ALLE-10Q-09.30.2014-Q3
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
_______________________________
FORM 10-Q
_______________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 001-35971
_______________________________ 
ALLEGION PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
_______________________________
Ireland
98-1108930
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Block D
Iveagh Court
Harcourt Road
Dublin 2, Ireland
(Address of principal executive offices, including zip code)
+(353) (1) 2546200
(Registrant’s telephone number, including area code)
_______________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x   NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” "accelerated filer," and "smaller reporting company," in Rule 12b-2 of the Exchange Act.

Large accelerated filer
¨
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
x
 
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES  ¨    NO  x
The number of ordinary shares outstanding of Allegion plc as of October 27, 2014 was 95,728,586.


Table of Contents

ALLEGION PLC
FORM 10-Q
INDEX

 
 
 
 
 
 
Item 1 -
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2 -
 
 
 
Item 3 -
 
 
 
Item 4 -
 
 
 
 
 
Item 1 -
 
 
 
Item 1A -
 
 
 
Item 2 -
 
 
 
Item 6 -
 
 


Table of Contents

PART I-FINANCIAL INFORMATION

Item 1.
Financial Statements

ALLEGION PLC
CONDENSED AND CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
In millions, except per share amounts
2014
 
2013
 
2014
 
2013
Net revenues
$
546.7

 
$
529.0

 
$
1,544.8

 
$
1,525.9

Cost of goods sold
310.6

 
290.6

 
890.6

 
883.0

Selling and administrative expenses
130.5

 
122.2

 
391.5

 
357.2

Goodwill impairment charge
—

 
137.6

 
—

 
137.6

Operating income (loss)
105.6

 
(21.4
)
 
262.7

 
148.1

Interest expense
12.7

 
0.5

 
38.3

 
1.4

Other (gain) loss, net
(2.0
)
 
0.2

 
(3.1
)
 
6.9

Earnings (loss) before income taxes
94.9

 
(22.1
)
 
227.5

 
139.8

Provision for income taxes
27.2

 
45.5

 
66.6

 
102.4

Earnings (loss) from continuing operations
67.7

 
(67.6
)
 
160.9

 
37.4

Discontinued operations, net of tax
(2.1
)
 
(0.4
)
 
(10.9
)
 
(1.9
)
Net earnings (loss)
65.6

 
(68.0
)
 
150.0

 
35.5

Less: Net earnings attributable to noncontrolling interests
5.3

 
10.1

 
10.6

 
13.9

Net earnings (loss) attributable to Allegion plc
$
60.3

 
$
(78.1
)
 
$
139.4

 
$
21.6

Amounts attributable to Allegion plc ordinary shareholders:
 
 
 
 
 
 
 
Continuing operations
$
62.4

 
$
(77.7
)
 
$
150.3

 
$
23.5

Discontinued operations
(2.1
)
 
(0.4
)
 
(10.9
)
 
(1.9
)
Net earnings (loss)
$
60.3

 
$
(78.1
)
 
$
139.4

 
$
21.6

Earnings (loss) per share attributable to Allegion plc ordinary shareholders:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Continuing operations
$
0.65

 
$
(0.81
)
 
$
1.56

 
$
0.24

Discontinued operations
(0.02
)
 
—

 
(0.11
)
 
(0.01
)
Net earnings
$
0.63

 
$
(0.81
)
 
$
1.45

 
$
0.23

Diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.64

 
$
(0.81
)
 
$
1.54

 
$
0.24

Discontinued operations
(0.02
)
 
—

 
(0.11
)
 
(0.01
)
Net earnings
$
0.62

 
$
(0.81
)
 
$
1.43

 
$
0.23

Weighted-average shares outstanding
 
 
 
 
 
 
 
Basic
95.9

 
96.0

 
96.2

 
96.0

Diluted
96.9

 
96.0

 
97.3

 
96.0

 
 
 
 
 
 
 
 
Dividends declared per ordinary share
$
0.08

 
$
—

 
$
0.24

 
$
—

 
 
 
 
 
 
 
 
Total comprehensive income (loss)
$
40.5

 
$
(107.2
)
 
$
116.6

 
$
(12.3
)
Less: Total comprehensive income attributable to noncontrolling interests
5.7

 
10.3

 
10.1

 
14.8

Total comprehensive income (loss) attributable to Allegion plc
$
34.8

 
$
(117.5
)
 
$
106.5

 
$
(27.1
)
See accompanying notes to condensed and consolidated financial statements.

1
Table of Contents

ALLEGION PLC
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(Unaudited)
In millions
September 30,
2014
 
December 31,
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
251.4

 
$
227.4

Restricted cash
—

 
40.2

Accounts and notes receivable, net
287.3

 
260.0

Costs in excess of billings on uncompleted contracts
153.6

 
158.8

Inventories
180.7

 
153.6

Other current assets
61.0

 
74.8

Assets held for sale
—

 
11.2

Total current assets
934.0

 
926.0

Property, plant and equipment, net
212.5

 
200.2

Goodwill
509.9

 
504.9

Intangible assets, net
133.1

 
146.1

Other noncurrent assets
202.7

 
202.7

Total assets
$
1,992.2

 
$
1,979.9

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
222.9

 
$
211.3

Accrued expenses and other current liabilities
211.0

 
207.3

Short-term borrowings and current maturities of long-term debt
30.3

 
71.9

Total current liabilities
464.2

 
490.5

Long-term debt
1,249.2

 
1,272.0

Other noncurrent liabilities
272.8

 
273.1

Total liabilities
1,986.2

 
2,035.6

Equity:
 
 
 
Allegion plc shareholders’ equity (deficit):
 
 
 
Ordinary shares
1.0

 
1.0

Capital in excess of par value
2.6

 
8.4

Retained earnings
95.4

 
0.4

Accumulated other comprehensive income (loss)
(129.7
)
 
(96.6
)
Total Allegion plc shareholders’ equity
(30.7
)
 
(86.8
)
Noncontrolling interests
36.7

 
31.1

Total equity
6.0

 
(55.7
)
Total liabilities and equity
$
1,992.2

 
$
1,979.9

See accompanying notes to condensed and consolidated financial statements.


