filings.toolsItem 16. FORM 10-K SUMMARY
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Item 16. FORM 10-K SUMMARY
Not applicable.
SIGNATURES
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.
ALLEGION PLC
(Registrant)
| By: | /s/ David D. Petratis | |
| David D. Petratis | ||
| Chief Executive Officer | ||
| Date: | February 18, 2020 |
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 | Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) | February 18, 2020 | ||
| (David D. Petratis) | ||||
| /s/ Patrick S. Shannon | Senior Vice President and Chief Financial Officer (Principal Financial Officer) | February 18, 2020 | ||
| (Patrick S. Shannon) | ||||
| /s/ Douglas P. Ranck | Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) | February 18, 2020 | ||
| (Douglas P. Ranck) | ||||
| /s/ Kirk S. Hachigian | Director | February 18, 2020 | ||
| (Kirk S. Hachigian) | ||||
| /s/ Steven C. Mizell | Director | February 18, 2020 | ||
| (Steven C. Mizell) | ||||
| /s/ Nicole Parent Haughey | Director | February 18, 2020 | ||
| (Nicole Parent Haughey) | ||||
| /s/ Dean Schaffer | Director | February 18, 2020 | ||
| (Dean Schaffer) | ||||
| /s/ Charles L. Szews | Director | February 18, 2020 | ||
| (Charles L. Szews) | ||||
| /s/ Martin E. Welch III | Director | February 18, 2020 | ||
| (Martin E. Welch III) | ||||
ALLEGION PLC
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders 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, 2019 and 2018, 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, 2019, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 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, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 and Note 11 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
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 appearing 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.
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 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.
F-2
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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessment - EMEIA and Asia Pacific Reporting Units
As described in Notes 2 and 5 to the consolidated financial statements, the Company’s consolidated goodwill balance was $873.3 million as of December 31, 2019, and the goodwill associated with the EMEIA and Asia Pacific reporting units was $285.5 million and $102.8 million, respectively. Goodwill is tested 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 is more likely than not less than the carrying amount of the reporting unit. 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 multiple of earnings (market approach), with each method being weighted in the calculation. The income approach relies on management’s estimates of revenue growth rates, margin assumptions, and discount rates to estimate future cash flows. The market approach requires the determination of an appropriate peer group, which is utilized to derive estimated fair values based on selected market multiples.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of EMEIA and Asia Pacific reporting units is a critical audit matter are there was significant judgment by management when developing the fair value measurements of the reporting units. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s cash flow projections and significant assumptions, including revenue growth rates, margin assumptions, discount rates, peer group determination, and market multiple selection. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained from these procedures.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Company’s reporting units. These procedures also included, among others, testing management’s process for developing the fair value estimates; evaluating the appropriateness of the discounted cash flow and market multiple models; testing the completeness, accuracy, and relevance of the underlying data used in the models; and evaluating the significant assumptions used by management, including the revenue growth rates, margin assumptions, discount rates, peer group determination, and market multiple selection. Evaluating management’s assumptions relating to revenue growth rates and margin assumptions involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting units, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Evaluating the Company’s peer group determinations included assessing the appropriateness of the identified peer companies. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow and market multiple models, and certain significant assumptions, including the discount rates, selected peer groups, and market multiples.
/s/ PricewaterhouseCoopers LLP
Indianapolis, Indiana
February 18, 2020
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, | 2019 | 2018 | 2017 | |||||||||
| Net revenues | $ | 2,854.0 | $ | 2,731.7 | $ | 2,408.2 | ||||||
| Cost of goods sold | 1,601.7 | 1,558.4 | 1,335.3 | |||||||||
| Selling and administrative expenses | 687.2 | 647.5 | 580.4 | |||||||||
| Operating income | 565.1 | 525.8 | 492.5 | |||||||||
| Interest expense | 56.0 | 54.0 | 105.7 | |||||||||
| Loss on divestitures | 30.1 | — | — | |||||||||
| Other expense (income), net | 3.8 | (3.4 | ) | (8.9 | ) | |||||||
| Earnings before income taxes | 475.2 | 475.2 | 395.7 | |||||||||
| Provision for income taxes | 73.1 | 39.8 | 119.0 | |||||||||
| Net earnings | 402.1 | 435.4 | 276.7 | |||||||||
| Less: Net earnings attributable to noncontrolling interests | 0.3 | 0.5 | 3.4 | |||||||||
| Net earnings attributable to Allegion plc | $ | 401.8 | $ | 434.9 | $ | 273.3 | ||||||
| Amounts attributable to Allegion plc ordinary shareholders: | ||||||||||||
| Earnings per share attributable to Allegion plc ordinary shareholders: | ||||||||||||
| Basic net earnings: | $ | 4.29 | $ | 4.58 | $ | 2.87 | ||||||
| Diluted net earnings: | $ | 4.26 | $ | 4.54 | $ | 2.85 | ||||||
| Net earnings | $ | 402.1 | $ | 435.4 | $ | 276.7 | ||||||
| Other comprehensive income (loss), net of tax | ||||||||||||
| Currency translation | 13.4 | (56.9 | ) | 97.5 | ||||||||
| Cash flow hedges: | ||||||||||||
| Unrealized net gains arising during period | — | 4.6 | 5.2 | |||||||||
| Net gains reclassified into earnings | (7.5 | ) | (2.3 | ) | (4.7 | ) | ||||||
| Tax benefit (expense) | 1.9 | (0.5 | ) | (0.1 | ) | |||||||
| Total cash flow hedges, net of tax | (5.6 | ) | 1.8 | 0.4 | ||||||||
| Pension and OPEB adjustments: | ||||||||||||
| Prior service (costs) gains and net actuarial (losses) gains, net | (8.3 | ) | (16.6 | ) | 25.5 | |||||||
| Amortization reclassified into earnings | 6.1 | 4.5 | 5.2 | |||||||||
| Settlements/curtailments reclassified into earnings | 2.3 | — | 0.1 | |||||||||
| Currency translation and other | (2.7 | ) | 5.1 | 0.7 | ||||||||
| Tax (expense) benefit | (0.4 | ) | 1.6 | (12.2 | ) | |||||||
| Total pension and OPEB adjustments, net of tax | (3.0 | ) | (5.4 | ) | 19.3 | |||||||
| Other comprehensive income (loss), net of tax | 4.8 | (60.5 | ) | 117.2 | ||||||||
| Total comprehensive income, net of tax | 406.9 | 374.9 | 393.9 | |||||||||
| Less: Total comprehensive income attributable to noncontrolling interests | 0.2 | 0.9 | 2.8 | |||||||||
| Total comprehensive income attributable to Allegion plc | $ | 406.7 | $ | 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, | 2019 | 2018 | ||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 355.3 | $ | 283.8 | ||||
| Restricted cash | 3.4 | 6.8 | ||||||
| Accounts and notes receivable, net | 329.8 | 324.9 | ||||||
| Inventories | 269.9 | 280.3 | ||||||
| Current tax receivable | 14.2 | 15.4 | ||||||
| Other current assets | 29.2 | 19.6 | ||||||
| Assets held for sale | — | 0.8 | ||||||
| Total current assets | 1,001.8 | 931.6 | ||||||
| Property, plant and equipment, net | 291.4 | 276.7 | ||||||
| Goodwill | 873.3 | 883.0 | ||||||
| Intangible assets, net | 510.9 | 547.1 | ||||||
| Deferred and noncurrent income taxes | 112.5 | 84.6 | ||||||
| Other noncurrent assets | 177.3 | 87.2 | ||||||
| Total assets | $ | 2,967.2 | $ | 2,810.2 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 221.0 | $ | 235.0 | ||||
| Accrued compensation and benefits | 98.4 | 95.3 | ||||||
| Accrued expenses and other current liabilities | 174.7 | 135.0 | ||||||
| Current tax payable | 12.8 | 20.2 | ||||||
| Short-term borrowings and current maturities of long-term debt | 0.1 | 35.3 | ||||||
| Total current liabilities | 507.0 | 520.8 | ||||||
| Long-term debt | 1,427.6 | 1,409.5 | ||||||
| Postemployment and other benefit liabilities | 87.7 | 81.2 | ||||||
| Deferred and noncurrent income taxes | 107.8 | 115.9 | ||||||
| Other noncurrent liabilities | 76.7 | 28.8 | ||||||
| Total liabilities | 2,206.8 | 2,156.2 | ||||||
| Equity: | ||||||||
| Allegion plc shareholders’ equity | ||||||||
| Ordinary shares, $0.01 par value (92,723,682 and 94,637,450 shares issued and outstanding at December 31, 2019 and 2018, respectively) | 0.9 | 0.9 | ||||||
| Capital in excess of par value | — | — | ||||||
| Retained earnings | 975.1 | 873.6 | ||||||
| Accumulated other comprehensive loss | (218.6 | ) | (223.5 | ) | ||||
| Total Allegion plc shareholders’ equity | 757.4 | 651.0 | ||||||
| Noncontrolling interests | 3.0 | 3.0 | ||||||
| Total equity | 760.4 | 654.0 | ||||||
| Total liabilities and equity | $ | 2,967.2 | $ | 2,810.2 |
See accompanying notes to consolidated financial statements.
F-5
| Allegion plc Consolidated Statements of Equity | |||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Allegion plc Shareholders' equity | |||||||||||||||||||||||||||
| In millions | Total equity | Ordinary Shares | Capital in excess of par value | Retained earnings | Accumulated other comprehensive loss | Noncontrolling interests | |||||||||||||||||||||
| Amount | Shares | ||||||||||||||||||||||||||
| Balance at December 31, 2016 | $ | 116.4 | $ | 1.0 | 95.3 | $ | — | $ | 376.6 | $ | (264.3 | ) | $ | 3.1 | |||||||||||||
| Cumulative effect of change in accounting principle | (5.0 | ) | — | — | — | (5.0 | ) | — | — | ||||||||||||||||||
| Net earnings | 276.7 | — | — | — | 273.3 | — | 3.4 | ||||||||||||||||||||
| Other comprehensive income (loss), net | 117.2 | — | — | — | — | 117.8 | (0.6 | ) | |||||||||||||||||||
| Shares issued under incentive stock plans | 7.2 | — | — | 7.2 | — | — | — | ||||||||||||||||||||
| Repurchase of ordinary shares | (60.0 | ) | — | (0.8 | ) | (13.9 | ) | (46.1 | ) | — | — | ||||||||||||||||
| Share-based compensation | 15.8 | — | 0.6 | 15.8 | — | — | — | ||||||||||||||||||||
| Dividends declared to noncontrolling interests | (1.8 | ) | — | — | — | — | — | (1.8 | ) | ||||||||||||||||||
| Cash dividends declared ($0.64 per share) | (60.9 | ) | — | — | — | (60.9 | ) | — | — | ||||||||||||||||||
| Other (see Note 14) | (0.1 | ) | — | — | — | 6.5 | (6.4 | ) | (0.2 | ) | |||||||||||||||||
| Balance at December 31, 2017 | 405.5 | 1.0 | 95.1 | 9.1 | 544.4 | (152.9 | ) | 3.9 | |||||||||||||||||||
| Net earnings | 435.4 | — | — | — | 434.9 | — | 0.5 | ||||||||||||||||||||
| Other comprehensive (loss) income, net | (60.5 | ) | — | — | — | — | (60.9 | ) | 0.4 | ||||||||||||||||||
| Shares issued under incentive stock plans | 3.2 | — | — | 3.2 | — | — | — | ||||||||||||||||||||
| Repurchase of ordinary shares | (67.3 | ) | (0.1 | ) | (0.9 | ) | (31.5 | ) | (35.7 | ) | — | — | |||||||||||||||
| Share-based compensation | 19.2 | — | 0.4 | 19.2 | — | — | — | ||||||||||||||||||||
| Dividends declared to noncontrolling interests | (1.8 | ) | — | — | — | — | — | (1.8 | ) | ||||||||||||||||||
| Cash dividends declared ($0.84 per share) | (79.7 | ) | — | — | — | (79.7 | ) | — | — | ||||||||||||||||||
| Reclassification due to adoption of ASU 2018-02 (see Note 14) | — | — | — | — | 9.7 | (9.7 | ) | — | |||||||||||||||||||
| Balance at December 31, 2018 | 654.0 | 0.9 | 94.6 | — | 873.6 | (223.5 | ) | 3.0 | |||||||||||||||||||
| Net earnings | 402.1 | — | — | — | 401.8 | — | 0.3 | ||||||||||||||||||||
| Other comprehensive income (loss), net | 4.8 | — | — | — | — | 4.9 | (0.1 | ) | |||||||||||||||||||
| Repurchase of ordinary shares | (226.0 | ) | — | (2.3 | ) | (26.5 | ) | (199.5 | ) | — | — | ||||||||||||||||
| Share-based compensation activity | 26.5 | — | 0.4 | 26.5 | — | — | — | ||||||||||||||||||||
| Dividends declared to noncontrolling interests | (0.2 | ) | — | — | — | — | — | (0.2 | ) | ||||||||||||||||||
| Cash dividends declared ($1.08 per share) | (100.9 | ) | — | — | — | (100.9 | ) | — | — | ||||||||||||||||||
| Other | 0.1 | — | — | — | 0.1 | — | — | ||||||||||||||||||||
| Balance at December 31, 2019 | $ | 760.4 | $ | 0.9 | 92.7 | $ | — | $ | 975.1 | $ | (218.6 | ) | $ | 3.0 |
See accompanying notes to consolidated financial statements.
