Stock-Based Compensation:

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 Years Ended December 31,
	2012		2011		2010
Compensation expense⁽¹⁾	$	15.2	$	13.7	$	15.4

⁽¹⁾ Stock-Based Compensation expense is recorded in our Corporate and other business segment.

Incentive Plan

Under the Lennox International Inc. 2010 Incentive Plan, as amended and restated (the “2010 Incentive Plan”), we are authorized to issue awards for 24.3 million shares of common stock. As of December 31, 2012, awards for 20.6 million shares of common stock had been granted, net of cancellations and repurchases, and there were 3.7 million shares available for future issuance.

The 2010 Incentive Plan provides for various long-term incentive awards, which include stock options, performance share units, restricted stock units and stock appreciation rights. A description of these long-term incentive awards and related activity within each award category is provided below.

Performance Share Units

Under the 2010 Incentive Plan, performance share units are granted to certain employees at the discretion of the Board of Directors with a three-year performance period beginning January 1^st of each year. Upon meeting the performance and vesting criteria, performance share units are converted to an equal number of shares of our common stock.

Performance share units vest if, at the end of the three-year performance period, at least the threshold performance level has been attained. To the extent that the payout level attained is less than 100%, the difference between 100% and the units earned and distributed will be forfeited. Eligible participants may also earn additional units of our common stock, which would increase the potential payout from 101% to 200% of the units granted, depending on LII's performance over the three-year performance period.

Performance share units under the 2010 Incentive Plan are classified as equity awards. The fair value of units is calculated as the average of the high and low market price of the stock on the date of grant discounted by the expected dividend rate over the service period. Units are amortized to expense ratably over the service period. The compensation expense for any additional units which may be earned is estimated each reporting period based on the fair value of the stock at the date of grant. The number of units expected to be earned will be adjusted, as necessary, to reflect the actual number of units awarded.

The following table provides information on our performance share units (dollars in millions, except weighted-average fair values of grants):



	For the Years Ended December 31,
	2012			2011			2010
Performance Share Units:
Compensation expense	$	5.7		$	1.7		$	4.1
Weighted-average fair value of grants, per share	$	48.64		$	31.78		$	44.85
Payout ratio for shares paid	52.5		%	—		%	127.7		%

A summary of the status of our undistributed performance share units as of December 31, 2012, and changes during the year then ended, is presented below (in millions, except per share data):



	Shares		Weighted- Average Grant Date Fair Value per Share
Undistributed performance share units:
Undistributed as of December 31, 2011	0.9		$	33.40
Granted	0.1		48.64
Adjustments to shares paid based on payout ratio	(0.1	)	26.58
Distributed	(0.1	)	25.73
Forfeited	(0.1	)	35.96
Undistributed as of December 31, 2012⁽¹⁾	0.7		$	39.06

⁽¹⁾ Undistributed performance share units include approximately 0.5 million units with a weighted-average grant date fair value of $40.31 per share that had not yet vested and 0.2 million units that have vested but were not yet distributed.

As of December 31, 2012, we had $12.1 million of total unrecognized compensation cost related to non-vested performance share units that is expected to be recognized over a weighted-average period of 2.3 years. Our estimated forfeiture rate for performance share units was 20.0% as of December 31, 2012.

The total fair value of performance share units distributed and the resulting tax deductions to realize tax benefits were as follows (in millions):



	For the Years Ended December 31,
	2012		2011		2010
Fair value of performance share units distributed	$	6.0	$	—	$	13.2
Realized tax benefits from tax deductions	2.3		—		5.0

Our practice is to issue new shares of common stock or utilize treasury stock to satisfy performance share unit distributions.

Restricted Stock Units

Under the 2010 Incentive Plan, restricted stock units are issued to attract and retain key employees. Generally, at the end of a three-year retention period, the units will vest and be distributed in shares of our common stock to the participant.

Restricted stock units under the 2010 Incentive Plan are classified as equity awards. The fair value of units granted is the average of the high and low market price of the stock on the date of grant discounted by the expected dividend rate over the service period. Units are amortized to compensation expense ratably over the service period. The following table provides information on our restricted stock units (dollars in millions, except weighted-average fair value of grants):



	For the Years Ended December 31,
	2012		2011		2010
Restricted Stock Units:
Compensation expense	$	5.0	$	6.6	$	6.6
Weighted-average fair value of grants, per share	$	48.45	$	32.34	$	44.80

A summary of the status of our non-vested restricted stock units as of December 31, 2012 and changes during the year then ended is presented below (in millions, except per share data):



	Shares		Weighted- Average Grant Date Fair Value per Share
Non-vested restricted stock units:
Non-vested as of December 31, 2011	0.6		$	36.51
Granted	0.2		48.45
Distributed	(0.2	)	35.16
Forfeited	(0.1	)	36.55
Non-vested as of December 31, 2012	0.5		$	40.50

As of December 31, 2012, we had $11.9 million of total unrecognized compensation cost related to non-vested restricted stock units that is expected to be recognized over a weighted-average period of 2.3 years. Our estimated forfeiture rate for restricted stock units was 20.9% as of December 31, 2012.