2
Table of Contents

ALLEGION PLC
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
Nine months ended
 
September 30,
In millions
2014
 
2013
Cash flows from operating activities:
 
 
 
Net earnings
150.0

 
35.5

Discontinued operations, net of tax
10.9

 
1.9

Adjustments to arrive at net cash provided by (used in) operating activities:
 
 
 
Goodwill impairment charge
—

 
137.6

Depreciation and amortization
36.5

 
34.2

Excess tax benefit from share based awards
(3.8
)
 
—

Deferred income taxes
2.1

 
—

Gain on sale of property, plant and equipment
—

 
(21.3
)
Changes in assets and liabilities and other non-cash items
(20.9
)
 
(31.2
)
Net cash provided by continuing operating activities
174.8

 
156.7

Net cash provided by (used in) discontinued operating activities
(2.8
)
 
0.9

Net cash provided by operating activities
172.0

 
157.6

Cash flows from investing activities:
 
 
 
Capital expenditures
(39.8
)
 
(12.0
)
Acquisition of businesses, net of cash acquired
(23.0
)
 
—

Other investing activities, net
41.9

 
24.4

Net cash provided by (used in) investing activities
(20.9
)
 
12.4

Cash flows from financing activities:
 
 
 
Net debt repayments
(63.1
)
 
(0.2
)
Dividends paid to ordinary shareholders
(22.6
)
 
—

Repurchase of ordinary shares
(50.3
)
 
—

Net transfers to former Parent and affiliates
—

 
(118.5
)
Other financing activities, net
15.4

 
(5.2
)
Net cash used in continuing financing activities
(120.6
)
 
(123.9
)
Effect of exchange rate changes on cash and cash equivalents
(6.5
)
 
4.9

Net increase in cash and cash equivalents
24.0

 
51.0

Cash and cash equivalents - beginning of period
227.4

 
317.5

Cash and cash equivalents - end of period
$
251.4

 
$
368.5

See accompanying notes to condensed and consolidated financial statements.


3
Table of Contents

ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Basis of Presentation
The accompanying condensed and consolidated financial statements of Allegion plc, an Irish public limited company, and its consolidated subsidiaries ("Allegion" or "the Company"), reflect the consolidated operations of the Company and have been prepared in accordance with United States Securities and Exchange Commission ("SEC") interim reporting requirements. Accordingly, the accompanying condensed and consolidated financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America ("GAAP") for full financial statements and should be read in conjunction with the consolidated financial statements included in the Allegion Annual Report on Form 10-K for the year ended December 31, 2013. In the opinion of management, the accompanying condensed and consolidated financial statements contain all adjustments, which include normal recurring adjustments, necessary to present fairly the consolidated unaudited results for the interim periods presented.

On September 1, 2014 the Company completed the sale of its United Kingdom (UK) Door businesses to an affiliate of Alcyon Financial Limited, a financial investment firm. Historical results of the component have been reclassified to discontinued operations for all periods presented. See Note 16 - Discontinued Operations for more information.

Note 2 – Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements:

In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-04, "Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date." ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements where the total obligation is fixed at the reporting date, and for which no specific guidance currently exists. This new guidance is effective for annual reporting periods beginning on or after December 15, 2013 and subsequent interim periods. The requirements of ASU 2013-04 do not have a significant impact on the Condensed and Consolidated Financial Statements.

In March 2013, the FASB issued ASU 2013-05, "Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity." ASU 2013-05 clarifies the application of GAAP to the release of cumulative translation adjustments related to changes of ownership in or within foreign entities, including step acquisitions. This new guidance is effective for annual reporting periods beginning on or after December 15, 2013 and subsequent interim periods. The requirements of ASU 2013-04 do not have a significant impact on the Condensed and Consolidated Financial Statements.

In July 2013, the FASB issued ASU 2013-11 Income Taxes (Topic 740), "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss or a Tax Credit Carryforward Exists." With certain exceptions, ASU 2013-11 requires entities to present an unrecognized tax benefit, or portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. The guidance is effective for interim and annual periods beginning after December 15, 2013 on either a prospective or retrospective basis with early adoption permitted. The requirements of ASU 2013-11 do not have a significant impact on the Condensed and Consolidated Financial Statements.

Recently Issued Accounting Pronouncements

In April 2014, the FASB issued ASU 2014-08 "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," which amends the definition of a discontinued operation in Accounting Standards Codification Topic 205-20 (Presentation of Financial Statements — Discontinued Operations) and requires entities to disclose additional information about disposal transactions that do not meet the discontinued operations criteria. ASU 2014-08 redefines a discontinued operation as a component or group of components of an entity that (1) has been disposed of by sale or other than by sale or is classified as held for sale and (2) represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. According to the ASU, a strategic shift that has (or will have) a major effect on an entity’s operations and results includes the disposal of a major geographical area, a major line of business, a major equity investment, or other major parts of an entity. The ASU is effective prospectively for disposals or components classified as held for sale in periods on or after December 15, 2014. The Company is assessing what impact, if any, the ASU 2014-08 will have on the Condensed and Consolidated Financial Statements.


4
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


In May 2014, the FASB issued ASU 2014-09 "Revenue from Contracts with Customers." ASU 2014-09 is the result of a joint project between the FASB and International Accounting Standards Board ("IASB") to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards ("IFRS") that would remove inconsistencies and weaknesses in revenue requirements, provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, provide more useful information to users of financial statements through improved disclosure requirements and simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. The ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is assessing what impact, if any, ASU 2014-09 will have on the Condensed and Consolidated Financial Statements.

In June 2014, the FASB issued ASU 2014-12 "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period." ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The ASU is effective for annual and interim reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early application is permitted. The requirements of ASU 2014-12 are not expected to have a significant impact on the Condensed and Consolidated Financial Statements.

Note 3 – Inventories
Depending on the business, U.S. inventories are stated at the lower of cost or market using the last-in, first-out (LIFO) method or the lower of cost or market using the first-in, first-out (FIFO) method. Non-U.S. inventories are primarily stated at the lower of cost or market using the FIFO method.
The major classes of inventory were as follows:
In millions
September 30,
2014
 
December 31,
2013
Raw materials
$
62.8

 
$
68.3

Work-in-process
46.9

 
34.5

Finished goods
105.4

 
84.6

 
215.1

 
187.4

LIFO reserve
(34.4
)
 
(33.8
)
Total
$
180.7

 
$
153.6


Note 4 – Goodwill
The changes in the carrying amount of goodwill for the nine months ended September 30, 2014 were as follows:  
In millions
Americas
 
EMEIA
 
Asia Pacific
 
Total
December 31, 2013 (gross)
$
362.8

 
$
540.0

 
$
87.6

 
$
990.4

Acquisitions
2.3

 
—

 
10.3

 
12.6

Currency translation
—

 
(4.6
)
 
(3.0
)
 
(7.6
)
September 30, 2014 (gross)
365.1

 
535.4

 
94.9

 
995.4

Accumulated impairment *
—

 
(478.6
)
 
(6.9
)
 
(485.5
)
Goodwill (net)
$
365.1

 
$
56.8

 
$
88.0

 
$
509.9

* The Company recorded a $137.6 million goodwill impairment charge in the EMEIA segment in the third quarter of 2013.


