Celebrating 5 years
2018 annual report
April 18, 2019
Dear Allegion Shareholders,
Five years ago, when Allegion became a standalone company, we set out to build a global business we could all
be proud of: a company anchored in a long history with great people and brands. We established aspirations for
a clear strategy, sustained, profitable growth and outstanding shareholder value. We have delivered on those
aspirations and promises. I couldn’t be more proud of our company’s accomplishments over the past five years
and am more excited than ever about our future.
By focusing on our five growth pillars, category-leading brands and core business strengths, Allegion has achieved
remarkable results. As you read the enclosed 2018 Annual Report and companion 10-K, you will see the results of
our first five years:
• doubled earnings per share
• delivered industry-leading total shareholder return
• achieved industry-leading organic revenue growth, at a five-year CAGR of 5.6 percent
• garnered industry-leading EBITDA margins
• invested in innovation, especially in electronics and the Internet of Things
• formed Allegion Ventures to supplement our internal innovation engine by investing in new technology
and partnering to bring solutions to the market faster
• completed a total of 20 acquisitions and equity investments
• made a positive impact on the communities where we operate, through charitable giving and thousands
of volunteer hours
• achieved some of the best safety metrics in the industry
The “great eight” Allegion values serve as the lighthouse of our culture, and we continue to invest in employee
engagement. Everywhere I go, employees love to share their favorite Allegion value and how it guides their
decision making. Our employees are living our values and driving continuous improvement in everything they do. I
applaud their collective efforts that speak loudly in our results.
As we look to the next five years, we have sharpened our company strategy in a way that complements our
deep expertise while also positioning us for the digital, connected future. Allegion’s strength as a global security
provider gives us leverage in a world that is moving toward connectivity and digitization. Access has always been
an important part of our past and will be an even more important part of the future, as we connect the world
through seamless access and smart devices.
In closing, remember that access opens everything. It opens a world of possibilities. It opens our future, and I
believe it will define our next decade of success. Our executive leadership team, Board of Directors and I are
committed to be a publicly traded company you are proud to own. Our future has never been brighter!
Sincerely,
David Petratis
Chairman, President and CEO
Allegion plc
$2.7 billion
2018
annual revenue
30+ brands
globally
30
countries
where we work
11,000+
employees
130
countries
where our products
are sold
700+
global active
patents
10,000+
channel
partners
worldwide
For more statistics
from 2018 visit
allegion.com/numbers
Our brands
w
e
N
s
’
t
a
h
W
h
t
w
o
r
g
r
u
o
g
n
v
i
r
d
d
n
a
i
Schlage Connect™
Smart Deadbolt
Zigbee
Schlage Connect™
Smart Deadbolt
Z-Wave Plus
Schlage Sense™
Smart Deadbolt
Bluetooth + WIFI Adapter
Schlage Encode™
Smart Deadbolt
WIFI
• Key by Amazon
w/ Cloud Cam
• Amazon Echo Plus
• Amazon Show
• Smart Things
• Smart Things
• Wink
• Schlage Home App
for iOS and Android
(remote capability)
• Schlage Home App
• Key by Amazon
• Key by Amazon
+ Ring
• Amazon Alexa
• Google Assistant
• Amazon Alexa
• Google Assistant
• Amazon Alexa
• Google Assistant
• Amazon Alexa
Works with
apps/hubs
Works
with voice
assistance
Smart Handle AX
Exit device
Door controller
Mortise lock
Q6
SEL 500
X7
Push-Pull
MI 6400
MI 460T
ENGAGE, INTERFLEX, MILRE, SCHLAGE and SIMONSVOSS are trademarks of Allegion plc or its respective
subsidiaries. All other marks are the property of their respective owners.
the right balance between category leadership,
AD Systems, Gainsborough, ISONAS, QMI and
regions. Total revenue growth was assisted by
our core strengths in specification, enterprise
growth, with top-line growth in all three
delivered more than 13 percent total revenue
innovation, convenience and efficiency. We
excellence and product offerings that strike
acquisitions made during the year, including
of industry-leading organic growth and
profitability. We did this by executing on the
company’s strategic pillars and building on
s In 2018, Allegion delivered another year
t
l
u
s
e
R
r
u
O
future is to shape it. That’s why innovation is
to help us integrate with other solutions and
part of our culture and a driving force for our
channel strategies are key to enabling these
that better serve our customers around the
We know that the best way to predict the
world. More than half of our engineering jobs
businesses to meet their full potential.
TGP. Our specification writing capabilities and
were dedicated to future products (electronics
employees. From the manufacturing floor to IT
get to market faster. Our investments in digital
and software), and open platforming continues
and product teams, our company of experts are
“curious beyond the obvious,” creating solutions
transformation extended beyond hardware
products. Overtur, our cloud-based suite
of specification tools that centralizes data,
reduces errors and allows more collaboration
with architecture partners and project teams,
was launched in all three regions. In addition,
Allegion’s annual Trailblazer Innovation
Tournament continues to tap into employee
creativity and extend our innovation pipeline.
Electronics continue to be a growth area, and
worldwide sales of electronic locks for physical
access control is expected to reach $2.6 billion
by 20221. By enabling legacy products to become
smarter and investing in forward-thinking
technologies, Allegion is pushing the boundaries
to offer customers comprehensive solutions that
pair mechanical strength with electronics, edge
devices and cloud-based security solutions. In
2018, Allegion’s Americas electronics revenue
growth outpaced the market, across residential
and non-residential businesses.
Outside-in thinking was in the forefront in
2018. Allegion Ventures was formed in March
to invest beyond the core, finding technologies
that can make security and access smarter,
stronger, faster and less intrusive. For example,
investing in Pindrop, a pioneer in voice security
and authentication, can add a second layer of
authentication to heighten security. Our business
also formed alliances with European smart-
home innovator Nuki. Integrations with leading
software solutions and consumer platforms
embedded Allegion solutions into connected
building and voice-assistant technology.
Throughout Allegion, our employees seek out
ways to better understand, meet and anticipate
customer needs and improve the user
experience. As we look to the future, Allegion’s
vision of “seamless access and a safer world”
serves as the inspiration for refreshed strategic
pillars, outlined on the next page.
117%*
Total Shareholder
Return since Spin
5.6%
CAGR, organic
growth (5-Year)
* Source: Calculations based on information in FactSet for the period Dec. 1, 2013 – Feb. 28, 2019
and assumes dividends are reinvested
50%
of available
engineering hours
toward new products
& technologies
1 IHS Markit
All third party marks are the property of the respective owners
Allegion 2018 Annual Report
Our future
Expand
in core
markets
Broaden &
evolve the core
• Optimize channel
relationships
• Digitally enable
the demand
creation process
• Provide leading
products
and solutions
• Expand product
offerings
Deliver
new value
in access
Be the
partner
of choice
Enterprise
excellence
Capital
allocation
Create innovative
access solutions
& platforms
Leverage partners
& ecosystems
Focus on total
value creation
• Participate in
• Focus on enhancing
the user experience
recognized, secure,
industry-leading
platforms
• Develop
collaborative
strategic
partnerships
• Leverage
open standards
• Accelerate new
product
development and
vitality index
• Create modular,
globally scalable
hardware and
software platforms
• Connect and grow
intelligent products
and platforms
• Provide an
excellent customer
experience
throughout
the value chain
• Drive productivity
and continuous
improvement
• Create a workplace
culture of
safety, health
and engagement
Take a flexible,
balanced,
& disciplined
approach
• Organic
investment
• Opportunistic
acquisitions
• Allegion Ventures
• Shareholder
distributions
Proud moments
“
While we stayed true to our long history of being
the safety and security industry leader, we weren’t
afraid to take on digital transformation. We weren’t
afraid to embrace change, which has led us to
create an exciting and vibrant culture at Allegion.
“
Tony Park | Sales leader (Korea)
Allegion 2018 Annual Report
f
o
d
r
a
o
B
s
r
o
t
c
e
r
i
D
Kirk S. Hachigian
Carla Cico
Nicole Parent Haughey
Lead Director (Allegion);
Non-Executive Chairman,
JELD-WEN Holding, Inc.*
Former Chief Executive Officer,
Rivoli S.p.A
Former Chief Operating Officer,
Mimeo.com, Inc.
Dean I. Schaffer
Charles L. Szews
Martin E. Welch III
Former Partner, Ernst & Young LLP
Former Chief Executive Officer,
Oshkosh Corporation
Former Executive Vice President
& Chief Financial Officer,
Visteon Corporation
Committees of the Board
Audit & finance
Compensation
Corporate governance
& nominating
M. Welch, Chair
D. Schaffer, Chair
K. Hachigian, Chair
C. Cico
K. Hachigian
C. Cico
K. Hachigian
C. Cico
N. Parent Haughey
N. Parent Haughey
N. Parent Haughey
D. Schaffer
D. Schaffer
C. Szews
M. Welch
C. Szews
M. Welch
* Mr. Hachigian has announced that he will be retiring as Chairman at the conclusion of JELD-WEN’s annual meeting
of shareholders on May 9, 2019.
David Petratis
Chairman, President
& Chief Executive Officer
Allegion 2018 Annual Report
Executive leadership team
Top row
From left to right
Tim Eckersley
Senior Vice President,
President of the Americas
Vince Wenos
Vice President, Global
Technology & Engineering
Jeff Braun
Senior Vice President,
General Counsel, Secretary
& Chief Compliance Officer
Bottom row
From left to right
Chris Muhlenkamp
Senior Vice President,
Global Operations &
Integrated Supply Chain
Jeff Wood
Senior Vice President,
President of Asia Pacific
Patrick Shannon
Senior Vice President,
Chief Financial Officer
Tracy Kemp
Senior Vice President,
Chief Information Officer
Shelley Meador
Senior Vice President, Chief
Human Resources Officer
Lúcia Veiga Moretti
Senior Vice President,
President of EMEIA
David Petratis
Chairman, President
& Chief Executive Officer
Proud moments
“
My proudest moment was when I received my first
digital stamp stating FDAI (fire door assembly
inspector). This was only possible because Allegion
believes in its people and they believed in me.
Silcy Simon | Specification writer (Dubai)
“
Allegion 2018 Annual Report
t
n
i
r
p
t
o
o
F
g
n
i
r
u
t
c
a
f
u
n
a
M
To learn more about
our other locations visit
allegion.com/locations
Dublin, IRL
Faenza, ITL
Carmel, IN
Shanghai, CHN
Americas
Regional office
Carmel, Indiana
Production facilities
Blue Ash, Ohio
Bogota, Colombia
Chino, California
Ensenada, Mexico
Everett, Washington
Indianapolis, Indiana
Irving, Texas
McKenzie, Tennessee
Perrysburg, Ohio
Princeton, Illinois
Security, Colorado
Snoqualmie, Washington
Tecate, Mexico
Tijuana, Mexico
Toronto, Ontario
EMEIA
Corporate Headquarters
Dublin, Ireland
Regional office
Faenza, Italy
Production facilities
Clamecy, France
Faenza, Italy
Osterfeld, Germany
Asia Pacific
Regional office
Shanghai, China
Production facilities
Auckland, New Zealand
Dubai, UAE
Feuquieres, France
Renchen, Germany
Bucheon, South Korea
Durchhausen, Germany
Monsampolo, Italy
Zawiercie, Poland
Jinshan, China
Duzce, Turkey
Muenster, Germany
Veenendaal, Netherlands
Brooklyn, Australia
Global engineering design center
Bangalore, India
Melbourne, Australia
Sydney, Australia
Allegion 2018 Annual Report
Financials
Year ended December 31, 2018
in millions, except per share amounts
Year ended December 31, 2017
in millions, except per share amounts
Reported
Adjustments
Adjusted
(non-GAAP)
Reported
Adjustments
Adjusted
(non-GAAP)
Net revenues
$ 2,731.7
$
–
$ 2,731.7
$ 2,408.2
$
–
$ 2,408.2
Operating income
Operating margin
525.8
22.8 1
19.2%
548.6
20.1%
492.5*
20.5%*
18.5 1
511.0*
21.2%*
Earnings before income taxes
475.2
Provision for income taxes
Effective income tax rate
Net earnings
39.8
8.4%
435.4
22.8 2
27.4 3
120.2%
(4.6)
498.0
67.2
13.5%
430.8
395.7
119.0
30.1%
276.7
63.2 2
(43.5) 3
(68.8)%
106.7
458.9
75.5
16.5%
383.4
Non-controlling interest
0.5
–
0.5
3.4
–
3.4
Net earnings attributable
to Allegion plc
$ 434.9
$
(4.6)
$
430.3
$ 273.3
$
106.7
$
380.0
Diluted earnings per ordinary
share attributable to Allegion
plc shareholders
$
4.54
$
(0.04) $
4.50
$
2.85
$
1.11
$
3.96
1 Adjustments to operating income for the year ended December 31, 2018 consist of $16.5 million of restructuring charges and merger and
acquisition expenses and $6.3 million of backlog revenue amortization related to an acquisition. Adjustments to operating income for the year
ended December 31, 2017 consist of $18.5 million of restructuring charges and merger and acquisition expenses.
2 Adjustments to earnings before taxes for the year ended December 31, 2018 consist of the adjustments to operating income discussed above.
Adjustments to earnings before taxes for the year ended December 31, 2017 consist of the adjustments to operating income discussed above
and $44.7 million of charges related to the refinance of the Company’s Credit Facility, redemption of its 2021 and 2023 Senior Notes and
issuance of its 2024 and 2027 Senior Notes.
3 Adjustments to the provision for income taxes for the year ended December 31, 2018 consist of $5.5 million of tax benefit related to the
excluded items discussed above and a $21.9 million tax benefit related to an adjustment to the provisional amounts previously recognized
related to U.S. Tax Reform. Adjustments to the provision for income taxes for the year ended December 31, 2017 consist of $10.0 million of tax
benefit related to the excluded items discussed above and $53.5 million of tax expense related to U.S. Tax Reform.
* 2017 Operating income and Operating margins were restated due to the adoption of a new accounting standard in 2018 requiring retroactive
changes to the classification of certain pension related costs.
Allegion 2018 Annual Report
Organic
growth
+6% 13.6%
Adjusted EPS
increased
At a glance
Grew above
market
Increased
EPS
Strong
cash flow
(49.1)
2018
$408.7
$457.8 net cash flow
from operating activities
(49.3)
(50.0)
2017*
$297.94
$347.24 net cash flow
from operating activities
Cash flow
Year ended December 31 (in millions)
Capital expenditures
Available cash flow
One-time discretionary pension contribution
4 Net cash flow from operating activities of $347.2 million and available cash flow of $297.9 million in 2017 include a one-time discretionary
pension contribution of $50 million made to the company’s U.S. defined benefit pension plan.
The Company presents operating income, operating margin, net earnings, diluted earnings per share (EPS), on both a U.S. GAAP basis and on an
adjusted basis, revenue growth on a U.S. GAAP basis and organic revenue growth (non-GAAP), and also presents adjusted EBITDA and adjusted
EBITDA margin. The Company presents these measures because management believes they provide useful perspective of the Company’s
underlying business results, trends and a more comparable measure of period-over-period results. These measures are also used to evaluate
senior management and are a factor in determining at-risk compensation. Investors should not consider non-GAAP measures as alternatives to
the related U.S. GAAP measures.
The Company defines the presented non-GAAP measures as follows:
• Adjustments to operating income, operating margin, net earnings, EPS, and EBITDA include items such as goodwill impairment charges,
restructuring charges, asset impairments, merger and acquisitions costs, debt refinancing costs, amounts related to U.S. Tax Reform and
charges related to the divestiture of businesses
• Organic revenue growth is defined as U.S. GAAP revenue growth excluding the impact of divestitures, acquisitions and currency effects
• Available cash flow is defined as U.S. GAAP net cash operating activities less capital expenditures.
These non-GAAP measures may not be defined and calculated the same as similar measures used by other companies.
Allegion 2018 Annual Report
e
r
u
t
l
u
C
Vision
Seamless access
and a safer world
Purpose
We create peace of
mind by pioneering
safety and security
Our vision and purpose
Every pioneer needs a good sense of direction - and every day, we put our
principles into practice. Doing so makes us a stronger company, and a better
place to work.
Our values
Do the right thing
Be safe, be healthy
Serve others, not
yourself
Have a passion
for excellence
Be empowered &
accountable
This is your business,
run with it
Enjoy what you do
and celebrate who
we are
Be curious beyond
the obvious
Proud moments
“
Our core values are second to none. When you
come to work every day, you feel like you’re coming
to work with family members. All my colleagues
are wonderful people and so very knowledgeable,
and it also doesn’t hurt that we manufacture the
“
best products in the industry.
Erv Sherer | Project sales manager (U.S.)
Allegion 2018 Annual Report Allegion strives to be a good corporate citizen globally.
Our code of conduct describes the high standard
Wellness
We encourage our employees to embrace a safe and
we place on our responsibility to communities and
healthy lifestyle – both at home and at work. We partner
the marketplace. Our code of conduct describes our
with several organizations that empower healthy habits
commitment to lawful and ethical conduct and guides
and tackle systemic and broad-based challenges to
our interactions with customers, suppliers, employees
health and wellness. Some workplaces offer bicycle-
and each other. Together, our corporate values and code
sharing programs, while others form activity-based
of conduct are the foundation of positive relationships.
clubs and compete in community sports challenges and
Allegion is also honored to support our global communities
and live our value of “serving others.” We empower
employees to identify local needs and make a difference
through three philanthropic pillars: safety and security,
wellness and communities where we live and thrive.
marathons. We have a major focus on heart health and
blood cancers through sponsorships of the American
Heart Association and the Leukemia & Lymphoma
Society, and our senior leaders and employee-led groups
are actively involved in those causes throughout the year.
Safety & security
Making the world safer is inherent in our corporate vision.
Our people advocate for safe codes and standards,
use their expertise in construction, safety and security
to make our communities better. In 2017, that included
thousands of volunteer hours with non-profits dedicated
to safe housing and homeownership. Allegion also
continues to support the mission of safe and secure
schools, supporting a broad array of organizations and
initiatives that bring together advocates, communities
and industry to find responsible solutions for safe
learning environments.
Communities where we live & thrive
Because Allegion is a global company, our people work to
address the diverse and unique needs of the communities
where we live and thrive through local programs and
initiatives. Our efforts are wide-reaching and include
financial support, in-kind donations, volunteer projects,
on-going mentoring and tutoring relationships and
support for victims of domestic violence, disaster relief
and many more community priorities.
To learn more about how we serve the places we
live and work, visit allegion.com/community
Allegion celebrated a special milestone
in the greater Indianapolis area:
2,500
employee
volunteers
* Includes the time period prior to Allegion’s spin-off
from Ingersoll Rand plc in 2013.
$840,000
in funding
Millions
in product
donations, nationally
Dream Builder
sponsor of
10 homes
in 10 years*
Allegion 2018 Annual Report t
n
e
m
n
o
r
i
v
n
E
y
t
i
l
i
i
b
a
n
a
t
s
u
s
&
y
t
e
f
a
s
,
h
t
l
a
e
h
At Allegion, we create peace of mind by pioneering safety and security and value
a “be safe, be healthy” mindset to positively impact our global environment,
employees, customers and local community members. In its five years as an
independent company, Allegion has committed to do business in a safe and
environmentally responsible manner. Our company regularly monitors its
facilities and processes to comply with environmental standards and regulations.
We strive to advance sustainable business practices by setting strong safety
standards and working to help improve the environment, while operating in
accordance with the following principles:
Continual improvement in Environmental, Health and Safety (EHS)
management systems and performance, with the goals of reducing the
usage of natural resources, minimizing waste, decreasing pollution and
preventing accidents and injuries
Periodic, formal evaluation of our EHS compliance
Integration of integrity and personal accountability through the belief that
every Allegion employee and contractor is responsible for safety
• Lead by example to ensure a safe, healthy and environmentally
friendly workplace
• Engage in training and education for employees to understand their role in
supporting the EHS issues associated with their jobs and work areas
• Be empowered to report unsafe conditions
• Understand they have a duty to protect themselves, their co-workers
and the environment
Integration of sound environmental, health, safety and sustainability
strategies into all business functions
Designing, operating and maintaining our facilities with the objective of
helping to minimize negative environmental impacts
Responsible use of materials, including, where feasible, the recycling and
reuse of materials
Sensitivity to community concerns about EHS issues
Allegion 2018 Annual Report
We aim to reinforce this commitment in multiple
the impact of our products on the environment, we
ways, including the employee code of conduct, the
participate in numerous sustainability initiatives,
business partner code of conduct, audits, acquisition
including Leadership in Energy and Environmental Design
integration, EHS consultation and participation during the
(LEED) program, The Living Building Challenge and the
development and/or implementation of programs.
Living Product Challenge. In addition, we conduct Life
The application of these principles continues to positively
impact Allegion’s sustainability performance. Safety and
Cycle Assessments and publish both Environmental and
Chemical Declarations for select products.
environmental “kaizens” are held to drive continuous
Allegion values the importance of a safer and cleaner
improvement globally with a focus toward identifying,
world and commits to be a responsible member of our
eliminating and reducing hazards and waste.
global communities.
Allegion continues to look for ways to offer products that
support global sustainability initiatives. To understand
For 2018, key results vs. the year before:
2.8% YOY
Reduction in
water usage*
* Data is normalized to hours worked
12.4% YOY
Reduction in
greenhouse
gas emissions*
15.3% YOY
Reduction in
waste disposed*
6.7% YOY
Improvement in
the Lost Time
Injury Rate (LTIR)
Proud moments
“
I’m proud of Allegion’s customer-first approach
and its commitment to develop the best solution
“
for the client.
Pavan Chandrashekara | Specification writer (Dubai)
Allegion 2018 Annual Report Live. Work. Visit. Protect.
At home &
on-the-move
Residential
Multi-family
Portable security
At work
Commercial offices
& facilities
Government institutions
Energy facilities
Transportation
In your
community
Education
Community buildings
& recreation centers
Hospitality
Health care facilities
Locks, keys & levers
Portable & out of home
Mechanical locks, master key
Portable and action sports locks
Electronic access
& monitoring
systems, mechanical levers
and security, action sports lights
Electronic and connected locks,
and handles, padlocks
access management cards, keypads,
credentials, readers, software, services
Doors, exits, openers,
closers & accessories
Other door hardware
Accessibility & wellness
Weather stripping, threshold
Safety and comfort solutions,
Doors, exit devices, door openers,
solutions, hinges, lites, louvers
bath hardware, accessibility
latches, other door accessories
aids, quiet solutions
Proud moments
“
Each of the last five years has been unique in the
challenges that have been presented, and every
year our people have shown their desire to improve
their learning, their growth and their resiliency
in accomplishing those objectives, and that is a
remarkable spirit to have.
“
Tim McDonnell | Director, global supply strategy & risk management (U.S.)
Allegion 2018 Annual Report Brand
Description
Brand
Description
High-performance interior and storefront door systems,
specializing in sliding and acoustic solutions. This U.S. brand
offers acoustics control, privacy and ADA compliance.
Innovative products and a commitment to a greener future
make FSH a leading brand of low-energy electromechanical
security devices in Australia and New Zealand.
Brands & offerings
Excellence in design and a rigorous approach to quality
have given Australian-made Austral Lock a reputation for
premium security.
Pre-eminent supplier of door furniture for the Australian
market, known for design, ease of installation and quality.
This leading European consumer brand provides both bike and
home security.
Known worldwide for its high quality door holders and door
stops, Glynn-Johnson can handle even the most demanding
door control applications.
One of the most trusted security brands in France, Bricard is
renowned for its quality in DIY and commercial applications.
The Bricard Art luxury line is for the aesthetically-minded.
Tough home security products in Latin America, Inafer’s
experience in rim locks, floor hinges and door hardware gives
the strength consumers need to stay safe and secure.
With a focus on architectural door hardware for the sliding and
folding door industry, Brio’s solutions bring leading designers’
and architects’ ideas to life.
German expertise in workforce management and electronic
access control systems helps international customers keep
employees and visitors safe.
A commitment to excellence for over a century has made
Briton a competitive, quality choice for securing entrances and
exits with dependable solutions worldwide.
Delivers a proven power-over-ethernet access control solution
for U.S. commercial settings.
Internationally known expert in mechanical and electronic
solutions for managing security and access, CISA protects
homes, businesses and hospitality.
Providing the means for Turkish consumers to secure their
property, ITO has established itself as an authority in cylinders,
padlocks, master key systems, door closers and exit devices.
With its quality construction, Falcon is an easy-to-use,
cost-effective addition for building security, providing locks,
exit devices, key systems, and closers.
Offering a wide range of attractively designed, functional
hinges, pull and push plates, door stops, and other door
hardware and accessories, Ives is a proven partner in helping
build security from the ground up.
Icon
Key
Locks, keys
& levers
Portable &
out of home
Electronic access
& monitoring
Exits, openers,
closers & doors
Other door hardware
& accessories
Quiet solutions,
accessibility & wellness
allegion.com
©2019 Allegion plc. All rights reserved.
©2019 Allegion plc. All rights reserved.
Brand
Description
Brand
Description
Brands & offerings
The leading bicycle locks in the U.S., Kryptonite’s premium
portable and action sports safety and security solutions
allow athletes, thrill-seekers and adventurers to venture on.
Kryptonite locks are sold internationally.
The global looked-to solution for door closure in high-traffic
areas, LCN products perform seamlessly in critical moments
across a variety of industries, from schools to correctional
facilities to healthcare.
Known for its quality locks, and fire and safe-egress hardware
in Australia and New Zealand, Legge secures a wide range of
commercial and institutional buildings. Residential locks and
hardware are also available in the U.K.
Internationally known for superior quality, innovation, and
style, Schlage is the residential and commercial leader in door
hardware. Schlage’s wide portfolio includes electronic and
mechanical locks and access control hardware.
Digital cylinders and smart technology have made
SimonsVoss a leader in electro-mechanical solutions in
Europe and Asia-Pacific.
Quality hollow metal doors and frames by Steelcraft serve
institutional, commercial and industrial customers across the
U.S. and Latin America.
Electric strikes, electromagnetic locks and access control
accessories designed to meet the challenges of everyday,
on-the-job applications in the U.S.
Advanced fire-rated glass entrance and wall systems for
institutions and non-residential buildings in North America
and the Middle East.
At the core of every Milre product is a drive to be best-in-class.
After intensive research and development, these South Korean
solutions are more than electronic locks: they are high-class
masterpieces of technology.
Providing portable security for bicycles and other on-the-go
needs throughout Europe, Trelock’s provides the ultimate
innovation for on-the-go security.
Normbau specializes in providing the comfort and accessibility
hardware that meets architectural needs across residential,
commercial and healthcare projects in France and Germany.
Performance-oriented exit devices and accessories has made
Von Duprin a trusted mainstay for use in high-traffic areas
around the world.
One of the Middle East’s largest manufacturers of commercial
steel and wood doors and frames, including options for
pre-installed door sets that are code compliant across
multiple markets.
Maker of U.S. commercial steel doors and frames, including
specialty applications, e.g., bullet resistant, tornado and
windstorm, acoustical and lead-lined applications.
Sealing systems and technologies – sound, fire, smoke and
threshold – are Zero’s expertise. Their category leadership
comes from a high attention to detail and impeccable quality.
Icon
Key
Locks, keys
& levers
Portable &
out of home
Electronic access
& monitoring
Exits, openers,
closers & doors
Other door hardware
& accessories
Quiet solutions,
accessibility & wellness
allegion.com
©2019 Allegion plc. All rights reserved.
We are
many.
E
S
Y
N
:
t
i
d
e
r
c
o
t
o
h
P
We are
one.
We are Allegion.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X
—
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2018
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission File No. 001-35971
ALLEGION PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
Ireland
(State or other jurisdiction of incorporation or
organization)
98-1108930
(I.R.S. Employer
Identification No.)
Block D
Iveagh Court
Harcourt Road
Dublin 2, Ireland
(Address of principal executive offices)
Registrant’s telephone number, including area code: +(353) (1) 2546200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Ordinary Shares,
Par Value $0.01 per Share
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
NO
YES
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. YES
NO
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
NO
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted 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 such files). YES
NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this
chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
YES
NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer,"
"smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.:
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
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 Act).
YES
NO
The aggregate market value of ordinary shares held by non-affiliates on June 30, 2018 was approximately $7.3 billion based on
the closing price of such stock on the New York Stock Exchange.
The number of ordinary shares outstanding as of February 14, 2019 was 94,458,335.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement to be filed within 120 days of the close of the registrant’s fiscal year in
connection with the registrant’s Annual General Meeting of Shareholders to be held June 5, 2019 (the "Proxy Statement") are
incorporated by reference into Part II and Part III of this Form 10-K.
ALLEGION PLC
Form 10-K
For the Fiscal Year Ended December 31, 2018
TABLE OF CONTENTS
Part I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Item 5.
Part II
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Item 7A.
Quantitative and Qualitative Disclosure About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
Part IV
Item 15.
Item 16.
Signatures
Exhibits, Financial Statement Schedules
Form 10-K Summary
Page
4
13
24
24
24
24
26
28
29
47
48
49
49
49
51
51
51
51
51
52
57
58
CAUTIONARY STATEMENT FOR FORWARD LOOKING STATEMENTS
Certain statements in this report, other than purely historical information, are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements generally are identified by the words "believe," "project," "expect,"
"anticipate," "estimate," "forecast," "outlook," "intend," "strategy," "future", "opportunity", "plan," "may," "should," "will,"
"would," "will be," "will continue," "will likely result," or the negative thereof or variations thereon or similar expressions generally
intended to identify forward-looking statements.
Forward-looking statements may relate to such matters as projections of revenue, margins, expenses, tax provisions, earnings,
cash flows, benefit obligations, dividends, share purchases or other financial items; any statements of the plans, strategies and
objectives of management for future operations, including those relating to any statements concerning expected development,
performance or market share relating to our products and services; any statements regarding future economic conditions or our
performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and
any statements of assumptions underlying any of the foregoing. These statements are based on currently available information
and our current assumptions, expectations and projections about future events. While we believe that our assumptions, expectations
and projections are reasonable in view of the currently available information, you are cautioned not to place undue reliance on
our forward-looking statements. You are advised to review any further disclosures we make on related subjects in materials we
file with or furnish to the United States Securities and Exchange Commission (SEC). Forward-looking statements speak only as
of the date they are made and are not guarantees of future performance. They are subject to future events, risks and uncertainties -
many of which are beyond our control - as well as potentially inaccurate assumptions, that could cause actual results to differ
materially from our expectations and projections. We do not undertake to update any forward-looking statements.
Factors that might affect our forward-looking statements include, among other things:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
economic, political and business conditions in the markets in which we operate;
the demand for our products and services, including changes in customer preferences, conditions of the commercial and
residential construction and remodeling markets and our ability to maintain beneficial relationships with large customers;
competitive factors in the industry in which we compete, including new technical developments;
the development, commercialization and acceptance of new products and services;
the ability to protect and use intellectual property;
fluctuations in currency exchange rates;
the ability to complete and integrate any acquisitions;
results of investments made to complement our existing businesses and our pursuit of business opportunities that may
diverge from our core businesses;
our ability to operate efficiently and productively;
disruptions in our global supply chain, including product manufacturing and logistical services provided by outsourcing
partners;
improper conduct by any of our employees, agents or business partners;
our ability to manage risks related to our information technology and operational technology systems and cyber-security,
including disruption and breaches of our information systems and implementation of new processes that may cause
disruptions and be more difficult, costly or time consuming than expected;
our reliance on third-party vendors for many of the critical elements of our global information and operational technology
infrastructure and their failure to provide effective support for such infrastructure;
changes in tax requirements, including tax rate changes, the adoption of new United States (U.S.) or non-U.S. tax legislation
or exposure to additional tax liabilities and revised tax law interpretations;
changes to trade agreements, sanctions, import and export regulations and custom duties;
the outcome of any litigation, governmental investigations or proceedings;
interest rate fluctuations and other changes in borrowing costs, in addition to risks associated with our outstanding and
future indebtedness;
other capital market conditions, including availability of funding sources and currency exchange rate fluctuations;
availability of and fluctuations in the prices of key commodities and the impact of higher energy prices;
2
•
•
•
•
•
potential further impairment of our goodwill, indefinite-lived intangible assets and/or our long-lived assets;
ability to recruit and retain a highly qualified and diverse workforce;
risks related to our spin-off from Ingersoll Rand plc;
the possible effects on us of future legislation or interpretations in the U.S. that may limit or eliminate potential U.S. tax
benefits resulting from our incorporation in a non-U.S. jurisdiction, such as Ireland, or deny U.S. government contracts
to us based upon our incorporation in such non-U.S. jurisdiction; and
the impact our outstanding indebtedness may have on our business and operations.
Some of the significant risks and uncertainties that could cause actual results to differ materially from our expectations and
projections are described more fully in Item 1A "Risk Factors." You should read that information in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this report and our Consolidated Financial
Statements and related notes in Item 8 of this report. We note such information for investors as permitted by the Private Securities
Litigation Reform Act of 1995.
3
Item 1. BUSINESS
Overview
PART I
Allegion plc ("Allegion," "we," "us" or "the Company") is a leading global provider of security products and solutions that keep
people safe, secure and productive. We make the world safer as a company of experts, securing the places where people thrive,
and we create peace of mind by pioneering safety and security. We offer an extensive and versatile portfolio of mechanical and
electronic security products across a range of market-leading brands. Our experts across the globe deliver high-quality security
products, services and systems, and we use our deep expertise to serve as trusted partners to end-users who seek customized
solutions to their security needs.
Door closers and controls
Electronic security products
Exit devices
Allegion Principal Products
Doors and door systems
Electronic, biometric and mobile access control systems
Locks, locksets, portable locks, key systems and services
Time, attendance and workforce productivity systems
Other accessories
Access control security products and solutions are critical elements in every building and home. Many door openings are configured
to maximize a room’s particular form and function while also meeting local and national building and safety code requirements
and end-user security needs. Most buildings have multiple door openings, each serving its own purpose and requiring different
specific access-control solutions. Each door must fit exactly within its frame, be prepared precisely for its hinges, synchronize
with its specific lockset and corresponding latch and align with a specific key to secure the door. Moreover, security products are
increasingly linked electronically, integrated into software and popular consumer technology platforms and controlled with mobile
applications, creating additional functionality and complexity.
We believe our ability to deliver a wide range of solutions that can be custom-configured to meet end-users’ security needs is a
key driver of our success. We accomplish this with:
•
•
•
•
Our extensive and versatile product portfolio, combined with our deep expertise, which enables us to deliver the right
products and solutions to meet diverse security and functional specifications and to successfully and securely integrate
into leading technology and systems;
Our consultative approach and expertise, which enables us to develop the most efficient and appropriate building security
and access-control specifications to fulfill the unique needs of our end-users and their partners, including architects,
contractors, home-builders and engineers;
Our access to and management of key channels in the market, which is critical to delivering our products in an efficient
and consistent manner; and
Our enterprise excellence capabilities, including our global manufacturing operations and agile supply chain, which
facilitate our ability to deliver specific product and system configurations to end-users and consumers worldwide, quickly
and efficiently.
We believe that the security products industry is growing and will continue to benefit from several global macroeconomic and
long-term demographic trends, including:
•
•
•
•
the convergence of mechanical and electronic security products;
heightened awareness of security requirements;
increased global urbanization; and
the shift to a digital, interconnected environment.
We believe the security products industry will also benefit from continued growth in institutional, commercial and residential end-
markets. As end-users adopt newer technologies in their facilities and homes, we also expect growth in the global electronic product
categories we serve to outperform growth in mechanical products.
We operate in three geographic regions: Americas; Europe, Middle East, India and Africa ("EMEIA"); and Asia Pacific. We sell
our products and solutions under the following brands:
4
Allegion Brands
(listed for each region)
5
We sell a wide range of security products and solutions for end-users in commercial, institutional and residential facilities worldwide,
including the education, healthcare, government, hospitality, commercial office and single and multi-family residential markets.
Our leading brands include CISA®, Interflex®, LCN®, Schlage®, SimonsVoss® and Von Duprin®. We believe LCN, Schlage
and Von Duprin hold the No. 1 position in their primary product categories in North America while CISA, Interflex and SimonsVoss
hold the No.1 or No. 2 position in their primary product categories in certain European markets.
6
For the year ended December 31, 2018, we generated Net revenues of $2,731.7 million and operating income of $525.8 million.
History and Developments
We were incorporated in Ireland on May 9, 2013, to hold the commercial and residential security businesses of Ingersoll Rand
plc ("Ingersoll Rand"). On December 1, 2013, we became a stand-alone public company after Ingersoll Rand completed the
separation of these businesses from the rest of Ingersoll Rand via the transfer of these businesses from Ingersoll Rand to us and
the issuance by us of ordinary shares directly to Ingersoll Rand’s shareholders (the "Spin-off"). Our security businesses have long
and distinguished operating histories. Several of our brands were established nearly 100 years ago, and many originally created
their categories:
•
•
•
•
•
Von Duprin, established in 1908, was awarded the first exit device patent;
Schlage, established in 1920, was awarded the first patents granted for the cylindrical lock and the push button lock;
LCN, established in 1926, created the first door closer;
CISA, established in 1926, devised the first electronically controlled lock; and
SimonsVoss, established in 1995, created the first keyless digital transponder.
We have built upon these founding legacies since our entry into the security products market through the acquisition of Schlage,
Von Duprin and LCN in 1974. Today, we continue to develop and introduce innovative and market-leading products. In 2018,
product innovation spanned:
•
•
•
Improvements to the user experience, product design and ergonomics;
New technology solutions, software, mobile applications and integration with leading platforms; and
Improved locks and lights for portable security.
Recent examples of successful product launches are illustrated in the table below:
7
Product
Brands
Year
Innovation
Updates to single and multi-family residential electronic locking platforms
that provide for keyless entry (Touch); connected locking (Connect);
integration with the Internet of Things (IoT), Apple HomeKit, Amazon
Alexa, Google Assistant and Android platforms (Sense); multi-family
interconnected locking (Control); next-generation smart lock that is the
first-ever WiFi enabled deadbolt to work with Key by Amazon and Ring
devices with built-in connectivity (Encode); and 4-in-1 lock with fingerprint
sensors, smart card, code access or a physical key (SEL).
2016/2017/
2018
Expanded handlesets for Schlage’s new universal functionality solution that
allows homeowners to change from a doorknob to a lever and convert a
non-locking door to lockable in minutes (Custom) and expanded ranges of
cylinders and new aluminum trims for DIY customers (Bricard).
Continual technology upgrades include Z-Wave Plus and Zigbee Certified
to improve battery life and range, improve the user experience and enable
partnerships with leading providers like Key by Amazon (Connect).
New residential e-locks for Asia Pacific and improved biometric sensors,
new designs and push-pull electronic locks with Bluetooth modules (Q6,
X7, Milre).
