Commitments and Contingencies

The Company provides accruals for all direct costs, including legal costs, associated with the estimated resolution of contingencies at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated. Costs accrued are estimated based upon an analysis of potential results, assuming a combination of litigation and settlement strategies and outcomes. Legal costs for other than probable contingencies are expensed when services are performed.

Indemnifications

The Company has indemnified third parties for certain matters in a number of transactions involving dispositions of former subsidiaries, including certain pension and environmental liabilities. The Company has recorded liabilities in relation to these indemnifications in the accompanying unaudited condensed consolidated balance sheet as follows:



	September 26, 2015		December 31, 2014
	(Dollar amounts in millions)

Accrued expenses	$	2.5	$	2.5
Other long-term liabilities	1.6		2.4
	$	4.1	$	4.9

Undiscounted future payments	$	4.0	$	5.1

Product Warranty and Recall Reserves

The Company sells a number of products and offers a number of warranties including, in some instances, extended warranties for which the Company receives proceeds. The specific terms and conditions of these warranties vary depending on the product sold and the country in which the product is sold. The Company estimates the costs that may be incurred under its warranties, with the exception of extended warranties, and records a liability for such costs at the time of sale. Warranty costs are included in cost of products sold. Deferred revenue from extended warranties is recorded at estimated fair value and is amortized over the life of the warranty and periodically reviewed to ensure that the amount recorded is equal to or greater than estimated future costs. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rates of warranty claims, cost per claim, and new product introductions. The Company periodically assesses the adequacy of its recorded warranty claims and adjusts the amounts as necessary.

Changes in the Company’s combined short-term and long-term warranty liabilities during the third quarter and nine months of 2015 and 2014 are as follows:



	Third Quarter of						Nine Months of
	2015			2014			2015			2014
	(Dollar amounts in millions)
Balance, beginning of period	$	53.2		$	57.7		$	54.8		$	56.8
Warranties provided during period	5.4			4.6			17.0			19.9
Settlements made during period	(6.4		)	(6.9		)	(19.2		)	(22.5		)
Other changes in liability estimate, including expirations and acquisitions	(0.5		)	(0.3		)	(0.9		)	0.9
Balance, end of period	$	51.7		$	55.1		$	51.7		$	55.1

The Company has undertaken several voluntary product recalls and reworks over the past several years and could do so in the future given the nature of the Company's business. Additional product recalls and reworks could result in material future costs. Many of the Company's products, especially certain models of bath fans, range hoods, and residential furnaces and air conditioners, have a large installed base, and any recalls or reworks related to such products could be particularly costly. The costs of product recalls or reworks are not generally covered by insurance. Recalls or reworks may adversely affect the Company's reputation as a manufacturer of high-quality, safe products and could have a material adverse effect on its financial condition, results of operations and cash flows.

Assumption of Distribution Centers

In October 2015, it was determined that effective December 31, 2015, the Company would assume control of certain U.S. dedicated distribution centers that had been operated by a third party logistics provider since 2013. As a result, on the effective date, the Company will assume the operating lease arrangements for these distribution centers, as well as purchase, at fair value, certain machinery and equipment utilized in the operation of these distribution centers that is currently owned and operated by the third party. The purchase price for the machinery and equipment will be finalized prior to the effective date and is expected to be between $5.0 million and $7.0 million.

The operating leases that the Company will assume have initial remaining lease terms of approximately 1 to 3 years and contain renewal options ranging from an additional 3 to 15 years. Rental payments during the renewal terms are based on market rates at the date of renewal and therefore do not represent bargain renewal options. The operating lease arrangements contain escalating rental payments that will result in the rental expense being straight-lined over the remaining initial lease terms in accordance with ASC 840, “Leases”, and also contain obligations to pay insurance and taxes. There are no significant restoration or other obligations under the lease arrangements that would represent material asset retirement obligations. The future minimum lease payments for these operating leases is as follows:



Year Ended December 31,	Future Minimum Rental Obligations
	(Dollar amounts in millions)
2016	$	4.3
2017	5.9
2018	3.3

In connection with the assumption of the control of these distribution centers, the Company anticipates hiring approximately 200 employees who currently work at those centers for the third party.

