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Commitments and Contingencies | 6 Months Ended
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Jun. 30, 2019
Commitments and Contingencies Disclosure [Abstract] |
Commitments and Contingencies | Commitments and Contingencies: Leases On February 25, 2016, the FASB issued ASU No. 2016-02, Leases (ASC 842). We adopted ASC 842 on January 1, 2019, using the effective date method, with the cumulative-effect adjustment to the opening balance sheet of retained earnings as of the effective date. The financial results reported in periods prior to January 1, 2019 are unchanged. Upon adoption, we recognized almost all of our leases greater than one year in duration on the balance sheet as right-of-use assets and lease liabilities. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification is based on criteria that are largely similar to those applied in current lease accounting standard, but without explicit bright lines. We have made certain assumptions in judgments when applying ASC 842. Those judgments of most significance are as follows:
• | We elected the package of practical expedients available for transition which allow us to not reassess:
◦ | Whether expired or existing contracts contain leases under the new definition of a lease;
◦ | Lease classification for expired or existing leases; and
◦ | Whether previously capitalized initial direct costs would qualify for capitalization under ASC 842.
• | We did not elect to use hindsight for transition when considering judgments and estimates such as assessments of lessee options to extend or terminate a lease or purchase the underlying asset.
• | We did not elect to reassess whether land easements meet the definition of a lease if they were not accounted for as leases under the former rules.
• | For all asset classes, we elected to not recognize a right-of-use asset and lease liability for leases with a term of 12 months or less.
• | For all asset classes, we elected to 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.
We determine if an arrangement is a lease at inception. Operating leases are included in our Consolidated Balance Sheet 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 Sheet. 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. The components of lease expense were as follows (in millions):
| For the Three Months Ended June 30, 2019 |  | For the Six Months Ended June 30, 2019
Finance lease cost: |  |  |
Amortization of right-of-use assets | $ | 1.8 |  |  | $ | 3.3 |
Interest on lease liabilities | 0.2 |  |  | 0.3 |
Operating lease cost | 14.9 |  |  | 29.3 |
Short-term lease cost | 1.2 |  |  | 2.3 |
Variable lease cost | 5.2 |  |  | 10.1 |
Total lease cost | $ | 23.3 |  |  | $ | 45.3 |
Other information |  |  |
Cash paid for amounts included in the measurement lease liabilities: |  |  |
Operating cash flows from operating leases | $ | 14.7 |  |  | $ | 27.4 |
Financing cash flows from finance leases | $ | 2.3 |  |  | $ | 3.8 |
Right-of-use assets obtained in exchange for new finance lease liabilities | $ | 2.8 |  |  | $ | 6.0 |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 5.0 |  |  | $ | 21.6 |
| As of June 30, 2019
Finance lease right-of-use assets | 23.9 |
Operating lease right-of-use assets | 166.2 |
Finance lease liability, current | 6.6 |
Finance lease liability, non-current | 23.4 |
Operating lease liability, current | 49.6 |
Operating lease liability, non-current | 117.6 |
Weighted-average remaining lease term - finance leases | 5.31 years |
Weighted-average remaining lease term - operating leases | 4.25 years |
Weighted-average discount rate - finance leases | 2.18 | %
Weighted-average discount rate – operating leases | 3.97 | %
Future annual minimum lease payments and finance lease commitments as of June 30, 2019 were as follows (in millions):
| Operating Leases |  | Finance Leases
2019 (excluding the six months ended June 30, 2019) | $ | 28.5 |  |  | $ | 3.7 |
2020 | 50.9 |  |  | 6.5 |
2021 | 37.8 |  |  | 4.9 |
2022 | 25.8 |  |  | 3.1 |
2023 | 19.7 |  |  | 1.2 |
2024 and thereafter | 19.2 |  |  | 11.7 |
Total minimum lease payments | $ | 181.9 |  |  | $ | 31.1 |
Less imputed interest | (14.7 | ) |  | (1.1 | )
Lease liability | $ | 167.2 |  |  | $ | 30.0 |
The Company adopted ASU 2016-02 on January 1, 2019 as noted above, and as required, the following disclosure is provided for periods prior to adoption. Future annual minimum lease payments and capital lease commitments as of December 31, 2018 were as follows (in millions):
| Operating Leases |  | Capital Leases
2019 | $ | 47.4 |  |  | $ | 6.6 |
2020 | 38.4 |  |  | 5.4 |
2021 | 27.2 |  |  | 3.8 |
2022 | 17.9 |  |  | 2.1 |
2023 | 12.7 |  |  | 0.9 |
Thereafter | 16.1 |  |  | 12.8 |
Total minimum lease payments | $ | 159.7 |  |  | $ | 31.6 |
Less amount representing interest |  |  | (2.1 | )
Present value of minimum payments |  |  | $ | 29.5 |
On March 1, 2019, we entered into an agreement with a financial institution to renew the lease of our corporate headquarters in Richardson, Texas for a term of five years through March 1, 2024. The leased property consists of an office building of approximately 192,000 square feet, land and related improvements. During the lease term, we are obligated to pay base rent in quarterly installments, payable in arrears. At the end of the lease term, we must do one of the following: (i) purchase the property for $41.2 million; (ii) vacate the property and return it in good condition; (iii) arrange for the sale of the leased property to a third party; or (iv) renew the lease under mutually agreeable terms. If we elect to sell the property to a third party and the sales proceeds are less than the lease balance of $41.2 million, we must pay any such deficit to the financial institution. Any such deficit payment cannot exceed 87% of the lease balance. The headquarters lease is classified as an operating lease and its future annual minimum lease payments are included in the table above. Our obligations under the headquarters lease are secured by a pledge of our interest in the leased property. The lease contains customary lease covenants and events of default as well as events of default if (i) indebtedness of $75 million or more is not paid when due, (ii) there is a change of control or (iii) we fail to comply with certain covenants incorporated from our existing credit facility agreement. We believe we were in compliance with these financial covenants as of June 30, 2019. Product Warranties and Product Related Contingencies We 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 June 30, 2019 |  | As of December 31, 2018
Accrued expenses | $ | 37.6 |  |  | $ | 37.9 |
Other liabilities | 76.3 |  |  | 73.7 |
Total warranty liability | $ | 113.9 |  |  | $ | 111.6 |
The changes in product warranty liabilities related to continuing operations for the six months ended June 30, 2019 were as follows (in millions):
Total warranty liability as of December 31, 2018 | $ | 111.6 |
Warranty claims paid | (15.3 | )
Changes resulting from issuance of new warranties | 22.2 |
Changes in estimates associated with pre-existing liabilities | (4.1 | )
Changes in foreign currency translation rates and other | 0.1 |
Warranty liability from divestitures | (0.6 | )
Total warranty liability as of June 30, 2019 | $ | 113.9 |
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 was isolated, the vendor is supplying corrected components, and we are manufacturing products with the corrected components. We incurred and recorded expenses associated with this product quality in 2017. In the second quarter of 2019, the vendor agreed to reimburse us for certain losses incurred due to this quality issue. These reimbursements will include cash payments in 2019 and price reductions on annual qualifying purchases from this vendor through 2024. The total reimbursements we receive from the vendor should off set the cost we have incurred related to this product quality matter. 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, our insurance coverage for settlements and judgments for asbestos-related claims varies depending on several factors and are subject to policy limits, so we may have greater financial exposure for future settlements and judgments. For the three months ended June 30, 2019 and 2018, expense for asbestos-related litigation was $0.4 million and $(0.2) million and for the six months ended June 30, 2019 and 2018, expense for asbestos-related litigation was $1.8 million and $1.9 million, respectively, net of probable insurance recoveries, for known and future asbestos-related litigation and is recorded in Losses (gains) and other expenses, net in the Consolidated Statements of Operations. 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. We have insurance for the repair or replacement of our assets that suffered damage or loss, and we are working closely with our insurance carriers and claims adjusters to ascertain the amount of insurance recoveries due to us as a result of the damage and loss we suffered. Our insurance policies also provide business interruption coverage, 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 Gain from insurance recoveries, net of losses incurred and Insurance proceeds for lost profits in the Consolidated Statements of Operations. The following table summarizes the Gain from insurance recoveries, net of losses incurred:
(Amounts in millions) | For the Three months Ended June 30, 2019 |  | For the Six months Ended June 30, 2019
Insurance recoveries received | $ | 52.0 |  |  | $ | 128.0 |
Less losses and expenses incurred: |  |  |
Site clean-up and remediation | 6.2 |  |  | 23.3 |
Factory inefficiencies due to lower productivity | 4.5 |  |  | 8.0 |
Other | 9.4 |  |  | 18.4 |
Total losses and expenses | $ | 20.1 |  |  | $ | 49.7 |
Total gain from insurance recoveries | $ | 31.9 |  |  | $ | 78.3 |
Presentation in the Consolidated Statements of Operations: |  |  |
Insurance proceeds for lost profits | (26.0 | ) |  | (65.5 | )
Gain from insurance recoveries, net of losses incurred | (5.9 | ) |  | (12.8 | )

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