Allegion plc ("Allegion," "we," "us" or "the Company") is a leading global provider of security products and solutions that keep people and assets safe and secure and productive. We make the world safer as a company of experts, securingin the places where people thrive,they live, learn, work and wevisit. We create peace of mind by pioneering safety and security.security with a vision of seamless access and a safer world. Seamless access allows authorized, automated and safe passage and movement through spaces and places in the most efficient and frictionless manner possible. Central to our vision is partnering and developing ecosystems to create a flawless experience and enable an uninterrupted and secure flow of people and assets. We offer an extensive and versatile portfolio of mechanicalsecurity and electronic securityaccess control products and solutions across a range of market-leading brands. Our experts across the globe deliver high-quality security products, services and systems, and we use our deep expertise to serve as trusted partners to end-users who seek customized solutions to their security needs.
Access control security products and solutions are critical elements in every building and home. Many door openings are configured to maximize a room’s particular form and function while also meeting local and national building and safety code requirements and end-user security needs. Most buildings have multiple door openings, each serving its own purpose and requiring different specific access-controlaccess control solutions. Each door must fit exactly within its frame, be prepared precisely for its hinges, synchronize with its specific lockset and corresponding latch and align with a specific key to secure the door. Moreover, with the increasing adoption of the Internet of Things ("IoT"), security products – including credentials – are increasingly linked electronically, integrated into software and popular consumer technology platforms and controlled with mobile applications, creating additional functionality and complexity.
We were incorporated in Ireland on May 9, 2013, to hold the commercial and residential security businesses of what was then Ingersoll Rand plc ("Ingersoll Rand"). On December 1, 2013, we became a stand-alone public company after Ingersoll Rand completed the separation of these businesses from the rest of Ingersoll Rand via the transfer of these businesses from Ingersoll Rand to us and the issuance by us of ordinary shares directly to Ingersoll Rand’s shareholders (the "Spin-off"). Our security businesses have long and distinguished operating histories. Several of our brands were established more than 75100 years ago, and many of our brands originally created their categories:
We have built upon these founding legacies since our entry into the security products market through the acquisition of Schlage, Von Duprin and LCN in 1974. Today, we continue to develop, acquire and introduce innovative and market-leading products. For example, in 2022, we acquired Stanley Access Technologies LLC and assets related to the automatic entrance solutions business from Stanley Black & Decker, Inc. (the "Access Technologies business"), which patented the world's first hands-free door operator in 1931. Through this acquisition, we have added another innovative market leader to our portfolio of businesses and broadened our product and service offerings throughout the U.S. and Canada.
Industry and Competition
The global markets weWe serve encompasscustomers within institutional, commercial institutional and residential construction and remodeling markets throughout North America, Europe, the Middle EastAsia and Asia-Pacific. In recent years, growth in electronic security products and solutions continues to outperform the industry as a whole as end-users adopt newer technologies in their facilities.Oceania. We expect the security products industry will continue to benefit from favorable long-term demographic trends such as continued urbanization of the global population, increased concerns about safety and security, new attention on touchless solutions that help promote a healthy environment and technology-driven innovation.
innovation that enables seamless access and a better user experience as people and assets traverse multiple locations and facilities. Further, we expect continued growth in connected security products and solutions as end-users continue to adopt newer technologies, including IoT, in their facilities and single and multi-family homes.
The security products markets are highly competitive and fragmented throughout the world, with a number of large multi-national companies and thousands of smaller regional and local companies. This high degree of fragmentation primarily reflects local regulatory requirements and highly variable end-user needs. We believe our principal global competitors are Assa Abloy AB and dorma+kabadormakaba Group. We also face competition in various markets and product categories throughout the world, including from Spectrum Brands Holdings, Inc. in the North American residential market. As we move into more technologically-advancedtechnologically advanced product categories, we may also compete against new, more specialized competitors.
competitors and technology companies.
Our success depends on a variety of factors, including brand and reputation, product breadth, innovation, integration with popular technology platforms, quality and delivery capabilities, price and service capabilities. As many of our businesses sell through wholesale distribution, our success also depends on building and partnering with a strong channel network. Although price often serves as an important customer decision criterion,point, we also compete based on the breadth, innovation and quality of our products and solutions, our ability to custom-configure solutions to meet individual end-user requirements and our global supply chain.
Our Reporting Segments
We manufacture and sell mechanical and electronic security products and solutions in approximately 130 countries. Approximately 96% of our 2017 revenues were to customers in the North America, Western Europe and the Asia-Pacific regions.
The following table presents the relative percentages of total segment revenue attributable to each reporting segment for each of the last three fiscal years. See Note 20, "Business Segment Information," to our annual consolidated financial statements for information regarding net revenues, operating income, and total assets by reportable segment:
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| For the Years Ended December 31 |
| 2017 | | 2016 | | 2015 |
Americas | 73% | | 74% | | 75% |
EMEIA | 22% | | 21% | | 19% |
Asia Pacific | 5% | | 5% | | 6% |
Our Americas segment provides security products and solutions in approximately 30 countries throughout North America, Central America, the Caribbean and South America. The segment offers a broad range of products and solutions including locks, locksets, portable locks, key systems, door closers, exit devices, doors and door systems, electronic products, and access control and time and attendance systems to end-users in the commercial, institutional and residential markets, including into the education, healthcare, government, commercial office and single and multi-family residential markets. This segment’s primary brands are LCN, Schlage, and Von Duprin.
Our EMEIA segment provides security products and solutions in approximately 85 countries throughout Europe, the Middle East, India and Africa. The segment offers the same portfolio of products as the Americas segment, as well as workforce productivity solutions. This segment’s primary brands are AXA, Bricard, CISA, Interflex and SimonsVoss. This segment also resells North American LCN, Schlage, and Von Duprin products, primarily in the Middle East.
Our Asia Pacific segment provides security products and solutions in approximately 15 countries throughout Asia Pacific. The segment offers the same portfolio of products as the Americas segment. This segment’s primary brands are Brio, FSH, Legge, Milre, and Schlage.
Products and Services
We offer anthe following extensive and versatile portfolio of mechanicalsecurity and electronic securityaccess control products and solutions across a range of market-leading brands:
•Locks, locksets, portable locks and key systems: A broad array of cylindrical, tubular and mortise door locksets, security levers and master key systems that are used to protect and control access. We also offeraccess and a range of portable security products, including bicycle, small vehicle and travel locks.
locks;Door•Electronic security products and access control systems: A broad range of electrified locks, electrified door closers and exit devices, access control products and systems, credentials and credential readers and accessories, including IoT, Bluetooth Low Energy, Power over Ethernet and cloud-based solutions;
•Time, attendance and workforce productivity systems: These products are designed to help business customers manage and monitor workforce access, attendance and employee scheduling;
•Door controls and systems and exit devices: An extensive portfolio of life-safety products and solutions generally installed on fire doors and facility entrances and exits. Door closers are devices that automatically close doors after they are opened. Exit devices, are generally horizontal attachmentsalso known as panic hardware, provide rapid egress to doorsallow building occupants to exit safely in an emergency. Door controls and enable rapid egress.
Electronic security productssystems include mechanical door closers, automatic door operators, as well as high-performance interior and access control systems: A broadstorefront door systems. In addition, with our recently acquired Access Technologies business, we now offer a full range of electrified locks, access control systems, biometric hand reader systems, key cardautomatic entrance solutions, including sliding, swing, folding and reader systemsICU doors, as well as an array of sensors, controls and security options for commercial and institutional buildings;
•Doors, accessories including Internet of Things (IoT) and cloud-based solutions.
Time, attendance and workforce productivity systems: Products and services designed to help business customers manage and monitor workforce access control parameters, attendance and employee scheduling. We offer ongoing aftermarket services in addition to design and installation offerings.
Doors and door systemsother: A portfolio of hollow metal, glass wood, and specialty doors, and door systems.
Other accessories: Aas well as a variety of additional security products and product components, including hinges, door levers,pulls, door stops, bike lights, louvers, weather stripping, thresholds and other accessories, as well as certain bathroom fittings.
fittings and accessibility aids; and
•Services and software: Our Access Technologies business offers extensive planned inspection, maintenance and repair services for its automatic entrance solutions throughout the U.S. and Canada. Additionally, we offer software as a service ("SaaS") offerings throughout the U.S. and internationally, including access control, IoT integration and workforce management solutions. We also offer ongoing aftermarket services, design and installation offerings and locksmith services in select locations.
Customers
We sell most of our products and solutions through distribution and retail channels, ranging fromincluding specialty distribution, toe-commerce and wholesalers. We have built a network of channel partners that help our customers choose the right solution to meet their security needs and help commercial and institutional end-users fulfill and install orders. We also sell through a variety of retail channels, ranging fromincluding large do-it-yourself home improvement centers, tomultiple online and e-commerce platforms, as well as small, specialty showroom outlets. We work with our retail partners on developing marketing and merchandising strategies to maximize their sales per square foot of shelf space. Through a few of our businesses, most notably our Access Technologies business, Interflex business and our Global Portable Security brands, we also provide products and solutionsservices directly to end-users.
Our 10 largest customers represented approximately 25%26% of our total Net revenues in 2017.2022. No single customer represented 10% or more of our total Net revenues in 2017.2022.
Sales and Marketing
In markets where we sell through commercial and institutional distribution channels, we employ sales professionals around the world who work with a combination of end-users, security professionals, architects, contractors, engineers and distribution partners to develop specific, custom-configured solutions for our end-users’ needs. Our field sales professionals are assisted by specification writers who work with architects, engineers and consultants to help design door openings and security systems to meet end-users’ functional, aesthetic and regulatory requirements. Both groups are supported by dedicated customer care and technical sales-support specialists worldwide. We also support our sales efforts with a variety of marketing efforts, including trade-specific advertising, cooperative distributor merchandising, digital marketing and marketing at a variety of industry trade shows.
In markets in which we sell through retail and home-builder distribution channels, we have teams of sales, merchandising and marketing professionals who help drive brand and product awareness through our channel partners and to consumers. We utilize a variety of advertising and marketing strategies, including traditional consumer media, retail merchandising, digital marketing, retail promotions and builder and consumer trade shows, to support these teams.
We also work actively with several industry bodies around the world to help promote effective and consistent safety and security standards. For example, we are members of the American Association of Automatic Door Manufacturers (AAADM), Builders Hardware Manufacturers Association (BHMA), Connectivity Standards Alliance, Construction Specification Institute, Door and Hardware Institute (DHI), FiRa Consortium, National Association of State Fire Marshals (NASFM), Partner Alliance for Safer Schools (PASS), Physical Security Interoperability Alliance (PSIA), Security Industry Association, Smart CardSecurity Technology Alliance, American SocietyZ-Wave Alliance, The European Federation of Healthcare Engineering, American InstituteAssociations of Architects, Construction Specification Institute,Locks and Builders Hardware Manufacturers (ARGE), ASSOFERMA (Italy), BHE (Germany) and UNIQ (France). We also have established the Safety and Security Institute in China, which helps to educate government officials, architects and builders and advocates for consistent building codes and standards that address end-users’ safety and security.
Production and Distribution
We manufacture our products in ourseveral geographic markets around the world. We operate 3129 principal production and assembly facilities including 14– 16 in theour Allegion Americas region, 12segment and 13 in EMEIA and 5 in Asia Pacific.our Allegion International segment. We own 1516 of these facilities and lease the others. Our
strategy is to produce in the region of use, wherever appropriate, to allow us to be closer to the end-user and increase efficiency and timely product delivery. Much of our United States (U.S.)U.S. based residential portfolio is manufactured in the Baja Regionregion of Mexico under a NAFTA Maquiladora.
the Maquiladora, Manufacturing and Export Services Industry ("IMMEX") program. In managing our network of production and assembly facilities, we focus on eliminating excess capacity, reducing cycle time through productivity, and harmonizing production practicescontinuous improvement in customer experience, employee health and safety, procedures.productivity, resource utilization and operational excellence.
We distribute our products through a broad network of channel partners. In addition, third-party manufacturing and logistics providers perform certain manufacturing, storage and distribution services for us to support certain parts of our manufacturing and distribution network.
Raw Materials
We support our region-of-use production strategy with corresponding region-of-use supplier partners where available.for much of our supply base. Our global and regional commodity teams work with production leadership, product management and materials management teams to ensure adequateprocure materials are available for production.
Where appropriate, we may enter into fixed-cost contracts to lower overall costs.
We purchase a wide range of raw materials, including steel, zinc, brass and other non-ferrous metals, as well as other parts and components, such as electronic components, to support our production facilities. Where appropriate,Through much of 2022, we may enter into fixed-cost contractscontinued to lowerexperience supply chain disruptions and delays, including logistical challenges; shortages in parts and materials (particularly shortages of electronic components); and increased material and other inflation. While these trends have negatively impacted our results of operations, we have taken multiple actions to address these challenges, including product redesigns, carrying increased levels of safety stock and working with our supplier base, including establishing new and diverse supplier relationships, to increase part and component availability and our overall costs.
supply chain agility. As a result of these actions, we have seen many of these supply chain related challenges improve over the second half of 2022, although shortages of electronic parts and components persist. See "Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" for a more detailed discussion of these trends and challenges.
Intellectual Property
Intellectual property, inclusive of certain patents, trademarks, copyrights, know-how, trade secrets and other proprietary rights, is important to our business. We create, protect and enforce our intellectual property investments in a variety of ways. We work actively in the U.S. and internationally to try to ensure the protection and enforcement of our intellectual property rights. We use trademarks on nearly all of our products and believe that such distinctive marks are an important factor in creating a market for our goods, in identifying us and in distinguishing our products from others. We consider our CISA, Interflex, LCN, Schlage, SimonsVoss, Von Duprin LCN, CISA, SimonsVoss, Interflex and other associated trademarks to be among our most valuable assets, and we have registered these trademarks in a number of countries. Although certain proprietary intellectual property rights are important to our success, we do not believe we are materially dependent on any particular patent or license, or any particular group of patents or licenses.
Facilities
We operate through a broad network of sales offices, engineering centers, 3129 principal production and assembly facilities and several distribution centers throughout the world. Our active properties represent approximately 7.06.7million square feet, of which approximately 47%41%is leased.
The following table shows the location of our principal worldwide production and assembly facilities:
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Production and Assembly Facilities |
Allegion Americas | | EMEIA | | Asia PacificAllegion International |
Blue Ash, Ohio | | Clamecy, France | | Auckland, New Zealand |
Bogota, ColombiaChino, California | | Dubai, United Arab Emirates | | Bucheon, South KoreaBlackburn, Australia |
Chino, CaliforniaEnsenada, Mexico | | Durchhausen, Germany | | Jinshan, ChinaBrooklyn, Australia |
Ensenada, MexicoEverett, Washington | | Duzce, Turkey | | Melbourne, AustraliaClamecy, France |
Indianapolis, IndianaFarmington, Connecticut | | Faenza, Italy | | Sydney, AustraliaDurchhausen, Germany |
Irving, TexasGreenfield, Indiana | | Feuquieres, France | | Faenza, Italy |
McKenzie, TennesseeIndianapolis, Indiana | | Monsampolo, Italy | | Feuquieres, France |
Perrysburg, OhioIrving, Texas | | Muenster, Germany | | Jinshan, China |
Princeton, IllinoisMcKenzie, Tennessee | | Osterfeld, Germany | | Monsampolo, Italy |
Security, ColoradoMississauga, Ontario | | Renchen,Osterfeld, Germany | | |
Snoqualmie, WashingtonPerrysburg, Ohio | | Siewierz, Poland | | Renchen, Germany |
Tecate, MexicoPrinceton, Illinois | | Veenendaal, Netherlands | | |
Tijuana, MexicoSecurity, Colorado | | | | Zawiercie, Poland |
Toronto, OntarioSnoqualmie, Washington | | |
Tecate, Mexico | | |
Tijuana, Mexico | | |
Research and Development
We are committed to investing in highly productiveour research and development capabilities particularly in electro-mechanical systems. Our research and development ("R&D") expenditures were approximately $48.3 million, $47.3 million and $45.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.
We concentratewith a focus on developing technology innovations that will deliver growth through the introduction of new products and solutions, and also on driving continuoussolutions. In addition, we invest in initiatives that continuously drive improvements in product cost, quality, safety and sustainability.
We manage our R&DOur research and development team is managed as a global, group with an emphasis on a global collaborative approachgroup to identify and develop new technologies and worldwide product platforms. We are organized on a regional basis toOur regionally located resources leverage expertise in local standards and configurations. In additionconfigurations and apply those to regional engineering centers in each geographic region,adapt products for the benefit of our customers. Further, we also operate a global technology center in Bengaluru, India, which augments and supports our regional engineering center of excellence in Bangalore, India.
and technology teams.
Seasonality
Our business experiences seasonality that varies by product and service line. BecauseFor instance, as more construction and do-it-yourself projects occur during the second and third calendar quarters of each year in the Northern Hemisphere, our security product sales related to those projects are typically are higher in those quarters than in the first and fourth calendar quarters. However, our Interflex businesscertain other businesses typically experiencesexperience higher sales in the fourth calendar quarter due to demand for services and project timing. Revenue by quarter
Human Capital
Our human capital strategy is based on our values and is foundational to achieving our business strategy. To ensure we attract and retain top talent, we strive for the years endeda diverse and inclusive culture that rewards performance, provides growth and development opportunities and supports employees through competitive compensation, benefits and numerous volunteer and charitable giving opportunities.
As of December 31, 2017, 20162022, we had approximately 12,300 employees worldwide, with approximately 46% employed within the U.S. and 2015approximately 54% based outside the U.S. Among our U.S. based employees, approximately 15% were subject to collective bargaining agreements with various labor unions. Outside the U.S., we have employees in certain countries, particularly in Europe, that are represented by an employee representative organization, such as follows:a works council. The vast majority of our employees work on a full-time basis. Our employee base is supplemented by contingent labor where business demand fluctuates or we experience short-term needs for specialized skills. We believe our relations with our workforce in both unionized and non-unionized settings are generally positive.
Compensation and Benefits
Compensation and benefit programs are tailored to be competitive in the geographies where we work, including a total rewards package (which varies by country/region) that includes hourly and salaried compensation, performance-based incentive and long-term equity incentive plans, retirement, insurance and government social welfare programs, disability and family leave,
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| First Quarter | Second Quarter | Third Quarter | Fourth Quarter |
2017 | 23% | 26% | 25% | 26% |
2016 | 22% | 26% | 26% | 26% |
2015 | 22% | 25% | 26% | 27% |
health and wellness programs, education benefits to pursue degrees and certifications and additional offerings to support financial stability and personal planning. The Allegion Leadership Behaviors – break boundaries, innovate, be courageous, engage and develop, champion change and be inclusive – work in concert with our performance management system to reinforce our values and code of conduct in assessing how people lead and deliver top performance.
Talent Attraction
Employees
Our employer brand strength creates a differentiated employee experience that attracts and retains the right talent for Allegion. Our talent attraction efforts are focused on and highlight a culture that reflects our core values, Allegion Leadership Behaviors and business objectives. These efforts begin well before people work for us. Around the world, our sites partner with schools and support teachers, providing mentoring, grants, scholarships, internships, co-op programs, classroom technology and on-site activities and full-time rotational programs after graduation. Our sites sponsor science, technology, engineering and math ("STEM") programs and competitions to spur interest in fields like robotics, IT and engineering. In the U.S., we also host annual Manufacturing Day events virtually and at several of our production and assembly facilities. These programs expose students to careers in manufacturing and technology and provide educators with programming to encourage academic excellence and social development while building a pipeline of talent for us.
We currentlywant to attract talent with core capabilities relevant to our long-term corporate business strategy: customer focus, innovation, partnering, pace and agility and collaboration. We use a variety of recruitment tactics to ensure a strong base of labor for manufacturing operations and to build the base of talent with these capabilities. Throughout the recruitment cycle, we provide a technology-enabled seamless experience for internal and external candidates and hiring managers.
Talent Development and Succession Planning
Talent development and succession planning are key components of the Allegion Operating System, our system of annual operation that supports governance, reporting processes and management of the business. Our performance management system includes annual performance reviews for all permanent salaried employees, where, in alignment with our values, an open feedback culture is encouraged, regardless of level or hierarchy. Inclusive talent development and succession planning takes place at all levels of the organization and is supported through the Allegion Leadership Behaviors, individual career mapping, assessment of performance and talent pipeline planning up to and including the executive leadership team ("ELT"). As part of their quarterly business review, the ELT reviews talent development, focusing on developing a diverse succession pipeline. These cross-functional reviews highlight individuals who are ready for new opportunities, individuals who are on a special assignment or project and individuals early in their career that demonstrate emerging leadership skills.