5
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


Note 5 – Intangible Assets
The gross amount of the Company’s intangible assets and related accumulated amortization were as follows:
 
 
September 30, 2014
 
December 31, 2013
In millions
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
Completed technologies/patents
 
$
28.5

 
$
(23.3
)
 
$
5.2

 
$
26.4

 
$
(23.6
)
 
$
2.8

Customer relationships
 
99.3

 
(38.2
)
 
61.1

 
107.8

 
(38.1
)
 
69.7

Trademarks (finite-lived)
 
93.2

 
(36.6
)
 
56.6

 
101.4

 
(36.8
)
 
64.6

Other
 
10.6

 
(10.6
)
 
—

 
13.4

 
(13.4
)
 
—

Total finite-lived intangible assets
 
231.6

 
$
(108.7
)
 
122.9

 
249.0

 
$
(111.9
)
 
137.1

Trademarks (indefinite-lived)
 
10.2

 
 
 
10.2

 
9.0

 
 
 
9.0

Total
 
$
241.8

 
 
 
$
133.1

 
$
258.0

 
 
 
$
146.1


Intangible asset amortization expense was $7.4 million and $7.1 million for the nine months ended September 30, 2014 and 2013, respectively. Future estimated amortization expense on existing intangible assets in each of the next five years amounts to approximately $10.0 million for full year 2014, $8.0 million for 2015, $8.0 million for 2016, $8.0 million for 2017, and $8.0 million for 2018.

Note 6 – Acquisitions

On January 2, 2014, the Company completed the acquisition of certain assets of Schlage Lock de Colombia S.A., the second largest mechanical lock manufacturer in Colombia. On April 30, 2014, the Company completed the acquisition of Fire & Security Hardware Pty Limited (FSH), an electromechanical locking provider in Australia. Aggregate cash consideration paid for these acquisitions was approximately $23.0 million.

Note 7 – Debt and Credit Facilities

Long-term debt and other borrowings consisted of the following:
In millions
September 30,
2014
 
December 31,
2013
Term Loan A Facility due 2018
$
481.2

 
$
500.0

Term Loan B Facility due 2020
496.3

 
500.0

5.75% Senior notes due 2021
300.0


300.0

Other debt, including capital leases, maturing in various amounts through 2016
2.0

 
43.9

Total debt
1,279.5

 
1,343.9

Less: current portion of long term debt
30.3

 
71.9


$
1,249.2

 
$
1,272.0


Senior Secured Credit Facilities

A wholly-owned subsidiary of the Company has a credit agreement providing for (i) $1.0 billion of Senior Secured Term Loan Facilities, consisting of a $500 million “tranche A” Term Loan Facility due in 2018 (the "Term Loan A Facility") and a $500 million "tranche B" Term Loan Facility due in 2020 (the "Term Loan B Facility," and together with the Term Loan A Facility, the "Term Facilities"), and (ii) a $500 million Senior Secured Revolving Credit Facility (the "Revolver") maturing in 2018. The Company refers to these credit facilities as its "Senior Secured Credit Facilities." The Company repaid $22.5 million of principal on its Term Loan A and Term Loan B Facilities during the nine months ended September 30, 2014 in accordance with the terms of its senior secured credit facility. At September 30, 2014, the Company did not have any borrowings outstanding under the Revolver and had $29.2 million of letters of credit outstanding, which reduces the availability under the Revolver.


6
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


Outstanding borrowings under the Senior Secured Credit Facilities currently accrue interest at LIBOR plus an applicable margin. The applicable margin for borrowings under the Term Loan B Facility is 2.25% as of September 30, 2014, with LIBOR for the Term Loan B Facility to be subject to a floor of 0.75% per annum. The applicable margin for borrowings under the Revolver and the Term Loan A Facility is subject to a credit facility rating-based pricing grid with the LIBOR ranging from 1.75% to 2.25%. The margin for Term Loan A Facility borrowings was 2.00% as of September 30, 2014.

The Company amended its Senior Secured Credit Facilities on October 15, 2014. See Note 21 for further details.

Senior Notes

A wholly-owned subsidiary of the Company has issued $300 million of 5.75% senior notes due 2021 (the "Senior Notes"). The Senior Notes accrue interest at the rate of 5.75% per annum, payable semi-annually on April 1 and October 1 of each year, commencing on April 1, 2014. The Senior Notes mature on October 1, 2021.

At September 30, 2014, the weighted-average interest rate for borrowings was 2.6% under the Term Loan Facilities and 5.75% under the Senior Notes.

Note 8 – 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.

On the date 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 highly effective in offsetting the changes in the cash flows of the hedged item. To the extent the derivative is deemed to be a highly effective hedge, the fair market value changes of the instrument are recorded to accumulated other comprehensive income (AOCI).

Any ineffective portion of a derivative instrument’s change in fair value is recorded in Net earnings in the period of change. If the hedging relationship ceases to be highly effective, or it becomes probable that a forecasted transaction is no longer expected to occur, the hedging relationship will be undesignated and any future gains and losses on the derivative instrument will be recorded in Net earnings.
Currency Hedging Instruments
The net notional amount of the Company’s currency derivatives was $154.0 million and $209.6 million at September 30, 2014 and December 31, 2013, respectively. At September 30, 2014 and December 31, 2013, gains of $0.9 million and $0.5 million, net of tax, respectively, were included in AOCI related to the fair value of the Company’s currency derivatives designated as accounting hedges. The amount expected to be reclassified into Net earnings over the next twelve months is a gain of $0.9 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 September 30, 2014, the maximum term of the Company’s currency derivatives was less than one year.
Interest Rate Swaps
In June 2014, the Company entered into forward starting interest rate swaps for $300.0 million of the Company's variable rate $985.0 million Term Loan Facilities. Swaps with notional amounts totaling $275.0 million become effective in January 2015 and

7
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


expire in September 2017 and swaps with notional amounts totaling $25.0 million become effective in January 2015 and expire in December 2016. These interest rate swaps met the criteria to be accounted for as cash flow hedges of variable rate interest payments. Consequently, the changes in fair value of the interest rate swaps were recognized in AOCI. At September 30, 2014, $0.8 million of gains were recorded in AOCI related to these interest rate swaps and none are expected to be reclassified into Interest expense over the next twelve months.
The fair values of derivative instruments included within the Condensed and Consolidated Balance Sheets were as follows:
 
Asset derivatives
 
Liability derivatives
In millions
September 30,
2014
 
December 31,
2013
 
September 30,
2014
 
December 31,
2013
Derivatives designated as hedges:

 

 

 

Currency derivatives
$
1.2

 
$
0.7

 
$
—

 
$
—

Interest rate swaps
0.8

 
—

 
—

 
—

Derivatives not designated as hedges:

 

 

 