F-6
| Allegion plc Consolidated Statements of Cash Flows In millions | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| For the years ended December 31, | 2019 | 2018 | 2017 | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net earnings | $ | 402.1 | $ | 435.4 | $ | 276.7 | ||||||
| Adjustments to arrive at net cash provided by operating activities: | ||||||||||||
| Debt extinguishment costs | 2.7 | — | 43.1 | |||||||||
| Depreciation and amortization | 83.0 | 86.2 | 66.9 | |||||||||
| Impairment of trade names | 5.9 | — | — | |||||||||
| Share-based compensation | 20.4 | 19.6 | 16.2 | |||||||||
| Loss on divestitures | 30.1 | — | — | |||||||||
| Discretionary pension plan contribution | — | — | (50.0 | ) | ||||||||
| Deferred income taxes | (30.2 | ) | (64.4 | ) | 24.9 | |||||||
| Other items | (3.6 | ) | (8.0 | ) | (2.4 | ) | ||||||
| Changes in other assets and liabilities | ||||||||||||
| Accounts and notes receivable | (6.0 | ) | (8.6 | ) | (22.7 | ) | ||||||
| Inventories | 5.4 | (19.7 | ) | (4.4 | ) | |||||||
| Other current and noncurrent assets | (15.0 | ) | (3.3 | ) | 3.5 | |||||||
| Accounts payable | (11.0 | ) | 33.9 | 0.4 | ||||||||
| Other current and noncurrent liabilities | 4.4 | (13.3 | ) | (5.0 | ) | |||||||
| Net cash provided by operating activities | 488.2 | 457.8 | 347.2 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Capital expenditures | (65.6 | ) | (49.1 | ) | (49.3 | ) | ||||||
| Acquisition of and equity investments in businesses, net of cash acquired | (7.6 | ) | (376.1 | ) | (20.8 | ) | ||||||
| Proceeds from sale of equity investment | — | — | 15.6 | |||||||||
| Proceeds related to business dispositions | 3.3 | — | 1.2 | |||||||||
| Purchase of investments | — | (14.3 | ) | — | ||||||||
| Other investing activities, net | (7.7 | ) | (4.3 | ) | 3.1 | |||||||
| Net cash used in investing activities | $ | (77.6 | ) | $ | (443.8 | ) | $ | (50.2 | ) | |||
| Cash flows from financing activities: | ||||||||||||
| Short-term borrowings, net | $ | (0.2 | ) | $ | (0.6 | ) | $ | (1.3 | ) | |||
| Proceeds from Revolving facility | — | 115.0 | 165.0 | |||||||||
| Repayments of Revolving facility | — | (115.0 | ) | (165.0 | ) | |||||||
| Issuance of term facility | — | — | 700.0 | |||||||||
| Settlement of second amended credit facility | — | — | (856.3 | ) | ||||||||
| Proceeds from issuance of senior notes | 400.0 | — | 800.0 | |||||||||
| Redemption of senior notes | — | — | (600.0 | ) | ||||||||
| Payments of long-term debt | (417.7 | ) | (35.5 | ) | (32.3 | ) | ||||||
| Net (repayments of) proceeds from debt | (17.9 | ) | (36.1 | ) | 10.1 | |||||||
| Debt issuance costs | (4.2 | ) | — | (9.5 | ) | |||||||
| Redemption premium | — | — | (33.2 | ) | ||||||||
| Dividends paid to ordinary shareholders | (100.6 | ) | (79.4 | ) | (60.9 | ) | ||||||
| Repurchase of ordinary shares | (226.0 | ) | (67.3 | ) | (60.0 | ) | ||||||
| Proceeds from shares issued under incentive plans | 6.5 | 3.2 | 7.2 | |||||||||
| Other financing activities, net | — | (3.8 | ) | (4.6 | ) | |||||||
| Net cash used in financing activities | (342.2 | ) | (183.4 | ) | (150.9 | ) | ||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (0.3 | ) | (6.2 | ) | 7.7 | |||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 68.1 | (175.6 | ) | 153.8 | ||||||||
| Cash, cash equivalents and restricted cash – beginning of period | 290.6 | 466.2 | 312.4 | |||||||||
| Cash, cash equivalents and restricted cash – end of period | $ | 358.7 | $ | 290.6 | $ | 466.2 |
See accompanying notes to consolidated financial statements.
F-7
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 and assets safe and secure in the places where they reside, work and thrive. Allegion creates peace of mind by pioneering safety and security with a vision of seamless access and a safer world. The Company offers an extensive and versatile portfolio of mechanical and electronic security products and solutions 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 controlled subsidiaries of the Company. A noncontrolling interest in a subsidiary is considered an ownership interest in a controlled subsidiary that is not attributable to the Company. The Company includes noncontrolling interests 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.
Equity method affiliates represent unconsolidated entities in which the Company demonstrates significant influence in the affiliate but does not have a controlling financial interest. 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.
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 and liabilities including goodwill and other intangible assets, product warranties, sales allowances, pension plan benefits, postretirement benefits other than pensions, taxes, lease related assets and liabilities, environmental costs and 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 a subsidiary’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 provides for an allowance for doubtful accounts and notes receivable, which represents the best estimate of probable loss inherent in the Company’s accounts and notes receivable portfolios. The Company's estimates are influenced by a continuing credit evaluation of customers’ financial condition, trade accounts and notes receivable aging and historical loss experience. The Company has reserved $5.6 million and $3.3 million for doubtful accounts and notes receivable as of December 31, 2019 and 2018, respectively.
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
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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 | 10 | to | 50 | years |
| Machinery and equipment | 2 | to | 12 | years |
| Software | 2 | to | 7 | years |
Repair and maintenance costs that do not extend the useful life of the asset are expensed 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 fully 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 asset.
Investments: The Company periodically invests in debt or equity securities of start-up companies and/or development stage technology or other companies without acquiring a controlling interest. The Company applies the equity method of accounting when the Company has the ability to exercise significant influence over the operating and financial decision making of the investee. Investments in equity method affiliates totaled $18.2 million and $16.0 million as of December 31, 2019 and 2018, respectively. Debt and equity investments that have readily determinable fair values in which the Company does not have significant influence are generally classified as available-for-sale securities and subsequently measured at fair value with any unrealized holding gains and losses being reported in Other comprehensive income. The Company's investments without readily determinable fair values are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer and are qualitatively assessed for impairment indicators at each reporting period. Investments in debt and equity securities not accounted for under the equity method of accounting totaled $18.1 million and $9.5 million as of December 31, 2019 and 2018, respectively. The Company's investments are principally recorded within Other noncurrent assets within the Consolidated Balance Sheets.
Leases: In accordance with ASC 842, the Company records a right-of-use ("ROU") asset and lease liability for substantially all leases for which it is a lessee. In determining if a contract represents a lease, consideration is given to all relevant facts and circumstances to assess whether or not the contract conveys the right to control the use of an identified asset, either explicit or implicit, for a period of time in exchange for consideration. Judgment and estimation is also required in determining the lease classification and the amount of the ROU asset and corresponding lease liability for each lease, which includes determining the appropriate lease term and an applicable discount rate. The Company assesses the specific terms and conditions of each lease to determine the appropriate classification as either an operating or finance lease. In determining the appropriate length of the lease term, both the minimum period over which lease payments are required plus any renewal options that are both within the Company's control to exercise and are reasonably certain of being exercised as of lease commencement are considered. The Company considers all relevant factors to determine if sufficient incentives exist as of lease commencement to conclude whether or not renewal is reasonably certain. When available, the rate implicit in the lease is utilized as the discount rate to determine the lease liability. If this rate is unavailable, the Company utilizes its incremental borrowing rate as the discount rate, which is the rate at inception of the lease that would hypothetically be incurred to borrow over a similar term the funds needed to purchase the leased asset. Refer to Note 11 for further details on the Company's lease accounting policies.
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 ASC 350, "Intangibles—Goodwill and Other,", 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 a reporting unit or indefinite-lived intangible asset is more likely than not less than the carrying amount of the asset.
Recoverability of goodwill is measured at the reporting unit level. The carrying amount of a 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 of the reporting unit. 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 multiple of earnings (market approach), with each method being weighted in the calculation.
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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 completed technologies, 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 | 20 | years |
| Trade names (finite-lived) | 25 | years |
| Completed technologies/patents | 10 | years |
| Other | 7 | 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 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, 2019 and 2018 was $103.0 million and $101.7 million, respectively.
Product Warranties: The Company offers a standard warranty with most product sales, and the value of such warranty is included in the contractual sales price. Standard product warranty accruals are recorded at the time of sale and are estimated based upon product warranty terms and historical experience. The Company regularly assesses the adequacy of its liabilities and makes adjustments as necessary based on known or anticipated warranty claims, or as new information becomes available. Refer to Note 21 for further details regarding 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. 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. The Company's remaining Net revenues involve services, including installation and consulting. See Note 20 for additional information regarding the Company's revenue recognition policies.
Sales returns and customer disputes involving a question of quantity or price are accounted for as variable consideration, and therefore, as a reduction to Net revenues and as a contra receivable. At December 31, 2019 and 2018, the Company had a customer claim accrual (contra receivable) of $36.5 million and $31.6 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, 2019 and 2018, the Company had a sales incentive accrual of $37.2 million and $33.9 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.
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 caused by past operations, which do not contribute to current or future revenues, are expensed. Liabilities for remediation costs
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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 21 for further details related to 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 costs are expensed when incurred. For the years ended December 31, 2019, 2018 and 2017, expenses related to research and development activities amounted to approximately $54.7 million, $54.4 million and $48.3 million, respectively, and consist of salaries, wages, benefits, building costs and other overhead expenses.
Employee Benefit Plans: The Company provides a range of benefits, including pensions, postretirement and postemployment benefits to eligible current and former employees. Determining the costs 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 estimates and are generally recorded to 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 12 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 liabilities, product warranties, 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 21 for further details related to 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 variable 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 income (loss), net of tax, and in Net earnings at the time earnings are affected by the hedged transaction. For undesignated 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 regarding derivative instruments.
Recent Accounting Pronouncements
Recently Adopted 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 of a twelve-month term or greater, these arrangements are to be recognized as assets and liabilities on the balance sheet of the lessee. Under ASU 2016-02, an ROU asset and lease liability are recorded for all leases, whether operating or financing, while the statement of comprehensive income reflects 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 provided narrow amendments to clarify how to apply certain aspects of ASU 2016-02, and ASU 2018-11, "Leases (Topic 842): Targeted Improvements", which provided 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. In March 2019, the FASB issued ASU 2019-01, "Leases (Topic 842): Codification Improvements", which exempted entities from having to provide certain interim disclosures in the fiscal year of adoption of ASU 2016-02 and its related standards. These ASUs (collectively “ASC 842”) were 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. Comparative period financial information has not been adjusted for the effects of adopting ASC 842 and no cumulative-effect adjustment was required to the opening balance of Retained earnings on the adoption date.
The Company has also made updates to its systems, policies and internal controls over financial reporting related to the adoption of ASC 842 on January 1, 2019. See Note 11 for further information and expanded disclosure related to the Company's leases.
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Recently Issued Accounting Pronouncements:
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 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted ASU 2016-13 and its related updates on January 1, 2020, and the adoption did not have a material impact to the Consolidated Financial Statements, although the Company has made updates to its policies and internal controls over financial reporting as a result of adoption.
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 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 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted ASU 2018-15 on January 1, 2020, and does not believe the adoption will have a material impact to the Consolidated Financial Statements.
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." The new guidance is intended to simplify the accounting for income taxes by removing certain exceptions and by updating accounting requirements around franchise taxes, goodwill recognized for tax purposes, the allocation of current and deferred tax expense among legal entities, among other minor changes. The ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company is assessing what impact ASU 2019-12 will have on the Consolidated Financial Statements.
In January 2020, the FASB issued ASU 2020-01, "Investments—Equity Securities (Topic321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815." The amendments in ASU 2020-01 clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting. The amendments also clarify the accounting for certain forward contracts and purchased options accounted for under Topic 815. The ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company is assessing what impact ASU 2020-01 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 Inventories were as follows:
| In millions | 2019 | 2018 | ||||||
| Raw materials | $ | 116.8 | $ | 117.2 | ||||
| Work-in-process | 33.1 | 34.4 | ||||||
| Finished goods | 120.0 | 128.7 | ||||||
| Total | $ | 269.9 | $ | 280.3 |
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NOTE 4 – PROPERTY, PLANT AND EQUIPMENT
At December 31, the major classes of Property, plant and equipment were as follows:
| In millions | 2019 | 2018 | ||||||
| Land | $ | 16.6 | $ | 15.6 | ||||
| Buildings | 154.8 | 148.4 | ||||||
| Machinery and equipment | 417.1 | 407.7 | ||||||
| Software | 155.0 | 146.0 | ||||||
| Construction in progress | 42.5 | 31.1 | ||||||
| 786.0 | 748.8 | |||||||
| Accumulated depreciation | (494.6 | ) | (472.1 | ) | ||||
| Property, plant and equipment, net | $ | 291.4 | $ | 276.7 |
Depreciation expense for the years ended December 31, 2019, 2018 and 2017 was $47.1 million, $46.2 million and $40.0 million, which includes amounts for software amortization of $14.5 million, $15.4 million and $14.3 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 were as follows:
| In millions | Americas | EMEIA | Asia Pacific | Total | ||||||||||||
| December 31, 2017 (gross) | $ | 375.2 | $ | 769.8 | $ | 101.7 | $ | 1,246.7 | ||||||||
| Accumulated impairment | — | (478.6 | ) | (6.9 | ) | (485.5 | ) | |||||||||
| December 31, 2017 (net) | 375.2 | 291.2 | 94.8 | 761.2 | ||||||||||||
| Acquisitions | 111.1 | 10.2 | 20.5 | 141.8 | ||||||||||||
| Currency translation | (0.2 | ) | (12.9 | ) | (6.9 | ) | (20.0 | ) | ||||||||
| December 31, 2018 (net) | 486.1 | 288.5 | 108.4 | 883.0 | ||||||||||||
| Acquisitions and adjustments (a) | (1.3 | ) | 2.7 | (4.4 | ) | (3.0 | ) | |||||||||
| Currency translation | 0.2 | (5.7 | ) | (1.2 | ) | (6.7 | ) | |||||||||
| December 31, 2019 (net) | $ | 485.0 | $ | 285.5 | $ | 102.8 | $ | 873.3 |
| (a) | In 2019, the Company made reclassifications to goodwill across all segments related to a change in how revenue is managed for a specific immaterial product line where revenue previously managed in the Asia Pacific segment is now being managed in the Americas and EMEIA segments. |
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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:
| 2019 | 2018 | |||||||||||||||||||||||
| In millions | Gross carrying amount | Accumulated amortization | Net carrying amount | Gross carrying amount | Accumulated amortization | Net carrying amount | ||||||||||||||||||
| Completed technologies/patents | $ | 59.3 | $ | (19.2 | ) | $ | 40.1 | $ | 59.4 | $ | (14.2 | ) | $ | 45.2 | ||||||||||
| Customer relationships | 412.7 | (107.5 | ) | 305.2 | 419.3 | (88.5 | ) | 330.8 | ||||||||||||||||
| Trade names (finite-lived) | 82.5 | (49.4 | ) | 33.1 | 84.9 | (47.4 | ) | 37.5 | ||||||||||||||||
| Other | 17.6 | (8.1 | ) | 9.5 | 9.5 | (6.5 | ) | 3.0 | ||||||||||||||||
| Total finite-lived intangible assets | 572.1 | $ | (184.2 | ) | 387.9 | 573.1 | $ | (156.6 | ) | 416.5 | ||||||||||||||
| Trade names (indefinite-lived) | 123.0 | 123.0 | 130.6 | 130.6 | ||||||||||||||||||||
| Total | $ | 695.1 | $ | 510.9 | $ | 703.7 | $ | 547.1 |
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 the years ended 2019, 2018 and 2017, was $31.2 million, $36.3 million and $22.1 million, respectively. Intangible asset amortization expense for 2018 included the amortization of approximately $6 million of backlog revenue that was acquired during an acquisition in 2018. Future estimated amortization expense on existing intangible assets in each of the next five years amounts to approximately $28.8 million for 2020, $28.8 million for 2021, $28.7 million for 2022, $28.6 million for 2023 and $28.3 million for 2024.
