Edgar Filing: Allegion plc

10-Q

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, 2015



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	x	Accelerated filer	¨

Non-accelerated filer	¨	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 26, 2015 was 95,911,934.

Table of Contents

ALLEGION PLC

FORM 10-Q

INDEX




PART I FINANCIAL INFORMATION		1

Item 1 -	Financial Statements	1

	Condensed and Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014 (Unaudited)	1

	Condensed and Consolidated Balance Sheets at September 30, 2015 and December 31, 2014 (Unaudited)	2

	Condensed and Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 (Unaudited)	3

	Notes to Condensed and Consolidated Financial Statements (Unaudited)	4

Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

Item 3 -	Quantitative and Qualitative Disclosures about Market Risk	45

Item 4 -	Controls and Procedures	45

PART II OTHER INFORMATION		46

Item 1 -	Legal Proceedings	46

Item 1A -	Risk Factors	46

Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 6 -	Exhibits	47

SIGNATURES		48

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	2015			2014			2015			2014
Net revenues	$	544.5		$	546.7		$	1,522.7		$	1,544.8
Cost of goods sold	304.5			310.1			873.8			890.0
Selling and administrative expenses	129.6			130.5			371.8			391.6
Operating income	110.4			106.1			277.1			263.2
Interest expense	13.7			12.7			36.6			38.3
Loss on divestitures	106.7			—			106.7			—
Other (income) expense, net	(3.2		)	(2.0		)	0.3			(3.1		)
Earnings (loss) before income taxes	(6.8		)	95.4			133.5			228.0
Provision for income taxes	19.4			27.3			50.8			66.8
Earnings (loss) from continuing operations	(26.2		)	68.1			82.7			161.2
Discontinued operations, net of tax	(0.2		)	(2.0		)	(0.4		)	(10.8		)
Net earnings (loss)	(26.4		)	66.1			82.3			150.4
Less: Net earnings attributable to noncontrolling interests	0.9			5.3			0.3			10.6
Net earnings (loss) attributable to Allegion plc	$	(27.3	)	$	60.8		$	82.0		$	139.8
Amounts attributable to Allegion plc ordinary shareholders:
Continuing operations	$	(27.1	)	$	62.8		$	82.4		$	150.6
Discontinued operations	(0.2		)	(2.0		)	(0.4		)	(10.8		)
Net earnings (loss)	$	(27.3	)	$	60.8		$	82.0		$	139.8
Earnings (loss) per share attributable to Allegion plc ordinary shareholders:
Basic:
Continuing operations	$	(0.28	)	$	0.65		$	0.86		$	1.57
Discontinued operations	—			(0.02		)	—			(0.12		)
Net earnings (loss)	$	(0.28	)	$	0.63		$	0.86		$	1.45
Diluted:
Continuing operations	$	(0.28	)	$	0.65		$	0.85		$	1.55
Discontinued operations	—			(0.02		)	—			(0.11		)
Net earnings (loss)	$	(0.28	)	$	0.63		$	0.85		$	1.44
Weighted-average shares outstanding
Basic	95.9			95.9			95.8			96.2
Diluted	95.9			96.9			96.9			97.3

Dividends declared per ordinary share	$	0.10		$	0.08		$	0.30		$	0.24

Total comprehensive income (loss)	$	(29.1	)	$	40.9		$	54.7		$	117.0
Less: Total comprehensive income (loss) attributable to noncontrolling interests	(0.3		)	5.6			(0.9		)	10.1
Total comprehensive income (loss) attributable to Allegion plc	$	(28.8	)	$	35.3		$	55.6		$	106.9

See accompanying notes to condensed and consolidated financial statements.

Table of Contents

ALLEGION PLC

CONDENSED AND CONSOLIDATED BALANCE SHEETS

(Unaudited)



In millions	September 30, 2015			December 31, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	175.2		$	290.5
Accounts and notes receivable, net	273.1			230.4
Inventories	216.3			169.3
Other current assets	56.8			55.6
Assets held for sale	154.3			255.9
Total current assets	875.7			1,001.7
Property, plant and equipment, net	227.9			207.2
Goodwill	823.4			484.4
Intangible assets, net	260.3			125.4
Other noncurrent assets	221.7			197.2
Total assets	$	2,409.0		$	2,015.9
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	180.2		$	175.6
Accrued expenses and other current liabilities	196.3			203.8
Short-term borrowings and current maturities of long-term debt	59.0			49.6
Liabilities held for sale	81.7			103.5
Total current liabilities	517.2			532.5
Long-term debt	1,575.9			1,215.0
Other noncurrent liabilities	287.9			249.9
Total liabilities	2,381.0			1,997.4
Equity:
Allegion plc shareholders’ equity (deficit):
Ordinary shares	1.0			1.0
Capital in excess of par value	17.9			—
Retained earnings	170.2			142.4
Accumulated other comprehensive loss	(174.6		)	(148.2		)
Total Allegion plc shareholders’ equity (deficit)	14.5			(4.8		)
Noncontrolling interests	13.5			23.3
Total equity	28.0			18.5
Total liabilities and equity	$	2,409.0		$	2,015.9

See accompanying notes to condensed and consolidated financial statements.