Currency derivatives
1.7

 
—

 
6.4

 
2.7

Total derivatives
$
3.7

 
$
0.7

 
$
6.4

 
$
2.7

Asset and liability derivatives included in the table above are recorded within Other current assets and Accrued expenses and other current liabilities, respectively.
The amounts associated with derivatives designated as hedges affecting Net earnings and AOCI for the nine months ended September 30 were as follows:
  
Amount of gain (loss)
recognized in AOCI
 
Location of gain
(loss) reclassified from
AOCI and recognized
into Net earnings
 
Amount of gain (loss) reclassified from AOCI and
recognized into Net earnings
In millions
2014
 
2013
 
 
2014
 
2013
Currency derivatives
$
0.9

 
$
1.1

 
Cost of goods sold
 
$
2.5

 
$
0.9

Interest rate swaps
0.8

 
—

 
Interest expense
 
—

 
—

Total
$
1.7

 
$
1.1

 

 
$
2.5

 
$
0.9


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 9 – Pensions and Postretirement Benefits Other than Pensions

The Company sponsors several U.S. defined benefit and defined contribution plans covering substantially all of its 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.

8
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


The components of the Company’s net periodic pension benefit costs for the three and nine months ended September 30 were as follows:
 
U.S.
 
Three months ended
 
Nine months ended
In millions
2014
 
2013
 
2014
 
2013
Service cost
$
1.7

 
$
2.3

 
$
5.3

 
$
6.7

Interest cost
2.8

 
2.5

 
8.4

 
7.6

Expected return on plan assets
(2.7
)
 
(2.7
)
 
(8.3
)
 
(8.0
)
Net amortization of:

 

 

 

Prior service costs
0.1

 
0.1

 
0.5

 
0.4

Plan net actuarial losses
0.5

 
1.0

 
1.5

 
2.9

Net periodic pension benefit cost
$
2.4

 
$
3.2

 
$
7.4

 
$
9.6

 
Non-U.S.
 
Three months ended
 
Nine months ended
In millions
2014
 
2013
 
2014
 
2013
Service cost
$
1.3

 
$
1.0

 
$
3.6

 
$
2.8

Interest cost
4.4

 
2.6

 
13.1

 
7.8

Expected return on plan assets
(4.3
)
 
(2.4
)
 
(13.0
)
 
(7.2
)
Net amortization of:
 
 
 
 
 
 
 
Prior service costs
—

 
—

 
—

 
—

Plan net actuarial losses
0.7

 
0.4

 
2.1

 
1.3

Net periodic pension benefit cost
$
2.1

 
$
1.6

 
$
5.8

 
$
4.7

Net curtailment gain
3.2

 
—

 
3.2

 
—

Net periodic pension benefit cost after curtailment
$
5.3

 
$
1.6

 
$
9.0

 
$
4.7

The Company made employer contributions of $1.2 million and $0.9 million to its defined benefit pension plans during the nine months ended September 30, 2014 and 2013. Additional contributions of approximately $15.7 million are expected during the remainder of 2014.
Postretirement Benefits Other Than Pensions
The Company sponsors several postretirement plans that provide 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.
The components of net periodic postretirement benefit cost for the three and nine months ended September 30 were as follows:
 
Three months ended
 
Nine months ended
In millions
2014
 
2013
 
2014
 
2013
Service cost
$
—

 
$
0.1

 
$
0.1

 
$
0.2

Interest cost
0.1

 
0.1

 
0.4

 
0.4

Net amortization of:
 
 
 
 
 
 
 
Prior service gains
(0.4
)
 
(0.6
)
 
(1.2
)
 
(1.7
)
Net actuarial losses
—

 
0.1

 
—

 
0.2

Net periodic postretirement benefit cost
$
(0.3
)
 
$
(0.3
)
 
$
(0.7
)
 
$
(0.9
)


9
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)



Note 10 – Fair Value Measurement
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 three levels that are described below:
•
Level 1 – Inputs based on quoted prices in active markets for identical assets or liabilities.
•
Level 2 – Inputs other than Level 1 quoted prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
•
Level 3 – Unobservable inputs based on little or no market activity and that are significant to the fair value of the assets and liabilities.
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability based on the best information available under the circumstances. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Assets and liabilities measured at fair value at September 30, 2014 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:
 
 
 
 
 
 
 
Marketable securities
$
18.1

 
$
—

 
$
—

 
$
18.1

Foreign currency contracts
—

 
2.9

 
—

 
2.9

Interest rate swap
—

 
0.8

 
—

 
—

Total asset recurring fair value measurements
18.1

 
3.7

 
—

 
21.0

Liabilities:

 

 

 

Foreign currency contracts
—

 
6.4

 
—

 
6.4

Total liability recurring fair value measurements
—

 
6.4

 
—

 
6.4

Financial instruments not carried at fair value
 
 
 
 
 
 
 
Total debt
—

 
1,282.1

 
—

 
1,282.1

Total financial instruments not carried at fair value
$
—

 
$
1,282.1

 
$
—

 
$
1,282.1


10
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


Assets and liabilities measured at fair value at December 31, 2013 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:
 
 
 
 
 
 
 
Marketable securities
$
20.2

 
$
—

 
$
—

 
$
20.2

Foreign currency contracts
—

 
0.7

 
—

 
0.7

Total asset recurring fair value measurements
20.2

 
0.7

 
—

 
20.9

Liabilities:

 

 

 

Foreign currency contracts
—

 
2.7

 
—

 
2.7

Total liability recurring fair value measurements
—

 
2.7

 
—

 
2.7

Financial instruments not carried at fair value
 
 
 
 
 
 
 
Total debt
—

 
1,356.3

 
—

 
1,356.3

Total financial instruments not carried at fair value
$
—

 
$
1,356.3

 
$
—

 
$
1,356.3

The Company determines the fair value of its financial assets and liabilities using the following methodologies:
•
Marketable securities – These securities include investments in publicly traded stock of non-U.S. companies held by non-U.S. subsidiaries of the Company. The fair value is obtained for the securities based on observable market prices quoted on public stock exchanges.
•
Foreign currency contracts – These instruments include foreign currency contracts for non-functional currency balance sheet exposures. The fair value of the foreign currency contracts are determined based on a pricing model that uses spot rates and forward prices from actively quoted currency markets that are readily accessible and observable.
•
Interest rate swaps – These instruments include forward-starting interest rate swap contracts for $300.0 million of the Company's variable rate debt. The fair value of the derivative instruments are determined based on quoted prices for the Company's swaps, which are not considered an active market.
•
Debt – These securities are recorded at cost and include senior notes maturing through 2021. The fair value of the long-term debt instruments is obtained based on observable market prices quoted on public exchanges for similar assets.
The carrying values of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings are a reasonable estimate of their fair value due to the short-term nature of these instruments.