Learning and Development
Opportunities for on-going learning and development are delivered to employees through structured coursework, on-site and expert-led training and experiential, applied development. The Allegion Academy is offered globally, supporting multiple languages and providing more than 20,000 self-guided online courses, as well as learning community channels on targeted skills and topics like inclusion and diversity. We offer programs to provide successive levels of development, including reskilling and upskilling existing employees, as well as strengths-based leadership curriculum and global programs for employee mentoring and coaching. Enterprise excellence initiatives and sprint teams expand skills in lean manufacturing and quality principles and lead to redesigning workflow to boost productivity and reduce waste.
Engagement and Diversity, Equity and Inclusion ("DEI")
Engagement and DEI are also parts of the Allegion Operating System. Engagement surveys provide a mechanism to gather direct employee feedback, give team leaders insights on potential areas of focus and allow leaders to prioritize and take action on their teams’ foundational, inclusion, growth and development needs. Strengths-based leadership is an element of our commitment to inclusion: the more employees understand their own strengths, the better equipped they are to add value and appreciate the contributions of diverse members of their teams.
Engagement and DEI are topics for learning communities, employee roundtables and ongoing, regular analysis and dialogue among people leaders, executive leadership and Board of Directors. We believe in fundamental standards that support our employees, including a commitment to building and maintaining diverse and inclusive workplaces, safe and healthy practices and competitive wages and benefits. We embrace all differences and similarities among colleagues and within the relationships we foster with customers, suppliers and the communities where we live and work. Employee led resource and affinity groups provide enrichment opportunities for women's leadership, early career professionals, allies and members of the LBGTQIA+, veteran and Hispanic communities, working parents, innovation, health and fitness, site-specific engagement and community volunteering and philanthropy. Whatever background, experience, race, color, national origin, religion, age, gender, gender identity, disability status, sexual orientation, protected veteran status or any other characteristic protected by law, we make sure that potential and current employees have approximately 10,000 employees.every opportunity for application and the opportunity to give their best at work.
The efforts of Allegion’s DEI Steering Committee, our ELT and the employee-led Inclusion Council, are driving expectations and accountability while creating role models and change champions. Our DEI strategy has three core pillars:
•Learn & listen deeply: Learn to recognize biases and mitigate them. Seek to first understand an individual's perspective rather than respond or act;
•Unite widely: Create a workplace where all employees feel welcomed, respected and valued, enabling customers to more easily connect with our brands through our people; and
•Take action: Identify the unique things that impact our organization, our communities and our industry.
During 2022, we updated our strategic action priorities, which center on: 1) Building and sustaining equitable policies and practices; 2) Creating an inclusive culture; and 3) Elevating the approach to DEI in our industry and having a positive impact on our communities. We are dedicated to fulfilling equal opportunity commitments in all decisions regarding all employment actions and at all levels of employment. In partnership with our Human Resources organization, our Equal Employment Opportunity Officer ensures that the applicable policy and procedures are appropriately established, implemented and disseminated, including those prohibiting discrimination, harassment, bullying and/or retaliation.
Civic Involvement
Civic involvement is part of the value proposition we offer employees and supports DEI, growth and development. We provide multi-faceted support for our communities, guided by three philanthropic pillars: safety and security; wellness; and addressing the unique needs of the communities where we live, learn, work and visit. Corporate sponsorships and voluntary employee payroll deductions support a wide range of non-profits, including those that address housing and school security and safety; children and youth programs; education and scholarships for people of color and those who are economically disadvantaged and support for Historically Black Colleges and Universities; community safety nets for basic needs (e.g., food, shelter, transportation) for underserved people and to break the cycle of poverty; wellness, mental health, health research, emergency relief and blood supply initiatives; and programs to advance equality, justice and address systemic bias. In addition to corporate sponsorships, site leaders and employees are encouraged to organize local volunteer and fundraising activities, provide grants to local organizations and serve on boards and committees.
Respect for Human Rights
Our respect for human rightsisexpressed instandards for our employees, our business partners, our customers and our communities. We uphold our Global Human Rights Policy, with standards that align with basic working conditions and human rights concepts advanced by international organizations such as the International Labor Organization and the United Nations. This policy also represents our own minimum standards for working conditions and human rights in our business and supply chains. In addition, we conduct risk assessments and continue to have conversations with the suppliers and companies we work with about the importance of human rights.
Employee Health and Safety
Employee health and safety are top priorities, and we consistently rank as the safest among leading competitors on core measures such as the total recordable incident rate. ‘Be safe, be healthy’ is a core organizational value in our proactive safety culture and has guided our response throughout the COVID-19 pandemic. We continue to adapt to changing health conditions at a local level and support a wide range of health and safety measures, including encouraging preventative measures such as COVID-19 and influenza vaccines and booster shots.
The ELT, with oversight from our Board of Directors, is responsible for risk management, employee accountability, safety hazard recognition and executing safety initiatives. We monitor leading and lagging indicators related to health and safety as part of our ongoing management of the Allegion Operating System and regularly update the Corporate Governance and Nominating Committee of the Board of Directors on key developments and employee health and safety topics. In recognition of our efforts to integrate sound environmental, health and safety ("EHS") management with our business operations, in 2021, we received the renowned Robert W. Campbell Award from the National Safety Council.
Regulatory Matters
We are subject to a variety of federal, state and local laws and regulations, both within and outside the U.S., relating to EHS matters. We are committed to conducting our business in a safe, environmentally responsible and sustainable manner, in compliance with all applicable EHS laws and regulations, and in a manner that helps promote and protect the health and safety of our environment, associates, customers, contractors and members of our local communities worldwide.We operate with principles that support our proactive commitments, including:
•Integrating sound EHS and sustainability strategies in all elements of our business functions, including objectives and measurements;
•Conducting periodic, formal evaluation of our compliance status and annual review of objectives and targets;
•Creating a workplace culture where all employees are responsible for safety;
•Making continuous improvements in EHS and sustainability management systems and performance, including the reduction in the usage of natural resources, waste minimization, prevention of pollution and prevention of workplace accidents, injuries and risks;
•Designing, operating and maintaining our facilities in a manner that minimizes negative EHS and sustainability impacts;
•Using materials responsibly, including the recycling and reuse of materials, where feasible; and
•Acting in a way that shows sensitivity to community concerns about EHS and sustainability issues.
We recognize that these principles are critical to our future success. We have a dedicated environmental program that is designed to reduce the utilization and generation of hazardous materials during the manufacturing process as well asand to remediate any identified environmental concerns. As to the latter, we are currently engaged in site investigations and remediation activities to address environmental cleanup from past operations at current and former production facilities. The CompanyWe also regularly evaluates its remediation programs and considers alternativeevaluate our remediation methods that are in addition to, or in replacement of, those we currently utilized by the Companyutilize based upon enhanced technology and regulatory changes.
We are sometimes a party to environmental lawsuits and claims and have, from time to time, received notices of potential violations of environmental laws and regulations from the U.S. Environmental Protection Agency (the "EPA"("EPA") and similar state authorities. We have also been identified as a potentially responsible party ("PRP") for cleanup costs associated with off-site waste disposal at federal Superfund and state remediation sites. For all such sites, there are other PRPs and, in most instances, our involvement is minimal.
In estimating our liability, we have assumed that we will not bear the entire cost of remediation of any site to the exclusion of other PRPs who may be jointly and severally liable. The ability of other PRPs to participate has been taken into account, based on our understanding of the parties’ financial condition and probable contributions on a per site basis. Additional lawsuits and claims involving environmental matters are likely to arise from time to time in the future. For a further discussion of our potential environmental liabilities, see Notes 2 and 21 to the Consolidated Financial Statements.
We incurred $3.2 million, $23.3 million,Environmental, social and $4.4 milliongovernance ("ESG") factors important to our business are embedded into our values and our leadership's commitment to create a workplace culture committed to doing the right thing in the right way. Our Board of expenses duringDirectors oversees the years ended December 31, 2017, 2016,Company's ESG strategies, goals and 2015, respectively, for environmental remediationperformance, and both our leadership and employees all have a responsibility to uphold excellence, as we believe our commitment to ESG matters helps advance engagement and business vitality. In 2022, Allegion was among the notable companies honored with a SEAL Business Sustainability Award, in recognition of our proactive water reduction project implemented across two of our production facilities in the Baja region of Mexico. Additional information about our ESG priorities and progress may be found in the ESG section of our website (found under the ESG tab at sites presently or formerly owned or leased by us. Aswww.allegion.com). The website highlights our ongoing progress and advancements in ESG matters, and includes our materiality matrix of December 31, 2017 and 2016, we have recorded reserves for environmental matters of $28.9 million and $30.6 million. Of these amounts $8.9 million and $9.6 million, respectively, relate to remediation of sites previously disposed by us. Given the evolving nature of environmental laws, regulations and technology, the ultimate cost of future compliance is uncertain.
ESG priorities.
Available Information
We are required to file annual, quarterly and current reports, proxy statements and other documents with the U.S. Securities andSEC under the Exchange Commission ("SEC").Act. The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The public can obtain any documents that are filed by us at http://www.sec.gov.
In addition, thisthe Company's Annual Report on Form 10-K, as well as future quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to all of the foregoing reports, are made available free of charge on our Internet website (http://www.allegion.com)www.allegion.com) as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC.
Throughout this Form 10-K, we refer to additional information that may be found or is available on our websites. The contents ofinformation contained on, or that may be accessed through, our website arewebsites is not incorporated by reference ininto, and is not part of, this report.Form 10-K.
Item 1A. RISK FACTORS
We are subject to future events, risks and uncertainties – many of which are beyond our control – that could materially and adversely affect our business, financial condition, results of operations and cash flows. You should carefully consider the risksrisk factors discussed below, together with all the other information included in this Form 10-K, in evaluating us, our ordinary shares and our senior notes. If any of the events, risks or uncertainties below actually occurs, our business, financial conditions,condition, results of operations and cash flows could be materially and adversely affected. Any such adverse effect may cause the trading price of our ordinary shares to decline, and as a result, you could lose all or part of your investment in us. Our business, financial condition, results of operations and cash flows may also be materially and adversely affected by events, risks and uncertainties not known to us or events, risks and uncertainties that we currently believe to be immaterial.
Economic, Market and Financial Risks Related
Our business operations and performance have been, and are expected to Our Businesscontinue to be, impacted by global macroeconomic factors. Ongoing macroeconomic challenges could adversely impact our business, results of operations, financial conditions and cash flows.
Macroeconomic challenges, including ongoing supply chain disruptions and delays, material, electronic component and labor shortages, cost inflation, rising interest rates and volatility in the capital markets, have impacted, and may continue to impact, our business, our customers and our suppliers. These challenges may also make it more challenging for us to manufacture and deliver products to our customers, could cause periodic production interruptions and supply constraints, impact our ability to forecast and plan for future business activities and, if not adequately managed, could have a material adverse impact on our business, results of operations, financial condition and cash flows.
Further, demand for our products and solutions is impacted by the strength of institutional, commercial and residential construction and remodeling markets, which are sensitive to national, regional and local economic conditions. As a result, deterioration of these macroeconomic conditions (or weakness in these conditions existing for an extended period of time), a decline in general economic activity or recession in the U.S. or global economy could slow demand for new construction or remodeling projects and result in our customers cancelling or delaying orders, which in turn could erode average selling prices and result in declines in our revenues, profitability and cash flows.
Increased prices and inflation could negatively impact our margin performance and our financial results.
Elevated levels of inflation, including rising prices for raw materials, parts and components, freight, packaging, labor and energy, increases our costs to manufacture and distribute our products and services, and we may be unable to pass these increased costs on to our customers. We do not currently use financial derivatives to hedge against volatility in commodity prices; however, we utilize firm purchase commitments, where possible, to help mitigate risk. The pricing of some materials, parts and components we use is based on market prices. To mitigate this exposure, we may use annual price contracts to minimize the impact of inflation and to benefit from deflation.
Additionally, we are exposed to fluctuations in other costs such as packaging, freight, labor and energy prices. If inflation in these costs increases beyond our ability to control for them through measures such as implementing operating efficiencies, or we are not able to increase prices to sufficiently offset the effect of various cost increases without negatively impacting customer demand, our margin performance and results of operations would be negatively impacted.
Our global operations subject us to economic risks.
We are incorporatedOur businesses operate around the world in Irelandvarious geographic regions and operate in countries worldwide.product markets. Additionally, we procure various products, parts, components and services from supplier partners located throughout the world. Our global operations depend on products manufactured, purchased and sold in the U.S. and internationally, including in Australia, Canada, China, Europe, Korea, Mexico, New Zealand and Turkey.the Middle East. The political, economic and regulatory environments in which we operate are becoming increasingly volatile and uncertain. Accordingly, we are subject to multiple risks that are inherent in operating and sourcing globally, including:
•Changes to trade agreements, sanctions, import and export regulations, including imposition of burdensome tariffs and quotas, and customs duties;
changes•Changes in applicable tax regulations and interpretations;
•Economic downturns;
•Social and political unrest, instability, national and international conflict, including war, border closures, civil disturbances, terrorist acts and other geographical disputes and uncertainties;
•Government measures to restrict business activity, for example, to prevent the spread of a communicable disease;
•Changes in laws and regulations or imposition of currency restrictions and other restraints in various jurisdictions;
limitation•Limitation of ownership rights, including expropriation of assets by a local government, and limitation on the ability to repatriate earnings;
•Sovereign debt crises and currency instability in developed and developing countries;
changes in applicable tax regulations and interpretations;
imposition of burdensome tariffs and quotas;
difficulty•Difficulty in staffing and managing global operations;
difficulty•Difficulty in enforcing agreements, collecting receivables and protecting assets through non-U.S. legal systems; and
political unrest, national•Difficulty in transporting materials, components and international conflict, including war, civil disturbances and terrorist acts; and
economic downturns and social and political instability.
products.
These risks could increasehave increased our cost of doing business in the U.S. and internationally,internationally. These risks may also increase our counterparty risk, disrupt our operations, disrupt the ability of suppliers and customers to fulfill their obligations, increase our effective tax rate, increase the cost of our products, limit our ability to sell products and services in certain markets, reduce our operating margin and cash flows and/or negatively impact our ability to compete.
Our business relies on the institutional, commercial and residential construction and remodeling markets.
We primarily relyDemand for our security products and solutions relies on the institutional, commercial and residential construction and remodeling markets, which are marked by cyclicality based on overall economic conditions.conditions, including consumer confidence and disposable income, corporate and government spending, work-from-home trends, availability of credit and demand for new housing and infrastructure. Weakness or instability in one or more of these markets may cause current and potential customers to delay or cancel major capital projects or otherwise choose not to make purchases, which could negatively impact the demand for our products and services.solutions and erode average selling prices.
Currency exchange rate fluctuations have had, and may continue to have, an adverse effect on our business, financial condition, results of operations and cash flows.
We are exposed to a variety of market risks, including the effects of changes in currency exchange rates. See "Part II, Item 7A. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative and Qualitative Disclosures About Market Risk."
Approximately 25% of our 2022 Net revenues were derived outside the U.S., and we expect sales to non-U.S. customers to continue to represent a significant portion of our consolidated Net revenues. Although we may enter into currency exchange contracts to reduce our risk related to currency exchange fluctuations, changes in the relative fair values of currencies occur from time to time and in some instances, as was the case in 2022, have had a significant impact on our Net revenues. We do not hedge against all our currency exposure, and therefore, our results of operations will continue to be susceptible to impacts from currency fluctuations.
We also translate assets, liabilities, revenues and expenses denominated in non-U.S. dollar currencies into U.S. dollars for our Consolidated Financial Statements based on applicable exchange rates. Consequently, fluctuations in the value of the U.S. dollar compared to other currencies may have a material impact on the value of these items in our Consolidated Financial Statements, even if their value has not changed in their original currency. Further, certain of our businesses may invoice customers in a currency other than its functional currency, or may be invoiced by suppliers in a currency other than its functional currency, which could result in unfavorable translation effects on these businesses and our results of operations.
We may be required to recognize impairment charges for our goodwill, indefinite-lived intangible assets and other long-lived assets.
At December 31, 2022, the net carrying value of our goodwill and other indefinite-lived intangible assets totaled approximately $1.4 billion and $110 million, respectively. Pursuant to U.S. generally accepted accounting principles ("GAAP"), we are required to annually assess our goodwill and indefinite-lived intangible assets for impairment. In addition, interim assessments must be performed for these and other long-lived assets whenever events or changes in circumstances indicate that an impairment may have occurred. Significant disruptions to our business or end market conditions, protracted economic weakness (including a potential economic downturn or recession), unexpected significant declines in operating results of reporting units, divestitures or market capitalization declines may result in recognition of impairment charges to our goodwill, indefinite-lived intangible or other long-lived assets. Any charges relating to such impairments could have a material adverse impact on our results of operations in the periods when recognized.
The capital and credit markets are important to our business.
Continued instability in U.S. and global capital and credit markets, including market disruptions, limited liquidity and interest rate volatility or reductions in the credit ratings assigned to us by independent ratings agencies, could reduce our access to capital markets, increase our costs of borrowing or adversely impact our ability to obtain favorable financing terms in the future. In particular, if we are unable to access capital and credit markets on terms that are acceptable to us, we may not be able to execute potential merger and acquisition plans, make other investments or fully execute our business plans and strategy.
Our suppliers and customers are also dependent upon the capital and credit markets. Limitations on the ability of customers, suppliers or financial counterparties to access credit could lead to insolvencies of key suppliers and customers, limit or prevent customers from obtaining credit to finance purchases of our products and services, delay institutional, commercial and/or residential construction and remodeling projects and cause delays in the delivery of key products from suppliers.
There are risks associated with our outstanding and future indebtedness.
We had approximately $2.1 billion of outstanding indebtedness at December 31, 2022. Included in this total was $69 million outstanding under our senior unsecured revolving credit facility (the "2021 Revolving Facility") that permits borrowings of up to $500 million. A portion of our cash flows from operations is dedicated to servicing our indebtedness and will not be available for other purposes, including our operations, capital expenditures, payment of dividends, share repurchases or future business opportunities or other strategic investments.
Our ability to make scheduled payments or to refinance our debt obligations depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control, such as the credit ratings assigned to us by independent ratings agencies or our ability to access capital markets on acceptable terms. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, reduce or eliminate the payment of dividends, sell assets, seek additional capital or seek to restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In such event, we could face substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service and other obligations.
Additionally, at December 31, 2022, our borrowings included a variable rate term loan facility (the "2021 Term Facility", and together with the 2021 Revolving Facility, the "2021 Credit Facilities"). The 2021 Credit Facilities had a combined outstanding variable rate balance of $306.5 million at December 31, 2022, which exposes us to variable interest rate risk. Applicable variable interest rates have increased throughout 2022, resulting in increased Interest expense. We are also exposed to the risk of continued rising interest rates to the extent we fund our short or long-term financing needs with variable-rate borrowings under the 2021 Revolving Facility. If variable base rates under the 2021 Credit Facilities continue to increase in the future, our Interest expense could increase as well. For more details about our interest rate exposure under the 2021 Credit Facilities, please see Part II. Item 7A.
Strategic and Operational Risks
Increased competition, including from technicaltechnological developments, could adversely affect our business.
The markets in which we operate include a large number of participants, including multi-national, companies, regional companies and small, local companies. We primarily compete on the basis of quality, innovation, expertise, effective channels to market, breadth of product offering and price. We may be unable to effectively compete on all these bases. Further, in a number of our product offerings, we compete with our retail customers and technology partners who use their own private labels. If we are unable to anticipate evolving trends in the market or the timing and scale of our competitors’ activities and initiatives, including increased competition from private label brands, the demand for our products and services could be negatively impacted.
In addition, we compete in a marketan industry that is experiencing the convergence of the mechanical, electronic and digital products. Technology and innovation play significant roles in the competitive landscape. Our success depends, in part, upon the research, development and implementation of new technologies and products.products including obtaining, maintaining and enforcing necessary intellectual property protections. Securing and maintaining key partnerships and alliances, as well asrecruiting and retaining highly skilled and qualified employee talent includingand having access to technologies, services, intellectual property and solutions developed by others will play a significant role in our ability to effectively compete. The continual development of new technologies by existing and new competitors, including non-traditional competitors with significant resources, could adversely affect our ability to sustain operating margins and desirable levels of sales volumes. To remain competitive, we must develop new products and service offerings and respond to new technologies in a timely manner.
Our growth is dependent, in part, on the development, commercialization and acceptance of new products and services.