Enhancements to the comprehensive portfolio of globally available
mechanical, wired electrified and wireless electronic solutions to give a
common aesthetic and consistent user experience throughout a building;
wireless locks can be managed with Allegion’s ENGAGE web and mobile
apps or with Software Alliance Member systems (AD, CO, LE, NDE).
2016/2017/
2018
New rim and mortice locks for Southeast Asia (S-series), expanded
cylinders for the European locksmith channel and multipoint mortise locks
(Bricard), new stainless-steel trims (Bricard, Briton) and enhancements to
the electronic Smart Handle (SimonsVoss).
Residential
Locks, Cylinders
and Levers
Schlage (Touch,
Connect, Sense,
Control,
Encode,
Custom, SEL,
Q6, X7),
Bricard, Milre
Commercial
Locks,
Cylinders,
Levers and
Electronic
Access Platforms
Schlage (AD,
CO, LE, NDE,
S-series),
Bricard, Briton,
SimonsVoss,
CISA
Exit Devices and
Closers
Von Duprin,
Falcon, CISA
2018
Bike Lighting
and Portable
Locking
Solutions
AXA,
Kryptonite,
Trelock
2017/2018
Software, Mobile
and Web
Applications
Allegion
(Overtur,
ENGAGE),
Interflex
2018
Firmware releases for the U.S. channel-partner readers to give new
functionality and USB communication mode for readers (Schlage). Mobile
credentials, new Bluetooth Low Energy and RFID technology and
integrations between electronic locks and exit devices (CISA).
New award-winning and cost-effective retrofit exit device that allows for
remote undogging and monitoring with partner software (Von Duprin).
New fire-rated retrofit series (Falcon), quiet exit solutions (Von Duprin)
and a new range of asymmetric rack-and-pinion door closers (CISA).
Broad range of innovation in bike safety from each of our Global Portable
Security brands (AXA, Kryptonite and Trelock), ranging from compact
dynamo lights and e-bike lights to USB, battery powered and rechargeable
lights.
New and expanded lines of folding locks, integrated chains and ring locks
and applications for bikes and motorcycles (AXA, Kryptonite, Trelock)
and expanded track-and-trace services (AXA).
Introduction of a new cloud-based suite of tools for project teams to
collaborate on specifications and the security design of doors and
openings, which provides a centralized place to capture and maintain
door hardware requirements and decisions with easy options to push
information back to the design tools (Overtur).
Multiple enhancements to the user experience include biometric login for
the mobile app, simplified account and site set-up and gateway site
survey (ENGAGE).
New modules for visitor management, encouraging self-service and
Microsoft Outlook functionality (Interflex).
In addition, in 2018 we announced the formation of Allegion Ventures, a corporate venture fund that aims to supplement Allegion
innovation by investing in innovative technologies and companies.
8
Industry and Competition
The global markets we serve encompass commercial, institutional and residential construction markets throughout North America,
EMEIA and Asia Pacific. In recent years, as end-users adopt newer technologies in their facilities and single and multi-family
homes, growth in electronic security products and solutions continues to outperform growth in mechanical security products and
solutions. We expect the security products industry will benefit from favorable long-term demographic trends such as continued
urbanization of the global population, increased concerns about safety and security and technology-driven innovation.
The security products markets are highly competitive and fragmented throughout the world, with a number of large multi-national
companies and thousands of smaller regional and local companies. This high fragmentation primarily reflects local regulatory
requirements and highly variable end-user needs. We believe our principal global competitors are Assa Abloy AB and dormakaba
Group. We also face competition in various markets and product categories throughout the world, including from Spectrum Brands
Holdings, Inc. in the North American residential market. As we move into more technologically-advanced product categories, we
may also compete against new, more specialized competitors.
Our success depends on a variety of factors, including brand and reputation, product breadth, integration with popular technology
platforms, quality and delivery capabilities, price and service capabilities. As many of our businesses sell through wholesale
distribution, our success also depends on building and partnering with a strong channel network. Although price often serves as
an important customer decision criterion, we also compete based on the breadth and quality of our products and solutions, our
ability to custom-configure solutions to meet individual end-user requirements and our global supply chain.
Products and Services
We offer an extensive and versatile portfolio of mechanical and electronic security products across a range of market-leading
brands:
•
•
•
•
•
•
Locks, locksets, portable locks and key systems and services: A broad array of cylindrical and mortise door locksets,
security levers and master key systems that are used to protect and control access and a range of portable security
products, including bicycle, small vehicle and travel locks. We also offer locksmith services in select locations;
Door closers, controls and exit devices: An extensive portfolio of life-safety products generally installed on fire doors
and facility entrances and exits. Door closers are devices that automatically close doors after they are opened. Exit
devices are generally horizontal attachments to doors and enable rapid egress;
Electronic security products and access control systems: A broad range of electrified locks, access control systems,
key card and reader systems and accessories, including Internet of Things (IoT), Bluetooth Low Energy (BLE), Power
over Ethernet and cloud-based solutions;
Time, attendance and workforce productivity systems: Products and services designed to help business customers
manage and monitor workforce access control parameters, attendance and employee scheduling. We offer ongoing
aftermarket services in addition to design and installation offerings;
Doors and door systems: A portfolio of hollow metal, glass, wood and specialty doors and door systems; and
Other accessories: A variety of additional security and product components, including hinges, door levers, door stops,
bike lights, louvers, weather stripping, thresholds and other accessories, as well as certain bathroom fittings and
accessibility aids.
Customers
We sell most of our products and solutions through distribution and retail channels, including specialty distribution, e-commerce
and wholesalers. We have built a network of channel partners that help our customers choose the right solution to meet their
security needs and help commercial and institutional end-users fulfill and install orders. We also sell through a variety of retail
channels, including large do-it-yourself home improvement centers, multiple on-line and e-commerce platforms, as well as small,
specialty showroom outlets. We work with our retail partners on developing marketing and merchandising strategies to maximize
their sales per square foot of shelf space. Through our Interflex and API Locksmiths businesses and Global Portable Security
brands, we also provide products and solutions directly to end-users.
Our 10 largest customers represented approximately 25% of our total Net revenues in 2018. No single customer represented
10% or more of our total Net revenues in 2018.
9
Sales and Marketing
In markets where we sell through commercial and institutional distribution channels, we employ sales professionals around the
world who work with a combination of end-users, security professionals, architects, contractors, engineers and distribution partners
to develop specific custom-configured solutions for our end-users’ needs. Our field sales professionals are assisted by specification
writers who work with architects, engineers and consultants to help design door openings and security systems to meet end-users’
functional, aesthetic and regulatory requirements. Both groups are supported by dedicated customer care and technical sales-
support specialists worldwide. We also support our sales efforts with a variety of marketing efforts, including trade-specific
advertising, cooperative distributor merchandising, digital marketing and marketing at a variety of industry trade shows.
In markets in which we sell through retail and home-builder distribution channels, we have teams of sales, merchandising and
marketing professionals who help drive brand and product awareness through our channel partners and to consumers. We utilize
a variety of advertising and marketing strategies, including traditional consumer media, retail merchandising, digital marketing,
retail promotions and builder and consumer trade shows, to support these teams.
We also work actively with several industry bodies around the world to help promote effective and consistent safety and security
standards. For example, we are members of Builders Hardware Manufacturers Association (BHMA), Security Industry Association,
Smart Card Alliance, American Society of Healthcare Engineering, American Institute of Architects, Construction Specification
Institute, ASSOFERMA (Italy), BHE (Germany) and UNIQ (France).
Production and Distribution
We manufacture our products in our geographic markets around the world. We operate 34 production and assembly facilities,
including 16 in Americas, 12 in EMEIA and 6 in Asia Pacific. We own 17 of these facilities and lease the others. Our strategy is
to produce in the region of use, wherever appropriate, to allow us to be closer to the end-user and increase efficiency and timely
product delivery. Much of our U.S. based residential portfolio is manufactured in the Baja region of Mexico under a NAFTA
Maquiladora. In managing our network of production facilities, we focus on eliminating excess capacity, reducing cycle time
through productivity and harmonizing production practices and safety procedures.
We distribute our products through a broad network of channel partners. In addition, third-party manufacturing and logistics
providers perform certain manufacturing, storage and distribution services for us to support certain parts of our manufacturing
and distribution network.
Raw Materials
We support our region-of-use production strategy with corresponding region-of-use supplier partners, where available. Our global
and regional commodity teams work with production leadership, product management and materials management teams to ensure
adequate materials are available for production.
We purchase a wide range of raw materials, including steel, zinc, brass and other non-ferrous metals, to support our production
facilities. Where appropriate, we may enter into fixed-cost contracts to lower overall costs.
Intellectual Property
Intellectual property, inclusive of certain patents, trademarks, copyrights, know-how, trade secrets and other proprietary rights, is
important to our business. We create, protect and enforce our intellectual property investments in a variety of ways. We work
actively in the U.S. and internationally to try to ensure the protection and enforcement of our intellectual property rights. We use
trademarks on nearly all of our products and believe such distinctive marks are an important factor in creating a market for our
goods, in identifying us and in distinguishing our products from others. We consider our CISA, Interflex, LCN, Schlage,
SimonsVoss, Von Duprin and other associated trademarks to be among our most valuable assets, and we have registered these
trademarks in a number of countries. Although certain proprietary intellectual property rights are important to our success, we do
not believe we are materially dependent on any particular patent or license, or any particular group of patents or licenses.
Facilities
We operate through a broad network of sales offices, engineering centers, 34 production and assembly facilities and several
distribution centers throughout the world. Our active properties represent approximately 6.9 million square feet, of which
approximately 37% is leased. The following table shows the location of our worldwide production and assembly facilities:
10
Asia Pacific
Auckland, New Zealand
Brooklyn, Australia
Bucheon, South Korea
Jinshan, China
Melbourne, Australia
Sydney, Australia
Production and Assembly Facilities
EMEIA
Clamecy, France
Dubai, United Arab Emirates
Durchhausen, Germany
Duzce, Turkey
Faenza, Italy
Feuquieres, France
Monsampolo, Italy
Muenster, Germany
Osterfeld, Germany
Renchen, Germany
Veenendaal, Netherlands
Zawiercie, Poland
Americas
Blue Ash, Ohio
Bogota, Colombia
Boulder, Colorado
Chino, California
Ensenada, Mexico
Everett, Washington
Indianapolis, Indiana
Irving, Texas
McKenzie, Tennessee
Mississauga, Ontario
Perrysburg, Ohio
Princeton, Illinois
Security, Colorado
Snoqualmie, Washington
Tecate, Mexico
Tijuana, Mexico
Research and Development
We are committed to investing in highly productive research and development capabilities, particularly in electro-mechanical
systems. We concentrate on developing technology innovations that will deliver growth through the introduction of new products
and solutions, as well as driving continuous improvements in product cost, quality, safety and sustainability.
We manage our R&D team as a global group, with an emphasis on a global collaborative approach, to identify and develop new
technologies and worldwide product platforms. We are organized on a regional basis to leverage expertise in local standards and
configurations. In addition to regional engineering centers in each geographic region, we also operate a global engineering design
center in Bangalore, India.
Seasonality
Our business experiences seasonality that varies by product line. Because more construction and do-it-yourself projects occur
during the second and third calendar quarters of each year in the Northern Hemisphere, our security product sales related to those
projects are typically higher in those quarters than in the first and fourth calendar quarters. However, certain other businesses
typically experience higher sales in the fourth calendar quarter due to project timing. Net revenues by quarter for the years ended
December 31, 2018, 2017 and 2016 are as follows:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2018
2017
2016
22%
23%
22%
26%
26%
26%
26%
25%
26%
26%
26%
26%
Employees
As of December 31, 2018, we had approximately 11,000 employees.
Environmental Regulation
We have a dedicated environmental program that is designed to reduce the utilization and generation of hazardous materials during
the manufacturing process as well as to remediate identified environmental concerns. As to the latter, we are currently engaged
in site investigations and remediation activities to address environmental cleanup from past operations at current and former
production facilities. We regularly evaluate our remediation programs and consider alternative remediation methods that are in
addition to, or in replacement of, those we currently utilize based upon enhanced technology and regulatory changes.
11
We are sometimes a party to environmental lawsuits and claims and have received notices of potential violations of environmental
laws and regulations from the U.S. Environmental Protection Agency (the "EPA") and similar state authorities. We have also been
identified as a potentially responsible party ("PRP") for cleanup costs associated with off-site waste disposal at federal Superfund
and state remediation sites. For all such sites, there are other PRPs and, in most instances, our involvement is minimal.
In estimating our liability, we have assumed that we will not bear the entire cost of remediation of any site to the exclusion of
other PRPs who may be jointly and severally liable. The ability of other PRPs to participate has been taken into account, based
on our understanding of the parties’ financial condition and probable contributions on a per site basis. Additional lawsuits and
claims involving environmental matters are likely to arise from time to time in the future.
We incurred $2.4 million, $3.2 million and $23.3 million of expenses during the years ended December 31, 2018, 2017 and 2016,
respectively, for environmental remediation at sites presently or formerly owned or leased by us. As of December 31, 2018 and
2017, we have recorded reserves for environmental matters of $22.6 million and $28.9 million, respectively. Of these amounts
$6.3 million and $8.9 million, respectively, relate to remediation of sites previously disposed by us. Given the evolving nature of
environmental laws, regulations and technology, the ultimate cost of future compliance is uncertain.
Available Information
We are required to file annual, quarterly and current reports, proxy statements and other documents with the SEC under the
Securities Exchange Act of 1934. The SEC maintains an Internet website that contains reports, proxy and information statements
and other information regarding issuers that file electronically with the SEC. The public can obtain any documents that are filed
by us at http://www.sec.gov.
In addition, this Annual Report on Form 10-K, as well as future quarterly reports on Form 10-Q, current reports on Form 8-K and
any amendments to all of the foregoing reports, are made available free of charge on our Internet website (http://www.allegion.com)
as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. The contents of our
website are not incorporated by reference in this report.
12
Item 1A. RISK FACTORS
We discuss our expectations regarding future performance, events and outcomes in this Form 10-K, quarterly and annual reports,
press releases and other written and oral communications. All statements except for historical and present factual information are
“forward-looking statements” and are based on financial data and business plans available only as of the time the statements are
made, which may become outdated or incomplete. Forward-looking statements are inherently uncertain, and investors must
recognize that events could significantly differ from our expectations. You should carefully consider the risk factors discussed
below, together with all the other information included in this Form 10-K, in evaluating us, our ordinary shares and our senior
notes. If any of the risks below actually occurs, our business, financial condition, results of operations and cash flows could be
materially and adversely affected. Any such adverse effect may cause the trading price of our ordinary shares to decline, and as a
result, you could lose all or part of your investment in us. Our business may also be adversely affected by risks and uncertainties
not known to us or risks that we currently believe to be immaterial. We assume no obligation to update any forward-looking
statements as a result of new information, future events or other factors.
Risks Related to Our Business
Our global operations subject us to economic risks.
We are incorporated in Ireland and operate in countries worldwide. Our global operations depend on products manufactured,
purchased and sold in the U.S. and internationally, including in Australia, China, Colombia, Europe, Korea, Mexico, New Zealand,
Turkey and the United Arab Emirates. The political, economic and regulatory environments in which we operate are becoming
increasingly volatile and uncertain. Accordingly, we are subject to risks that are inherent in operating globally, including:
•
•
•
•
•
•
•
•
•
changes in laws and regulations or imposition of currency restrictions and other restraints in various jurisdictions;
limitation of ownership rights, including expropriation of assets by a local government, and limitation on the ability to
repatriate earnings;
sovereign debt crises and currency instability in developed and developing countries;
changes in applicable tax regulations and interpretations;
changes to trade agreements, sanctions, import and export regulations, including imposition of burdensome tariffs and
quotas, and customs duties;
difficulty in staffing and managing global operations;
difficulty in enforcing agreements, collecting receivables and protecting assets through non-U.S. legal systems;
political unrest, national and international conflict, including war, civil disturbances and terrorist acts; and
economic downturns and social and political instability.
These risks could increase our cost of doing business in the U.S. and internationally, increase our counterparty risk, disrupt our
operations, disrupt the ability of suppliers and customers to fulfill their obligations, increase our effective tax rate, increase the
cost of our products, limit our ability to sell products in certain markets, reduce our operating margin, reduce cash flow and
negatively impact our ability to compete.
Our business relies on the institutional, commercial and residential construction and remodeling markets.
We primarily rely on the institutional, commercial and residential construction and remodeling markets, which are marked by
cyclicality based on overall economic conditions. Weakness or instability in these markets may cause current and potential
customers to delay or choose not to make purchases, which could negatively impact the demand for our products and services.
Increased competition, including from technical developments, could adversely affect our business.
The markets in which we operate include a large number of participants, including multi-national companies, regional companies
and small local companies. We primarily compete on the basis of quality, innovation, expertise, effective channels to market,
breadth of product offering and price. We may be unable to effectively compete on all these bases. If we are unable to anticipate
evolving trends in the market or the timing and scale of our competitors’ activities and initiatives, the demand for our products
and services could be negatively impacted.
In addition, we compete in an industry that is experiencing the convergence of mechanical, electronic and digital products.
Technology and innovation play significant roles in the competitive landscape. Our success depends, in part, upon the research,
development and implementation of new technologies and products including obtaining, maintaining and enforcing necessary
intellectual property protections. Securing and maintaining key partnerships and alliances, recruiting and retaining highly skilled
and qualified employee talent and having access to technologies, services, intellectual property and solutions developed by others
13
will play a significant role in our ability to effectively compete. The continual development of new technologies by existing and
new competitors, including non-traditional competitors with significant resources, could adversely affect our ability to sustain
operating margins and desirable levels of sales volumes. To remain competitive, we must develop new products and respond to
new technologies in a timely manner.
Our growth is dependent, in part, on the development, commercialization and acceptance of new products and services.
We must develop and commercialize new products and services in order to remain competitive in our current and future markets
and in order to continue to grow our business. The speed of development by our competitors and new market entrants is increasing.
We cannot provide any assurance that any new product or service will be successfully commercialized in a timely manner, if ever,
or, if commercialized, will result in returns greater than our investment. Investment in a product or service could divert our attention
and resources from other projects that become more commercially viable in the market. We also cannot provide any assurance
that any new product or service will be accepted by the market.
Changes in customer preferences and the inability to maintain beneficial relationships with large customers could adversely
affect our business.
We have significant customers, particularly major retailers, although no one customer represented 10% or more of our total Net
revenues in any of the past three fiscal years. The loss or material reduction of business, the lack of success of sales initiatives or
changes in customer preferences or loyalties for our products related to any such significant customer could have a material adverse
impact on our business. In addition, major customers who are volume purchasers are much larger than us and have strong bargaining
power with suppliers. This limits our ability to recover cost increases through higher selling prices. Furthermore, unanticipated
inventory adjustments by these customers can have a negative impact on sales.
Our brands are important assets of our businesses, and violation of our trademark rights by imitators could negatively impact
revenues and brand reputation.
Our brands and trademarks enjoy a reputation for quality and value and are important to our success and competitive position.
Unauthorized use of our trademarks may not only erode sales of our products but may also cause significant damage to our brand
name and reputation, interfere with relationships with our customers and increase litigation costs. There can be no assurance that
our on-going effort to protect our brand and trademark rights will prevent all violations.
Currency exchange rate fluctuations may adversely affect our results.
We are exposed to a variety of market risks, including the effects of changes in currency exchange rates. See "Management’s
Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosure About Market
Risk."
Approximately 30% of our 2018 Net revenues were derived outside the U.S., and we expect sales to non-U.S. customers to continue
to represent a significant portion of our consolidated Net revenues. Although we may enter into currency exchange contracts to
reduce our risk related to currency exchange fluctuations, changes in the relative fair values of currencies occur from time to time
and may, in some instances, have a material impact on our results of operations. We do not hedge against all of our currency
exposure and therefore, our business will continue to be susceptible to currency fluctuations.
We also translate assets, liabilities, revenues and expenses denominated in non-U.S. dollar currencies into U.S. dollars for our
Consolidated Financial Statements based on applicable exchange rates. Consequently, fluctuations in the value of the U.S. dollar
compared to other currencies may have a material impact on the value of these items in our Consolidated Financial Statements,
even if their value has not changed in their original currency.
Our business strategy includes making acquisitions and investments that complement our existing business. These acquisitions
and investments could be unsuccessful or consume significant resources, which could adversely affect our operating results.
We will continue to analyze and evaluate the acquisition of strategic businesses or product lines with the potential to strengthen
our industry position or enhance our existing set of products and services offerings. We cannot provide assurance that we will
identify or successfully complete transactions with suitable acquisition candidates in the future, nor can we provide assurance that
completed acquisitions will be successful.
Some of the businesses we may seek to acquire or invest in may be marginally profitable or unprofitable. For these businesses to
achieve acceptable levels of profitability, we must improve their management, operations, products and market penetration. We
14
may not be successful in this regard and we may encounter other difficulties in integrating acquired businesses into our existing
operations.
Acquisitions and investments may involve significant cash expenditures, debt incurrence, operating losses and expenses.
Acquisitions involve numerous other risks, including:
•
•
•
•
•
•
•
•
•
•
•
diversion of management time and attention from daily operations;
difficulties integrating acquired businesses, technologies and personnel into our business;
difficulties completing the transaction in a timely manner;
difficulties realizing synergies expected to result from acquisitions;
difficulties in obtaining and verifying the financial statements and other business information of acquired businesses;
inability to obtain regulatory approvals and/or required financing on favorable terms;
potential loss of key employees, key contractual relationships or key customers of acquired companies or of us;
difficulties competing in the new markets we enter;
assumption of the liabilities and exposure to unforeseen liabilities of acquired companies;
dilution of interests of holders of our ordinary shares through the issuance of equity securities or equity-linked securities;
and
difficulty in integrating financial reporting systems and implementing controls, procedures and policies, including
disclosure controls and procedures and internal control over financial reporting, appropriate for public companies of
our size at companies that, prior to the acquisition, had lacked such controls, procedures and policies.
We continually look to expand our services and products into international markets. As we expand into new international markets,
we will have only limited experience in marketing and operating services and products in such markets. In some instances, we
may rely on the efforts and abilities of foreign business partners in such markets. Certain international markets may be slower
than U.S. markets in adopting our services and products, and our operations in such markets may not develop at a rate that supports
our level of investment. In addition to the risks outlined above, expansion into certain international markets may require us to
compete with local businesses with greater knowledge of the market, including the tastes and preferences of customers and
businesses with dominant market shares. Any acquisitions or investments may ultimately harm our business or financial condition;
as such, acquisitions may not be successful and may ultimately result in impairment charges.
We may pursue business opportunities that diverge from core business.
We may pursue business opportunities that diverge from our core business, including expanding our products or service offerings,
investing in new and unproven technologies and forming new alliances with companies to distribute our products and services.
We can offer no assurance that any such business opportunities will prove to be successful. Among other negative effects, our
investment in new business opportunities may exceed the returns we realize. Additionally, any new investments could have higher
cost structures than our current business, which could reduce operating margins and require more working capital. In the event
that working capital requirements exceed operating cash flow, we may be required to draw on our revolving credit facility or
pursue other external financing, which may not be readily available.
Our enterprise excellence efforts may not achieve the improvements we expect.
We utilize a number of tools to improve efficiency and productivity. Implementation of new processes to our operations could
cause disruptions and may prove to be more difficult, costly or time consuming than expected. There is no assurance that all of
our planned enterprise excellence projects will be fully implemented, or if implemented, will realize the expected improvements.
Our periodic restructuring plans may not be successful.
We have in the past restructured or made other adjustments to our workforce and manufacturing footprint in response to market
changes, product changes, performance issues, changes in strategy, acquisitions and other internal and external considerations.
Historically, these types of restructuring activities have resulted in increased restructuring costs and temporarily reduced
productivity. In addition, we may not achieve or sustain the expected growth or cost savings benefits of these restructurings or do
so within the expected timeframe. These effects could recur in connection with future acquisitions and other restructurings and
our Net revenues and other results of operations could be negatively affected.
Material adverse legal judgments, fines, penalties or settlements could adversely affect our business.
We are currently and may in the future become involved in legal proceedings and disputes incidental to the operation of our
business. Our business may be adversely affected by the outcome of these proceedings and other contingencies (including, without
15
limitation, environmental, product liability, intellectual property, data protection and labor and employment matters) that cannot
be predicted with certainty. As required by U.S. generally accepted accounting principles ("GAAP"), we establish reserves based
on our assessment of contingencies. Subsequent developments in legal proceedings and other contingencies may affect our
assessment and estimates of the loss contingency recorded as a reserve, and we may be required to make additional material
payments.
Allegations that we have infringed the intellectual property rights of third parties could negatively affect us.
We may be subject to claims of infringement of intellectual property rights by third parties. In particular, we often compete in
areas having extensive intellectual property rights owned by others and we have become subject to claims alleging infringement
of intellectual property rights of others. In general, if it is determined that one or more of our technologies, products or services
infringes the intellectual property rights owned by others, we may be required to cease marketing those services, to obtain licenses
from the holders of the intellectual property at a material cost or to take other actions to avoid infringing such intellectual property
rights. The litigation process is costly and subject to inherent uncertainties, and we may not prevail in litigation matters regardless
of the merits of our position. Adverse intellectual property litigation or claims of infringement against us may become extremely
disruptive if the plaintiffs succeed in blocking the trade of our products and services and may have a material adverse effect on
our business.
Our reputation, ability to do business and results of operations could be impaired by improper conduct by any of our employees,
agents or business partners.
We are subject to regulation under a variety of U.S. federal and state and non-U.S. laws, regulations and policies including laws
related to anti-corruption, export and import compliance, anti-trust and money laundering due to our global operations. We cannot
provide assurance that our internal controls will always protect us from the improper conduct of our employees, agents and business
partners. Any improper conduct could damage our reputation and subject us to, among other things, civil and criminal penalties,
material fines, equitable remedies (including profit disgorgement and injunctions on future conduct), securities litigation and a
general loss of investor confidence.
Disruptions in our global supply chain, including product manufacturing and logistical services provided by outsourcing
partners, may negatively impact our business.
Our ability to meet our customers' needs and achieve cost targets depends on our ability to maintain key manufacturing and supply
arrangements, including execution of supply chain optimizations and certain sole supplier or sole manufacturing arrangements.
The loss or disruption of such manufacturing and supply arrangements could interrupt product supply and, if not effectively
managed and remedied, have an adverse impact on our business.
We outsource certain manufacturing and logistical services to partners located throughout the world. Our reliance on these third
parties reduces our control over the manufacturing and delivery process, exposing us to risks including reduced control over quality
assurance, product costs, product supply and delivery delays. If we are unable to effectively manage these relationships, or if these
third parties experience delays, disruptions, capacity constraints, regulatory issues or quality control problems in their operations
or otherwise fail to meet our future requirements for timely delivery, our ability to ship and deliver certain of our products to our
customers could be impaired and our business could be harmed.
We may be subject to risks relating to our information technology and operational technology systems.
We rely extensively on information technology and operational technology systems, networks and services including hardware,
software, firmware and technological applications and platforms (collectively, "IT Systems") to manage and operate our business
from end-to-end, including ordering and managing materials from suppliers, design and development, manufacturing, marketing,
selling and shipping to customers, invoicing and billing, managing our banking and cash liquidity systems, managing our enterprise
resource planning and other accounting and financial systems and complying with regulatory, legal and tax requirements. There
can be no assurance that our current IT Systems will function properly. We have invested and will continue to invest in improving
our IT Systems. Some of these investments are significant and impact many important operational processes and procedures. There
is no assurance that any newly implemented IT Systems will improve our current systems, improve our operations or yield the
expected returns on the investments. In addition, the implementation of new IT Systems may cause disruptions in our operations
and, if not properly implemented and maintained, negatively impact our business. If our IT Systems cease to function properly or
if these systems do not provide the anticipated benefits, our ability to manage our operations could be impaired.
16
We currently rely on third-party vendors for many of the critical elements of our global information and operational technology
infrastructure and their failure to provide effective support for such infrastructure could negatively impact our business and
financial results.
We have outsourced many of the critical elements of our global information and operational technology infrastructure to third-
party service providers in order to achieve efficiencies. If such service providers do not perform or do not perform effectively, we
may not be able to achieve the expected efficiencies and may have to incur additional costs to address failures in providing service
by the service providers. Depending on the function involved, such non-performance, ineffective performance or failures of service
may lead to business disruptions, processing inefficiencies or security breaches.
Disruptions or breaches of our information systems could adversely affect us.
Despite our implementation of network security measures which have focused on prevention, mitigation, resilience and recovery,
our network and products, including access solutions, may be vulnerable to cybersecurity attacks, computer viruses, malicious
codes, malware, ransomware, phishing, social engineering, denial of service, hacking, break-ins and similar disruptions.
Cybersecurity attacks and intrusion efforts are continuous and evolving, and in certain cases they have been successful at the most
robust institutions. The scope and severity of risks that cyber threats present have increased dramatically and include, but are not
limited to, malicious software, attempts to gain unauthorized access to data or premises, exploiting weaknesses related to vendors
or other third parties that could be exploited to attack our systems, denials of service and other electronic security breaches that
could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of
data. Any such event could have a material adverse effect on our business, operating results and financial condition, as we face
regulatory, reputational and litigation risks resulting from potential cyber incidents, as well as the potential of incurring significant
remediation costs.
Our daily business operations also require us to retain sensitive data such as intellectual property, proprietary business information
and data related to customers, suppliers and business partners within our networking infrastructure including data from individuals
subject to the European Union's General Data Protection Regulation. The loss or breach of such information due to various causes
including catastrophic events, natural disasters, power outages, system failures, computer viruses, improper data handling and
employee error or malfeasance could result in wide reaching negative impacts to our business, and as such, the ongoing maintenance
and security of this information is pertinent to the success of our business operations and our strategic goals.
Our networking infrastructure and related assets may be subject to unauthorized access by hackers, employee error or malfeasance
or other unforeseen activities. Such issues could result in the disruption of business processes, network degradation and system
downtime, along with the potential that a third party will exploit our critical assets such as intellectual property, proprietary business
information and data related to our customers, suppliers and business partners. To the extent that such disruptions occur and our
business continuity plans do not effectively address these disruptions in a timely manner, they may cause delays in the manufacture
or shipment of our products and the cancellation of customer orders and, as a result, our business operating results and financial
condition could be materially and adversely affected, resulting in a possible loss of business or brand reputation.
Commodity shortages, price increases and higher energy prices could negatively affect our financial results.
We rely on suppliers to secure commodities, including steel, zinc, brass and other non-ferrous metals, required for the manufacture
of our products. A disruption of deliveries from our suppliers or decreased availability of commodities could have an adverse
effect on our ability to meet our commitments to customers or increase our operating costs. We believe that available sources of
supply will generally be sufficient for our needs for the foreseeable future. Nonetheless, the unavailability of some commodities
could have a material adverse impact on our business.
Volatility in the prices of these commodities could increase the costs of our products and services, and we may not be able to pass
on these costs to our customers. We do not currently use financial derivatives to hedge against this volatility; however, we utilize
firm purchase commitments to mitigate risk. The pricing of some commodities we use is based on market prices. To mitigate this
exposure, we may use annual price contracts to minimize the impact of inflation and to benefit from deflation.
Additionally, we are exposed to fluctuations in energy prices due to the instability of current market prices. Higher energy costs
increase our operating costs and the cost of shipping our products and supplying services to our customers around the world.
Consequently, sharp price increases, the imposition of taxes or an interruption of supply could cause us to lose the ability to
effectively manage the risk of rising energy prices and may have an adverse impact on our results of operations and cash flows.
17
We may be required to recognize impairment charges for our goodwill, indefinite-lived intangible assets and other long-lived
assets.
At December 31, 2018, the net carrying value of our goodwill and other indefinite-lived intangible assets totaled approximately
$883.0 million and $130.6 million, respectively. Pursuant to GAAP, we are required to annually assess our goodwill, indefinite-
lived intangibles and other long-lived assets to determine if they are impaired. In addition, interim assessments must be performed
whenever events or changes in circumstances indicate that impairment may have occurred. If the testing performed indicates that
impairment has occurred, we are required to record a non-cash impairment charge for the difference between the carrying value
of the goodwill or other indefinite-lived intangible assets and the fair value of the goodwill or other indefinite-lived intangible
assets in the period the determination is made. Disruptions to our business, end market conditions and protracted economic
weakness, unexpected significant declines in operating results of reporting units, divestitures and market capitalization declines
may result in additional charges for goodwill and other asset impairments. We have significant intangible assets, including goodwill
with an indefinite life, which are susceptible to valuation adjustments as a result of changes in such factors and conditions.
The basis of the fair value for our impairment assessments is determined by projecting future cash flows using assumptions
concerning future operating performance and economic conditions that may differ from actual cash flows. Financial and credit
market volatility directly impacts our fair value measurement through our weighted-average cost of capital that we use to determine
our discount rate and through our stock price that we use to determine our market capitalization. Although our last analysis regarding
the fair values of the goodwill and indefinite-lived intangible assets for our reporting units indicates that they exceed their respective
carrying values, materially different assumptions regarding the future performance of our businesses or significant declines in our
stock price could result in goodwill and intangible asset impairment losses. Specifically, an unanticipated deterioration in Net
revenues and operating margins generated by our EMEIA and/or Asia Pacific segments could trigger future impairment in those
segments. While we currently believe that our projected results will not result in future impairment, a deterioration in results or
other factors could trigger a future impairment.
Our ability to successfully grow and expand our business depends on our ability to recruit and retain a highly qualified and
diverse workforce.
Our ability to successfully grow and expand our business depends on the contributions and abilities of our employees and key
management, including, for example, the ability of our sales force to adapt to any changes made in the sales organization and
achieve adequate customer coverage. We must therefore continue to effectively recruit, retain and motivate key management, sales
and other highly qualified and skilled personnel to maintain our current business and support our projected growth. A shortage of
these key employees for various reasons, including changes in laws and policies regarding immigration and work authorizations
in jurisdictions where we have operations, might jeopardize our ability to grow and expand our business.
Our operations are subject to regulatory risks.
Our U.S. and non-U.S. operations are subject to a number of laws and regulations, including fire and building codes and
environmental, health and safety standards. We have incurred, and will be required to continue to incur, significant expenditures
to comply with these laws and regulations. Changes to, or changes in interpretations of, current laws and regulations could require
us to increase our compliance expenditures, cause us to significantly alter or discontinue offering existing products and services
or cause us to develop new products and services. Altering current products and services or developing new products and services
to comply with changes in the applicable laws and regulations could require significant research and development investments,
increase the cost of providing the products and services and adversely affect the demand for our products and services.
In the event a regulatory authority concludes that we are not or have not at all times been in full compliance with these laws or
regulations, we could be fined, criminally charged or otherwise sanctioned.
Certain environmental laws assess liability on current or previous owners of real property or operators of manufacturing facilities
for the costs of investigation, removal or remediation of hazardous substances or materials at such properties or at properties at
which parties have disposed of hazardous substances. Liability for investigative, removal and remedial costs under certain U.S.
federal and state laws and certain non-U.S. laws are retroactive, strict and joint and several. In addition to cleanup actions brought
by governmental authorities, private parties could bring personal injury or other claims due to the presence of, or exposure to,
hazardous substances. We have received notification from U.S. and non-U.S. governmental agencies, including the EPA and similar
state environmental agencies, that conditions at a number of current and formerly owned sites where we and others have disposed
of hazardous substances require investigation, cleanup and other possible remedial action. These agencies may require that we
reimburse the government for its costs incurred at these sites or otherwise pay for the costs of investigation and cleanup of these
sites, including by providing compensation for natural resource damage claims from such sites. For more information, see "Business
- Environmental Regulation."
18
While we have planned for future capital and operating expenditures to maintain compliance with environmental laws and have
accrued for costs related to current remedial efforts, our costs of compliance, or our liabilities arising from past or future releases
of, or exposures to, hazardous substances, may exceed our estimates. We may also be subject to additional environmental claims
for personal injury or cost recovery actions for remediation of facilities in the future based on our past, present or future business
activities.
The capital and credit markets are important to our business.
Instability in U.S. and global capital and credit markets, including market disruptions, limited liquidity and interest rate volatility
or reductions in the credit ratings assigned to us by independent ratings agencies, could reduce our access to capital markets or
increase the cost of funding our short and long-term credit requirements. In particular, if we are unable to access capital and credit
markets on terms that are acceptable to us, we may not be able to make certain investments or fully execute our business plans
and strategy.
Our suppliers and customers are also dependent upon the capital and credit markets. Limitations on the ability of customers,
suppliers or financial counterparties to access credit could lead to insolvencies of key suppliers and customers, limit or prevent
customers from obtaining credit to finance purchases of our products and services and cause delays in the delivery of key products
from suppliers.
As a global business, we have a relatively complex tax structure, and there is a risk that tax authorities will disagree with
our tax positions.
Since we conduct operations worldwide through our subsidiaries, we are subject to complex transfer pricing regulations in the
countries in which we operate. Transfer pricing regulations generally require that, for tax purposes, transactions between us and
our affiliates be priced on a basis that would be comparable to an arm's length transaction and that contemporaneous documentation
be maintained to support the tax allocation. Although uniform transfer pricing standards are emerging in many of the countries in
which we operate, there is still a relatively high degree of uncertainty and inherent subjectivity in complying with these rules. To
the extent that any tax authority disagrees with our transfer pricing policies, we could become subject to significant tax liabilities
and penalties. Our tax returns are subject to review by taxing authorities in the jurisdictions in which we operate. Although we
believe that we have provided for all tax exposures, the ultimate outcome of a tax review could differ materially from our provisions.
We could be subject to changes in tax rates, the adoption of new U.S. or international tax legislation or exposure to additional
tax liabilities.
Our future effective tax rate and cash tax obligations could be adversely affected by shifts in our mix of earnings in countries with
varying statutory tax rates, changes in the valuation of our deferred tax assets or liabilities or changes in tax laws, regulations,
interpretations or accounting principles, as well as certain discrete items. In addition, we are subject to regular review and audit
by both U.S. and non-U.S. tax authorities. As a result, we have received, and may in the future receive, assessments in multiple
jurisdictions on various tax-related assertions. Any adverse outcome of such a review or audit could have a negative effect on our
operating results and financial condition. In addition, the determination of our worldwide provision for income taxes and other
tax liabilities requires significant judgment, and there are many transactions and calculations where the ultimate tax determination
is uncertain. Although we believe our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded
in our financial statements and may materially affect our financial results in the period or periods for which such determination
is made. Furthermore, due to shifting economic and political conditions, tax policies, laws, interpretations and rates in various
jurisdictions may be subject to significant change, which could materially affect our financial position and results of operations. For
example, the 2017 Tax Cuts and Jobs Act (the “Tax Reform Act”) enacted in December 2017 in the U.S. had a significant impact
on our cash tax obligations and the issuance of additional regulatory guidance related to the Tax Reform Act could materially
affect our cash tax obligations and effective tax rate. In addition, many countries in Europe, as well as a number of other countries
and organizations, have recently proposed or recommended changes to existing tax laws or have enacted new laws that could
significantly increase our effective tax rate or cash tax obligations in many countries where we do business or require us to change
the manner in which we operate our business.