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. During the 2019 impairment testing, it was determined that two of the Company's indefinite-lived trade names were impaired. As such, impairment charges totaling $5.9 million were recorded in the fourth quarter of 2019 and are included within Selling and administrative expenses within the Consolidated Statement of Comprehensive Income. In 2018 and 2017, the Company determined the fair value of all indefinite-lived intangible assets exceeded their respective carrying values, and accordingly, no impairment charges were recorded in either of these years.
NOTE 7 - ACQUISITIONS
In 2018, the Company completed six acquisitions:
| Business | Date | |
| Technical Glass Products, Inc. ("TGP") | January 2018 | |
| Hammond Enterprises, Inc. ("Hammond") | January 2018 | |
| Qatar Metal Industries LLC ("QMI") | February 2018 | |
| AD Systems, Inc. ("AD Systems") | March 2018 | |
| Gainsborough Hardware and API Locksmiths ("Door and Access Systems") | July 2018 | |
| ISONAS Security Systems, Inc. ("ISONAS") | July 2018 |
Total cash paid for these acquisitions was approximately $373 million (net of cash acquired), including $4.6 million during the year ended December 31, 2019. These acquisitions were accounted for as business combinations. The allocation of the aggregate purchase price to assets acquired and liabilities assumed is complete as of December 31, 2019, and was as follows:
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| In millions | |||
| Accounts receivable, net | $ | 28.9 | |
| Inventories | 28.5 | ||
| Other current assets | 1.3 | ||
| Property, plant and equipment, net | 27.6 | ||
| Goodwill | 139.8 | ||
| Intangible assets, net | 204.3 | ||
| Other noncurrent assets | 2.0 | ||
| Accounts payable | (11.1 | ) | |
| Accrued expenses and other current liabilities | (35.7 | ) | |
| Other noncurrent liabilities | (11.1 | ) | |
| Total consideration | $ | 374.5 |
Intangible assets acquired include 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.
The following unaudited pro forma financial information for the year ended December 31, 2018 reflects the consolidated results of operations of the Company as if these acquisitions had taken place on January 1, 2017:
| In millions | 2018 | |||
| Net revenues | $ | 2,774.2 | ||
| Net earnings attributable to Allegion plc | $ | 446.8 |
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 removal of backlog revenue acquired as well as acquisition and integration expenses incurred in 2018 related to these acquisitions, partially offset by incremental amortization of intangible assets.
Additionally, in January 2017, the Company acquired Republic Doors & Frames, LLC ("Republic") through one of its subsidiaries.
During the years ended December 31, 2019, 2018 and 2017, the Company incurred $2.0 million, $10.0 million and $4.7 million, respectively, of acquisition and integration related expenses, which are included in Selling and administrative expenses in the Consolidated Statement of Comprehensive Income.
NOTE 8 - DIVESTITURES
In June 2019, the Company closed its production facility in Turkey and subsequently sold certain of the production assets thereof, which collectively met the definition of a business under ASC 805, "Business Combinations" (see Note 16 for further information around the Company's restructuring activities). Total proceeds from the sale were approximately $4.1 million. The Company recorded a loss on divestiture of $24.2 million ($25.5 million, net of tax), primarily driven by $25.0 million of cumulative currency translation adjustments previously deferred in equity that were reclassified to earnings upon sale. The loss is included as a component of Loss on divestitures in the Consolidated Statement of Comprehensive Income.
Additionally, during the fourth quarter of 2019, the Company sold its interests in its Colombia operations for an immaterial amount. As a result of the sale, the Company recorded a net loss on divestiture of $5.9 million, of which $1.2 million relates to cumulative
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currency translation adjustments previously deferred in equity that were reclassified to earnings upon sale. The net loss is included as a component of Loss on divestitures in the Consolidated Statement of Comprehensive Income.
Neither of these divestitures is expected to have a material impact on the Company's future results of operations or cash flows.
NOTE 9 – DEBT AND CREDIT FACILITIES
At December 31, long-term debt and other borrowings consisted of the following:
| In millions | 2019 | 2018 | |||||
| Term Facility | $ | 238.8 | $ | 656.3 | |||
| Revolving Facility | — | — | |||||
| 3.200% Senior Notes due 2024 | 400.0 | 400.0 | |||||
| 3.550% Senior Notes due 2027 | 400.0 | 400.0 | |||||
| 3.500% Senior Notes due 2029 | 400.0 | — | |||||
| Other debt | 0.7 | 1.2 | |||||
| Total borrowings outstanding | 1,439.5 | 1,457.5 | |||||
| Less discounts and debt issuance costs, net | (11.8 | ) | (12.7 | ) | |||
| Total debt | 1,427.7 | 1,444.8 | |||||
| Less current portion of long-term debt | 0.1 | 35.3 | |||||
| Total long-term debt | $ | 1,427.6 | $ | 1,409.5 |
Unsecured Credit Facilities
As of December 31, 2019, the Company has an unsecured Credit Agreement in place, consisting of a $700.0 million term loan facility (the “Term Facility”), of which $238.8 million is outstanding at December 31, 2019, 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.
At inception, the Term Facility was scheduled to amortize 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. Principal amounts repaid on the Term Facility may not be reborrowed. During the year ended December 31, 2019, the Company made a $400.0 million principal payment to partially pay down the outstanding Term Facility balance, utilizing all of the net proceeds from the issuance of the 3.500% Senior Notes due 2029 (see below), plus cash on hand. As a result of this payment, the Company has satisfied its obligation to make quarterly installments on the Term Facility up to the maturity date, with the remaining outstanding balance due on September 12, 2022. In conjunction with this principal pay down, the Company recognized a $2.7 million charge related to the write-off of previously deferred financing costs related to the Term Facility, which is included in Interest expense in the Consolidated Statement of Comprehensive Income for the year ended December 31, 2019. The Company repaid a total of $417.5 million of principal on its Term Facility during the year ended December 31, 2019.
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, 2019, there were no borrowings outstanding on the Revolving Facility and the Company had $16.3 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, 2019, the outstanding borrowings under the Term Facility accrue interest at LIBOR plus a margin of 1.250%. To manage the exposure to fluctuations in LIBOR rates, the Company has interest rate swaps to fix the interest rate for $200.0 million of the outstanding borrowings as of December 31, 2019. These interest rate swaps will expire in September 2020 (see Note 10). At December 31, 2019, the weighted-average interest rate for borrowings was 2.68% under the Term Facility (including the effect of interest rate swaps).
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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, 2019, the Company was in compliance with all covenants.
Senior Notes
As of December 31, 2019, 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”), both of which were issued on October 2, 2017. The 3.200% Senior Notes and the 3.550% Senior 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. The 3.200% Senior Notes and the 3.550% Senior 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 3.200% Senior Notes and the 3.550% Senior 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.
During the year ended December 31, 2019, Allegion plc issued $400.0 million aggregate principal amount of its 3.500% Senior Notes due 2029 (the “3.500% Senior Notes”). The 3.500% Senior Notes require semi-annual interest payments on April 1 and October 1, beginning April 1, 2020, and will mature on October 1, 2029. Net proceeds from the issuance of the 3.500% Senior Notes, along with cash on hand, were utilized to make the $400.0 million principal payment on the Term Facility discussed above. The Company incurred and deferred $4.2 million of discounts and financing costs associated with the 3.500% Senior Notes, which will be amortized to Interest expense over the 10-year term of the 3.500% Senior Notes. The 3.500% Senior Notes are senior unsecured obligations of Allegion plc, are guaranteed by Allegion US Hold Co and rank equally with all of the Company's existing and future senior unsecured indebtedness.
2017 Refinancing
The Company entered into its unsecured Credit Agreement in September 2017, using the proceeds from the Term Facility along with initial borrowings under the Revolving Facility to repay in full the outstanding borrowings under the Company's previously outstanding secured credit facility. Additionally, in October 2017, the Company used the net proceeds from the 3.200% Senior Notes and the 3.550% Senior Notes to redeem in full $600.0 million aggregate of previously outstanding senior notes. Related to these activities, the Company recorded a $33.2 million charge for the redemption premiums associated with the previously outstanding senior notes, 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.
Future Repayments
Scheduled principal repayments on indebtedness as of December 31, 2019 were as follows:
| In millions | |||
| 2020 | $ | 0.1 | |
| 2021 | 0.1 | ||
| 2022 | 238.9 | ||
| 2023 | 0.1 | ||
| 2024 | 400.3 | ||
| Thereafter | 800.0 | ||
| Total | $ | 1,439.5 |
Cash paid for interest for the years ended December 31, 2019, 2018 and 2017 was $48.8 million, $52.0 million and $58.4 million, respectively.
F-17
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.
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 Derivatives
The gross notional amount of the Company’s currency derivatives was $146.4 million and $81.8 million at December 31, 2019 and 2018, respectively. At December 31, 2019 and 2018, a loss of $0.1 million and a gain of $1.8 million, net of tax, respectively, 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 loss of approximately $0.1 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, 2019, 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 related to the Company's variable rate Term Facility. The notional amount of these interest rate swaps was $200.0 million and $250.0 million at December 31, 2019 and 2018, respectively. During the year ended December 31, 2019, the Company settled an interest rate swap with a $50.0 million notional amount in conjunction with the principal pay down on the outstanding Term Facility (see Note 9). The remaining interest rate swaps expire in September 2020 and meet 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, 2019 and 2018, gains of $0.5 million and $4.3 million, net of tax, respectively, were recorded in Accumulated other comprehensive loss related to these interest rate swaps. The amount expected to be reclassified into Net earnings over the next twelve months is a gain of approximately $0.5 million. The actual amounts that will be reclassified to Net earnings may vary from this amount as a result of changes in market conditions.
F-18
The fair values of derivative instruments included within the Consolidated Balance Sheets as of December 31 were as follows:
| Designated as hedge instruments | Not designated as hedge instruments | ||||||||||||||||
| In millions | Balance Sheet classification | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Asset derivatives | |||||||||||||||||
| Currency derivatives | Other current assets | $ | — | $ | 1.7 | $ | 0.4 | $ | 0.4 | ||||||||
| Interest rate swaps | Other current assets | 0.7 | — | — | — | ||||||||||||
| Interest rate swaps | Other noncurrent assets | — | 5.7 | — | — | ||||||||||||
| Total asset derivatives | 0.7 | 7.4 | 0.4 | 0.4 | |||||||||||||
| Liability derivatives | |||||||||||||||||
| Currency derivatives | Accrued expenses and other current liabilities | 0.8 | — | 0.7 | 0.1 | ||||||||||||
| Total liability derivatives | $ | 0.8 | $ | — | $ | 0.7 | $ | 0.1 |
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:
| Amount of gain (loss) recognized in Accumulated other comprehensive loss | Location of gain (loss) recognized in Net earnings | Amount of gain (loss) reclassified from Accumulated other comprehensive loss and recognized into Net earnings | ||||||||||||||||||||||||
| In millions | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||||
| Currency derivatives | $ | 1.9 | $ | 4.3 | $ | 4.0 | Cost of goods sold | $ | 4.4 | $ | 2.3 | $ | 4.7 | |||||||||||||
| Interest rate swaps | (1.9 | ) | 2.5 | 1.2 | Interest expense | 3.1 | 2.2 | (0.3 | ) | |||||||||||||||||
| Total | $ | — | $ | 6.8 | $ | 5.2 | $ | 7.5 | $ | 4.5 | $ | 4.4 |
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 expense (income), net in the Consolidated Statements of Comprehensive Income.
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 - LEASES
The Company records a right-of-use ("ROU") asset and lease liability for substantially all leases for which it is a lessee, in accordance with ASC 842. At inception of a contract, the Company considers all relevant facts and circumstances to assess whether or not the contract represents a lease by determining whether or not the contract conveys the right to control the use of an identified asset, either explicit or implicit, for a period of time in exchange for consideration. 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. Total rental expense for the twelve months ended December 31, 2019, was $43.2 million and is classified within Cost of goods sold and Selling and administrative expenses within the Consolidated Statement of Comprehensive Income. Rental expense related to short-term leases, variable lease payments or other leases or lease components not included within the ROU asset or lease liability totaled $8.1 million for the twelve months ended December 31, 2019. No material lease costs have been capitalized on the Consolidated Balance Sheet as of December 31, 2019. Total rental expense for the twelve months ended December 31, 2018 and 2017, as determined in accordance with the previous lease guidance, ASC 840, was $42.5 million and $35.5 million, respectively, and is classified within Cost of goods sold and Selling and administrative expenses within the Consolidated Statements of Comprehensive Income.
Upon adoption of ASC 842, the Company utilized the following elections and practical expedients:
F-19
| • | The Company 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 had a term of less than 12 months and did not include a purchase option that was reasonably certain to be exercised, the Company elected not to apply ASC 842 recognition requirements. Nonetheless, the Company will include leases of less than 12 months within the updated footnote disclosures where applicable. |
| • | If the Company enters into a large number of leases in the same month with the same terms and conditions, these will be accounted for as a group (portfolio), assuming the lease model under this approach will not materially differ from applying ASC 842 to each individual lease. |
| • | The Company elected to not reassess arrangements entered into prior than January 1, 2019, in terms of whether an arrangement is or contained a lease, the lease classification applied or to separate initial direct costs. |
| • | The Company elected to use hindsight in determining the lease term for lease contracts that have historically been renewed or amended. |
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 hypothetically 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 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. The Company assesses all relevant factors to determine if sufficient incentives exist as of lease commencement to conclude whether or not 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 for debt instruments with terms approximating the weighted-average term for its real estate leases to discount the future lease payments over the lease term to present value. The Company does incur variable lease payments for certain of its real estate leases, such as reimbursements of property taxes, maintenance and other operational costs to the lessor. In general, these variable lease payments are not captured as part of the lease liability or ROU asset, but rather are expensed as incurred.
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, and 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 applies similar estimates and judgments to its equipment lease portfolio in determining the lease payments and lease term as it does to its real estate lease portfolio. 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 for debt instruments with terms approximating the weighted-average term for its equipment leases to discount the future lease payments over the lease term to present value. The Company does not typically incur variable lease payments related to its equipment leases.