We must develop and commercialize new products and services that meet the varied and evolving needs of our customers and end-users in order to remain competitive in our current and future markets and in order to continue to grow our business. End users are continually adopting more advanced technologies in their facilities and homes, accelerated by the increasing adoption of IoT technologies and connected devices, which will require us to devote significant effort and resources to the development, maintenance and enhancement of the IT systems and other infrastructure required to support and/or enhance the functionality of our electronic products and solutions. The speed of development by our competitors and new market entrants is increasing. We cannot provide any assurance that any new product or service will be successfully commercialized in a timely manner, if ever, or, if commercialized, will result in returns greater than our investment. Investment in a product or service could divert our attention and resources from other projects that become more commercially viable in the market. We also cannot provide any assurance that any new product or service will be accepted by the market.
Changes in customer and consumer preferences and the inability to maintain beneficial relationships with large customers could adversely affect our business.
We have significant customers, particularly major retailers, although no one customer represented 10% or more of our total Net revenues in any of the past three fiscal years. The loss or material reduction of business, either due to a reduction in demand
from one or more of our significant customers, or our inability to timely meet any elevated level of customer demand for various reasons, the lack of success of sales initiatives or changes in customer preferences or loyalties for our products related to any such significant customer could have a material adverse impact on our business. In addition, major customers who are volume purchasers are much larger than us and have strong bargaining power with their suppliers. This limits our ability to recover cost increases through higher selling prices. Furthermore, unanticipated inventory adjustments by these customers can have a negative impact on sales.
We also sell our products through various trade channels, including traditional retail and e-commerce channels. If we or our major customers are not successful in navigating the shifting consumer preferences to distribution channels such as e-commerce, our expected future revenues may be negatively impacted.
If our products or solutions fail to meet certification and specification requirements, are defective, cause, or are alleged to have caused, bodily harm or injury, or otherwise fall short of end-users' needs and expectations, our business may be negatively impacted.
The security and access control product markets we serve often have unique certification and specification requirements, reflecting local regulatory requirements and highly variable end-user needs. While we strive to meet all certification and specification requirements, if any of our products or solutions do not meet such requirements, or contain, or are perceived to contain, defects or otherwise fall short of end-users' needs and expectations, fail to perform as intended, or are otherwise alleged to result in property damage, bodily injury and/or death we may become subject to personal injury lawsuits and/or product liability claims, and if found liable, may incur significant costs, which could negatively impact our business, results of operations or financial condition.
Additionally, electronic security products and solutions are increasingly more sophisticated and technologically complex than the mechanical security products we sell and have an increased risk of design, cybersecurity or manufacturing defects, which could lead to recalls, product replacements or modifications, write-offs of inventory or other assets and significant warranty and other expenses. Product quality issues could also adversely affect the end-user experience, resulting in reputational harm, loss of competitive advantage, poor market acceptance, reduced demand for products and solutions, delay in new product and service introductions and lost sales. Further, adverse publicity, whether or not justified, or allegations of product or service quality issues, even if false or unfounded, could damage our reputation and negatively affect our sales.
Our business and innovation strategies include making acquisitions of, and investments in, external companies. These acquisitions and investments could be unsuccessful, consume significant resources or increase our exposure to cybersecurity, data privacy or other regulatory risks, which could adversely affect our business, financial condition, results of operations and cash flows.
Our long-term growth strategies include the acquisition of businesses or product lines to strengthen our industry position, enhance our existing set of products and services offerings or expand into adjacent markets. For example, in July 2022, we completed the acquisition of the Access Technologies business. However, we cannot provide assurance that we will identify or successfully complete acquisitions with suitable candidates in the future, nor can we provide assurance that completed or future acquisitions will be successful or otherwise achieve the anticipated strategic and financial benefits, including cost and revenue synergies.
Acquisitions often place significant demands on management, operational and financial resources, which could decrease management’s capacity to focus on other important business strategies or divert resources from other parts of our business. Further, the success of future or completed acquisitions will depend, in large part, on the successful integration of operations, sales and marketing, information technology, finance and administrative operations. We cannot provide assurance that we will be able to successfully integrate these new businesses. Additionally, the financing of future business acquisitions may increase our leverage, impact our credit rating and/or diminish our financial position and ability to re-invest in our existing businesses. Future acquisitions may also be dependent on our ability to access the capital and credit markets to obtain new debt or equity financing to fund the purchase price on terms that are acceptable to us.
Some of the businesses we may seek to acquire may be marginally profitable or unprofitable. For these businesses to achieve acceptable levels of profitability, we may need to improve their management, operations, products and market penetration or incur significant capital expenditures. We may not be successful in this regard, the costs of doing so may exceed our original estimates or we may encounter other potential difficulties.
Acquisitions also involve numerous other risks, including:
•Difficulties in obtaining and verifying the financial statements and other business information of acquired businesses;
•Inability to obtain regulatory approvals and/or required financing on favorable terms;
•Potential loss of key employees, key contractual relationships or key customers of acquired companies or of us;
•Difficulties competing in any new markets we may enter;
•Assumption of the liabilities and exposure to unforeseen liabilities (including, but not limited to, regulatory, legal and product or personal liability claims) of acquired companies;
•Cybersecurity related vulnerabilities or data security incidents that may be present in the IT Systems of acquired companies, or emerge when integrating the acquired company into our IT Systems;
•Dilution of interests of holders of our ordinary shares through the issuance of equity securities or equity-linked securities;
•Labor disruptions, work stoppages or other employee-related issues, particularly if employees of the acquired companies are represented by labor unions or trade councils; and
•Difficulty in integrating financial reporting systems and implementing controls, procedures and policies, including disclosure controls and procedures and internal control over financial reporting appropriate for public companies of our size at companies that, prior to the acquisition, had lacked such controls, procedures and policies.
Further, as part of our innovation strategy, from time to time we invest in start-up companies and/or development stage technology or other companies. In evaluating these opportunities, we follow a structured evaluation process that considers factors such as potential financial returns, new expertise in emerging technology and business benefits. Despite our best efforts to calculate potential return and risk, some or all of the companies we invest in may be unprofitable at the time of, and subsequent to, our investment. We may lose money in these investments, including the potential for future impairment charges on the investments, and the anticipated benefits of the technology and business relationships may be less than expected.
We may pursue business opportunities that diverge from our core business.
We may pursue business opportunities that diverge from our core business, including expanding our products or service offerings, seeking to expand our products and services into new international markets, investing in new and unproven technologies and forming new alliances with companies to develop and distribute our products and services. We can offer no assurance that any such business opportunities will prove successful. Certain international markets may be slower than our established markets in adopting our services and products, and our operations in such markets may not develop at a rate that supports our level of investment. Among other negative effects, our investment in new business opportunities may exceed the returns we realize. New investments could have higher cost structures than our current business, which could reduce operating margins and require more working capital. In the event that working capital requirements exceed operating cash flow, we may be required to draw on the 2021 Revolving Facility or pursue other external financing, which may not be readily available. Additionally, our pursuit of new business opportunities that diverge from our core business may expose us to different risks and uncertainties other than those described in this “Risk Factors” section or elsewhere in this Annual Report on Form 10-K. In addition to the risks outlined above, expansion into certain new markets may require us to compete with local businesses with greater knowledge of the market, including the tastes and preferences of end-users, and higher market shares.
Our strategic initiatives, including enterprise excellence efforts among other significant capital expenditure projects, may not achieve the improvements or financial returns we expect.
We utilize a number of tools to improve efficiency and productivity. Implementation of new processes to our operations could cause disruptions and may prove to be more difficult, costly or time consuming than expected. Additionally, from time to time we undertake substantial capital projects for varying reasons, such as to increase production capacity or to insource certain products, parts or components. We invest in areas we believe best align with our business strategies and that will optimize future returns. However, there can be no assurance that all our planned enterprise excellence projects or other capital expenditures will be fully implemented, or if implemented, will realize the expected improvements or financial returns.
We may not be able to effectively manage and implement restructuring initiatives or other organizational changes.
We have, from time to time, restructured or made other adjustments to our workforce and manufacturing footprint, and may need to do so in the future, in response to market or product changes, performance issues, changes in strategy, acquisitions and/or other internal or external considerations. These restructuring activities and other organizational changes often result in increased restructuring costs, diversion of management’s time and attention from daily operations, cybersecurity and other operational risks and temporarily reduced productivity. If we are unable to successfully manage and implement restructuring and other organizational changes, we may not achieve or sustain the expected growth or cost savings benefits of these activities or do so within the expected timeframe. These effects could recur in connection with future acquisitions and other organizational changes and our results of operations could be negatively affected.
The effects of global climate change or other unexpected events, including global health crises, may disrupt our operations and have a negative impact on our business.
The effects of global climate change, such as extreme weather conditions and natural disasters occurring more frequently or with more intense effects, or the occurrence of unexpected events including wildfires, tornadoes, hurricanes, earthquakes, floods, tsunamis and other severe hazards in the countries where we operate or sell products and services, could adversely affect our business, financial condition, results of operations and cash flows. These events could disrupt our operations by impacting the availability and cost of materials needed for manufacturing, cause physical damage or closure of our manufacturing sites or distribution centers, lead to loss of human capital and/or cause temporary or long-term disruption in the manufacturing or delivery of products and services to customers. These events and disruptions could also adversely affect our customers’ and
suppliers’ financial condition or ability to operate, resulting in reduced customer demand, delays in payments received or supply chain disruptions. Further, these events and disruptions could increase insurance and other operating costs, including impacting our decisions regarding construction of new facilities to select areas less prone to climate change risks and natural disasters, which could result in indirect financial risks passed through the supply chain or other price modifications to our products and services.
Additionally, as we have experienced in recent years, the COVID-19 pandemic created significant volatility, uncertainty and economic disruption, both for our business (and many of our customers and suppliers) and the U.S. and global economy more generally. It also led, both directly and indirectly, to significant operating challenges, including disruptions to our and our suppliers’ operations, shortages of electronic and other parts and components, freight delays, increased labor shortages and logistical challenges. Although most governments have eased or eliminated their restrictions on travel and social interactions, and lifted non-essential business closures, several jurisdictions in which we have operations, such as China, have public health and government mandates that restrict business activities. These mandates and restrictions have, and could continue to have, an impact on our business and operations, and on the operations of some of our suppliers.
Global health crises, such as the COVID-19 pandemic or any other actual or threatened epidemic, pandemic, or outbreak and spread of a communicable disease or virus in the countries where we operate or sell products and provide services could adversely affect our operations and financial performance. Further, any national, state or local government mandates or other orders taken to minimize the spread of a global health crisis could restrict our ability to conduct business as usual, as well as the business activities of our key customers and suppliers, including the potential for labor shortages. In particular, the ultimate extent of the impact of any epidemic, pandemic or other global health crisis on our business, financial condition and results of operations will depend on future developments which are highly uncertain and cannot be predicted.
We may be subject to risks relating to our information technology and operational technology systems.
We rely extensively on information technology and operational technology systems, networks and services including hardware, software, firmware and technological applications and platforms (collectively, "IT Systems") to manage and operate our business from end-to-end, including ordering and managing materials from suppliers, design and development, manufacturing, marketing, selling and shipping to customers, invoicing and billing, managing our banking and cash liquidity systems, managing our enterprise resource planning and other accounting and financial systems and complying with regulatory, legal and tax requirements. There can be no assurance that our current IT Systems will function properly. We have invested and will continue to invest in improving our IT Systems. Some of these investments are significant and impact many important operational processes and procedures. There is no assurance that newly implemented IT Systems will improve our current systems, improve our operations or yield the expected returns on the investments. In addition, the implementation of new IT Systems may be more difficult, costly or time consuming than expected and cause disruptions in our operations and, if not properly implemented and maintained, negatively impact our business. If our IT Systems cease to function properly or if these systems do not provide the anticipated benefits, our ability to manage our operations could be impaired.
We currently rely on third-party service providers for many of the critical elements of our global information and operational technology infrastructure, and their failure to provide effective support for such infrastructure could increase our cybersecurity risk or otherwise negatively impact our business and financial results.
We have outsourced many of the critical elements of our global information and operational technology infrastructure to third-party service providers in order to achieve efficiencies. If such service providers experience a disruption due to a cyberattack or other internal or external factors, or they do not perform or perform effectively, we may not be able to achieve the expected efficiencies and may have to incur additional costs to address failures in providing service by the service providers. Depending on the function involved, such non-performance, ineffective performance or failures of service may lead to business disruptions, processing inefficiencies or security breaches.
Disruptions or breaches of our information systems could adversely affect us.
Despite our implementation of cybersecurity measures, which have focused on prevention, mitigation, resilience and recovery, our network and products, including access solutions, may be vulnerable to cybersecurity attacks, computer viruses, malicious codes, malware, ransomware, phishing, social engineering, denial of service, hacking, break-ins and similar disruptions. Cybersecurity attacks and intrusion efforts are continuous and evolving, and in certain cases they have been successful at the most robust institutions. The scope and severity of risks that cyber threats present have increased dramatically and include, but are not limited to, malicious software, ransomware attacks, attempts to gain unauthorized access to data or premises, exploiting weaknesses related to vendors or other third parties that could be exploited to attack our systems, denials of service and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of data. Any such event could have a material adverse effect on our business, financial condition, results of operations and cash flows as we face regulatory, reputational and litigation risks resulting from potential cyber incidents, as well as the potential of incurring significant remediation costs. Further, while we maintain insurance coverage that may, subject to policy terms and exclusions, cover certain aspects of our cyber risks, such insurance coverage may be insufficient to cover our losses or all types of claims that may arise in the continually evolving area of cyber risk.
Our daily business operations also require us to collect and/or retain sensitive data such as intellectual property, proprietary business information and data related to customers, employees, suppliers and business partners within our networking infrastructure including data from individuals subject to the European Union's General Data Protection Regulation, that is subject to privacy and security laws, regulations and/or customer-imposed controls. Despite our efforts to protect such data, the loss or breach of such data due to various causes including material security breaches, catastrophic events, extreme weather, natural disasters, power outages, system failures, computer viruses, improper data handling, programming errors, unauthorized access and employee error or malfeasance could result in wide reaching negative impacts to our business. As such, the ongoing maintenance and security of this information is pertinent to the success of our business operations and our strategic goals.
In addition, we operate in an environment where there are different and potentially conflicting data privacy laws and regulations in effect or expected to go into effect in the future, including regulations related to devices connected through IoT, in the various jurisdictions in which we operate, and we must understand and comply with such laws and regulations while ensuring our data is secure.
Our networking infrastructure and related assets may be subject to unauthorized access by hackers, employee error or malfeasance or other unforeseen activities. Such issues could result in the disruption of business processes, network degradation and system downtime, along with the potential that a third party will exploit our critical assets such as intellectual property, proprietary business information and data related to our customers, suppliers and business partners. To the extent that such disruptions occur, and our business continuity plans do not effectively address these disruptions in a timely manner, they may cause delays in the manufacture or shipment of our products and the cancellation of customer orders and, as a result, our business operating results and financial condition could be materially and adversely affected, resulting in a possible loss of business or brand reputation.
Our ability to successfully grow and expand our business depends on our ability to recruit and retain a highly qualified and diverse workforce.
Our ability to successfully grow and expand our business is dependent upon our ability to recruit and retain a workforce with the skills necessary to develop, manufacture and deliver the products and services desired by our customers. We need highly skilled and qualified personnel in multiple areas, including engineering, sales, manufacturing, information technology, cybersecurity, business development, strategy and management. We must therefore continue to effectively recruit, retain and motivate highly qualified, skilled and diverse personnel to maintain our current business and support our projected growth. A shortage of these employees for various reasons, including intense competition for skilled employees, labor shortages, increased labor costs, candidates’ preference to work remotely, changes in laws and policies regarding immigration and work authorizations or any government or public health mandates in jurisdictions where we have operations that may result in workforce attrition and difficulty with recruiting, may jeopardize our ability to grow and expand our business.
We continue to experience increased labor shortages at some of our production and distribution facilities. While we have historically experienced some level of ordinary course turnover of employees, the COVID-19 pandemic increased turnover and the ensuing negative macroeconomic environment exacerbated labor shortages and contributed to further increases in employee turnover. Labor shortages and increased turnover rates have led to, and could in the future lead to, increased costs, such as increased overtime to meet customer demand and increased wage rates to attract and retain employees and could negatively affect our ability to efficiently operate our production facilities or otherwise operate at full capacity. An overall or prolonged labor shortage, lack of skilled labor, increased turnover or sustained level of wage inflation could have a material adverse impact on our business, financial position, results of operations and cash flows.
Disruptions in our global supply chain, including product manufacturing and logistical services provided by our supplier partners, may negatively impact our business.
We procure certain products, including raw materials and other commodities, including steel, zinc, brass and other non-ferrous metals, as well as parts, components (including electronic components) and logistical services from supplier partners located throughout the world. Our ability to meet our customers' needs and achieve cost targets depends on our ability to maintain key manufacturing and supply arrangements, including supplier execution and certain sole supplier or sole manufacturing arrangements. Our reliance on these third parties reduces our control over the manufacturing and delivery process, exposing us to risks including reduced control over product costs and delivery. Additionally, because not all of our supply arrangements provide for guaranteed supply and some key parts and components may be available only from a single supplier or a limited group of suppliers, we are also subject to supply and pricing risks, which could negatively impact our margin performance, results of operations, inventory levels and cash flows.
If we are unable to effectively manage these relationships, or if these third parties experience delays, disruptions, shortages of materials, labor, electronic and other components, capacity constraints, regulatory issues or quality control problems in their operations, freight delays and other supply chain constraints and disruptions, or otherwise fail to meet our future requirements for timely delivery, our ability to ship and deliver certain of our products to our customers could be impaired and our business could be harmed.
Legal and Compliance Risks
We are subject to risks related to corporate social responsibility and reputational matters.
Our reputation and the reputation of our brands, including the perception held by our customers, end-users, business partners, investors, other key stakeholders and the communities in which we do business are influenced by various factors. There is an increased focus from our stakeholders, as well as regulatory authorities both within the U.S. and internationally, on ESG practices and disclosure. If we fail, or are perceived to have failed, in any number of ESG matters, such as environmental stewardship, DEI, good corporate governance, workplace conduct and support for local communities, or to effectively respond to changes in, or new, legal, regulatory or reporting requirements concerning climate change or other sustainability concerns, we may be subject to regulatory fines and penalties, and our reputation or the reputation of our brands may suffer. Further, we have made several public commitments regarding our intended reduction of carbon emissions, including a commitment to achieve carbon neutral emissions by 2050. Although we intend to meet these commitments, we may be required to expend significant resources to do so, which could increase our operational costs. Further, there can be no assurance of the extent to which any of our commitments will be achieved, or that any future investments we make to achieve such commitments will meet investor, legal and/or any other regulatory expectations and requirements. If we are unable to meet our commitments, we could incur adverse publicity and reaction from investors, advocacy groups or other stakeholders, which could adversely impact our reputation and brand perception. Such damage to our reputation and the reputation of our brands may negatively impact our business, demand for our products and services, our financial condition and results of operations.
In addition, negative or inaccurate postings or comments on social media or networking websites about our company or our brands could generate adverse publicity that could damage our reputation or the reputation of our brands. If we are unable to effectively manage real or perceived issues, including concerns about product quality, safety, corporate social responsibility or other matters, sentiments toward the Company or our products could be negatively impacted, and our financial results could suffer.
Our brands are important assets of our businesses, and violation of our trademark rights by imitators could negatively impact revenues and brand reputation.
Our brands and trademarks enjoy a reputation for quality and value and are important to our success and competitive position. Unauthorized use of our trademarks may not only erode sales of our products but may also cause significant damage to our brand name and reputation, interfere with relationships with our customers and increase litigation costs. There can be no assurance that our on-going effort to protect our brand and trademark rights will prevent all violations.
Currency exchange rate fluctuations may adversely affect our results.
We are exposed to a variety of market risks, including the effects of changes in currency exchange rates. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosure About Market Risk."
Approximately 30% of our 2017 net revenues were derived outside the U.S., and we expect sales to non-U.S. customers to continue to represent a significant portion of our consolidated net revenues. Although we may enter into currency exchange contracts to reduce our risk related to currency exchange fluctuations, changes in the relative fair values of currencies occur from time to time and may, in some instances, have a material impact on our results of operations. Because we do not hedge against all of our currency exposure our business will continue to be susceptible to currency fluctuations.
We also translate assets, liabilities, revenues and expenses denominated in non-U.S. dollar currencies into U.S. dollars for our consolidated financial statements based on applicable exchange rates. Consequently, fluctuations in the value of the U.S. dollar compared to other currencies will have a material impact on the value of these items in our consolidated financial statements, even if their value has not changed in their original currency.
Our business strategy includes making acquisitions and investments that complement our existing business. These acquisitions and investments could be unsuccessful or consume significant resources, which could adversely affect our operating results.