There are risks associated with our outstanding and future indebtedness.
We have approximately $1.5 billion of outstanding indebtedness at December 31, 2018. In addition, we have a senior unsecured
revolving credit facility that permits borrowings of up to an additional $500 million. Volatility in the credit markets could adversely
impact our ability to obtain favorable financing terms in the future. A substantial portion of our cash flows from operations is
19
dedicated to the payment of principal and interest on our indebtedness and will not be available for other purposes, including our
operations, capital expenditures, payment of dividends, share repurchase programs or future business opportunities.
Our ability to make scheduled payments or to refinance our debt obligations depends on our financial and operating performance,
which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond
our control. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce
or delay capital expenditures, reduce or eliminate the payment of dividends, sell assets, seek additional capital or seek to restructure
or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled
debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and
might be required to sell material assets or operations to attempt to meet our debt service and other obligations.
Additionally, a portion of our borrowings at December 31, 2018 includes a term loan with a variable rate of interest, which exposes
us to interest rate risk. We are exposed to the risk of rising interest rates to the extent that we fund our operations with short-term
or variable-rate borrowings. At December 31, 2018, our $1.5 billion of aggregate debt outstanding includes $656 million of floating-
rate term loans and $800 million of fixed-rate senior notes. We have the ability to incur up to $500 million of additional floating-
rate debt under our senior unsecured revolving credit facility. We have entered into interest rate swaps for $250 million of our
floating-rate term loans to manage our interest rate risk. A 100 basis-point increase in LIBOR would have resulted in incremental
2018 interest expense of approximately $4.3 million. If the LIBOR or other applicable base rates under our senior unsecured credit
facilities increase in the future, the interest on floating-rate debt could have a material impact on our interest expense.
Risks Relating to the Spin-off
In connection with the Spin-off, Ingersoll Rand indemnified us for certain liabilities and we indemnified Ingersoll Rand for
certain liabilities. If we are required to act on these indemnities to Ingersoll Rand, we may need to divert cash to meet those
obligations and our financial results could be negatively impacted. The Ingersoll Rand indemnity may not be sufficient to
insure us against the full amount of liabilities for which it will be allocated responsibility, and Ingersoll Rand may not be able
to satisfy its indemnification obligations in the future.
Pursuant to the Separation and Distribution Agreement, the Employee Matters Agreement and the Tax Matters Agreement with
Ingersoll Rand, Ingersoll Rand agreed to indemnify us for certain liabilities, and we agreed to indemnify Ingersoll Rand for certain
liabilities, in each case for uncapped amounts. Such indemnities may be significant and could negatively impact our business,
particularly indemnities relating to our actions that could impact the tax-free nature of the Spin-off. Third parties could also seek
to hold us responsible for any of the liabilities that Ingersoll Rand retained. Further, the indemnity from Ingersoll Rand may not
be sufficient to protect us against the full amount of such liabilities, and Ingersoll Rand may not be able to fully satisfy its
indemnification obligations. Moreover, even if we ultimately succeed in recovering from Ingersoll Rand any amounts for which
we are held liable, we may be temporarily required to bear these losses ourselves.
If the distribution or certain internal transactions undertaken in anticipation of the Spin-off are determined to be taxable for
U.S. federal income tax purposes, we, our shareholders that are subject to U.S. federal income tax and/or Ingersoll Rand could
incur significant U.S. federal income tax liabilities and, in certain circumstances, we could be required to indemnify Ingersoll
Rand for material taxes pursuant to indemnification obligations under the Tax Matters Agreement.
Ingersoll Rand has received an IRS ruling substantially to the effect that, among other things, the distribution of our ordinary
shares, together with certain related transactions, qualify under Sections 355 and 368(a) of the Internal Revenue Code ("the Code"),
with the result that Ingersoll Rand and Ingersoll Rand’s shareholders will not recognize any taxable income, gain or loss for U.S.
federal income tax purposes as a result of the Spin-off, except to the extent of cash received in lieu of fractional shares (the "IRS
Ruling"). The IRS Ruling also provided that certain internal transactions undertaken in anticipation of the distribution qualify for
favorable treatment under the Code. In addition to obtaining the IRS Ruling, Ingersoll Rand received opinions from the law firm
of Simpson Thacher & Bartlett LLP substantially to the effect that certain requirements, including certain requirements that the
IRS did not rule on, necessary to obtain tax-free treatment have been satisfied, such that the distribution for U.S. federal income
tax purposes and certain other matters relating to the distribution, including certain internal transactions undertaken in anticipation
of the distribution, received tax-free treatment under Section 355 of the Code. The receipt and effectiveness of the IRS Ruling and
the opinions were conditions to the distribution that were satisfied or waived by Ingersoll Rand. The IRS Ruling and the opinions
rely on certain facts and assumptions and certain representations and undertakings from us and Ingersoll Rand regarding the past
and future conduct of our respective businesses and other matters. Notwithstanding the IRS Ruling and the opinions, the IRS could
determine on audit that the distribution or the internal transactions should be treated as taxable transactions if it determines that
any of these facts, assumptions, representations or undertakings is not correct or has been violated, or that the distribution or the
internal transactions should be taxable for other reasons, including as a result of significant changes in shares or asset ownership
after the distribution. A legal opinion represents the tax adviser’s best legal judgment, is not binding on the IRS or the courts, and
20
the IRS or the courts may not agree with the opinion. In addition, the opinion will be based on then current law, and cannot be
relied upon if current law changes with retroactive effect. If the distribution is determined to be taxable, the distribution could be
treated as a taxable dividend or capital gain for U.S. federal income tax purposes, and our shareholders could incur significant
U.S. federal income tax liabilities. In addition, we or Ingersoll Rand could incur significant U.S. federal income tax liabilities if
it is ultimately determined that certain internal transactions undertaken in anticipation of the distribution are taxable.
In addition, under the terms of the Tax Matters Agreement, in the event the distribution or the internal transactions were determined
to be taxable as a result of actions taken after the distribution by us or Ingersoll Rand, the party responsible for such failure would
be responsible for all taxes imposed on us or Ingersoll Rand as a result thereof. If such failure is not the result of actions taken
after the distribution by us or Ingersoll Rand, then we would be responsible for any taxes imposed on us or Ingersoll Rand as a
result of such determination. Such tax amounts could be significant.
If the distribution is determined to be taxable for Irish tax purposes, significant Irish tax liabilities may arise.
Ingersoll Rand has received an opinion of the Irish Revenue regarding the Irish tax consequences of the distribution to the effect
that certain reliefs and exemptions for corporate reorganizations apply. In addition to obtaining the opinion from Irish Revenue,
Ingersoll Rand received an opinion from the law firm of Arthur Cox confirming the applicability of the relevant exemptions and
reliefs to the distribution and that certain internal transactions will not trigger tax costs. These opinions rely on certain facts and
assumptions and certain representations and undertakings from us and Ingersoll Rand regarding the past and future conduct of
our respective businesses and other matters. Notwithstanding the opinions, the Irish Revenue could determine on audit that the
distribution or the internal transactions do not qualify for the relevant exemptions or reliefs if it determines that any of these facts,
assumptions, representations or undertakings is not correct or has been violated. A legal opinion represents the tax adviser’s best
legal judgment, is not binding on the Irish Revenue or the courts and the Irish Revenue or the courts may not agree with the legal
opinion. In addition, the legal opinion was based on then current law, and cannot be relied upon if current law changes with
retroactive effect. If the distribution ultimately is determined not to fall within certain exemptions or reliefs, the distribution could
result in our shareholders having an Irish tax liability as a result of the distribution (if a shareholder is an Irish resident or holds
shares in Ingersoll Rand in an Irish branch or agency), or we or Ingersoll Rand could incur Irish tax liabilities.
In addition, under the terms of the Tax Matters Agreement, in the event the distribution does not qualify for certain reliefs or
exemptions, then we would be responsible for any taxes imposed on us or Ingersoll Rand as a result of such determination. Such
tax amounts could be significant.
Risks Related to Our Incorporation in Ireland
Irish law differs from the laws in effect in the United States and may afford less protection to holders of our securities.
The U.S. currently does not have a treaty with Ireland providing for the reciprocal recognition and enforcement of judgments in
civil and commercial matters. As such, there is some uncertainty as to whether the courts of Ireland would recognize or enforce
judgments of U.S. courts obtained against us or our directors or officers based on U.S. federal or state civil liability laws, including
the civil liability provisions of the U.S. federal or state securities laws, or hear actions against us or those persons based on those
laws.
As an Irish company, we are governed by the Companies Act 2014 of Ireland, as amended, which differs in some material respects
from laws generally applicable to U.S. corporations and shareholders, including, among others, differences relating to interested
director and officer transactions and shareholder lawsuits. Likewise, the duties of directors and officers of an Irish company
generally are owed to the company only. Shareholders of Irish companies generally do not have a personal right of action against
directors or officers of the company and may exercise such rights of action on behalf of the company only in limited circumstances.
Accordingly, holders of our securities may have more difficulty protecting their interests than would holders of securities of a
corporation incorporated in a jurisdiction of the U.S.
In addition, Irish law allows shareholders to authorize share capital which then can be issued by a board of directors without
shareholder approval. Also, subject to specified exceptions, Irish law grants statutory preemptive rights to existing shareholders
to subscribe for new issuances of shares for cash. At our annual meeting of shareholders, our shareholders authorized our Board
of Directors to issue up to 33% of our issued ordinary shares and further authorized our Board of Directors to issue up to 5% of
such shares for cash without first offering them to our existing shareholders. Both of these authorizations will expire after a certain
period unless renewed by our shareholders, and we cannot guarantee that the renewal of these authorizations will always be
approved.
21
Changes in tax laws, regulations or treaties, changes in our status under the tax laws of many jurisdictions or adverse
determinations by taxing authorities could increase our tax burden or otherwise affect our financial condition or operating
results, as well as subject our shareholders to additional taxes.
The realization of any tax benefit related to our incorporation and tax residence in Ireland could be impacted by changes in tax
laws, tax treaties or tax regulations or the interpretation or enforcement thereof by the tax authorities of many jurisdictions. From
time to time, proposals have been made and/or legislation has been introduced to change the tax laws of various jurisdictions or
limit tax treaty benefits that if enacted could materially increase our tax burden and/or our effective tax rate. For instance, pending
regulatory guidance on the recently enacted U.S. tax legislation could modify or eliminate the tax deductibility of various currently
deductible payments, which could materially and adversely affect our effective tax rate and cash tax position. Moreover, other
legislative proposals could have a material adverse impact on us by overriding certain tax treaties and limiting the treaty benefits
on certain payments, which could increase our tax liability. We cannot predict the outcome of any specific legislation in any
jurisdiction.
While we monitor proposals that would materially impact our tax burden and/or our effective tax rate and investigate our options,
we could still be subject to increased taxation on a going forward basis no matter what action we undertake if certain legislative
proposals are enacted, certain tax treaties are amended and/or our interpretation of applicable tax law is challenged and determined
to be incorrect. In particular, any changes and/or differing interpretations of applicable tax law that have the effect of disregarding
our incorporation in Ireland, limiting our ability to take advantage of tax treaties between jurisdictions, modifying or eliminating
the deductibility of various currently deductible payments or increasing the tax burden of operating or being resident in a particular
country, could subject us to increased taxation.
Dividends received by our shareholders may be subject to Irish dividend withholding tax.
In certain circumstances, we are required to deduct Irish dividend withholding tax (currently at the rate of 20%) from dividends
paid to our shareholders. In the majority of cases, shareholders residing in the U.S. will not be subject to Irish withholding tax,
and shareholders resident in a number of other countries will not be subject to Irish withholding tax provided that they complete
certain Irish dividend withholding tax forms. However, some shareholders may be subject to withholding tax, which could
discourage the investment in our stock and adversely impact the price of our shares.
Dividends received by our shareholders could be subject to Irish income tax.
Dividends paid in respect of our shares generally are not subject to Irish income tax where the beneficial owner of these dividends
is exempt from Irish dividend withholding tax, unless the beneficial owner of the dividend has some connection with Ireland other
than his or her shareholding in Allegion.
Our shareholders who receive their dividends subject to Irish dividend withholding tax will generally have no further liability to
Irish income tax on the dividends unless the beneficial owner of the dividend has some connection with Ireland other than his or
her shareholding in Allegion.
Certain provisions in our Memorandum and Articles of Association, among other things, could prevent or delay an acquisition
of us, which could decrease the trading price of our ordinary shares.
Our Memorandum and Articles of Association contains provisions to deter takeover practices, inadequate takeover bids and
unsolicited offers. These provisions include, amongst others:
•
•
•
•
a provision of our Articles of Association which generally prohibits us from engaging in a business combination with an
interested shareholder (being (i) the beneficial owner, directly or indirectly, of 10% or more of our voting shares or (ii)
an affiliate or associate of us that has at any time within the last five years been the beneficial owner, directly or indirectly,
or 10% or more of our voting shares), subject to certain exceptions;
rules regarding how shareholders may present proposals or nominate directors for election at shareholder meetings;
the right of our Board of Directors to issue preferred shares without shareholder approval in certain circumstances, subject
to applicable law; and
the ability of our Board of Directors to set the number of directors and to fill vacancies on our Board of Directors in
certain circumstances.
We believe these provisions will provide some protection to our shareholders from coercive or otherwise unfair takeover tactics.
These provisions are not intended to make us immune from takeovers. However, these provisions will apply even if the offer may
be considered beneficial by some shareholders and could delay or prevent an acquisition that our Board of Directors determines
22
is in our best interests and our shareholders' best interests. These provisions may also prevent or discourage attempts to remove
and replace incumbent directors.
In addition, several mandatory provisions of Irish law could prevent or delay an acquisition of us. For example, Irish law does not
permit shareholders of an Irish public limited company to take action by written consent with less than unanimous consent. We
also will be subject to various provisions of Irish law relating to mandatory bids, voluntary bids, requirements to make a cash offer
and minimum price requirements, as well as substantial acquisition rules and rules requiring the disclosure of interests in our
shares in certain circumstances. Also, Irish companies, including us, may alter their Memorandum of Association and Articles of
Association only with the approval of at least 75% of the votes of the company’s shareholders cast in person or by proxy at a
general meeting of the company.
The agreements that we entered into with Ingersoll Rand in connection with the Spin-off generally require Ingersoll Rand’s consent
to any assignment by us of our rights and obligations under the agreements. The consent and termination rights set forth in these
agreements might discourage, delay or prevent a change of control that shareholders may consider favorable.
23
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
We operate through a broad network of sales offices, engineering centers, 34 production and assembly facilities and several
distribution centers throughout the world. Our active properties represent about 6.9 million square feet, of which approximately
37% is leased.
The majority of our plant facilities are owned by us with the remainder under long-term lease arrangements. We believe that our
plants have been well maintained, are generally in good condition and are suitable for the conduct of our business.
Item 3. LEGAL PROCEEDINGS
In the normal course of business, we are involved in a variety of lawsuits, claims and legal proceedings, including commercial
and contract disputes, employment matters, product liability claims, environmental liabilities, intellectual property disputes and
tax-related matters. In our opinion, pending legal matters are not expected to have a material adverse impact on our results of
operations, financial condition, liquidity or cash flows.
This item should be read in conjunction with the Company's Risk Factors in Part I, Item 1A for additional information.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of executive officers of the Company as of February 19, 2019.
David D. Petratis, age 61, has served as our Chairman, President and Chief Executive Officer since 2013.
Patrick S. Shannon, age 56, has served as our Senior Vice President and Chief Financial Officer since 2013.
Jeffrey N. Braun, age 59, has served as our Senior Vice President, General Counsel and Chief Compliance Officer since 2014, and
Secretary since 2018. Mr. Braun served as our Deputy General Counsel and Chief Compliance Officer from 2013 to 2014.
Timothy P. Eckersley, age 57, has served as our Senior Vice President and President - Americas since 2013.
Tracy L. Kemp, age 50, has served as our Senior Vice President and Chief Information Officer since 2015. Ms. Kemp served as
our Vice President and Chief Information Officer from 2013 to 2015.
Shelley A. Meador, age 47, has served as our Senior Vice President and Chief Human Resources Officer since 2016. Ms. Meador
served as our Vice President - Tax from 2013 to 2016.
Lucia Veiga Moretti, age 54, has served as our Senior Vice President and President - EMEIA since 2014. Previously, Ms. Moretti
served as Senior Vice President and President, Delphi Product and Service Solutions for Delphi Automotive (a supplier of
automotive technologies) from 2011 to 2014.
Chris E. Muhlenkamp, age 61, has served as our Senior Vice President - Global Operations and Integrated Supply Chain since
2014. Mr. Muhlenkamp served as our Vice President - Global Operations and Integrated Supply Chain from 2013 to 2014.
Douglas P. Ranck, age 60, has served as our Vice President, Controller and Chief Accounting Officer since 2013.
Vincent Wenos, age 52, has served as our Vice President - Global Technology and Engineering since 2018. Mr. Wenos served as
both our Vice President - Americas Engineering and Vice President - Global Mechanical Products from 2016 to 2018. Mr. Wenos
24
previously served as Vice President - Global Product Development and Technology at Stanley Black & Decker, Inc. (a global
diversified consumer and industrial products company).
Jeffrey M. Wood, age 48, has served as our Senior Vice President and President - Asia Pacific since 2017. Mr. Wood served as our
Vice President, Global Supply Management from 2013 to 2017.
All above-listed officers except for Ms. Moretti and Mr. Wenos have been employed by the Company for more than the past five
years. No family relationship exists between any of the above-listed executive officers of the Company. All officers are elected
to hold office for one year or until their successors are elected and qualified.
25
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Information regarding the principal market for our ordinary shares and related shareholder matters is as follows:
Our ordinary shares are traded on the NYSE under the symbol ALLE. As of February 14, 2019, the number of record holders of
ordinary shares was 2,648. Information regarding equity compensation plans required to be disclosed pursuant to this Item is
incorporated by reference from our Proxy Statement.
Dividend Policy
Our Board of Directors declared dividends of $0.21 per ordinary share on February 8, 2018, April 5, 2018, September 6, 2018
and December 6, 2018. On February 5, 2019, our Board of Directors declared a dividend of $0.27 per ordinary share payable
March 29, 2019. We paid a total of $79.4 million in cash for dividends to ordinary shareholders during the year ended December 31,
2018. Future dividends on our ordinary shares, if any, will be at the discretion of our Board of Directors and will depend on, among
other things, our results of operations, cash requirements and surplus, financial condition, contractual restrictions and other factors
that the Board of Directors may deem relevant, as well as our ability to pay dividends in compliance with the Irish Companies
Act. Under the Irish Companies Act, dividends and distributions may only be made from distributable reserves. Distributable
reserves, broadly, means the accumulated realized profits of Allegion plc (ALLE-Ireland). In addition, no distribution or dividend
may be made unless the net assets of ALLE-Ireland are equal to, or in excess of, the aggregate of ALLE-Ireland’s called up share
capital plus undistributable reserves and the distribution does not reduce ALLE-Ireland’s net assets below such aggregate.
Issuer Purchases of Equity Securities
In February 2017, our Board of Directors approved a new stock repurchase authorization of up to $500 million of the Company's
ordinary shares ("2017 Share Repurchase Authorization"). The 2017 Share Repurchase Authorization does not have a prescribed
expiration date. We paid a total of $67.3 million to repurchase 0.9 million ordinary shares during the year ended December 31,
2018 and $60.0 million to repurchase 0.8 million ordinary shares during the year ended December 31, 2017. At December 31,
2018, we have approximately $372.7 million available under the 2017 Share Repurchase Authorization.
26
Performance Graph
The annual changes for the period shown December 1, 2013 (when our ordinary shares began trading) to December 31, 2018 in
the graph on this page are based on the assumption that $100 had been invested in Allegion plc ordinary shares, the Standard &
Poor’s 500 Stock Index ("S&P 500") and the Standard & Poor's 400 Capital Goods Index ("S&P 400 Capital Goods") on December
1, 2013, and that all quarterly dividends were reinvested. The total cumulative dollar returns shown on the graph represent the
value that such investments would have had on December 31, 2018.
December
1, 2013
December
31, 2013
December
31, 2014
December
31, 2015
December
31, 2016
December
31, 2017
December
31, 2018
Allegion plc
S&P 500
S&P 400 Capital Goods
100.00
100.00
100.00
102.20
102.53
104.58
129.03
116.57
104.84
154.37
118.18
99.07
150.97
132.31
130.70
189.19
161.20
162.97
191.42
154.13
140.14
27
Item 6. SELECTED FINANCIAL DATA (1)
In millions, except per share amounts:
As of and for the years ended December 31,
2018
2017
2016
2015
2014
Net revenues
$ 2,731.7
$ 2,408.2
$ 2,238.0
$2,068.1
$2,118.3
Net earnings (loss) attributable to Allegion plc
ordinary shareholders:
Continuing operations
Discontinued operations
Total assets
Total debt
Total Allegion plc shareholders’ equity
(deficit)
Earnings (loss) per share attributable to
Allegion plc ordinary shareholders:
Basic:
Continuing operations
Discontinued operations
Diluted:
Continuing operations
Discontinued operations
Dividends declared per ordinary share
434.9 (a)
—
273.3 (b)
—
229.1 (c)
—
154.3 (d)
(0.4)
186.3 (e)
(11.1)
2,810.2
2,542.0
2,247.4
2,263.0
2,015.9
1,444.8
1,477.3
1,463.8
1,523.1
1,264.6
651.0
401.6
113.3
25.6
(4.8)
$
$
$
4.58
—
4.54
—
0.84
$
$
$
2.87
—
2.85
—
0.64
$
$
$
2.39
—
$
1.61
(0.01)
$
1.94
(0.12)
2.36
—
$
1.59
$
—
1.92
(0.12)
0.48
$
0.40
$
0.32
(a) Net earnings for the year ended December 31, 2018 includes a $21.9 million tax benefit related to an adjustment to the
provisional amounts previously recognized related to the enactment of the U.S. Tax Reform Act.
(b) Net earnings for the year ended December 31, 2017 includes $44.7 million of costs related to the refinancing of our credit
facilities and senior notes and a net tax charge of $53.5 million related to the U.S. Tax Reform Act.
(c) Net earnings for the year ended December 31, 2016 includes $84.4 million of losses related to our previously divested
Systems Integration business.
(d) Net earnings from continuing operations for the year ended December 31, 2015 includes $104.2 million of losses related
to the divestitures of our Venezuelan operations and our majority stake in our Systems Integration business.
(e) Net earnings from continuing operations for the year ended December 31, 2014 includes an after-tax, non-cash inventory
impairment charge of $18.7 million and a $9.1 million after-tax, non-cash charge related to the devaluation of the
Venezuelan bolivar.
(1) The Company has not restated 2014 - 2017 for the impact of the adoption of ASC 606 as of January 1, 2018. The Company
has also not restated 2015 or 2014 for the impact of the adoption of ASU 2016-09 in the fourth quarter of 2016, nor 2014 for the
impact of the adoption of ASU 2015-17 and ASU 2015-03 as of December 31, 2015. The impact of excluding the above standards
in prior period presentation is not material.
28
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-
looking statements. Factors that might cause a difference include, but are not limited to, those discussed under Item 1A. Risk
Factors in this Annual Report on Form 10-K. The following section is qualified in its entirety by the more detailed information,
including our consolidated financial statements and the notes thereto, which appears elsewhere in this Annual Report.
Overview
Organization
We are a leading global provider of security products and solutions operating in three geographic regions: Americas, EMEIA and
Asia Pacific. We sell a wide range of security products and solutions for end-users in commercial, institutional and residential
markets worldwide, including the education, healthcare, government, commercial office and single and multi-family residential
markets. Our leading brands include CISA, Interflex, LCN, Schlage, SimonsVoss and Von Duprin.
Trends and Economic Events
The security products industry has benefited from accelerated growth in institutional, commercial and residential end-markets in
recent years. We also expect the security products industry will benefit from favorable long-term demographic trends such as
continued urbanization of the global population, increased concerns about safety and security and technology-driven innovation.
In recent years, growth in electronic security products and solutions continues to outperform mechanical products, and we expect
growth in the global electronic product categories we serve to continue to outperform growth in mechanical products, as end-users
adopt newer technologies in their facilities and homes. Our recent acquisitions have been made to capitalize on this trend.
The economic conditions discussed above and a number of other challenges and uncertainties that could affect our business are
described under Part I, Item 1A, "Risk Factors."
2018 and 2017 Significant Events
Acquisitions
We completed six business acquisitions in 2018 and one business acquisition in 2017:
Business
Republic Doors & Frames, LLC ("Republic")
Technical Glass Products, Inc. ("TGP")
Hammond Enterprises, Inc. ("Hammond")
Qatar Metal Industries LLC ("QMI")
AD Systems, Inc. ("AD Systems")
Gainsborough Hardware and API Locksmiths ("Door and Access Systems")
ISONAS Security Systems, Inc. ("ISONAS")
Date
January 2017
January 2018
January 2018
February 2018
March 2018
July 2018
July 2018
Republic provides hollow metal doors and frames throughout the U.S. and in select non-U.S. markets, complementing our
Steelcraft® brand and core business in the Americas segment. Republic has been integrated into our Americas segment.
TGP provides fire-rated architectural glass and framing solutions for commercial buildings, as well as non-fire rated architectural
glass and framing, including channel glass systems and curtain walls throughout the U.S., Canada and select markets in the Middle
East. TGP has been integrated into our Americas and EMEIA segments.
We acquired 100% of the machinery, equipment and intellectual property of a division of Hammond. The assets acquired have
been integrated into our existing production facilities and are specific to our Schlage-branded products.
QMI specializes in fire rated and non-fire rated steel and wooden doors, acoustic doors, wooden cabinets and access panels in the
Middle East and Africa. QMI has been integrated into our EMEIA segment.
29
AD Systems designs and manufactures high-performance interior and storefront door systems, specializing in sliding and acoustic
solutions for the U.S. market. AD Systems' portfolio includes sliding and swinging doors, perimeter frames, door hardware,
gasketing, seals and sidelite panels. AD Systems has been integrated into our Americas segment.
Door and Access Systems, based in Australia, includes the brands Gainsborough Hardware, the market-leading residential door
hardware brand in Australia, and API Locksmiths, which serves the Australian market with its keying, installation and access
control services. Door and Access Systems has been integrated into our Asia Pacific segment.
ISONAS designs and manufactures edge-computing technology that produces Power over Ethernet access control solutions for
non-residential end-markets in the U.S. ISONAS has been integrated into our Americas segment.
The incremental impact of the 2018 acquisitions for the twelve months ended December 31, 2018 was an increase in Net revenues
of approximately $160.2 million and an increase to Operating income of approximately $2.8 million. The incremental impact of
acquisitions for the twelve months ended December 31, 2017 was an increase in Net revenues of approximately $32.3 million and
a decrease to Operating income of approximately $0.6 million.
During the years ended December 31, 2018 and 2017, we incurred $10.0 million and $4.7 million of acquisition and integration
related expenses, respectively.
2018 Dividends
We paid quarterly dividends of $0.21 per ordinary share to shareholders on record as of March 15, 2018, June 15, 2018, September
17, 2018, and December 17, 2018. We paid a total of $79.4 million in cash for dividends to ordinary shareholders during the year
ended December 31, 2018.
Restructuring charges
We incurred charges of $4.9 million and $12.3 million for the years ended December 31, 2018 and 2017, respectively, in conjunction
with ongoing restructuring actions. We also incurred other non-qualified restructuring charges of $1.6 million and $1.5 million
for the years ended December 31, 2018 and 2017, respectively, related to costs directly attributable to restructuring activities but
that do not fall into the severance, exit or disposal category.
Financing activities
In 2017, we entered into a new $1.2 billion unsecured credit agreement (the "Credit Agreement"), consisting of a $700.0 million
term loan facility (the “Term Facility”) and a $500.0 million revolving credit facility (the “Revolving Facility”, and together with
the Term Facility, the “Credit Facilities”), and repaid in full our previously outstanding secured credit facility, the Second Amended
and Restated Credit Agreement, dated as of September 30, 2015.
Also in 2017, we issued $400.0 million of 3.200% Senior Notes due 2024 (the “3.200% Senior Notes”) and $400.0 million of
3.550% Senior Notes due 2027 (the “3.550% Senior Notes” and, together with the 3.200% Senior Notes, the “Notes”). We used
a portion of the net proceeds from the Notes to redeem in full our previously outstanding $300.0 million Senior Notes due 2021
and $300.0 million Senior Notes due 2023.
30
Results of Operations - For the years ended December 31
Dollar amounts in millions, except per share
amounts
Net revenues
$
Cost of goods sold
Selling and administrative expenses
Operating income
Interest expense
2018
2,731.7
1,558.4
647.5
525.8
54.0
% of Net
Revenues
57.0%
23.7%
19.2%
Loss on divestitures
Other income, net
Earnings before income taxes
Provision for income taxes
Net earnings
Less: Net earnings attributable to
noncontrolling interests
Net earnings attributable to Allegion
plc
Diluted net earnings per ordinary
share attributable to Allegion plc
ordinary shareholders:
$
$
—
(3.4)
475.2
39.8
435.4
0.5
434.9
4.54
Net Revenues
$
$
$
% of Net
Revenues
55.4%
24.1%
20.5%
2017
2,408.2
1,335.3
580.4
492.5
105.7
—
(8.9)
395.7
119.0
276.7
3.4
273.3
2.85
% of Net
Revenues
55.8%
24.8%
19.4%
2016
2,238.0
1,248.3
555.4
434.3
64.3
84.4
(9.4)
295.0
63.8
231.2
2.1
229.1
2.36
$
$
$
Net revenues for the year ended December 31, 2018 increased by 13.4%, or $323.5 million, compared to the same period in 2017
due to the following:
Pricing
Volume
Acquisitions
Currency exchange rates
Total
1.6%
4.4%
6.6%
0.8%
13.4%
The increase in Net revenues was primarily driven by higher volumes in all segments, improved pricing, incremental Net revenues
from the acquisitions discussed above and favorable foreign currency exchange rate movements relative to the U.S. Dollar.
Net revenues for the year ended December 31, 2017 increased by 7.6%, or $170.2 million, compared to the same period in 2016
due to the following:
Pricing
Volume
Acquisitions
Currency exchange rates
Total
1.8%
3.9%
1.4%
0.5%
7.6%
The increase in Net revenues was primarily driven by higher volumes and improved pricing in all segments, incremental Net
revenues from acquisitions and favorable foreign currency exchange rate movements relative to the U.S. Dollar.
Cost of Goods Sold
For the year ended December 31, 2018, Cost of goods sold as a percentage of Net revenues increased to 57.0% from 55.4% due
to the following:
31
Inflation in excess of pricing and productivity
Volume / product mix
Acquisitions
Investment spending
Currency exchange rates
Restructuring / acquisition costs
Total
0.1 %
(0.1)%
1.5 %
0.3 %
(0.1)%
(0.1)%
1.6 %
Costs of goods sold as a percentage of Net revenues for the year ended December 31, 2018 increased primarily due to inflation
in excess of pricing and productivity, the impact of acquisitions and increased investment spending. These increases were partially
offset by favorable currency exchange rate movements, favorable product mix and volume and decreased restructuring and
acquisition costs.
For the year ended December 31, 2017, Cost of goods sold as a percentage of Net revenues decreased to 55.4% from 55.8% due
to the following:
Pricing and productivity in excess of inflation
Volume / product mix
Acquisitions
Currency exchange rates
Environmental remediation charge
Restructuring / acquisition costs
Total
(0.4)%
0.4 %
0.5 %
(0.1)%
(0.7)%
(0.1)%
(0.4)%
Costs of goods sold as a percentage of Net revenues for the year ended December 31, 2017 decreased primarily due to pricing and
productivity benefits in excess of inflation, favorable foreign currency exchange rate movements, a decrease related to an
environmental remediation charge in 2016 and decreased restructuring and acquisition costs. These decreases were partially offset
by unfavorable product mix and volume and the impact of acquisitions.
Selling and Administrative Expenses
For the year ended December 31, 2018, Selling and administrative expenses as a percentage of Net revenues decreased to 23.7%
from 24.1% due to the following:
Inflation in excess of productivity
Volume leverage
Acquisitions
Investment spending
Total
0.5 %
(0.8)%
(0.4)%
0.3 %
(0.4)%
Selling and administrative expenses as a percentage of Net revenues for the year ended December 31, 2018 decreased primarily
due to favorable leverage due to increased volume and the impact of acquisitions. These decreases were partially offset by inflation
in excess of productivity benefits and increased investment spending.
For the year ended December 31, 2017, Selling and administrative expenses as a percentage of Net revenues decreased to 24.1%
from 24.8% due to the following:
Productivity in excess of inflation
Volume leverage
Acquisitions
Investment spending
Restructuring / acquisition costs
Total
32
(0.6)%
(0.9)%
(0.2)%
0.7 %
0.3 %
(0.7)%
Selling and administrative expenses as a percentage of Net revenues for the year ended December 31, 2017 decreased primarily
due to favorable leverage due to increased volume, productivity benefits in excess of inflation and acquisitions. These decreases
were partially offset due to increased investment spending and higher restructuring and acquisition costs.
Operating Income/Margin
Operating income for the year ended December 31, 2018 increased $33.3 million from the same period in 2017 and Operating
margin decreased to 19.2% from 20.5% for the same period in 2017 due to the following:
In millions
December 31, 2017
Inflation in excess of pricing and productivity
Volume / product mix
Currency exchange rates
Investment spending
Acquisitions
Restructuring / acquisition costs
December 31, 2018
Operating Income
Operating Margin
$
$
492.5
(6.4)
45.3
3.1
(13.5)
2.8
2.0
525.8
20.5 %
(0.6)%
0.9 %
— %
(0.5)%
(1.2)%
0.1 %
19.2 %
Operating income increased due to favorable volume/product mix in all segments, foreign currency exchange rate movements,
the impact of acquisitions and lower restructuring and acquisition costs. These increases were partially offset by inflation in excess
of pricing and productivity and increased investment spending.
Operating margin decreased primarily due to inflation in excess of pricing and productivity, increased investment spending and
lower margins from acquisitions during the current year. These decreases were partially offset by favorable volume/product mix
and lower restructuring and acquisition costs.
Operating income for the year ended December 31, 2017 increased $58.2 million and Operating margin increased to 20.5%
from 19.4% for the same period in 2016 due to the following:
In millions
December 31, 2016
Pricing and productivity in excess of inflation
Volume / product mix
Currency exchange rates
Investment spending
Acquisitions
Environmental remediation charge
Restructuring / acquisition costs
December 31, 2017
Operating Income
Operating Margin
$
$
434.3
30.7
29.4
4.2
(15.4)
(0.6)
15.0
(5.1)
492.5
19.4 %
1.0 %
0.5 %
0.1 %
(0.7)%
(0.3)%
0.7 %
(0.2)%
20.5 %
Operating income and Operating margin both increased due to favorable volume/product mix in all segments, pricing improvements
and productivity in excess of inflation, favorable foreign currency exchange rate movements and lower environmental remediation
charges in 2017 due to a charge in 2016 for a change in approach for environmental remediation related to two sites in the Americas.
These increases were partially offset by increased investment spending, the impact of acquisitions and higher restructuring and
acquisition costs.
Interest Expense
Interest expense for the year ended December 31, 2018 decreased $51.7 million compared to the same period of 2017 primarily
due to $44.7 million of costs in the prior year associated with the refinancing of our Credit Facilities, issuance of our 3.200% and
3.550% Senior Notes and redemption of our previously outstanding Senior notes due 2021 and 2023 in the third and fourth quarters
of 2017. Lower interest rates on our outstanding indebtedness also contributed to the decrease in Interest expense.
Interest expense for the year ended December 31, 2017 increased $41.4 million compared to the same period of 2016. Interest
expense increased primarily due to $44.7 million of costs associated with the refinancing of our Credit Facilities, issuance of our
33
3.200% and 3.550% Senior Notes and redemption of our previously outstanding Senior notes due 2021 and 2023 in the third and
fourth quarters of 2017, as discussed above.
Other income, net
The components of Other income, net, for the year ended December 31 were as follows:
In millions
Interest income
Foreign currency exchange loss
Earnings from and gains on the sale of equity investments
Net periodic pension and postretirement benefit (income) cost, less service cost
Other
Other income, net
2018
2017
2016
(0.8) $
0.3
(0.4)
(2.8)
0.3
(3.4) $
(1.2) $
0.7
(5.4)
4.3
(7.3)
(8.9) $
(1.9)
2.0
(3.6)
8.8
(14.7)
(9.4)
$
$
For the year ended December 31, 2018, Other income, net decreased by $5.5 million compared to the same period in 2017, due
to a cumulative gain of $5.4 million from the sale of iDevices, LLC and gains of $7.3 million related to legal entity liquidations
in our Asia Pacific region, of which $2.2 million was attributed to noncontrolling interests, in 2017, neither of which were recurring
in 2018. These decreases were partially offset by Net periodic pension and postretirement benefit income, less service cost of $2.8
million in 2018, compared to Net periodic pension and postretirement benefit cost, less service cost of $4.3 million in 2017.
For the year ended December 31, 2017, Other income, net decreased by $0.5 million compared with the same period in 2016.
This decrease was due to gains from the sale of marketable securities of $12.4 million in 2016, which did not recur in 2017. This
decrease is partially offset by the cumulative $5.4 million gain from the sale of iDevices, LLC and the gains of $7.3 million related
to legal entity liquidations in our Asia Pacific region discussed above, as well as decreased Net periodic pension and postretirement
benefit cost, less service cost in 2017 compared to 2016.
Provision for Income Taxes
On December 22, 2017, the President of the United States signed comprehensive tax legislation commonly referred to as the Tax
Cuts and Jobs Act (the “Tax Reform Act”). The Tax Reform Act makes broad and complex changes to the U.S. tax code which
impacted our years ended December 31, 2018 and 2017, including, but not limited to (1) reducing the U.S. federal corporate tax
rate, (2) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries, and (3) requiring a review of
the future realizability of deferred tax balances.
For the year ended December 31, 2018, our effective tax rate was 8.4% compared to 30.1% for the year ended December 31, 2017.
The effective income tax rate for the year ended December 31, 2018 was positively impacted by a $21.9 million tax benefit related
to the Tax Reform Act and the reduction in the US statutory tax rate from 35% to 21%. The effective income tax rate for the year
ended December 31, 2017 was negatively impacted by a $53.5 million tax charge related to the Tax Reform Act, which was
partially offset by the release of $10.4 million of valuation allowances.