The amounts included within the Consolidated Balance Sheet related to the Company's ROU asset and lease liability at December 31, 2019, were as follows:
| In millions | Balance Sheet classification | Real estate | Equipment | Total | |||||||||
| ROU asset | Other noncurrent assets | $ | 57.5 | $ | 23.9 | $ | 81.4 | ||||||
| Lease liability - current | Accrued expenses and other current liabilities | 15.4 | 10.4 | 25.8 | |||||||||
| Lease liability - noncurrent | Other noncurrent liabilities | 42.1 | 13.5 | 55.6 | |||||||||
| Other information: | |||||||||||||
| Weighted-average remaining term (years) | 6.5 | 2.8 | |||||||||||
| Weighted-average discount rate | 4.5 | % | 3.8 | % |
F-20
The following table summarizes additional information related to the Company's leases for the year ended December 31, 2019:
| In millions | Real estate | Equipment | Total | |||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | 19.2 | $ | 15.9 | $ | 35.1 | ||||||
| ROU assets obtained in exchange for new lease liabilities | 14.7 | 16.0 | 30.7 |
The Company frequently enters into both real estate and equipment leases in the normal course of business. While there have been lease agreements entered into that have not yet commenced as of December 31, 2019, none of these leases provide new rights or obligations to the Company that are material individually or in the aggregate.
Future Repayments
Future minimum rental commitments for the subsequent five years under non-cancellable operating leases with terms in excess of one year as of December 31, 2018 were as follows:
| In millions | Total | |||
| 2019 | $ | 30.3 | ||
| 2020 | 21.5 | |||
| 2021 | 14.1 | |||
| 2022 | 9.3 | |||
| 2023 | 5.5 |
Scheduled minimum lease payments required under non-cancellable operating leases for both the real estate and equipment lease portfolios for the next five years and thereafter as of December 31, 2019, were as follows:
| In millions | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | |||||||||||||||||||||
| Real estate leases | $ | 17.6 | $ | 14.3 | $ | 10.3 | $ | 6.0 | $ | 3.5 | $ | 15.4 | $ | 67.1 | ||||||||||||||
| Equipment leases | 11.1 | 7.5 | 4.0 | 1.7 | 0.8 | — | 25.1 | |||||||||||||||||||||
| Total | $ | 28.7 | $ | 21.8 | $ | 14.3 | $ | 7.7 | $ | 4.3 | $ | 15.4 | $ | 92.2 |
The difference between the total undiscounted minimum lease payments and the combined current and noncurrent lease liabilities as of December 31, 2019, is due to imputed interest of $10.8 million.
NOTE 12 – 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-21
The following table details information regarding the Company’s pension plans at December 31:
| U.S. | NON-U.S. | |||||||||||||||
| In millions | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Change in benefit obligations: | ||||||||||||||||
| Benefit obligation at beginning of year | $ | 293.3 | $ | 317.5 | $ | 356.8 | $ | 396.3 | ||||||||
| Service cost | 6.5 | 8.6 | 1.7 | 3.3 | ||||||||||||
| Interest cost | 11.7 | 10.4 | 8.8 | 8.4 | ||||||||||||
| Employee contributions | — | — | 0.3 | 0.3 | ||||||||||||
| Amendments | — | — | (0.8 | ) | 5.0 | |||||||||||
| Actuarial losses (gains) | 42.2 | (25.4 | ) | 45.7 | (14.9 | ) | ||||||||||
| Benefits paid | (13.0 | ) | (16.5 | ) | (16.9 | ) | (19.4 | ) | ||||||||
| Foreign exchange rate changes | — | — | 13.9 | (21.1 | ) | |||||||||||
| Curtailments and settlements | — | — | (5.0 | ) | (0.2 | ) | ||||||||||
| Acquisitions | — | — | — | 0.5 | ||||||||||||
| Other, including expenses paid | 0.3 | (1.3 | ) | — | (1.4 | ) | ||||||||||
| Benefit obligation at end of year | $ | 341.0 | $ | 293.3 | $ | 404.5 | $ | 356.8 | ||||||||
| Change in plan assets: | ||||||||||||||||
| Fair value at beginning of year | $ | 259.4 | $ | 283.2 | $ | 352.2 | $ | 398.4 | ||||||||
| Actual return on plan assets | 50.4 | (12.1 | ) | 55.2 | (9.8 | ) | ||||||||||
| Company contributions | 6.0 | 6.1 | 10.6 | 5.4 | ||||||||||||
| Employee contributions | — | — | 0.3 | 0.3 | ||||||||||||
| Benefits paid | (13.0 | ) | (16.5 | ) | (16.9 | ) | (19.4 | ) | ||||||||
| Foreign exchange rate changes | — | — | 15.2 | (20.8 | ) | |||||||||||
| Curtailment and settlements | — | — | (6.2 | ) | (0.2 | ) | ||||||||||
| Other, including expenses paid | (1.3 | ) | (1.3 | ) | (1.4 | ) | (1.7 | ) | ||||||||
| Fair value of assets at end of year | $ | 301.5 | $ | 259.4 | $ | 409.0 | $ | 352.2 | ||||||||
| Funded status: | ||||||||||||||||
| Plan assets (less than) exceeding benefit obligations | $ | (39.5 | ) | $ | (33.9 | ) | $ | 4.5 | $ | (4.6 | ) | |||||
| Amounts included in the balance sheet: | ||||||||||||||||
| Other noncurrent assets | $ | — | $ | — | $ | 29.3 | $ | 21.1 | ||||||||
| Accrued compensation and benefits | (0.5 | ) | (0.3 | ) | (0.8 | ) | (1.1 | ) | ||||||||
| Postemployment and other benefit liabilities | (39.0 | ) | (33.6 | ) | (24.0 | ) | (24.6 | ) | ||||||||
| Net amount recognized | $ | (39.5 | ) | $ | (33.9 | ) | $ | 4.5 | $ | (4.6 | ) |
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, 2019, 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-22
The pretax amounts recognized in Accumulated other comprehensive loss were as follows:
| U.S. | ||||||||||||
| In millions | Prior service cost | Net actuarial losses | Total | |||||||||
| December 31, 2017 | $ | (1.8 | ) | $ | (72.5 | ) | $ | (74.3 | ) | |||
| Current year changes recorded to Accumulated other comprehensive loss | — | (1.1 | ) | (1.1 | ) | |||||||
| Amortization reclassified to earnings | 0.3 | 4.0 | 4.3 | |||||||||
| December 31, 2018 | $ | (1.5 | ) | $ | (69.6 | ) | $ | (71.1 | ) | |||
| Current year changes recorded to Accumulated other comprehensive loss | — | (4.2 | ) | (4.2 | ) | |||||||
| Amortization reclassified to earnings | 0.3 | 4.7 | 5.0 | |||||||||
| December 31, 2019 | $ | (1.2 | ) | $ | (69.1 | ) | $ | (70.3 | ) |
| NON-U.S. | ||||||||||||
| In millions | Prior service cost | Net actuarial losses | Total | |||||||||
| December 31, 2017 | $ | 0.1 | $ | (60.6 | ) | $ | (60.5 | ) | ||||
| Current year changes recorded to Accumulated other comprehensive loss | (5.0 | ) | (10.4 | ) | (15.4 | ) | ||||||
| Amortization reclassified to earnings | — | 0.9 | 0.9 | |||||||||
| Currency translation and other | 0.2 | 3.9 | 4.1 | |||||||||
| December 31, 2018 | $ | (4.7 | ) | $ | (66.2 | ) | $ | (70.9 | ) | |||
| Current year changes recorded to Accumulated other comprehensive loss | 0.8 | (4.8 | ) | (4.0 | ) | |||||||
| Amortization reclassified to earnings | 0.2 | 1.3 | 1.5 | |||||||||
| Settlements/curtailments reclassified to earnings | — | 2.3 | 2.3 | |||||||||
| Currency translation and other | (0.1 | ) | (2.4 | ) | (2.5 | ) | ||||||
| December 31, 2019 | $ | (3.8 | ) | $ | (69.8 | ) | $ | (73.6 | ) |
Weighted-average assumptions used:
| Benefit obligations at December 31, | 2019 | 2018 | ||||
| Discount rate: | ||||||
| U.S. plans | 3.3 | % | 4.3 | % | ||
| Non-U.S. plans | 1.9 | % | 2.8 | % | ||
| Rate of compensation increase: | ||||||
| U.S. plans | 3.0 | % | 3.0 | % | ||
| Non-U.S. plans | 3.0 | % | 3.3 | % |
The accumulated benefit obligation for all U.S. defined benefit pension plans was $332.4 million and $284.8 million at December 31, 2019 and 2018, respectively. The accumulated benefit obligation for all non-U.S. defined benefit pension plans was $396.7 million and $349.1 million at December 31, 2019 and 2018, 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-23
Information regarding pension plans with accumulated benefit obligations more than plan assets were:
| U.S. | NON-U.S. | |||||||||||||||
| In millions | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Projected benefit obligation | $ | 341.0 | $ | 293.3 | $ | 34.0 | $ | 34.5 | ||||||||
| Accumulated benefit obligation | 332.4 | 284.8 | 29.1 | 29.6 | ||||||||||||
| Fair value of plan assets | $ | 301.5 | $ | 259.4 | $ | 9.5 | $ | 8.8 |
Future pension benefit payments are expected to be paid as follows:
| In millions | U.S. | NON-U.S. | |||||
| 2020 | $ | 19.3 | $ | 18.7 | |||
| 2021 | 21.6 | 19.3 | |||||
| 2022 | 21.2 | 20.0 | |||||
| 2023 | 23.6 | 20.6 | |||||
| 2024 | 28.1 | 21.6 | |||||
| 2025 - 2029 | $ | 99.5 | $ | 119.6 |
The components of the Company’s net periodic pension benefit costs for the years ended December 31 include the following:
| U.S. | ||||||||||||
| In millions | 2019 | 2018 | 2017 | |||||||||
| Service cost | $ | 6.5 | $ | 6.8 | $ | 7.1 | ||||||
| Interest cost | 11.7 | 10.5 | 10.5 | |||||||||
| Expected return on plan assets | (12.5 | ) | (14.4 | ) | (12.0 | ) | ||||||
| Administrative costs and other | 1.7 | 1.6 | 1.6 | |||||||||
| Net amortization of: | ||||||||||||
| Prior service costs | 0.3 | 0.3 | 0.3 | |||||||||
| Plan net actuarial losses | 4.7 | 4.1 | 4.8 | |||||||||
| Net periodic pension benefit cost | $ | 12.4 | $ | 8.9 | $ | 12.3 |
| NON-U.S. | ||||||||||||
| In millions | 2019 | 2018 | 2017 | |||||||||
| Service cost | $ | 1.7 | $ | 1.7 | $ | 1.5 | ||||||
| Interest cost | 8.8 | 8.4 | 8.9 | |||||||||
| Expected return on plan assets | (13.0 | ) | (15.4 | ) | (14.3 | ) | ||||||
| Administrative costs and other | 1.3 | 1.8 | 2.5 | |||||||||
| Net amortization of: | ||||||||||||
| Prior service costs | 0.2 | — | — | |||||||||
| Plan net actuarial losses | 1.4 | 0.9 | 1.9 | |||||||||
| Net curtailment and settlement losses | 2.3 | — | 0.1 | |||||||||
| Net periodic pension benefit cost (income) | $ | 2.7 | $ | (2.6 | ) | $ | 0.6 |
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) are recorded within Other expense (income), net within the Consolidated Statements of Comprehensive Income.
Pension expense for 2020 is projected to be approximately $7.4 million, utilizing the assumptions for calculating the pension benefit obligations at the end of 2019.
F-24
Weighted-average assumptions used:
| Net periodic pension cost for the year ended December 31, | 2019 | 2018 | 2017 | ||||||
| Discount rate: | |||||||||
| U.S. plans | 4.3 | % | 3.6 | % | 4.1 | % | |||
| Non-U.S. plans | 2.8 | % | 2.5 | % | 2.6 | % | |||
| Rate of compensation increase: | |||||||||
| U.S. plans | 3.0 | % | 3.0 | % | 3.5 | % | |||
| Non-U.S. plans | 3.3 | % | 3.3 | % | 3.2 | % | |||
| Expected return on plan assets: | |||||||||
| U.S. plans | 5.0 | % | 5.3 | % | 4.8 | % | |||
| Non-U.S. plans | 3.8 | % | 4.0 | % | 4.0 | % |
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, 2019, by asset category were as follows:
| Fair value measurements | Total | |||||||||||||||||||
| In millions | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Assets measured at NAV | ||||||||||||||||
| Cash, cash equivalents and short-term investments | $ | — | $ | — | $ | — | $ | 4.7 | $ | 4.7 | ||||||||||
| Common collective trusts | — | — | — | 262.5 | 262.5 | |||||||||||||||
| Other(a) | — | — | — | 34.3 | 34.3 | |||||||||||||||
| Total U.S. pension plan assets | $ | — | $ | — | $ | — | $ | 301.5 | $ | 301.5 |
| (a) | Includes a group trust diversified credit fund and real estate investment trust. |
The fair values of the Company’s U.S. pension plan assets at December 31, 2018, by asset category were as follows:
| Fair value measurements | Total | |||||||||||||||||||
| In millions | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Assets measured at NAV | ||||||||||||||||
| Cash, cash equivalents and short-term investments | $ | — | $ | 3.1 | $ | — | $ | — | $ | 3.1 | ||||||||||
| Common collective trusts | — | — | — | 237.6 | 237.6 | |||||||||||||||
| Other(a) | — | — | — | 18.7 | 18.7 | |||||||||||||||
| Total U.S. pension plan assets | $ | — | $ | 3.1 | $ | — | $ | 256.3 | $ | 259.4 |
| (a) | Includes a group trust diversified credit fund. |
No material transfers in or out of Level 3 occurred during the year ended December 31, 2019 or 2018.
The Company determines the fair value of its U.S. pension plan assets using the following methodologies:
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| • | Cash, cash equivalents and short-term investments – Short-term investments are valued at their daily net asset value (NAV) per share or the equivalent based upon the fair value of the underlying investments. NAV per share or the equivalent is used for fair value purposes as a practical expedient and is calculated by the investment manager or sponsor of the fund. These investments primarily consist of short-term investment funds. |
| • | Common collective trusts - Common collective trust (CCT) funds are not publicly traded and are valued at NAV per share or the equivalent based upon the fair value of the underlying investments. NAV per share or the equivalent is used for fair value purposes as a practical expedient and is calculated by the investment manager or sponsor of the applicable fund. CCT funds consist of a variety of publicly traded securities, including equity mutual funds, U.S. government and agency obligations, corporate and non-U.S. bonds, securitized credit and emerging market debt. There are no unfunded commitments, redemption frequency restrictions or other redemption restrictions related to such investments. |
The fair values of the Company’s non-U.S. pension plan assets at December 31, 2019, by asset category were as follows:
| Fair value measurements | Total | |||||||||||||||||||
| In millions | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Assets measured at NAV | ||||||||||||||||
| Cash, cash equivalents and short-term investments | $ | 0.9 | $ | — | $ | — | $ | 56.9 | $ | 57.8 | ||||||||||
| Equity mutual funds | — | 2.7 | — | 102.5 | 105.2 | |||||||||||||||
| Corporate and non-U.S. bonds | — | 118.0 | — | 70.1 | 188.1 | |||||||||||||||
| Other(a) | — | 9.0 | 3.4 | 45.5 | 57.9 | |||||||||||||||
| Total non-U.S. pension plan assets | $ | 0.9 | $ | 129.7 | $ | 3.4 | $ | 275.0 | $ | 409.0 |
(a) Primarily includes a core diversified credit fund and derivative contracts.