Product Liability Contingencies

Nortek Global HVAC LLC ("Nordyne"), our wholly owned subsidiary, is the defendant in a putative class action lawsuit in Florida, Harris, et al. v. Nordyne, LLC, Case No. 1:14-cv-21884-BB, filed in the United States District Court for the Southern District of Florida. In addition, Nortek, Inc., Nortek Global HVAC LLC and Nortek Global HVAC Latin America, Inc. are the defendants in a putative class action lawsuit in Tennessee, Bauer, et al. v. Nordyne, LLC et al., Case No. 3:14-cv-01940, filed in the United States District Court for the Middle District of Tennessee. These lawsuits allege that evaporator and condenser coils in Nordyne’s residential heating and cooling products are susceptible to a type of potential corrosion of the copper tubing in the units that can result in coil leaks and/or failure of the units. The Florida action was initiated on May 21, 2014 and seeks compensatory damages associated with Nordyne’s alleged wrongdoing, injunctive relief, and attorneys’ fees and costs. The Tennessee action was initiated on October 3, 2014 and seeks damages associated with repairing, retrofitting and/or replacing the allegedly defective products, the loss of value due to the alleged defect, property damages associated with the alleged defect, injunctive relief, punitive damages, and attorneys’ fees and costs. No arguments or ruling with respect to class action status have occurred to date in either of these actions. While these actions are in their initial stages, the Company believes it has meritorious defenses against these complaints. At this time, the Company believes that the likelihood of a material loss in such matters is remote and has not recognized a loss or liability in these actions; however, it is possible that events could occur that would change the likelihood of a material loss, which could ultimately have a material impact on our business. The Company will continue to assess the likelihood of a material loss as the actions progress.

Other Commitments and Contingencies

As previously reported, as part of the Company's routine internal audit activities, it discovered certain questionable hospitality, gift and payment practices, and other expenses at the Company’s subsidiary, Linear Electronics (Shenzhen) Co. Ltd. (“Linear China”), which are inconsistent with the Company’s policies and raise concerns under the U.S. Foreign Corrupt Practices Act and perhaps under other applicable anti-corruption laws. The Company initiated an internal investigation into these practices and payments with the assistance of outside counsel.

On January 7, 2015 and January 8, 2015, respectively, the Company voluntarily contacted the SEC and the United States Department of Justice ("DOJ") to advise both agencies of the Company's internal investigation. The Company is in discussions with both agencies and intends to continue to cooperate with any SEC or DOJ investigation into these matters. The Company takes these matters very seriously and is committed to conducting its business in compliance with all applicable laws.

Based on information known at this time, the Company currently believes that the amount of the questionable expenses and payments is not material with respect to the Company’s financial condition or results of operations. However, at this time, the Company is unable to predict what, if any, action may be taken by the DOJ or SEC or any penalties or remedial measures these agencies may seek, but intends to cooperate with both agencies. Any determination that the Company's operations or activities are not in compliance with existing laws or regulations could result in the imposition of fines, civil and criminal penalties, and equitable remedies, including disgorgement or injunctive relief. The Company cannot reasonably estimate the potential liability, if any, related to these matters resulting from any proceedings that may be commenced by the SEC, the DOJ or any other governmental authorities. Accordingly, no provision with respect to such matters has been recorded in the accompanying consolidated financial statements. For the third quarter and nine months of 2015, approximately $0.4 million and $1.8 million, respectively, was recorded for legal and other professional services incurred related to the internal investigation of this matter. The Company expects to incur additional costs relating to the investigation of this matter throughout 2015.

The Company is subject to other contingencies, including legal proceedings and claims, arising out of its businesses that cover a wide range of matters including, among others, environmental matters, contract and employment claims, product liability, warranty, and modification and adjustment or replacement of component parts of units sold, which include product recalls. Product liability, environmental and other legal proceedings also include matters with respect to businesses previously owned. The Company has used various substances in its products and manufacturing operations which have been or may be deemed to be hazardous or dangerous, and the extent of its potential liability, if any, under environmental, product liability and workers' compensation statutes, rules, regulations and case law is unclear. Furthermore, due to the lack of adequate information and the potential impact of present regulations and any future regulations, there are certain circumstances in which the amount or range of possible losses cannot be reasonably estimated.

While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, warranty, product liability, environmental liabilities, and product recalls, the Company believes that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. It is possible, however, that results of operations for any particular future period could be materially affected by changes in the Company's assumptions or strategies related to these contingencies or changes that are not within the Company's control.