For the year ended December 31, 2017, our effective tax rate was 30.1% compared to 21.6% for the year ended December 31,
2016. The effective income tax rate for the year ended December 31, 2017 was negatively impacted by a $53.5 million tax charge
related to the Tax Reform Act, which was partially offset by the release of $10.4 million of valuation allowances. The effective
income tax rate for the year ended December 31, 2016 was negatively impacted by $84.4 million (before and after tax) of charges
related to the divestiture of our Systems Integration business in China during 2015.
34
Review of Business Segments
We operate in and report financial results for three segments: Americas, EMEIA, and Asia Pacific. These segments represent the
level at which our chief operating decision maker reviews company financial performance and makes operating decisions.
Segment operating income is the measure of profit and loss that our chief operating decision maker uses to evaluate the financial
performance of the business and as the basis for resource allocation, performance reviews and compensation. For these reasons,
we believe that Segment operating income represents the most relevant measure of Segment profit and loss. Our chief operating
decision maker may exclude certain charges or gains, such as corporate charges and other special charges, to arrive at a Segment
operating income that is a more meaningful measure of profit and loss upon which to base our operating decisions. We define
Segment operating margin as Segment operating income as a percentage of the segment's Net revenues.
The segment discussions that follow describe the significant factors contributing to the changes in results for each segment included
in Net earnings.
Segment Results of Operations - For the years ended December 31
In millions
Net revenues
Americas
EMEIA
Asia Pacific
Total
Segment operating income
Americas
EMEIA
Asia Pacific
Total
Segment operating margin
Americas
EMEIA
Asia Pacific
2018
2017
% Change
2017
2016
% Change
$ 1,988.6
$ 1,767.5
589.9
153.2
523.5
117.2
12.5 %
12.7 %
30.7 %
$ 1,767.5
$ 1,645.7
523.5
117.2
485.9
106.4
$ 2,731.7
$ 2,408.2
$ 2,408.2
$ 2,238.0
$
544.5
$
508.5
49.3
6.9
44.1
9.5
7.1 %
11.8 %
(27.4)%
$
508.5
$
456.7
44.1
9.5
35.3
6.1
$
600.7
$
562.1
$
562.1
$
498.1
7.4%
7.7%
10.2%
11.3%
24.9%
55.7%
27.4%
8.4%
4.5%
28.8%
8.4%
8.1%
28.8%
8.4%
8.1%
27.8%
7.3%
5.7%
Americas
Our Americas segment is a leading provider of security products and solutions in approximately 30 countries throughout North
America, Central America, the Caribbean and South America. The segment sells a broad range of products and solutions including,
locks, locksets, portable locks, key systems, door closers, exit devices, doors and door systems, electronic products and access
control systems to end-users in commercial, institutional and residential facilities, including the education, healthcare, government,
commercial office and single and multi-family residential markets. This segment’s primary brands are LCN, Schlage, Steelcraft
and Von Duprin.
2018 vs 2017
Net revenues
Net revenues for the year ended December 31, 2018 increased by 12.5%, or $221.1 million, compared to the same period in 2017
due to the following:
Pricing
Volume
Acquisitions
Total
35
1.7%
5.1%
5.7%
12.5%
The increase in Net revenues is due to higher volumes, improved pricing and acquisitions during the current year. Net revenues
from non-residential products for the year ended December 31, 2018 increased mid-teens compared to the prior year, primarily
driven by higher volumes, improved pricing and acquisitions in the current year. Net revenues from residential products for the
year ended December 31, 2018 increased mid-single digits compared to the prior year.
Operating income/margin
Segment operating income for the year ended December 31, 2018 increased $36.0 million and Segment operating margin decreased
to 27.4% from 28.8% compared to the same period in 2017 due to the following:
In millions
December 31, 2017
Inflation in excess of pricing and productivity
Volume / product mix
Currency exchange rates
Investment spending
Acquisitions
Restructuring / acquisition costs
December 31, 2018
Operating Income
Operating Margin
$
$
508.5
(4.2)
42.1
0.7
(7.2)
3.3
1.3
544.5
28.8 %
(0.8)%
0.9 %
0.1 %
(0.4)%
(1.3)%
0.1 %
27.4 %
Operating income increased primarily due to favorable volume/product mix, favorable foreign currency exchange rate movements,
acquisitions during the current year and year-over-year decreases in restructuring and acquisition costs. These increases were
partially offset by inflation in excess of pricing and productivity and increased investment spending.
Operating margin decreased primarily due to inflation in excess of pricing and productivity, increased investment spending and
lower margins from acquisitions during the current year. These decreases were partially offset by favorable volume/product mix,
favorable foreign currency exchange rate movements and year-over-year decreases in restructuring and acquisition costs.
2017 vs 2016
Net revenues
Net revenues for the year ended December 31, 2017 increased by 7.4%, or $121.8 million, compared to the same period in 2016
due to the following:
Pricing
Volume
Acquisitions
Currency exchange rates
Total
2.0%
3.8%
1.4%
0.2%
7.4%
The increase in Net revenues was due to higher volumes, improved pricing, the impact of an acquisition in January 2017 and
favorable foreign currency exchange rate movements. Net revenues from non-residential products for the year ended December 31,
2017 increased high single digits compared to the prior year due to market growth, product launches, and channel initiatives. Net
revenues from residential products for the year ended December 31, 2017 increased mid-single digits compared to the prior year.
Operating income/margin
Segment operating income for the year ended December 31, 2017 increased $51.8 million and Segment operating margin increased
to 28.8% from 27.8% compared to the same period in 2016 due to the following:
36
In millions
December 31, 2016
Pricing and productivity in excess of inflation
Volume / product mix
Currency exchange rates
Investment spending
Acquisitions
Environmental remediation charge
Restructuring / acquisition costs
December 31, 2017
Operating Income
Operating Margin
$
$
456.7
25.9
22.2
2.6
(10.7)
0.3
15.0
(3.5)
508.5
27.8 %
1.0 %
0.3 %
0.1 %
(0.7)%
(0.4)%
0.9 %
(0.2)%
28.8 %
Operating income increased primarily due to pricing improvements and productivity in excess of inflation, favorable volume/
product mix, favorable foreign currency exchange rate movements, lower environmental remediation charges in 2017 due to a
2016 charge for a change in approach for environmental remediation related to two sites in the U.S. and the impact of acquisitions.
These increases were partially offset by increased investment spending primarily for new product development and channel
development and restructuring and acquisition costs.
Operating margin increased primarily due to pricing improvements and productivity in excess of inflation, favorable volume/
product mix, favorable foreign currency exchange rate movements and lower environmental remediation charges in 2017 due to
a charge in 2016 for a change in approach for environmental remediation related to two sites in the U.S. These increases were
partially offset by increased investment spending primarily for new product development and channel development, restructuring
and acquisition costs and the impact of acquisitions.
EMEIA
Our EMEIA segment provides security products and solutions in approximately 85 countries throughout Europe, the Middle East,
India and Africa. The segment offers end-users a broad range of products, services and solutions including, locks, locksets, portable
locks, key systems, door closers, exit devices, doors and door systems, electronic products and access control systems, as well as
time and attendance and workforce productivity solutions. This segment’s primary brands are AXA, Bricard, Briton, CISA, Interflex
and SimonsVoss. This segment also resells LCN, Schlage and Von Duprin products, primarily in the Middle East.
2018 vs 2017
Net revenues
Net revenues for the year ended December 31, 2018 increased by 12.7%, or $66.4 million, compared to the same period in 2017
due to the following:
Pricing
Volume
Acquisitions
Currency exchange rates
Total
1.5%
2.2%
5.1%
3.9%
12.7%
The increase in Net revenues is due to higher volumes, improved pricing, favorable foreign currency exchange rate movements
and the impact of acquisitions in the current year.
Operating income/margin
Segment operating income for the year ended December 31, 2018 increased $5.2 million compared to the same period in 2017,
while Segment operating margin remained consistent at 8.4% in 2018, the same as in 2017, due to the following:
37
In millions
December 31, 2017
Pricing and productivity in excess of inflation
Volume / product mix
Currency exchange rates
Investment spending
Acquisitions
Restructuring / acquisition costs
December 31, 2018
Operating Income
Operating Margin
$
$
44.1
0.2
5.3
3.0
(4.1)
(2.6)
3.4
49.3
8.4 %
(0.1)%
0.8 %
0.3 %
(0.8)%
(0.9)%
0.7 %
8.4 %
Operating income increased due to favorable volume/product mix, pricing improvements and productivity in excess of inflation,
favorable foreign currency exchange rate movements and year-over-year decreases in restructuring and acquisition costs. These
increases were partially offset by increased investment spending and the impact of acquisitions in the current year.
Operating margin was unchanged year-over-year at 8.4%. Improvements due to favorable volume/product mix, foreign currency
exchange rate movements and year-over-year changes in restructuring and acquisition costs were offset by lower pricing
improvements and productivity in excess of inflation, increased investment spending and lower margins from acquisitions during
the current year.
2017 vs 2016
Net revenue
Net revenues for the year ended December 31, 2017 increased by 7.7%, or $37.6 million, compared to the same period in 2016
due to following:
Pricing
Volume
Acquisitions / divestitures
Currency exchange rates
Total
1.6%
3.1%
1.6%
1.4%
7.7%
The increase in Net revenues was due to higher volumes, improved pricing, the impact of an acquisition made in the prior year
and favorable foreign currency exchange rate movements.
Operating income/margin
Segment operating income for the year ended December 31, 2017 increased $8.8 million and Segment operating margin
increased to 8.4% from 7.3% compared to the same period in 2016 due to the following:
In millions
December 31, 2016
Pricing and productivity in excess of inflation
Volume / product mix
Currency exchange rates
Investment spending
Acquisitions
Restructuring / acquisition costs
December 31, 2017
Operating Income
Operating Margin
$
$
35.3
4.6
5.2
1.3
(2.4)
(0.9)
1.0
44.1
7.3 %
0.8 %
0.8 %
0.1 %
(0.5)%
(0.3)%
0.2 %
8.4 %
The increases were primarily due to favorable volume/product mix, pricing improvements and productivity in excess of inflation,
favorable foreign currency exchange rate movements and year-over-year change in restructuring and acquisition costs. These
increases were partially offset by increased investment spending and the impact from an acquisition in 2016.
38
Asia Pacific
Our Asia Pacific segment provides security products, services and solutions in approximately 15 countries throughout the Asia
Pacific region. The segment offers end-users a broad range of products, services and solutions including, locks, locksets, portable
locks, key systems, door closers, exit devices, electronic products and access control systems. This segment’s primary brands are
Brio, Briton, FSH, Gainsborough, Legge, Milre and Schlage.
2018 vs 2017
Net revenues
Net revenues for the year ended December 31, 2018 increased by 30.7%, or $36.0 million, compared to the same period in 2017,
due to the following:
Pricing
Volume
Acquisitions
Currency exchange rates
Total
(0.1)%
3.2 %
28.6 %
(1.0)%
30.7 %
The increase in Net revenues was primarily due to an acquisition during the current year and higher volumes. These increases
were partially offset by unfavorable foreign currency exchange rate movements and slightly lower pricing.
Operating income/margin
Segment operating income for the year ended December 31, 2018 decreased $2.6 million and Segment operating margin decreased
to 4.5% from 8.1% compared to the same period in 2017 due to the following:
In millions
December 31, 2017
Pricing and productivity in excess of inflation
Volume / product mix
Currency exchange rates
Investment spending
Acquisitions
Restructuring / acquisition costs
December 31, 2018
Operating Income
Operating Margin
$
$
9.5
1.3
(2.1)
(0.6)
(1.0)
2.1
(2.3)
6.9
8.1 %
1.1 %
(2.0)%
(0.4)%
(0.8)%
(0.4)%
(1.1)%
4.5 %
Operating income decreased due to unfavorable volume/product mix, unfavorable foreign currency exchange rate movements,
increased investment spending and year-over-year increases in restructuring and acquisition costs. These decreases were partially
offset by pricing and productivity improvements in excess of inflation and an acquisition during the current year.
Operating margin decreased due to unfavorable volume/product mix, unfavorable foreign currency exchange rate movements,
increased investment spending, lower margins from an acquisition during the current year and year-over-year increases in
restructuring and acquisition expenses. These decreases were partially offset by pricing and productivity improvements in excess
of inflation.
2017 vs 2016
Net revenues
Net revenues for the year ended December 31, 2017 increased by 10.2%, or $10.8 million, compared with the same period in
2016, due to the following:
39
Pricing
Volume
Acquisitions
Currency exchange rates
Total
0.4%
7.3%
0.7%
1.8%
10.2%
The increase in Net revenues was due to higher volumes, improved pricing, the impact of an acquisition in 2016 and favorable
foreign currency exchange rate movements.
Operating income/margin
Segment operating income for the year ended December 31, 2017 increased $3.4 million and Segment operating margin increased
to 8.1% from 5.7% compared with the same period in 2016 due to the following:
In millions
December 31, 2016
Pricing and productivity in excess of inflation
Volume / product mix
Currency exchange rates
Investment spending
Acquisitions
December 31, 2017
Operating Income
Operating Margin
$
$
6.1
1.5
2.0
0.4
(0.4)
(0.1)
9.5
5.7 %
1.3 %
1.3 %
0.3 %
(0.4)%
(0.1)%
8.1 %
The increases were primarily related to pricing improvements and productivity in excess of inflation, improved volume/product
mix and favorable foreign currency exchange rate movements. These increases were partially offset by increased investment
spending and the impact of an acquisition in 2016.
Liquidity and Capital Resources
Sources and uses of liquidity
Our primary source of liquidity is cash provided by operating activities. Cash provided by operating activities is used to invest in
new product development, fund capital expenditures and fund working capital requirements and is expected to be adequate to
service any future debt, pay any declared dividends and potentially fund acquisitions and share repurchases. Our ability to fund
these capital needs depends on our ongoing ability to generate cash from our operating activities and to access our borrowing
facilities (including unused availability under our Revolving Facility) and capital markets. We believe that our future cash provided
by operating activities, availability under our Revolving Facility and access to funds on hand and capital markets will provide
adequate resources to fund our operating and financing needs.
The following table reflects the major categories of cash flows for the years ended December 31. For additional details, please
see the Consolidated Statements of Cash Flows in the Consolidated Financial Statements.
In millions
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Operating activities
2018
2017
2016
$
$
$
457.8
(443.8)
(183.4) $
$
347.2
(50.2)
(150.9) $
377.5
(64.0)
(196.0)
Net cash provided by operating activities for the year ended December 31, 2018 increased $110.6 million compared to 2017. This
increase in Net cash provided by operating activities for 2018 was primarily due to higher Net earnings in the current year and a
discretionary $50.0 million contribution to the U.S. qualified defined benefit pension plan in 2017, partially offset by changes in
working capital and an increase in cash paid for taxes.
40
Net cash provided by operating activities for the year ended December 31, 2017 decreased $30.3 million compared to 2016,
reflecting the $50.0 million discretionary contribution to the U.S. qualified defined benefit pension plan discussed above, as well
as increased cash paid for taxes, partially offset by higher Net earnings in 2017 compared to 2016.
Investing activities
Net cash used in investing activities for the year ended December 31, 2018 increased $393.6 million compared to 2017. The
increase in Net cash used in investing activities is primarily due to approximately $368 million of cash payments related to
acquisitions and approximately $8 million of investments in unconsolidated entities during the year ended December 31, 2018,
compared to $20.8 million for an acquisition in 2017. Additionally contributing to the increase in Net cash used in investing
activities was the purchase of $14.3 million of investments during the year ended December 31, 2018 and the sale of an equity
investment during 2017, which resulted in an investing cash inflow of $15.6 million that did not recur in 2018.
Net cash used in investing activities for the year ended December 31, 2017 decreased $13.8 million compared to 2016. The decrease
in Net cash used in investing activities is primarily due to $15.6 million in proceeds from the sale of an equity investment during
2017 that did not occur in 2016 and a $10.6 million decrease of cash payments related to acquisitions. These changes were partially
offset by $14.1 million of cash received from the sale of marketable securities in 2016 that did not recur in 2017.
Financing activities
Net cash used in financing activities for the year ended December 31, 2018 increased $32.5 million compared to the year ended
December 31, 2017. The increase in Net cash used in financing activities is primarily due to an increase in dividend payments of
$18.5 million year-over-year. Additionally, during the year ended December 31, 2018, we repurchased $67.3 million of common
shares, compared to $60.0 million during 2017.
Net cash used in financing activities for the year ended December 31, 2017 decreased $45.1 million compared to 2016. The
decrease in Net cash used in financing activities is due to net proceeds from debt issuances over debt repayments of $10.1 million
in 2017 versus net debt repayments of $64.4 million during 2016. Debt financing activity in 2017 included the redemption of the
2021 and 2023 Senior Notes for a total of $600.0 million and the settlement of the previously outstanding Term Loan A Facility
of $856.3 million, offset by the issuance of the 3.200% and 3.550% Senior Notes in an aggregate amount of $800.0 million and
a new term loan facility maturing on September 12, 2022 (the "Term Facility") in the amount of $700.0 million. Additionally,
during the year ended December 31, 2017, we repurchased $60.0 million of common shares, compared to $85.1 million during
2016. We also made dividend payments to ordinary shareholders of $60.9 million in 2017, compared to $46.0 million in 2016.
Capitalization
Long-term debt at December 31 consisted of the following:
In millions
Term Facility
Revolving Facility
3.200% Senior Notes due 2024
3.550% Senior Notes due 2027
Other debt
Total borrowings outstanding
Less discounts and debt issuance costs, net
Total debt
Less current portion of long-term debt
Total long-term debt
2018
2017
$
656.3
$
—
400.0
400.0
1.2
1,457.5
(12.7)
1,444.8
35.3
$
1,409.5
$
691.3
—
400.0
400.0
1.0
1,492.3
(15.0)
1,477.3
35.0
1,442.3
As of December 31, 2018, we have an unsecured Credit Agreement in place that provides for up to $1,200.0 million in unsecured
financing, consisting of a $700.0 million term loan facility (the “Term Facility”) and a $500.0 million revolving credit facility (the
“Revolving Facility” and, together with the Term Facility, the “Credit Facilities”). The Credit Facilities mature on September 12,
2022. The Term Facility amortizes in quarterly installments at the following rates: 1.25% per quarter starting December 31, 2017
through December 31, 2020, 2.5% per quarter from March 31, 2021 through June 30, 2022, with the balance due on September
12, 2022. The Revolving Facility provides aggregate commitments of up to $500.0 million, which includes up to $100.0 million
41
for the issuance of letters of credit. At December 31, 2018, there were no borrowings outstanding on the Revolving Facility, and
we had $17.1 million of letters of credit outstanding.
Outstanding borrowings under the Credit Facilities accrue interest at our option of (i) a LIBOR rate plus the applicable margin or
(ii) a base rate plus the applicable margin. The applicable margin ranges from 1.125% to 1.500% depending on our credit ratings.
To manage our exposure to fluctuations in LIBOR rates, we have interest rate swaps to fix the interest rate for $250.0 million of
the outstanding borrowings (see Note 10 to the Consolidated Financial Statements).
As of December 31, 2018, we also have $400.0 million outstanding of 3.200% Senior Notes due 2024 (the “3.200% Senior Notes”)
and $400.0 million outstanding of 3.550% Senior Notes due 2027 (the “3.550% Senior Notes” and, together with the 3.200%
Senior Notes, the “Notes”). The Notes require semi-annual interest payments on April 1 and October 1 of each year and will mature
on October 1, 2024 and October 1, 2027, respectively.
Historically, the majority of our earnings were considered to be permanently reinvested in jurisdictions where we have made, and
intend to continue to make, substantial investments to support the ongoing development and growth of our global operations. As
a result of the Tax Reform Act transition tax, we analyzed our global working capital requirements and the potential tax liabilities
that would be incurred if certain non-U.S. subsidiaries made distributions, which include local country withholding tax and potential
U.S. state taxation. Based on this analysis, we made no changes to our permanent reinvestment assertions to reinvest earnings in
our non-U.S. subsidiaries outside of the U.S.
Pension Plans
Our investment objective in managing defined benefit plan assets is to ensure that all present and future benefit obligations are
met as they come due. We seek to achieve this goal while trying to mitigate volatility in plan funded status, contributions and
expense by better matching the characteristics of the plan assets to that of the plan liabilities. Global asset allocation decisions are
based on a dynamic approach whereby a plan's allocation to fixed income assets increases as the funded status increases. We
monitor plan funded status and asset allocation regularly in addition to investment manager performance.
We monitor the impact of market conditions on our defined benefit plans on a regular basis. In January 2017, we made a discretionary
$50.0 million contribution to the U.S. qualified defined benefit pension plan. At December 31, 2018, the funded status of our
qualified pension plan for U.S. employees decreased to 93.1% from 93.3% at December 31, 2017. The funded status for our non-
U.S. pension plans decreased to 98.7% at December 31, 2018 from 100.5% at December 31, 2017. Funded status for all of our
pension plans at December 31, 2018 decreased to 94.1% from 95.5% at December 31, 2017. For further details on pension plan
activity, see Note 11 to the Consolidated Financial Statements.
Contractual Obligations
The following table summarizes our contractual cash obligations by required payment periods:
In millions
Long-term debt (including current maturities)
Interest payments on long-term debt
Purchase obligations
Operating leases
Total contractual cash obligations
2019
2020-2021
2022-2023
Thereafter
Total
$
$
35.3
$
49.9
402.7
30.3
518.2 $
105.0
$
516.3
$
800.9
$
99.6
—
35.5
240.1
$
69.5
—
14.8
600.6
$
62.9
—
17.4
881.2
$
1,457.5
281.9
402.7
98.0
2,240.1
Future interest payments on variable rate long-term debt are estimated based on the rate in effect as of December 31, 2018. Future
expected obligations under our pension and postretirement benefit plans, income taxes, environmental and product liability matters
have not been included in the contractual cash obligations table above.
Pensions
At December 31, 2018, we had net pension liabilities of $38.5 million, which consist of plan assets of $611.6 million and benefit
obligations of $650.1 million. It is our objective to contribute to the pension plans to ensure adequate funds are available in the
plans to make benefit payments to plan participants and beneficiaries when required. The funded status for all of our pension plans
decreased to 94.1% at December 31, 2018 from 95.5% at December 31, 2017. We currently project that an additional approximately
$11.6 million will be contributed to our plans worldwide in 2019. Because the timing and amounts of long-term funding requirements
42
for pension obligations are uncertain, they have been excluded from the preceding table. See Note 11 to the Consolidated Financial
Statements for additional information.
Postretirement Benefits Other than Pensions
At December 31, 2018, we had postretirement benefit obligations of $7.6 million. We fund postretirement benefit costs principally
on a pay-as-you-go basis as medical costs are incurred by covered retiree populations. Benefit payments, which are net of expected
plan participant contributions and Medicare Part D subsidies, are not expected to be material in 2019. Because the timing and
amounts of long-term funding requirements for postretirement obligations are uncertain, they have been excluded from the
preceding table.
Income Taxes
At December 31, 2018, we have total unrecognized tax benefits for uncertain tax positions of $42.0 million and $5.7 million of
related accrued interest and penalties, net of tax. These liabilities have been excluded from the preceding table as we are unable
to reasonably estimate the amount and period in which these liabilities might be paid. See Note 17 to the Consolidated Financial
Statements for additional information regarding matters relating to income taxes, including unrecognized tax benefits and tax
authority disputes.
Contingent Liabilities
We are involved in various litigation, claims and administrative proceedings, including those related to environmental, asbestos-
related and product liability matters. We believe that these liabilities are subject to the uncertainties inherent in estimating future
costs for contingent liabilities and will likely be resolved over an extended period of time. Because the timing and amounts of
potential future cash flows are uncertain, they have been excluded from the preceding table. See Note 20 to the Consolidated
Financial Statements for additional information.
Critical Accounting Policies
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our Consolidated Financial
Statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with those
accounting principles requires management to use judgment in making estimates and assumptions based on the relevant information
available at the end of each period. These estimates and assumptions have a significant effect on reported amounts of assets and
liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities because they result primarily from
the need to make estimates and assumptions on matters that are inherently uncertain. Actual results may differ from estimates. If
updated information or actual amounts are different from previous estimates, the revisions are included in our results for the period
in which they become known.
The following is a summary of certain accounting estimates and assumptions made by management that we consider critical:
•
Goodwill and indefinite-lived intangible assets – We have significant goodwill and indefinite-lived intangible assets on our
Consolidated Balance Sheets related to previous business combinations. Our goodwill and other indefinite-lived intangible
assets are tested annually during the fourth quarter for impairment or when there is a significant change in events or
circumstances that indicate that the fair value of an asset is more likely than not less than the carrying amount of the asset.
Recoverability of goodwill is measured at the reporting unit level and starts with a comparison of the carrying amount of
the reporting unit to its estimated fair value. If the estimated fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is not impaired. To the extent that the carrying value of the reporting unit exceeds its estimated
fair value, a goodwill impairment charge will be recognized for the amount by which the carrying value of the reporting
unit exceeds its fair value, not to exceed the carrying amount of goodwill.
As quoted market prices are not available for our reporting units, the calculation of their estimated fair values is based on
two valuation techniques, a discounted cash flow model (income approach) and a market adjusted multiple of earnings and
revenues (market approach), with each method being weighted in the calculation. The income approach relies on the
Company’s estimates of future cash flows and explicitly addresses factors such as timing, growth and margins, with due
consideration given to forecasting risk. The market approach reflects the market’s expectations for future growth and risk,
with adjustments to account for differences between the guideline publicly-traded companies and the subject reporting
units.
43
The estimated fair values for each of our reporting units exceeded their carrying values by more than 15% for the 2018
goodwill impairment test. Additionally, a 1% increase in the discount rate used or a 1% decrease in the terminal growth
rate would not result in the carrying value of any reporting unit exceeding its estimated fair value.
Assessing the fair value of our reporting units includes, among other things, making key assumptions for estimating future
cash flows and appropriate market multiples. These assumptions are subject to a high degree of judgment and complexity.
We make every effort to estimate future cash flows as accurately as possible with the information available at the time the
forecast is developed. However, changes in assumptions and estimates may affect the estimated fair value of the reporting
unit and could result in impairment charges in future periods. Factors that have the potential to create variances in the
estimated fair value of the reporting unit include, but are not limited to, the following:
•
•
•
•
•
•
Decreases in estimated market sizes or market growth rates due to greater-than-expected declines in volumes,
pricing pressures or disruptive technology;
Declines in our market share and penetration assumptions due to increased competition or an inability to develop
or launch new products;
The impacts of the market volatility, including greater-than-expected declines in pricing, reductions in volumes
or fluctuations in foreign exchange rates;
The level of success of on-going and future research and development efforts, including those related to recent
acquisitions, and increases in the research and development costs necessary to obtain regulatory approvals and
launch new products;
Increase in the price or decrease in the availability of key commodities and the impact of higher energy prices;
and
Increases in our market-participant risk-adjusted weighted-average cost of capital.
Other Indefinite-lived intangible assets - We performed our annual indefinite-lived intangible asset impairment testing in
2018 and determined our indefinite-lived intangible assets were not impaired. Recoverability of intangible assets with
indefinite useful lives is determined on a relief from royalty methodology, which is based on the implied royalty paid, at
an appropriate discount rate, to license the use of an asset rather than owning the asset. The present value of the after-tax
cost savings (i.e. royalty relief) indicates the estimated fair value of the asset. Any excess of the carrying value over the
estimated fair value is recognized as an impairment loss equal to that excess.
A significant increase in the discount rate, decrease in the long-term growth rate, decrease in the royalty rate or substantial
reductions in our end-markets and volume assumptions could have a negative impact on the estimated fair values of any
of our indefinite-lived intangible assets. The estimates of fair value are based on the best information available as of the
date of the assessment, which primarily incorporates management assumptions about expected future cash flows.
•
•
Long-lived assets and finite-lived intangible assets – Long-lived assets and finite-lived intangible assets are reviewed for
impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not
be fully recoverable. Assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows
can be generated. Impairment in the carrying value of an asset could be recognized whenever anticipated future undiscounted
cash flows from an asset are less than its carrying value. The impairment is measured as the amount by which the carrying
value exceeds the fair value of the asset as determined by an estimate of discounted cash flows. The estimates of fair value
are based on the best information available as of the date of the assessment, and changes in business conditions could
potentially require future adjustments to these valuations.
Loss contingencies – Liabilities are recorded for various contingencies arising in the normal course of business, including
litigation and administrative proceedings, environmental and asbestos matters and product liability, product warranty,
worker’s compensation and other claims. We have recorded reserves in the Consolidated Financial Statements related to
these matters, which are developed using input derived from actuarial estimates and historical and anticipated experience
data depending on the nature of the reserve, and in certain instances with consultation of legal counsel, internal and external
consultants and engineers. Subject to the uncertainties inherent in estimating future costs for these types of liabilities, we
believe our estimated reserves are reasonable and do not believe the final determination of the liabilities with respect to
these matters would have a material effect on our financial condition, results of operations, liquidity or cash flows for any
year.
•
Revenue recognition – Net revenues are recognized based on the satisfaction of performance obligations under the terms
of a contract. A performance obligation is a promise in a contract to transfer control of a distinct product or to provide a
44
service, or a bundle of products or services, to a customer, and is the unit of account under ASC 606. We have two principal
revenue streams, tangible product sales and services. Approximately 99% of consolidated Net revenues involve contracts
with a single performance obligation, the transfer of control of a product or bundle of products to a customer. Transfer of
control typically occurs when goods are shipped from our facilities or at other predetermined control transfer points (for
instance, destination terms). Net revenues are measured as the amount of consideration we expect to receive in exchange
for transferring control of the products and takes into account variable consideration, such as sales incentive programs,
including discounts and volume rebates. The existence of these programs does not preclude revenue recognition but does
require our best estimate of the variable consideration to be made based on expected activity, as these items are reserved
for as a deduction to Net revenues over time based on our historical rates of providing these incentives and annual forecasted
sales volumes.
Our remaining Net revenues involve services, including installation and consulting. Unlike the single performance obligation
to ship a product or bundle of products, the service revenue stream delays revenue recognition until the service performance
obligations are satisfied. In some instances, customer acceptance provisions are included in sales arrangements to give the
buyer the ability to ensure the service meets the criteria established in the order. In these instances, revenue recognition is
deferred until the performance obligations are satisfied, which could include acceptance terms specified in the arrangement
being fulfilled through customer acceptance or a demonstration that established criteria have been satisfied.
We do not adjust the transaction price for the effects of a significant financing component, as the time period between
control transfer of goods and services is less than one year. Sales, value-added and other similar taxes collected by us are
excluded from Net revenues. We also have elected to account for shipping and handling activities that occur after control
of the related goods transfers as fulfillment activities instead of performance obligations. Our payment terms are generally
consistent with the industries in which our businesses operate.
Sales returns and customer disputes involving a question of quantity or price are accounted for as variable consideration,
and therefore, as a reduction in revenue and a contra receivable. At December 31, 2018 and 2017, we had a customer claim
accrual (contra receivable) of $31.6 million and $32.5 million, respectively. All other incentives or incentive programs
where the customer is required to reach a certain level of purchases, remain a customer for a certain period, provide a rebate
form or is subject to additional requirements are also considered variable consideration and are accounted for as a reduction
of revenue and a liability. At December 31, 2018 and 2017, we had a sales incentive accrual of $33.9 million and $31.8
million, respectively. Variable consideration is estimated based on the most likely amount we expect to receive from
customers. Each of these accruals represents the Company’s best estimate of the most likely amount expected to be received
from customers based on historical experience. These estimates are reviewed regularly for accuracy. If updated information
or actual amounts are different from previous estimates, the revisions are included in the Company’s results for the period
in which they become known. Historically, the aggregate differences, if any, between the Company’s estimates and actual
amounts in any year have not had a material impact on the Consolidated Financial Statements. We also offer a standard
warranty with most product sales, and the value of such warranty is included in the contractual price. The corresponding
cost of the warranty obligation is accrued as a liability (see Note 20).
•
Income taxes – We account for income taxes in accordance with ASC Topic 740. Deferred tax assets and liabilities are
determined based on temporary differences between financial reporting and tax bases of assets and liabilities, applying
enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. We recognize future
tax benefits, such as net operating losses and non-U.S. tax credits, to the extent that realizing these benefits is considered
in our judgment to be more likely than not. We regularly review the recoverability of our deferred tax assets considering
our historic profitability, projected future taxable income, timing of the reversals of existing temporary differences and the
feasibility of our tax planning strategies. Where appropriate, we record a valuation allowance with respect to future tax
benefits.
The provision for income taxes involves a significant amount of management judgment regarding interpretation of relevant
facts and laws in the jurisdictions in which we operate. Future changes in applicable laws, projected levels of taxable income
and tax planning could change the effective tax rate and tax balances recorded by us. In addition, tax authorities periodically
review income tax returns filed by us and can raise issues regarding our filing positions, timing and amount of income or
deductions and the allocation of income among the jurisdictions in which we operate. A significant period of time may
elapse between the filing of an income tax return and the ultimate resolution of an issue raised by a revenue authority with
respect to that return. We believe that we have adequately provided for any reasonably foreseeable resolution of these
matters. We will adjust our estimates if significant events so dictate. To the extent that the ultimate results differ from our
original or adjusted estimates, the effect will be recorded in the provision for income taxes in the period that the matter is
finally resolved.
The Tax Reform Act constituted a major change to the U.S. tax system. The estimated impact of the Tax Reform Act is
based on current interpretations and related assumptions. As discussed further in Note 17 to the Consolidated Financial
45
•
•
Statements, where applicable, we included estimates in our Consolidated Financial Statements for impacts of the new Tax
Reform Act. The actual impact to us may be materially different from current estimates based on future regulatory
developments.
Employee benefit plans – We provide a range of benefits to eligible employees and retirees, including pensions,
postretirement and postemployment benefits. Determining the cost associated with such benefits is dependent on various
actuarial assumptions including discount rates, expected return on plan assets, compensation increases, employee mortality,
turnover rates and healthcare cost trend rates. Actuarial valuations are performed to determine expense in accordance with
GAAP. Actual results may differ from the actuarial assumptions and are generally accumulated into Accumulated other
comprehensive loss and amortized into earnings over future periods.
We review our actuarial assumptions at each measurement date and make modifications to the assumptions based on current
rates and trends, if appropriate. The discount rate, the rate of compensation increase and the expected long-term rates of
return on plan assets are determined as of each measurement date. Discount rates for all plans are established using
hypothetical yield curves based on the yields of corporate bonds rated AA quality. Spot rates are developed from the yield
curve and used to discount future benefit payments. The rate of compensation increase is dependent on expected future
compensation levels. The expected long-term rate of return on plan assets reflects the average rate of returns expected on
the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. The expected
long-term rate of return on plan assets is based on what is achievable given the plan’s investment policy, the types of assets
held and the target asset allocation. The expected long-term rate of return is determined as of each measurement date.
We believe the assumptions utilized in recording our obligations under our plans are reasonable based on input from our
actuaries, outside investment advisors and information as to assumptions used by plan sponsors.
Changes in any of the assumptions can have an impact on the net periodic pension and postretirement benefit cost. Estimated
sensitivities to the expected 2018 net periodic pension benefit cost of a 0.25% rate decline in the two basic assumptions are
as follows: the decline in the discount rate would increase expense by approximately $0.8 million and the decline in the
estimated return on assets would increase expense by approximately $0.6 million.
Business combinations – The fair value of the consideration paid in a business combination is allocated to tangible assets
and identifiable intangible assets, liabilities assumed and goodwill. Acquired intangible assets primarily include indefinite-
lived trade names, customer relationships and completed technologies. The accounting for acquisitions involves a
considerable amount of judgment and estimation, including the fair value of acquired intangible assets involving projections
of future revenues and cash flows that are either discounted at an estimated discount rate or measured at an estimated royalty
rate; fair value of other acquired assets and assumed liabilities, including potential contingencies; and the useful lives of
the acquired assets. The assumptions used to determine the fair value of acquired intangible assets include projections
developed using internal forecasts, available industry and market data, estimates of long-term growth rates, profitability,
customer attrition and royalty rates, which are determined at the time of the business combination. The Company uses an
income approach or market approach (or both) in accordance with accepted valuation models for each acquired intangible
asset to determine the fair value. The impact of prior or future business combinations on our financial condition or results
of operations may be materially impacted by the change in or initial selection of assumptions and estimates.
Recent Accounting Pronouncements
See Note 2 to our Consolidated Financial Statements included in Item 8 herein for a discussion of recently issued and adopted
accounting pronouncements.
46
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to fluctuations in currency exchange rates, interest rates and commodity prices which could impact our results of
operations and financial condition.
Foreign Currency Exposures
We have operations throughout the world that manufacture and sell products in various international markets. As a result, we are
exposed to movements in exchange rates of various currencies against the U.S. dollar as well as against other currencies throughout
the world. We actively manage material currency exposures that are associated with purchases and sales and other assets and
liabilities at the legal entity level; however, we do not hedge currency translation risk. We attempt to hedge exposures that cannot
be naturally offset to an insignificant amount with foreign currency derivatives. Derivative instruments utilized by us in our hedging
activities are viewed as risk management tools, involve little complexity and are not used for trading or speculative purposes. To
minimize the risk of counter party non-performance, derivative instrument agreements are made only through major financial
institutions with significant experience in such derivative instruments.
We evaluate our exposure to changes in currency exchange rates on our foreign currency derivatives using a sensitivity analysis.
The sensitivity analysis is a measurement of the potential loss in fair value based on a percentage change in exchange rates. Based
on the firmly committed currency derivative instruments in place at December 31, 2018, a hypothetical change in fair value of
those derivative instruments assuming a 10% adverse change in exchange rates would result in an additional unrealized loss of
approximately $6.8 million. This amount, when realized, would be partially offset by changes in the fair value of the underlying
transactions.
Commodity Price Exposures
We are exposed to volatility in the prices of commodities used in some of our products and we use fixed price contracts to manage
this exposure. We do not have committed commodity derivative instruments in place at December 31, 2018.
Interest Rate Exposure
Outstanding borrowings under the Credit Facilities accrue interest at the option of the Company of (i) a LIBOR rate plus the
applicable margin or (ii) a base rate plus the applicable margin. The applicable margin ranges from 1.125% to 1.500% depending
on the Company's credit ratings. At December 31, 2018, the outstanding borrowings under the Term Facility accrue interest at
LIBOR plus a margin of 1.250%. To manage the Company's exposure to fluctuations in LIBOR rates, the Company has interest
rate swaps to fix the interest rate for $250.0 million of the outstanding borrowings.
These swaps expire in September 2020. A 100 basis-point increase in LIBOR would have resulted in incremental 2018 interest
expense of approximately $4.3 million. If the base interest rate in our credit facilities increases in the future, our floating-rate debt
could have a material effect on our interest expense.