The fair values of the Company’s non-U.S. pension plan assets at December 31, 2018, by asset category were as follows:
| Fair value measurements | Total | |||||||||||||||||||
| In millions | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Assets measured at NAV | ||||||||||||||||
| Cash, cash equivalents and short-term investments | $ | 1.3 | $ | 36.1 | $ | — | $ | — | $ | 37.4 | ||||||||||
| Equity mutual funds | — | 2.6 | — | 88.7 | 91.3 | |||||||||||||||
| Corporate and non-U.S. bonds | — | 109.4 | — | 31.7 | 141.1 | |||||||||||||||
| Other(a) | — | 41.3 | 3.2 | 37.9 | 82.4 | |||||||||||||||
| Total non-U.S. pension plan assets | $ | 1.3 | $ | 189.4 | $ | 3.2 | $ | 158.3 | $ | 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, 2019 or 2018.
The Company determines the fair value of its non-U.S. pension 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, 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, or at their NAV per share or the equivalent based upon the fair value of the underlying investments. NAV per share or the equivalent is used for fair value purposes as a practical expedient and is calculated by the investment manager or sponsor of the fund. These investments primarily consist of short-term investment funds. |
| • | Equity mutual funds – Equity mutual funds are primarily valued at their 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. |
F-26
| • | 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 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 $6.0 million to the U.S. pension plans in 2019, $6.1 million in 2018 and $55.7 million in 2017 (of which $50.0 million was discretionary). The Company made required and discretionary contributions to its non-U.S. pension plans of $10.6 million in 2019, $5.4 million in 2018 and $5.2 million in 2017.
The Company currently projects that approximately $11.5 million will be contributed to its U.S and non-U.S. plans in 2020. 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 2020 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 $15.6 million, $14.4 million and $14.0 million in 2019, 2018 and 2017, respectively. The Company’s contributions relating to non-U.S. defined contribution plans and other non-U.S. benefit plans were $6.0 million, $8.0 million and $7.0 million in 2019, 2018 and 2017, respectively.
Deferred Compensation Plan
The Company maintains an Executive Deferred Compensation Plan ("EDCP"), which is an unfunded, nonqualified plan that, prior to 2019, permitted certain employees to defer receipt of up to 50% of their annual salary and up to 100% of their annual bonus awards, performance stock plan awards and restricted stock units received upon commencement of employment. As of December 31, 2019 and 2018, the deferred compensation liability balance was $17.4 million and $15.1 million, respectively, which was recorded within Postemployment and other benefit liabilities in the Consolidated Balance Sheets.
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 expense (income), net within the Consolidated Statements of Comprehensive Income.
The benefit obligation related to the Company's postretirement plans as of December 31, 2019 and 2018 was $6.8 million and $7.6 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 $0.1 million, $0.5 million and $1.4 million, for the years ended December 31, 2019, 2018 and 2017, respectively. Net period postretirement benefit income (expense) for 2020 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 13 – 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. |
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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.
Assets and liabilities measured at fair value at December 31, 2019, were as follows:
| Fair value measurements | Total fair value | ||||||||||||||
| In millions | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||
| Recurring fair value measurements | |||||||||||||||
| Assets: | |||||||||||||||
| Investments | $ | — | $ | 17.4 | $ | — | $ | 17.4 | |||||||
| Interest rate swaps | — | 0.7 | — | 0.7 | |||||||||||
| Foreign currency contracts | — | 0.4 | — | 0.4 | |||||||||||
| Total asset recurring fair value measurements | $ | — | $ | 18.5 | $ | — | $ | 18.5 | |||||||
| Liabilities: | |||||||||||||||
| Foreign currency contracts | $ | — | $ | 1.5 | $ | — | $ | 1.5 | |||||||
| Deferred compensation and other retirement plans | — | 23.1 | — | 23.1 | |||||||||||
| Total liability recurring fair value measurements | $ | — | $ | 24.6 | $ | — | $ | 24.6 | |||||||
| Financial instruments not carried at fair value | |||||||||||||||
| Total debt | $ | — | $ | 1,474.0 | $ | — | $ | 1,474.0 | |||||||
| Total financial instruments not carried at fair value | $ | — | $ | 1,474.0 | $ | — | $ | 1,474.0 |
Assets and liabilities measured at fair value at December 31, 2018, were as follows:
| Fair value measurements | Total fair value | ||||||||||||||
| In millions | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||
| Recurring fair value measurements | |||||||||||||||
| Assets: | |||||||||||||||
| Investments | $ | — | $ | 14.3 | $ | — | $ | 14.3 | |||||||
| Interest rate swaps | — | 5.7 | — | 5.7 | |||||||||||
| Foreign currency contracts | — | 2.1 | — | 2.1 | |||||||||||
| Total asset recurring fair value measurements | $ | — | $ | 22.1 | $ | — | $ | 22.1 | |||||||
| Liabilities: | |||||||||||||||
| Foreign currency contracts | $ | — | $ | 0.1 | $ | — | $ | 0.1 | |||||||
| Deferred compensation and other retirement plans | — | 19.1 | — | 19.1 | |||||||||||
| Total liability recurring fair value measurements | $ | — | $ | 19.2 | $ | — | $ | 19.2 | |||||||
| Financial instruments not carried at fair value | |||||||||||||||
| Total debt | $ | — | $ | 1,403.2 | $ | — | $ | 1,403.2 | |||||||
| Total financial instruments not carried at fair value | $ | — | $ | 1,403.2 | $ | — | $ | 1,403.2 |
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. |
F-28
| • | Interest rate swaps – These instruments include interest rate swap contracts related to the Company's variable rate Term Facility. The fair value of the derivative instruments is determined based on quoted prices for the Company's swaps, which is 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. |
| • | 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 2029. 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 and notes receivable, Accounts payable and 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, 2019, are the same as those used at December 31, 2018.
NOTE 14 – EQUITY
Ordinary Shares
The reconciliation of Ordinary shares is as follows:
| In millions | Total | |
| December 31, 2018 | 94.6 | |
| Shares issued under incentive plans | 0.4 | |
| Repurchase of ordinary shares | (2.3 | ) |
| December 31, 2019 | 92.7 |
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, 2019.
On February 2, 2017, the Company's Board of Directors approved a share repurchase authorization of up to $500 million of the Company's ordinary shares (the "2017 Share Repurchase Authorization"). During the year ended December 31, 2019, the Company paid $226.0 million to repurchase 2.3 million ordinary shares on the open market under the 2017 Share Repurchase Authorization.
On February 6, 2020, the Company's Board of Directors approved a new share repurchase authorization of up to, and including, $800 million of the Company's ordinary shares (the "2020 Share Repurchase Authorization"), replacing the existing 2017 Share Repurchase Authorization. The 2020 Share Repurchase Authorization does not have a prescribed expiration date.
F-29
Accumulated Other Comprehensive Loss
The changes in Accumulated other comprehensive loss were as follows:
| In millions | Cash flow hedges | Pension and OPEB items | Foreign currency items | Total | ||||||||||||
| December 31, 2016 | $ | 3.4 | $ | (120.5 | ) | $ | (147.2 | ) | $ | (264.3 | ) | |||||
| Other comprehensive income, net of tax | 0.4 | 19.3 | 98.1 | 117.8 | ||||||||||||
| Other(a) | — | (6.4 | ) | — | (6.4 | ) | ||||||||||
| December 31, 2017 | 3.8 | (107.6 | ) | (49.1 | ) | (152.9 | ) | |||||||||
| Other comprehensive income (loss), net of tax | 1.8 | (5.4 | ) | (57.3 | ) | (60.9 | ) | |||||||||
| Reclassification to Retained earnings upon adoption of ASU 2018-02(b) | 0.5 | (10.2 | ) | — | (9.7 | ) | ||||||||||
| December 31, 2018 | 6.1 | (123.2 | ) | (106.4 | ) | (223.5 | ) | |||||||||
| Other comprehensive (loss) income, net of tax(c) | (5.6 | ) | (3.0 | ) | 13.5 | 4.9 | ||||||||||
| December 31, 2019 | $ | 0.5 | $ | (126.2 | ) | $ | (92.9 | ) | $ | (218.6 | ) |
| (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. |
| (b) | 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," allowing entities to reclassify tax effects stranded in AOCI as a result of the Tax Reform Act. The Company elected to early adopt and apply the amendments in ASU 2018-02 in 2018. The impact of adoption resulted in the reclassification presented above. |
| (c) | During 2019, the Company reclassified $26.2 million of cumulative foreign currency translation adjustments to earnings upon the sale of the Company's business operations in Colombia and Turkey, which is included in Foreign currency items in the table above. See Note 8 for further information on these divestitures. |
All amounts of Other comprehensive income (loss) attributable to noncontrolling interests on the Consolidated Statements of Equity relate to foreign currency items.
NOTE 15 – 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 stock 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 3.1 million remain available as of December 31, 2019 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:
F-30
| In millions | 2019 | 2018 | 2017 | |||||||||
| Stock options | $ | 3.5 | $ | 4.3 | $ | 3.3 | ||||||
| RSUs | 10.0 | 9.6 | 7.0 | |||||||||
| PSUs | 6.9 | 5.7 | 5.8 | |||||||||
| Deferred compensation | 3.2 | (0.8 | ) | 2.8 | ||||||||
| Pre-tax expense | 23.6 | 18.8 | 18.9 | |||||||||
| Tax benefit | (3.0 | ) | (1.9 | ) | (6.4 | ) | ||||||
| After-tax expense | $ | 20.6 | $ | 16.9 | $ | 12.5 |
Stock Options / RSUs
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 years ended December 31, 2019, 2018 and 2017, was estimated to be $19.58, $21.29 and $18.22 per share, respectively, using the Black-Scholes option-pricing model. The weighted-average assumptions used were as follows:
| 2019 | 2018 | 2017 | |||||||
| Dividend yield | 1.23 | % | 0.97 | % | 0.89 | % | |||
| Volatility | 21.44 | % | 22.38 | % | 24.93 | % | |||
| Risk-free rate of return | 2.53 | % | 2.75 | % | 2.08 | % | |||
| Expected life | 6.0 years | 6.0 years | 6.0 years |
Expected volatility is based on the weighted-average combination of the Company's historic volatility and 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. The expected life of the Company’s stock option awards 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.
Changes in options outstanding under the plans for the years ended December 31, 2019, 2018 and 2017, were as follows:
| Shares subject to option | Weighted- average exercise price**(a)** | Aggregate intrinsic value (millions) | Weighted- average remaining life (years) | ||||||||||
| December 31, 2016 | 1,313,070 | $ | 39.87 | ||||||||||
| Granted | 165,113 | 71.84 | |||||||||||
| Exercised | (410,397 | ) | 31.54 | ||||||||||
| Canceled | (15,906 | ) | 60.84 | ||||||||||
| December 31, 2017 | 1,051,880 | 47.80 | |||||||||||
| Granted | 160,849 | 86.92 | |||||||||||
| Exercised | (239,427 | ) | 36.50 | ||||||||||
| Canceled | (16,104 | ) | 74.23 | ||||||||||
| December 31, 2018 | 957,198 | 56.71 | |||||||||||
| Granted | 195,675 | 88.07 | |||||||||||
| Exercised | (272,003 | ) | 42.97 | ||||||||||
| Canceled | (17,248 | ) | 85.22 | ||||||||||
| Outstanding December 31, 2019 | 863,622 | $ | 67.57 | $ | 49.2 | 6.4 | |||||||
| Exercisable December 31, 2019 | 534,013 | $ | 56.58 | $ | 36.3 | 5.1 |
F-31
| (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:
| Options outstanding | Options exercisable | |||||||||||||||||||||||||
| Range of exercise price | Number outstanding at December 31, 2019 | Weighted- average remaining life (years) | Weighted- average exercise price | Number exercisable at December 31, 2019 | Weighted- average remaining life (years) | Weighted- average exercise price | ||||||||||||||||||||
| $ | 10.01 | — | $ | 20.00 | 8,099 | 0.1 | $ | 19.44 | 8,099 | 0.1 | $ | 19.44 | ||||||||||||||
| 20.01 | — | 30.00 | 35,158 | 1.6 | 26.79 | 35,158 | 1.6 | 26.79 | ||||||||||||||||||
| 30.01 | — | 40.00 | 19,841 | 2.7 | 32.33 | 19,841 | 2.7 | 32.33 | ||||||||||||||||||
| 40.01 | — | 50.00 | 47,705 | 4.0 | 43.38 | 47,705 | 4.0 | 43.38 | ||||||||||||||||||
| 50.01 | — | 60.00 | 307,869 | 5.2 | 56.84 | 307,869 | 5.2 | 56.84 | ||||||||||||||||||
| 60.01 | — | 70.00 | — | 0.0 | — | — | 0.0 | — | ||||||||||||||||||
| 70.01 | — | 80.00 | 122,074 | 7.0 | 71.84 | 74,411 | 7.0 | 71.84 | ||||||||||||||||||
| $ | 80.01 | — | $ | 90.00 | 322,876 | 8.7 | 87.59 | 40,930 | 8.0 | 86.93 | ||||||||||||||||
| 863,622 | 6.4 | $ | 67.57 | 534,013 | 5.1 | $ | 56.58 |
At December 31, 2019, there was $1.3 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 years ended December 31, 2019 and 2018, was $16.3 million and $11.5 million, respectively. Generally, stock options expire ten years from their date of grant.