Table of Contents

ALLEGION PLC

CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Nine months ended
	September 30,
In millions	2015			2014
Cash flows from operating activities:
Net earnings	82.3			150.4
Discontinued operations, net of tax	0.4			10.8
Adjustments to arrive at net cash provided by (used in) operating activities:
Loss on divestitures	104.5			—
Depreciation and amortization	37.5			36.5
Changes in assets and liabilities and other non-cash items	(98.7		)	(22.9		)
Net cash provided by continuing operating activities	126.0			174.8
Net cash used in discontinued operating activities	(0.5		)	(2.8		)
Net cash provided by operating activities	125.5			172.0
Cash flows from investing activities:
Capital expenditures	(27.3		)	(39.8		)
Acquisition of and equity investments in businesses, net of cash acquired	(511.4		)	(23.0		)
Other investing activities, net	4.3			41.9
Net cash used in investing activities	(534.4		)	(20.9		)
Cash flows from financing activities:
Short-term borrowings, net	11.8			(40.6		)
Proceeds from revolving credit facility	400.0			—
Proceeds from long-term debt	300.0			—
Payments on revolving credit facility	(320.0		)	—
Payments of long-term debt	(24.4		)	(22.5		)
Debt borrowings (repayments), net	367.4			(63.1		)
Dividends paid to ordinary shareholders	(28.7		)	(22.6		)
Repurchase of ordinary shares	(30.0		)	(50.3		)
Other financing activities, net	(7.8		)	15.4
Net cash provided by (used in) continuing financing activities	300.9			(120.6		)
Effect of exchange rate changes on cash and cash equivalents	(7.3		)	(6.5		)
Net increase (decrease) in cash and cash equivalents	(115.3		)	24.0
Cash and cash equivalents - beginning of period	290.5			227.4
Cash and cash equivalents - end of period	$	175.2		$	251.4

See accompanying notes to condensed and consolidated financial statements.

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, 2014. 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.

Note 2 – Recent Accounting Pronouncements

Recently Adopted 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. As a result of the adoption of ASU 2014-08, the Company's divestiture of its operation in Venezuela and the planned divestiture of its systems integration business in China do not qualify as discontinued operations. See Note 7 below for more information.

Recently Issued Accounting Pronouncements

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. On July 9, 2015, the FASB voted to defer the effective date by one year to the interim and annual periods beginning on or after December 15, 2017. Early adoption is permitted for periods beginning on or after December 15, 2016. The Company is assessing what impact 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 adoption is permitted. The requirements of ASU 2014-12 are not expected to have a significant impact on the Condensed and Consolidated Financial Statements.

In August 2014, the FASB issued ASU 2014-15, "Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern." ASU 2014-15 provides guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. The ASU will be effective in the

ALLEGION PLC

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(Unaudited)

fourth quarter of 2016. Early adoption is permitted. The requirements of ASU 2014-15 are not expected to have a significant impact on the Condensed and Consolidated Financial Statements.

In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs." ASU 2015-03 amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of as an asset. The ASU is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. The requirements of ASU 2015-03 are not expected to have a significant impact on the Condensed and Consolidated Financial Statements. As of September 30, 2015, the Company had $30.5 million in unamortized debt issuance costs.

In May 2015, the FASB issued ASU 2015-07, "Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)." ASU 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient and removes the requirement to make certain disclosures for these investments. The ASU will be effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. The Company is assessing what impact ASU 2015-07 will have on the Condensed and Consolidated Financial Statements.

In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory." ASU 2015-11 changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. The standard defines net realizable value as estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. The ASU is effective for annual and interim reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted. The requirements of ASU 2015-11 are not expected to have a significant impact on the Condensed and Consolidated Financial Statements.

In September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 802): Simplifying the Accounting for Measurement-Period Adjustments." ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Prior to the issuance of the standard, entities were required to retrospectively apply adjustments made to provisional amounts recognized in a business combination. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, and early adoption 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

Inventories are stated at the lower of cost or net realizable value. In the fourth quarter of 2014, the Company changed its method of inventory costing for certain inventory in its Americas operating segment to the first-in first-out (FIFO) method from the last-in first-out (LIFO) method. The Company's other operating segments also determine inventory cost using the FIFO method.

The major classes of inventory were as follows:



In millions	September 30, 2015		December 31, 2014
Raw materials	$	63.0	$	52.7
Work-in-process	34.3		26.0
Finished goods	119.0		90.6
Total	$	216.3	$	169.3

Note 4 – Goodwill

The changes in the carrying amount of goodwill for the nine months ended September 30, 2015 were as follows:



In millions	Americas			EMEIA			Asia Pacific			Total
December 31, 2014 (gross)	$	364.8		$	533.1		$	72.0		$	969.9
Accumulated impairment	—			(478.6		)	(6.9		)	(485.5		)
December 31, 2014 (net)	364.8			54.5			65.1			484.4
Acquisitions	9.2			316.1			29.1			354.4
Write-off	(0.8		)	—			—			(0.8		)
Currency translation	(0.4		)	(5.7		)	(8.5		)	(14.6		)
September 30, 2015 Goodwill (net)	$	372.8		$	364.9		$	85.7		$	823.4

As discussed in Note 7 - Divestitures, below, in September 2015 the assets of the Company's security system integration business within the Asia Pacific segment were reclassified to assets held for sale for all periods presented. Goodwill allocated to this business was $21.6 million at December 31, 2014. In conjunction with determining the fair value of the assets held for sale, the Company determined that the goodwill previously assigned to this business was impaired. As a result, approximately $21.0 million of the $80.6 million pre-tax charge related to the divestiture recorded in the third quarter of 2015 related to the write-off of goodwill.