47
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) The following Consolidated Financial Statements and Financial Statement Schedule and the report thereon of
PricewaterhouseCoopers LLP dated February 19, 2019, are presented following Item 16 of this Annual Report on Form
10-K.
Consolidated Financial Statements:
Report of independent registered public accounting firm
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016
Consolidated Balance Sheets at December 31, 2018 and 2017
For the years ended December 31, 2018, 2017 and 2016:
Consolidated Statements of Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Financial Statement Schedule:
Schedule II – Valuation and Qualifying Accounts for the years ended December 31, 2018, 2017 and 2016
(b) The unaudited selected quarterly financial data for the two years ended December 31, is as follows:
In millions, except per share amounts
2018
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Net revenues
Cost of goods sold
Operating income
Net earnings
Net earnings attributable to Allegion plc
Earnings per share attributable to Allegion plc ordinary
shareholders:
$
613.1
$
704.7
$
711.5
$
355.3
98.7
72.4
72.2
399.1
143.4
114.0
113.9
402.1
142.3
116.1
116.0
Basic
Diluted
$
$
0.76
0.75
$
$
1.20
1.19
$
$
1.22
1.21
$
$
702.4
401.9
141.4
132.9
132.8
1.40
1.39
2017
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Net revenues
Cost of goods sold
Operating income
Net earnings
Net earnings attributable to Allegion plc
Earnings per share attributable to Allegion plc ordinary
shareholders:
$
548.8
$
627.0
$
609.4
$
307.6
99.5
68.7
68.4
345.7
135.0
105.8
105.5
335.0
127.1
90.1
89.8
Basic
Diluted
$
$
0.72
0.71
$
$
1.11
1.10
$
$
0.95
0.94
$
$
623.0
347.0
130.9
12.1
9.6
0.10
0.10
Net earnings from the fourth quarter of 2018 includes a net tax benefit of $18.6 million related to an adjustment to the
provisional accounting related to the U.S. Tax Reform Act.
Net earnings from the fourth quarter of 2017 includes a $41.3 million charge related to the refinancing of our senior notes and a
net tax charge of $53.5 million related to the U.S. Tax Reform Act.
48
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, including its Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of
the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the end of the period covered by this Annual
Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded as of
December 31, 2018, that the Company's disclosure controls and procedures were effective in ensuring that information required
to be disclosed by the Company in reports that it files or submits under the Exchange Act has been recorded, processed, summarized
and reported, within the time periods specified in the Commission's rules and forms, and that such information has been accumulated
and communicated to the Company's management including its Chief Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure.
(b) Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined
under Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and
procedures that:
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the Company’s assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being
made only in accordance with authorizations of the Company’s management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In making this
assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework (2013). We concluded that our internal control over financial reporting was
effective as of December 31, 2018.
As discussed in Item 7, we have completed six business acquisitions during 2018. Because they were acquired by us in 2018, we
have excluded these businesses, AD Systems, Door and Access Systems, Hammond, Isonas, QMI and TGP, from our assessment
of internal control over financial reporting as of December 31, 2018. These entities are wholly-owned subsidiaries whose total
assets and total revenues represent approximately 3% and 6%, respectively, of the related consolidated financial statement amounts
as of and for the year ended December 31, 2018. We are currently integrating these entities into our compliance programs and
internal control processes.
The effectiveness of our internal control over financial reporting has been audited by PricewaterhouseCoopers LLP, the independent
registered public accounting firm, as stated in their report herein.
(c) Changes in Internal Control Over Financial Reporting
There were no changes in the Company's internal control over financial reporting that occurred during the quarter ended
December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
49
Item 9B. OTHER INFORMATION
None.
50
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information regarding our executive officers is included in Part I under the caption "Executive Officers of Registrant."
The other information required by this item is incorporated herein by reference to the information contained under the headings
"Item 1. Election of Directors", "Section 16(a) Beneficial Ownership Reporting Compliance" and "Corporate Governance" in our
Proxy Statement.
Item 11. EXECUTIVE COMPENSATION
The other information required by this item is incorporated herein by reference to the information contained under the headings
"Compensation Discussion and Analysis", "Executive Compensation" and "Compensation Committee Report" in our Proxy
Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The other information required by this item is incorporated herein by reference to the information contained under the headings
"Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" of our Proxy
Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The other information required by this item is incorporated herein by reference to the information contained under the headings
"Corporate Governance" and "Certain Relationships and Related Person Transactions" of our Proxy Statement.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to the information contained under the caption "Fees of
the Independent Auditors" in our Proxy Statement.
51
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a) 1. and 2.
Financial statements and financial statement schedule
See Item 8.
3.
Exhibits
The exhibits listed on the accompanying index to exhibits are filed as part of this Annual Report on
Form 10-K.
52
ALLEGION PLC
INDEX TO EXHIBITS
(Item 15(a))
Description
Pursuant to the rules and regulations of the SEC, we have filed certain agreements as exhibits to this Annual Report on Form 10-
K. These agreements may contain representations and warranties by the parties. These representations and warranties have been
made solely for the benefit of the other party or parties to such agreements and (i) may have been qualified by disclosures made
to such other party or parties, (ii) were made only as of the date of such agreements or such other date(s) as may be specified in
such agreements and are subject to more recent developments, which may not be fully reflected in our public disclosure, (iii) may
reflect the allocation of risk among the parties to such agreements and (iv) may apply materiality standards different from what
may be viewed as material to investors. Accordingly, these representations and warranties may not describe our actual state of
affairs at the date hereof and should not be relied upon.
(a) Exhibits
Exhibit
Number
2.1
3.1
4.1
4.2
4.3
4.4
Exhibit Description
Method of Filing
Separation and Distribution Agreement between
Ingersoll-Rand plc and Allegion plc, dated
November 29, 2013.
Incorporated by reference to Exhibit 2.1 to
the Company’s Form 8-K filed with the SEC
on December 2, 2013 (File No. 001-35971).
Amended and Restated Memorandum and Articles
of Association of Allegion plc.
Incorporated by reference to Exhibit 3.1 to
the Company’s Form 8-K filed with the SEC
on June 13, 2016 (File No. 001-35971).
Indenture, dated as of October 2, 2017, among
Allegion US Holding Company Inc., Allegion plc
and Wells Fargo Bank, National Association.
Incorporated by reference to Exhibit 4.1 of
Allegion plc's Current Report on Form 8-K
filed October 2, 2017.
First Supplemental Indenture, dated as of October
2, 2017, among Allegion US Holding Company
Inc., Allegion plc and Wells Fargo Bank, National
Association.
Form of Global Note representing the 3.200%
Senior Notes due 2024.
Second Supplemental Indenture, dated as of
October 2, 2017, among Allegion US Holding
Company Inc., Allegion plc and Wells Fargo
Bank, National Association.
4.5
Form of Global Note representing the 3.550%
Senior Notes due 2027.
Incorporated by reference to Exhibit 4.2 of
Allegion plc's Current Report on Form 8-K
filed October 2, 2017.
Incorporated by reference to Exhibit 4.3 of
Allegion plc's Current Report on Form 8-K
filed October 2, 2017 (included in Exhibit
4.2).
Incorporated by reference to Exhibit 4.4 of
Allegion plc's Current Report on Form 8-K
filed October 2, 2017.
Incorporated by reference to Exhibit 4.5 of
Allegion plc's Current Report on Form 8-K
filed October 2, 2017 (included in Exhibit
4.4).
10.1
Form of Separation Agreement and Release. *
Filed herewith.
10.2
10.3
Tax Matters Agreement between Ingersoll-Rand
plc and Allegion plc.
Credit Agreement, dated as of September 12,
2017.
Incorporated by reference to Exhibit 10.1 to
the Company’s Form 8-K filed with the SEC
on December 2, 2013 (File No. 001-35971).
Incorporated by reference to Exhibit 10.1 of
Allegion plc's Current Report on Form 8-K
filed September 15, 2017.
53
10.4
Employee Matters Agreement between Ingersoll-
Rand plc and Allegion plc.
10.5
2013 Incentive Stock Plan. *
10.6
Executive Deferred Compensation Plan. *
10.7
Supplemental Employee Savings Plan. *
10.8
Elected Officer Supplemental Program. *
10.9
Key Management Supplemental Program. *
10.10
Supplemental Pension Plan. *
10.11
Senior Executive Performance Plan. *
10.12
David D. Petratis Offer Letter, dated June 19,
2013. *
10.13
Patrick S. Shannon Offer Letter, dated April 9,
2013. *
10.14
Timothy P. Eckersley Offer Letter, dated October
3, 2013. *
10.15
Lucia V. Moretti, Offer Letter, dated February 19,
2014. *
10.16
Jeffrey N. Braun Offer Letter, dated June 13,
2014. *
10.17
Form of Allegion plc Deed Poll Indemnity.
54
Incorporated by reference to Exhibit 10.2 to
the Company’s Form 8-K filed with the SEC
on December 2, 2013 (File No. 001-35971).
Incorporated by reference to Exhibit 10.5 to
the Company’s Registration Statement on
Form 10 filed with the SEC on June 17, 2013,
as amended (File No. 001-35971).
Incorporated by reference to Exhibit 10.6 to
the Company’s Registration Statement on
Form 10 filed with the SEC on June 17, 2013,
as amended (File No. 001-35971).
Incorporated by reference to Exhibit 10.7 to
the Company’s Registration Statement on
Form 10 filed with the SEC on June 17, 2013,
as amended (File No. 001-35971).
Incorporated by reference to Exhibit 10.8 to
the Company’s Registration Statement on
Form 10 filed with the SEC on June 17, 2013,
as amended (File No. 001-35971).
Incorporated by reference to Exhibit 10.9 to
the Company’s Registration Statement on
Form 10 filed with the SEC on June 17, 2013,
as amended (File No. 001-35971).
Incorporated by reference to Exhibit 10.10 to
the Company’s Registration Statement on
Form 10 filed with the SEC on June 17, 2013,
as amended (File No. 001-35971).
Incorporated by reference to Exhibit 10.11 to
the Company’s Registration Statement on
Form 10 filed with the SEC on June 17, 2013,
as amended (File No. 001-35971).
Incorporated by reference to Exhibit 10.14 to
the Company’s Registration Statement on
Form 10 filed with the SEC on June 17, 2013,
as amended (File No. 001-35971).
Incorporated by reference to Exhibit 10.15 to
the Company’s Registration Statement on
Form 10 filed with the SEC on June 17, 2013,
as amended (File No. 001-35971).
Incorporated by reference to Exhibit 10.16 to
the Company’s Registration Statement on
Form 10 filed with the SEC on June 17, 2013,
as amended (File No. 001-35971).
Incorporated by reference to Exhibit 10.1 to
the Company's Form 10-K filed with the SEC
on February 26, 2016 (File No. 001-35971).
Incorporated by reference to Exhibit 10.15 to
the Company's Form 10-K filed with the SEC
on February 17, 2017 (File No. 001-35971).
Incorporated by reference to Exhibit 10.21 to
the Company’s Registration Statement on
Form 10 filed with the SEC on June 17, 2013,
as amended (File No. 001-35971).
10.18
Form of Allegion US Holding Company, Inc.
Deed Poll Indemnity.
10.19
Form of Allegion Irish Holding Company Limited
Deed Poll Indemnity.
10.20
Annual Incentive Plan. *
10.21
Change in Control Severance Plan. *
Incorporated by reference to Exhibit 10.22 to
the Company’s Registration Statement on
Form 10 filed with the SEC on June 17, 2013,
as amended (File No. 001-35971).
Incorporated by reference to Exhibit 10.23 to
the Company’s Registration Statement on
Form 10 filed with the SEC on June 17, 2013,
as amended (File No. 001-35971).
Incorporated by reference to Exhibit 10.1 to
the Company's Form 10-K filed with the SEC
on March 10, 2014 (File No. 001-35971).
Incorporated by reference to Exhibit 10.2 to
the Company's Form 10-K filed with the SEC
on March 10, 2014 (File No. 001-35971).
10.22
Form of Restricted Stock Unit Award Agreement.
*
Filed herewith.
10.23
Form of Stock Option Award Agreement. *
Filed herewith.
10.24
10.25
10.26
10.27
21.1
23.1
31.1
31.2
32.1
Form of Performance Share Unit Award
Agreement. *
Filed herewith.
Incorporated by reference to Exhibit 10.4 to
the Company's Form 8-K filed with the SEC
on February 9, 2016 (File No. 001-35971).
Incorporated by reference to Exhibit 10.1 to
the Company's Form 10-Q filed with the SEC
on April 30, 2015 (File No. 001-35971).
Incorporated by reference to Exhibit 10.1 to
the Company's Form 10-Q filed with the SEC
on July 30, 2015 (File No. 001-35971).
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
Furnished herewith.
Form of Special Restricted Stock Unit Award
Agreement. *
Form of Non-Employee Director Restricted Stock
Unit Award Agreement. *
Share Purchase Agreement dated June 26, 2015
between SimonsVoss Luxco S.à r.l., SimonsVoss
Co-Invest GmbH & Co. KG, Mr Frank Rövekamp
and Allegion Luxembourg Holding & Financing
S.à r.l.
List of subsidiaries of Allegion plc.
Consent of Independent Registered Public
Accounting Firm.
Certification of Chief Executive Officer Pursuant
to Rule 13a-14(a) or Rule 15d-14(a), as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
Certification of Chief Financial Officer Pursuant
to Rule 13a-14(a) or Rule 15d-14(a), as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
Certifications of Chief Executive Officer and
Chief Financial Officer Pursuant to Rule
13a-14(b) or Rule 15d-14(b) and 18U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
55
Filed herewith.
101
The following materials from the Company’s
Annual Report on Form 10-K for the year ended
December 31, 2018, formatted in XBRL
(Extensible Business Reporting Language): (i) the
Consolidated Statements of Comprehensive
Income, (ii) the Consolidated Balance Sheets, (iii)
the Consolidated Statements of Cash Flows, (iv)
the Consolidated Statements of Equity and (v)
Notes to Consolidated Financial Statements.
* Compensatory plan or arrangement.
56
Item 16. FORM 10-K SUMMARY
Not applicable.
57
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
ALLEGION PLC
(Registrant)
By:
/s/ David D. Petratis
David D. Petratis
Chief Executive Officer
February 19, 2019
Date:
58
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ David D. Petratis
(David D. Petratis)
/s/ Patrick S. Shannon
(Patrick S. Shannon)
/s/ Douglas P. Ranck
(Douglas P. Ranck)
/s/ Carla Cico
(Carla Cico)
/s/ Kirk S. Hachigian
(Kirk S. Hachigian)
/s/ Nicole Parent Haughey
(Nicole Parent Haughey)
/s/ Dean Schaffer
(Dean Schaffer)
/s/ Charles L. Szews
(Charles L. Szews)
/s/ Martin E. Welch III
(Martin E. Welch III)
Chairman of the Board, President and Chief
Executive Officer (Principal Executive Officer)
February 19, 2019
Senior Vice President and Chief Financial
Officer (Principal Financial Officer)
February 19, 2019
Vice President, Controller and Chief Accounting
Officer (Principal Accounting Officer)
February 19, 2019
Director
Director
Director
Director
Director
Director
February 19, 2019
February 19, 2019
February 19, 2019
February 19, 2019
February 19, 2019
February 19, 2019
59
ALLEGION PLC
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Financial Statement Schedule: Schedule II – Valuation and Qualifying Accounts for the years ended
December 31, 2018, 2017 and 2016
F-2
F-4
F-5
F-6
F-7
F-9
F-54
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Allegion plc:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Allegion plc and its subsidiaries (the “Company”) as of December
31, 2018 and 2017, and the related consolidated statements of comprehensive income, of equity and of cash flows for each of the
three years in the period ended December 31, 2018, including the related notes and financial statement schedule listed in the
accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's
internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in
Management's Report on Internal Control Over Financial Reporting under Item 9A. Our responsibility is to express opinions on
the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Technical Glass
Products, Inc., Hammond Enterprises, Inc., Qatar Metal Industries LLC, AD Systems, Inc., Gainsborough Hardware and API
Locksmiths, and ISONAS Security Systems, Inc. from its assessment of internal control over financial reporting as of December
31, 2018 because they were acquired by the Company in purchase business combinations in 2018. We have also excluded Technical
Glass Products, Inc., Hammond Enterprises, Inc., Qatar Metal Industries LLC, AD Systems, Inc., Gainsborough Hardware and
API Locksmiths, and ISONAS Security Systems, Inc. from our audit of internal control over financial reporting. Technical Glass
Products, Inc., Hammond Enterprises, Inc., Qatar Metal Industries LLC, AD Systems, Inc., Gainsborough Hardware and API
Locksmiths, and ISONAS Security Systems, Inc. are wholly owned subsidiaries whose total assets and total revenues excluded
from management’s assessment and our audit of internal control over financial reporting represent approximately 3% and 6%,
respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
F-2
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Indianapolis, Indiana
February 19, 2019
We have served as the Company’s auditor since 2013.
F-3
Allegion plc
Consolidated Statements of Comprehensive Income
In millions, except per share amounts
For the years ended December 31,
Net revenues
Cost of goods sold
Selling and administrative expenses
Operating income
Interest expense
Loss on divestitures
Other income, net
Earnings before income taxes
Provision for income taxes
Net earnings
Less: Net earnings attributable to noncontrolling interests
Net earnings attributable to Allegion plc
Amounts attributable to Allegion plc ordinary shareholders:
Earnings per share attributable to Allegion plc ordinary shareholders:
Basic net earnings:
Diluted net earnings:
Dividends declared per ordinary share
Net earnings
Other comprehensive income (loss), net of tax
Currency translation
Cash flow hedges and marketable securities:
Unrealized net gains arising during period
Net gains reclassified into earnings
Tax expense
Total cash flow hedges and marketable securities, net of tax
Pension and OPEB adjustments:
Net actuarial (losses) gains for the period
Amortization reclassified into earnings
Settlements/curtailments reclassified to earnings
Currency translation and other
Tax benefit (expense)
Total pension and OPEB adjustments, net of tax
Other comprehensive (loss) income, net of tax
Total comprehensive income, net of tax
Less: Total comprehensive income attributable to noncontrolling interests
2018
2017
2016
$
2,731.7
$
2,408.2
$
1,558.4
1,335.3
2,238.0
1,248.3
647.5
525.8
54.0
—
(3.4)
475.2
39.8
435.4
0.5
580.4
492.5
105.7
—
(8.9)
395.7
119.0
276.7
3.4
$
$
$
$
$
434.9
$
273.3
$
4.58
4.54
0.84
435.4
$
$
$
$
2.87
2.85
0.64
276.7
$
$
$
$
555.4
434.3
64.3
84.4
(9.4)
295.0
63.8
231.2
2.1
229.1
2.39
2.36
0.48
231.2
(56.9)
97.5
(40.7)
4.6
(2.3)
(0.5)
1.8
(16.6)
4.5
—
5.1
1.6
(5.4)
(60.5)
374.9
0.9
5.2
(4.7)
(0.1)
0.4
25.5
5.2
0.1
0.7
(12.2)
19.3
117.2
393.9
2.8
9.7
(19.0)
(1.3)
(10.6)
3.1
6.0
0.3
14.4
(5.0)
18.8
(32.5)
198.7
1.7
197.0
Total comprehensive income attributable to Allegion plc
$
374.0
$
391.1
$
See accompanying notes to consolidated financial statements.
F-4
Allegion plc
Consolidated Balance Sheets
In millions, except share amounts
As of December 31,
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Accounts and notes receivable, net
Inventories
Current tax receivable
Other current assets
Assets held for sale
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Deferred and noncurrent income taxes
Other noncurrent assets
Total assets
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
Accrued compensation and benefits
Accrued expenses and other current liabilities
Current tax payable
Short-term borrowings and current maturities of long-term debt
Total current liabilities
Long-term debt
Postemployment and other benefit liabilities
Deferred and noncurrent income taxes
Other noncurrent liabilities
Total liabilities
Equity:
Allegion plc shareholders’ equity
Ordinary shares, $0.01 par value (94,637,450 and 95,062,385 shares issued and
outstanding at December 31, 2018 and 2017, respectively)
Capital in excess of par value
Retained earnings
Accumulated other comprehensive loss
Total Allegion plc shareholders’ equity
Noncontrolling interest
Total equity
Total liabilities and equity
See accompanying notes to consolidated financial statements.
F-5
2018
2017
$
283.8
$
6.8
324.9
280.3
15.4
19.6
0.8
931.6
276.7
883.0
547.1
84.6
87.2
466.2
—
296.6
239.8
12.2
17.0
0.9
1,032.7
252.2
761.2
394.3
35.4
66.2
$
$
2,810.2
$
2,542.0
235.0
$
95.3
135.0
20.2
35.3
520.8
1,409.5
81.2
115.9
28.8
188.3
84.7
134.6
18.2
35.0
460.8
1,442.3
85.9
123.6
23.9
2,156.2
2,136.5
0.9
—
873.6
(223.5)
651.0
3.0
654.0
1.0
9.1
544.4
(152.9)
401.6
3.9
405.5
$
2,810.2
$
2,542.0
Allegion plc
Consolidated Statements of Equity
In millions
Balance at December 31, 2015
Net earnings
Other comprehensive loss
Shares issued under incentive stock plans
Repurchase of ordinary shares
Share-based compensation
Acquisition/divestiture of noncontrolling interest
Dividends declared to noncontrolling interest
Cash dividends declared ($0.48 per share)
Other
Balance at December 31, 2016
Cumulative effect of change in accounting principle
Net earnings
Other comprehensive income (loss)
Shares issued under incentive stock plans
Repurchase of ordinary shares
Share-based compensation
Dividends declared to noncontrolling interest
Cash dividends declared ($0.64 per share)
Other (see Note 13)
Balance at December 31, 2017
Net earnings
Other comprehensive (loss) income
Shares issued under incentive stock plans
Repurchase of ordinary shares
Share-based compensation
Dividends declared to noncontrolling interest
Cash dividends declared ($0.84 per share)
Reclassification due to adoption of ASU 2018-02 (see Note 2)
Balance at December 31, 2018
See accompanying notes to consolidated financial statements.
Allegion plc Shareholders' equity
Ordinary Shares
Total
equity
Amount
Shares
Capital in
excess of
par value
Retained
earnings
Accumulated
other
comprehensive
loss
Non-
controlling
Interest
$
29.7
$
1.0
96.0
$
24.4
$
232.4
$
(232.2) $
231.2
(32.5)
5.8
(85.1)
16.6
(0.4)
(2.7)
(46.0)
(0.2)
116.4
(5.0)
276.7
117.2
7.2
(60.0)
15.8
(1.8)
(60.9)
(0.1)
405.5
435.4
(60.5)
3.2
(67.3)
19.2
(1.8)
(79.7)
—
—
—
—
—
—
—
—
—
—
—
—
—
(1.3)
0.6
—
—
—
—
1.0
95.3
—
—
—
—
—
—
—
—
—
1.0
—
—
—
—
—
—
—
(0.8)
0.6
—
—
—
95.1
—
—
—
(0.1)
(0.9)
—
—
—
—
0.4
—
—
—
—
—
5.8
(46.4)
16.6
(0.4)
—
—
—
—
—
—
—
7.2
(13.9)
15.8
—
—
—
9.1
—
—
3.2
(31.5)
19.2
—
—
—
229.1
—
—
(38.7)
—
—
—
(46.0)
(0.2)
376.6
(5.0)
273.3
—
—
(46.1)
—
—
(60.9)
6.5
544.4
434.9
—
—
(35.7)
—
—
(79.7)
9.7
—
(32.1)
—
—
—
—
—
—
—
(264.3)
—
—
117.8
—
—
—
—
—
(6.4)
(152.9)
—
(60.9)
—
—
—
—
—
(9.7)
$
654.0
$
0.9
94.6
$
— $
873.6
$
(223.5) $
4.1
2.1
(0.4)
—
—
—
—
(2.7)
—
—
3.1
—
3.4
(0.6)
—
—
—
(1.8)
—
(0.2)
3.9
0.5
0.4
—
—
—
(1.8)
—
—
3.0
F-6
Allegion plc
Consolidated Statements of Cash Flows
In millions
For the years ended December 31,
Cash flows from operating activities:
Net earnings
Adjustments to arrive at net cash provided by operating activities:
2018
2017
2016
$
435.4
$
276.7
$
231.2
Debt extinguishment costs
Depreciation and amortization
Share-based compensation
Loss on divestitures
Gain on sale of marketable securities
Loss (gain) on sale of property, plant and equipment
Equity earnings, net of dividends
Discretionary pension plan contribution
Deferred income taxes
Other items
Changes in other assets and liabilities
Accounts and notes receivable
Inventories
Other current and noncurrent assets
Accounts payable
Other current and noncurrent liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Acquisition of and equity investments in businesses, net of cash acquired
Proceeds from sale of property, plant and equipment
Proceeds from sale of equity investment
Proceeds (payments) related to business dispositions
Purchase of investments
Proceeds from sale of marketable securities
Other investing activities, net
Net cash used in investing activities
$
—
86.2
19.6
—
—
0.4
(0.1)
—
(64.4)
(8.3)
(8.6)
(19.7)
(3.3)
33.9
(13.3)
457.8
43.1
66.9
16.2
—
—
(0.1)
(5.3)
(50.0)
24.9
3.0
(22.7)
(4.4)
3.5
0.4
(5.0)
347.2
(49.1)
(376.1)
0.2
—
—
(14.3)
—
(4.5)
(443.8) $
(49.3)
(20.8)
3.1
15.6
1.2
—
—
—
(50.2) $
—
66.9
16.6
84.4
(12.4)
1.3
(3.2)
—
6.3
(7.7)
(19.8)
(15.6)
62.0
3.4
(35.9)
377.5
(42.5)
(31.4)
0.1
—
(4.3)
—
14.1
—
(64.0)
F-7
2018
2017
2016
$
(0.6) $
(1.3) $
115.0
(115.0)
—
—
—
—
(35.5)
(36.1)
—
—
(79.4)
(67.3)
3.2
(3.8)
(183.4)
(6.2)
(175.6)
466.2
290.6
$
165.0
(165.0)
700.0
(856.3)
800.0
(600.0)
(32.3)
10.1
(9.5)
(33.2)
(60.9)
(60.0)
7.2
(4.6)
(150.9)
7.7
153.8
312.4
466.2
$
(17.4)
—
—
—
—
—
—
(47.0)
(64.4)
(0.3)
—
(46.0)
(85.1)
5.8
(6.0)
(196.0)
(4.8)
112.7
199.7
312.4
Allegion plc
Consolidated Statements of Cash Flows - (Continued)
In millions
For the years ended December 31,
Cash flows from financing activities:
Short-term borrowings, net
Proceeds from revolving facility
Repayments of revolving facility
Issuance of term facility
Settlement of second amended credit facility
Proceeds from issuance of senior notes
Redemption of senior notes
Payments of long-term debt
Net (repayments of) proceeds from debt
Debt issuance costs
Redemption premium
Dividends paid to ordinary shareholders
Repurchase of ordinary shares
Proceeds from shares issued under incentive plans
Other financing activities, net
Net cash used in financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Net (decrease) increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash – beginning of period
Cash, cash equivalents and restricted cash – end of period
$
See accompanying notes to consolidated financial statements.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF COMPANY AND BASIS OF PRESENTATION
Allegion plc, an Irish public limited company, and its consolidated subsidiaries ("Allegion" or "the Company") are a leading global
company that provides security products and solutions that keep people safe, secure and productive. The Company makes the
world safer as a company of experts, securing the places where people thrive. Allegion creates peace of mind by pioneering safety
and security. The Company offers an extensive and versatile portfolio of mechanical and electronic security products across a
range of market-leading brands including CISA®, Interflex®, LCN®, Schlage®, SimonsVoss® and Von Duprin®.
Basis of presentation: The Consolidated Financial Statements were prepared in accordance with generally accepted accounting
principles in the United States of America ("GAAP") as defined by the Financial Accounting Standards Board ("FASB") within
the FASB Accounting Standards Codification ("ASC").
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies used in the preparation of the accompanying Consolidated Financial Statements
follows:
Principles of Consolidation: The Consolidated Financial Statements include all majority-owned subsidiaries of the Company. A
noncontrolling interest in a subsidiary is considered an ownership interest in a majority-owned subsidiary that is not attributable
to the parent. The Company includes noncontrolling interest as a component of Total equity in the Consolidated Balance Sheets
and the Net earnings attributable to noncontrolling interests are presented as an adjustment from Net earnings used to arrive at
Net earnings attributable to Allegion plc in the Consolidated Statements of Comprehensive Income.
Partially-owned equity affiliates generally represent 20-50% ownership interests in investments and where the Company
demonstrates significant influence in investments but does not have a controlling financial interest. Partially-owned equity affiliates
are accounted for under the equity method. The Company is also required to consolidate variable interest entities in which it bears
a majority of the risk to the entities’ potential losses or stands to gain from a majority of the entities’ expected returns. Transactions
between the Company and Ingersoll Rand and its affiliates are herein referred to as "related party" or "affiliated" transactions.
Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the
date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Estimates
are based on several factors including the facts and circumstances available at the time the estimates are made, historical experience,
risk of loss, general economic conditions and trends and the assessment of the probable future outcome. Some of the more significant
estimates include useful lives of property, plant and equipment and intangible assets, purchase price allocations of acquired
businesses, valuation of assets including goodwill and other intangible assets, product warranties, sales allowances, pension plans,
postretirement benefits other than pensions, taxes, environmental costs, product liability and other contingencies. Actual results
could differ from those estimates. Estimates and assumptions are reviewed periodically, and the effects of changes, if any, are
reflected in the Consolidated Statements of Comprehensive Income in the period that they are determined.
Currency Translation: Assets and liabilities where the functional currency is not the U.S. dollar, have been translated at year-
end exchange rates, and income and expense accounts have been translated using average exchange rates throughout the year.
Adjustments resulting from the process of translating an entity’s financial statements into the U.S. dollar have been recorded in
the Equity section of the Consolidated Balance Sheets within Accumulated other comprehensive loss.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, demand deposits and all highly liquid investments
with original maturities at the time of purchase of three months or less.
Inventories: Inventories are stated at the lower of cost and net realizable value using the first-in, first-out (FIFO) method.
Allowance for Doubtful Accounts: The Company has provided for an allowance for doubtful accounts receivable, which
represents the best estimate of probable loss inherent in the Company’s accounts receivable portfolio. Changes in the financial
condition of customers or other unanticipated events, which may affect their ability to make payments, could result in charges for
additional allowances exceeding the Company's estimates. The Company's estimates are influenced by the following
considerations: a continuing credit evaluation of customers’ financial condition; trade accounts receivable aging; and historical
loss experience. The Company has reserved $3.3 million and $2.8 million for doubtful accounts as of December 31, 2018 and
2017, respectively.
F-9
Property, Plant and Equipment: Property, plant and equipment are stated at cost, less accumulated depreciation. Assets placed
in service are recorded at cost and depreciated using the straight-line method over the estimated useful life of the asset except for
leasehold improvements, which are depreciated over the shorter of their economic useful life or their lease term. The range of
useful lives used to depreciate property, plant and equipment is as follows:
Buildings
Machinery and equipment
Software
10
2
2
to
to
to
50
12
7
years
years
years
Repair and maintenance costs that do not extend the useful life of the asset are charged against earnings as incurred. Major
replacements and significant improvements that increase asset values and extend useful lives are capitalized.
The Company assesses the recoverability of the carrying value of its property, plant and equipment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability is measured by a comparison
of the carrying amount of an asset to the future net undiscounted cash flows expected to be generated by the asset. If the undiscounted
cash flows are less than the carrying amount of the asset, an impairment loss is recognized for the amount by which the carrying
value of the asset exceeds the fair value of the assets.
Goodwill and Intangible Assets: The Company records as goodwill the excess of the purchase price of an acquired business over
the fair value of the net assets acquired.
In accordance with GAAP, goodwill and other indefinite-lived intangible assets are tested and reviewed annually for impairment
during the fourth quarter or whenever there is a significant change in events or circumstances that indicate that the fair value of
the reporting unit or indefinite-lived intangible asset is more likely than not less than the carrying amount of the reporting unit or
indefinite-lived intangible asset.
Recoverability of goodwill is measured at the reporting unit level. The carrying amount of the reporting unit is compared to its
estimated fair value. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is
not impaired. To the extent that the carrying value of the reporting unit exceeds its estimated fair value, a goodwill impairment
charge will be recognized for the amount by which the carrying value of the reporting unit exceeds its fair value, not to exceed
the carrying amount of goodwill. Estimated fair value of the Company's reporting units is based on two valuation techniques, a
discounted cash flow model (income approach) and a market adjusted multiple of earnings and revenues (market approach), with
each method being weighted in the calculation.
Recoverability of other intangible assets with indefinite useful lives (i.e. Trade names) is determined on a relief from royalty
methodology, which is based on the implied royalty paid, at an appropriate discount rate, to license the use of an asset rather than
owning the asset. The present value of the after-tax cost savings (i.e. royalty relief) indicates the estimated fair value of the asset.
Any excess of the carrying value over the estimated fair value is recognized as an impairment loss equal to that excess.
Intangible assets such as patents, customer-related intangible assets and other intangible assets with finite useful lives are amortized
on a straight-line basis over their estimated economic lives. The weighted-average useful lives approximate the following:
Customer relationships
Trade names (finite-lived)
Completed technology/patents
Other
20 years
25 years
10 years
25 years
Recoverability of intangible assets with finite useful lives is assessed in the same manner as property, plant and equipment as
described above.
Income Taxes: The calculation of the Company’s income taxes involves considerable judgment and the use of both estimates and
allocations. Deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax
bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected
to reverse. The Company recognizes future tax benefits, such as net operating losses and tax credits, to the extent that realizing
these benefits is considered in its judgment to be more likely than not. The Company regularly reviews the recoverability of its
deferred tax assets considering its historic profitability, projected future taxable income, timing of the reversals of existing temporary
F-10
differences and the feasibility of its tax planning strategies. Where appropriate, the Company records a valuation allowance with
respect to future tax benefits.
Cash paid for income taxes, net of refunds, for the twelve months ended December 31, 2018 and 2017 was $101.7 million and
$86.7 million, respectively.
On December 22, 2017, the President of the United States signed comprehensive tax legislation commonly referred to as the Tax
Cuts and Jobs Act (the “Tax Reform Act”), which is discussed in greater detail in Note 17. The Tax Reform Act includes a provision
termed the global intangible low-taxed income ("GILTI"). The GILTI provisions will require the Company to include in its U.S.
income tax return foreign subsidiary earnings in excess of an allowable return on the non-U.S. subsidiary's tangible assets. The
Company has elected to account for GILTI tax in the period in which it is incurred.
Product Warranties: Standard product warranty accruals are recorded at the time of sale and are estimated based upon product
warranty terms and historical experience. The Company assesses the adequacy of its liabilities and will make adjustments as
necessary based on known or anticipated warranty claims, or as new information becomes available. Refer to Note 20 for further
details of product warranties.
Revenue Recognition: Net revenues are recognized based on the satisfaction of performance obligations under the terms of a
contract. A performance obligation is a promise in a contract to transfer control of a distinct product or to provide a service, or a
bundle of products or services, to a customer, and is the unit of account under ASC 606. The Company has two principal revenue
streams, tangible product sales and services. Approximately 99% of consolidated Net revenues involve contracts with a single
performance obligation, which is the transfer of control of a product or bundle of products to a customer. Transfer of control
typically occurs when goods are shipped from the Company's facilities or at other predetermined control transfer points (for
instance, destination terms). Net revenues are measured as the amount of consideration the Company expects to receive in exchange
for transferring control of the products and takes into account variable consideration, such as sales incentive programs, including
discounts and volume rebates. The existence of these programs does not preclude revenue recognition but does require the
Company's best estimate of the variable consideration to be made based on expected activity, as these items are reserved for as a
deduction to Net revenues over time based on historical rates of providing these incentives and annual forecasted sales volumes.
The Company's remaining Net revenues involve services, including installation and consulting. Unlike the single performance
obligation to ship a product or bundle of products, the service revenue stream delays revenue recognition until the service
performance obligations are satisfied. In some instances, customer acceptance provisions are included in sales arrangements to
give the buyer the ability to ensure the service meets the criteria established in the order. In these instances, revenue recognition
is deferred until the performance obligations are satisfied, which could include acceptance terms specified in the arrangement
being fulfilled through customer acceptance or a demonstration that established criteria have been satisfied.
The Company does not adjust the transaction price for the effects of a significant financing component, as the time period between
control transfer of goods and services is less than one year. Sales, value-added and other similar taxes collected by the Company
are excluded from Net revenues. The Company has also elected to account for shipping and handling activities that occur after
control of the related goods transfers as fulfillment activities instead of performance obligations. The Company's payment terms
are generally consistent with the industries in which their businesses operate.
Sales returns and customer disputes involving a question of quantity or price are accounted for as variable consideration, and
therefore, as a reduction in revenue and a contra receivable. At December 31, 2018 and 2017, the Company had a customer claim
accrual (contra receivable) of $31.6 million and $32.5 million, respectively. All other incentives or incentive programs where the
customer is required to reach a certain level of purchases, remain a customer for a certain period, provide a rebate form or is subject
to additional requirements are also considered variable consideration and are accounted for as a reduction of revenue and a liability.
At December 31, 2018 and 2017, the Company had a sales incentive accrual of $33.9 million and $31.8 million, respectively.
Variable consideration is estimated based on the most likely amount expected to be received from customers. Each of these accruals
represents the Company’s best estimate of the most likely amount expected to be received from customers based on historical
experience. These estimates are reviewed regularly for accuracy. If updated information or actual amounts are different from
previous estimates, the revisions are included in the Company’s results for the period in which they become known. Historically,
the aggregate differences, if any, between the Company’s estimates and actual amounts in any year have not had a material impact
on the Consolidated Financial Statements. The Company also offers a standard warranty with most product sales, and the value
of such warranty is included in the contractual price. The corresponding cost of the warranty obligation is accrued as a liability
(see Note 20).
Environmental Costs: The Company is subject to laws and regulations relating to protecting the environment. Environmental
expenditures relating to current operations are expensed or capitalized as appropriate. Expenditures relating to existing conditions
F-11
caused by past operations, which do not contribute to current or future revenues, are expensed. Liabilities for remediation costs
are recorded when they are probable and can be reasonably estimated, generally no later than the completion of feasibility studies
or the Company’s commitment to a plan of action. The assessment of this liability, which is calculated based on existing technology,
does not reflect any offset for possible recoveries from insurance companies and is not discounted. Refer to Note 20 for further
details of environmental matters.
Research and Development Costs: The Company conducts research and development activities for the purpose of developing
and improving new products and services. These expenditures are expensed when incurred. For the years ended December 31,
2018, 2017 and 2016, these expenditures amounted to approximately $54.4 million, $48.3 million and $47.3 million, respectively,
and consist of salaries, wages, benefits, building costs and other overhead expenses.