The following table summarizes RSU activity for the years ended December 31, 2019, 2018 and 2017:
| RSUs | Weighted- average grant date fair value**(a)** | ||||||
| Outstanding and unvested at December 31, 2016 | 205,634 | $ | 58.99 | ||||
| Granted | 124,933 | 73.76 | |||||
| Vested | (90,523 | ) | 58.78 | ||||
| Canceled | (10,038 | ) | 60.47 | ||||
| Outstanding and unvested at December 31, 2017 | 230,006 | 66.83 | |||||
| Granted | 132,865 | 84.65 | |||||
| Vested | (104,065 | ) | 65.42 | ||||
| Canceled | (14,459 | ) | 76.25 | ||||
| Outstanding and unvested at December 31, 2018 | 244,347 | 76.51 | |||||
| Granted | 134,518 | 91.75 | |||||
| Vested | (118,060 | ) | 73.52 | ||||
| Canceled | (24,286 | ) | 79.53 | ||||
| Outstanding and unvested at December 31, 2019 | 236,519 | $ | 86.37 |
| (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, 2019, there was $7.6 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 Stock
The Company has a Performance Stock 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.
F-32
In February 2017, 2018 and 2019, 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.
The following table summarizes PSU activity for the maximum number of shares that may be issued for the years ended December 31, 2019, 2018 and 2017:
| PSUs | Weighted-average grant date fair value**(a)** | ||||||
| Outstanding and unvested at December 31, 2016 | 209,604 | $ | 56.02 | ||||
| Granted | 99,832 | 78.13 | |||||
| Vested | (146,830 | ) | 72.01 | ||||
| Forfeited | (1,783 | ) | 67.10 | ||||
| Outstanding and unvested at December 31, 2017 | 160,823 | 55.02 | |||||
| Granted | 93,018 | 86.46 | |||||
| Vested | (90,967 | ) | 68.05 | ||||
| Forfeited | (6,833 | ) | 79.93 | ||||
| Outstanding and unvested at December 31, 2018 | 156,041 | 65.07 | |||||
| Granted | 68,125 | 87.02 | |||||
| Vested | (56,773 | ) | 61.00 | ||||
| Forfeited | (10,045 | ) | 68.63 | ||||
| Outstanding and unvested at December 31, 2019 | 157,348 | $ | 75.82 |
| (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, 2019, there was $5.1 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
Prior to 2019, the Company allowed key employees to defer a portion of their eligible granted PSUs and/or 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 16 – RESTRUCTURING ACTIVITIES
During 2019, 2018, and 2017, the Company recorded $16.5 million, $4.9 million and $12.3 million, respectively, of expenses associated with restructuring activities. Included within the 2019 restructuring expenses are approximately $8.4 million relating to the Company's closure of its production facility in Turkey during the year. The facility was closed to help streamline the Company's operational footprint in the EMEIA region, and these expenses are primarily related to severance and other employee separation costs, including approximately $1.9 million of pension curtailment costs, which are included within Other expense (income), net within the Consolidated Statements of Comprehensive Income. All other restructuring expenses for the years ended December 31, 2019, 2018 and 2017, are included within Cost of goods sold and Selling and administrative expenses within the Consolidated Statements of Comprehensive Income. The Company completed the divestiture of its Turkey business in the fourth quarter of 2019 (see Note 8).
F-33
The changes in the restructuring reserve during the years ended December 31, 2019 and 2018, were as follows:
| In millions | Total | |||
| December 31, 2017 | $ | 4.2 | ||
| Additions | 4.9 | |||
| Cash and non-cash uses | (6.9 | ) | ||
| Currency translation | (0.1 | ) | ||
| December 31, 2018 | 2.1 | |||
| Additions | 16.5 | |||
| Cash and non-cash uses | (17.3 | ) | ||
| Currency translation | (0.1 | ) | ||
| December 31, 2019 | $ | 1.2 |
The majority of the costs accrued as of December 31, 2019, will be paid within one year.
The Company also incurred other non-qualified restructuring charges of $5.7 million, $1.6 million and $1.5 million during the years ended December 31, 2019, 2018 and 2017, 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. Approximately $4.3 million of the non-qualified restructuring expenses incurred during 2019 related to the closure of the Company's production facility in Turkey discussed above. Non-qualified restructuring charges are included within Cost of goods sold and Selling and administrative expenses within the Consolidated Statements of Comprehensive Income.
NOTE 17 – OTHER EXPENSE (INCOME), NET
At December 31, the components of Other expense (income), net were as follows:
| In millions | 2019 | 2018 | 2017 | |||||||||
| Interest income | $ | (1.8 | ) | $ | (0.8 | ) | $ | (1.2 | ) | |||
| Foreign currency exchange loss | 1.8 | 0.3 | 0.7 | |||||||||
| Loss (earnings) from and gains on sale of equity investments | 0.1 | (0.4 | ) | (5.4 | ) | |||||||
| Net periodic pension and postretirement benefit cost (income), less service cost | 6.8 | (2.8 | ) | 4.3 | ||||||||
| Other | (3.1 | ) | 0.3 | (7.3 | ) | |||||||
| Other expense (income), net | $ | 3.8 | $ | (3.4 | ) | $ | (8.9 | ) |
Other expense (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 Loss (earnings) from and gains on sale of equity investments in the table above. Other expense (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.
NOTE 18 – INCOME TAXES
Earnings before income taxes for the years ended December 31 were taxed within the following jurisdictions:
| In millions | 2019 | 2018 | 2017 | |||||||||
| U.S. | $ | 211.1 | $ | 151.4 | $ | 166.5 | ||||||
| Non-U.S. | 264.1 | 323.8 | 229.2 | |||||||||
| Total | $ | 475.2 | $ | 475.2 | $ | 395.7 |
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The components of the Provision for income taxes for the years ended December 31 were as follows:
| In millions | 2019 | 2018 | 2017 | |||||||||
| Current tax expense: | ||||||||||||
| U.S. | $ | 87.1 | $ | 86.4 | $ | 78.8 | ||||||
| Non-U.S. | 16.2 | 18.1 | 15.0 | |||||||||
| Total: | 103.3 | 104.5 | 93.8 | |||||||||
| Deferred tax (benefit) expense: | ||||||||||||
| U.S. | (25.2 | ) | (56.1 | ) | 41.2 | |||||||
| Non-U.S. | (5.0 | ) | (8.6 | ) | (16.0 | ) | ||||||
| Total: | (30.2 | ) | (64.7 | ) | 25.2 | |||||||
| Total tax expense (benefit): | ||||||||||||
| U.S. | 61.9 | 30.3 | 120.0 | |||||||||
| Non-U.S. | 11.2 | 9.5 | (1.0 | ) | ||||||||
| Total | $ | 73.1 | $ | 39.8 | $ | 119.0 |
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:
| Percent of pretax income | |||||||||
| 2019 | 2018 | 2017 | |||||||
| Statutory U.S. rate | 21.0 | % | 21.0 | % | 35.0 | % | |||
| Increase (decrease) in rates resulting from: | |||||||||
| Non-U.S. tax rate differential (1) | (10.6 | ) | (11.9 | ) | (20.0 | ) | |||
| State and local income taxes (1) | 3.0 | 2.1 | 1.8 | ||||||
| Reserves for uncertain tax positions | 0.5 | 2.1 | 0.8 | ||||||
| Tax on unremitted earnings | 0.1 | (1.2 | ) | 0.8 | |||||
| Tax Reform Act | — | (4.6 | ) | 13.5 | |||||
| Trade incentives | 0.2 | 0.6 | — | ||||||
| Production incentives | — | — | (0.9 | ) | |||||
| Impact of divestitures | 1.6 | — | — | ||||||
| Other adjustments | (0.4 | ) | 0.3 | (0.9 | ) | ||||
| Effective tax rate | 15.4 | % | 8.4 | % | 30.1 | % |
| (1) | Net of changes in valuation allowances |
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.
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 reflected the income tax effects of the Tax Reform Act in the reporting period in which the accounting under ASC 740 was completed. 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 consisted 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.
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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.
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 | 2019 | 2018 | ||||||
| Deferred tax assets: | ||||||||
| Inventory and accounts receivable | $ | 5.3 | $ | 15.3 | ||||
| Fixed assets and intangibles | 2.3 | 2.2 | ||||||
| Postemployment and other benefit liabilities | 31.0 | 29.1 | ||||||
| Other reserves and accruals | 14.2 | 12.8 | ||||||
| Net operating losses, tax credits and other carryforwards | 346.3 | 419.9 | ||||||
| Other | 0.8 | 0.7 | ||||||
| Gross deferred tax assets | 399.9 | 480.0 | ||||||
| Less: deferred tax valuation allowances | (241.0 | ) | (357.1 | ) | ||||
| Deferred tax assets net of valuation allowances | $ | 158.9 | $ | 122.9 | ||||
| Deferred tax liabilities: | ||||||||
| Fixed assets and intangibles | $ | (104.3 | ) | $ | (104.9 | ) | ||
| Postemployment and other benefit liabilities | (5.1 | ) | (3.5 | ) | ||||
| Unremitted earnings of foreign subsidiaries | (2.4 | ) | (0.5 | ) | ||||
| Other | (3.8 | ) | (6.3 | ) | ||||
| Gross deferred tax liabilities | (115.6 | ) | (115.2 | ) | ||||
| Net deferred tax assets | $ | 43.3 | $ | 7.7 |
At December 31, 2019, $2.4 million of deferred taxes were 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.
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At December 31, 2019, the Company had the following tax losses and tax credit carryforwards available to offset taxable income in prior and future years:
| In millions | Amount | Expiration Period | ||||
| U.S. Federal tax loss carryforwards | $ | 20.0 | 2027-2037 | |||
| U.S. Federal and State credit carryforwards | 22.5 | 2025-2037 | ||||
| U.S. State tax loss carryforwards | 27.4 | 2020-Unlimited | ||||
| Non-U.S. tax loss carryforwards | $ | 934.7 | 2020-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 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 | 2019 | 2018 | 2017 | |||||||||
| Beginning balance | $ | 357.1 | $ | 312.9 | $ | 225.5 | ||||||
| Increase to valuation allowance | 2.8 | 70.9 | 96.9 | |||||||||
| Decrease to valuation allowance | (118.6 | ) | (25.0 | ) | (11.9 | ) | ||||||
| Foreign exchange translation | (0.3 | ) | (1.7 | ) | 2.4 | |||||||
| Ending balance | $ | 241.0 | $ | 357.1 | $ | 312.9 |
During the year ended December 31, 2019, the valuation allowance decreased by $116.1 million. This decrease is the result of changes in country specific tax laws, internal restructurings, jurisdictional profitability and changes in judgment and facts regarding the realizability of deferred tax assets.
The Company has total unrecognized tax benefits of $37.3 million and $42.0 million as of December 31, 2019 and 2018, respectively. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $37.3 million as of December 31, 2019. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| In millions | 2019 | 2018 | 2017 | |||||||||
| Beginning balance | $ | 42.0 | $ | 29.0 | $ | 32.0 | ||||||
| Additions based on tax positions related to the current year | 5.7 | 9.5 | 6.4 | |||||||||
| Additions based on tax positions related to prior years | 1.7 | 8.2 | 1.6 | |||||||||
| Reductions based on tax positions related to prior years | (7.0 | ) | (1.4 | ) | (5.0 | ) | ||||||
| Reductions related to settlements with tax authorities | (4.0 | ) | (1.5 | ) | (7.1 | ) | ||||||
| Reductions related to lapses of statute of limitations | (0.8 | ) | (1.1 | ) | (1.2 | ) | ||||||
| Translation (gain)/loss | (0.3 | ) | (0.7 | ) | 2.3 | |||||||
| Ending balance | $ | 37.3 | $ | 42.0 | $ | 29.0 |
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 $6.2 million and $5.7 million at December 31, 2019 and 2018, respectively. For the years ended December 31, 2019 and 2018, the Company recognized $1.3 million and $0.8 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 $8.6 million during the next 12 months.
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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 no indemnity receivables at December 31, 2019, and $5.4 million of indemnity receivables included in Other noncurrent assets at December 31, 2018, primarily related to additional competent authority relief filings.
NOTE 19 – 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 | 2019 | 2018 | 2017 | ||||||
| Weighted-average number of basic shares | 93.6 | 95.0 | 95.1 | ||||||
| Shares issuable under share-based compensation plans | 0.7 | 0.7 | 0.9 | ||||||
| Weighted-average number of diluted shares | 94.3 | 95.7 | 96.0 |
At December 31, 2019, 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 20 – 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 21).
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, revenue recognition related to services revenues is delayed until the service based 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 years ended December 31, 2019 and 2018, no adjustments related to performance obligations satisfied in previous periods were recorded.
The Company applies the practical expedients allowed under ASC 606 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
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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 its businesses operate.
The following table shows the Company's Net revenues related to both tangible product sales and services for the years ended December 31, 2019, 2018 and 2017, respectively, 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:
| 2019 | |||||||||||||||
| In millions | Americas | EMEIA | Asia Pacific | Consolidated | |||||||||||
| Net revenues | |||||||||||||||
| Products | $ | 2,114.5 | $ | 546.1 | $ | 158.8 | $ | 2,819.4 | |||||||
| Services | — | 26.4 | 8.2 | 34.6 | |||||||||||
| Total Net revenues | $ | 2,114.5 | $ | 572.5 | $ | 167.0 | $ | 2,854.0 |
| 2018 | |||||||||||||||
| In millions | Americas | EMEIA | Asia Pacific | Consolidated | |||||||||||
| Net revenues | |||||||||||||||
| Products | $ | 1,988.6 | $ | 567.8 | $ | 148.9 | $ | 2,705.3 | |||||||
| Services | — | 22.1 | 4.3 | 26.4 | |||||||||||
| Total Net revenues | $ | 1,988.6 | $ | 589.9 | $ | 153.2 | $ | 2,731.7 |
| 2017**(a)** | |||||||||||||||
| In millions | Americas | EMEIA | Asia Pacific | Consolidated | |||||||||||
| Net revenues | |||||||||||||||
| Products | $ | 1,767.5 | $ | 501.9 | $ | 117.2 | $ | 2,386.6 | |||||||
| Services | — | 21.6 | — | 21.6 | |||||||||||
| Total Net revenues | $ | 1,767.5 | $ | 523.5 | $ | 117.2 | $ | 2,408.2 |
| (a) | The Company adopted ASC 606 on January 1, 2018, on a modified retrospective basis, and as such, amounts presented for the year ended December 31, 2017, are based on ASC 605. |
As of December 31, 2019 and 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 were 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 21 – 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
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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 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 $1.7 million, $2.4 million and $3.2 million of expenses during the years ended December 31, 2019, 2018 and 2017, respectively, for environmental remediation at sites presently or formerly owned or leased by the Company. Environmental remediation costs are recorded in Costs of goods sold within the Consolidated Statements of Comprehensive Income.