We will continue to analyze and evaluate the acquisition of strategic businesses or product lines with the potential to strengthen our industry position or enhance our existing set of products and services offerings. We cannot assure you that we will identify or successfully complete transactions with suitable acquisition candidates in the future, nor can we assure you that completed acquisitions will be successful.
Some of the businesses we may seek to acquire or invest in may be marginally profitable or unprofitable. For these businesses to achieve acceptable levels of profitability, we must improve their management, operations, products and market penetration. We may not be successful in this regard and we may encounter other difficulties in integrating acquired businesses into our existing operations.
Acquisitions and investments may involve significant cash expenditures, debt incurrence, operating losses and expenses. Acquisitions involve numerous other risks, including:
diversion of management time and attention from daily operations;
difficulties integrating acquired businesses, technologies and personnel into our business;
difficulties realizing synergies expected to result from acquisitions;
difficulties in obtaining and verifying the financial statements and other business information of acquired businesses;
inability to obtain regulatory approvals and/or required financing on favorable terms;
potential loss of key employees, key contractual relationships or key customers of acquired companies or of us;
assumption of the liabilities and exposure to unforeseen liabilities of acquired companies;
dilution of interests of holders of our ordinary shares through the issuance of equity securities or equity-linked securities; and
difficulty in integrating financial reporting systems and implementing controls, procedures and policies, including disclosure controls and procedures and internal control over financial reporting, appropriate for public companies of our size at companies that, prior the acquisition, had lacked such controls, procedures and policies.
We continually look to expand our services and products into international markets. As we expand into new international markets, we will have only limited experience in marketing and operating services and products in such markets. In other instances, we may rely on the efforts and abilities of foreign business partners in such markets. Certain international markets may be slower than domestic markets in adopting our services and products, and our operations in international markets may not develop at a rate that supports our level of investment. In addition to the risks outlined above, expansion into international markets may require us to compete with local businesses with greater knowledge of the market, including the tastes and preferences of customers, and businesses with dominant market shares.
It may be difficult for us to complete transactions quickly, integrate acquired operations efficiently into our current business operations or effectively compete in new markets we enter. Any acquisitions or investments may ultimately harm our business or financial condition, as such acquisitions may not be successful and may ultimately result in impairment charges.
We may pursue business opportunities that diverge from core business.
We may pursue business opportunities that diverge from our core business, including expanding our products or service offerings, investing in new and unproven technologies, and forming new alliances with companies to distribute our products and services. We can offer no assurance that any such business opportunities will prove to be successful. Among other negative effects, our investment in new business opportunities may exceed the returns we realize. Additionally, any new investments could have higher cost structures than our current business, which could reduce operating margins and require more working capital. In the event that working capital requirements exceed operating cash flow, we may be required to draw on our revolving credit facility or pursue other external financing, which may not be readily available.
Our enterprise excellence efforts may not achieve the improvements we expect.
We utilize a number of tools to improve efficiency and productivity. Implementation of new processes to our operations could cause disruptions and there is no assurance that all of our planned enterprise excellence projects will be fully implemented, or if implemented will realize the expected improvements.
Our periodic restructuring plans may not be successful.
We have in the past restructured or made other adjustments to our workforce and manufacturing footprint in response to market changes, product changes, performance issues, change in strategies, acquisitions, and other internal and external considerations. Historically, these types of restructuring have resulted in increased restructuring costs and temporary reduced productivity. In addition, we may not achieve or sustain the expected growth or cost savings benefits of these restructurings, or do so within the expected timeframe. These effects could recur in connection with future acquisitions and other restructurings and our revenues and other results of operations could be negatively affected.
Material adverse legal judgments, fines, penalties or settlements imposed against us or our assets could adversely affect our business.
business, financial condition, results of operations and cash flows.
We are currently, and may in the future become, involved in legal proceedings, claims and disputes incidental to the operation of our business.business in the ordinary course. Our business may be adversely affected by the outcome of these proceedings and other contingencies (including, without limitation, environmental, product and warranty liability, claims for property damage, physical harm or bodily injury, antitrust, intellectual property, data protection, privacy and labor and employment matters) that cannot be predicted with certainty. As required by U.S. generally accepted accounting principles ("GAAP"),GAAP, we establish reserves based on our assessment of contingencies.the probability of contingencies and whether we are able to reasonably estimate the expected range of loss. Subsequent developments in legal
proceedings and other contingencies may affect our assessment and estimates of the loss contingency recorded as a reserve, and we may incur additional costs or be required to make additional material payments.
payments beyond our previously recorded reserves.
Allegations that we have infringed the intellectual property rights of third parties could negatively affect us.
We may be subject to claims of infringement of intellectual property rights by third parties. In particular, we often compete in areas having extensive intellectual property rights owned by others, and we have become subject to claims alleging infringement of intellectual property rights of others. In general, if it is determined that one or more of our technologies, products or services infringes the intellectual property rights owned by others, we may be required to cease marketing those products or services, to obtain licenses from the holders of the intellectual property at a material cost or to take other actions to avoid infringing thesuch intellectual property rights. The litigation process is costly and subject to inherent uncertainties, and we may not prevail in litigation matters regardless of the merits of our position. Adverse intellectual property litigation or claims of infringement against us may become extremely disruptive if the plaintiffs succeed in blocking the trade of our products and services and may have a material adverse effect on our business.
Our reputation, ability to do business and results of operations could be impaired by improper conduct by any of our employees, agents or business partners.
We are subject to regulation under a variety of U.S. federal and state and non-U.S. laws, regulations and policies including laws related to anti-bribery and anti-corruption, export and import compliance, anti-trustcompetition and moneyanti-money laundering due to our global operations. We provide compliance training for our employees and have other controls and procedures in these areas. We cannot provide assurance that our internal controls will always protect us from the improper conduct of our employees, agents and business partners. Any improper conduct could damage our reputation and subject us to, among other things, civil and
criminal penalties, material fines, equitable remedies (including profit disgorgement and injunctions on future conduct), securities litigation, adverse publicity and a general loss of investor confidence.
Disruptions in our global supply chain, including product manufacturing and logistical services provided by outsourcing partners, may negatively impact our business.
Our ability to meet our customers' needs and achieve cost targets depends on our ability to maintain key manufacturing and supply arrangements, including execution of supply chain optimizations and certain sole supplier or sole manufacturing arrangements. The loss or disruption of such manufacturing and supply arrangements could interrupt product supply and, if not effectively managed and remedied, have an adverse impact on our business.
We outsource certain manufacturing and logistical services to partners located throughout the world. Our reliance on these third parties reduces our control over the manufacturing and delivery process, exposing us to risks, including reduced control over quality assurance, product costs, product supply and delivery delays. If we are unable to manage these relationships, or if these third parties experience delays, disruptions, capacity constraints, regulatory issues or quality control problems in their operations or fail to meet our future requirements for timely delivery, our ability to ship and deliver certain of our hardware products to our customers could be impaired and our hardware business could be harmed.
We may be subject to risks relating to our information technology systems.
We rely extensively on information technology systems to manage and operate our business. There can be no assurance that our current information technology systems will function properly. We have invested and will continue to invest in improving our information technology systems. Some of these investments are significant and impact many important operational processes and procedures. There is no assurance that any newly implemented information technology systems will improve our current systems, will improve our operations, or will yield the expected returns on the investments. In addition, the implementation of new information technology systems may cause disruptions in our operations and, if not properly implemented, negatively impact our business. If our information technology systems cease to function properly or if these systems do not provide the anticipated benefits, our ability to manage our operations could be impaired.
We currently rely on a single vendor for many of the critical elements of our global information technology infrastructure and its failure to provide effective support for such infrastructure could negatively impact our business and financial results.
We have outsourced many of the critical elements of our global information technology infrastructure to a third-party service provider in order to achieve efficiencies. If the service provider does not perform or does not perform effectively, we may not be able to achieve the expected efficiencies and may have to incur additional costs to address failures in providing service by the service provider. Depending on the function involved, such non-performance, ineffective performance or failures of service may lead to business disruptions, processing inefficiencies or security breaches.
Disruptions or breaches of our information systems could adversely affect us.
Despite our implementation of network security measures, which have focused on prevention, mitigation, resilience, and recovery, our network and products may be vulnerable to cybersecurity attacks, computer viruses, break-ins and similar disruptions. Cybersecurity attacks and intrusion efforts are continuous and evolving, and in certain cases they have been successful at the most robust institutions. The scope and severity of risks that cyber threats present have increased dramatically, and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, exploiting weaknesses related to vendors or other third parties that could be exploited to attack our systems, denials of service, and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of data. Any such event could have a material adverse effect on our business, operating results and financial condition, as we face regulatory, reputational and litigation risks resulting from potential cyber incidents, as well as the potential of incurring significant remediation costs.
Our daily business operations also require us to retain sensitive data such as intellectual property, proprietary business information and data related to customers, suppliers and business partners within our networking infrastructure. The loss or breach of such information could result in wide reaching negative impacts to our business, and as such, the ongoing maintenance and security of this information is pertinent to the success of our business operations and our strategic goals.
Our networking infrastructure and related assets may be subject to unauthorized access by hackers, employee errors, or other unforeseen activities. Such issues could result in the disruption of business processes, network degradation and system downtime, along with the potential that a third party will exploit our critical assets such as intellectual property, proprietary business information and data related to our customers, suppliers and business partners. To the extent that such disruptions occur, they may cause delays in the manufacture or shipment of our products and the cancellation of customer orders and, as a result, our business operating results and financial condition could be materially and adversely affected resulting in a possible loss of business or brand reputation.
Commodity shortages, price increases and higher energy prices could negatively affect our financial results.
We rely on suppliers to secure commodities, including steel, zinc, brass and other non-ferrous metals, required for the manufacture of our products. A disruption of deliveries from our suppliers or decreased availability of commodities could have an adverse effect on our ability to meet our commitments to customers or increase our operating costs. We believe that available sources of supply will generally be sufficient for our needs for the foreseeable future. Nonetheless, the unavailability of some commodities could have a material adverse impact on our business.
Volatility in the prices of these commodities could increase the costs of our products and services, and we may not be able to pass on these costs to our customers. We do not currently use financial derivatives to hedge against this volatility, however, we utilize firm purchase commitments to mitigate risk. The pricing of some commodities we use is based on market prices. To mitigate this exposure, we may use annual price contracts to minimize the impact of inflation and to benefit from deflation.
Additionally, we are exposed to fluctuations in energy prices due to the instability of current market prices. Higher energy costs increase our operating costs and the cost of shipping our products and supplying services to our customers around the world. Consequently, sharp price increases, the imposition of taxes or an interruption of supply, could cause us to lose the ability to effectively manage the risk of rising energy prices and may have an adverse impact on our results of operations and cash flows.
We may be required to recognize impairment charges for our goodwill and other indefinite-lived intangible assets.
At December 31, 2017, the net carrying value of our goodwill and other indefinite-lived intangible assets totaled approximately $761.2 million and $75.4 million, respectively. Pursuant to GAAP, we are required to annually assess our goodwill, indefinite-lived intangibles and other long-lived assets to determine if they are impaired. In addition, interim assessments must be performed whenever events or changes in circumstances indicate that impairment may have occurred. If the testing performed indicates that impairment has occurred, we are required to record a non-cash impairment charge for the difference between the carrying value
of the goodwill or other intangible assets and the fair value of the goodwill or other intangible assets in the period the determination is made. Disruptions to our business, end market conditions and protracted economic weakness, unexpected significant declines in operating results of reporting units, divestitures and market capitalization declines may result in additional charges for goodwill and other asset impairments. We have significant intangible assets, including goodwill with an indefinite life, which are susceptible to valuation adjustments as a result of changes in such factors and conditions.
The basis of the fair value for our impairment assessments is determined by projecting future cash flows using assumptions concerning future operating performance and economic conditions that may differ from actual cash flows. The financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital that we use to determine our discount rate and through our stock price that we use to determine our market capitalization. Although our last analysis regarding the fair values of the goodwill and indefinite-lived intangible assets for our reporting units indicates that they exceed their respective carrying values, materially different assumptions regarding the future performance of our businesses or significant declines in our stock price could result in additional goodwill and intangible impairment losses. Specifically, an unanticipated deterioration in net revenues and operating margins generated by our EMEIA and/or Asia Pacific segments could trigger future impairment in those segments. While we currently believe that our projected results will not result in future impairment, a deterioration in results or other factors could trigger a future impairment.
Successful sales and marketing efforts depend on our ability to recruit and retain qualified employees.
Our ability to successfully grow our business depends on the contributions and abilities of key executives, our sales force and other personnel, including the ability of our sales force to adapt to any changes made in the sales organization and achieve adequate customer coverage. We must therefore continue to sufficiently recruit, retain and motivate management, sales and other personnel to maintain our current business and support our projected growth. A shortage of these key employees might jeopardize our ability to grow and expand our business.
public confidence.
Our operations are subject to regulatory risks.
Our U.S. and non-U.S. operations are subject to a number of laws and regulations, including fire and building codes and standards, environmental and health and safety.EHS standards. We have incurred, and will be required to continue to incur, significant expenditures to comply with these laws and regulations. Changes to, or changes in interpretations of, current laws and regulations, including climate change legislation or other environmental mandates, could require us to increase our compliance expenditures, cause us to significantly alter or discontinue offering existing products and services or cause us to develop new products and services. Altering current products and services or developing new products and services to comply with changes in the applicable laws and regulations could require significant research and development investments, increase the cost of providing the products and services and adversely affect the demand for our products and services.
We may not have been, or we may not at all times be, in full compliance with these laws and regulations. In the event a regulatory authority concludes that we are not or have not at all times been in full compliance with these laws or regulations, we could be fined, criminally charged or otherwise sanctioned.
Certain environmental laws assess liability on current or previous owners of real property or operators of manufacturing facilities for the costs of investigation, removal or remediation of hazardous substances or materials at such properties or at properties at which parties have disposed of hazardous substances. Liability for investigative, removal and remedial costs under certain U.S. federal and state laws and certain non-U.S. laws are retroactive, strict and joint and several. In addition to cleanup actions brought by governmental authorities, private parties could bring personal injury or other claims due to the presence of, or exposure to, hazardous substances. We have received notificationnotifications from U.S. and non-U.S. governmental agencies, including the EPA and similar state environmental agencies, that conditions at a number of current and formerly owned sites where we and others have disposed of hazardous substances require investigation, cleanup and other possible remedial action. These agencies may require that we reimburse the government for its costs incurred at these sites or otherwise pay for the costs of investigation and cleanup of these sites, including by providing compensation for natural resource damage claims from such sites. For more information, see "Business - Environmental Regulation."Item 1. Business – Regulatory Matters."
While we have planned for future capital and operating expenditures to maintain compliance with environmental laws and have accrued for costs related to current remedial efforts, our costs of compliance, or our liabilities arising from past or future releases of, or exposures to, hazardous substances, may exceed our estimates. We may also be subject to additional environmental claims for personal injury or cost recovery actions for remediation of facilities in the future based on our past, present or future business activities.
The capital and credit markets are important to our business.
Instability in U.S. and global capital and credit markets, including market disruptions, limited liquidity and interest rate volatility, or reductions in the credit ratings assigned to us by independent ratings agencies could reduce our access to capital markets or increase the cost of funding our short and long term credit requirements. In particular, if we are unable to access capital and credit markets on terms that are acceptable to us, we may not be able to make certain investments or fully execute our business plans and strategy.
Our suppliers and customers are also dependent upon the capital and credit markets. Limitations on the ability of customers, suppliers or financial counterparties to access credit could lead to insolvencies of key suppliers and customers, limit or prevent customers from obtaining credit to finance purchases of our products and services and cause delays in the delivery of key products from suppliers.
As a global business, we have a relatively complex tax structure, and there is a risk that tax authorities will disagree with our tax positions.
Since we conduct operations worldwide through our subsidiaries, we are subject to complex transfer pricing regulations in the countries in which we operate. Transfer pricing regulations generally require that, for tax purposes, transactions between us and our affiliates be priced on a basis that would be comparable to an arm's length transaction and that contemporaneous documentation be maintained to support the tax allocation. Although uniform transfer pricing standards are emerging in many of the countries in which we operate, there is still a relatively high degree of uncertainty and inherent subjectivity in complying with these rules. To the extent that any tax authority disagrees with our transfer pricing policies, we could become subject to significant tax liabilities and penalties. Our tax returns are subject to review by taxing authorities in the jurisdictions in which we operate. Although we believe that we have provided for all tax exposures, the ultimate outcome of a tax review could differ materially from our provisions.
We could be subject to changes in tax rates, the adoption of new tax legislation or exposure to additional tax liabilities.
ChangesOur future effective tax rate and cash tax obligations could be adversely affected by shifts in our effective incomemix of earnings in countries with varying statutory tax raterates, changes in the valuation of our deferred tax assets or liabilities or changes in tax laws, regulations, interpretations or accounting principles, as well as certain discrete items. In addition, we are subject to regular review and audit by tax authorities. As a result, we have received, and may in the future receive, assessments in multiple jurisdictions on various tax-related assertions. Any adverse outcome of such a review or audit could have an adversea negative effect on our operating results and financial condition. In addition, the determination of operations.
Weour worldwide provision for income taxes and other tax liabilities requires significant judgment, and there are subjectmany transactions and calculations where the ultimate tax determination is uncertain. Although we believe our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our Consolidated Financial Statements and may materially affect our financial results in the period or periods for which such determination is made. Furthermore, due to taxes in Ireland, the U.S. and numerous other jurisdictions. Due toshifting economic and political conditions, tax policies, laws, interpretations and rates in various jurisdictions may be subject to significant change.
Our futurechange, which could materially affect our financial position and results of operations. For example, many countries in Europe, as well as a number of other countries and organizations, have recently proposed, recommended or implemented changes to existing tax laws or have enacted new laws that could significantly increase our effective tax rate mayor cash tax obligations in countries where we do business or require us to change the manner in which we operate our business.
The Organization for Economic Cooperation and Development (“OECD”) has led international efforts in recent years to devise a permanent two-pillar solution to address the tax challenges arising from the digitization of the economy. Pillar One focuses on nexus and profit allocation. Pillar Two provides for a global minimum effective corporate tax rate of 15%, applied on a jurisdiction-by-jurisdiction basis. We currently expect to be adversely affectedoutside the scope of the Pillar One proposals. In December 2021, the OECD published detailed rules that define the scope of the Pillar Two proposal and, based on our current understanding of the minimum revenue thresholds contained in these rules, we expect to be within their scope and implementation. A number of countries are currently proposing to implement core elements of the Pillar Two proposal by the start of 2024, and on December 15, 2022, the European Union adopted a Council Directive which requires certain Pillar Two rules to be transposed into member states’ national laws starting in 2024. As a consequence, our global effective tax rate could be materially impacted by such legislation, or any resulting local country legislation enacted in response to any potential global minimum tax rates. Additionally, the European Commission has been investigating whether various tax regimes or private tax rulings provided by a number of additional factors including:
the jurisdictions in which profits are determinedcountry to be earned and taxed;
the resolution of issues arising from tax audits with various tax authorities;
changes in the enforcement environment;
changes in the valuation of our deferred tax assets and liabilities;
changes in jurisdictional mix of profits;
changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles;
changes in foreign tax rates or agreed upon foreign taxable base; and/or
the repatriation of earnings from outside Ireland for which we have not previously provided for taxes.
There are risks associated with our outstanding and future indebtedness
particular taxpayers may constitute State Aid.
We have approximately $1.5 billioncannot currently predict the outcome of outstanding indebtedness at December 31, 2017. In addition, we have a senior unsecured revolving credit facility that permits borrowingsany of up to an additional $500 million. Volatilitythese potential changes or investigations in the credit markets could adversely impact our ability to obtain favorable terms on financing in the future. A substantial portion of our cash flows from operations is dedicated to the payment of principal and interest on our indebtedness and will not be available for other purposes, including our operations, capital expenditures, payment of dividends, share repurchase programs and future business opportunities.
Our ability to make scheduled payments or to refinance our debt obligations depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, reduce or eliminate the payment of dividends, sell assets, seek additional capital or seek to restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service and other obligations.
Additionally, a portion of our borrowings at December 31, 2017 include a term loan with a variable rate of interest which exposes us to interest rate risk. We are exposed to the risk of rising interest rates to the extent that we fund our operations with short-term
or variable-rate borrowings. At December 31, 2017, our $1.5 billion of aggregate debt outstanding includes $691 million of floating-rate term loans and $800 million of our fixed-rate senior notes. We have the ability to incur up to $500 million of additional floating-rate debt under our senior unsecured revolving credit facility. We have entered into interest rate swaps for $250 million of our floating-rate term loans to manage our interest rate risk. A 100 basis point increase in LIBOR would have resulted in incremental 2017 interest expense of approximately $5.6 million. If the LIBOR or other applicable base rates under our senior unsecured credit facilities increase in the future then the interest on floating-rate debt could have a material effect on our interest expense.