Note 5 – Intangible Assets

The gross amount of the Company’s intangible assets and related accumulated amortization were as follows:



	September 30, 2015							December 31, 2014
In millions	Gross carrying amount		Accumulated amortization			Net carrying amount		Gross carrying amount		Accumulated amortization			Net carrying amount
Completed technologies/patents	$	29.1	$	(22.5	)	$	6.6	$	27.1	$	(22.8	)	$	4.3
Customer relationships	198.0		(38.0		)	160.0		94.7		(37.0		)	57.7
Trademarks (finite-lived)	82.0		(35.5		)	46.5		89.3		(36.0		)	53.3
Other	17.0		(9.0		)	8.0		10.2		(10.2		)	—
Total finite-lived intangible assets	326.1		$	(105.0	)	221.1		221.3		$	(106.0	)	115.3
Trademarks (indefinite-lived)	39.2					39.2		10.1					10.1
Total	$	365.3				$	260.3	$	231.4				$	125.4

Intangible asset amortization expense was $6.6 million and $7.2 million for the nine months ended September 30, 2015 and 2014, respectively. Future estimated amortization expense on existing intangible assets in each of the next five years amounts to approximately $10.9 million for full year 2015, $17.2 million for 2016, $17.2 million for 2017, $17.2 million for 2018, and $17.2 million for 2019.

Note 6 – Acquisitions

In February 2015, the Company made an investment in iDevices, a brand and development partner in the Internet of Things industry. The investment is accounted for using the equity method.

In April 2015, the Company completed the acquisition of certain assets of Zero International, Inc. ("Zero"). Zero manufactures door and window products for commercial spaces and products include sealing systems, such as sound control, fire and smoke protection, threshold applications, lites, door louvers, intumescent products, photo-luminescent and flood barrier for doors.

In May 2015, the Company completed the acquisition of the assets of Brio, a division of RMD Industries Pty Ltd ("Brio"). Brio is a designer and manufacturer of sliding and folding door hardware for commercial and residential spaces in Australia, New Zealand, the United Kingdom and the United States.

In July 2015, the Company completed the acquisition of Milre Systek Co., Ltd. ("Milre"). Milre is a leading security solutions manufacturer in South Korea, focused on producing high-quality and innovative electronic door locks.

In September 2015, the Company completed the acquisition of SimonsVoss Technologies GmbH ("SimonsVoss") for approximately $230.0 million. SimonsVoss, headquartered in Munich, Germany, is an electronic lock company in the European electronic market segment. SimonsVoss generated sales of approximately $69.2 million in 2014.

In September 2015, the Company completed the acquisition of AXA Stenman Holding ("AXA") for approximately $208.0 million. AXA is a European residential and portable security provider headquartered in Veenendaal, the Netherlands, with production facilities in the Netherlands, France and Poland. AXA manufactures and sells a branded portfolio of portable locks and lights as well as a wide variety of window and door hardware. The products are sold throughout Europe to bicycle manufacturers, retail distributors and property builders. AXA generated sales of approximately $79.8 million in 2014.

Total consideration paid for the acquisitions was $511.4 million (net of cash acquired). The preliminary allocation of the aggregate purchase price to assets acquired and liabilities assumed for the acquisitions described above is as follows:



In millions
Accounts and notes receivable, net	$	23.3
Inventories	27.7
Other current assets	2.0
Property, plant and equipment, net	27.2
Goodwill	355.4
Intangible assets, net	152.0
Other noncurrent assets	12.6
Accounts payable	(12.2		)
Accrued expenses and other current liabilities	(22.3		)
Deferred tax liabilities and other noncurrent liabilities	(54.3		)
Total cash consideration	$	511.4

The purchase price allocations for the acquisitions are pending completion of valuations for certain acquired intangible assets, finalization of working capital adjustments and calculation of deferred tax balances. These acquisitions are accounted for as business combinations.

The following unaudited pro forma financial information for the three and nine months ended September 30, 2015 and 2014 reflects the consolidated results of operations of the Company as if the acquisitions had taken place on January 1, 2014.



	Three months ended					Nine months ended
In millions, except per share amounts	2015			2014		2015		2014
Net revenues	$	565.7		$	591.6	$	1,624.8	$	1,686.1
Net earnings (loss) attributable to Allegion plc	$	(23.1	)	$	59.6	$	86.3	$	131.2
Basic income (loss) per share	$	(0.24	)	$	0.62	$	0.90	$	1.36
Diluted income (loss) per share	$	(0.24	)	$	0.62	$	0.89	$	1.35

During the three and nine months ended September 30, 2015 the Company incurred $5.1 million and $7.1 million of acquisition related costs. These expenses are included in Selling and administrative expenses in the Condensed and Consolidated Statement of Comprehensive Income. For pro forma purposes, these expenses were assumed to have been incurred on January 1, 2014. Pro

forma Net earnings (loss) attributable to Allegion plc in the table above has been adjusted to reflect the costs in the assumed acquisition period.