Software Costs: The Company capitalizes certain qualified internal-use software costs during the application development stage
and subsequently amortizes those costs over the software's useful life, which ranges from 2 to 7 years.
Employee Benefit Plans: The Company provides a range of benefits, including pensions, postretirement and postemployment
benefits to eligible current and former employees. Determining the cost associated with such benefits is dependent on various
actuarial assumptions, including discount rates, expected return on plan assets, compensation increases, employee mortality,
turnover rates and healthcare cost trend rates. Actuaries perform the required calculations to determine expense in accordance
with GAAP. Actual results may differ from the actuarial assumptions and are generally accumulated into Accumulated other
comprehensive loss and amortized into Net earnings over future periods. The Company reviews its actuarial assumptions at each
measurement date and makes modifications to the assumptions based on current rates and trends, if appropriate. Refer to Note 11
for further details on employee benefit plans.
Loss Contingencies: Liabilities are recorded for various contingencies arising in the normal course of business, including litigation
and administrative proceedings, environmental matters, product liability, product warranty, worker’s compensation and other
claims. The Company has recorded reserves in the financial statements related to these matters, which are developed using inputs
derived from actuarial estimates and historical and anticipated experience data depending on the nature of the reserve and, in
certain instances, with consultation of legal counsel, internal and external consultants and engineers. Subject to the uncertainties
inherent in estimating future costs for these types of liabilities, the Company believes its estimated reserves are reasonable and
does not believe the final determination of the liabilities with respect to these matters would have a material effect on the financial
condition, results of operations, liquidity or cash flows of the Company for any year. Refer to Note 20 for further details on loss
contingencies.
Derivative Instruments: The Company periodically enters into cash flow and other derivative transactions to specifically hedge
exposure to various risks related to currency and interest rates. The Company recognizes all derivatives on the Consolidated
Balance Sheets at their fair value as either assets or liabilities. For designated cash flow hedges, the changes in fair value of the
derivative contract is recorded in Other comprehensive (loss) income, net of tax, and in Net earnings at the time earnings are
affected by the hedged transaction. For other derivative transactions, the changes in the fair value of the derivative contract are
immediately recognized in Net earnings. Refer to Note 10 for further details on derivative instruments.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements:
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers" (ASC 606). ASC 606 is a single,
comprehensive revenue recognition model for all contracts with customers. The model is based on changes in contract assets
(rights to receive consideration) and liabilities (obligations to provide a good or perform a service). Revenue is recognized based
on the satisfaction of performance obligations, which occurs when control of a good or service transfers to a customer. ASC 606
contains expanded disclosure requirements relating to the nature, amount, timing and uncertainty of revenue and cash flows arising
from contracts with customers. ASC 606 allows entities to adopt the standard on either a full retrospective approach or report the
cumulative effect as of the date of adoption ("modified retrospective method"). The FASB has also issued the following standards
which clarify ASU 2014-09: ASU 2017-14, Revenue Recognition, Revenue from Contracts with Customers: Amendments to SEC
Paragraphs Pursuant to Staff Accounting Bulletin No. 116 and SEC Release No. 33-10403, ASU 2017-13, Revenue Recognition,
Revenue from Contracts with Customers: Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20,
2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments, ASU 2016-20, Revenue from
Contracts with Customers: Technical Corrections and Improvements, ASU 2016-12, Revenue from Contracts with Customers:
Narrow-Scope Improvements and Practical Expedients and ASU 2016-10, Revenue from Contracts with Customers: Identifying
Performance Obligations and Licensing. The Company adopted each of these standards (collectively, "ASC 606") on January 1,
2018 on a modified retrospective basis, which was applied to all contracts not completed as of January 1, 2018. The impact of
F-12
adopting ASC 606 was not material to the Company’s Consolidated Financial Statements at January 1, 2018, or for the year ended
December 31, 2018, and no cumulative effect adjustment was recorded to opening Retained earnings. Expanded disclosure as
required by the new standards is presented within Note 19.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Liabilities.” The new guidance revises the accounting related to unconsolidated equity
investments, other than those accounted for under the equity method. The new guidance requires the fair value measurement of
investments in unconsolidated equity securities that are not accounted for under the equity method through the statement of
comprehensive income. Entities will no longer be able to apply the cost method of accounting for equity securities that do not
have readily determinable fair values. Instead, for these types of equity investments, entities may measure the investment at cost
less impairment plus or minus observable price changes (in orderly transactions). This ASU was effective for the Company on
January 1, 2018. The adoption of ASU 2016-01 did not have a material impact on the Consolidated Financial Statements.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Clarification of Certain Cash Receipts
and Cash Payments." ASU 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and
payments in the statement of cash flows by adding or clarifying guidance on eight specific cash flow issues. The ASU is effective
for annual and interim reporting periods beginning after December 15, 2017, and as such, the Company adopted ASU 2016-15
on January 1, 2018. The amendments in this update are required to be applied retrospectively to all periods presented. The adoption
of ASU 2016-15 did not have a material impact on the Consolidated Financial Statements.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash." ASU 2016-18
requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts
generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and
restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning of period and end
of period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for annual and interim reporting periods
beginning after December 15, 2017, and as such, the Company adopted ASU 2016-18 on January 1, 2018. The adoption of ASU
2016-18 did not have a material impact on the Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business."
This update provides guidance to assist companies in evaluating whether transactions should be accounted for as acquisitions (or
disposals) of assets or businesses. The update provides a more robust framework to use in determining when a set of transferred
assets and activities is a business. This ASU is effective for annual and interim reporting periods beginning after December 15,
2017, and requires prospective adoption. The Company adopted ASU 2017-01 on January 1, 2018. The adoption of ASU 2017-01
did not have a material impact on the Consolidated Financial Statements.
In March 2017, the FASB issued ASU 2017-07, "Compensation—Retirement Benefits (Topic 715): Improving the Presentation
of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." ASU 2017-07 requires that an employer report the
service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent
employees during the period. The other components of net benefit cost are required to be presented in the statement of comprehensive
income separately from the service cost component and outside a subtotal of operating income. ASU 2017-07 also allows only
the service cost component to be eligible for capitalization when applicable (for example, as a cost of internally manufactured
inventory or a self-constructed asset). The ASU is effective for annual periods beginning after December 15, 2017, and as such,
the Company adopted ASU 2017-07 on January 1, 2018. The Company has applied ASU 2017-07 retrospectively for the presentation
of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost
in the Consolidated Statements of Comprehensive Income and prospectively for the capitalization of the service cost component
of net periodic pension cost and net periodic postretirement benefit in the Consolidated Balance Sheets. Accordingly, for all periods
presented in the Consolidated Financial Statements, the service cost component of net periodic pension benefit cost (income) is
recorded in Cost of goods sold and Selling and administrative expenses within the Consolidated Statements of Comprehensive
Income. The remaining components of net periodic pension benefit cost (income) are recorded within Other income, net. The
adoption of ASU 2017-07 did not have a material impact on the Consolidated Financial Statements.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting
for Hedging Activities." ASU 2017-12 addresses previous limitations on how an entity can designate the hedged risk in certain
cash flow and fair value hedging relationships by expanding and refining hedge accounting for both nonfinancial and financial
risk components and aligning the recognition and presentation of the effects of the hedging instrument and the hedged item in the
financial statements. The ASU is effective for annual periods beginning after December 15, 2018, with early adoption permitted.
The Company elected to early adopt the provisions of ASU 2017-12 on January 1, 2018. The amendments in this update have
been applied to hedging relationships existing on the date of adoption. In October 2018, the FASB issued ASU 2018-16, "Derivatives
and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a
F-13
Benchmark Interest Rate for Hedge Accounting Purposes." ASU 2018-16 slightly amended ASU 2017-12 to allow for the use of
the SOFR OIS as a benchmark interest rate for hedge accounting purposes, in addition to the previously allowable benchmark
interest rates. As the Company had previously adopted ASU 2017-12, ASU 2018-16 was effective for the Company upon release
by the FASB. The adoptions of both ASU 2017-12 and ASU 2018-16 did not have a material impact on the Consolidated Financial
Statements.
In February 2018, the FASB issued ASU 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." The new guidance permits entities to
reclassify tax effects stranded in accumulated other comprehensive income (AOCI) as a result of the Tax Reform Act. ASU 2018-02
provides this option not only for the impact to deferred tax assets and liabilities due to the reduction in the U.S. tax rate, but also
for tax effects stranded in AOCI for other reasons specific to the Tax Reform Act, such as state taxes or transitioning to a territorial
tax system. Tax effects that are stranded in AOCI for reasons not relating to the Tax Reform Act may not be reclassified under
ASU 2018-02. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal
years. Early adoption is permitted. Entities that adopt the ASU in an annual or interim period after the period of enactment are
able to choose whether to apply the amendments retrospectively to each period in which the effect of the Tax Reform Act is
recognized or to apply the amendments in the period of adoption. The Company has elected to early adopt ASU 2018-02 on
December 31, 2018, and to apply the amendments in the year ended December 31, 2018. The impact of adoption resulted in a
reclassification of $9.7 million of tax effects stranded in AOCI into Retained earnings.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement." The new guidance modifies the disclosure requirements related to fair
value measurements in Topic 820, Fair Value Measurement, including removing certain previous disclosure requirements, adding
certain new disclosure requirements and modifying certain other disclosure requirements. The ASU will be effective for fiscal
years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The
Company elected to early adopt ASU 2018-13 on October 1, 2018. The adoption of ASU 2018-13 did not have a material impact
on the Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-14, "Compensation—Retirement Benefits—Defined Benefit Plans—General
(Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans." The new
guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans,
including removing certain previous disclosure requirements, adding certain new disclosure requirements, and clarifying certain
other disclosure requirements. The ASU will be effective for fiscal years beginning after December 15, 2020, including interim
periods within those fiscal years. Early adoption is permitted. The Company elected to early adopt ASU 2018-14 on October 1,
2018. The adoption of ASU 2018-14 did not have a material impact on the Consolidated Financial Statements.
Recently Issued Accounting Pronouncements:
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 requires the identification of arrangements
that should be accounted for as leases. In general, for lease arrangements exceeding a twelve-month term, these arrangements will
be recognized as assets and liabilities on the balance sheet of the lessee. Under ASU 2016-02, a right-of-use asset and lease
obligation will be recorded for all leases, whether operating or financing, while the income statement will reflect lease expense
for operating leases and amortization/interest expense for financing leases. In July 2018, the FASB issued ASU 2018-10,
"Codification Improvements to Topic 842 (Leases)", which provides narrow amendments to clarify how to apply certain aspects
of ASU 2016-02, and ASU 2018-11, "Leases (Topic 842): Targeted Improvements", which provides an additional transition method
by allowing entities to initially apply ASU 2016-02, and subsequent related standards, at the adoption date and recognize a
cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. These ASUs (collectively
“ASC 842”) are effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods.
The Company adopted ASC 842 on January 1, 2019 utilizing the transition method allowed per ASU 2018-11, and accordingly,
comparative period financial information will not be adjusted for the effects of adopting ASC 842. No cumulative-effect adjustment
was required to the opening balance of retained earnings on the adoption date. The Company has substantially completed an
assessment of the new standard’s impact and determined the new standards will not have a material impact on the Company's
Consolidated Statements of Comprehensive Income or Cash Flows; however, the estimated impact of adopting ASC 842 will
result in a right-of-use (ROU) asset and lease liability being recorded on the Consolidated Balance Sheets subsequent to December
31, 2018 in the range of approximately $80-90 million, based on the lease portfolio existing as of this date. While the ROU asset
will be classified as a noncurrent asset, approximately one-third of the lease liability amount is expected to be classified as a current
liability, with the remainder being classified as noncurrent.
The Company has also made updates to its systems, policies, and internal controls over financial reporting in preparation of
adopting these standards on January 1, 2019.
F-14
Upon adoption of ASC 842, the Company utilized the following elections and practical expedients:
•
•
•
•
•
The Company has elected to not separate non-lease components from lease components and instead to account for each
separate lease component and the non-lease components associated with that lease component as a single lease component.
If at the lease commencement date, a lease has a lease term of 12 months or less and does not include a purchase option
that is reasonably certain to exercise, the Company will elect not to apply ASC 842 recognition requirements. Nonetheless,
the Company intends to include leases of less than 12 months within the updated footnote disclosures, if material.
If the Company enters into a large number of leases in the same month with the same terms and conditions, these will
be looked at as a group (portfolio) assuming the lease model under this approach will not materially differ from applying
to each individual lease.
As the Company has applied the new transition method allowed per ASU 2018-11, the Company has elected to not
reassess arrangements entered into prior than January 1, 2019 for whether an arrangement is or contains a lease, the lease
classification applied or to separate initial direct costs.
The Company has elected to use hindsight in determining the lease term for lease contracts that have historically been
renewed or amended.
The Company has no significant lease agreements in place for which the Company is a lessor, and substantially all of the Company’s
leases for which the Company is a lessee are classified as operating leases under the existing guidance in ASC 840 as of December
31, 2018. As such, due to the practical expedient election to not reassess lease classification, substantially all the Company's leases
will continue to be classified as operating leases under ASC 842. When available, the Company will utilize the rate implicit in the
lease as the discount rate to determine the lease liability in accordance with ASC 842. However, if this rate is not available, the
Company will use its incremental borrowing rate as the discount rate, which is the rate, at inception of the lease, the Company
would incur to borrow over a similar term the funds needed to purchase the leased asset. As a lessee, the Company categorizes its
leases into two general categories: real estate leases and equipment leases.
The Company’s real estate lease portfolio includes leased production and assembly facilities, warehouses and distribution centers,
office space and to a lesser degree, employee housing. The terms and conditions of real estate leases can vary significantly from
lease to lease. The Company has assessed the specific terms and conditions of each real estate lease to determine the amount of
the lease payments and the length of the lease term, which includes the minimum period over which lease payments are required
plus any renewal options that are both within the Company's control to exercise and reasonably certain of being exercised upon
lease commencement. In determining whether or not a renewal option is reasonably certain of being exercised, the Company
assesses all relevant factors to determine if sufficient incentives exist as of lease commencement to conclude renewal is reasonably
certain. There are no material residual value guarantees provided by the Company, nor any restrictions or covenants imposed by
the real estate leases to which the Company is a party. In determining the lease liability, the Company utilizes its incremental
borrowing rate to discount the future lease payments over the lease term to present value. As of December 31, 2018, the weighted-
average remaining term of the Company’s real estate lease portfolio was approximately 7.1 years.
The Company’s equipment leases include vehicles, material handling equipment, other machinery and equipment utilized in the
Company's production and assembly facilities, warehouses and distribution centers, laptops and other IT equipment, as well as
other miscellaneous leased equipment. Most of the equipment leases are for terms ranging from two to five years, although terms
and conditions can vary from lease to lease. The Company has applied similar estimates and judgments to its equipment lease
portfolio as it has to its real estate lease portfolio in adopting ASC 842. There are no material residual value guarantees provided
by the Company, nor any restrictions or covenants imposed by the equipment leases to which the Company is a party. In determining
the lease liability, the Company utilizes its incremental borrowing rate to discount the future lease payments over the lease term
to present value. As of December 31, 2018, the weighted-average remaining term of the Company’s equipment lease portfolio
was approximately 2.3 years.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments." In November 2018, the FASB issued ASU 2018-19, "Codification Improvements to Topic 326, Financial
Instruments—Credit Losses". The new guidance introduces an approach based on expected losses to estimate credit losses on
certain types of financial instruments. These ASUs will be effective for fiscal years beginning after December 15, 2019, including
interim periods within those fiscal years. Early adoption is permitted. The Company is assessing what impact ASU 2016-13 will
have on the Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40):
Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The
F-15
new guidance aligns the requirements for capitalizing implementation costs incurred in a cloud-based hosting arrangement that
is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software
(and hosting arrangements that include an internal-use software license). The ASU will be effective for fiscal years beginning after
December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is assessing
what impact ASU 2018-15 will have on the Consolidated Financial Statements.
NOTE 3 – INVENTORIES
Inventories are stated at the lower of cost and net realizable value using the first-in, first-out (FIFO) method.
At December 31, the major classes of inventory were as follows:
In millions
Raw materials
Work-in-process
Finished goods
Total
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT
At December 31, the major classes of property, plant and equipment were as follows:
In millions
Land
Buildings
Machinery and equipment
Software
Construction in progress
Accumulated depreciation
Total
2018
2017
117.2
$
34.4
128.7
280.3
$
66.6
29.8
143.4
239.8
$
$
2018
2017
$
15.6
$
148.4
407.7
146.0
31.1
748.8
(472.1)
276.7
$
$
16.0
142.2
383.9
141.4
24.4
707.9
(455.7)
252.2
Depreciation expense for the years ended December 31, 2018, 2017 and 2016 was $46.2 million, $40.0 million and $40.9 million,
which includes amounts for software amortization of $15.4 million, $14.3 million and $16.6 million, respectively.
NOTE 5 – GOODWILL
The Company records as goodwill the excess of the purchase price over the fair value of the net assets acquired. Once the final
valuation has been performed for each acquisition, adjustments may be recorded. The changes in the carrying amount of Goodwill
are as follows:
In millions
December 31, 2016 (gross)
Accumulated impairment *
December 31, 2016 (net)
Acquisitions and settlements
Currency translation
December 31, 2017 (net)
Acquisitions and settlements
Currency translation
December 31, 2018 (net)
Americas
EMEIA
Asia Pacific
Total
$
372.9
$
—
372.9
2.3
—
375.2
111.1
(0.2)
486.1
$
$
736.1
(478.6)
257.5
(1.6)
35.3
291.2
10.2
(12.9)
288.5
$
$
93.3
(6.9)
86.4
1.3
7.1
94.8
20.5
(6.9)
108.4
$
$
1,202.3
(485.5)
716.8
2.0
42.4
761.2
141.8
(20.0)
883.0
* Accumulated impairment consists of charges of $137.6 million (EMEIA), $341.0 million (EMEIA) and $6.9 million (Asia
Pacific).
F-16
NOTE 6 – INTANGIBLE ASSETS
The following table sets forth the gross amount and related accumulated amortization of the Company’s intangible assets at
December 31:
In millions
Completed technologies/patents
Customer relationships
Trade names (finite-lived)
Other
Total finite-lived intangible assets
Trade names (indefinite-lived)
Total
Gross
carrying
amount
2018
Accumulated
amortization
Net
carrying
amount
Gross
carrying
amount
2017
Accumulated
amortization
Net
carrying
amount
$
$
$
$
59.4
419.3
84.9
9.5
573.1
130.6
703.7
(14.2) $
(88.5)
(47.4)
(6.5)
(156.6)
$
45.2
330.8
37.5
3.0
416.5
130.6
547.1
$
$
$
$
32.6
324.5
89.0
7.9
454.0
75.4
529.4
(10.0) $
(74.1)
(46.1)
(4.9)
(135.1)
$
22.6
250.4
42.9
3.0
318.9
75.4
394.3
The Company amortizes intangible assets with finite useful lives on a straight-line basis over their estimated economic lives in
accordance with GAAP. Indefinite-lived intangible assets are not subject to amortization, but instead are tested for impairment at
least annually (more frequently if certain indicators are present).
Intangible asset amortization expense for 2018, 2017 and 2016 was $36.3 million, $22.1 million and $20.5 million, respectively.
As discussed further in Note 7, intangible asset amortization expense for 2018 included the amortization of approximately $6
million of backlog revenue that was acquired during a business combination in the first quarter of 2018. This acquired backlog
revenue was fully amortized as of June 30, 2018. Future estimated amortization expense on existing intangible assets in each of
the next five years amounts to approximately $28.4 million for 2019, $28.4 million for 2020, $28.4 million for 2021, $28.4 million
for 2022 and $28.2 million for 2023.
In accordance with the Company’s indefinite-lived intangible asset impairment testing policy outlined in Note 2, the Company
performs its annual impairment test in the fourth quarter of each year. In each of the past three years, the Company determined
the fair value of all indefinite-lived intangible assets exceeded their respective carrying values. Therefore, no impairment charges
were recorded during 2018, 2017 or 2016.
NOTE 7 - ACQUISITIONS
2018
During the year ended December 31, 2018, the Company completed six acquisitions:
Business
Technical Glass Products, Inc. ("TGP")
Hammond Enterprises, Inc. ("Hammond")
Qatar Metal Industries LLC ("QMI")
AD Systems, Inc. ("AD Systems")
Gainsborough Hardware and API Locksmiths ("Door and Access Systems")
ISONAS Security Systems, Inc. ("ISONAS")
Date
January 2018
January 2018
February 2018
March 2018
July 2018
July 2018
In January 2018, the Company acquired 100% of TGP through one of its subsidiaries. TGP provides fire-rated architectural glass
and framing solutions for commercial buildings, as well as non-fire rated architectural glass and framing, including channel glass
systems and curtain walls throughout the U.S., Canada and select markets in the Middle East. TGP has been integrated into the
Company's Americas and EMEIA segments.
In January 2018, the Company acquired 100% of the machinery, equipment and intellectual property of a division of Hammond
through one of its subsidiaries. The assets acquired have been integrated into the Company's existing production facilities and are
specific to the Company's Schlage-branded products.
F-17
In February 2018, the Company acquired 100% of QMI through one of its subsidiaries. QMI specializes in fire rated and non-fire
rated steel and wooden doors, acoustic doors, wooden cabinets and access panels in the Middle East and Africa. QMI has been
integrated into the Company's EMEIA segment.
In March 2018, the Company acquired 100% of AD Systems through one of its subsidiaries. AD Systems designs and manufactures
high-performance interior and storefront door systems, specializing in sliding and acoustic solutions. AD Systems' portfolio includes
sliding and swinging doors, perimeter frames, door hardware, gasketing, seals and sidelite panels. AD Systems has been integrated
into the Company's Americas segment.
In July 2018, the Company acquired Door and Access Systems, based in Australia, through one of its subsidiaries. This business
includes the brands Gainsborough Hardware, the market-leading residential door hardware brand in Australia, and API Locksmiths,
which serves the Australian market with its keying, installation and access control services. Door and Access Systems has been
integrated into the Company's Asia Pacific segment.
In July 2018, the Company acquired 100% of ISONAS through one of its subsidiaries. ISONAS designs and manufactures edge-
computing technology that produces Power over Ethernet access control solutions for non-residential end-markets. ISONAS has
been integrated into the Company's Americas segment.
Total consideration paid for these six acquisitions to date was approximately $368 million (net of cash acquired). The Company
estimates the fair value of future consideration to be paid, including contingent consideration, to be approximately $6 million.
Cash on hand and $75 million of borrowings on the Revolving Facility, which has since been repaid, were utilized to fund these
acquisitions. The allocation of the aggregate purchase price to assets acquired and liabilities assumed is complete as of December 31,
2018, for the Company's acquisitions of TGP, Hammond, QMI and AD Systems; however, such allocation is still preliminary as
of December 31, 2018, for the acquisitions of Door and Access Systems and ISONAS pending completion of final valuations.
The preliminary allocation of the aggregate purchase price to assets acquired and liabilities assumed for all six acquisitions described
above is as follows:
In millions
Accounts receivable, net
Inventories
Other current assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Other noncurrent assets
Accounts payable
Accrued expenses and other current liabilities
Other noncurrent liabilities
Total consideration
$
$
28.9
28.5
1.3
27.6
141.8
204.3
—
(11.1)
(35.7)
(11.1)
374.5
Intangible assets are primarily comprised of approximately $59 million of indefinite-lived trade names, $112 million of customer
relationships and $33 million of completed technologies and other intangibles, which includes approximately $6 million of acquired
backlog revenue. The customer relationships have a 17-year weighted-average useful life, while the completed technologies and
other intangibles, excluding the backlog revenue, have a 16-year weighted-average useful life. The backlog revenue was fully
amortized as of June 30, 2018.
Goodwill results from several factors including Allegion-specific synergies that were excluded from the cash flow projections
used in the valuation of intangible assets and intangible assets that do not qualify for separate recognition, for example, assembled
workforce. The majority of the goodwill is expected to be deductible for tax purposes. All of the six acquisitions discussed above
are accounted for as business combinations.
F-18
The following unaudited pro forma financial information for the years ended December 31, 2018 and 2017 reflects the
consolidated results of operations of the Company as if these acquisitions had taken place on January 1, 2017:
In millions, except per share amounts
Net revenues
Net earnings attributable to Allegion plc
Basic net earnings per share
Diluted net earnings per share
2018
2017
$
$
$
$
2,774.2
446.8
4.70
4.67
$
$
$
$
2,612.1
256.9
2.70
2.68
The unaudited pro forma financial information is presented for informational purposes only and does not purport to be indicative
of results of operations that would have occurred had the pro forma events taken place on the date indicated or the future consolidated
results of operations of the combined company. The unaudited pro forma financial information has been calculated after applying
the Company's accounting policies and adjusting the historical financial results to reflect additional items directly attributable to
the acquisitions that would have been incurred assuming the acquisitions had occurred on January 1, 2017. Adjustments to historical
financial information include additional amortization of approximately $9.7 million (net of tax) included in the year ended December
31, 2017, in the pro forma table above. Approximately $3.9 million (net of tax) of this additional amortization relates to backlog
revenue acquired by the Company, which was recorded in Cost of goods sold.
The following financial information reflects Net revenues and Loss before income taxes of the acquisitions for the year ended
December 31, 2018 since their respective acquisition dates included in the Consolidated Statement of Comprehensive Income:
In millions
Net revenues
Loss before income taxes
2018
160.2
(3.2)
$
$
During the year ended December 31, 2018, the Company incurred $10.0 million of acquisition and integration related expenses,
which are included in Selling and administrative expenses in the Consolidated Statement of Comprehensive Income.
During the year ended December 31, 2018, the Company also made $8 million of equity method investments in three entities,
Yonomi Inc., a U.S. based mobile application and cloud platform provider for connected living, Nuki GmbH, a European retrofit
residential smart lock innovator, and Conneqtech, a European based IoT platform developer specializing in connected mobility
and tracking features for bicycles and healthcare.
2017
In January 2017, the Company acquired Republic Doors & Frames, LLC ("Republic") through one of its subsidiaries. During the
year ended December 31, 2017 the Company incurred $4.7 million of acquisition and integration related costs, which are included
in Selling and administrative expenses in the Consolidated Statement of Comprehensive Income.
2016
In June 2016, the Company acquired 100% of Trelock GmbH, a portable safety and security provider, and certain affiliated
companies. Acquisition and integration related costs were not material to the 2016 Consolidated Statement of Comprehensive
Income.
NOTE 8 - DIVESTITURES
As previously disclosed, the Company sold a majority stake of Bocom Wincent Technologies Co., Ltd. ("Systems Integration")
in the fourth quarter of 2015. Under the terms of the transaction, the Company was to receive consideration of up to $75.0
million based on the future cash collection performance of Systems Integration and additional payments of approximately $8.3
million related to working capital transferred with the sale. During the third quarter of 2016 the receivable was considered impaired,
as it was determined that certain unfavorable events occurred related to the Systems Integration business requiring an impairment
of the original consideration and working capital transfer amounts that were recorded at the time of the sale. A charge of $81.4
million (net of tax) was recorded. The total charge of $84.4 million was recorded within Loss on divestitures within the Consolidated
Statement of Comprehensive Income for the twelve months ended December 31, 2016.
F-19
NOTE 9 – DEBT AND CREDIT FACILITIES
At December 31, long-term debt and other borrowings consisted of the following:
In millions
Term Facility
Revolving Facility
3.200% Senior Notes due 2024
3.550% Senior Notes due 2027
Other debt
Total borrowings outstanding
Less discounts and debt issuance costs, net
Total debt
Less current portion of long-term debt
Total long-term debt
Unsecured Credit Facilities
2018
2017
$
656.3
$
—
400.0
400.0
1.2
1,457.5
(12.7)
1,444.8
35.3
$
1,409.5
$
691.3
—
400.0
400.0
1.0
1,492.3
(15.0)
1,477.3
35.0
1,442.3
As of December 31, 2018, the Company has an unsecured Credit Agreement in place that provides for up to $1,200.0 million in
unsecured financing, consisting of a $700.0 million term loan facility (the “Term Facility”) and a $500.0 million revolving credit
facility (the “Revolving Facility” and, together with the Term Facility, the “Credit Facilities”). The Credit Facilities mature on
September 12, 2022 and are unconditionally guaranteed jointly and severally on an unsecured basis by the Company and Allegion
US Holding Company Inc. ("Allegion US Hold Co"), the Company's wholly-owned subsidiary.
The Term Facility amortizes in quarterly installments at the following rates: 1.25% per quarter starting December 31, 2017 through
December 31, 2020, 2.5% per quarter from March 31, 2021 through June 30, 2022, with the balance due on September 12, 2022.
The Company may voluntarily prepay outstanding amounts under the Term Facility at any time without premium or penalty,
subject to customary breakage costs. Amounts borrowed under the Term Facility that are repaid may not be reborrowed. The
Company repaid $35.0 million of principal on its Term Facility during 2018.
The Revolving Facility provides aggregate commitments of up to $500.0 million, which includes up to $100.0 million for the
issuance of letters of credit. At December 31, 2018, there were no borrowings outstanding on the Revolving Facility and the
Company had $17.1 million of letters of credit outstanding. Commitments under the Revolving Facility may be reduced at any
time without premium or penalty, and amounts repaid may be reborrowed. The Company pays certain fees with respect to the
Revolving Facility, including an unused commitment fee on the undrawn portion of the Revolving Facility of between 0.125%
and 0.200% per year, depending on the Company's credit rating, as well as certain other fees.
Outstanding borrowings under the Credit Facilities accrue interest at the option of the Company of (i) a LIBOR rate plus the
applicable margin or (ii) a base rate plus the applicable margin. The applicable margin ranges from 1.125% to 1.500% depending
on the Company's credit ratings. At December 31, 2018, the outstanding borrowings under the Term Facility accrue interest at
LIBOR plus a margin of 1.250%. To manage the Company's exposure to fluctuations in LIBOR rates, the Company has interest
rate swaps to fix the interest rate for $250.0 million of the outstanding borrowings (see Note 10).
The Credit Facilities contain negative and affirmative covenants and events of default that, among other things, limit or restrict
the Company's ability to enter into certain transactions. In addition, the Credit Facilities require the Company to comply with a
maximum leverage ratio and a minimum interest expense coverage ratio, as defined within the agreement. As of December 31,
2018, the Company was in compliance with all covenants.
Senior Notes
As of December 31, 2018, Allegion US Hold Co has $400.0 million outstanding of its 3.200% Senior Notes due 2024 (the “3.200%
Senior Notes”) and $400.0 million outstanding of its 3.550% Senior Notes due 2027 (the “3.550% Senior Notes” and, together
with the 3.200% Senior Notes, the “Notes”), both of which were issued on October 2, 2017. The Notes require semi-annual interest
payments on April 1 and October 1 of each year and will mature on October 1, 2024 and October 1, 2027, respectively.
F-20
The Notes are senior unsecured obligations of Allegion US Hold Co and rank equally with all of Allegion US Hold Co’s existing
and future senior unsecured and unsubordinated indebtedness. The guarantee of the Notes is the senior unsecured obligation of
the Company and ranks equally with all of the Company's existing and future senior unsecured and unsubordinated indebtedness.
2017 Refinancing
The Company entered into the Credit Agreement on September 12, 2017. The initial proceeds of $700.0 million from the Term
Facility, along with initial borrowings of $165.0 million under the Revolving Facility, were used primarily to repay in full the
outstanding borrowing under the Company’s previously outstanding secured credit facility, the Second Amended and Restated
Credit Agreement, dated as of September 30, 2015. All obligations under the Second Amended and Restated Credit Agreement
were satisfied, all commitments thereunder were terminated, and all guarantees and security interests that had been granted in
connection therewith were released.
On October 3, 2017, Allegion US Hold Co used the net proceeds from the Notes to redeem in full the previously outstanding
$300.0 million Senior Notes due 2021 and $300.0 million Senior Notes due 2023, as well as to repay in full the borrowings under
the Revolving Facility and other costs associated with the refinancing.
Related to the 2017 refinancing activities, the Company recorded a $33.2 million charge for the redemption premiums associated
with the Senior Notes due 2021 and 2023, non-cash charges of $9.9 million related to the write-off of previously deferred financing
costs and $1.6 million of third party costs. These charges were all recorded within Interest expense in the Consolidated
Statement of Comprehensive Income for the year ended December 31, 2017. The Company also incurred and deferred $10.8
million of discounts and financing costs associated with the new debt, which is being amortized to Interest expense over the
terms of the respective debt.
Future Repayments
Scheduled principal repayments on indebtedness as of December 31, 2018 are as follows:
In millions
2019
2020
2021
2022
2023
Thereafter
Total
$
$
35.3
35.0
70.0
516.3
—
800.9
1,457.5
At December 31, 2018, the weighted-average interest rate for borrowings was 3.50% under the Term Facility (including the effect
of interest rate swaps), 3.200% under the 3.200% Senior Notes and 3.550% under the 3.550% Senior Notes. Cash paid for interest
for the years ended December 31, 2018, 2017 and 2016 was $52.0 million, $58.4 million and $56.0 million, respectively.
NOTE 10 – FINANCIAL INSTRUMENTS
In the normal course of business, the Company uses various financial instruments, including derivative instruments, to manage
the risks associated with interest and currency rate exposures. These financial instruments are not used for trading or speculative
purposes.
When a derivative contract is entered into, the Company designates the derivative instrument as a cash flow hedge of a forecasted
transaction, a cash flow hedge of a recognized asset or liability or as an undesignated derivative. The Company formally documents
its hedge relationships, including identification of the derivative instruments and the hedged items, as well as its risk management
objectives and strategies for undertaking the hedge transaction. This process includes linking derivative instruments that are
designated as hedges to specific assets, liabilities or forecasted transactions.
The fair market value of derivative instruments is determined through market-based valuations and may not be representative of
the actual gains or losses that will be recorded when these instruments mature due to future fluctuations in the markets in which
they are traded.
F-21
The Company assesses at inception and at least quarterly thereafter, whether the derivatives used in cash flow hedging transactions
are effective in offsetting the changes in the cash flows of the hedged item. To the extent the derivative is deemed to be an effective
hedge, the fair market value changes of the instrument are recorded to Accumulated other comprehensive income (AOCI), while
changes in the fair market value of derivatives not deemed to be an effective hedge are recorded in Net earnings in the period of
change. If the hedging relationship ceases to be effective subsequent to inception, or it becomes probable that a forecasted transaction
is no longer expected to occur, the hedging relationship will be undesignated and any future gains or losses on the derivative
instrument will be recorded in Net earnings.
Currency Hedging Instruments
The gross notional amount of the Company’s currency derivatives was $81.8 million and $57.7 million at December 31, 2018 and
2017, respectively. At December 31, 2018 and 2017, gains of $1.8 million and $0.3 million, net of tax, were included in Accumulated
other comprehensive loss related to the fair value of the Company’s currency derivatives designated as cash flow hedges. The
amount expected to be reclassified into Net earnings over the next twelve months is a gain of $1.8 million. The actual amounts
that will be reclassified to Net earnings may vary from this amount as a result of changes in market conditions. Gains and losses
associated with the Company’s currency derivatives not designated as hedges are recorded in Net earnings as changes in fair value
occur. At December 31, 2018, the maximum term of the Company’s currency derivatives was less than one year.
Interest Rate Swaps
The Company has interest rate swaps to fix the interest rate paid during the contract period for $250.0 million of the Company's
variable rate Term Facility. These interest rate swaps expire in September 2020 and met the criteria to be accounted for as cash
flow hedges of variable rate interest payments. Consequently, the changes in fair value of the interest rate swaps are recognized
in Accumulated other comprehensive loss. At December 31, 2018 and 2017, $4.3 million and $3.5 million of gains, net of tax,
were recorded in Accumulated other comprehensive loss related to these interest rate swaps. The approximate amount expected
to be reclassified into Net earnings over the next twelve months is a gain of approximately $3 million. The actual amounts that
will be reclassified to Net earnings may vary from this amount as a result of changes in market conditions.
The fair values of derivative instruments included within the Consolidated Balance Sheets as of December 31 were as follows:
In millions
Derivatives designated as hedges:
Currency derivatives
Interest rate swaps
Derivatives not designated as hedges:
Currency derivatives
Total derivatives
Asset derivatives
Liability derivatives
2018
2017
2018
2017
$
$
1.7
5.7
0.4
7.8
$
$
0.2
5.3
—
5.5
$
$
— $
—
0.1
0.1
$
0.3
—
0.4
0.7
Asset and liability currency derivatives included in the table above are recorded within Other current assets and Accrued expenses
and other current liabilities, respectively. Interest rate swap derivatives included in the table above are recorded within Other
noncurrent assets.
The amounts associated with derivatives designated as hedges affecting Net earnings and Accumulated other comprehensive loss
for the years ended December 31 were as follows:
In millions
Currency derivatives
Interest rate swaps
Total
Amount of gain recognized in
Accumulated other comprehensive loss
2018
2017
2016
Location of gain (loss)
recognized in Net
earnings
$
$
4.3
2.5
6.8
$
$
4.0
1.2
5.2
$
$
4.2 Cost of goods sold
Interest expense
5.4
9.6
Amount of gain (loss)
reclassified from Accumulated other
comprehensive loss and recognized into
Net earnings
2018
2017
2016
$
$
2.3
2.2
4.5
$
$
4.7
(0.3)
4.4
$
$
5.4
—
5.4
The gains and losses associated with the Company's non-designated currency derivatives, which are offset by changes in the fair
value of the underlying transactions, are included within Other income, net in the Consolidated Statements of Comprehensive
Income.
F-22
Concentration of Credit Risk
The counterparties to the Company’s forward contracts and swaps consist of a number of investment grade major international
financial institutions. The Company could be exposed to losses in the event of nonperformance by the counterparties. However,
the credit ratings and the concentration of risk in these financial institutions are monitored on a continuous basis and present no
significant credit risk to the Company.
NOTE 11 – PENSIONS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company sponsors several U.S. defined benefit and defined contribution plans covering substantially all U.S. employees.
Additionally, the Company has non-U.S. defined benefit and defined contribution plans covering eligible non-U.S. employees.
Postretirement benefits, other than pensions, provide healthcare benefits, and in some instances, life insurance benefits for certain
eligible employees.
Pension Plans
The noncontributory defined benefit pension plans covering non-collectively bargained U.S. employees provide benefits on an
average pay formula while most plans for collectively bargained U.S. employees provide benefits on a flat dollar benefit formula.
The non-U.S. pension plans generally provide benefits based on earnings and years of service. The Company also maintains
additional other supplemental plans for officers and other key employees.