These methodologies used by the Company to determine the fair value of its financial assets and liabilities at September 30, 2014 are the same as those used at December 31, 2013. There have been no significant transfers between Level 1 and Level 2 categories.

Note 11 – Equity
The reconciliation of Ordinary shares is as follows:
In millions
Total
December 31, 2013
96.0

Shares issued under incentive plans, net
0.8

Repurchase of ordinary shares
(1.0
)
September 30, 2014
95.8


11
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


During the three and nine months ended September 30, 2014, the Company paid $19.9 million to repurchase 0.4 million ordinary shares and $50.3 million to repurchase 1.0 million ordinary shares, respectively, on the open market under a share repurchase program previously approved by its Board of Directors.
The components of Equity for the nine months ended September 30, 2014 were as follows:
In millions
Allegion plc
shareholders’
equity
 
Noncontrolling
interests
 
Total
equity
Balance at December 31, 2013
$
(86.8
)
 
$
31.1

 
$
(55.7
)
Net earnings
139.4

 
10.6

 
150.0

Currency translation
(41.6
)
 
(0.5
)
 
(42.1
)
Change in value of marketable securities and derivatives qualifying as cash flow hedges, net of tax
0.7

 
—

 
0.7

Pension and OPEB adjustments, net of tax
8.0

 
—

 
8.0

Total comprehensive income
106.5

 
10.1

 
116.6

Share-based compensation
9.7

 
—

 
9.7

Dividends to noncontrolling interests
—

 
(4.5
)
 
(4.5
)
Dividends to ordinary shareholders
(23.0
)
 
—

 
(23.0
)
Repurchase of ordinary shares
(50.3
)
 
—

 
(50.3
)
Shares issued under incentive plans, net
16.4

 
—

 
16.4

       Other
(3.2
)
 
—

 
(3.2
)
Balance at September 30, 2014
$
(30.7
)
 
$
36.7

 
$
6.0

The components of Equity for the nine months ended September 30, 2013 were as follows:
In millions
Allegion plc
shareholders’
equity
 
Noncontrolling
interests
 
Total
equity
Balance at December 31, 2012
$
1,343.2

 
$
23.0

 
$
1,366.2

Net earnings
21.6

 
13.9

 
35.5

Currency translation
(56.9
)
 
0.9

 
(56.0
)
Change in value of marketable securities and derivatives qualifying as cash flow hedges, net of tax
4.9

 
—

 
4.9

Pension and OPEB adjustments, net of tax
3.3

 
—

 
3.3

Total comprehensive income
(27.1
)
 
14.8

 
(12.3
)
Dividends to noncontrolling interests
—

 
(5.2
)
 
(5.2
)
Distribution/contribution to/from Parent Company
(47.7
)
 
—

 
(47.7
)
Balance at September 30, 2013
$
1,268.4

 
$
32.6

 
$
1,301.0


12
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


Other Comprehensive Income (Loss)

The changes in Accumulated other comprehensive income (loss) for the nine months ended September 30, 2014 are as follows:
In millions
 
Cash flow hedges and marketable securities
 
Pension and OPEB Items
 
Foreign Currency Items
 
Total
December 31, 2013
 
$
16.7

 
$
(131.3
)
 
$
18.0

 
$
(96.6
)
Other comprehensive income before reclassifications
 
3.2

 
5.1

 
(41.6
)
 
(33.3
)
Amounts reclassified from accumulated other comprehensive income
 
(2.5
)
 
2.9

 
—

 
0.4

Tax (expense) benefit
 
(0.2
)
 
—

 
—

 
(0.2
)
September 30, 2014
 
$
17.2

 
$
(123.3
)
 
$
(23.6
)
 
$
(129.7
)

The changes in Accumulated other comprehensive income (loss) for the nine months ended September 30, 2013 are as follows:
In millions
 
Cash flow hedges and marketable securities
 
Pension and OPEB Items
 
Foreign Currency Items
 
Total
December 31, 2012
 
$
10.9

 
$
(95.7
)
 
$
77.1

 
$
(7.7
)
Other comprehensive income before reclassifications
 
5.8

 
0.2

 
(57.1
)
 
(51.1
)
Amounts reclassified from accumulated other comprehensive income
 
(0.9
)
 
3.1

 
—

 
2.2

Tax (expense) benefit
 
0.2

 
—

 
—

 
0.2

September 30, 2013
 
$
16.0

 
$
(92.4
)
 
$
20.0

 
$
(56.4
)

The reclassifications out of Accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2014 were as follows:
 
 
Amount Reclassified from Accumulated Other Comprehensive Income
 
 
In millions
 
Three months ended
 
Nine months ended
 
Statement of Comprehensive Income Line Item
Reclasses below represent (Income) loss to the Statement of Comprehensive Income
 
 
 
 
 
 
 
Gains and losses on cash flow hedges:
 
 
 
 
 
 
Foreign exchange contracts
 
$
(1.9
)
 
$
(2.5
)
 
 Cost of goods sold
 
 
(1.9
)
 
(2.5
)
 
 Earnings before income taxes
 
 
(0.3
)
 
(0.2
)
 
 Provision for income taxes
 
 
$
(2.2
)
 
$
(2.7
)
 
 Earnings from continuing operations
 
 
 
 
 
 
 
Defined benefit pension items:
 
 
 
 
 
 
Amortization of:
 
 
 
 
 
 
Prior-service (gains) costs
 
$
(0.3
)
 
$
(0.7
)
 
 (a)
Actuarial (gains) losses
 
1.2

 
3.6

 
 (a)
 
 
0.9

 
2.9

 
 Earnings from continuing operations
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(1.3
)
 
$
0.2

 
 Earnings from continuing operations
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension cost and net periodic postretirement benefit cost (see Note 9 for additional details).

13
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)



The reclassifications out of Accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2013 were as follows:
 
 
Amount Reclassified from Accumulated Other Comprehensive Income
 
 
In millions
 
Three months ended
 
Nine months ended
 
Statement of Comprehensive Income Line Item
Reclasses below represent (Income) loss to the Statement of Comprehensive Income
 
 
 
 
 
 
 
Gains and losses on cash flow hedges:
 
 
 
 
 
 
Foreign exchange contracts
 
$
(0.3
)
 
$
(0.9
)
 
 Cost of goods sold
 
 
(0.3
)
 
(0.9
)
 
 Earnings before income taxes
 
 
0.2

 
0.2

 
 Provision for income taxes
 
 
$
(0.1
)
 
$
(0.7
)
 
 Earnings from continuing operations
 
 
 
 
 
 
 
Defined benefit pension items:
 
 
 
 
 
 
Amortization of:
 
 
 
 
 
 
Prior-service (gains) costs
 
$
(0.5
)
 
$
(1.3
)
 
 (a)
Actuarial (gains) losses
 
1.5

 
4.4

 
 (a)
 
 
1.0

 
3.1

 
 Earnings from continuing operations
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
0.9

 
$
2.4

 
 Earnings from continuing operations
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension cost and net periodic postretirement benefit cost (see Note 9 for additional details).