The Company’s historical financial information was adjusted to give effect to the pro forma events that were directly attributable to the acquisitions. This unaudited pro forma financial information has been 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 results of the acquired companies to reflect the additional amortization that would have been charged assuming the fair value adjustments to intangible assets had been applied from January 1, 2014 with the consequential tax effects. Additionally, interest related to the issuance of $300 million of senior notes and the borrowing of $100 million on the revolving facility has been included in the pro forma results above as if the debt was outstanding as of January 1, 2014. For purposes of calculating interest on the additional debt amounts, the Company has assumed the total amount is outstanding for all pro forma periods presented.

The following financial information reflects the results of revenue and earnings of the acquisitions since their respective acquisition dates included in the Condensed and Consolidated Statement of Comprehensive Income as of the three and nine months ended September 30, 2015.



	Three months ended		Nine months ended
In millions	2015		2015
Net revenues	$	23.7	$	30.0

Earnings before income tax	$	2.6	$	3.3

Note 7 – Divestitures

As previously disclosed, the Company sold its majority ownership in its Venezuelan operation to Venezuelan investors. As a result of the sale in the third quarter of 2015, the Company recorded a non-cash charge of $26.1 million, which primarily represents cumulative currency translation adjustments that were previously deferred in equity and were reclassified to a loss in the Condensed and Consolidated Statement of Comprehensive Income. The assets and liabilities of the Venezuela operation were reclassified to assets and liabilities held for sale within the Condensed and Consolidated Balance Sheets for all periods presented.

As previously disclosed, the Company entered into an agreement to sell a majority stake of Bocom Wincent Technologies Co., Ltd. ("Bocom") in the third quarter of 2015. Bocom operates a security system integration business exclusively in China. Under the terms of the transaction, the Company may receive up to $75 million based on the future performance and will retain 15% of the shares of Bocom. The Company currently estimates the fair value of the consideration to be $70.4 million. The transaction is expected to close in the fourth quarter of this year, subject to regulatory approvals.

The Company recorded a pre-tax charge of $80.6 million ($84.4 million after-tax) in the third quarter of 2015 to write the carrying value of Bocom’s assets and liabilities down to their estimated fair value less costs to complete the transaction. Bocom's assets and liabilities were reclassified to assets and liabilities held for sale within the Condensed and Consolidated Balance Sheets for all periods presented.

Bocom's assets and liabilities held for sale at September 30, 2015 and December 31, 2014 were comprised of the following:



In millions	September 30, 2015		December 31, 2014
Accounts receivable, net	$	16.5	$	26.8
Costs in excess of billings on uncompleted contracts	133.3		181.1
Inventory	2.3		1.3
Other current assets	0.7		4.0
Other noncurrent assets	1.5		24.2
Total assets held for sale	154.3		237.4

Accounts payable	63.3		72.9
Accrued expenses & other current liabilities	18.2		24.8
Other noncurrent liabilities	0.2		0.8
Total liabilities held for sale	$	81.7	$	98.5

Net revenues and loss before income taxes of Bocom for the three and nine months ended September 30 were as follows:



	Three months ended					Nine months ended
In millions	2015			2014		2015			2014
Net Revenues	$	10.6		$	16.5	$	35.7		$	39.3

Loss before income taxes	(1.4		)	—		(3.8		)	(5.0		)

Net revenues and earnings for Bocom have historically been weighted to the second half of the year, reflecting typical seasonality of contract awards. Net revenues and operating income were $97.3 million and $4.5 million for the year ended December 31, 2014.

Upon closing of the sale, the Company currently estimates that it will record additional charges of $5.5 million to $7.5 million.

Note 8 – Debt and Credit Facilities

Long-term debt and other borrowings consisted of the following:



In millions	September 30, 2015		December 31, 2014
Term Loan Facility due 2020	$	938.4	$	962.8
Revolver Facility due 2020	80.0		—
5.75% Senior notes due 2021	300.0		300.0
5.875% Senior notes due 2023	300.0		—
Other debt, including capital leases, maturing in various amounts through 2028	16.5		1.8
Total debt	1,634.9		1,264.6
Less: current portion of long term debt	59.0		49.6
	$	1,575.9	$	1,215.0

Senior Secured Credit Facilities

As of September 30, 2015, the Company has a credit agreement providing for (i) a $938.4 million Senior Secured Term Loan Facility maturing on October 15, 2020 (the "Term Loan Facility") and (ii) a $500.0 million Senior Secured Revolving Credit Facility (the "Revolver") maturing in 2020. The Company refers to these credit facilities as its "Senior Secured Credit Facilities." Allegion plc is the primary borrower for the Senior Secured Credit Facilities.

ALLEGION PLC

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(Unaudited)

In September 2015, the Company entered into a Second Amendment and Restatement Agreement (the “Second Amendment and Restatement Agreement”) to amend and restate its existing Amended and Restated Credit Agreement (the “Credit Agreement”), dated as of November 26, 2013 and amended and restated on October 15, 2014. The terms of the Second Amendment and Restatement Agreement are substantially consistent with the terms of the Credit Agreement, subject to certain changes, including:(i) a reduction of the applicable margin for LIBOR rate borrowings to range from 1.375% to 1.875% (from 1.50% to 2.00%) and the applicable margin for base rate borrowings to range from 0.375% to 0.875% (from 0.50% to 1.00%), in each case depending on the corporate credit or family rating, (ii) an extension of the maturity date of the Revolver and the Term Loan Facility from October 15, 2019 to October 15, 2020; and (iii) changes to certain other terms of the Credit Agreement, including the restrictive covenants, to provide the Company with additional flexibility.