F-23
The following table details information regarding the Company’s pension plans at December 31:
In millions
Change in benefit obligations:
U.S.
NON-U.S.
2018
2017
2018
2017
Benefit obligation at beginning of year
$
317.5
$
286.9
$
396.3
$
380.5
Service cost
Interest cost
Employee contributions
Amendments
Actuarial (gains) losses
Benefits paid
Foreign exchange rate changes
Curtailments and settlements
Acquisitions
Other, including expenses paid
Benefit obligation at end of year
Change in plan assets:
Fair value at beginning of year
Actual return on plan assets
Company contributions
Employee contributions
Benefits paid
Foreign exchange rate changes
Settlements
Acquisitions
Other, including expenses paid
Fair value of assets at end of year
Funded status:
Plan assets (less than) over benefit obligations
Amounts included in the balance sheet:
Other noncurrent assets
Accrued compensation and benefits
Postemployment and other benefit liabilities
Net amount recognized
8.6
10.4
—
—
(25.4)
(16.5)
—
—
—
(1.3)
293.3
283.2
(12.1)
6.1
—
(16.5)
—
—
—
(1.3)
259.4
(33.9)
—
(0.3)
(33.6)
(33.9)
$
$
$
$
$
$
8.7
10.5
—
—
17.5
(12.4)
—
—
7.3
(1.0)
317.5
202.4
31.9
55.7
—
(12.4)
—
—
6.5
(0.9)
283.2
(34.3)
—
(0.2)
(34.1)
(34.3)
$
$
$
$
$
$
3.3
8.4
0.3
5.0
(14.9)
(19.4)
(21.1)
(0.2)
0.5
(1.4)
356.8
398.4
(9.8)
5.4
0.3
(19.4)
(20.8)
(0.2)
—
(1.7)
352.2
(4.6)
21.1
(1.1)
(24.6)
(4.6)
$
$
$
$
$
$
$
$
$
$
$
$
3.3
8.9
0.3
—
(15.4)
(13.7)
34.3
(0.9)
—
(1.0)
396.3
353.4
22.3
5.2
0.3
(13.7)
33.7
(0.9)
—
(1.9)
398.4
2.1
28.5
(1.3)
(25.1)
2.1
It is the Company’s objective to contribute to the pension plans to ensure adequate funds are available in the plans to make benefit
payments to plan participants and beneficiaries when required. However, certain plans are not funded due to either legal, accounting
or tax requirements in certain jurisdictions. As of December 31, 2018, approximately 5% of the Company's projected benefit
obligation relates to plans that are not funded, of which the majority are non-U.S. plans.
F-24
The pretax amounts recognized in Accumulated other comprehensive loss were as follows:
In millions
December 31, 2016
Current year changes recorded to Accumulated other comprehensive loss
Amortization reclassified to earnings
December 31, 2017
Current year changes recorded to Accumulated other comprehensive loss
Amortization reclassified to earnings
December 31, 2018
In millions
December 31, 2016
Current year changes recorded to Accumulated other comprehensive loss
Amortization reclassified to earnings
Settlements/curtailments reclassified to earnings
Currency translation and other
December 31, 2017
Current year changes recorded to Accumulated other comprehensive loss
Amortization reclassified to earnings
Currency translation and other
December 31, 2018
Weighted-average assumptions used:
Benefit obligations at December 31,
Discount rate:
U.S. plans
Non-U.S. plans
Rate of compensation increase:
U.S. plans
Non-U.S. plans
Prior service cost
U.S.
Net actuarial
losses
Total
$
$
$
(2.1) $
—
0.3
(1.8) $
—
0.3
(1.5) $
(79.7) $
2.4
4.8
(72.5) $
(1.1)
4.0
(69.6) $
(81.8)
2.4
5.1
(74.3)
(1.1)
4.3
(71.1)
Prior service cost
NON-U.S.
Net actuarial
losses
Total
$
$
$
— $
—
—
—
0.1
$
0.1
(5.0)
—
0.2
(4.7) $
(79.6) $
23.3
1.8
0.1
(6.2)
(60.6) $
(10.4)
0.9
3.9
(66.2) $
2018
2017
4.3%
2.8%
3.0%
3.3%
(79.6)
23.3
1.8
0.1
(6.1)
(60.5)
(15.4)
0.9
4.1
(70.9)
3.6%
2.5%
3.0%
3.2%
The accumulated benefit obligation for all U.S. defined benefit pension plans was $284.8 million and $304.9 million at December
31, 2018 and 2017, respectively. The accumulated benefit obligation for all non-U.S. defined benefit pension plans was $349.1
million and $388.3 million at December 31, 2018 and 2017, respectively.
The Company estimates the service and interest cost components of net periodic benefit cost utilizing a full yield-curve approach.
Under this approach, the Company applies discounting using the applicable spot rates derived from the yield curve to discount
the cash flows used to measure the benefit obligation. These spot rates align to each of the projected benefit obligations and service
cost cash flows.
F-25
Information regarding pension plans with accumulated benefit obligations more than plan assets were:
In millions
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
U.S.
NON-U.S.
2018
2017
2018
2017
$
$
293.3
284.8
259.4
$
$
317.5
304.9
283.2
Future pension benefit payments are expected to be paid as follows:
In millions
2019
2020
2021
2022
2023
2024 - 2028
$
$
$
U.S.
$
$
$
34.5
29.6
8.8
17.0
24.2
17.8
18.4
20.3
34.4
29.5
7.9
NON-U.S.
16.9
17.4
18.3
19.1
19.6
$
103.2
$
110.4
The components of the Company’s net periodic pension benefit costs for the years ended December 31 include the following:
In millions
Service cost
Interest cost
Expected return on plan assets
Administrative costs and other
Net amortization of:
Prior service costs
Plan net actuarial losses
Net periodic pension benefit cost
In millions
Service cost
Interest cost
Expected return on plan assets
Administrative costs and other
Net amortization of:
Plan net actuarial losses
Net periodic pension benefit (income) cost
Net curtailment and settlement losses
2018
U.S.
2017
2016
$
6.8
$
7.1
$
$
$
10.5
(14.4)
1.6
0.3
4.1
8.9
10.5
(12.0)
1.6
0.3
4.8
$
12.3
$
2018
NON-U.S.
2017
2016
1.7
$
1.5
$
8.4
(15.4)
1.8
0.9
(2.6)
—
8.9
(14.3)
2.5
1.9
0.5
0.1
Net periodic pension benefit (income) cost after net curtailment and
settlement losses
$
(2.6) $
0.6
$
6.8
9.8
(10.2)
2.6
0.7
4.7
14.4
1.4
10.7
(13.7)
1.7
2.2
2.3
0.3
2.6
The Service cost component of Net periodic pension benefit cost (income) is recorded in Cost of goods sold and Selling and
administrative expenses within the Consolidated Statements of Comprehensive Income. The remaining components of Net periodic
pension benefit cost (income), including Administrative costs and other, are recorded within Other income, net within the
Consolidated Statements of Comprehensive Income.
Pension expense for 2019 is projected to be approximately $11.4 million, utilizing the assumptions for calculating the pension
benefit obligations at the end of 2018.
F-26
Weighted-average assumptions used:
Net periodic pension cost for the year ended December 31,
Discount rate:
U.S. plans
Non-U.S. plans
Rate of compensation increase:
U.S. plans
Non-U.S. plans
Expected return on plan assets:
U.S. plans
Non-U.S. plans
2018
2017
2016
3.6%
2.5%
3.0%
3.3%
5.3%
4.0%
4.1%
2.6%
3.5%
3.2%
4.8%
4.0%
4.3%
3.7%
3.5%
3.0%
5.5%
4.5%
The expected long-term rate of return on plan assets reflects the average rate of returns expected on the funds invested or to be
invested to provide for the benefits included in the projected benefit obligation. The expected long-term rate of return on plan
assets is based on what is achievable given the plan’s investment policy, the types of assets held and target asset allocations. The
expected long-term rate of return is determined as of the measurement date. Each plan is reviewed, along with its historical returns
and target asset allocations, to determine the appropriate expected long-term rate of return on plan assets to be used.
The Company's overall objective in managing defined benefit plan assets is to ensure that all present and future benefit obligations
are met as they come due. The goal is to achieve this while trying to mitigate volatility in plan funded status, contributions and
expense by better matching the characteristics of the plan assets to that of the plan liabilities. Each plan’s funded status and asset
allocation is monitored regularly in addition to investment manager performance.
The fair values of the Company’s U.S. pension plan assets at December 31, 2018, by asset category are as follows:
In millions
Cash, cash equivalents and short-term investments
Equity mutual funds
Fixed income investments:
U.S. government and agency obligations
Corporate and non-U.S. bonds(a)
Other(b)
Total assets at fair value
Fair value measurements
Level 1
Level 2
Level 3
Assets
measured at
NAV
Total
fair value
$
— $
—
—
—
—
—
3.1
—
—
—
—
—
$
— $
— $
—
—
—
—
—
53.7
94.0
89.9
183.9
18.7
$
— $
3.1
$
— $
256.3
$
3.1
53.7
94.0
89.9
183.9
18.7
259.4
(a)
(b)
Includes state and municipal bonds.
Includes group trust diversified credit fund.
No material transfers in or out of Level 3 occurred during the year ended December 31, 2018.
F-27
The fair values of the Company’s U.S. pension plan assets at December 31, 2017, by asset category are as follows:
In millions
Cash, cash equivalents and short-term investments
Equity mutual funds
Fixed income investments:
U.S. government and agency obligations
Corporate and non-U.S. bonds(a)
Total assets at fair value
Receivables and payables, net
Net assets available for benefits
(a)
Includes state and municipal bonds.
Fair value measurements
Level 1
Level 2
Level 3
Assets
measured at
NAV
Total
fair value
— $
— $
$
— $
—
—
—
—
$
3.2
—
83.6
111.3
194.9
—
—
—
—
$
— $
198.1
$
— $
70.9
—
12.8
12.8
83.7
$
$
3.2
70.9
83.6
124.1
207.7
281.8
1.4
283.2
No material transfers in or out of Level 3 occurred during the year ended December 31, 2017.
The Company determines the fair value of its U.S. plan assets using the following methodologies:
•
•
•
•
Cash, cash equivalents and short-term investments – Short-term investments are valued at the closing price or amount
held on deposit by the custodian bank or at fair value by discounting the related cash flows based on current yields of
similar instruments with comparable durations considering the credit-worthiness of the issuer. As these investments are
not traded on active markets, they are classified as Level 2.
Equity mutual funds – Equity mutual funds are valued at their daily net asset value (NAV) per share or the equivalent.
NAV per share or the equivalent is used for fair value purposes as a practical expedient. NAV is calculated by the investment
manager or sponsor of the fund.
U.S. government and agency obligations – Quoted market prices are not available for these securities. Fair values are
either estimated using pricing models and/or quoted prices of securities with similar characteristics or discounted cash
flows, in which instances such securities are classified as Level 2, or valued at their net asset value (NAV) per share or
the equivalent. NAV per share or the equivalent is used for fair value purposes as a practical expedient and are calculated
by the investment manager or sponsor of the fund.
Corporate and non-U.S. bonds – Quoted market prices are not available for these securities. Fair values are either estimated
using pricing models and/or quoted prices of securities with similar characteristics or discounted cash flows, in which
instances such securities are classified as Level 2 or valued at their net asset value (NAV) per share or the equivalent.
NAV per share or the equivalent is used for fair value purposes as a practical expedient and are calculated by the investment
manager or sponsor of the fund.
The fair values of the Company’s non-U.S. pension plan assets at December 31, 2018, by asset category are as follows:
In millions
Cash, cash equivalents and short-term investments
Equity mutual funds
Corporate and non-U.S. bonds
Other(a)
Total assets at fair value
Fair value measurements
Level 1
Level 2
Level 3
Assets
measured at
NAV
Total
fair value
$
$
1.3
$
36.1
$
—
—
—
2.6
109.4
41.3
1.3
$
189.4
$
—
—
—
3.2
3.2
— $
88.7
31.7
37.9
$
158.3
$
37.4
91.3
141.1
82.4
352.2
(a)
Primarily includes insurance contracts, mortgage-backed securities, real estate and derivative contracts.
No material transfers in or out of Level 3 occurred during the year ended December 31, 2018.
F-28
The fair values of the Company’s non-U.S. pension plan assets at December 31, 2017, by asset category are as follows:
In millions
Cash and cash equivalents
Equity mutual funds
Corporate and non-U.S. bonds
Real estate
Other(a)
Total assets at fair value
Fair value measurements
Level 1
Level 2
Level 3
Assets
measured at
NAV
Total
fair value
$
36.7
$
— $
— $
— $
—
—
—
—
2.0
176.9
—
46.7
$
36.7
$
225.6
$
—
—
0.8
2.3
3.1
103.1
—
—
29.9
36.7
105.1
176.9
0.8
78.9
$
133.0
$
398.4
(a)
Primarily includes insurance contracts, mortgage-backed securities and derivative contracts.
No material transfers in or out of Level 3 occurred during the year ended December 31, 2017.
The Company determines the fair value of its non-U.S. plan assets using the following methodologies:
•
•
•
Cash, cash equivalents and short-term investments – Cash equivalents are valued using a market approach with inputs
including quoted market prices for either identical or similar instruments. Short-term investments are valued at the closing
price or amount held on deposit by the custodian bank or at fair value by discounting the related cash flows based on
current yields of similar instruments with comparable durations considering the credit-worthiness of the issuer. As these
investments are not traded on active markets, these investments are classified as Level 2.
Equity mutual funds – Equity mutual funds are primarily valued at their daily net asset value (NAV) per share or the
equivalent. NAV per share or the equivalent is used for fair value purposes as a practical expedient. NAV is calculated
by the investment manager or sponsor of the fund.
Corporate and non-U.S. bonds – Quoted market prices are not available for these securities. Fair values are either estimated
using pricing models and/or quoted prices of securities with similar characteristics or discounted cash flows, in which
instances such securities are classified as Level 2 or valued at their net asset value (NAV) per share or the equivalent.
NAV per share or the equivalent is used for fair value purposes as a practical expedient and are calculated by the investment
manager or sponsor of the fund.
The Company made employer contributions of $6.1 million to the U.S. pension plans in 2018, $55.7 million in 2017 (of which
$50.0 million was discretionary) and $7.9 million in 2016. The Company made required and discretionary contributions to its
non-U.S. pension plans of $5.4 million in 2018, $5.2 million in 2017 and $6.0 million in 2016.
The Company currently projects that approximately $11.6 million will be contributed to its U.S and non-U.S. plans in 2019. The
Company’s policy allows it to fund an amount, which could be in excess of or less than the pension cost expensed, subject to the
limitations imposed by current tax regulations. The Company anticipates funding the plans in 2019 in accordance with contributions
required by funding regulations or the laws of each jurisdiction.
Most of the Company’s U.S. employees are covered by defined contribution plans. Employer contributions are determined based
on criteria specific to the individual plans and amounted to approximately $14.4 million, $14.0 million and $13.3 million in 2018,
2017 and 2016, respectively. The Company’s contributions relating to non-U.S. defined contribution plans and other non-U.S.
benefit plans were $8.0 million, $7.0 million and $5.6 million in 2018, 2017 and 2016, respectively.
Deferred Compensation Plan
The Company maintains an Executive Deferred Compensation Plan ("EDCP"), which is an unfunded, nonqualified plan that
permits certain employees to defer receipt of up to 50% of their annual salary and up to 100% of their annual bonus awards,
performance share plan awards and restricted stock units received upon commencement of employment. As of December 31, 2018,
the deferred compensation liability balance was $15.1 million, which was recorded within Postemployment and other benefit
liabilities in the Consolidated Balance Sheet.
F-29
Postretirement Benefits Other Than Pensions
The Company sponsors a postretirement ("OPEB") plan that provides for healthcare benefits, and in some instances, life insurance
benefits, that cover certain eligible retired employees. The Company funds postretirement benefit obligations principally on a pay-
as-you- go basis. Generally, postretirement health benefits are contributory with contributions adjusted annually. Life insurance
plans for retirees are primarily noncontributory. Net periodic postretirement benefit income is included within Other income, net
within the Consolidated Statements of Comprehensive Income.
The benefit obligation related to the Company's postretirement plans as of December 31, 2018 and 2017 was $7.6 million and
$9.3 million, respectively, and is classified as Accrued compensation and benefits and Postemployment and other benefit liabilities
within the Consolidated Balance Sheets. Net periodic postretirement benefit income was $0.5 million, $1.4 million and $1.1
million, for the years ended December 31, 2018, 2017 and 2016, respectively. Net period postretirement benefit income (expense)
for 2019 is not projected to be material. Benefit payments for postretirement benefits, which are net of expected plan participant
contributions and Medicare Part D subsidies, are expected to be less than $1 million per year for the foreseeable future.
NOTE 12 – FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. Fair value measurements are based on a framework that utilizes the inputs market participants use to determine
the fair value of an asset or liability and establishes a fair value hierarchy to prioritize those inputs. The fair value hierarchy is
comprised of the three levels described below:
•
•
•
Level 1 – Inputs based on quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 quoted prices, such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the asset or liability.
Level 3 – Unobservable inputs based on little or no market activity and that are significant to the fair value of the assets
and liabilities.
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas
unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability based on the best
information available under the circumstances. A financial instrument’s categorization within the fair value hierarchy is based
upon the lowest level of input that is significant to the fair value measurement.
F-30
Assets and liabilities measured at fair value at December 31, 2018 are as follows:
In millions
Recurring fair value measurements
Assets:
Investments
Interest rate swaps
Foreign currency contracts
Total asset recurring fair value measurements
Liabilities:
Foreign currency contracts
Deferred compensation and other retirement plans
Total liability recurring fair value measurements
Financial instruments not carried at fair value:
Total debt
Total financial instruments not carried at fair value
$
$
$
$
$
$
Fair value measurements
Quoted prices
in active
markets for
identical assets
(Level 1)
Significant
other
observable
inputs (Level 2)
Significant
unobservable
inputs (Level 3)
Total
fair value
— $
14.3
$
— $
—
—
— $
— $
—
— $
— $
— $
5.7
2.1
22.1
0.1
19.1
19.2
1,403.2
1,403.2
$
$
$
$
$
—
—
— $
— $
—
— $
14.3
5.7
2.1
22.1
0.1
19.1
19.2
— $
— $
1,403.2
1,403.2
Assets and liabilities measured at fair value at December 31, 2017 are as follows:
In millions
Recurring fair value measurements
Assets:
Interest rate swaps
Foreign currency contracts
Total asset recurring fair value measurements
Liabilities:
Foreign currency contracts
Deferred compensation and other retirement plans
Total liability recurring fair value measurements
Financial instruments not carried at fair value:
Total debt
Total financial instruments not carried at fair value
Fair value measurements
Quoted prices
in active
markets for
identical assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
fair value
$
$
$
$
$
$
— $
—
— $
— $
—
— $
5.3
0.2
5.5
0.7
20.9
21.6
— $ 1,485.2
— $ 1,485.2
$
$
$
$
$
$
— $
—
— $
— $
—
— $
5.3
0.2
5.5
0.7
20.9
21.6
— $
— $
1,485.2
1,485.2
The Company determines the fair value of its financial assets and liabilities using the following methodologies:
•
•
•
Investments – These instruments include equity mutual funds and corporate bond funds. The fair value is obtained based
on observable market prices quoted on public exchanges for similar instruments.
Interest rate swaps – These instruments include forward-starting interest rate swap contracts for $250.0 million of the
Company's variable rate debt. The fair value of the derivative instruments is determined based on quoted prices for the
Company's swaps, which are not considered an active market.
Foreign currency contracts – These instruments include foreign currency contracts for non-functional currency balance
sheet exposures. The fair value of the foreign currency contracts is determined based on a pricing model that uses spot
rates and forward prices from actively quoted currency markets that are readily accessible and observable.
F-31
•
•
Deferred compensation and other retirement plans - These include obligations related to deferred compensation and other
retirement plans adjusted for market performance. The fair value is obtained based on observable market prices quoted
on public exchanges for similar instruments.
Debt – These instruments are recorded at cost and include senior notes maturing through 2027. The fair value of the long-
term debt instruments is obtained based on observable market prices quoted on public exchanges for similar instruments.
The carrying values of Cash and cash equivalents, Restricted cash, Accounts receivable, Accounts payable, Accrued expenses and
other current liabilities are a reasonable estimate of their fair value due to the short-term nature of these instruments.
The methodology used by the Company to determine the fair value of its financial assets and liabilities at December 31, 2018 are
the same as those used at December 31, 2017.
NOTE 13 – EQUITY
Ordinary Shares
The reconciliation of Ordinary shares is as follows:
In millions
December 31, 2017
Shares issued under incentive plans
Repurchase of ordinary shares
December 31, 2018
Total
95.1
0.4
(0.9)
94.6
Allegion had 400.0 million ordinary shares authorized and 10.0 million $0.001 par value preferred shares authorized (with none
outstanding) at December 31, 2018.
On February 2, 2017, the Company's Board of Directors approved a new stock repurchase authorization of up to $500 million of
the Company's ordinary shares. This stock repurchase authorization replaced the authorization previously established in 2014.
During the year ended December 31, 2018, the Company paid $67.3 million to repurchase 0.9 million ordinary shares on the open
market under this new repurchase authorization.
Other Comprehensive Income (Loss)
The changes in Accumulated other comprehensive loss are as follows:
In millions
December 31, 2015
Other comprehensive (loss) income, net of tax
December 31, 2016
Other comprehensive income, net of tax
Other(a)
December 31, 2017
Other comprehensive income (loss), net of tax
Reclassification to Retained earnings upon adoption of ASU
2018-02 (see Note 2)
December 31, 2018
Cash flow
hedges and
marketable
securities
Pension and
OPEB items
Foreign
currency
items
Total
$
$
$
14.0
(10.6)
3.4
0.4
—
3.8
1.8
0.5
6.1
(139.3) $
18.8
(120.5)
19.3
(6.4)
(107.6)
(5.4)
(106.9) $
(40.3)
(147.2)
98.1
—
(49.1)
(57.3)
(10.2)
(123.2) $
—
(106.4) $
$
(232.2)
(32.1)
(264.3)
117.8
(6.4)
(152.9)
(60.9)
(9.7)
(223.5)
(a)
During 2017, the Company reclassified $6.4 million between Accumulated other comprehensive loss and Retained
earnings to correct a prior period classification error of Pension and OPEB items. The Company does not believe
this reclassification is material to 2017 or to any of its previously issued annual or interim financial statements.
All amounts of Other comprehensive income (loss) attributable to noncontrolling interests on the Consolidated Statements of
Equity relate to foreign currency items.
F-32
NOTE 14 – SHARE-BASED COMPENSATION
The Company records share-based compensation awards using a fair value method and recognizes compensation expense for an
amount equal to the fair value of the share-based payment issued in its financial statements. The Company’s share-based
compensation plans include programs for stock options, restricted stock units ("RSUs"), performance share units ("PSUs") and
deferred compensation.
Under the Company's incentive stock plan, the total number of ordinary shares authorized by the shareholders is 8.0 million, of
which 3.4 million remain available as of December 31, 2018 for future incentive awards.
Compensation Expense
Share-based compensation expense is included in Cost of goods sold and Selling and administrative expenses within the
Consolidated Statements of Comprehensive Income. The following table summarizes the expenses recognized for the years ended
December 31:
In millions
Stock options
RSUs
PSUs
Deferred compensation
Pre-tax expense
Tax benefit
Total
Stock Options / RSUs
2018
2017
2016
4.3
9.6
5.7
(0.8)
18.8
(1.9)
16.9
$
$
3.3
7.0
5.8
2.8
18.9
(6.4)
12.5
$
$
4.1
7.7
4.8
0.8
17.4
(5.6)
11.8
$
$
Eligible participants may receive (i) stock options, (ii) RSUs or (iii) a combination of both stock options and RSUs. The fair value
of each of the Company’s stock option and RSU awards is expensed on a straight-line basis over the required service period, which
is generally the 3-year vesting period. However, for stock options and RSUs granted to retirement eligible employees, the Company
recognizes expense for the fair value at the grant date.
The average fair value of the stock options granted for the year ended December 31, 2018, 2017 and 2016 was estimated to be
$21.29, $18.22 and $15.86 per share, respectively, using the Black-Scholes option-pricing model. The weighted-average
assumptions used were the following:
Dividend yield
Volatility
Risk-free rate of return
Expected life
2018
2017
2016
0.97%
22.38%
2.75%
0.89%
24.93%
2.08%
0.83%
28.85%
1.38%
6.0 years
6.0 years
6.0 years
Expected volatility is based on the weighted-average of the implied volatility of a group of the Company’s peers. The risk-free
rate of return is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the award is granted with a maturity
equal to the expected term of the award. Historical peer data is used to estimate forfeitures within the Company’s valuation model.
The expected life of the Company’s stock option awards granted post separation is derived from the simplified approach based
on the weighted-average time to vest and the remaining contractual term and represents the period of time that awards are expected
to be outstanding.
F-33
Changes in options outstanding under the plans for the years ended December 31, 2018, 2017 and 2016 are as follows:
Shares
subject
to option
Weighted-
average
exercise price
(a)
Aggregate
intrinsic
value (millions)
Weighted-
average
remaining life
(years)
December 31, 2015
1,592,167
$
Granted
Exercised
Canceled
December 31, 2016
Granted
Exercised
Canceled
December 31, 2017
Granted
Exercised
Canceled
Outstanding December 31, 2018
Exercisable December 31, 2018
231,521
(447,019)
(63,599)
1,313,070
165,113
(410,397)
(15,906)
1,051,880
160,849
(239,427)
(16,104)
957,198
638,441
$
$
33.91
57.91
26.04
53.40
39.87
71.84
31.54
60.84
47.80
86.92
36.50
74.23
56.71
46.94
$
$
23.1
20.9
6.1
5.0
(a)
The weighted-average exercise price of awards represents the exercise price of the awards on the grant date converted
to ordinary shares of the Company.
The following table summarizes information concerning currently outstanding and exercisable options:
Range of
exercise price
$
10.01 — $ 20.00
20.01 —
30.01 —
40.01 —
50.01 —
60.01 —
70.01 —
30.00
40.00
50.00
60.00
70.00
80.00
$
80.01 — $ 90.00
Options outstanding
Options exercisable
Number
outstanding at
December 31,
2018
Weighted-
average
remaining
life (years)
Weighted-
average
exercise
price
Number
exercisable at
December 31,
2018
Weighted-
average
remaining
life (years)
Weighted-
average
exercise
price
43,401
84,921
51,823
102,403
373,873
421
146,698
153,658
957,198
0.7
2.6
4.0
5.0
6.2
7.8
8.0
9.1
6.1
$
$
16.18
26.73
32.33
43.37
56.90
63.93
71.84
86.92
56.71
43,401
84,921
51,823
102,403
309,915
210
45,514
254
638,441
0.7
2.6
4.0
5.0
6.0
7.8
8.0
2.9
5.0
$
$
16.18
26.73
32.33
43.37
56.70
63.93
71.84
86.93
46.94
At December 31, 2018, there was $1.4 million of total unrecognized compensation cost from stock option arrangements granted
under the plan, which is primarily related to unvested shares of non-retirement eligible employees. The aggregate intrinsic value
of the Company's options exercised during the year ended December 31, 2018 and 2017, was $11.5 million and $17.5 million,
respectively. Generally, stock options expire ten years from their date of grant.
F-34
The following table summarizes RSU activity for the years ended December 31, 2018, 2017 and 2016:
Outstanding and unvested at December 31, 2015
Granted
Vested
Canceled
Outstanding and unvested at December 31, 2016
Granted
Vested
Canceled
Outstanding and unvested at December 31, 2017
Granted
Vested
Canceled
Outstanding and unvested at December 31, 2018
RSUs
344,930
$
123,299
(220,854)
(41,741)
205,634
124,933
(90,523)
(10,038)
230,006
132,865
(104,065)
(14,459)
244,347
$
Weighted-
average grant
date fair value
(a)
49.59
59.49
45.83
52.40
58.99
73.76
58.78
60.47
66.83
84.65
65.42
76.25
76.51
(a)
The weighted-average grant date fair value represents the fair value of the awards on the grant date converted to
ordinary shares of the Company.
At December 31, 2018, there was $7.0 million of total unrecognized compensation cost from RSU arrangements granted under
the plan, which is related to unvested shares of non-retirement eligible employees.
Performance Shares
The Company has a Performance Share Program ("PSP") for key employees which provides awards in the form of PSUs based
on performance against pre-established objectives. The annual target award level is expressed as a number of the Company's
ordinary shares. All PSUs are settled in the form of ordinary shares unless deferred.
In February 2016, 2017 and 2018, the Company's Compensation Committee granted PSUs that were earned based 50% upon a
performance condition, measured at each reporting period by earnings per share ("EPS") performance in relation to pre-established
targets set by the Compensation Committee, and 50% upon a market condition, measured by the Company’s relative total
shareholder return ("TSR") against the S&P 400 Capital Goods Index over a three-year performance period. The fair values of
the market conditions are estimated using a Monte Carlo simulation approach in a risk-neutral framework to model future stock
price movements based upon historical volatility, risk-free rates of return and correlation matrix.
F-35
The following table summarizes PSU activity for the maximum number of shares that may be issued for the years ended December
31, 2018, 2017 and 2016:
PSUs
Weighted-average
grant date fair value
(a)
Outstanding and unvested at December 31, 2015
202,043
$
Granted
Vested
Forfeited
Outstanding and unvested at December 31, 2016
Granted
Vested
Forfeited
Outstanding and unvested at December 31, 2017
Granted
Vested
Forfeited
Outstanding and unvested at December 31, 2018
94,201
(64,979)
(21,661)
209,604
99,832
(146,830)
(1,783)
160,823
93,018
(90,967)
(6,833)
156,041
$
64.92
64.83
72.69
57.07
56.02
78.13
72.01
67.10
55.02
86.46
68.05
79.93
65.07
(a)
The weighted-average grant date fair value represents the fair value of the awards on the grant date converted to
ordinary shares of the Company.
At December 31, 2018, there was $4.9 million of total unrecognized compensation cost from the PSP based on current performance,
which is related to unvested shares. This compensation will be recognized over the required service period, which is generally the
three-year vesting period.
Deferred Compensation
The Company allows key employees to defer a portion of their eligible compensation into a number of investment choices, including
its ordinary share equivalents. Any amounts invested in ordinary share equivalents will be settled in ordinary shares of the Company
at the time of distribution.
NOTE 15 – RESTRUCTURING ACTIVITIES
During 2018, 2017, and 2016, the Company recorded $4.9 million, $12.3 million and $3.1 million, respectively, of expenses
associated with restructuring activities. These expenses are included within Cost of goods sold and Selling and administrative
expenses within the Consolidated Statements of Comprehensive Income.
The changes in the restructuring reserve during the years ended December 31, 2018 and 2017, were as follows:
In millions
December 31, 2016
Additions
Cash and non-cash uses
Currency translation
December 31, 2017
Additions
Cash and non-cash uses
Currency translation
December 31, 2018
The majority of the costs accrued as of December 31, 2018, will be paid within one year.
F-36
Total
3.5
12.3
(11.8)
0.2
4.2
4.9
(6.9)
(0.1)
2.1
$
$
The Company also incurred other non-qualified restructuring charges of $1.6 million, $1.5 million and $6.4 million during the
years ended December 31, 2018, 2017 and 2016, respectively, in conjunction with the other restructuring plans, which represent
costs that are directly attributable to restructuring activities, but that do not fall into the severance, exit or disposal category.
NOTE 16 – OTHER INCOME, NET
At December 31, the components of Other income, net were as follows:
In millions
Interest income
Foreign currency exchange loss
Earnings from and gains on the sale of equity investments
Net periodic pension and postretirement benefit (income) cost, less service cost
Other
Other income, net
2018
2017
2016
(0.8) $
0.3
(0.4)
(2.8)
0.3
(3.4) $
(1.2) $
0.7
(5.4)
4.3
(7.3)
(8.9) $
(1.9)
2.0
(3.6)
8.8
(14.7)
(9.4)
$
$
Other income, net for the year ended December 31, 2018, was primarily related to Net periodic pension and postretirement benefit
income, less service cost.
Other income, net for the year ended December 31, 2017, included a gain of $5.4 million from the sale of iDevices, LLC, which
is included within the Earnings from and gains on the sale of equity investments in the table above. Other income, net for the year
ended December 31, 2017, also included gains of $7.3 million related to legal entity liquidations in the Asia Pacific segment, of
which $2.2 million was attributed to noncontrolling interests. These gains are included within Other in the table above. These
gains were partially offset by Net periodic pension and postretirement benefit cost, less service cost.
During the year ended December 31, 2016, the Company recorded gains from the sale of marketable securities of $12.4 million,
which is included within Other in the table above. These gains were partially offset by Net periodic pension and postretirement
benefit cost, less service cost.
NOTE 17 – INCOME TAXES
Earnings before income taxes for the years ended December 31 were taxed within the following jurisdictions:
The components of the Provision for income taxes for the years ended December 31 were as follows:
2018
2017
2016
$
$
151.4
323.8
475.2
$
$
166.5
229.2
395.7
2018
2017
$
$
86.4
18.1
104.5
$
$
$
78.8
15.0
93.8
41.2
(16.0)
25.2
120.0
(1.0)
119.0
$
129.9
165.1
295.0
2016
43.8
13.8
57.6
14.4
(8.2)
6.2
58.2
5.6
63.8
(56.1)
(8.6)
(64.7)
30.3
9.5
$
39.8
$
F-37
In millions
U.S.
Non-U.S.
Total
In millions
Current tax expense:
U.S.
Non-U.S.
Total:
Deferred tax (benefit) expense:
U.S.
Non-U.S.
Total:
Total tax expense (benefit):
U.S.
Non-U.S.
Total
The Provision for income taxes differs from the amount of income taxes determined by applying the applicable U.S. statutory
income tax rate to pretax income, as a result of the following differences:
Statutory U.S. rate
Increase (decrease) in rates resulting from:
Non-U.S. tax rate differential (1)
State and local income taxes (1)
Reserves for uncertain tax positions
Tax on unremitted earnings
Tax Reform Act
Trade incentives
Production incentives
Other adjustments
Effective tax rate
(1)
Net of changes in valuation allowances
Percent of pretax income
2018
2017
2016
21.0%
35.0%
35.0%
(11.9)
2.1
2.1
(1.2)
(4.6)
0.6
—
0.3
8.4%
(20.0)
1.8
0.8
0.8
13.5
—
(0.9)
(0.9)
30.1%
(17.4)
2.0
2.0
1.2
—
—
(0.6)
(0.6)
21.6%
On December 22, 2017, the Tax Reform Act became law, resulting in broad and complex changes to the U.S. tax code. The impact
to the Company's Consolidated Financial Statements during the year ended December 31, 2017, included, but were not limited
to, a (1) reduced U.S. federal corporate tax rate from 35.0% to 21.0%, effective January 1, 2018, (2) required a one-time transition
tax on certain unrepatriated earnings of non-U.S. subsidiaries and (3) required review of the future realizability of deferred tax
balances.
The Tax Reform Act also put in place new tax laws which include, but are not limited to, a (1) Base Erosion Anti-abuse Tax
(BEAT), which is a new minimum tax, (2) general elimination of U.S. federal income taxes on dividends from foreign subsidiaries,
(3) provision designed to tax currently global intangible low taxed income (GILTI), (4) provision that may limit the amount of
currently deductible interest expense, (5) repeal of certain domestic production incentives, (6) limitation on the deductibility of
certain executive compensation and (7) limitation on the utilization of foreign tax credits to reduce the U.S. income tax liability.
Shortly after the Tax Reform Act was enacted, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting
Implications of the Tax Cuts and Jobs Act (SAB 118) which provided guidance on accounting for the Tax Reform Act’s impact.
SAB 118 provided a measurement period, which in no case was to extend beyond one year from the Tax Reform Act enactment
date, during which a company acting in good faith could complete the accounting for the impacts of the Tax Reform Act under
ASC Topic 740. In accordance with SAB 118, the Company must reflect the income tax effects of the Tax Reform Act in the
reporting period in which the accounting under ASC 740 is complete. The Company recorded a provisional discrete net tax charge
of $53.5 million related to the Tax Reform Act during the year ended December 31, 2017. This net charge primarily consists of a
net charge of $24.5 million due to the remeasurement of deferred tax accounts to reflect the corporate rate reduction impact to the
Company's net deferred tax balances, a net charge of $22.8 million due to the future realizability of certain deferred tax balances
and a net charge for the transition tax of $5.0 million.
In accordance with the expiration of the one-year SAB 118 measurement period, the Company completed the assessment of the
income tax effects of the Tax Reform Act in the fourth quarter of 2018. In finalizing the net tax charge resulting from the Tax
Reform Act, the Company reversed $22.8 million of previous charges and recorded an additional $0.9 million of transition tax,
each of which is described more fully below.
During 2018, the U.S. Internal Revenue Service and Treasury Department released interpretative guidance and accordingly, the
Company reversed the $22.8 million of valuation allowance during the year ended December 31, 2018, primarily related to the
deductibility of interest limitation carryforward balances and certain executive compensation.
Also during 2018, U.S. Internal Revenue Service and Treasury Department released interpretive guidance and draft regulations
which resulted in the $0.9 million increase in the transition tax charge. The Company elected to pay the full liability for the deemed
repatriation of foreign earnings during the year ended December 31, 2018. On January 15, 2019, the U.S. Internal Revenue Service
and Treasury Department released final regulations related to the Transition Tax that clarifies the required treatment of certain
F-38
items. The Company is in the process of evaluating the impact of these regulations on its related tax positions but does not believe
such final regulations will materially impact the transition tax recorded.
The majority of the Company's earnings are considered permanently reinvested. The transition tax resulted in certain previously
untaxed non-U.S. earnings being included in the U.S. federal and state 2017 taxable income. As a result of the Tax Reform Act,
the Company analyzed its global working capital requirements and the potential tax liabilities that would be incurred if certain
non-U.S. subsidiaries made distributions, which include local country withholding tax and potential U.S. state taxation. Based on
this analysis, the Company made no changes to its permanent reinvestment assertions to reinvest the earnings in its non-U.S.
subsidiaries outside of the U.S. Thus, the Company has not recorded any incremental withholding or income tax liabilities on its
investment in its non-U.S. subsidiaries.