Risks Relating to the Spin-off
In connection with the Spin-off, Ingersoll Rand indemnified us for certain liabilities and we indemnified Ingersoll Rand for certain liabilities. If we are required to act on these indemnities to Ingersoll Rand, we may need to divert cash to meet those obligations and our financial results could be negatively impacted. The Ingersoll Rand indemnity may not be sufficient to insure us against the full amount of liabilities for which it will be allocated responsibility, and Ingersoll Rand may not be able to satisfy its indemnification obligations in the future.
Pursuant to the Separation and Distribution Agreement, the Employee Matters Agreement and the Tax Matters Agreement with Ingersoll Rand, Ingersoll Rand agreed to indemnify us for certain liabilities, and we agreed to indemnify Ingersoll Rand for certain liabilities, in each case for uncapped amounts. Such indemnities may be significant and could negatively impact our business, particularly indemnities relating to our actions that could impact the tax-free nature of the Spin-off. Third parties could also seek to hold us responsible forany jurisdiction, but if any of the liabilities that Ingersoll Rand retained. Further,above occurs and impacts us, this could increase our tax burden and/or effective tax rate. We continue to examine the indemnity from Ingersoll Randimpact the above items may not be sufficient to protect us againsthave on our business, including their impact on the full amount of such liabilities, and Ingersoll Rand may not be able to fully satisfy its indemnification obligations. Moreover, even iftax we ultimately succeed in recovering from Ingersoll Rand any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves.must pay.
If the distribution or certain internal transactions undertaken in anticipation of the spin-off are determined to be taxable for U.S. federal income tax purposes, we, our shareholders that are subject to U.S. federal income tax and/or Ingersoll Rand could incur significant U.S. federal income tax liabilities and, in certain circumstances, we could be required to indemnify Ingersoll Rand for material taxes pursuant to indemnification obligations under the Tax Matters Agreement.
Ingersoll Rand has received an IRS ruling substantially to the effect that, among other things, the distribution of our ordinary shares, together with certain related transactions, qualify under Sections 355 and 368(a) of the Internal Revenue Code ("the Code"), with the result that Ingersoll Rand and Ingersoll Rand’s shareholders will not recognize any taxable income, gain or loss for U.S. federal income tax purposes as a result of the Spin-off, except to the extent of cash received in lieu of fractional shares (the "IRS Ruling"). The IRS Ruling also provided that certain internal transactions undertaken in anticipation of the distribution qualify for favorable treatment under the Code. In addition to obtaining the IRS Ruling, Ingersoll Rand received opinions from the law firm of Simpson Thacher & Bartlett LLP substantially to the effect that certain requirements, including certain requirements that the IRS did not rule on, necessary to obtain tax-free treatment have been satisfied, such that the distribution for U.S. federal income tax purposes and certain other matters relating to the distribution, including certain internal transactions undertaken in anticipation of the distribution, received tax-free treatment under Section 355 of the Code. The receipt and effectiveness of the IRS Ruling and the opinions were conditions to the distribution that were satisfied or waived by Ingersoll Rand. The IRS Ruling and the opinions rely on certain facts and assumptions and certain representations and undertakings from us and Ingersoll Rand regarding the past and future conduct of our respective businesses and other matters. Notwithstanding the IRS Ruling and the opinions, the IRS could determine on audit that the distribution or the internal transactions should be treated as taxable transactions if it determines that any of these facts, assumptions, representations or undertakings is not correct or has been violated, or that the distribution or the internal transactions should be taxable for other reasons, including as a result of significant changes in shares or asset ownership after the distribution. A legal opinion represents the tax adviser’s best legal judgment, is not binding on the IRS or the courts, and the IRS or the courts may not agree with the opinion. In addition, the opinion will be based on then current law, and cannot be relied upon if current law changes with retroactive effect. If the distribution is determined to be taxable, the distribution could be treated as a taxable dividend or capital gain for U.S. federal income tax purposes, and our shareholders could incur significant U.S. federal income tax liabilities. In addition, we or Ingersoll Rand could incur significant U.S. federal income tax liabilities if it is ultimately determined that certain internal transactions undertaken in anticipation of the distribution are taxable.
In addition, under the terms of the Tax Matters Agreement, in the event the distribution or the internal transactions were determined to be taxable as a result of actions taken after the distribution by us or Ingersoll Rand, the party responsible for such failure would be responsible for all taxes imposed on us or Ingersoll Rand as a result thereof. If such failure is not the result of actions taken after the distribution by us or Ingersoll Rand, then we would be responsible for any taxes imposed on us or Ingersoll Rand as a result of such determination. Such tax amounts could be significant.
If the distribution is determined to be taxable for Irish tax purposes, significant Irish tax liabilities may arise.
Ingersoll Rand has received an opinion of the Irish Revenue regarding the Irish tax consequences of the distribution to the effect that certain reliefs and exemptions for corporate reorganizations apply. In addition to obtaining the opinion from Irish Revenue, Ingersoll Rand received an opinion from the law firm of Arthur Cox confirming the applicability of the relevant exemptions and reliefs to the distribution and that certain internal transactions will not trigger tax costs. These opinions rely on certain facts and assumptions and certain representations and undertakings from us and Ingersoll Rand regarding the past and future conduct of our respective businesses and other matters. Notwithstanding the opinions, Irish Revenue could determine on audit that the distribution or the internal transactions do not qualify for the relevant exemptions or reliefs if it determines that any of these facts, assumptions, representations or undertakings is not correct or has been violated. A legal opinion represents the tax adviser’s best legal judgment, is not binding on Irish Revenue or the courts and Irish Revenue or the courts may not agree with the legal opinion. In addition, the legal opinion was based on then current law, and cannot be relied upon if current law changes with retroactive effect. If the distribution ultimately is determined not to fall within certain exemptions or reliefs, the distribution could result in our shareholders having an Irish tax liability as a result of the distribution (if a shareholder is an Irish resident or holds shares in Ingersoll Rand in an Irish branch or agency), or we or Ingersoll Rand could incur Irish tax liabilities.
In addition, under the terms of the Tax Matters Agreement, in the event the distribution does not qualify for certain reliefs or exemptions, then we would be responsible for any taxes imposed on us or Ingersoll Rand as a result of such determination. Such tax amounts could be significant.
Risks Related to Our Incorporation in Ireland
Irish law differs from the laws in effect in the United States and may afford less protection to holders of our securities.
The United StatesU.S. currently does not have a treaty with Ireland providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters. As such, there is some uncertainty as to whether the courts of Ireland would recognize or enforce judgments of U.S. courts obtained against us or our directors or officers based on U.S. federal or state civil liability laws, including the civil liability provisions of the U.S. federal or state securities laws, or hear actions against us or those persons based on those laws.
As an Irish company, we are governed by the Irish Companies Act 2014 of Ireland, as amended, which differs in some material respects from laws generally applicable to U.S. corporations and shareholders, including, among others, differences relating to interested director and officer transactions and shareholder lawsuits. Likewise, the duties of directors and officers of an Irish company generally are owed to the company only. Shareholders of Irish companies generally do not have a personal right of action against directors or officers of the company and may exercise such rights of action on behalf of the company only in limited circumstances. Accordingly, holders of our securities may have more difficulty protecting their interests than would holders of securities of a corporation incorporated in a jurisdiction of the United States.
U.S.
In addition, Irish law allows shareholders to authorize share capital which then can be issued by a board of directors without shareholder approval. Also, subject to specified exceptions, Irish law grants statutory preemptive rights to existing shareholders to subscribe for new issuances of shares for cash. However, we have opted outAt our annual general meeting of shareholders, our shareholders authorized our Board of Directors to issue up to 33% of our issued ordinary shares and further authorized our Board of Directors to issue up to 5% of such shares for cash without first offering them to our existing shareholders. Both of these preemption rights in our Articles of Association as permitted under Irish company law. Irish law provides that this opt-out expiresauthorizations will expire after five yearsa certain period unless renewed by a special resolution of the shareholders. These authorizations must be renewed by theour shareholders, every five years and we cannot guarantee that the renewal of these authorizations will always be approved.
If the Directors' authority to issue ordinary shares is not renewed, then we may be limited in our ability to use our shares, for example, as consideration for acquisitions.
Changes in tax laws, regulations or treaties, changes in our status under the tax laws of many jurisdictions or adverse determinations by taxing authorities could increase our tax burden or otherwise affect our financial condition or operating results, as well as subject our shareholders to additional taxes.
The realization of any tax benefit related to our incorporation and tax residence in Ireland could be impacted by changes in tax laws, tax treaties or tax regulations or the interpretation or enforcement thereof by the tax authorities of many jurisdictions. From time to time, proposals have been made and/or legislation has been introduced to change the tax laws of various jurisdictions or limit tax treaty benefits that if enacted could materially increase our tax burden and/or our effective tax rate. For instance, recent U.S. legislative proposals could modify or eliminate the tax deductibility of various currently deductible payments, which could materially and adversely affect our effective tax rate and cash tax position. Moreover, other U.S. legislative proposals could have a material adverse impact on us by overriding certain tax treaties and limiting the treaty benefits on certain payments, by our U.S. subsidiaries to our non-U.S. affiliates, which could increase our tax liability. We cannot predict the outcome of any specific legislation in any jurisdiction.
While we monitor proposals that would materially impact our tax burden and/or our effective tax rate and investigate our options, we could still be subject to increased taxation on a going forward basis no matter what action we undertake if certain legislative proposals are enacted, certain tax treaties are amended and/or our interpretation of applicable tax law is challenged and determined to be incorrect. In particular, any changes and/or differing interpretations of applicable tax law that have the effect of disregarding our incorporation in Ireland, limiting our ability to take advantage of tax treaties between jurisdictions, modifying or eliminating the deductibility of various currently deductible payments or increasing the tax burden of operating or being resident in a particular country, could subject us to increased taxation.
Dividends received by our shareholders may be subject to Irish dividend withholding tax.
In certain circumstances, we are required to deduct Irish dividend withholding tax (currently at the rate of 20%)25% from dividends paid to our shareholders. In the majority of cases, shareholders residing in the United StatesU.S. will not be subject to Irish withholding tax, and shareholders resident in a number of other countries will not be subject to Irish withholding tax provided that they complete certain Irish dividend withholding tax forms. However, some shareholders may be subject to withholding tax, which could discourage the investment in our stock and adversely impact the price of our shares.
Dividends received by our shareholders couldmay be subject to Irish income tax.
Dividends paid in respect of our shares generally are not subject to Irish income tax where the beneficial owner of these dividends is exempt from Irish dividend withholding tax, unless the beneficial owner of the dividend has some connection with Ireland other than his or her shareholding in Allegion.
Our shareholders who receive their dividends subject to Irish dividend withholding tax will generally have no further liability to Irish income tax on the dividends unless the beneficial owner of the dividend has some connection with Ireland other than his or her shareholding in Allegion.
Certain provisions in our Memorandum and Articles of Association, among other things, could prevent or delay an acquisition of us, which could decrease the trading price of our ordinary shares.
Our Memorandum and Articles of Association containcontains provisions to deter takeover practices, inadequate takeover bids and unsolicited offers. These provisions include, amongst others:
a•A provision of our Articles of Association which generally prohibits us from engaging in a business combination with an interested shareholder (being (i) the beneficial owner, directly or indirectly, of the relevant percentage10% or more of our voting shares or (ii) an affiliate or associate of us that has at any time within the last five years been the beneficial owner, directly or indirectly, of the relevant percentage10% or more of our voting shares), subject to certain exceptions;
rules•Rules regarding how shareholders may present proposals or nominate directors for election at shareholder meetings;
the•The right of our Board of Directors to issue preferred shares without shareholder approval in certain circumstances, subject to applicable law; and
the•The ability of our Board of Directors to set the number of directors and to fill vacancies on our Board of Directors in certain circumstances.
Directors.
We believe these provisions will provide some protection to our shareholders from coercive or otherwise unfair takeover tactics. These provisions are not intended to make us immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some shareholders and could delay or prevent an acquisition that our Board of Directors determines is in our best interests and our shareholders' best interests. These provisions may also prevent or discourage attempts to remove and replace incumbent directors.
In addition, several mandatory provisions of Irish law could prevent or delay an acquisition of us. For example, Irish law does not permit shareholders of an Irish public limited company to take action by written consent with less than unanimous consent. We also will be subject to various provisions of Irish law relating to mandatory bids, voluntary bids, requirements to make a cash offer and minimum price requirements, as well as substantial acquisition rules and rules requiring the disclosure of interests in our shares in certain circumstances. Also, Irish companies, including us, may alter their Memorandum of Association and Articles of Association only with the approval of at least 75% of the votes of the company’s shareholders cast in person or by proxy at a general meeting of the company.
The agreements that we entered into with Ingersoll Rand in connection with the spin-off generally require Ingersoll Rand’s consent to any assignment by us of our rights and obligations under the agreements. The consent and termination rights set forth in these agreements might discourage, delay or prevent a change of control that shareholders may consider favorable.
Item 1B.UNRESOLVED STAFF COMMENTS
None.
Item 2.PROPERTIES
We operate through a broad network of sales offices, engineering centers, 3129 principal production and assembly facilities and several distribution centers throughout the world. Our active properties represent about 7.06.7 million square feet, of which approximately 47%41% is leased.
The majorityWe own 16 of our plantproduction and assembly facilities, are owned by us with the remainder under long-term lease arrangements. We believe that our plants have been well maintained, are generally in good condition and are suitable for the conduct of our business.
Item 3.LEGAL PROCEEDINGS
In the normal course of business, we are involved in a variety of lawsuits, claims and legal proceedings, including commercial and contract disputes, employment matters, product liability claims, environmental liabilities, intellectual property disputes and tax-related matters. In our opinion, pending legal matters are not expected to have a material adverse impact on our results of operations, financial condition, liquidity or cash flows.
Executive OfficersThis item should be read in conjunction with the Risk Factors set forth in Part I. Item 1A of the Registrantthis Form 10-K.
David D. Petratis, age 60, is our Chairman, President and Chief Executive Officer. Mr. Petratis served as the Chairman, President and Chief Executive Officer of Quanex Building Products Corporation (a manufacturer of engineered material and components for the building products markets) from 2008 to July 2013.
Patrick S. Shannon, age 55, is our Senior Vice President and Chief Financial Officer. Mr. Shannon served as the Vice President and Treasurer of Ingersoll-Rand plc (a global diversified company) from 2012 to October 2013.
Jeffrey N. Braun, age 58, is our Senior Vice President and General Counsel. Mr. Braun served as our Deputy General Counsel and Chief Compliance Officer from September 2013 to June 2014. Mr. Braun previously served as General Counsel of General Motors China, a subsidiary of General Motors Company (a global automotive company) from 2010 to 2013.
Timothy P. Eckersley, age 56, is our Senior Vice President - Americas. Mr. Eckersley served as Ingersoll Rand’s President, Security Technologies - Americas from 2007 to November 2013.
Todd V. Graves, age 51, is our Senior Vice President - Engineering and Technology. Mr. Graves served as our Vice President - Technology and Engineering from 2013 to January 2016. Mr. Graves served as Ingersoll Rand's Vice President - Technology and Engineering, Security Technologies, from 2012 to 2013.
Tracy L. Kemp, age 49, is our Senior Vice President and Chief Information Officer. Ms. Kemp served as our Vice President and Chief Information Officer from 2013 to February 2015. Prior to that, Ms. Kemp served as Ingersoll Rand’s Vice President - Chief Information Officer, Security Technologies and Residential Solutions sectors from 2011 to 2013.
Shelley A. Meador, age 46, is our Senior Vice President - Human Resources and Communications. Ms. Meador served as our Vice President - Tax from 2013 to August 2016. Ms. Meador previously served as Vice President - Tax at Hillenbrand, Inc. (a global diversified industrial company) from 2011 to 2013.
Lucia Veiga Moretti, age 53, is our Senior Vice President - EMEIA. Ms. Moretti previously served as Senior Vice President and President, Delphi Product and Service Solutions for Delphi Automotive (a supplier of automotive technologies) from 2011 to February 2014.
Chris E. Muhlenkamp, age 60, is our Senior Vice President - Global Operations and Integrated Supply Chain. Mr. Muhlenkamp served as our Vice President - Global Operations and Integrated Supply Chain from 2013 to February 2014. Mr. Muhlenkamp served as Ingersoll Rand's Vice President - Operations and Global Integrated Supply Chain, Security Technologies, from 2011 to 2013.
Douglas P. Ranck, age 59, is our Vice President, Controller and Chief Accounting Officer. Mr. Ranck served as Ingersoll Rand’s Global Controller and Financial Planning and Analysis Leader - Climate Solutions from 2008 to October 2013.
Jeffrey M. Wood, age 47, is our Senior Vice President - Asia Pacific. Mr. Wood previously served as our Vice President, Global Supply Management from 2013 to January 2017. Mr. Wood also served as Senior Vice President, Supply Chain for the Buildings division of Schneider Electric SE (an energy management and automation company) from 2011 to 2013.
No family relationship exists between any of the above-listed executive officers of the Company. All officers are elected to hold office for one year or until their successors are elected and qualified.
Item 4.MINE SAFETY DISCLOSURES
Not applicable.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The following is a list of executive officers of the Company as of February 22, 2023.
John H. Stone, age 52, has served as our President and Chief Executive Officer since July 2022. Prior to joining Allegion, Mr. Stone served as President, Worldwide Construction, Forestry and Power Systems at Deere & Company, an agricultural machinery and heavy equipment company ("Deere"), from 2020 to 2022, and prior to that, served as Senior Vice President, Intelligent Solutions Group at Deere from 2016 to 2020.
Michael J. Wagnes, age 49, has served as our Senior Vice President and Chief Financial Officer since March 2022. Mr. Wagnes served as our Vice President and General Manager, Commercial Americas from 2020 to 2022 and as our Vice President – Investor Relations and Treasury from 2016 to 2020.
Jeffrey N. Braun, age 63, has served as our Senior Vice President and General Counsel since 2014. Mr. Braun also served as Secretary from July 2022 to February 2023 and from 2018 to 2020.
Timothy P. Eckersley, age 61, has served as our Senior Vice President – Allegion International since 2021. Mr. Eckersley served as our Senior Vice President – Americas from 2013 to 2020.
Cynthia D. Farrer, age 60, has served as our Senior Vice President – Global Operations and Integrated Supply Chain since June 2021. Ms. Farrer served as our Vice President – Global Operations and Integrated Supply Chain from 2020 to 2021 and as Vice President, Global Supply Management from 2017 to 2020.
David S. Ilardi, age 44, has served as our Senior Vice President – Allegion Americas since March 2022. Mr. Ilardi served as our General Manager, Allegion Home from 2019 to 2022 and Regional Vice President Sales, Central Region from 2017 to 2019.
Tracy L. Kemp, age 54, has served as our Senior Vice President – Chief Information and Digital Officer since December 2020. Ms. Kemp served as our Senior Vice President – Chief Customer and Digital Officer from 2019 to 2020 and Senior Vice President and Chief Information Officer from 2015 to 2019.
Robert C. Martens, age 52, has served as our Senior Vice President – Chief Innovation and Design Officer since December 2019 and Futurist and President of Allegion Ventures since 2017.
Nickolas A. Musial, age 42, has served as our Vice President, Controller and Chief Accounting Officer since March 2022. Mr. Musial served as our Vice President of Finance, Allegion Americas from 2017 to 2022.
Jennifer L. Preczewski, age41, has served as our Senior Vice President – Chief Human Resources Officer since February 2023. Ms. Preczewski served as our Vice President – Chief Human Resources Officer from July 2022 to February 2023, as our Vice President, HR – Total Rewards and Global Talent from 2020 to 2022, Vice President, Global Talent from 2018 to 2020, and Vice President, Human Resources – Americas from 2016 to 2018.
Vincent M. Wenos, age 56, has served as our Senior Vice President – Chief Technology Officer since June 2019. Mr. Wenos served as our Vice President – Global Technology and Engineering from 2018 to 2019 and as both Vice President – Americas Engineering and Vice President – Global Mechanical Products from 2016 to 2018.
All above-listed executive officers except for Mr. Stone have been employed by the Company for more than the past five years. No family relationship exists between any of the above-listed executive officers or directors of the Company. All executive officers are elected to hold office for one year or until their successors are elected and qualified or their earlier death, resignation or removal from office by our Board of Directors.