Outstanding borrowings under the Senior Secured Credit Facilities currently accrue interest at LIBOR plus an applicable margin. The margin for the Term Loan Facility borrowings was 1.63% at September 30, 2015.

To manage the Company's exposure to fluctuations in LIBOR rates, the Company has interest rate swaps for $300.0 million of the Company's variable rate $938.4 million Term Loan Facility. Swaps with notional amounts totaling $275.0 million were effective in January 2015 and expire in September 2017 and swaps with notional amounts totaling $25.0 million were effective in January 2015 and expire in December 2016. The swaps exchange 90-day LIBOR for a fixed interest rate.

During August 2015, the Company borrowed $400.0 million under the Revolver in order to fund a portion of the acquisitions of SimonsVoss and AXA. In addition to repaying $320.0 million of the outstanding Revolver balance during September 2015, the Company repaid $24.4 million of principal on its Term Loan Facility during the nine months ended September 30, 2015 in accordance with the terms of its Senior Secured Credit Facility. At September 30, 2015, the Company had $80.0 million outstanding under the Revolver and had $27.4 million of letters of credit outstanding.

Senior Notes

A wholly-owned subsidiary of the Company has issued $300.0 million of 5.75% senior notes due 2021 (the "2021 Senior Notes"). The 2021 Senior Notes accrue interest at the rate of 5.75% per annum, payable semi-annually on April 1 and October 1 of each year. The 2021 Senior Notes mature on October 1, 2021.

In September 2015, the Company issued $300.0 million of 5.875% senior notes due 2023 (the "2023 Senior Notes"). The Company used the net proceeds of the offering and cash on hand to repay approximately $300.0 million under Allegion’s revolving credit facility. The 2023 Senior Notes accrue interest at the rate of 5.875% per annum, payable semi-annually on March 15 and September 15 of each year, beginning March 15, 2016. The 2023 Senior Notes mature on September 15, 2023.

At September 30, 2015, the weighted-average interest rate for borrowings was 2.3% under the Term Loan Facility (including the effect of interest rate swaps), 5.75% under the 2021 Senior Notes and 5.875% under the 2023 Senior Notes.

Note 9 – 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.

ALLEGION PLC

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(Unaudited)

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 loss.

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 gross notional amount of the Company’s currency derivatives was $291.7 million and $494.5 million at September 30, 2015 and December 31, 2014, respectively. At September 30, 2015 and December 31, 2014, gains of $1.7 million and $1.6 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 gain of $1.7 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, 2015, 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 to fix the interest rate paid during the contract period for $300.0 million of the Company's variable rate $938.4 million Term Loan Facility. Swaps with notional amounts totaling $275.0 million effective January 2015 expire in September 2017 and swaps with notional amounts totaling $25.0 million effective January 2015 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 Accumulated other comprehensive loss. At September 30, 2015, $3.2 million of losses were recorded in Accumulated other comprehensive loss 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, 2015		December 31, 2014		September 30, 2015		December 31, 2014
Derivatives designated as hedges:
Currency derivatives	$	1.9	$	2.1	$	—	$	—
Interest rate swaps	—		—		3.2		0.9
Derivatives not designated as hedges:
Currency derivatives	1.8		2.2		1.8		13.9
Total derivatives	$	3.7	$	4.3	$	5.0	$	14.8

Asset and liability derivatives included in the table above are recorded within Other current assets and Accrued expenses and other current liabilities within the Condensed and Consolidated Balance Sheets.

ALLEGION PLC

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(Unaudited)

The amounts associated with derivatives designated as hedges affecting Net earnings and Accumulated other comprehensive loss for the nine months ended September 30 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	2015			2014		Location of gain (loss) recognized in Net earnings	2015		2014
Currency derivatives	$	5.7		$	0.9	Cost of goods sold	$	5.5	$	2.5
Interest rate swaps	(2.2		)	0.8		Interest expense	—		—
Total	$	3.5		$	1.7		$	5.5	$	2.5

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 10 – 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.

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	2015			2014			2015			2014
Service cost	$	2.7		$	1.7		$	7.4		$	5.3
Interest cost	2.7			2.8			8.2			8.4
Expected return on plan assets	(2.8		)	(2.7		)	(8.5		)	(8.3		)
Net amortization of:
Prior service costs	0.1			0.1			0.5			0.5
Plan net actuarial losses	1.2			0.5			3.5			1.5
Net periodic pension benefit cost	$	3.9		$	2.4		$	11.1		$	7.4
Net settlement losses	—			—			0.6			—
Net periodic pension benefit cost after settlement losses	$	3.9		$	2.4		$	11.7		$	7.4

ALLEGION PLC

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(Unaudited)



	Non-U.S.
	Three months ended						Nine months ended
In millions	2015			2014			2015			2014
Service cost	$	0.8		$	1.3		$	2.5		$	3.6
Interest cost	3.4			4.4			10.3			13.1
Expected return on plan assets	(4.5		)	(4.3		)	(13.4		)	(13.0		)
Amortization of plan net actuarial losses	0.4			0.7			1.1			2.1
Net periodic pension benefit cost	$	0.1		$	2.1		$	0.5		$	5.8

The Company made employer contributions of $0.3 million and $1.2 million during the nine months ended September 30, 2015 and 2014 to its defined benefit pension plans. Additional contributions of approximately $4.2 million are expected during the remainder of 2015.