Note 12 – Share-Based Compensation
The Company records share-based compensation awards using a fair value method and recognizes compensation expense for an amount equal to the fair value of the share-based payment issued in its financial statements. The Company’s share-based compensation plans include programs for stock options, restricted stock units (RSUs), performance share units (PSUs) and deferred compensation.

Compensation Expense

Share-based compensation expense relates to continuing operations and is included in Selling and administrative expenses. The expenses recognized for the three and nine months ended September 30 were as follows:
 
Three months ended
 
Nine months ended
In millions
2014
 
2013
 
2014
 
2013
Stock options
$
0.8

 
$
0.3

 
$
2.7

 
$
1.4

RSUs
1.3

 
0.6

 
4.5

 
2.1

PSUs
1.1

 
0.2

 
2.5

 
0.9

Deferred compensation
—

 
0.6

 
0.5

 
1.2

Pre-tax expense
3.2

 
1.7

 
10.2

 
5.6

Tax benefit
(1.1
)
 
(0.6
)
 
(3.6
)
 
(2.1
)
After-tax expense
$
2.1

 
$
1.1

 
$
6.6

 
$
3.5



14
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


Stock Options/RSUs

Eligible participants may receive (i) stock options, (ii) RSUs or (iii) a combination of both stock options and RSUs. Grants issued during the nine months ended September 30 were as follows:
 
2014
 
2013
 
Number
granted
 
Weighted-
average fair
value per award
 
Number
granted
 
Weighted-
average fair
value per award
Stock options
188,817

 
$
19.54

 
123,200

 
$
16.50

RSUs
101,653

 
$
54.29

 
50,197

 
$
52.60


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 is determined using the Black-Scholes option-pricing model. The following assumptions were used during the nine months ended September 30:
 
2014
 
2013
Dividend yield
0.60
%
 
1.60
%
Volatility
36.55
%
 
42.14
%
Risk-free rate of return
1.94
%
 
0.85
%
Expected life
6.0 years

 
5.1 years


For grants issued prior to December 1, 2013, expected volatility is based on the historical volatility from traded options on the stock of Ingersoll Rand plc ("Ingersoll Rand"), the former parent of our commercial and residential security businesses. The risk-free rate of return is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the award is granted with a maturity equal to the expected term of the award. Historical data is used to estimate forfeitures within Ingersoll Rand's valuation model. The expected life of the Ingersoll Rand's stock option awards is derived from historical experience and represents the period of time that awards are expected to be outstanding.

For grants issued on or after December 1, 2013, expected volatility is based on the weighted average of the implied volatility of a group of the Company’s peers due to the lack of trading history for the Company's ordinary shares. The risk-free rate of return is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the award is granted with a maturity equal to the expected term of the award. Historical peer data is used to estimate forfeitures within the Company’s valuation model. The expected life of the Company’s stock option awards granted post separation is derived from the simplified approach based on the weighted average time to vest and the remaining contractual term and represents the period of time that awards are expected to be outstanding.

Performance Shares

The Company has a Performance Share Program for key employees. The program 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. During the nine months ended September 30, 2014, the Company granted PSUs with a maximum award level of approximately 0.2 million shares.

In December 2013, the Company’s Compensation Committee granted PSUs that are earned based upon the total shareholder return ("TSR") of the Company’s share performance compared to the TSR of the 41 companies currently comprising the S&P 400 Capital Goods Index over the three-year performance period based on the change in the 30 day average price for the index from December 2013 to the 30 day average price for the index in December 2016. The fair value of the market condition is estimated using a Monte Carlo simulation.

In March 2014, the Company’s Compensation Committee granted PSUs that were based 50% upon a performance condition, measured at each performance period by earnings per share ("EPS") growth, and 50% upon a market condition, measured by the

15
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


Company’s relative TSR as compared to the TSR of the industrial group of companies in the S&P 400 Capital Goods Index over the one-year, two-year, and three-year performance periods. The fair values of the market condition were estimated using a Monte Carlo Simulation approach in a risk-neutral framework based upon historical volatility, risk-free rates and correlation matrix.

Deferred Compensation

The Company allows key employees to defer a portion of their eligible compensation into a number of investment choices including its ordinary share equivalents. Any amounts invested in ordinary share equivalents will be settled in ordinary shares of the Company at the time of distribution.

Note 13 – Restructuring Activities
The changes in the restructuring reserve during the nine months ended September 30, 2014 were as follows:
In millions
EMEIA
 
Total
December 31, 2013
$
2.8

 
$
2.8

Additions
5.4

 
5.4

Cash and non-cash uses
(6.3
)
 
(6.3
)
September 30, 2014
$
1.9

 
$
1.9


The majority of the costs accrued as of September 30, 2014 will be paid within one year.

2014 EMEIA Restructuring Plan

In the second quarter of 2014, management committed to a plan to restructure the EMEIA segment to improve efficiencies and regional cost structure. Expenses incurred for this plan for the three and nine months ended September 30, 2014 were as follows:
 
Three months ended
 
Nine months ended
In millions
2014
 
2013
 
2014
 
2013
EMEIA
$
0.2

 
$
—

 
$
4.6

 
$
—

Total
$
0.2

 
$
—

 
$
4.6

 
$
—

 
 
 
 
 
 
 
 
Cost of goods sold
$
0.1

 
$
—

 
$
1.1

 
$
—

Selling and administrative expenses
0.1

 
—

 
3.5

 
—

Total
$
0.2

 
$
—

 
$
4.6

 
$
—


In addition, the Company incurred other non-qualified restructuring charges of $0.4 million during the nine months ended September 30, 2014 in conjunction with the plan, which represents costs that are directly attributable to restructuring activities, but do not fall into the severance, exit or disposal category.

16
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)



Other Restructuring Plans
Other restructuring charges recorded during the three and nine months ended September 30 as part of prior restructuring plans were as follows:
 
Nine months ended
In millions
2014
 
2013
Americas
$
—

 
$
0.1

EMEIA
0.8

 
4.5

Total
$
0.8

 
$
4.6

 
 
 
 
Cost of goods sold
$
0.2

 
$
2.3

Selling and administrative expenses
0.6

 
2.3

Total
$
0.8

 
$
4.6


These charges primarily related to workforce reductions in an effort to increase efficiencies across multiple lines of business. There were no charges incurred during the three months ended September 30, 2014 or 2013 related to other restructuring plans.