PART II
Item 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Information regarding the principal market for our ordinary shares and related shareholder matters is as follows:
Our ordinary shares are traded on the NYSENew York Stock Exchange under the symbol ALLE. As of February 16, 2018,2023, the number of record holders of ordinary shares was 3,010. The high and low sales price per share and the dividend declared per share for the following periods were as follows:2,054.
|
| | | | | | | | | | | | |
| | Ordinary shares |
2017 | | High | | Low | | Dividend |
First quarter | | $ | 76.29 |
| | $ | 63.81 |
| | $ | 0.16 |
|
Second quarter | | 82.77 |
| | 73.93 |
| | 0.16 |
|
Third quarter | | 86.89 |
| | 76.79 |
| | 0.16 |
|
Fourth quarter | | $ | 89.81 |
| | $ | 78.63 |
| | $ | 0.16 |
|
2016 | | High | | Low | | Dividend |
First quarter | | $ | 65.40 |
| | $ | 52.95 |
| | $ | 0.12 |
|
Second quarter | | 69.69 |
| | 63.08 |
| | 0.12 |
|
Third quarter | | 73.49 |
| | 65.83 |
| | 0.12 |
|
Fourth quarter | | $ | 69.95 |
| | $ | 61.47 |
| | $ | 0.12 |
|
Information regarding equity compensation plans required to be disclosed pursuant to this Item is incorporated by reference from our Proxy Statement.
Dividend Policy
Our Board of Directors declared dividends of $0.16$0.41 per ordinary share on February 2, 2017,4, 2022, April 5, 2017,7, 2022, September 6, 20171, 2022 and December 6, 2017.1, 2022. On February 7, 2018,9, 2023, our Board of Directors declared a dividend of $0.21$0.45 per ordinary share payable on March 29, 2018.31, 2023, to shareholders of record on March 15, 2023. We paid a total of $60.9$143.9 million in cash for dividends to ordinary shareholders during the year ended December 31, 2017.2022. Future dividends on our ordinary shares, if any, will be at the discretion of our Board of Directors and will depend on, among other things, our results of operations, cash requirements and surplus, financial condition, contractual restrictions (including under the agreements governing our indebtedness) and other factors that the Board of Directors may deem relevant, as well as our ability to pay dividends in compliance with the Irish Companies Act. Under the Irish Companies Act, dividends and distributions may only be made from distributable reserves. Distributable reserves, broadly, means the accumulated realized profits of Allegion plc (ALLE-Ireland)("ALLE-Ireland") which are unrelated to any GAAP reported amounts (e.g., retained earnings). As of December 31, 2022, we had distributable reserves of $3.8 billion. In addition, no distribution or dividend may be made unless the net assets of ALLE-Ireland are equal to, or in excess of, the aggregate of ALLE-Ireland’s called up share capital plus undistributable reserves, and the distribution or dividend does not reduce ALLE-Ireland’s net assets below such aggregate.
Issuer Purchases of Equity Securities
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total number of shares purchased (000s) | | Average price paid per share | | Total number of shares purchased as part of the 2020 Share Repurchase Authorization (000s) | | Approximate dollar value of shares still available to be purchased under the 2020 Share Repurchase Authorization (000s) |
October 1 - October 31 | | — | | | $ | — | | | — | | | $ | 140,454 | |
November 1 - November 30 | | — | | | — | | | — | | | 140,454 | |
December 1 - December 31 | | — | | | — | | | — | | | 140,454 | |
Total | | — | | | $ | — | | | — | | | $ | 140,454 | |
In February 2017,2020, our Board of Directors approved a new stockshare repurchase authorization of up to, $500and including, $800 million of the Company'sCompany’s ordinary shares ("2017(the "2020 Share Repurchase Authorization"). The 20172020 Share Repurchase Authorization does not have a prescribed expiration date. We paid a totalBased on market conditions, share repurchases may be made from time to time in the open market at the discretion of $60.0 million to repurchase 0.8 million ordinary shares during the year ended December 31, 2017 and $85.1 million to repurchase 1.3 million ordinary shares during the year ended December 31, 2016 under the previous authorized share repurchase plan that was established in 2014. At December 31, 2017, we have approximately $440.0 million available under the 2017 Share Repurchase Authorization.management.
Performance Graph
The annual changes for the five-year period shown December 1, 2013 (when our ordinary shares began trading) to December 31, 2017 in the graph on this pagebelow are based on the assumption that $100 had been invested in Allegion plc ordinary shares, the Standard & Poor’s 500 Stock Index ("S&P 500") and the Standard & Poor's 400 Capital Goods Index ("S&P 400 Capital Goods") on December 1, 2013,31, 2017, and that all quarterly dividends were reinvested. The total cumulative dollar returns shown on the graph represent the value that such investments would have had on December 31, 2017.2022.
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | December 31, 2018 | December 31, 2019 | December 31, 2020 | December 31, 2021 | December 31, 2022 |
Allegion plc | 100.00 | 101.18 | 159.74 | 151.14 | 173.89 | 140.42 |
S&P 500 | 100.00 | 95.62 | 125.72 | 148.85 | 191.58 | 156.88 |
S&P 400 Capital Goods | 100.00 | 85.99 | 114.15 | 136.80 | 174.64 | 157.15 |
Item 6.[RESERVED]
|
| | | | | | | | | | | | |
| | December 1, 2013 | | December 31, 2013 | | December 31, 2014 | | December 31, 2015 | | December 31, 2016 | | December 31, 2017 |
Allegion plc | | 100.00 | | 102.20 | | 129.03 | | 154.37 | | 150.97 | | 189.19 |
S&P 500 | | 100.00 | | 102.53 | | 116.57 | | 118.18 | | 132.31 | | 161.20 |
S&P 400 Capital Goods | | 100.00 | | 104.58 | | 104.84 | | 99.07 | | 130.70 | | 162.97 |
Item 6.SELECTED FINANCIAL DATA (1)
In millions, except per share amounts:
|
| | | | | | | | | | | | | | | | | | | | | |
At and for the years ended December 31, | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | |
| | | | | | | | | | | |
Net revenues | | $ | 2,408.2 |
| | $ | 2,238.0 |
| | $ | 2,068.1 |
| | $ | 2,118.3 |
| | $ | 2,069.6 |
| |
| | | | | | | | | | | |
Net earnings (loss) attributable to Allegion plc ordinary shareholders: | | | | | | | | | | | |
Continuing operations | | 273.3 |
| (a) | 229.1 |
| (b) | 154.3 |
| (c) | 186.3 |
| (d) | 35.9 |
| (e), (f) |
Discontinued operations | | — |
| | — |
| | (0.4 | ) | | (11.1 | ) | | (3.6 | ) | |
| | | | | | | | | | | |
Total assets | | 2,542.0 |
| | 2,247.4 |
| | 2,263.0 |
| | 2,015.9 |
| | 2,000.6 |
| |
| | | | | | | | | | | |
Total debt | | 1,477.3 |
| | 1,463.8 |
| | 1,523.1 |
| | 1,264.6 |
| | 1,343.9 |
| |
| | | | | | | | | | | |
Total Allegion plc shareholders’ equity (deficit) | | 401.6 |
| | 113.3 |
| | 25.6 |
| | (4.8 | ) | | (66.1 | ) | |
| | | | | | | | | | | |
Earnings (loss) per share attributable to Allegion plc ordinary shareholders: | | | | | | | | | | | |
Basic: | | | | | | | | | | | |
Continuing operations | | $ | 2.87 |
| | $ | 2.39 |
| | $ | 1.61 |
| | $ | 1.94 |
| | $ | 0.37 |
| |
Discontinued operations | | — |
| | — |
| | (0.01 | ) | | (0.12 | ) | | (0.03 | ) | |
| | | | | | | | | | | |
Diluted: | | | | | | | | | | | |
Continuing operations | | $ | 2.85 |
| | $ | 2.36 |
| | $ | 1.59 |
| | $ | 1.92 |
| | $ | 0.37 |
| |
Discontinued operations | | — |
| | — |
| | — |
| | (0.12 | ) | | (0.03 | ) | |
| | | | | | | | | | | |
Dividends declared per ordinary share | | $ | 0.64 |
| | $ | 0.48 |
| | $ | 0.40 |
| | $ | 0.32 |
| | $ | — |
| |
| |
(a) | Net earnings from continuing operations for the year ended December 31, 2017 includes $44.7 million of costs related to the refinancing of our credit facilities and senior notes and a net tax charge of $53.5 million related to the U.S. Tax Reform Act. |
| |
(b) | Net earnings from continuing operations for the year ended December 31, 2016 includes $84.4 million of losses related to our previously divested systems integration business. |
| |
(c) | Net earnings from continuing operations for the year ended December 31, 2015 includes $104.2 million of losses related to the divestitures of our Venezuelan operations and our majority stake in our systems integration business. |
| |
(d) | Net earnings from continuing operations for the year ended December 31, 2014 includes an after-tax, non-cash inventory impairment charge of $18.7 million and a $9.1 million after-tax, non-cash charge related to the devaluation of the Venezuelan bolivar. |
| |
(e) | Net earnings from continuing operations for the year ended December 31, 2013 includes an after-tax, non-cash goodwill impairment charge of $131.2 million and $44.8 million of discrete tax adjustments consisting of $31.5 million of expense related to valuation allowances on deferred tax assets that are no longer expected to be utilized and $13.3 million of net tax expense resulting primarily from transactions occurring to effect the Spin-off. |
| |
(f) | Net earnings from continuing operations includes $174.5 million of centrally managed service costs and corporate allocations from Ingersoll Rand for the year ended December 31, 2013. |
(1) The Company has not restated 2015, 2014, or 2013 for the impact of the adoption of ASU 2016-09 in the fourth quarter of 2016. The Company has not restated 2014 or 2013 for the impact of the adoption of ASU 2015-17 and ASU 2015-03 as of December 31, 2015. The impact of excluding the above standards in prior period presentation is not material.
Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under Part I, Item 1A. Risk Factors in this Annual Report on Form 10-K. The following section is qualified in its entirety by the more detailed information, including our consolidated financial statements and the notes thereto, which appears elsewhere in this Annual Report.
Report on Form 10-K.
Overview
Organization
We are a leading global provider of security products and solutions operating in three geographic regions:two segments: Allegion Americas EMEIA, and Asia Pacific.Allegion International. We sell a wide range of security products and solutions for end-users in commercial, institutional and residential marketsfacilities worldwide, including into the education, healthcare, government, hospitality, retail, commercial office and single and multi-family residential markets. Our corporateleading brands include Schlage, Von Duprin,CISA, Interflex, LCN, CISA,Schlage, SimonsVoss and Interflex.Von Duprin.
Recent Developments
Industry Trends and Economic EventsOutlook
Current market conditions haveThroughout 2022 we experienced strong demand for our non-residential products and services in our Allegion Americas segment. Our ability to meet this elevated level of customer demand improved oversubstantially as the past few years,year progressed, due in part to our actions taken to address industry-wide supply-chain challenges (particularly shortages of electronic components), as well as improving availability of non-electronic parts and materials. Further, in response to the persistent, elevated levels of inflation seen throughout the year, we believe the security products industry will also benefit from continuedimplemented a series of pricing initiatives across our global businesses. Not only did these pricing initiatives significantly contribute to revenue growth in institutional, commercial,2022, they also helped mitigate the inflationary pressures on our cost base. We expect this pricing momentum to continue to drive revenue growth and help offset the impact of inflation into 2023.
While 2022 began with similar strong demand for our residential end-markets.products in our Allegion Americas segment, macroeconomic conditions had a more challenging impact on demand as the year progressed. A combination of elevated inflation and lower consumer sentiment impacted sales volumes of residential products within our Allegion Americas segment. We also expect the security products industry will benefit from favorable long-term demographic trends such as continued urbanizationexperienced a softening of demand throughout many of the global population,Eurozone economies during the second half of 2022, reflecting increased economic and geopolitical concerns about safetyin this region, which impacted several of our businesses in our Allegion International segment.
While supply chain challenges around the availability of electronic parts and securitycomponents persist, and technology-driven innovation.
In recent years, growth inwill likely continue to impact our ability to meet the elevated levels of demand for our electronic security products into 2023, we remain focused on providing exceptional service and solutions continuesinnovation to outperformour customers. Over the industry,course of 2022, we began to realize the benefits from our measures taken to mitigate operational and logistical inefficiencies caused by the supply chain challenges, such as re-engineering product designs and configurations to accept alternate electronic components and developing alternate sources of supply. We continue to invest in business initiatives to drive future growth and add value through seamless access and explore various options to enhance financial performance while minimizing disruption to customers and our overall business.
The macroeconomic and geopolitical trends and uncertainties noted above will likely continue to affect us in numerous and evolving ways, the full impact of which on our business, financial condition and results of operations will continue to depend on future developments that are beyond our control and we expect growth in the global electronic product categories we servemay not be able to continue to outperform the security products industryaccurately predict. These trends and uncertainties and their potential impact on our business, results of operations, financial condition and cash flows, as a wholewell as end-users adopt newer technologies in their facilities. Our recent acquisitions have been made to capitalize on this trend.
The economic conditions discussed above and a number of other challengesrisks, trends and uncertainties that could affect our business, financial condition and results of operations are described further under "Risk Factors.""Part I, Item 1A. Risk Factors".
20172022 and 20162021 Significant Events
Acquisition of the Access Technologies business
Acquisitions
WeOn July 5, 2022, we completed onethe acquisition of the Access Technologies business for a closing purchase price of $923.1 million. This acquisition in both 2017 and 2016:
|
| |
Acquisitions |
Business | Month |
Trelock | June 2016 |
Republic | January 2017 |
was financed by the net proceeds from the issuance of our 5.411% Senior Notes, together with borrowings under the 2021 Revolving Facility. The Access Technologies business has been integrated into our Allegion Americas segment
The incremental impactAccess Technologies business is a leading manufacturer, installer and service provider of automatic entrance solutions in North America, primarily in the U.S. and Canada. Its diversified customer base centers on non-residential settings, including retail, healthcare, education, commercial offices, hospitality and government. This acquisition helps us create a more comprehensive portfolio of access solutions, with the addition of automated entrance solutions. Additionally, the Access
Technologies business adds an expansive service and support network throughout the U.S. and Canada, broadening our solutions to national, regional and local customers, and complementing our existing strengths in these non-residential markets. Since the acquisition date and through December 31, 2022, the Access Technologies business generated $185.9 million in Net revenues.
Divestiture of Milre
In September 2022, we sold Milre Systek Co. Ltd. ("Milre") in South Korea for an immaterial amount. As a result of the acquisitions for the twelve months ended December 31, 2017 wassale, we recorded a net increase in revenuesloss on divestiture of approximately $32.3 million and$7.6 million.
Financing activities
On June 22, 2022, Allegion US Holding Company Inc., a net decrease to operating income of approximately $0.6 million compared to the same period in the prior year. The incremental impactwholly-owned subsidiary of the acquisitionsCompany ("Allegion US Hold Co"), issued $600.0 million aggregate principal amount of its 5.411% Senior Notes due 2032 (the “5.411% Senior Notes”). The 5.411% Senior Notes require semi-annual interest payments on January 1 and divestituresJuly 1, beginning January 1, 2023, and will mature on July 1, 2032. We incurred and deferred $5.9 million of discounts and financing costs associated with the 5.411% Senior Notes, which will be amortized to Interest expense over their 10-year term, as well as $4.3 million of third party financing costs that were recorded within Interest expense on the Consolidated Statement of Comprehensive Income for the twelve months ended December 31, 2016 was a net increase in revenues of approximately $63.6 million and a net increase in operating income of approximately $7.3 million compared to the same period in the prior year.
During the year ended December 31, 2017,2022.
On November 18, 2021, we incurred $4.7entered into a new $750.0 million unsecured credit agreement, consisting of due diligencethe $250.0 million 2021 Term Facility and acquisitionthe $500.0 million 2021 Revolving Facility. The proceeds of $250.0 million from the 2021 Term Facility were primarily used to repay in full our previously outstanding unsecured Term Facility.
2022 Dividends and integration costs. Acquisition related costs were not material to the 2016 Consolidated Statement of Comprehensive Income.
2017 Dividends
Share Repurchases
We paid quarterly dividends of $0.16$0.41 per ordinary share to shareholders on record as of March 13, 2017,16, 2022, June 13, 2017,16, 2022, September 15, 2017,16, 2022, and December 15, 2017. We paid16, 2022, for a total of $60.9$143.9 million in cashand repurchased approximately 0.5 million ordinary shares for dividends to ordinary shareholdersapproximately $61.0 million during the year ended December 31, 2017.2022.
In conjunction with ongoing restructuring actions throughout the year primarily related to workforce reductions and the closure and consolidation
We also incurred $1.5 million of other non-qualified restructuring charges during the year ended December 31, 2017 related to costs directly attributable to restructuring activities, but do not fall into the severance, exit, or disposal category.
Financing activities
We entered into a new $1.2 billion unsecured credit agreement (the "Credit Agreement"), consisting of a $700.0 million term loan facility (the “Term Facility”) and a $500.0 million revolving credit facility (the “Revolving Facility”, and together with the Term Facility, the “Credit Facilities”). The initial proceeds of $700.0 million from the Term Facility, along with initial borrowings of $165.0 million under the Revolving Facility, were used primarily to repay in full our previously outstanding secured credit facility, the Second Amended and Restated Credit Agreement, dated as of September 30, 2015. All obligations under the Second Amended and Restated Credit Agreement were satisfied, all commitments thereunder were terminated, and all guarantees and security interests that had been granted in connection therewith were released.
On October 2, 2017, we issued $400.0 million of 3.200% Senior Notes due 2024 (the “3.200% Senior Notes”) and $400.0 million of 3.550% Senior Notes due 2027 (the “3.550% Senior Notes” and, together with the 3.200% Senior Notes, the “Notes”). On October 3, 2017 we used the net proceeds from the Notes to redeem in full the $300.0 million Senior Notes due 2021 and the $300.0 million Senior Notes due 2023, as well as to repay in full the $165.0 million of borrowings under the Revolving Facility and other costs associated with the refinancing.
Results of Operations - For the years ended December 31
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dollar amounts in millions, except per share amounts | | 2022 | | % of Net revenues | | 2021 | | % of Net revenues | | | | |
Net revenues | | $ | 3,271.9 | | | | | $ | 2,867.4 | | | | | | | |
Cost of goods sold | | 1,949.5 | | | 59.6 | % | | 1,662.5 | | | 58.0 | % | | | | |
Selling and administrative expenses | | 736.0 | | | 22.5 | % | | 674.7 | | | 23.5 | % | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Operating income | | 586.4 | | | 17.9 | % | | 530.2 | | | 18.5 | % | | | | |
Interest expense | | 75.9 | | | | | 50.2 | | | | | | | |
Loss on divestitures | | 7.6 | | | | | — | | | | | | | |
Other income, net | | (11.6) | | | | | (44.0) | | | | | | | |
Earnings before income taxes | | 514.5 | | | | | 524.0 | | | | | | | |
Provision for income taxes | | 56.2 | | | | | 40.7 | | | | | | | |
Net earnings | | 458.3 | | | | | 483.3 | | | | | | | |
Less: Net earnings attributable to noncontrolling interests | | 0.3 | | | | | 0.3 | | | | | | | |
Net earnings attributable to Allegion plc | | $ | 458.0 | | | | | $ | 483.0 | | | | | | | |
| | | | | | | | | | | | |
Diluted net earnings per ordinary share attributable to Allegion plc ordinary shareholders: | | $ | 5.19 | | | | | $ | 5.34 | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
Dollar amounts in millions, except per share data | | 2017 | | % of Revenues | | 2016 | | % of Revenues | | 2015 | | % of Revenues |
Net revenues | | $ | 2,408.2 |
| |
| | $ | 2,238.0 |
| |
| | $ | 2,068.1 |
| |
|
Cost of goods sold | | 1,337.5 |
| | 55.5 | % | | 1,252.7 |
| | 56.0 | % | | 1,199.0 |
| | 58.0 | % |
Selling and administrative expenses | | 582.5 |
| | 24.2 | % | | 559.8 |
| | 25.0 | % | | 510.5 |
| | 24.7 | % |
Operating income | | 488.2 |
| | 20.3 | % | | 425.5 |
| | 19.0 | % | | 358.6 |
| | 17.3 | % |
Interest expense | | 105.7 |
| |
| | 64.3 |
| |
| | 52.9 |
| |
|
Loss on divestitures | | — |
| | | | 84.4 |
| | | | 104.2 |
| | |
Other income, net | | (13.2 | ) | | | | (18.2 | ) | | | | (7.8 | ) | | |
Earnings before income taxes | | 395.7 |
| |
| | 295.0 |
| |
| | 209.3 |
| |
|
Provision for income taxes | | 119.0 |
| | | | 63.8 |
| | | | 54.6 |
| | |
Earnings from continuing operations | | 276.7 |
| |
| | 231.2 |
| |
| | 154.7 |
| |
|
Discontinued operations, net of tax | | — |
| | | | — |
| | | | (0.4 | ) | | |
Net earnings | | 276.7 |
| |
| | 231.2 |
| |
| | 154.3 |
| |
|
Less: Net earnings attributable to noncontrolling interests | | 3.4 |
| | | | 2.1 |
| | | | 0.4 |
| | |
Net earnings attributable to Allegion plc | | $ | 273.3 |
| | | | $ | 229.1 |
| | | | $ | 153.9 |
| | |
Diluted net earnings per ordinary share attributable to Allegion plc ordinary shareholders: | |
| |
| |
| |
| |
| |
|
Continuing operations | | $ | 2.85 |
| |
| | $ | 2.36 |
| |
| | $ | 1.59 |
| |
|
Discontinued operations | | — |
| | | | — |
| | | | — |
| | |
Net earnings | | $ | 2.85 |
| | | | $ | 2.36 |
| | | | $ | 1.59 |
| | |
The discussions that follow describe the significant factors contributing to the changes in our results of operations for the years presented and form the basis used by management to evaluate the financial performance of the business. For a discussion of our results of operations for the year ended December 31, 2021, compared to the year ended December 31, 2020, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2021 Annual Report on Form 10-K filed with the SEC on February 15, 2022.