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 income for the three and nine months ended September 30 were as follows:



	Three months ended						Nine months ended
In millions	2015			2014			2015			2014
Service cost	$	—		$	—		$	0.1		$	0.1
Interest cost	0.1			0.1			0.3			0.4
Amortization of prior service gains	(0.4		)	(0.4		)	(1.2		)	(1.2		)
Net periodic postretirement benefit income	$	(0.3	)	$	(0.3	)	$	(0.8	)	$	(0.7	)

Note 11 – 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.

ALLEGION PLC

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(Unaudited)

Assets and liabilities measured at fair value at September 30, 2015 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)		Total fair value
Recurring fair value measurements
Assets:
Marketable securities	$	26.1	$	—	$	—	$	26.1
Foreign currency contracts	—		3.7		—		3.7
Total asset recurring fair value measurements	$	26.1	$	3.7	$	—	$	29.8
Liabilities:
Foreign currency contracts	$	—	$	1.8	$	—	$	1.8
Interest rate swap	—		3.2		—		3.2
Deferred compensation plans	—		14.8		—		14.8
Total liability recurring fair value measurements	$	—	$	19.8	$	—	$	19.8
Financial instruments not carried at fair value
Total debt	—		1,646.6		—		1,646.6
Total financial instruments not carried at fair value	$	—	$	1,646.6	$	—	$	1,646.6

Assets and liabilities measured at fair value at December 31, 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)		Total fair value
Recurring fair value measurements
Assets:
Marketable securities	$	17.9	$	—	$	—	$	17.9
Foreign currency contracts	—		4.3		—		4.3
Total asset recurring fair value measurements	$	17.9	$	4.3	$	—	$	22.2
Liabilities:
Foreign currency contracts	$	—	$	13.9	$	—	$	13.9
Interest rate swap	—		0.9		—		0.9
Deferred compensation plans	—		14.9		—		14.9
Total liability recurring fair value measurements	$	—	$	29.7	$	—	$	29.7
Financial instruments not carried at fair value
Total debt	—		1,279.4		—		1,279.4
Total financial instruments not carried at fair value	$	—	$	1,279.4	$	—	$	1,279.4

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.

ALLEGION PLC

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(Unaudited)


•	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.


•	Deferred compensation plans - These include obligations related to deferred compensation adjusted for market performance. The fair value is obtained based on observable market prices quoted on public exchanges for similar instruments.


•	Debt – These securities are recorded at cost and include senior notes maturing through 2023. 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, 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, 2015 are the same as those used at December 31, 2014. There have been no significant transfers between Level 1 and Level 2 categories.

Note 12 – Equity

The reconciliation of Ordinary shares is as follows:



In millions	Total
December 31, 2014	95.8
Shares issued under incentive plans, net	0.6
Repurchase of ordinary shares	(0.5	)
September 30, 2015	95.9

During the nine months ended September 30, 2015, the Company paid $30.0 million to repurchase 0.5 million ordinary shares 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, 2015 were as follows:



In millions	Allegion plc shareholders’ equity (deficit)			Noncontrolling interests			Total equity (deficit)
Balance at December 31, 2014	$	(4.8	)	$	23.3		$	18.5
Net earnings	82.0			0.3			82.3
Currency translation	(38.0		)	(1.2		)	(39.2		)
Change in value of marketable securities and derivatives qualifying as cash flow hedges, net of tax	7.3			—			7.3
Pension and OPEB adjustments, net of tax	4.3			—			4.3
Total comprehensive income	55.6			(0.9		)	54.7
Share-based compensation	10.3			—			10.3
Acquisition/divestiture of noncontrolling interests	—			1.7			1.7
Dividends to noncontrolling interests	—			(10.6		)	(10.6		)
Dividends to ordinary shareholders	(28.7		)	—			(28.7		)
Repurchase of ordinary shares	(30.0		)	—			(30.0		)
Shares issued under incentive plans, net	12.1			—			12.1
Balance at September 30, 2015	$	14.5		$	13.5		$	28.0

ALLEGION PLC

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(Unaudited)

The components of Equity for the nine months ended September 30, 2014 were as follows:



In millions	Allegion plc shareholders’ equity (deficit)			Noncontrolling interests			Total equity (deficit)
Balance at December 31, 2013	$	(66.1	)	$	31.1		$	(35.0	)
Net earnings	139.8			10.6			150.4
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	106.9			10.1			117.0
Share-based compensation	9.7			—			9.7
Dividends to noncontrolling interests	—			(4.5		)	(4.5		)
Dividends to ordinary shareholders	(23.0		)	—			(23.0		)
Shares issued under incentive plans, net	16.4			—			16.4
Repurchase of ordinary shares	(50.3		)	—			(50.3		)
Other	(3.3		)	—			(3.3		)
Balance at September 30, 2014	$	(9.7	)	$	36.7		$	27.0