As of December 31, 2019 and 2018, the Company has recorded reserves for environmental matters of $19.3 million and $22.6 million, respectively. The total reserve at December 31, 2019 and 2018, included $4.2 million and $6.3 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, 2019 and 2018, was $6.2 million and $5.6 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 years ended December 31, were as follows:
| In millions | 2019 | 2018 | 2017 | ||||||||
| Balance at beginning of period | $ | 14.5 | $ | 14.1 | $ | 13.3 | |||||
| Reductions for payments | (8.4 | ) | (7.9 | ) | (7.8 | ) | |||||
| Accruals for warranties issued during the current period | 10.3 | 7.8 | 9.0 | ||||||||
| Changes to accruals related to preexisting warranties | (0.4 | ) | 0.2 | (0.8 | ) | ||||||
| Acquisitions | — | 0.5 | — | ||||||||
| Translation | (0.1 | ) | (0.2 | ) | 0.4 | ||||||
| Balance at end of period | $ | 15.9 | $ | 14.5 | $ | 14.1 |
Standard product warranty liabilities are classified as Accrued expenses and other current liabilities within the Consolidated Balance Sheets.
NOTE 22 – 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
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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.
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 | 2019 | 2018 | 2017 | |||||||||
| Americas | ||||||||||||
| Net revenues | $ | 2,114.5 | $ | 1,988.6 | $ | 1,767.5 | ||||||
| Segment operating income | 611.6 | 544.5 | 508.5 | |||||||||
| Segment operating margin | 28.9 | % | 27.4 | % | 28.8 | % | ||||||
| Depreciation and amortization | 35.7 | 42.2 | 26.4 | |||||||||
| Capital expenditures | 32.1 | 22.5 | 26.1 | |||||||||
| Total segment assets | 1,239.0 | 1,175.8 | 872.4 | |||||||||
| EMEIA | ||||||||||||
| Net revenues | 572.5 | 589.9 | 523.5 | |||||||||
| Segment operating income | 34.3 | 49.3 | 44.1 | |||||||||
| Segment operating margin | 6.0 | % | 8.4 | % | 8.4 | % | ||||||
| Depreciation and amortization | 33.1 | 32.0 | 28.6 | |||||||||
| Capital expenditures | 16.9 | 16.2 | 17.1 | |||||||||
| Total segment assets | 1,057.6 | 1,052.1 | 1,027.7 | |||||||||
| Asia Pacific | ||||||||||||
| Net revenues | 167.0 | 153.2 | 117.2 | |||||||||
| Segment operating income | 0.5 | 6.9 | 9.5 | |||||||||
| Segment operating margin | 0.3 | % | 4.5 | % | 8.1 | % | ||||||
| Depreciation and amortization | 4.9 | 3.9 | 2.5 | |||||||||
| Capital expenditures | 11.4 | 4.2 | 1.5 | |||||||||
| Total segment assets | 281.1 | 286.6 | 196.3 | |||||||||
| Total Net revenues | $ | 2,854.0 | $ | 2,731.7 | $ | 2,408.2 | ||||||
| Reconciliation to earnings before income taxes | ||||||||||||
| Segment operating income from reportable segments | $ | 646.4 | $ | 600.7 | $ | 562.1 | ||||||
| Unallocated corporate expense | 81.3 | 74.9 | 69.6 | |||||||||
| Interest expense | 56.0 | 54.0 | 105.7 | |||||||||
| Loss on divestitures | 30.1 | — | — | |||||||||
| Other expense (income), net | 3.8 | (3.4 | ) | (8.9 | ) | |||||||
| Total earnings before income taxes | $ | 475.2 | $ | 475.2 | $ | 395.7 | ||||||
| Depreciation and amortization from reportable segments | $ | 73.7 | $ | 78.1 | $ | 57.5 | ||||||
| Unallocated depreciation and amortization | 4.4 | 4.2 | 4.1 | |||||||||
| Total depreciation and amortization | $ | 78.1 | $ | 82.3 | $ | 61.6 | ||||||
| Capital expenditures from reportable segments | $ | 60.4 | $ | 42.9 | $ | 44.7 | ||||||
| Corporate capital expenditures | 5.2 | 6.2 | 4.6 | |||||||||
| Total capital expenditures | $ | 65.6 | $ | 49.1 | $ | 49.3 | ||||||
| Assets from reportable segments | $ | 2,577.7 | $ | 2,514.5 | $ | 2,096.4 | ||||||
| Unallocated assets(a) | 389.5 | 295.7 | 445.6 | |||||||||
| Total assets | $ | 2,967.2 | $ | 2,810.2 | $ | 2,542.0 |
| (a) | Unallocated assets consist primarily of investments in unconsolidated affiliates, fixed assets, deferred income taxes and cash. |
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Net revenues by destination and product type for the years ended December 31, were as follows:
| In millions | 2019 | 2018 | 2017 | |||||||||
| Net revenues | ||||||||||||
| U.S. | $ | 1,988.9 | $ | 1,852.8 | $ | 1,645.6 | ||||||
| Non-U.S. | 865.1 | 878.9 | 762.6 | |||||||||
| Total | $ | 2,854.0 | $ | 2,731.7 | $ | 2,408.2 |
| In millions | 2019 | 2018 | 2017 | |||||||||
| Net revenues | ||||||||||||
| Mechanical products | $ | 2,247.0 | $ | 2,155.2 | $ | 1,906.4 | ||||||
| All other | 607.0 | 576.5 | 501.8 | |||||||||
| Total | $ | 2,854.0 | $ | 2,731.7 | $ | 2,408.2 |
In fiscal year 2019, 2018 and 2017, no customer exceeded 10% of consolidated Net revenues.
At December 31, long-lived assets by geographic area were as follows:
| In millions | 2019 | 2018 | ||||||
| Long-lived assets | ||||||||
| U.S. | $ | 242.0 | $ | 245.1 | ||||
| Non-U.S. | 437.3 | 448.1 | ||||||
| Total | $ | 679.3 | $ | 693.2 |
NOTE 23 – SUBSEQUENT EVENTS
On February 6, 2020, the Company's Board of Directors declared a quarterly dividend of $0.32 cents per ordinary share. The dividend is payable March 31, 2020 to shareholders of record on March 17, 2020.
NOTE 24 – GUARANTOR FINANCIAL INFORMATION
Allegion US Hold Co is the issuer of the 3.200% Senior Notes and 3.550% Senior Notes and is the guarantor of the 3.500% Senior Notes (all three senior notes, collectively, the "Senior Notes"). Allegion plc (the “Parent”) is the issuer of the 3.500% Senior Notes and is the guarantor of the 3.200% Senior Notes and 3.550% Senior Notes. Allegion US Hold Co is 100% owned by the Parent and each of the guarantees of Allegion US Hold Co and the Parent is full and unconditional and joint and several. The following tables present 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, 2019 and 2018, and for the years ended December 31, 2019, 2018 and 2017.
F-42
Condensed and Consolidated Statement of Comprehensive Income
For the year ended December 31, 2019
| In millions | Allegion plc | Allegion US Holding | Other Subsidiaries | Consolidating Adjustments | Total | ||||||||||||||
| Net revenues | $ | — | $ | — | $ | 2,854.0 | $ | — | $ | 2,854.0 | |||||||||
| Cost of goods sold | — | — | 1,601.7 | — | 1,601.7 | ||||||||||||||
| Selling and administrative expenses | 6.5 | 0.3 | 680.4 | — | 687.2 | ||||||||||||||
| Operating (loss) income | (6.5 | ) | (0.3 | ) | 571.9 | — | 565.1 | ||||||||||||
| Equity earnings (loss) in affiliates, net of tax | 448.3 | 281.9 | — | (730.2 | ) | — | |||||||||||||
| Interest expense | 30.5 | 24.9 | 0.6 | — | 56.0 | ||||||||||||||
| Intercompany interest and fees | 9.5 | 106.4 | (115.9 | ) | — | — | |||||||||||||
| Loss on divestitures | — | — | 30.1 | — | 30.1 | ||||||||||||||
| Other expense, net | — | — | 3.8 | — | 3.8 | ||||||||||||||
| Earnings (loss) before income taxes | 401.8 | 150.3 | 653.3 | (730.2 | ) | 475.2 | |||||||||||||
| Provision (benefit) for income taxes | — | (32.4 | ) | 105.5 | — | 73.1 | |||||||||||||
| Net earnings (loss) | 401.8 | 182.7 | 547.8 | (730.2 | ) | 402.1 | |||||||||||||
| Less: Net earnings attributable to noncontrolling interests | — | — | 0.3 | — | 0.3 | ||||||||||||||
| Net earnings (loss) attributable to Allegion plc | $ | 401.8 | $ | 182.7 | $ | 547.5 | $ | (730.2 | ) | $ | 401.8 | ||||||||
| Total comprehensive income (loss) | $ | 406.7 | $ | 179.0 | $ | 556.3 | $ | (735.1 | ) | $ | 406.9 | ||||||||
| Less: Total comprehensive income attributable to noncontrolling interests | — | — | 0.2 | — | 0.2 | ||||||||||||||
| Total comprehensive income (loss) attributable to Allegion plc | $ | 406.7 | $ | 179.0 | $ | 556.1 | $ | (735.1 | ) | $ | 406.7 |
F-43
Condensed and Consolidated Statement of Comprehensive Income
For the year ended December 31, 2018
| In millions | Allegion plc | Allegion US Holding | Other Subsidiaries | Consolidating Adjustments | Total | ||||||||||||||
| Net revenues | $ | — | $ | — | $ | 2,731.7 | $ | — | $ | 2,731.7 | |||||||||
| Cost of goods sold | — | — | 1,558.4 | — | 1,558.4 | ||||||||||||||
| Selling and administrative expenses | 6.3 | 0.1 | 641.1 | — | 647.5 | ||||||||||||||
| Operating (loss) income | (6.3 | ) | (0.1 | ) | 532.2 | — | 525.8 | ||||||||||||
| Equity earnings (loss) in affiliates, net of tax | 468.2 | 228.7 | — | (696.9 | ) | — | |||||||||||||
| Interest expense | 27.4 | 25.8 | 0.8 | — | 54.0 | ||||||||||||||
| Intercompany interest and fees | (0.4 | ) | 107.3 | (106.9 | ) | — | — | ||||||||||||
| Other income, net | — | — | (3.4 | ) | — | (3.4 | ) | ||||||||||||
| Earnings (loss) before income taxes | 434.9 | 95.5 | 641.7 | (696.9 | ) | 475.2 | |||||||||||||
| Provision (benefit) for income taxes | — | (28.2 | ) | 68.0 | — | 39.8 | |||||||||||||
| Net earnings (loss) | 434.9 | 123.7 | 573.7 | (696.9 | ) | 435.4 | |||||||||||||
| Less: Net earnings attributable to noncontrolling interests | — | — | 0.5 | — | 0.5 | ||||||||||||||
| Net earnings (loss) attributable to Allegion plc | $ | 434.9 | $ | 123.7 | $ | 573.2 | $ | (696.9 | ) | $ | 434.9 | ||||||||
| Total comprehensive income (loss) | $ | 374.0 | $ | 133.6 | $ | 501.9 | $ | (634.6 | ) | $ | 374.9 | ||||||||
| Less: Total comprehensive income attributable to noncontrolling interests | — | — | 0.9 | — | 0.9 | ||||||||||||||
| Total comprehensive income (loss) attributable to Allegion plc | $ | 374.0 | $ | 133.6 | $ | 501.0 | $ | (634.6 | ) | $ | 374.0 |
F-44
Condensed and Consolidated Statement of Comprehensive Income
For the year ended December 31, 2017
| In millions | Allegion plc | Allegion US Holding | Other Subsidiaries | Consolidating Adjustments | Total | ||||||||||||||
| Net revenues | $ | — | $ | — | $ | 2,408.2 | $ | — | $ | 2,408.2 | |||||||||
| Cost of goods sold | — | — | 1,335.3 | — | 1,335.3 | ||||||||||||||
| Selling and administrative expenses | 5.3 | 0.2 | 574.9 | — | 580.4 | ||||||||||||||
| Operating (loss) income | (5.3 | ) | (0.2 | ) | 498.0 | — | 492.5 | ||||||||||||
| Equity earnings (loss) in affiliates, net of tax | 348.3 | 154.3 | — | (502.6 | ) | — | |||||||||||||
| Interest expense | 70.6 | 34.8 | 0.3 | — | 105.7 | ||||||||||||||
| Intercompany interest and fees | (0.9 | ) | 111.1 | (110.2 | ) | — | — | ||||||||||||
| Other income, net | — | — | (8.9 | ) | — | (8.9 | ) | ||||||||||||
| Earnings (loss) before income taxes | 273.3 | 8.2 | 616.8 | (502.6 | ) | 395.7 | |||||||||||||
| Provision (benefit) for income taxes | — | (30.4 | ) | 149.4 | — | 119.0 | |||||||||||||
| Net earnings (loss) | 273.3 | 38.6 | 467.4 | (502.6 | ) | 276.7 | |||||||||||||
| Less: Net earnings attributable to noncontrolling interests | — | — | 3.4 | — | 3.4 | ||||||||||||||
| Net earnings (loss) attributable to Allegion plc | $ | 273.3 | $ | 38.6 | $ | 464.0 | $ | (502.6 | ) | $ | 273.3 | ||||||||
| Total comprehensive income (loss) | $ | 391.1 | $ | 39.3 | $ | 584.1 | $ | (620.6 | ) | $ | 393.9 | ||||||||
| Less: Total comprehensive income attributable to noncontrolling interests | — | — | 2.8 | — | 2.8 | ||||||||||||||
| Total comprehensive income (loss) attributable to Allegion plc | $ | 391.1 | $ | 39.3 | $ | 581.3 | $ | (620.6 | ) | $ | 391.1 |
F-45
Condensed and Consolidated Balance Sheet
December 31, 2019
| In millions | Allegion plc | Allegion US Holding | Other Subsidiaries | Consolidating Adjustments | Total | ||||||||||||||
| Current assets: | |||||||||||||||||||
| Cash and cash equivalents | $ | 5.3 | $ | 1.3 | $ | 348.7 | $ | — | $ | 355.3 | |||||||||
| Restricted cash | — | — | 3.4 | — | 3.4 | ||||||||||||||
| Accounts and notes receivable, net | — | — | 329.8 | — | 329.8 | ||||||||||||||
| Inventories | — | — | 269.9 | — | 269.9 | ||||||||||||||
| Other current assets | 0.8 | 34.0 | 27.7 | (19.1 | ) | 43.4 | |||||||||||||
| Accounts and notes receivable affiliates | — | 1,408.6 | 2,674.0 | (4,082.6 | ) | — | |||||||||||||