Note 14 – Other (Gain) Loss, Net
The components of Other, net for the three and nine months ended September 30 were as follows:
 
Three months ended
 
Nine months ended
In millions
2014

2013
 
2014
 
2013
Interest income
$
(0.1
)
 
$
—

 
$
(0.4
)
 
$
(0.1
)
Exchange (gain) loss
(1.7
)
 
—

 
(2.3
)
 
6.9

Other
(0.2
)
 
0.2

 
(0.4
)
 
0.1

Other (gain) loss, net
$
(2.0
)
 
$
0.2

 
$
(3.1
)
 
$
6.9


Included within Exchange (gain) loss for the nine months ended September 30, 2013 is a $6.2 million realized foreign currency translation loss related to the devaluation of the Venezuelan Bolivar from the pre-existing exchange rate of 4.3 Bolivars to the U.S. dollar to 6.3 Bolivars to the U.S. dollar. See "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview" for further discussion regarding currency volatility in Venezuela.

Note 15 – Income Taxes

The effective income tax rates for the three months ended September 30, 2014 and 2013 were 28.7% and (205.9)%. The effective tax rate for the three months ended September 30, 2013 included the impact of a non-cash pre-tax goodwill impairment charge of $137.6 million ($131.2 million, net of tax). Excluding this charge, the effective tax rate was 44.9% for the three months ended September 30, 2013. The decrease in the effective income tax rate compared to 2013 is primarily due to favorable changes in the mix of pre-tax income earned in lower rate jurisdictions, favorable discrete tax benefits as well as an adjustment in the third quarter of 2013 to true-up the full-year 2013 effective tax rate.

The effective income tax rates for the nine months ended September 30, 2014 and 2013 were 29.3% and 73.2%, respectively. Excluding the goodwill impairment charge discussed above, the effective tax rate was 39.2% for the nine months ended September 30, 2013. The decrease in the effective income tax rate compared to 2013 is primarily due to favorable changes in the mix of pre-tax income earned in lower rate jurisdictions and favorable discrete tax benefits.


17
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


Note 16 – Discontinued Operations

EMEIA Divestiture

In the second quarter of 2014 the Company committed to a plan to sell its United Kingdom (UK) Door businesses to an unrelated third party. The transaction closed in the third quarter of 2014. The businesses sold include the Dor-o-Matic™ branded automatic door business, the Martin Roberts™ branded performance steel doorset business and the UK service organization. Historical results of the component have been reclassified to discontinued operations for all periods presented. In conjunction with the plan, we recorded a $7.6 million charge to write the carrying value of the assets to be sold down to their estimated fair value.

Net revenues and after-tax earnings of the component for the three and nine months ended September 30 were as follows:
 
Three months ended
 
Nine months ended
In millions
2014
 
2013
 
2014
 
2013
Net revenues
$
4.3

 
$
6.3

 
$
16.1

 
$
17.0

 
 
 
 
 
 
 
 
After-tax loss from operations
$
(0.3
)
 
$
(0.5
)
 
$
(2.0
)
 
$
(1.6
)
Loss on disposal
(1.0
)
 
—

 
(7.6
)
 
—

Discontinued operations, net of tax
$
(1.3
)
 
$
(0.5
)
 
$
(9.6
)
 
$
(1.6
)

The Company recorded an immaterial income tax benefit for the component's losses for the three and nine months ended September 30, 2013.

Other divestitures

Other discontinued operations recognized a loss of $0.8 million and earnings of $0.1 million for the three months ended September 30, 2014 and 2013 and a loss of $1.3 million and $0.3 million for the nine months ended September 30, 2014 and 2013. These losses were mainly related to lease expense and other miscellaneous expenses from previously sold businesses.


Note 17 – 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.

Basic and Diluted EPS for all periods prior to the spin-off from Ingersoll Rand reflect the number of distributed shares on December 1, 2013, or 96.0 million shares. These shares are treated as issued and outstanding from January 1, 2013 for purposes of calculating historical basic EPS for the three and nine months ended September 30, 2013. At the time of the spin-off from Ingersoll Rand, stock options and RSU awards were converted to awards of Allegion, and therefore there were no dilutive securities outstanding for historical periods.
The following table summarizes the weighted-average number of ordinary shares outstanding for basic and diluted earnings per share calculations for the three and nine months ended September 30:
 
Three months ended

Nine months ended
In millions
2014
 
2013
 
2014
 
2013
Weighted-average number of basic shares
95.9

 
96.0

 
96.2

 
96.0

Shares issuable under incentive stock plans
1.0

 
—

 
1.1

 
—

Weighted-average number of diluted shares
96.9

 
96.0

 
97.3

 
96.0





18
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


Note 18 – Business Segment Information

The Company classifies its businesses into the following three reportable segments based on industry and market focus: Americas, EMEIA and Asia Pacific.

Segment operating income is the measure of profit and loss that the Company’s chief operating decision maker uses to evaluate the financial performance of the business and as the basis for resource allocation, performance reviews, and compensation. For these reasons, the Company believes that Segment operating income represents the most relevant measure of segment profit and loss. The Company’s chief operating decision maker may exclude certain charges or gains, such as corporate charges and other special charges, from Operating income to arrive at a Segment operating income that is a more meaningful measure of profit and loss upon which to base its operating decisions. The Company defines Segment operating margin as Segment operating income as a percentage of Net revenues.

In the second quarter of 2014 management committed to a plan to sell a component of a business in the EMEIA region and reclassified historical results of the component to discontinued operations for all periods presented. The transaction closed in the third quarter of 2014.

Effective January 1, 2013, a product line was transferred from the Asia Pacific segment to the Americas segment. Within the Quarterly Condensed and Consolidated Financial Statements for the three and nine months ended September 30, 2013, goodwill was reclassified from the Asia Pacific segment to the Americas segment.
A summary of operations by reportable segment for the three and nine months ended September 30 was as follows:
 
Three months ended

Nine months ended
In millions
2014
 
2013
 
2014
 
2013
Net revenues
 
 
 
 
 
 
 
Americas
$
423.1

 
$
405.0

 
$
1,169.2

 
$
1,154.1

EMEIA
89.5

 
92.1

 
289.9

 
286.0

Asia Pacific
34.1

 
31.9

 
85.7

 
85.8

Total
$
546.7

 
$
529.0

 
$
1,544.8

 
$
1,525.9

Segment operating income (loss)
 
 
 
 
 
 
 
Americas
$
122.8

 
$
109.5

 
$
320.1

 
$
302.8

EMEIA (a)
0.4

 
(5.1
)
 
(4.3
)
 
(11.1
)
Asia Pacific (b)
(0.5
)
 
20.6

 
(7.0
)
 
18.7

Total
122.7

 
125.0

 
308.8

 
310.4

Reconciliation to Operating income
 
 
 