Other Comprehensive Income (Loss)

The changes in Accumulated other comprehensive income (loss) for the nine months ended September 30, 2015 are as follows:



In millions	Cash flow hedges and marketable securities			Pension and OPEB Items			Foreign Currency Items			Total
December 31, 2014	$	15.7		$	(116.1	)	$	(47.8	)	$	(148.2	)
Other comprehensive income (loss) before reclassifications	14.2			1.2			(38.0		)	(22.6		)
Amounts reclassified from accumulated other comprehensive income	(6.9		)	3.9			—			(3.0		)
Tax expense	—			(0.8		)	—			(0.8		)
September 30, 2015	$	23.0		$	(111.8	)	$	(85.8	)	$	(174.6	)

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	)	$	17.9		$	(96.7	)
Other comprehensive loss before reclassifications	3.2			5.1			(41.6		)	(33.3		)
Amounts reclassified from accumulated other comprehensive income	(2.5		)	2.9			—			0.4
Tax benefit	(0.2		)	—			—			(0.2		)
September 30, 2014	$	17.2		$	(123.3	)	$	(23.7	)	$	(129.8	)

ALLEGION PLC

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(Unaudited)

Reclassifications out of Accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2015 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 losses on cash flow hedges:
Foreign exchange contracts	$	(0.8	)	$	(5.5	)	Cost of goods sold
	(0.8		)	(5.5		)	Earnings before income taxes
	0.4			—			Provision for income taxes
	$	(0.4	)	$	(5.5	)	Earnings from continuing operations

Unrealized gains and losses on marketable securities:
Realized gain on sale of securities	$	(1.4	)	$	(1.4	)	Other (income) loss, net
	(1.4		)	(1.4		)	Earnings before income taxes
	—			—			Provision for income taxes
	$	(1.4	)	$	(1.4	)	Earnings from continuing operations

Defined benefit pension items:
Amortization of:
Prior-service gains	$	(0.3	)	$	(0.7	)	(a)
Actuarial losses	1.6			4.6			(a)
	1.3			3.9			Earnings before income taxes
	(0.4		)	(0.8		)	Provision for income taxes
	$	0.9		$	3.1		Earnings from continuing operations

Total reclassifications for the period	$	(0.9	)	$	(3.8	)	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 10 for additional details).

ALLEGION PLC

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(Unaudited)

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 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	$	(0.3	)	$	(0.7	)	(a)
Actuarial (gains) losses	1.2			3.6			(a)
	0.9			2.9			Earnings before income taxes
	—			—			Provision for income taxes
	0.9			2.9			Earnings from continuing operations

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

Note 13 – 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	2015			2014			2015			2014
Stock options	$	0.9		$	0.8		$	2.8		$	2.7
RSUs	1.5			1.3			4.4			4.5
PSUs	1.0			1.1			3.1			2.5
Deferred compensation	(0.6		)	—			(0.1		)	0.5
Pre-tax expense	2.8			3.2			10.2			10.2
Tax benefit	(0.9		)	(1.1		)	(3.4		)	(3.6		)
After-tax expense	$	1.9		$	2.1		$	6.8		$	6.6

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:



	2015			2014
	Number granted	Weighted- average fair value per award		Number granted	Weighted- average fair value per award
Stock options	220,679	$	17.88	188,817	$	19.54
RSUs	105,976	$	58.71	101,653	$	54.29

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:



	2015		2014
Dividend yield	0.69	%	0.60	%
Volatility	34.02	%	36.55	%
Risk-free rate of return	1.78	%	1.94	%
Expected life	6.0 years		6.0 years

Expected volatility is based on the weighted average of the implied volatility of a group of the Company’s peers 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 life 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 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, 2015, the Company granted PSUs with a maximum award level of approximately 0.1 million shares.

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 Company’s relative total shareholder return ("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.

In March 2015, the Company's Compensation Committee granted PSU's that were based 50% upon a performance condition, measured at the end of the performance period by EPS growth, and 50% upon a market condition, measured by the 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 three-year performance period. The fair value of the market condition was estimated using a Monte Carlo Simulation approach in a risk-neutral framework based upon historical volatility, risk-free rates and correlation matrix.

Deferred Compensation

ALLEGION PLC

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(Unaudited)

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 14 – Restructuring Activities

The changes in the restructuring reserve during the nine months ended September 30, 2015 were as follows:



In millions	EMEIA			Total
December 31, 2014	$	1.9		$	1.9
Additions, net of reversals	4.4			4.4
Cash and non-cash uses	(2.1		)	(2.1		)
Currency translation	(0.2		)	(0.2		)
September 30, 2015	$	4.0		$	4.0

The majority of the costs accrued as of September 30, 2015 will be paid within one year.

2015 Italy Restructuring Plan

In the second quarter of 2015, management committed to a restructuring plan in Italy. The plan aims to improve competitive position, ensure long-term viability and enhance customer experience. Expenses incurred for this plan for the three and nine months ended September 30 were as follows:



	Three months ended				Nine months ended
In millions	2015		2014		2015		2014
EMEIA	$	0.6	$	—	$	4.4	$	—
Total	$	0.6	$	—	$	4.4	$	—

Cost of goods sold	$	0.1	$	—	$	3.6	$	—
Selling and administrative expenses	0.5		—		0.8		—
Total	$	0.6	$	—	$	4.4	$	—

The above expenses primarily relate to severance charges.