At December 31, a summary of the deferred tax accounts was as follows:
In millions
Deferred tax assets:
Inventory and accounts receivable
Fixed assets and intangibles
Postemployment and other benefit liabilities
Other reserves and accruals
Net operating losses, tax credits and other carryforwards
Other
Gross deferred tax assets
Less: deferred tax valuation allowances
Deferred tax assets net of valuation allowances
Deferred tax liabilities:
Fixed assets and intangibles
Postemployment and other benefit liabilities
Unremitted earnings of foreign subsidiaries
Other
Gross deferred tax liabilities
Net deferred tax assets (liabilities)
2018
2017
$
15.3
$
2.2
29.1
12.8
419.9
0.7
480.0
(357.1)
122.9
$
(104.9) $
(3.5)
(0.5)
(6.3)
(115.2)
7.7
$
$
$
$
17.0
2.6
29.9
12.5
309.5
4.2
375.7
(312.9)
62.8
(101.7)
(4.7)
(6.0)
(7.4)
(119.8)
(57.0)
At December 31, 2018, $0.5 million of deferred tax was recorded for certain undistributed earnings of non-U.S. subsidiaries.
Historically, no deferred taxes have been provided for any portion of the remaining undistributed earnings of the Company's
subsidiaries since these earnings have been, and will continue to be, permanently reinvested in these subsidiaries. For many reasons,
including the number of legal entities and jurisdictions involved, the complexity of the Company's legal entity structure, the
complexity of tax laws in the relevant jurisdictions and the impact of projections of income for future years to any calculations,
the Company believes it is not practicable to estimate, within any reasonable range, the amount of additional taxes which may be
payable upon the distribution of earnings.
At December 31, 2018, the Company had the following tax losses and tax credit carryforwards available to offset taxable income
in prior and future years:
In millions
U.S. Federal tax loss carryforwards
U.S. Federal and State credit carryforwards
U.S. State tax loss carryforwards
Non-U.S. tax loss carryforwards
Amount
20.4
22.0
25.5
1,286.6
$
$
Expiration
Period
2027-2037
2020-2027
2019-2037
2019-Unlimited
The U.S. state loss carryforwards were incurred in various jurisdictions. The non-U.S. loss carryforwards were incurred in various
jurisdictions, predominantly in China, Ireland, Italy, Luxembourg and the United Kingdom.
The Company evaluates its deferred income tax assets to determine if valuation allowances are required or should be adjusted.
U.S. GAAP requires that companies assess whether valuation allowances should be established against their deferred tax assets
F-39
based on consideration of all available evidence, both positive and negative, using a "more likely than not" standard. This assessment
considers the nature, frequency and amount of recent losses, the duration of statutory carryforward periods and tax planning
strategies. In making such judgments, significant weight is given to evidence that can be objectively verified.
Activity associated with the Company’s valuation allowance is as follows:
In millions
Beginning balance
Increase to valuation allowance
Decrease to valuation allowance
Foreign exchange translation
Accumulated other comprehensive income
Ending balance
2018
2017
2016
$
312.9
$
225.5
$
70.9
(25.0)
(1.7)
—
96.9
(11.9)
2.4
—
$
357.1
$
312.9
$
133.3
109.0
(13.9)
(3.3)
0.4
225.5
During the year ended December 31, 2018, the valuation allowance increased by $44.2 million. This increase is the result of
changes in jurisdictional profitability, country specific tax laws and changes in judgment and facts regarding the realizability of
deferred tax assets.
The Company has total unrecognized tax benefits of $42.0 million and $29.0 million as of December 31, 2018 and 2017, respectively.
The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $38.5 million as of December
31, 2018. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
In millions
Beginning balance
Additions based on tax positions related to the current year
Additions based on tax positions related to prior years
Reductions based on tax positions related to prior years
Reductions related to settlements with tax authorities
Reductions related to lapses of statute of limitations
Translation (gain)/loss
Ending balance
2018
2017
2016
$
29.0
$
32.0
$
9.5
8.2
(1.4)
(1.5)
(1.1)
(0.7)
42.0
$
6.4
1.6
(5.0)
(7.1)
(1.2)
2.3
$
29.0
$
23.8
9.1
7.1
(5.5)
(0.6)
(0.9)
(1.0)
32.0
The Company records interest and penalties associated with the uncertain tax positions within its provision for income taxes. The
Company had reserves associated with interest and penalties, net of tax, of $5.7 million and $4.9 million at December 31, 2018
and 2017, respectively. For the years ended December 31, 2018 and 2017, the Company recognized $0.8 million and $0.0 million
in net interest and penalties, net of tax, related to these uncertain tax positions.
The total amount of unrecognized tax benefits relating to the Company's tax positions is subject to change based on future events
including, but not limited to, the settlements of ongoing audits and/or the expiration of applicable statutes of limitations. Although
the outcomes and timing of such events are highly uncertain, it is reasonably possible that the balance of gross unrecognized tax
benefits, excluding interest and penalties, could potentially be reduced by up to approximately $11.5 million during the next 12
months.
The provision for income taxes involves a significant amount of management judgment regarding interpretation of relevant facts
and laws in the jurisdictions in which the Company operates. Future changes in applicable laws, projected levels of taxable income
and tax planning could change the effective tax rate and tax balances recorded by the Company. In addition, tax authorities
periodically review income tax returns filed by the Company and can raise issues regarding its filing positions, timing and amount
of income or deductions and the allocation of income among the jurisdictions in which the Company operates. A significant period
of time may elapse between the filing of an income tax return and the ultimate resolution of an issue raised by a tax authority with
respect to that return. In the normal course of business, the Company is subject to examination by taxing authorities throughout
the world, including such major jurisdictions as Australia, Canada, France, Germany, Italy, Mexico, the Netherlands and the U.S.
In general, the examination of the material tax returns of subsidiaries of the Company is complete for the years prior to 2003, with
certain matters being resolved through appeals and litigation.
The Company had indemnity receivables in the amount of $5.4 million and $5.7 million included in Other noncurrent assets at
December 31, 2018 and 2017, respectively, primarily related to additional competent authority relief filings.
F-40
NOTE 18 – EARNINGS PER SHARE (EPS)
Basic EPS is calculated by dividing Net earnings attributable to Allegion plc by the weighted-average number of ordinary shares
outstanding for the applicable period. Diluted EPS is calculated after adjusting the denominator of the basic EPS calculation for
the effect of all potentially dilutive ordinary shares, which in the Company’s case, includes shares issuable under share-based
compensation plans.
The following table summarizes the weighted-average number of ordinary shares outstanding for basic and diluted earnings per
share calculations:
In millions
Weighted-average number of basic shares
Shares issuable under incentive stock plans
Weighted-average number of diluted shares
2018
2017
2016
95.0
0.7
95.7
95.1
0.9
96.0
95.8
1.1
96.9
At December 31, 2018, 0.1 million stock options were excluded from the computation of weighted-average diluted shares
outstanding because the effect of including these shares would have been anti-dilutive.
NOTE 19 – NET REVENUES
Net revenues are recognized based on the satisfaction of performance obligations under the terms of a contract. A performance
obligation is a promise in a contract to transfer control of a distinct product or to provide a service, or a bundle of products or
services, to a customer, and is the unit of account under ASC 606. The Company has two principal revenue streams, tangible
product sales and services. Approximately 99% of consolidated Net revenues involve contracts with a single performance
obligation, which is the transfer of control of a product or bundle of products to a customer. Transfer of control typically occurs
when goods are shipped from the Company's facilities or at other predetermined control transfer points (for instance, destination
terms). Net revenues are measured as the amount of consideration expected to be received in exchange for transferring control of
the products and takes into account variable consideration, such as sales incentive programs including discounts and volume
rebates. The existence of these programs does not preclude revenue recognition but does require the Company's best estimate of
the variable consideration to be made based on expected activity, as these items are reserved for as a deduction to Net revenues
over time based on the Company's historical rates of providing these incentives and annual forecasted sales volumes. The Company
also offers a standard warranty with most product sales and the value of such warranty is included in the contractual price. The
corresponding cost of the warranty obligation is accrued as a liability (see Note 20).
The Company's remaining Net revenues involve services, including installation and consulting. Unlike the single performance
obligation to ship a product or bundle of products, the service revenue stream delays revenue recognition until the service
performance obligations are satisfied. In some instances, customer acceptance provisions are included in sales arrangements to
give the buyer the ability to ensure the service meets the criteria established in the order. In these instances, revenue recognition
is deferred until the performance obligations are satisfied, which could include acceptance terms specified in the arrangement
being fulfilled through customer acceptance or a demonstration that established criteria have been satisfied. During the year ended
December 31, 2018, no adjustments related to performance obligations satisfied in previous periods were recorded.
Upon adoption of ASC 606, the Company used the practical expedients to omit the disclosure of remaining performance obligations
for contracts with an original expected duration of one year or less and for contracts where the Company has the right to invoice
for performance completed to date. The transaction price is not adjusted for the effects of a significant financing component, as
the time period between control transfer of goods and services is less than one year. Sales, value-added and other similar taxes
collected by the Company are excluded from Net revenues. The Company has also elected to account for shipping and handling
activities that occur after control of the related goods transfers as fulfillment activities instead of performance obligations. These
activities are included in Cost of goods sold in the Consolidated Statements of Comprehensive Income. The Company’s payment
terms are generally consistent with the industries in which their businesses operate.
The following table shows the Company's Net revenues for the years ended December 31, based on the two principal revenue
streams, tangible product sales and services, disaggregated by business segment. Net revenues are shown by tangible product
sales and services, as contract terms, conditions and economic factors affecting the nature, amount, timing and uncertainty
around revenue recognition and cash flows are substantially similar within each of the two principal revenue streams:
F-41
In millions
Net revenues
Products
Services
Total Net revenues
In millions
Net revenues
Products
Services
Total Net revenues
In millions
Net revenues
Products
Services
Total Net revenues
Americas
EMEIA
Asia Pacific
Consolidated
2018
$
$
$
$
$
$
1,988.6
—
1,988.6
Americas
1,767.5
—
1,767.5
Americas
1,645.7
—
1,645.7
$
$
$
$
$
$
148.9
4.3
153.2
$
$
2,705.3
26.4
2,731.7
567.8
22.1
589.9
$
$
2017(a)
EMEIA
Asia Pacific
Consolidated
117.2
—
117.2
$
$
2,386.6
21.6
2,408.2
501.9
21.6
523.5
$
$
2016(a)
EMEIA
Asia Pacific
Consolidated
464.9
21.0
485.9
$
$
106.4
—
106.4
$
$
2,217.0
21.0
2,238.0
(a)
The Company adopted ASU 2014-09 and related updates as of January 1, 2018, on a modified retrospective basis,
and as such, amounts presented for years ended December 31, 2017 and 2016, are based on ASC 605.
As of December 31, 2018, neither the contract assets related to the Company's right to consideration for work completed but not
billed nor the contract liabilities associated with contract revenue are material. As a practical expedient, the Company recognizes
incremental costs of obtaining a contract, if any, as an expense when incurred if the amortization period of the asset would have
been one year or less. The Company does not have any costs to obtain or fulfill a contract that are capitalized under ASC 606.
NOTE 20 – COMMITMENTS AND CONTINGENCIES
The Company is involved in various litigation, claims and administrative proceedings, including those related to environmental
and product warranty matters. Amounts recorded for identified contingent liabilities are estimates, which are reviewed periodically
and adjusted to reflect additional information when it becomes available. Subject to the uncertainties inherent in estimating future
costs for contingent liabilities, except as expressly set forth in this note, management believes that any liability which may result
from these legal matters would not have a material adverse effect on the financial condition, results of operations, liquidity or cash
flows of the Company.
Environmental Matters
The Company is dedicated to an environmental program to reduce the utilization and generation of hazardous materials during
the manufacturing process and to remediate identified environmental concerns. As to the latter, the Company is currently engaged
in site investigations and remediation activities to address environmental cleanup from past operations at current and former
production facilities. The Company regularly evaluates its remediation programs and considers alternative remediation methods
that are in addition to, or in replacement of, those currently utilized by the Company based upon enhanced technology and regulatory
changes. Changes to the Company's remediation programs may result in increased expenses and increased environmental reserves.
The Company is sometimes a party to environmental lawsuits and claims and has received notices of potential violations of
environmental laws and regulations from the U.S. Environmental Protection Agency and similar state authorities. It has also been
identified as a potentially responsible party ("PRP") for cleanup costs associated with off-site waste disposal at federal Superfund
and state remediation sites. For all such sites, there are other PRPs and, in most instances, the Company’s involvement is minimal.
In estimating its liability, the Company has assumed it will not bear the entire cost of remediation of any site to the exclusion of
other PRPs who may be jointly and severally liable. The ability of other PRPs to participate has been taken into account, based
F-42
on the Company's understanding of the parties’ financial condition and probable contributions on a per site basis. Additional
lawsuits and claims involving environmental matters are likely to arise from time to time in the future.
The Company incurred $2.4 million, $3.2 million and $23.3 million of expenses during the years ended December 31, 2018, 2017
and 2016, respectively, for environmental remediation at sites presently or formerly owned or leased by the Company. In the
fourth-quarter of 2016, with the collaboration and approval of state regulators, the Company launched a proactive, alternative
approach to remediate two sites in the U.S. This approach allowed the Company to more aggressively address environmental
conditions at these sites and reduce the impact of potential changes in regulatory requirements. As a result, the Company recorded
a $15 million charge for environmental remediation in 2016. Environmental remediation costs are recorded in Costs of goods sold
within the Consolidated Statements of Comprehensive Income.
As of December 31, 2018 and 2017, the Company has recorded reserves for environmental matters of $22.6 million and $28.9
million, respectively. The total reserve at December 31, 2018 and 2017, included $6.3 million and $8.9 million, respectively,
related to remediation of sites previously disposed by the Company. Environmental reserves are classified as Accrued expenses
and other current liabilities or Other noncurrent liabilities within the Consolidated Balance Sheets based on their expected term.
The Company's total current environmental reserve at December 31, 2018 and 2017, was $5.6 million and $12.6 million,
respectively, and the remainder is classified as noncurrent. Given the evolving nature of environmental laws, regulations and
technology, the ultimate cost of future compliance is uncertain.
Warranty Liability
Standard product warranty accruals are recorded at the time of sale and are estimated based upon product warranty terms and
historical experience. The Company assesses the adequacy of its liabilities and will make adjustments as necessary based on known
or anticipated warranty claims, or as new information becomes available.
The changes in the standard product warranty liability for the year ended December 31, were as follows:
In millions
Balance at beginning of period
Reductions for payments
Accruals for warranties issued during the current period
Changes to accruals related to preexisting warranties
Acquisitions
Translation
Balance at end of period
2018
2017
2016
14.1
(7.9)
7.8
0.2
0.5
(0.2)
14.5
$
$
13.3
(7.8)
9.0
(0.8)
—
0.4
$
14.1
$
11.7
(6.5)
8.1
0.2
—
(0.2)
13.3
$
$
Standard product warranty liabilities are classified as Accrued expenses and other current liabilities within the Consolidated Balance
Sheets.
Other Commitments and Contingencies
Certain office and warehouse facilities, transportation vehicles and data processing equipment are leased by the Company. Total
rental expense was $42.5 million in 2018, $35.5 million in 2017 and $32.5 million in 2016. Minimum lease payments required
under non-cancellable operating leases with terms in excess of one year for the next five years are as follows: $30.3 million in
2019, $21.5 million in 2020, $14.1 million in 2021, $9.3 million in 2022 and $5.5 million in 2023.
NOTE 21 – BUSINESS SEGMENT INFORMATION
The Company classifies its business into the following three reportable segments based on industry and market focus: Americas,
EMEIA and Asia Pacific.
The Company largely evaluates performance based on Segment operating income and Segment operating margins. Segment
operating income is the measure of profit and loss that the Company’s chief operating decision maker uses to evaluate the financial
performance of the business and as the basis for resource allocation, performance reviews and compensation. For these reasons,
the Company believes that Segment operating income represents the most relevant measure of segment profit and loss. The
Company’s chief operating decision maker may exclude certain charges or gains, such as corporate charges and other special
charges, from Operating income to arrive at a Segment operating income that is a more meaningful measure of profit and loss
upon which to base operating decisions. The Company defines Segment operating margin as Segment operating income as a
percentage of the segment's Net revenues.
F-43
A summary of operations and balance sheet information by reportable segments as of and for the years ended December 31 were
as follows:
Dollar amounts in millions
Americas
Net revenues
Segment operating income
Segment operating margin
Depreciation and amortization
Capital expenditures
Total segment assets
EMEIA
Net revenues
Segment operating income
Segment operating margin
Depreciation and amortization
Capital expenditures
Total segment assets
Asia Pacific
Net revenues
Segment operating income
Segment operating margin
Depreciation and amortization
Capital expenditures
Total segment assets
Total Net revenues
Reconciliation to earnings before income taxes
Segment operating income from reportable segments
Unallocated corporate expense
Interest expense
Loss on divestitures
Other income, net
Total earnings before income taxes
Depreciation and amortization from reportable segments
Unallocated depreciation and amortization
Total depreciation and amortization
Capital expenditures from reportable segments
Corporate capital expenditures
Total capital expenditures
Assets from reportable segments
Unallocated assets(a)
Total assets
2018
2017
2016
1,988.6
544.5
27.4%
42.2
22.5
1,175.8
589.9
49.3
8.4%
32.0
16.2
1,052.1
153.2
6.9
4.5%
3.9
4.2
286.6
2,731.7
600.7
74.9
54.0
—
(3.4)
475.2
78.1
4.2
82.3
42.9
6.2
49.1
2,514.5
295.7
2,810.2
$
$
$
$
$
$
$
$
$
$
$
1,767.5
508.5
28.8%
26.4
26.1
872.4
1,645.7
456.7
27.8%
26.4
21.5
852.7
523.5
44.1
8.4%
28.6
17.1
1,027.7
117.2
9.5
8.1%
2.5
1.5
196.3
2,408.2
562.1
69.6
105.7
—
(8.9)
395.7
57.5
4.1
61.6
44.7
4.6
49.3
2,096.4
445.6
2,542.0
$
$
$
$
$
$
$
$
$
485.9
35.3
7.3%
27.6
13.6
886.2
106.4
6.1
5.7%
2.4
1.1
177.4
2,238.0
498.1
63.8
64.3
84.4
(9.4)
295.0
56.4
5.0
61.4
36.2
6.3
42.5
1,916.3
331.1
2,247.4
$
$
$
$
$
$
$
$
$
$
(a)
Unallocated assets consist of investments in unconsolidated affiliates, fixed assets, deferred income taxes and cash.
F-44
Net revenues by destination and product as well as long-lived assets by geographic area for the years ended December 31 were
as follows:
In millions
Net revenues
U.S.
Non-U.S.
Total
In millions
Net revenues
Mechanical products
All other
Total
2018
2017
2016
$
$
$
$
1,852.8
878.9
2,731.7
2018
2,155.2
576.5
2,731.7
$
$
$
$
$
$
1,645.6
762.6
2,408.2
2017
1,906.4
501.8
2,408.2
$
$
$
$
1,531.2
706.8
2,238.0
2016
1,793.1
444.9
2,238.0
2018
2017
245.1
448.1
693.2
$
$
131.0
440.1
571.1
In fiscal year 2018, 2017 and 2016, no customer exceeded 10% of consolidated Net revenues.
At December 31, long-lived assets by geographic area were as follows:
In millions
Long-lived assets
U.S.
Non-U.S.
Total
NOTE 22 – SUBSEQUENT EVENTS
On February 5, 2019, the Company's Board of Directors declared a quarterly dividend of $0.27 cents per ordinary share. The
dividend is payable March 29, 2019 to shareholders of record on March 15, 2019.
F-45
NOTE 23 – GUARANTOR FINANCIAL INFORMATION
Allegion US Hold Co is the issuer of the 3.200% and 3.550% Senior Notes. Allegion plc is the guarantor of the 3.200% and 3.550%
Senior Notes. The following condensed and consolidated financial information of Allegion plc, Allegion US Hold Co and the
other Allegion subsidiaries that are not guarantors (the "Other Subsidiaries") on a combined basis as of December 31, 2018 and
2017, and for the years ended December 31, 2018, 2017 and 2016, is being presented in order to meet the reporting requirements
under the Senior Notes indenture and Rule 3-10 of Regulation S-X. In accordance with Rule 3-10(d) of Regulation S-X, separate
financial statements for the Issuer, Allegion plc, whom is the guarantor, are not required to be filed with the SEC as the subsidiary
debt issuer is directly or indirectly 100% owned by the Parent, whom is the guarantor, and the guarantees are full and unconditional
and joint and several.
During the twelve months ended December 31, 2018, an entity previously presented in the "Other Subsidiaries" column merged
with Allegion US Hold Co. The entity merged with Allegion US Hold Co primarily includes intercompany investments and
related equity; there is no material statement of comprehensive income or cash flow activity related to this entity. As a result,
the following condensed and consolidated financial information presented below as of December 31, 2017 and 2016 has been
updated to reflect this new structure.
Condensed and Consolidated Statement of Comprehensive Income
For the year ended December 31, 2018
In millions
Net revenues
Cost of goods sold
Selling and administrative expenses
Operating income (loss)
Equity earnings (loss) in affiliates, net of tax
Interest expense
Intercompany interest and fees
Other income, net
Earnings (loss) before income taxes
Provision (benefit) for income taxes
Net earnings (loss)
Less: Net earnings attributable to noncontrolling
interests
Net earnings (loss) attributable to Allegion plc
Total comprehensive income (loss)
Less: Total comprehensive income attributable
to noncontrolling interests
Total comprehensive income (loss) attributable
to Allegion plc
Allegion
plc
Allegion
US
Holding
Other
Subsidiaries
2,731.7
1,558.4
641.1
532.2
—
0.8
(106.9)
(3.4)
641.7
68.0
573.7
— $
—
0.1
(0.1)
228.7
25.8
107.3
—
95.5
(28.2)
123.7
Consolidating
Adjustments
$
Total
— $2,731.7
— 1,558.4
647.5
—
525.8
—
(696.9)
—
54.0
—
—
—
(3.4)
—
(696.9)
475.2
39.8
—
(696.9)
435.4
$ — $
—
6.3
(6.3)
468.2
27.4
(0.4)
—
434.9
—
434.9
—
$ 434.9
—
$ 123.7
$ 374.0
$ 133.6
$
$
—
—
0.5
573.2
501.9
0.9
$
$
—
0.5
(696.9) $ 434.9
(634.6) $ 374.9
—
0.9
$ 374.0
$ 133.6
$
501.0
$
(634.6) $ 374.0
F-46
Condensed and Consolidated Statement of Comprehensive Income
For the year ended December 31, 2017
In millions
Net revenues
Cost of goods sold
Selling and administrative expenses
Operating income (loss)
Equity earnings (loss) in affiliates, net of tax
Interest expense
Intercompany interest and fees
Other income, net
Earnings (loss) before income taxes
Provision (benefit) for income taxes
Net earnings (loss)
Less: Net earnings attributable to noncontrolling
interests
Net earnings (loss) attributable to Allegion plc
$ 273.3
Total comprehensive income (loss)
Less: Total comprehensive income attributable
to noncontrolling interests
Total comprehensive income (loss) attributable
to Allegion plc
$ 391.1
—
Allegion
plc
Allegion
US
Holding
Other
Subsidiaries
Consolidating
Adjustments
Total
$ — $
— $
2,408.2
$
—
5.3
(5.3)
348.3
70.6
(0.9)
—
273.3
—
273.3
—
—
1,335.3
0.2
(0.2)
154.3
34.8
111.1
—
8.2
(30.4)
38.6
$
$
$
$
—
38.6
39.3
—
574.9
498.0
—
0.3
(110.2)
(8.9)
616.8
149.4
467.4
3.4
464.0
584.1
2.8
— $2,408.2
— 1,335.3
—
—
(502.6)
—
—
—
(502.6)
—
(502.6)
580.4
492.5
—
105.7
—
(8.9)
395.7
119.0
276.7
$
$
—
3.4
(502.6) $ 273.3
(620.6) $ 393.9
—
2.8
$ 391.1
$
39.3
$
581.3
$
(620.6) $ 391.1
F-47
Condensed and Consolidated Statement of Comprehensive Income
For the year ended December 31, 2016
In millions
Net revenues
Cost of goods sold
Selling and administrative expenses
Operating income (loss)
Equity earnings (loss) in affiliates, net of tax
Interest expense
Intercompany interest and fees
Other expense, net
Earnings (loss) before income taxes
Provision (benefit) for income taxes
Net earnings (loss)
Less: Net earnings attributable to noncontrolling
interests
Net earnings (loss) attributable to Allegion plc
$ 229.1
Total comprehensive income (loss)
Less: Total comprehensive income attributable
to noncontrolling interests
Total comprehensive income (loss) attributable
to Allegion plc
$ 197.0
—
Allegion
plc
Allegion
US
Holding
Other
Subsidiaries
Consolidating
Adjustments
Total
$ — $
— $
2,238.0
$
—
4.7
(4.7)
277.3
43.5
(0.5)
—
229.6
0.5
229.1
—
—
—
—
155.5
20.2
109.4
—
25.9
(49.9)
75.8
$
$
$
$
—
75.8
79.6
—
1,248.3
550.7
439.0
—
0.6
(108.9)
75.0
472.3
113.2
359.1
2.1
357.0
320.8
1.7
— $2,238.0
— 1,248.3
—
—
(432.8)
—
—
—
(432.8)
—
(432.8)
555.4
434.3
—
64.3
—
75.0
295.0
63.8
231.2
$
$
—
2.1
(432.8) $ 229.1
(398.7) $ 198.7
—
1.7
$ 197.0
$
79.6
$
319.1
$
(398.7) $ 197.0
F-48
Condensed and Consolidated Balance Sheet
December 31, 2018
In millions
Current assets:
Cash and cash equivalents
Restricted cash
Accounts and notes receivable, net
Inventories
Other current assets
Assets held for sale
Accounts and notes receivable affiliates
Total current assets
Investment in affiliates
Property, plant and equipment, net
Intangible assets, net
Notes receivable affiliates
Other noncurrent assets
Short-term borrowings and current
maturities of long-term debt
Accounts and note payable affiliates
Total current liabilities
Long-term debt
Notes payable affiliates
Other noncurrent liabilities
Total liabilities
Equity:
Allegion plc
Allegion
US Holding
Other
Subsidiaries
Consolidating
Adjustments
Total
$
4.2
$
1.0
$
278.6
$
— $
283.8
—
—
—
0.5
—
—
4.7
1,265.8
—
—
30.8
4.0
—
—
—
33.7
—
816.2
850.9
718.2
—
—
1,061.2
61.2
$
$
6.8
—
369.5
376.3
792.8
35.0
0.3
37.3
615.8
— 2,553.4
1.2
5.5
654.3
3,728.0
6.8
324.9
280.3
19.1
0.8
369.8
1,280.3
—
276.7
1,430.1
2,553.4
106.6
5,647.1
0.3
816.2
1,311.5
0.9
1,092.0
219.2
2,623.6
3,020.5
3.0
3,023.5
$
5,647.1
—
—
—
(18.3)
—
(1,186.0)
(1,204.3)
(1,984.0)
—
—
(3,645.4)
—
—
(1,186.0)
(1,204.3)
—
(3,645.4)
—
(4,849.7)
(1,984.0)
—
(1,984.0)
6.8
324.9
280.3
35.0
0.8
—
931.6
—
276.7
1,430.1
—
35.3
—
520.8
1,409.5
—
225.9
2,156.2
651.0
3.0
654.0
$ (6,833.7) $ 2,810.2
Total assets
$ 1,305.3
$ 2,691.5
Current liabilities:
Accounts payable and accruals
$
2.0
$
171.8
$ (6,833.7) $ 2,810.2
495.0
$
(18.3) $
485.5
Total shareholders’ equity (deficit)
Noncontrolling interests
Total equity (deficit)
651.0
—
651.0
Total liabilities and equity
$ 1,305.3
(1,036.5)
—
(1,036.5)
$ 2,691.5
F-49
Condensed and Consolidated Balance Sheet
December 31, 2017
In millions
Current assets:
Allegion plc
Allegion
US Holding
Other
Subsidiaries
Consolidating
Adjustments
Total
Cash and cash equivalents
$
0.7
$
0.3
$
465.2
$
— $
—
—
(44.1)
—
(735.3)
(779.4)
(1,320.4)
—
—
(3,964.8)
—
466.2
296.6
239.8
29.2
0.9
—
1,032.7
—
252.2
1,155.5
—
101.6
$ (6,064.6) $ 2,542.0
296.6
239.8
16.7
0.9
305.3
1,324.5
—
252.2
1,155.5
2,381.0
91.0
5,204.2
461.0
$
(44.1) $
425.8
—
430.2
891.2
1.0
1,583.8
228.0
2,704.0
2,496.3
3.9
2,500.2
$
5,204.2
—
(735.3)
(779.4)
—
(3,964.8)
—
(4,744.2)
(1,320.4)
—
(1,320.4)
35.0
—
460.8
1,442.3
—
233.4
2,136.5
401.6
3.9
405.5
$ (6,064.6) $ 2,542.0
Accounts and notes receivable, net
Inventories
Other current assets
Assets held for sale
Accounts and notes receivable affiliates
Total current assets
Investment in affiliates
Property, plant and equipment, net
Intangible assets, net
Notes receivable affiliates
Other noncurrent assets
—
—
0.3
—
—
1.0
1,079.6
—
—
3.5
5.1
—
—
56.3
—
430.0
486.6
240.8
—
—
1,580.3
5.5
Total assets
$ 1,089.2
$ 2,313.2
Current liabilities:
Accounts payable and accruals
$
1.9
$
Short-term borrowings and current
maturities of long-term debt
Accounts and note payable affiliates
Total current liabilities
Long-term debt
Notes payable affiliates
Other noncurrent liabilities
Total liabilities
Equity:
$
$
7.0
—
304.9
311.9
792.0
35.0
0.2
37.1
649.3
— 2,381.0
1.2
4.2
687.6
3,489.1
Total shareholders’ equity (deficit)
Noncontrolling interests
Total equity (deficit)
401.6
—
401.6
Total liabilities and equity
$ 1,089.2
(1,175.9)
—
(1,175.9)
$ 2,313.2
F-50
Condensed and Consolidated Statement of Cash Flows
For the year ended December 31, 2018
In millions
Net cash provided by (used in) operating
activities
Cash flows from investing activities:
Capital expenditures
Acquisition of and equity investments in
businesses, net of cash acquired
Purchase of investments
Other investing activities, net
Net cash (used in) provided by investing
activities
Allegion
plc
Allegion
US
Holding
Other
Subsidiaries
Consolidating
Adjustments
Total
$ 209.3
$ (59.5) $
631.7
$
(323.7) $ 457.8
—
—
(49.1)
—
(49.1)
— (248.5)
—
—
(1.0)
—
(127.6)
(14.3)
(4.3)
— (376.1)
(14.3)
—
(4.3)
1.0
— (249.5)
(195.3)
1.0
(443.8)
Cash flows from financing activities:
Debt repayments, net
Net inter-company proceeds (payments)
Dividends paid to shareholders
Dividends paid
Proceeds from shares issued under incentive
plans
Repurchase of ordinary shares
Other financing activities, net
Net cash (used in) provided by financing
activities
Effect of exchange rate changes on cash and cash
equivalents
Net increase (decrease) in cash, cash equivalents
and restricted cash
Cash, cash equivalents and restricted cash –
beginning of period
Cash, cash equivalents and restricted cash – end
of period
(35.0)
(27.3)
(79.4)
—
3.2
(67.3)
—
—
309.7
—
—
—
—
—
(1.1)
(282.4)
—
(323.7)
—
—
(2.8)
—
—
—
323.7
—
—
(1.0)
(36.1)
—
(79.4)
—
3.2
(67.3)
(3.8)
(205.8)
309.7
(610.0)
322.7
(183.4)
—
3.5
0.7
—
0.7
0.3
(6.2)
—
(6.2)
(179.8)
— (175.6)
465.2
—
466.2
$
4.2
$
1.0
$
285.4
$
— $ 290.6
F-51
Condensed and Consolidated Statement of Cash Flows
For the year ended December 31, 2017
In millions
Net cash provided by (used in) operating
activities
Cash flows from investing activities:
Capital expenditures
Acquisition of businesses, net of cash acquired
Proceeds from sale of property, plant and
equipment
Proceeds from sale of equity investment
Proceeds (payments) related to business
dispositions
Net cash used in investing activities
Cash flows from financing activities:
Debt repayments, net
Debt issuance costs
Net inter-company proceeds (payments)
Redemption premium
Dividends paid to shareholders
Dividends paid
Proceeds from shares issued under incentive
plans
Repurchase of ordinary shares
Other financing activities, net
Net cash (used in) provided by financing
activities
Allegion
plc
Allegion
US
Holding
Other
Subsidiaries
Consolidating
Adjustments
Total
$ 581.3
$
63.3
$
565.0
$
(862.4) $ 347.2
—
—
—
—
—
—
—
—
—
—
—
—
(488.5)
(4.0)
49.7
(24.6)
(60.9)
—
7.2
(60.0)
—
500.0
(5.5)
(546.3)
(8.6)
—
—
—
—
(2.8)
(49.3)
(20.8)
3.1
15.6
1.2
(50.2)
(1.4)
—
496.6
—
—
(862.4)
—
—
(1.8)
—
—
—
—
—
—
—
—
—
—
—
862.4
—
—
—
(49.3)
(20.8)
3.1
15.6
1.2
(50.2)
10.1
(9.5)
—
(33.2)
(60.9)
—
7.2
(60.0)
(4.6)
(581.1)
(63.2)
(369.0)
862.4
(150.9)
Effect of exchange rate changes on cash and cash
equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents - beginning of period
Cash and cash equivalents - end of period
$
—
0.2
0.5
0.7
$
—
0.1
0.2
0.3
7.7
153.5
311.7
—
—
—
7.7
153.8
312.4
$
465.2
$
— $ 466.2
F-52
Condensed and Consolidated Statement of Cash Flows
For the year ended December 31, 2016
In millions
Net cash (used in) provided by operating
activities
Allegion
plc
Allegion
US
Holding
Other
Subsidiaries
Consolidating
Adjustments
Total
$ (25.6) $ 156.6
$
542.2
$
(295.7) $ 377.5
Cash flows from investing activities:
Capital expenditures
Acquisition of businesses, net of cash acquired
Proceeds from sales and maturities of marketable
securities
Proceeds (payments) related to business
disposition
Other investing activities, net
Net cash used in investing activities
Cash flows from financing activities:
Debt repayments, net
Debt issuance costs
Net inter-company proceeds (payments)
Dividends paid to shareholders
Dividends paid to noncontrolling interests
Dividends paid
Acquisition of noncontrolling interest
Proceeds from shares issued under incentive
plans
Repurchase of ordinary shares
Net cash provided by (used in) financing
activities
Effect of exchange rate changes on cash and cash
equivalents
Net (decrease) increase in cash and cash
equivalents
Cash and cash equivalents - beginning of period
Cash and cash equivalents - end of period
$
—
—
—
—
—
—
—
—
—
—
—
—
(47.0)
(0.3)
195.4
(46.0)
—
—
—
5.8
(85.1)
—
—
(157.4)
—
—
—
—
—
—
(42.5)
(31.4)
14.1
(4.3)
0.1
(64.0)
(17.4)
—
(38.0)
—
(2.7)
(295.7)
(3.3)
—
—
—
—
—
—
—
—
—
—
—
—
—
295.7
—
—
—
(42.5)
(31.4)
14.1
(4.3)
0.1
(64.0)
(64.4)
(0.3)
—
(46.0)
(2.7)
—
(3.3)
5.8
(85.1)
22.8
(157.4)
(357.1)
295.7
(196.0)
—
—
(4.8)
(2.8)
3.3
0.5
(0.8)
1.0
116.3
195.4
—
—
—
(4.8)
112.7
199.7
$
0.2
$
311.7
$
— $ 312.4
F-53
ALLEGION PLC
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
(Amounts in millions)
Allowances for Doubtful Accounts:
Balance December 31, 2015
Additions charged to costs and expenses
Deductions*
Currency translation
Balance December 31, 2016
Additions charged to costs and expenses
Deductions*
Currency translation
Balance December 31, 2017
Additions charged to costs and expenses
Deductions*
Currency translation
Balance December 31, 2018
*
"Deductions" include accounts and advances written off, less recoveries.
SCHEDULE II
$
$
3.8
0.1
(1.1)
(0.1)
2.7
0.8
(0.9)
0.2
2.8
1.6
(1.0)
(0.1)
3.3
F-54
Corporate data
Shareholder information services
The company’s 2018 Annual Report on
Form 10-K as filed with the Securities
and Exchange Commission, and other
company information, is available through
Allegion’s website, www.allegion.com.
Securities analysts, portfolio managers
and representatives of institutional
investors seeking information about the
company should contact:
Mike Wagnes
Vice President, Treasurer
and Investor Relations
+1.317.810.3494
Annual general meeting
June 5, 2019, at 4:00 p.m., local time
Ritz-Carlton Montréal
1228 Sherbrooke St. West
Montréal, H3G 1H6, Canada
Stock exchange
NYSE Ticker Symbol: ALLE
The most recent certifications by the
company’s Chief Executive Officer and
Chief Financial Officer pursuant 302 of
the Sarbanes-Oxley Act of 2002 are filed
as exhibits to the company’s Form 10-K.
The company filed with the New York
Stock Exchange an annual CEO
certification as required by Section
303A.12(a) of the New York Stock
Exchange Listed Company Manual.
Transfer agent and registrar
Computershare Telephone Inquiries:
+1.877.660.6629
Website:
www.computershare.com/investor
Address shareholder inquiries
with standard priority:
Computershare, P.O. Box 30170
College Station, TX 77842-3170
Address shareholder inquiries
with overnight priority:
Computershare, 211 Quality Circle, Suite 210
College Station, TX 77845
About Allegion™
Allegion (NYSE: ALLE) is a global pioneer in seamless access, with
leading brands like CISA®, Interflex®, LCN®, Schlage®, SimonsVoss® and
Von Duprin®. Focusing on security around the door and adjacent areas,
Allegion secures people and assets with a range of solutions for homes,
businesses, schools and institutions. Allegion had $2.7 billion in revenue in
2018, and sells products in almost 130 countries.
For more, visit www.allegion.com.
allegion.com
linkedin.com/company/allegion-plc
@AllegionPlc
To get more information on our 2018 performance visit:
allegion.com/annualreport
© 2019 Allegion plc. All rights reserved. AD SYSTEMS, API, AUSTRAL LOCK, AXA, BRICARD, BRIO,
BRITON, CISA, DEXTER, ENGAGE, FALCON, FSH, GAINSBOROUGH, GLYNN-JOHNSON, INAFER,
INTERFLEX, ISONAS, ITO KILIT, IVES, KRYPTONITE, LCN, LEGGE, LOCKNETICS, MILRE, MOBILEKEY,
NORMBAU, OVERTUR, QMI, REPUBLIC, SCHLAGE, SEGUREX, SIMONSVOSS, SMARTINTEGO,
STEELCRAFT, TGP, TRELOCK, VON DUPRIN, and ZERO are the property of Allegion plc. or its
respective subsidiaries. All other brand names, product names or trademarks are the property
of their respective owners.