Net Revenues
Net revenues for the year ended December 31, 20172022, increased by 7.6%14.1%, or $170.2$404.5 million,, as compared to the same period in 2016year ended December 31, 2021, due to the following:
|
| | | | |
Pricing | 1.89.8 | % |
Volume | 3.90.9 | % |
Acquisitions / divestitures | 1.46.4 | % |
Currency exchange rates | 0.5(3.0) | % |
Total | 7.614.1 | % |
The increase in netNet revenues was primarily driven by improved pricing across our major businesses, our acquisition of the Access Technologies business and higher volumes and improved pricing in all segments, incremental revenue from the acquisitions discussed above, and favorable foreign currency exchange rate movements relative to the US Dollar.
Net revenues for the year ended December 31, 2016 increased by 8.2%, or $169.9 million, compared to the same period in 2015 due to the following:
|
| | |
Pricing | 1.0 | % |
Volume | 4.8 | % |
Acquisitions / divestitures | 3.0 | % |
Currency exchange rates | (0.6 | )% |
Total | 8.2 | % |
The increase in net revenues was primarily driven by higher volumes and improved pricing in all segments and incremental revenue from acquisitions in our EMEIA segment,Allegion Americas segment. These increases were partially offset by unfavorable foreign currency exchange rate movements, lower volumes in our Allegion International segment and a divestiture in each of the prior and current year. Increased pricing was the result of multiple pricing initiatives implemented to help mitigate the impact of the persistent, elevated levels of inflation. We will continue to monitor the inflationary pressures to our businesses and address them through pricing initiatives where appropriate.
Pricing includes increases or decreases of price, including discounts, surcharges and/or other sales deductions, on our existing products and services. Volume includes increases or decreases of revenue due to the strengtheningchanges in unit volume of the US dollar against currencies in EMEIA, primarily the British pound.
existing products and services, as well as new products and services.
Cost of Goods Sold
For the year ended December 31, 2017, cost2022, Cost of goods sold as a percentage of revenue decreasedNet revenues increased to 55.5%59.6% from 56.0%58.0%, as compared to the year ended December 31, 2021, due to the following:
|
| | | | |
Pricing and productivityInflation in excess of inflationpricing and productivity | (0.50.7 | )% |
Volume/Volume / product mix | 0.4(0.9) | % |
Acquisitions / divestitures | 0.50.7 | % |
Investment spending | 0.2 | % |
Currency exchange rates | (0.10.3 | )% |
Environmental remediation charge | (0.7 | )% |
Restructuring / acquisition costsexpenses | (0.10.6 | )% |
Total | (0.51.6 | )% |
Cost of goods sold as a percentage of revenue for the year ended December 31, 2017 decreasedNet revenues increased primarily due to the impact inflation had on Cost of goods sold, which exceeded the beneficial impacts from pricing and productivity, benefits in excess of inflation, favorablelower gross margins associated with our acquired Access Technologies business, increased investment spending, higher restructuring and acquisition and integration costs year-over-year and unfavorable foreign currency exchange rate movements,movements. These increases to Cost of goods sold as a decreasepercentage of Net revenues were partially offset by favorable product mix, due to increased volumes in the Allegion Americas segment.
Inflation in excess of pricing and productivity includes the impact to Costs of goods sold from pricing, as defined above, in addition to productivity and inflation. Productivity represents improvements in unit costs of materials and cost reductions related to an environmental remediation chargeimprovements to our manufacturing design and processes. Inflation includes unit costs for the current period compared to the average actual cost for the prior period, multiplied by current year volumes. Volume/product mix represents the impact due to increases or decreases of revenue due to changes in unit volume, including new products and services, including the effect of changes in the prior year,mix of products and decreased restructuring costs. These decreases were offset by unfavorable product mixservices sold on Cost of goods sold.
Selling and volume and the impact of acquisitions.Administrative Expenses
For the year ended December 31, 2016, cost of goods sold as a percentage of revenue decreased to 56.0% from 58.0% due to the following:
|
| | |
Pricing and productivity in excess of inflation | (1.3 | )% |
Acquisitions / divestitures | (0.5 | )% |
Investment spending | 0.2 | % |
Currency exchange rates | (0.3 | )% |
Non-cash inventory impairment | (0.2 | )% |
Environmental remediation charge | 0.7 | % |
Restructuring / acquisition costs | (0.6 | )% |
Total | (2.0 | )% |
Costs of goods sold as a percentage of revenue for the year ended December 31, 2016 decreased primarily due to productivity benefits in excess of inflation, the impact of the acquisitions discussed above, favorable foreign currency exchange rate movements and decreased restructuring costs primarily in our EMEIA segment. These decreases were offset by increased investment spending and a charge for a change in approach for environmental remediation related to two sites in the Americas.
2022, Selling and Administrative Expenses
For the year ended December 31, 2017, selling and administrative expenses as a percentage of revenueNet revenues decreased to 24.2%22.5% from 25.0%23.5%, as compared to the year ended December 31, 2021, due to the following:
|
| | | | |
Productivity in excess of inflation | (0.7(1.5) | )% |
Volume leverage | (0.9(0.2) | )% |
Acquisitions / divestitures | (0.2(0.3) | )% |
Investment spending | 0.70.3 | % |
| |
Restructuring / acquisition costsexpenses | 0.30.7 | % |
Total | (0.8(1.0) | )% |
Selling and administrative expenses as a percentage of revenue for the year ended December 31, 2017Net revenues decreased primarily due to favorable leverage due to increased volume, productivity benefits in excessimprovements exceeding the impact of inflation, as well as favorable volume leverage and acquisitions.the beneficial impact from current and prior year acquisition and divestiture activity. These decreases were partially offset dueby a year-over-year increase in acquisition and integration expenses, which were primarily related to our acquisition of the Access Technologies business, and increased investment spending and higher restructuring and acquisition costs.spending.
ForProductivity in excess of inflation includes the year ended December 31, 2016,impact from reductions in selling and administrative expenses as a percentage of revenue increased to 25.0% from 24.7% due to the following:
|
| | |
Other inflation in excess of productivity | 0.8 | % |
Volume leverage | (1.2 | )% |
Acquisitions / divestitures | 0.7 | % |
Investment spending | 0.4 | % |
Restructuring / acquisition costs | (0.4 | )% |
Total | 0.3 | % |
Sellingproductivity projects and current period costs of ongoing selling and administrative functions compared to the same ongoing expenses as a percentagein the prior period. Volume leverage represents the contribution margin related to changes in sales volume, excluding the impact of revenue for the year ended December 31, 2016 increased primarily due to acquisitions, increased investment spendingprice, productivity, mix and inflation in excess of productivity. These increases were offset by favorable leverage dueinflation. Expenses related to increased volumehead count for strategic initiatives, new facilities or significant spending for strategic initiatives or new product and lower restructuring and acquisition costs.
channel development, are captured in Investment spending in the table above.
Operating Income/Margin
Operating income for the year ended December 31, 20172022, increased $62.7$56.2 million as compared to the year ended December 31, 2021, and Operating margin decreased to 17.9% from the same period in 2016 and operating margin increased to 20.3% from 19.0% for the same period in 201618.5%, due to the following:
| | | | | | | | | | | |
In millions | Operating Income | | Operating Margin |
December 31, 2021 | $ | 530.2 | | | 18.5 | % |
Pricing and productivity in excess of inflation | 79.7 | | | 0.9 | % |
Volume / product mix | 36.5 | | | 1.1 | % |
Currency exchange rates | (21.9) | | | (0.2) | % |
Investment spending | (16.0) | | | (0.6) | % |
Acquisitions/ divestitures | 18.6 | | | (0.4) | % |
Restructuring / acquisition expenses | (40.7) | | | (1.4) | % |
| | | |
| | | |
December 31, 2022 | $ | 586.4 | | | 17.9 | % |
|
| | | | | | |
in millions | Operating Income | | Operating Margin |
December 31, 2016 | $ | 425.5 |
| | 19.0 | % |
Pricing and productivity in excess of inflation | 35.0 |
| | 1.2 | % |
Volume/product mix | 29.4 |
| | 0.5 | % |
Currency exchange rates | 4.3 |
| | 0.1 | % |
Investment spending | (15.3 | ) | | (0.7 | )% |
Acquisitions | (0.6 | ) | | (0.3 | )% |
Environmental remediation charge | 15.0 |
| | 0.7 | % |
Restructuring / acquisition costs | (5.1 | ) | | (0.2 | )% |
December 31, 2017 | $ | 488.2 |
| | 20.3 | % |
The increase in Operating income was driven by pricing improvements in excess of inflation and operating margin both increased due toproductivity, favorable volume/product mix in all ofand the contribution to Operating income from our segments, pricing improvements and productivity in excess of inflation,favorable foreign currency exchange rate movements, and lower environmental remediation charges in the current year due to a charge in the prior year for a change in approach for environmental remediation related to two sites in the Americas.acquired Access Technologies business. These increases were partially offset by unfavorable foreign currency exchange rate movements, increased investment spending and a year-over-year increase in restructuring and acquisition and integration expenses, which were primarily related to our acquisition of the Access Technologies business.
The decrease in Operating margin was primarily due to the year-over-year increase in restructuring and acquisition expenses, unfavorable foreign currency exchange rate movements, increased investment spending and the dilutive impact of acquisitions and higher restructuring and acquisition costs.
Operating income for the year ended December 31, 2016 increased $66.9 million and operating margin increased to 19.0% from 17.3% for the same period in 2015 due to the following:
Operating
|
| | | | | | |
in millions | Operating Income | | Operating Margin |
December 31, 2015 | $ | 358.6 |
| | 17.3 | % |
Pricing and productivity in excess of inflation | 13.6 |
| | 0.5 | % |
Volume/product mix | 44.0 |
| | 1.2 | % |
Non-cash inventory impairment | 4.2 |
| | 0.2 | % |
Currency exchange rates | 4.6 |
| | 0.3 | % |
Investment spending | (12.3 | ) | | (0.6 | )% |
Acquisitions / divestitures | 7.3 |
| | (0.2 | )% |
Environmental remediation charge | (15.0 | ) | | (0.7 | )% |
Restructuring / acquisition costs | 20.5 |
| | 1.0 | % |
December 31, 2016 | $ | 425.5 |
| | 19.0 | % |
Operating income increased primarily due tomargin from our Access Technologies business. These decreases were partially offset by pricing improvements in excess of inflation and productivity, favorable volume/product mix in all of our segments, pricing improvements and productivity in excess of inflation, lower restructuring and acquisition costs, the positive impact of acquisitions and divestitures, inventory impairment charges in Venezuela in the prior year that did not occur in the current year and favorable foreign currency exchange rate movements. These increases were partially offset by investment spending and a charge for a change in approach for environmental remediation related to two sites in the Americas.
Operatingoperating margin increased primarily due to favorable volume/product mix in all of our segments, pricing improvements and productivity in excess of inflation, lower restructuring and acquisition costs, inventory impairment charges in Venezuela in the prior year and favorable foreign currency exchange rate movements. These increases were partially offset by investment spending, the impact of acquisitions and divestitures, and a charge for a change in approach for environmental remediation related to two sites in the Americas.
from recent divestitures.
Interest Expense
Interest expense for the year ended December 31, 20172022, increased $41.4$25.7 million as compared to the same period in 2016. Interest expense increased primarily due to $44.7 million of costs associated with the refinancing of our Credit Facilities, issuance of our new 3.200% and 3.550% Senior Notes, and redemption of our previously outstanding Senior Notes due 2021 and 2023.
Interest expense for the year ended December 31, 2016 increased $11.4 million compared with the same period of 2015. Interest expense increased2021, primarily due to increased debt balances frominterest on our 5.411% Senior Notes and the September 2015 issuance2021 Revolving Facility, as well as $4.3 million of third-party costs related to the financing of the Senior Notes due 2023.
Access Technologies business acquisition. The rise in interest rates over the course of 2022 also contributed to a higher weighted-average interest rate on our variable rate outstanding indebtedness.
Loss on DivestituresDivestiture
During the year ended December 31, 2015As discussed above, in September 2022 we entered intosold Milre for an agreement to sellimmaterial amount, resulting in a majority stake in our systems integration business in China and recorded a pre-tax chargenet loss of $78.1 million ($82.4 million after tax charges) to write the carrying value of the assets and liabilities down to their estimated fair value less costs to complete the transaction. During the year ended December 31, 2016 we recorded an additional after tax charge of $84.4 million to further write-down the carrying value of consideration receivable related to this divestiture.
$7.6 million.
Other income,Income, net
The components of Other income, net, for the yearyears ended December 31 were as follows:
| | In millions | | 2017 | | 2016 | | 2015 | In millions | | 2022 | | 2021 | |
Interest income | | $ | (1.2 | ) | | $ | (1.9 | ) | | $ | (1.5 | ) | Interest income | | $ | (1.3) | | | $ | (0.4) | | |
Exchange loss | | 0.7 |
| | 2.0 |
| | 4.9 |
| |
(Earnings) loss from and (gains) on the sale of equity investments | | (5.4 | ) | | (3.6 | ) | | 0.3 |
| |
Foreign currency exchange loss | | Foreign currency exchange loss | | 2.4 | | | 2.7 | | |
Earnings and gains from the sale of equity method investments, net | | Earnings and gains from the sale of equity method investments, net | | (0.8) | | | (6.4) | | |
Net periodic pension and postretirement benefit income, less service cost | | Net periodic pension and postretirement benefit income, less service cost | | (9.4) | | | (7.1) | | |
Other | | (7.3 | ) | | (14.7 | ) | | (11.5 | ) | Other | | (2.5) | | | (32.8) | | |
Other income, net | | $ | (13.2 | ) | | $ | (18.2 | ) | | $ | (7.8 | ) | Other income, net | | $ | (11.6) | | | $ | (44.0) | | |
For the year ended December 31, 2017,2022, Other income, net decreased by $5.0$32.4 million compared to the same period in 2016. During the year ended December 31, 2017 we recorded2021, primarily due to a cumulativenon-operating investment gain of $5.4 million from the sale of iDevices, LLC, and gains of $7.3 million related to legal entity liquidations$20.7 in our Asia Pacific region, of which $2.2 million has been attributed to noncontrolling interests.
For the year ended December 31, 2016, Other income, net increased by $10.4 million compared with the same period2021 that did not recur in 2015. During the year ended December 31, 2016 we recorded gains from the sale of marketable securities of $12.4 million, which2022. This gain is included within Other in the table above. Additionally, earningsAlso contributing to the decrease in Other income, net, are a prior year gain of $6.4 million from the sale of an equity method investments increased primarily due toinvestment that did not recur in 2022 and a gain recognized by andecrease in other realized and unrealized investment in 2016.
gains year-over-year.
Provision for Income Taxes
On December 22, 2017, the President of the United States signed comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Reform Act”). The Tax Reform Act makes broad and complex changes to the U.S. tax code which will impact our year ended December 31, 2017 including, but not limited to (1) reducing the U.S. federal corporate tax rate, (2) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that may electively be paid over eight years, and (3) requiring a review of the future realizability of deferred tax balances.
For the year ended December 31, 2017,2022, our effective tax rate was 30.1%10.9%, compared to 21.6%7.8% for the year ended December 31, 2016.2021. The effective income tax rate forincrease in the year ended December 31, 2017 was negatively impacted by a $53.5 million tax charge related to the Tax Reform Act, which was partially offset by the release of $10.4 million of valuation allowances. The effective income tax rate for the year ended December 31, 2016 was negatively impacted by $84.4 million (before and after tax) of charges related to the divestiture of our systems integration business in China during 2015.
For the year ended December 31, 2016, our effective tax rate was 21.6% compared to 26.1% for the year ended December 31, 2015. The effective income tax rate for the year ended December 31, 2016 was negatively impacted by $84.4 million (before and after tax) of charges related to the divestiture of our systems integration business in China during 2015. The effective income tax rate for the ended December 31, 2015 was negatively impacted by $111.3 million ($115.0 million after tax) of charges related to the divestiture of our systems integration business in China, the divestiture of our business in Venezuela and the devaluation of the Venezuelan bolivar. Excluding these charges, the effective tax rate for the year ended December 31, 2016 increased primarily due to increases inthe favorable resolutions of uncertain tax positions, in 2016 that were partially offset by favorable changes in jurisdictional tax rates and other discrete tax benefits in 2021 that have not recurred in 2022 and the mix of income earned in lowerhigher tax rate jurisdictions and the continued execution of our tax strategies.jurisdictions.
Review of Business Segments
We operate in and report financial results for threetwo segments: Allegion Americas EMEIA, and Asia Pacific.Allegion International. These segments represent the level at which our chief operating decision maker reviews companyour financial performance and makes operating decisions.
Segment operating income is the measure of profit and loss that our chief operating decision maker uses to evaluate the financial performance of the business and as the basis for resource allocation, performance reviews and compensation. For these reasons, we believe that Segment operating income represents the most relevant measure of Segment profit and loss. Our chief operating decision maker may exclude certain charges or gains, such as corporate charges and other special charges, from operating income to arrive at a Segment operating income that is a more meaningful measure of profit and loss upon which to base our operating decisions. We define Segment operating margin as Segment operating income as a percentage of netthe segment's Net revenues.
The segment discussions that follow describe the significant factors contributing to the changes in results for each segment included in continuing operations.
Segment Results of Operations - For the years ended December 31
| | | | | | | | | | | | | | | | | | | | | | | |
In millions | 2022 | | 2021 | | % Change | | | | | | |
Net revenues | | | | | | | | | | | |
Allegion Americas | $ | 2,551.6 | | | $ | 2,072.2 | | | 23.1 | % | | | | | | |
Allegion International | 720.3 | | | 795.2 | | | (9.4) | % | | | | | | |
Total | $ | 3,271.9 | | | $ | 2,867.4 | | | | | | | | | |
| | | | | | | | | | | |
Segment operating income | | | | | | | | | | | |
Allegion Americas | $ | 613.3 | | | $ | 525.0 | | | 16.8 | % | | | | | | |
Allegion International | 68.3 | | | 82.4 | | | (17.1) | % | | | | | | |
Total | $ | 681.6 | | | $ | 607.4 | | | | | | | | | |
| | | | | | | | | | | |
Segment operating margin | | | | | | | | | | | |
Allegion Americas | 24.0 | % | | 25.3 | % | | | | | | | | |
Allegion International | 9.5 | % | | 10.4 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
in millions | 2017 | | 2016 | | % Change | | 2016 | | 2015 | | % Change |
Net revenues | | | | | | | | | | | |
Americas | $ | 1,767.5 |
| | $ | 1,645.7 |
| | 7.4 | % | | $ | 1,645.7 |
| | $ | 1,558.4 |
| | 5.6 | % |
EMEIA | 523.5 |
| | 485.9 |
| | 7.7 | % | | 485.9 |
| | 386.3 |
| | 25.8 | % |
Asia Pacific | 117.2 |
| | 106.4 |
| | 10.2 | % | | 106.4 |
| | 123.4 |
| | (13.8 | )% |
Total | $ | 2,408.2 |
| | $ | 2,238.0 |
| | | | $ | 2,238.0 |
| | $ | 2,068.1 |
| | |
| | | | | | | | | | | |
Segment operating income (loss) | | | | | | | | | | | |
Americas | $ | 503.3 |
| | $ | 448.1 |
| | 12.3 | % | | $ | 448.1 |
| | $ | 418.0 |
| | 7.2 | % |
EMEIA | 45.2 |
| | 35.9 |
| | 25.9 | % | | 35.9 |
| | 8.6 |
| | 317.4 | % |
Asia Pacific | 9.5 |
| | 6.1 |
| | 55.7 | % | | 6.1 |
| | (3.4 | ) | | 279.4 | % |
Total | $ | 558.0 |
| | $ | 490.1 |
| | | | $ | 490.1 |
| | $ | 423.2 |
| | |
| | | | | | | | | | | |
Segment operating margin | | | | | | | | | | | |
Americas | 28.5 | % | | 27.2 | % | | | | 27.2 | % | | 26.8 | % | | |
EMEIA | 8.6 | % | | 7.4 | % | | | | 7.4 | % | | 2.2 | % | | |
Asia Pacific | 8.1 | % | | 5.7 | % | | | | 5.7 | % | | (2.8 | )% | | |
Allegion Americas
Our Allegion Americas segment is a leading provider of security products, services and solutions in approximately 30 countries throughout North America, Central America, the Caribbean and South America. The segment sells a broad range of products and solutions including, locks, locksets, portable locks, key systems, door closers,controls and systems, exit devices, doors, and door systems,accessories, electronic product andsecurity products, access control systems and software and service solutions to end-userscustomers in commercial, institutional and residential facilities, including into the education, healthcare, government, hospitality, retail, commercial office and single and multi-family residential markets. This segment’s primary brands are LCN, Schlage, Von Duprin and LCN.