 
 
 
 
Asset impairment (a)
—

 
(137.6
)
 
—

 
(137.6
)
Unallocated corporate expense
(17.1
)
 
(8.8
)
 
(46.1
)
 
(24.7
)
Operating income
$
105.6

 
$
(21.4
)
 
$
262.7

 
$
148.1

Reconciliation to Earnings before income taxes
 
 
 
 
 
 
 
Interest expense
12.7

 
0.5

 
38.3

 
1.4

Other (gain) loss, net
(2.0
)
 
0.2

 
(3.1
)
 
6.9

Earnings before income taxes
$
94.9

 
$
(22.1
)
 
$
227.5


$
139.8

  
(a) During the nine months ended September 30, 2013, the Company recorded a non-cash, pre-tax goodwill impairment charge of $137.6 million. This amount has been excluded from Segment operating income of the EMEIA segment as management excludes these charges from Operating income when making operating decisions about the business

(b) Segment operating income for the three and nine months ended September 30, 2013 include a $21.5 million gain on a property sale in China.


19
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)



Note 19 – Commitments and Contingencies

The Company is involved in various litigations, claims and administrative proceedings, including those related to environmental and product warranty matters. Amounts recorded for identified contingent liabilities are estimates, which are reviewed periodically and adjusted to reflect additional information when it becomes available. Subject to the uncertainties inherent in estimating future costs for contingent liabilities, except as expressly set forth in this note, management believes that any liability which may result from these legal matters would not have a material adverse effect on the financial condition, results of operations, liquidity or cash flows of the Company.

Environmental Matters

The Company is dedicated to an environmental program to reduce the utilization and generation of hazardous materials during the manufacturing process and to remediate identified environmental concerns. As to the latter, the Company is currently engaged in site investigations and remediation activities to address environmental cleanup from past operations at current and former production facilities.

The Company is sometimes a party to environmental lawsuits and claims and from time to time receives 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 our understanding of the parties’ financial condition and probable contributions on a per site basis. Additional lawsuits and claims involving environmental matters are likely to arise from time to time in the future.

During the three months ended September 30, 2014 and 2013, the Company incurred $0.6 million and $0.5 million of expenses for environmental remediation at sites presently or formerly owned or leased by us. During the nine months ended September 30, 2014 and 2013, the Company incurred $1.8 million and $1.5 million. As of September 30, 2014 and December 31, 2013, the Company has recorded reserves for environmental matters of $9.9 million and $10.8 million. Of these amounts, $2.9 million and $2.9 million relate to remediation of sites previously disposed by the Company. Environmental reserves are classified as Accrued expenses and other current liabilities or Other noncurrent liabilities based on their expected term. The Company's total current environmental reserve at September 30, 2014 and December 31, 2013 was $3.6 million and $4.2 million. The non-current reserve at September 30, 2014 and December 31, 2013 was $6.3 million and $6.6 million. 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 nine months ended September 30 were as follows:
In millions
2014
 
2013
Balance at beginning of period
$
9.7

 
$
9.5

Reductions for payments
(5.0
)
 
(4.4
)
Accruals for warranties issued during the current period
5.0

 
3.4

Changes to accruals related to preexisting warranties
0.5

 
0.3

Translation
(0.2
)
 
—

Balance at end of period
$
10.0

 
$
8.8


Standard product warranty liabilities are classified as Accrued expenses and other current liabilities.

20
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)



Note 20 – Guarantor Financial Information

Allegion US Holding Company, Inc. (the “Issuer”) as the issuer of the Senior Notes and Allegion plc (the “Parent”), Schlage Lock Company LLC and Von Duprin LLC (together, the “Subsidiary Guarantors”) are all guarantors of the Senior Notes. The following condensed and consolidated financial information of the Parent, the Issuer, the Subsidiary Guarantors and the other Allegion subsidiaries that are not guarantors (the “Other Subsidiaries”) on a combined basis as of September 30, 2014 and for the three and nine months ended September 30, 2014 and 2013, is being presented in order to meet the reporting requirements under the Senior Notes indenture and Rule 3-10 of Regulation S-X. In accordance with Rule 3-10(d) of Regulation S-X, separate financial statements for the Issuer, the Parent and the Subsidiary Guarantors are not required to be filed with the SEC as the subsidiary debt issuer and the guarantors are directly or indirectly 100% owned by the Parent and the guarantees are full and unconditional and joint and several.

The Company revised its Condensed and Consolidated Statement of Cash Flows for the nine months ended September 30, 2014 to correct for an immaterial error. The revision was made to reclassify $23.7 million of Intercompany dividends paid in the second quarter of 2014 by a Subsidiary Guarantor from net cash provided by continuing operating activities to net cash used in financing activities. The Company will present the revised Condensed and Consolidated Statement of Cash Flows for the six months ended June 30, 2014 as part of its Form 10-Q that will be filed for the six months ended June 30, 2015. The revision did not impact the net decrease in cash and cash equivalents for the Issuer, Parent, Other Subsidiaries or Allegion plc and solely impacted the second quarter 2014 financial reporting.



Condensed and Consolidated Statement of Comprehensive Income
For the three months ended September 30, 2014

In millions
Parent
 
Issuer
 
Subsidiary Guarantors
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Allegion plc
Net revenues
$
—

 
$
—

 
$
375.5

 
$
222.6

 
$
(51.4
)
 
$
546.7

Cost of goods sold
—

 
—

 
214.4

 
147.6

 
(51.4
)
 
310.6

Selling and administrative expenses
1.4

 
—

 
77.1

 
52.0

 
—

 
130.5

Operating income (loss)
(1.4
)
 
—

 
84.0

 
23.0

 
—

 
105.6

Equity earnings (loss) in affiliates, net of tax
62.3

 
80.6

 
3.8

 
100.1

 
(246.8
)
 
—

Interest expense
—

 
12.7

 
—

 
—

 
—

 
12.7

Intercompany interest and fees
—

 
12.7

 
(75.4
)
 
62.7

 
—

 
—

Other (gain) loss, net
—

 
—

 
(0.2
)
 
(1.8
)
 
—

 
(2.0
)
Earnings (loss) before income taxes
60.9

 
55.2

 
163.4

 
62.2

 
(246.8
)
 
94.9

Provision (benefit) for income taxes
0.3

 
9.5

 
59.5

 
(42.1
)
 
—

 
27.2

Earnings (loss) from continuing operations
60.6

 
45.7

 
103.9

 
104.3

 
(246.8
)
 
67.7

Discontinued operations, net of tax
—

 
—

 
—

 
(2.1
)
 
—

 
(2.1
)
Net earnings (loss)
60.6

 
45.7

 
103.9

 
102.2

 
(246.8