The total fair value of restricted stock units vested and the resulting tax deductions to realize tax benefits were as follows (in millions):



	For the Years Ended December 31,
	2012		2011		2010
Fair value of restricted stock units vested	$	8.6	$	8.8	$	9.4
Realized tax benefits from tax deductions	3.3		3.4		3.6

Our practice is to issue new shares of common stock or utilize treasury stock to satisfy restricted stock unit vestings.

Stock Appreciation Rights

In 2003, we began awarding stock appreciation rights to certain employees. Each recipient is given the “right” to receive a value, paid in shares of our common stock, equal to the future appreciation of our common stock price. Stock appreciation rights generally vest in one-third increments beginning on the first anniversary date after the grant date, and expire after seven years. The following table provides information on our stock appreciation rights (dollars in millions, except weighted-average fair value of grants):



	For the Years Ended December 31,
	2012		2011		2010
Stock Appreciation Rights:
Compensation expense	$	4.5	$	5.4	$	4.7
Weighted-average fair value of grants, per share	14.34		9.39		13.75

Compensation expense for stock appreciation rights is based on the fair value on the date of grant and is recognized over the service period. The fair value for these awards is estimated using the Black-Scholes-Merton valuation model. We use historical stock price data and other pertinent information to estimate the expected volatility and the outstanding period of the award for separate groups of employees that have similar historical exercise behavior to estimate expected life. The risk-free interest rate was based on zero-coupon U.S. Treasury instruments with a remaining term equal to the expected life of the stock appreciation right at the time of grant.

The fair value of each stock appreciation right granted in 2012, 2011 and 2010 is estimated on the date of grant using the following assumptions:



	2012		2011		2010
Expected dividend yield	1.75	%	2.39	%	1.46	%
Risk-free interest rate	0.48	%	0.62	%	1.46	%
Expected volatility	40.42	%	41.94	%	39.93	%
Expected life (in years)	4.14		4.07		4.04

A summary of the status of our stock appreciation rights as of December 31, 2012, and changes during the year then ended, is presented below (in millions, except per share data):



	Shares		Weighted-Average Exercise Price per Share
Stock appreciation rights:
Outstanding as of December 31, 2011	2.9		$	34.85
Granted	0.4		51.15
Exercised	(1.0	)	31.82
Forfeited	(0.1	)	37.81
Outstanding as of December 31, 2012	2.2		38.93
Exercisable as of December 31, 2012	1.3		$	35.75

The following table summarizes information about stock appreciation rights outstanding as of December 31, 2012 (in millions, except per share data and years):



	Stock Appreciation Rights Outstanding		Stock Appreciation Rights Exercisable
Range of Exercise Prices per Share	Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value	Weighted-Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value
$28.24 - $51.40	4.8	$30.0	3.7	$21.3

As of December 31, 2012, we had $9.7 million of unrecognized compensation cost related to non-vested stock appreciation rights that is expected to be recognized over a weighted-average period of 2.3 years. Our estimated forfeiture rate for stock appreciation rights was 19.6% as of December 31, 2012.

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



	For the Years Ended December 31,
	2012		2011		2010
Intrinsic value of stock appreciation rights exercised	$	14.4	$	4.2	$	10.1
Realized tax benefits from tax deductions	5.5		1.6		3.9

Our practice is to issue new shares of common stock or utilize treasury stock to satisfy the exercise of stock appreciation rights.

Employee Stock Purchase Plan

In May 2012, LII shareholders approved the 2012 Employee Stock Purchase Plan, or “2012 ESPP,” that allows effectively all employees who meet certain service requirements to purchase our common stock through payroll deductions at the end of three month offering periods. The purchase price for such shares is 95% of the fair market value of the stock on the last day of the offering period. A maximum of 2.5 million shares is authorized for purchase until the 2012 ESPP plan termination date of May 10, 2022, unless terminated earlier at the discretion of the Board of Directors.

Employees purchased approximately 17,300 shares under the 2012 ESPP during the year ended December 31, 2012. Approximately 2.5 million shares were available for purchase under the 2012 ESPP as of December 31, 2012.