In October 2015, the Company reached an agreement to provide severance benefits to certain employees in Italy. As a result of the agreement, the Company will record additional severance charges of approximately $8.4 million. This charge will result in cash expenditures, primarily in 2016.

The Company incurred other non-qualified restructuring charges of $0.6 million during the three and nine months ended September 30, 2015 in conjunction with the other restructuring plans, which represent costs that are directly attributable to restructuring activities, but do not fall into the severance, exit or disposal category.

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 were as follows:

ALLEGION PLC

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(Unaudited)



	Three months ended				Nine months ended
In millions	2015		2014		2015		2014
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.

Other Restructuring Plans

Other restructuring charges of $0.8 million were recorded during the nine months ended September 30, 2014 as part of other restructuring plans. These charges primarily relate to workforce reductions in an effort to increase efficiencies across multiple lines of business.

Note 15 – Other (Income) Expense, Net

The components of Other (income) expense, net for the three and nine months ended September 30 were as follows:



	Three months ended						Nine months ended
In millions	2015			2014			2015			2014
Interest income	$	(0.3	)	$	(0.1	)	$	(1.1	)	$	(0.4	)
Exchange (gain) loss	(0.2		)	(1.7		)	3.7			(2.3		)
Other	(2.7		)	(0.2		)	(2.3		)	(0.4		)
Other (income) expense, net	$	(3.2	)	$	(2.0	)	$	0.3		$	(3.1	)

In February 2015, the Venezuelan government announced changes to its exchange rate system that included the launch of a new, market-based system called the Marginal Currency System, or “SIMADI.” During the nine months ended September 30, 2015 the Company recorded a charge of $2.8 million in order to remeasure net monetary assets at the SIMADI rate and other unfavorable currency impacts. These losses are within Exchange (gain) loss in the table above. These losses were offset by other investment income received during the three months ended September 30, 2015 included within Other in the table above.

Note 16 – Income Taxes

The effective income tax rates for the three months ended September 30, 2015 and 2014 were (285.3)% and 28.6%. The effective income tax rate for the three months ended September 30, 2015 was negatively impacted by $106.7 million ($110.5 million after-tax) of charges related to the divestiture for the Company’s business in Venezuela and the anticipated divestiture of the Company’s systems integration business in China. Excluding these charges the effective tax rate for the three months ended September 30, 2015 decreased primarily due to favorable changes in the mix of income earned in lower rate jurisdictions and the favorable resolution of uncertain tax positions in 2015.

The effective income tax rates for the nine months ended September 30, 2015 and 2014 were 38.1% and 29.3%. The effective income tax rate for the nine months ended September 30, 2015 was negatively impacted by $113.6 million ($117.0 million after-tax) of charges related to the devaluation of the Venezuelan bolivar, the divestiture of the Company’s business in Venezuela and the anticipated divestiture of the Company’s systems integration business in China. Excluding these charges the effective tax rate

for the nine months ended September 30, 2015 decreased primarily due to favorable changes in the mix of income earned in lower rate jurisdictions and the favorable resolution of uncertain tax positions in 2015.

Note 17 – Discontinued Operations

Discontinued operations recognized losses of $0.2 million and $2.0 million for the three months ended September 30, 2015 and 2014 and losses of $0.4 million and $10.8 million for the nine months ended September 30, 2015 and 2014. These losses were mainly related to the sale of the UK Door Business in the third quarter of 2014 and non-cancelable lease expense and other miscellaneous expenses from previously sold businesses

Note 18 – Earnings Per Share (EPS)

Basic EPS is calculated by dividing Net earnings attributable to Allegion plc by the weighted-average number of ordinary shares outstanding for the applicable period. Diluted EPS is calculated after adjusting the denominator of the basic EPS calculation for the effect of all potentially dilutive ordinary shares, which in the Company’s case, includes shares issuable under share-based compensation plans.

The following table summarizes the weighted-average number of ordinary shares outstanding for basic and diluted earnings per share calculations for the three and nine months ended September 30:



	Three months ended		Nine months ended
In millions	2015	2014	2015	2014
Weighted-average number of basic shares	95.9	95.9	95.8	96.2
Shares issuable under incentive stock plans	—	1.0	1.1	1.1
Weighted-average number of diluted shares	95.9	96.9	96.9	97.3

At September 30, 2015, 0.4 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. Additionally, for the three months ended September 30, 2015, 1.0 million shares were excluded from the calculation above due to the Company's net loss from continuing operations.

Note 19 – 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.

ALLEGION PLC

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(Unaudited)

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	2015		2014		2015		2014
Net revenues
Americas	$	418.9	$	423.1	$	1,175.3	$	1,169.2
EMEIA	91.5		89.5		257.1		289.9
Asia Pacific	34.1		34.1		90.3		85.7
Total	$	544.5	$	546.7	$	1,522.7	$	1,544.8
Segment operating income (loss)
Americas	$	121.7	$	123.3	$	317.8	$	320.6
EMEIA	5.0		0.4		8.1