| Total current assets | 6.1 | 1,443.9 | 3,653.5 | (4,101.7 | ) | 1,001.8 | |||||||||||||
| Investment in affiliates | 1,725.2 | 1,017.2 | — | (2,742.4 | ) | — | |||||||||||||
| Property, plant and equipment, net | — | — | 291.4 | — | 291.4 | ||||||||||||||
| Intangible assets, net | — | — | 1,384.2 | — | 1,384.2 | ||||||||||||||
| Notes receivable affiliates | 30.2 | 416.6 | 651.9 | (1,098.7 | ) | — | |||||||||||||
| Other noncurrent assets | 4.5 | 39.4 | 245.9 | — | 289.8 | ||||||||||||||
| Total assets | $ | 1,766.0 | $ | 2,917.1 | $ | 6,226.9 | $ | (7,942.8 | ) | $ | 2,967.2 | ||||||||
| Current liabilities: | |||||||||||||||||||
| Accounts payable and accruals | $ | 6.5 | $ | 6.7 | $ | 512.8 | $ | (19.1 | ) | $ | 506.9 | ||||||||
| Short-term borrowings and current maturities of long-term debt | — | — | 0.1 | — | 0.1 | ||||||||||||||
| Accounts and note payable affiliates | 1.6 | 2,672.4 | 1,408.6 | (4,082.6 | ) | — | |||||||||||||
| Total current liabilities | 8.1 | 2,679.1 | 1,921.5 | (4,101.7 | ) | 507.0 | |||||||||||||
| Long-term debt | 633.2 | 793.8 | 0.6 | — | 1,427.6 | ||||||||||||||
| Notes payable affiliates | 364.6 | 287.3 | 446.8 | (1,098.7 | ) | — | |||||||||||||
| Other noncurrent liabilities | 2.7 | 6.7 | 262.8 | — | 272.2 | ||||||||||||||
| Total liabilities | 1,008.6 | 3,766.9 | 2,631.7 | (5,200.4 | ) | 2,206.8 | |||||||||||||
| Equity: | |||||||||||||||||||
| Total shareholders’ equity (deficit) | 757.4 | (849.8 | ) | 3,592.2 | (2,742.4 | ) | 757.4 | ||||||||||||
| Noncontrolling interests | — | — | 3.0 | — | 3.0 | ||||||||||||||
| Total equity (deficit) | 757.4 | (849.8 | ) | 3,595.2 | (2,742.4 | ) | 760.4 | ||||||||||||
| Total liabilities and equity | $ | 1,766.0 | $ | 2,917.1 | $ | 6,226.9 | $ | (7,942.8 | ) | $ | 2,967.2 |
F-46
Condensed and Consolidated Balance Sheet
December 31, 2018
| In millions | Allegion plc | Allegion US Holding | Other Subsidiaries | Consolidating Adjustments | Total | ||||||||||||||
| Current assets: | |||||||||||||||||||
| Cash and cash equivalents | $ | 4.2 | $ | 1.0 | $ | 278.6 | $ | — | $ | 283.8 | |||||||||
| Restricted cash | — | — | 6.8 | — | 6.8 | ||||||||||||||
| Accounts and notes receivable, net | — | — | 324.9 | — | 324.9 | ||||||||||||||
| Inventories | — | — | 280.3 | — | 280.3 | ||||||||||||||
| Other current assets | 0.5 | 33.7 | 19.1 | (18.3 | ) | 35.0 | |||||||||||||
| Assets held for sale | — | — | 0.8 | — | 0.8 | ||||||||||||||
| Accounts and notes receivable affiliates | — | 816.2 | 369.8 | (1,186.0 | ) | — | |||||||||||||
| Total current assets | 4.7 | 850.9 | 1,280.3 | (1,204.3 | ) | 931.6 | |||||||||||||
| Investment in affiliates | 1,265.8 | 718.2 | — | (1,984.0 | ) | — | |||||||||||||
| Property, plant and equipment, net | — | — | 276.7 | — | 276.7 | ||||||||||||||
| Intangible assets, net | — | — | 1,430.1 | — | 1,430.1 | ||||||||||||||
| Notes receivable affiliates | 30.8 | 1,061.2 | 2,553.4 | (3,645.4 | ) | — | |||||||||||||
| Other noncurrent assets | 4.0 | 61.2 | 106.6 | — | 171.8 | ||||||||||||||
| Total assets | $ | 1,305.3 | $ | 2,691.5 | $ | 5,647.1 | $ | (6,833.7 | ) | $ | 2,810.2 | ||||||||
| Current liabilities: | |||||||||||||||||||
| Accounts payable and accruals | $ | 2.0 | $ | 6.8 | $ | 495.0 | $ | (18.3 | ) | $ | 485.5 | ||||||||
| Short-term borrowings and current maturities of long-term debt | 35.0 | — | 0.3 | — | 35.3 | ||||||||||||||
| Accounts and note payable affiliates | 0.3 | 369.5 | 816.2 | (1,186.0 | ) | — | |||||||||||||
| Total current liabilities | 37.3 | 376.3 | 1,311.5 | (1,204.3 | ) | 520.8 | |||||||||||||
| Long-term debt | 615.8 | 792.8 | 0.9 | — | 1,409.5 | ||||||||||||||
| Notes payable affiliates | — | 2,553.4 | 1,092.0 | (3,645.4 | ) | — | |||||||||||||
| Other noncurrent liabilities | 1.2 | 5.5 | 219.2 | — | 225.9 | ||||||||||||||
| Total liabilities | 654.3 | 3,728.0 | 2,623.6 | (4,849.7 | ) | 2,156.2 | |||||||||||||
| Equity: | |||||||||||||||||||
| Total shareholders’ equity (deficit) | 651.0 | (1,036.5 | ) | 3,020.5 | (1,984.0 | ) | 651.0 | ||||||||||||
| Noncontrolling interests | — | — | 3.0 | — | 3.0 | ||||||||||||||
| Total equity (deficit) | 651.0 | (1,036.5 | ) | 3,023.5 | (1,984.0 | ) | 654.0 | ||||||||||||
| Total liabilities and equity | $ | 1,305.3 | $ | 2,691.5 | $ | 5,647.1 | $ | (6,833.7 | ) | $ | 2,810.2 |
F-47
Condensed and Consolidated Statement of Cash Flows
For the year ended December 31, 2019
| In millions | Allegion plc | Allegion US Holding | Other Subsidiaries | Consolidating Adjustments | Total | ||||||||||||||
| Net cash (used in) provided by operating activities | $ | (22.3 | ) | $ | (54.7 | ) | $ | 643.5 | $ | (78.3 | ) | $ | 488.2 | ||||||
| Cash flows from investing activities: | |||||||||||||||||||
| Capital expenditures | — | — | (65.6 | ) | — | (65.6 | ) | ||||||||||||
| Acquisition of and equity investments in businesses, net of cash acquired | — | — | (7.6 | ) | — | (7.6 | ) | ||||||||||||
| Proceeds related to business dispositions | — | — | 3.3 | — | 3.3 | ||||||||||||||
| Other investing activities, net | — | (7.5 | ) | (7.7 | ) | 7.5 | (7.7 | ) | |||||||||||
| Net cash (used in) provided by investing activities | — | (7.5 | ) | (77.6 | ) | 7.5 | (77.6 | ) | |||||||||||
| Cash flows from financing activities: | |||||||||||||||||||
| Debt repayments, net | (17.5 | ) | — | (0.4 | ) | — | (17.9 | ) | |||||||||||
| Debt issuance costs | (4.2 | ) | — | — | — | (4.2 | ) | ||||||||||||
| Net inter-company proceeds (payments) | 365.2 | 62.5 | (427.7 | ) | — | — | |||||||||||||
| Dividends paid to ordinary shareholders | (100.6 | ) | — | — | — | (100.6 | ) | ||||||||||||
| Dividends paid | — | — | (78.3 | ) | 78.3 | — | |||||||||||||
| Proceeds from shares issued under incentive plans | 6.5 | — | — | — | 6.5 | ||||||||||||||
| Repurchase of ordinary shares | (226.0 | ) | — | — | — | (226.0 | ) | ||||||||||||
| Other financing activities, net | — | — | 7.5 | (7.5 | ) | — | |||||||||||||
| Net cash provided by (used in) financing activities | 23.4 | 62.5 | (498.9 | ) | 70.8 | (342.2 | ) | ||||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | — | — | (0.3 | ) | — | (0.3 | ) | ||||||||||||
| Net increase in cash, cash equivalents and restricted cash | 1.1 | 0.3 | 66.7 | — | 68.1 | ||||||||||||||
| Cash, cash equivalents and restricted cash – beginning of period | 4.2 | 1.0 | 285.4 | — | 290.6 | ||||||||||||||
| Cash, cash equivalents and restricted cash – end of period | $ | 5.3 | $ | 1.3 | $ | 352.1 | $ | — | $ | 358.7 |
F-48
Condensed and Consolidated Statement of Cash Flows
For the year ended December 31, 2018
| In millions | Allegion plc | Allegion US Holding | Other Subsidiaries | Consolidating Adjustments | Total | ||||||||||||||
| Net cash provided by (used in) operating activities | $ | 209.3 | $ | (59.5 | ) | $ | 631.7 | $ | (323.7 | ) | $ | 457.8 | |||||||
| Cash flows from investing activities: | |||||||||||||||||||
| Capital expenditures | — | — | (49.1 | ) | — | (49.1 | ) | ||||||||||||
| Acquisition of and equity investments in businesses, net of cash acquired | — | (248.5 | ) | (127.6 | ) | — | (376.1 | ) | |||||||||||
| Purchase of investments | — | — | (14.3 | ) | — | (14.3 | ) | ||||||||||||
| Other investing activities, net | — | (1.0 | ) | (4.3 | ) | 1.0 | (4.3 | ) | |||||||||||
| Net cash (used in) provided by investing activities | — | (249.5 | ) | (195.3 | ) | 1.0 | (443.8 | ) | |||||||||||
| Cash flows from financing activities: | |||||||||||||||||||
| Debt repayments, net | (35.0 | ) | — | (1.1 | ) | — | (36.1 | ) | |||||||||||
| Net inter-company (payments) proceeds | (27.3 | ) | 309.7 | (282.4 | ) | — | — | ||||||||||||
| Dividends paid to ordinary shareholders | (79.4 | ) | — | — | — | (79.4 | ) | ||||||||||||
| Dividends paid | — | — | (323.7 | ) | 323.7 | — | |||||||||||||
| Proceeds from shares issued under incentive plans | 3.2 | — | — | — | 3.2 | ||||||||||||||
| Repurchase of ordinary shares | (67.3 | ) | — | — | — | (67.3 | ) | ||||||||||||
| Other financing activities, net | — | — | (2.8 | ) | (1.0 | ) | (3.8 | ) | |||||||||||
| Net cash (used in) provided by financing activities | (205.8 | ) | 309.7 | (610.0 | ) | 322.7 | (183.4 | ) | |||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | — | — | (6.2 | ) | — | (6.2 | ) | ||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 3.5 | 0.7 | (179.8 | ) | — | (175.6 | ) | ||||||||||||
| Cash, cash equivalents and restricted cash – beginning of period | 0.7 | 0.3 | 465.2 | — | 466.2 | ||||||||||||||
| Cash, cash equivalents and restricted cash – end of period | $ | 4.2 | $ | 1.0 | $ | 285.4 | $ | — | $ | 290.6 |
F-49
Condensed and Consolidated Statement of Cash Flows
For the year ended December 31, 2017
| In millions | Allegion plc | Allegion US Holding | Other Subsidiaries | Consolidating Adjustments | Total | ||||||||||||||
| Net cash provided by (used in) operating activities | $ | 581.3 | $ | 63.3 | $ | 565.0 | $ | (862.4 | ) | $ | 347.2 | ||||||||
| Cash flows from investing activities: | |||||||||||||||||||
| Capital expenditures | — | — | (49.3 | ) | — | (49.3 | ) | ||||||||||||
| Acquisition of businesses, net of cash acquired | — | — | (20.8 | ) | — | (20.8 | ) | ||||||||||||
| Proceeds from sale of property, plant and equipment | — | — | 3.1 | — | 3.1 | ||||||||||||||
| Proceeds from sale of equity investment | — | — | 15.6 | — | 15.6 | ||||||||||||||
| Proceeds related to business dispositions | — | — | 1.2 | — | 1.2 | ||||||||||||||
| Net cash used in investing activities | — | — | (50.2 | ) | — | (50.2 | ) | ||||||||||||
| Cash flows from financing activities: | |||||||||||||||||||
| Net (repayments of) proceeds from debt | (488.5 | ) | 500.0 | (1.4 | ) | — | 10.1 | ||||||||||||
| Debt issuance costs | (4.0 | ) | (5.5 | ) | — | — | (9.5 | ) | |||||||||||
| Net inter-company proceeds (payments) | 49.7 | (546.3 | ) | 496.6 | — | — | |||||||||||||
| Redemption premium | (24.6 | ) | (8.6 | ) | — | (33.2 | ) | ||||||||||||
| Dividends paid to ordinary shareholders | (60.9 | ) | — | — | — | (60.9 | ) | ||||||||||||
| Dividends paid | — | — | (862.4 | ) | 862.4 | — | |||||||||||||
| Proceeds from shares issued under incentive plans | 7.2 | — | — | — | 7.2 | ||||||||||||||
| Repurchase of ordinary shares | (60.0 | ) | — | — | — | (60.0 | ) | ||||||||||||
| Other financing activities, net | — | (2.8 | ) | (1.8 | ) | — | (4.6 | ) | |||||||||||
| Net cash (used in) provided by financing activities | (581.1 | ) | (63.2 | ) | (369.0 | ) | 862.4 | (150.9 | ) | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents | — | — | 7.7 | — | 7.7 | ||||||||||||||
| Net increase in cash and cash equivalents | 0.2 | 0.1 | 153.5 | — | 153.8 | ||||||||||||||
| Cash and cash equivalents - beginning of period | 0.5 | 0.2 | 311.7 | — | 312.4 | ||||||||||||||
| Cash and cash equivalents - end of period | $ | 0.7 | $ | 0.3 | $ | 465.2 | $ | — | $ | 466.2 |
F-50
SCHEDULE II
ALLEGION PLC
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2019**,** 2018 AND 2017
(Amounts in millions)
| Allowances for Doubtful Accounts: | |||
| Balance December 31, 2016 | $ | 2.7 | |
| Additions charged to costs and expenses | 0.8 | ||
| Deductions* | (0.9 | ) | |
| Currency translation | 0.2 | ||
| Balance December 31, 2017 | 2.8 | ||
| Additions charged to costs and expenses | 1.6 | ||
| Deductions* | (1.0 | ) | |
| Currency translation | (0.1 | ) | |
| Balance December 31, 2018 | 3.3 | ||
| Additions charged to costs and expenses | 2.4 | ||
| Currency translation | (0.1 | ) | |
| Balance December 31, 2019 | $ | 5.6 |
| * | "Deductions" include accounts and advances written off, less recoveries. |
F-51
Previous: Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES