We adopted ASC 842 on January 1, 2019, using the modified retrospective 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 previously applied. We have made certain assumptions in judgments when applying ASC 842. Those judgments of most significance are as follows:

We determine if an arrangement is a lease at inception. Operating leases are included in our Consolidated Balance Sheet as of December 31, 2019 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 74% 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.



	For the Year Ended December 31, 2019
Finance lease cost:
Amortization of right-of-use assets	$	7.6
Interest on lease liabilities	0.9
Operating lease cost	59.7
Short-term lease cost	4.3
Variable lease cost	19.9
Total lease cost	$	92.4

Other information
Cash paid for amounts included in the measurement lease liabilities:
Operating cash flows from operating leases	$	58.1
Financing cash flows from finance leases	6.4
Right-of-use assets obtained in exchange for new finance lease liabilities	13.4
Right-of-use assets obtained in exchange for new operating lease liabilities	51.5



	As of December 31, 2019
Finance lease right-of-use assets	$	28.4
Operating lease right-of-use assets	$	181.6
Finance lease liability, current	$	7.8
Finance lease liability, non-current	$	25.9
Operating lease liability, current	$	52.7
Operating lease liability, non-current	$	131.0
Weighted-average remaining lease term - finance leases	4.9 years
Weighted-average remaining lease term - operating leases	4.5 years
Weighted-average discount rate - finance leases	2.71		%
Weighted-average discount rate – operating leases	3.69		%



	Operating Leases			Finance Leases
2020	$	58.4		$	8.4
2021	46.3			6.8
2022	33.8			4.9
2023	26.7			2.5
2024	17.0			0.6
Thereafter	17.1			11.7
Total minimum lease payments	$	199.3		$	34.9
Less imputed interest	(15.6		)	(1.2		)
Present value of minimum payments	$	183.7		$	33.7

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 “Lake Park Renewal”). 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 Lake Park Renewal are secured by a pledge of our interest in the leased property. The Lake Park Renewal 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 December 31, 2019.

In 2008, we expanded our Tifton, Georgia manufacturing facility using the proceeds from industrial development bonds (“IDBs”). We entered into a lease agreement with the owner of the property and the issuer of the IDBs, and through our lease payments fund the interest payments to investors in the IDBs. We also guaranteed the repayment of the IDBs and have outstanding letters of credit totaling $11.7 million to fund a potential repurchase of the IDBs in the event investors exercised their right to tender the IDBs to the trustee. We had finance lease obligations of $11.7 million related to these transactions as of December 31, 2019 and 2018.

Environmental laws and regulations in the locations we operate can potentially impose obligations to remediate hazardous substances at our properties, properties formerly owned or operated by us, and facilities to which we have sent or send waste for treatment or disposal. We are aware of contamination at some facilities; however, we do not believe that any future remediation related to those facilities will be material to our results of operations. Total environmental accruals are included Accrued expenses and Other liabilities on the accompanying Consolidated Balance Sheets. Future environmental costs are estimates and may be subject to change due to changes in environmental remediation regulations, technology or site-specific requirements.

We incur the risk of liability for claims related to the installation and service of heating and air conditioning products, and we maintain liabilities for those claims that we self-insure. We are involved in various claims and lawsuits related to our products. Our product liability insurance policies have limits that, if exceeded, may result in substantial costs that could have an adverse effect on our results of operations. In addition, warranty claims and certain product liability claims are not covered by our product liability insurance.



Total warranty liability as of December 31, 2017	$	109.9
Payments made in 2018	(31.6		)
Changes resulting from issuance of new warranties	36.8
Changes in estimates associated with pre-existing liabilities	(1.5		)
Changes in foreign currency translation rates and other	(0.8		)
Warranty liability from divestitures	(1.2		)
Total warranty liability as of December 31, 2018	$	111.6
Payments made in 2019	(34.9		)
Changes resulting from issuance of new warranties	44.1
Changes in estimates associated with pre-existing liabilities	(7.6		)
Changes in foreign currency translation rates and other	—
Warranty liability from divestitures	(0.4		)
Total warranty liability as of December 31, 2019	$	112.8

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 table 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.

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 insignificant expenses associated with this product quality issue 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 include cash payments in 2019 and price reductions on annual qualifying purchases from this vendor through 2024.

We use a combination of third-party insurance and self-insurance plans to provide protection against claims relating to workers’ compensation/employers’ liability, general liability, product liability, auto liability, auto physical damage and other exposures. We use large deductible insurance plans, written through third-party insurance providers, for workers’ compensation/employers’ liability, general liability, product liability and auto liability. We also carry umbrella or excess liability insurance for all third-party and self-insurance plans, except for directors’ and officers’ liability, property damage and certain other insurance programs. For directors’ and officers’ liability, property damage and certain other exposures, we use third-party insurance plans that may include per occurrence and annual aggregate limits. We believe the deductibles and liability limits for all of our insurance policies are appropriate for our business and are adequate for companies of our size in our industry.

We maintain safety and manufacturing programs that are designed to remove risk, improve the effectiveness of our business processes and reduce the likelihood and significance of our various retained and insured risks. In recent years, our actual claims experience has collectively trended favorably and, as a result, both self-insurance expense and the related liability have decreased.

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 vary depending on several factors, and are subject to policy limits, so we may have greater financial exposure for future settlements and judgments. For the years ended December 31, 2019 and 2018, we estimated our probable liability for known cases at $10.2 million and $9.7 million, respectively, and these amounts were recorded in Accrued expenses in the Consolidated Balance Sheets. For the years ended December 31, 2019 and 2018, we estimated future asbestos-related litigation cases to be $22.1 million and $19.3 million, respectively, before consideration of probable insurance recoveries and these amounts were recorded in Other liabilities in the Consolidated Balance Sheets. For the years ended December 31, 2019, 2018 and 2017, we recorded expense of $3.1 million, $4.0 million and $3.5 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, individually or in the aggregate, 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 in a future period.

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 worked 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.

For the years ended December 31, 2019 and 2018, we incurred expenses and losses of $64.4 million and $86.0 million, respectively, related to damages caused by the tornado. These amounts included site clean-up and demolition, factory inefficiencies, freight to move product to other warehouses, professional fees, and sales and marketing promotional costs.

In December 2019, we reached a final settlement with our insurance carriers for the losses we suffered from the tornado. The settlement allowed for total cumulative insurance recoveries of $367.5 million, of which $243.2 million and $124.3 million were received in the years ended December 31, 2019 and 2018, respectively.



(Amounts in millions)	For the Year Ended December 31,
	2019		2018
Insurance recoveries received	$	243.2	$	124.3
Less losses and expenses incurred:
Site clean-up and remediation	20.4		50.9
Factory inefficiencies due to lower productivity	9.3		7.4
Write-off of property, plant and equipment	—		4.2
Write-off of inventory	—		5.8
Other	34.7		17.7
Total losses and expenses	$	64.4	$	86.0
Gain from insurance recoveries, net of losses incurred	$	178.8	$	38.3
Components of Gain from insurance recoveries, net of losses incurred:
Insurance proceeds for lost profits	99.2		27.4
Insurance proceeds for property damage incurred from natural disaster	79.6		10.9