units, unit coolers, fluid coolers, air cooled condensers, air handlers, process chillers, controls, compressorized racks, supermarket display cases and systems~~	~~Light Commercial;~~ ~~Food Preservation;~~ ~~Non-Food/Industrial~~	~~United States~~ ~~Canada~~ ~~Europe~~ ~~Asia Pacific~~ ~~South America~~ ~~Central America~~


◦	~~Net change in unrealized losses (gains) on unsettled futures contracts,~~



	As of September 30, 2017		As of December 31, 2016
Investment in marketable equity securities	$	4.7	$	4.4



(Amounts in millions)	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Current Assets:
Cash and cash equivalents	$	1.2		$	22.4	$	37.1	$	—		$	60.7
Accounts and notes receivable, net	—			35.5		562.6		—			598.1
Inventories, net	—			392.2		143.5		(4.8		)	530.9
Other assets	14.2			34.3		60.7		(28.3		)	80.9
Total current assets	15.4			484.4		803.9		(33.1		)	1,270.6
Property, plant and equipment, net	—			243.7		135.2		(4.3		)	374.6
Goodwill	—			117.8		65.7		17.1			200.6
Investment in subsidiaries	1,212.8			383.7		—		(1,596.5		)	—
Deferred income taxes	11.0			112.0		32.5		(12.2		)	143.3
Other assets, net	1.8			42.1		24.1		(1.4		)	66.6
Intercompany (payables) receivables, net	(453.9		)	461.3		95.1		(102.5		)	—
Total assets	$	787.1		$	1,845.0	$	1,156.5	$	(1,732.9	)	$	2,055.7
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt	$	—		$	—	$	326.0	$	—		$	326.0
Current maturities of long-term debt	21.9			0.3		0.2		—			22.4
Accounts payable	21.3			252.7		120.5		—			394.5
Accrued expenses	5.7			216.6		56.1		—			278.4
Income taxes (receivable) payable	(55.7		)	60.4		48.5		(50.8		)	2.4
Total current liabilities	(6.8		)	530.0		551.3		(50.8		)	1,023.7
Long-term debt	761.1			14.3		0.3		—			775.7
Post-retirement benefits, other than pensions	—			1.9		—		—			1.9
Pensions	—			77.1		13.1		—			90.2
Other liabilities	0.3			119.9		11.5		—			131.7
Total liabilities	754.6			743.2		576.2		(50.8		)	2,023.2
Commitments and contingencies
Total stockholders' equity	32.5			1,101.8		580.3		(1,682.1		)	32.5
Total liabilities and stockholders' equity	$	787.1		$	1,845.0	$	1,156.5	$	(1,732.9	)	$	2,055.7


	For the Three Months Ended September 30,													For the Three Months Ended March 31,
	Dollars (in millions)						Percent Change Fav/(Unfav)		Percent of Sales					Dollars (in millions)						Percent Change Fav/(Unfav)		Percent of Sales
	2017			2016					2017		2016			2020		2019						2020		2019
Net sales	$	1,052.3		$	1,010.0		4.2	%	100.0	%	100.0	%	Net sales	$	723.8	$	790.3	(8.4)	%	100.0	%	100.0	%
Cost of goods sold	738.6			699.7			(5.6	)	70.2		69.3		Cost of goods sold	558.1		588.7		5.2		77.1		74.5
Gross profit	313.7			310.3			1.1		29.8		30.7		Gross profit	165.7		201.6		(17.8)		22.9		25.5
Selling, general and administrative expenses	158.7			156.5			(1.4	)	15.1		15.5		Selling, general and administrative expenses	131.1		145.8		10.1		18.1		18.4
Losses and other expenses, net	3.0			0.7			(328.6	)	0.3		0.1
(Gains) losses and other expenses, net													(Gains) losses and other expenses, net	(1.0)		1.1		190.9		(0.1)		0.1
Restructuring charges	1.9			0.6			(216.7	)	0.2		0.1		Restructuring charges	0.5		0.5		—		0.1		0.1
Loss on sale of business													Loss on sale of business	—		8.5		100.0		—		1.1
Insurance proceeds for lost profits													Insurance proceeds for lost profits	—		(39.5)		100.0		—		(5.0)
Loss (gain) from natural disaster, net of insurance recoveries													Loss (gain) from natural disaster, net of insurance recoveries	1.6		(6.9)		123.2		0.2		(0.9)
Income from equity method investments	(4.5		)	(4.4		)	2.3		(0.4	)	(0.4	)	Income from equity method investments	(2.9)		(2.6)		11.5		(0.4)		(0.3)
Operating income	$	154.6		$	156.9		(1.5	)%	14.7	%	15.5	%	Operating income	$	36.4	$	94.7	(61.6)	%	5.0	%	12.0	%