2017 vs 2016
Stanley Access Technologies, which we utilize with permission in accordance with the terms of the Access Technologies acquisition agreement ("Stanley" is the property of Stanley Logistics L.L.C).
Net revenues
Net revenues for the year ended December 31, 20172022, increased by 7.4%23.1%, or $121.8$479.4 million,, as compared to the same period in 2016year ended December 31, 2021, due to the following:
|
| | | | |
Pricing | 2.011.4 | % |
Volume | 3.83.0 | % |
Acquisitions | 1.49.0 | % |
Currency exchange rates | 0.2(0.3) | % |
Total | 7.423.1 | % |
The increase in Net revenues was due todriven by significantly improved pricing, higher volumes improved pricing, the impact of an acquisition in January 2017,for our non-residential products and favorableour Access Technologies business acquisition. These increases were partially offset by unfavorable foreign currency exchange rate movements. movements and lower volumes for our residential products. Increased pricing was the result of multiple pricing initiatives implemented to help mitigate the impact of persistent, elevated levels of inflation. We will continue to monitor the inflationary pressures to our businesses and address them through pricing initiatives where appropriate.
Net revenues from non-residential products for the year ended December 31, 2017(excluding Net revenues from our acquired Access Technologies business), increased high single digitsby a low twenties percent compared to the same period in the prior year, duedriven by improved pricing and higher volumes. Strong demand throughout 2022 and improvements around the availability of materials and components, driven in part by our actions to market growth, product launches and channel initiatives. mitigate these supply-chain challenges, helped drive the increase in volumes compared to 2021.
Net revenues from residential products for the year ended December 31, 2017 increased mid-singledecreased by a low single digits percent compared to the same periodprior year. Increased pricing was offset by lower volumes during the year. During the second half of 2022, we experienced a softening in market demand for our residential products, due in part to elevated inflation and lower consumer sentiment, which resulted in reduced sales volumes. Further, market conditions for new residential construction deteriorated over the prior year primarilylatter half of 2022, due in part to domestic market growth.a rapid and substantial increase in mortgage rates. Given these factors, we anticipate softness in demand for our residential products to continue into 2023.
Growth in electronic security products and solutions is a metric monitored by management and a focus of our investors. Electronic products encompass both residential and non-residential products, and include all electrified product categories including, but not limited to, electronic and electrified locks, access control systems and electronic and electrified door controls and systems and exit devices. Net revenues from the sale of electronic products increased by a high teens percent compared to 2021, driven by improved pricing and higher volumes. While we continue to experience delays and shortages of electronic components from key suppliers, we expect continued growth from the sale of electronic products in 2023 given the combination of our pricing initiatives and our actions taken to mitigate these delays and shortages.
Operating income/margin
Segment operating income for the year ended December 31, 20172022, increased $55.2$88.3 million, and segmentSegment operating margin increaseddecreased to 28.5%24.0% from 27.2%25.3% as compared to the same period in 2016year ended December 31, 2021, due to the following:
| | | | | | | | | | | |
In millions | Operating Income | | Operating Margin |
December 31, 2021 | $ | 525.0 | | | 25.3 | % |
Pricing and productivity in excess of inflation | 57.1 | | | — | % |
Volume / product mix | 52.2 | | | 1.7 | % |
Currency exchange rates | (4.4) | | | (0.1) | % |
Investment spending | (10.4) | | | (0.5) | % |
Acquisitions | 16.4 | | | (1.3) | % |
Acquisition expenses | (22.6) | | | (1.1) | % |
December 31, 2022 | $ | 613.3 | | | 24.0 | % |
|
| | | | | | |
in millions | Operating Income | | Operating Margin |
December 31, 2016 | $ | 448.1 |
| | 27.2 | % |
Pricing and productivity in excess of inflation | 29.3 |
| | 1.2 | % |
Volume / Product mix | 22.2 |
| | 0.3 | % |
Currency exchange rates | 2.6 |
| | 0.1 | % |
Investment spending | (10.7 | ) | | (0.6 | )% |
Acquisitions | 0.3 |
| | (0.4 | )% |
Environmental remediation charge | 15.0 |
| | 0.9 | % |
Restructuring / acquisition costs | (3.5 | ) | | (0.2 | )% |
December 31, 2017 | $ | 503.3 |
| | 28.5 | % |
OperatingThe increase in Segment operating income increasedwas primarily due todriven by pricing improvements and productivity in excess of inflation and productivity, favorable volume/product mix favorable foreign currency exchange rate movements, lower environmental remediation charges in the current year due to a charge in the prior year for a change in approach for environmental remediation related to two sites in the U.S., and the impact of acquisitions. These increases were partially offset by increased investment spending primarily for new product development and channel development and restructuring and acquisition costs.
Operating margin increased primarily duecontribution to pricing improvements and productivity in excess of inflation, favorable volume/product mix, favorable foreign currency exchange rate movements, and lower environmental remediation charges in the current year due to a charge in the prior year for a change in approach for environmental remediation related to two sites in the U.S. These increases were partially offset by increased investment spending primarily for new product development and channel development, restructuring and acquisition costs, and the impact of acquisitions.
2016 vs 2015
Net revenues
Net revenues for the year ended December 31, 2016 increased by 5.6%, or $87.3 million, compared to the same period in 2015 due to the following:
|
| | |
Pricing | 0.9 | % |
Volume | 5.6 | % |
Acquisitions | (0.6 | )% |
Currency exchange rates | (0.3 | )% |
Total | 5.6 | % |
The increase in revenues was primarily due to higher volumes and improved pricing. Net revenuesSegment operating income from non-residential products for the year ended December 31, 2016 increased mid to high single digits compared to the same period in the prior year due to market growth, product launches, and channel initiatives. Net revenues from residential products for the year ended December 31, 2016 increased low single digits compared to the same period in the prior year primarily due to domestic market growth.our acquired Access Technologies business. These increases were partially offset by unfavorable foreign currency exchange rate movements, increased investment spending and a year-over-year increase in acquisition and integration expenses, which were primarily related to our acquisition of the 2015 divestiture of our Venezuelan operation.Access Technologies business.
Operating income/margin
The decrease in Segment operating income for the year ended December 31, 2016 increased $30.1 million and segment operating margin increased to 27.2% from 26.8% compared to the same period in 2015was primarily due to the following:
|
| | | | | | |
in millions | Operating Income | | Operating Margin |
December 31, 2015 | $ | 418.0 |
| | 26.8 | % |
Pricing and productivity in excess of inflation | 9.9 |
| | 0.4 | % |
Volume / Product mix | 40.2 |
| | 1.0 | % |
Non-cash inventory impairment | 4.2 |
| | 0.3 | % |
Currency exchange rates | 6.5 |
| | 0.5 | % |
Investment spending | (6.4 | ) | | (0.4 | )% |
Acquisitions / divestitures | (7.4 | ) | | (0.3 | )% |
Environmental remediation charge | (15.0 | ) | | (1.0 | )% |
Restructuring / acquisition costs | (1.9 | ) | | (0.1 | )% |
December 31, 2016 | $ | 448.1 |
| | 27.2 | % |
The increases were primarily dueyear-over-year increase in acquisition and integration expenses, the impact to favorable volume/product mix, inventory impairment charges year-over-year in Venezuela, pricing improvementsSegment operating margin from our Access Technologies business, increased investment spending and productivity in excess of inflation and favorableunfavorable foreign currency exchange rate movements. These increasesdecreases were partially offset by the divestiture of our Venezuelan operations, increased investment spending primarily for new favorable volume/product development and channel development, restructuring and acquisition costs and a charge for a change in approach for environmental remediation at two sites in the U.S.mix.
EMEIAAllegion International
Our EMEIAAllegion International segment provides security products, services and solutions in approximately 85 countriesprimarily throughout Europe, the Middle East, IndiaAsia and Africa.Oceania. The segment offers end-users a broad range of products, services and solutions including locks, locksets, portable locks, key systems, door closers,controls and systems, exit devices, doors, and door systems, electronic product andsecurity products, access control systems, as well as time and attendance and workforce productivity solutions, among other software and service solutions. This segment’s primary brands are AXA, Bricard, Briton, CISA, Gainsborough, Interflex and SimonsVoss. This segment also resells Schlage, Von Duprin and LCN products, primarily in the Middle East.
2017 vs 2016
Net revenues
Net revenues for the year ended December 31, 2017 increased by 7.7%, or $37.6 million, compared to the same period in 2016 due to the following:
|
| | |
Pricing | 1.6 | % |
Volume | 3.1 | % |
Acquisitions | 1.6 | % |
Currency exchange rates | 1.4 | % |
Total | 7.7 | % |
The increase in revenues was due to higher volumes, improved pricing, the impact of an acquisition made in the prior year, and favorable foreign currency exchange rate movements.
Operating income/margin
Segment operating income for the year ended December 31, 2017 increased $9.3 million and segment operating margin increased to 8.6% from 7.4% compared to the same period in 2016 due to the following:
|
| | | | | | |
in millions | Operating Income | | Operating Margin |
December 31, 2016 | $ | 35.9 |
| | 7.4 | % |
Pricing and productivity in excess of inflation | 5.1 |
| | 0.9 | % |
Volume / Product mix | 5.2 |
| | 0.8 | % |
Currency exchange rates | 1.3 |
| | 0.1 | % |
Investment spending | (2.4 | ) | | (0.5 | )% |
Acquisitions | (0.9 | ) | | (0.3 | )% |
Restructuring / acquisition costs | 1.0 |
| | 0.2 | % |
December 31, 2017 | $ | 45.2 |
| | 8.6 | % |
The increases were primarily due to pricing improvements and productivity in excess of inflation, improvements in volume/product mix, favorable foreign currency exchange rate movements, and year-over-year change in restructuring and acquisition costs. These increases were partially offset by increased investment spending and the impact from an acquisition in the prior year.
2016 vs 2015
Net revenue
Net revenues for the year ended December 31, 2016 increased by 25.8%, or $99.6 million, compared to the same period in 2015 due to following:
|
| | |
Pricing | 1.2 | % |
Volume | 1.0 | % |
Acquisitions / divestitures | 25.4 | % |
Currency exchange rates | (1.8 | )% |
Total | 25.8 | % |
The increase in revenues was primarily due to the full-year impact of acquisitions made in 2015, slightly higher volumes and improved pricing offset by unfavorable foreign currency exchange rate movements.
Operating income/margin
Segment operating income for the year ended December 31, 2016 increased $27.3 million and operating margin increased to 7.4% from 2.2% compared to the same period in 2015 due to the following:
|
| | | | | | |
in millions | Operating Income | | Operating Margin |
December 31, 2015 | $ | 8.6 |
| | 2.2 | % |
Pricing and productivity in excess of inflation | 9.4 |
| | 1.6 | % |
Volume / Product mix | 0.2 |
| | — | % |
Currency exchange rates | (1.9 | ) | | (0.5 | )% |
Investment spending | (2.2 | ) | | (0.6 | )% |
Acquisitions / divestitures | 9.0 |
| | 1.4 | % |
Restructuring / acquisition costs | 12.8 |
| | 3.3 | % |
December 31, 2016 | $ | 35.9 |
| | 7.4 | % |
The increases were primarily due to pricing improvements and productivity in excess of inflation, the impact of 2015 acquisitions, slight improvement in volume/product mix and year-over-year change in restructuring and acquisition costs. These increases were partially offset by unfavorable foreign currency exchange rate movements and increased investment spending.
Asia Pacific
Our Asia Pacific segment provides security products and solutions in approximately 15 countries throughout the Asia Pacific region. The segment offers end-users a broad range of products, services and solutions including, locks, locksets, portable locks, key systems, door closers, exit devices, electronic product and access control systems. This segment’s primary brands are Milre, Schlage, Legge, Brio and FSH.
2017 vs 2016
Net revenues
Net revenues for the year ended December 31, 2017 increased by 10.2%, or $10.8 million, compared to the same period in 2016, due to the following:
|
| | |
Pricing | 0.4 | % |
Volume | 7.3 | % |
Acquisitions | 0.7 | % |
Currency exchange rates | 1.8 | % |
Total | 10.2 | % |
The increase in revenues was due to higher volumes, improved pricing, the impact of an acquisition made in the prior year, and favorable foreign currency exchange rate movements.
Operating income/margin
Segment operating income for the year ended December 31, 2017 increased $3.4 million and segment operating margin increased to 8.1% from 5.7% compared with the same period in 2016 due to the following:
|
| | | | | | |
in millions | Operating Income | | Operating Margin |
December 31, 2016 | $ | 6.1 |
| | 5.7 | % |
Pricing and productivity in excess of inflation | 1.5 |
| | 1.3 | % |
Volume / Product mix | 2.0 |
| | 1.3 | % |
Currency exchange rates | 0.4 |
| | 0.3 | % |
Investment spending | (0.4 | ) | | (0.4 | )% |
Acquisitions | (0.1 | ) | | (0.1 | )% |
December 31, 2017 | $ | 9.5 |
| | 8.1 | % |
The increases wereprimarily related to pricing improvements and productivity in excess of inflation, improved volume/product mix, and favorable foreign currency exchange rate movements. These increases were partially offset by increased investment spending and the impact of an acquisition in the prior year.
2016 vs 2015
Net revenues
Net revenues for the year ended December 31, 20162022, decreased by 13.8%9.4%, or $17.0$74.9 million, as compared withto the same period of 2015,year ended December 31, 2021, due to the following:
|
| | | | |
Pricing | 0.45.6 | % |
Volume | 7.1(4.6) | % |
Acquisitions / divestitures | (19.7(0.3) | )% |
Currency exchange rates | (1.6(10.1) | )% |
Total | (13.8(9.4) | )% |
The decrease in Net revenues was primarily due to the divestiture of our systems integration business in China in the fourth quarter of 2015, as well asdriven by lower volumes and unfavorable foreign currency exchange rate movements.movements, due to the strengthening of the U.S. dollar relative to most of the currencies in which we do business throughout our Allegion International segment. Both a prior year and current year divestiture also contributed slightly to the decrease in Net revenues. These decreases were partially offset by higher volumes, acquisition revenue and slightly improved pricingpricing.
As discussed above, softening demand throughout much of the Eurozone in 2022 has impacted several of our businesses in our remaining business.
Allegion International segment. Additionally, COVID-19 related lockdowns in China throughout the year also contributed to lower volumes. While we anticipate pricing initiatives to continue to positively contribute to revenue growth in 2023, volume growth will likely continue to be tempered until prevailing macroeconomic and geopolitical conditions improve.
Operating income/income margin
Segment operating income for the year ended December 31, 2016 increased $9.52022, decreased $14.1 million, and segmentSegment operating margin increaseddecreased to 5.7%9.5% from (2.8)%10.4% as compared withto the same period in 2015year ended December 31, 2021, due to the following:
|
| | | | | | |
in millions | Operating Income | | Operating Margin |
December 31, 2015 | $ | (3.4 | ) | | (2.8 | )% |
Inflation in excess of pricing and productivity | (0.4 | ) | | (0.1 | )% |
Volume / Product mix | 3.5 |
| | 2.8 | % |
Investment spending | (1.1 | ) | | (0.9 | )% |
Acquisitions / divestitures | 5.6 |
| | 5.1 | % |
Restructuring / acquisition costs | 1.9 |
| | 1.6 | % |
December 31, 2016 | $ | 6.1 |
| | 5.7 | % |
| | | | | | | | | | | |
In millions | Operating Income | | Operating Margin |
December 31, 2021 | $ | 82.4 | | | 10.4 | % |
Pricing and productivity in excess of inflation | 23.7 | | | 2.4 | % |
Volume / product mix | (15.6) | | | (1.5) | % |
Currency exchange rates | (17.6) | | | (1.3) | % |
Investment spending | (5.5) | | | (0.7) | % |
Acquisitions / divestitures | 2.1 | | | 0.3 | % |
Restructuring / acquisition expenses | (1.2) | | | (0.1) | % |
| | | |
| | | |
December 31, 2022 | $ | 68.3 | | | 9.5 | % |
The increasesdecreases in Segment operating income and Segment operating margin were primarily related to improveddriven by unfavorable volume/product mix, the divestiture of our systems integration business in China in 2015, acquisitionsunfavorable foreign currency exchange rate movements, increased investment spending and thea year-over-year changeincrease in restructuring and acquisition costs.expenses. These increasesdecreases were partially offset by increased investment spendingpricing and inflationproductivity improvements in excess of pricinginflation and productivity.both prior year and current year acquisition and divestiture activity.
Liquidity and Capital Resources
Liquidity Outlook, Sources and uses of liquidity
Uses
Our primary source of liquidity is cash provided by operating activities. Cash provided by operating activities is used to invest in new product development and fund capital expenditures and fund working capital requirementsrequirements. Our ability to generate cash from our operating activities, our unused availability under the 2021 Revolving Facility and is expectedour access to be adequate to service any future debt, pay any declared dividendsthe capital and potentially fund acquisitions and share repurchases. Our abilitycredit markets enable us to fund these capital needs, dependsexecute our long-term growth strategies and return value to our shareholders. Further, our business operates with strong operating cash flows, low leverage and low capital intensity, providing financial flexibility, including sufficient access to credit markets.
Our short-term financing needs primarily consist of working capital requirements, restructuring initiatives, capital spending, dividend payments and principal and interest payments on our ongoing abilitylong-term debt. Long-term financing needs depend largely on potential growth opportunities, including potential acquisitions, repayment or refinancing of our long-term obligations and repurchases of our ordinary shares. Of our total outstanding indebtedness as of December 31, 2022, approximately 85% incurs fixed-rate interest and is therefore not exposed to generatethe risk of rising variable interest rates.
Based upon our operations, existing cash provided by operating activities,balances and to access our borrowing facilities (including unused availability under the 2021 Revolving Facility, as of December 31, 2022, we expect cash flows from operations to be sufficient to maintain a sound financial position and liquidity and to meet our Revolving Facility) and capital markets.financing needs for at least the next 12 months. Further, we do not anticipate any covenant compliance challenges with any of our outstanding indebtedness for at least the next 12 months. We also believe that our future cash provided by operating activities,existing availability under our Revolving Facilitythe 2021 Credit Facilities and access to funds on handcredit and capital markets will provide adequate resourcesare sufficient to fundachieve our operating and financing needs.
longer-term strategic plans.
The following table reflects the major categories of cash flows for the years ended December 31. For additional details, please see the Consolidated Statements of Cash Flows in the Consolidated Financial Statements.
| | | | | | | | | | | | | | | | |
In millions | | 2022 | | 2021 | | |
Net cash provided by operating activities | | $ | 459.5 | | | $ | 488.6 | | | |
Net cash used in investing activities | | (994.1) | | | (31.6) | | | |
Net cash provided by (used in) financing activities | | $ | 437.0 | | | $ | (529.3) | | | |
|
| | | | | | | | | | | | |
In millions | | 2017 | | 2016 | | 2015 |
Cash provided by continuing operating activities | | $ | 347.2 |
| | $ | 377.5 |
| | $ | 257.4 |
|
Cash used in investing activities | | (50.2 | ) | | (64.0 | ) | | (533.8 | ) |
Cash (used in) provided by financing activities | | $ | (150.9 | ) | | $ | (196.0 | ) | | $ | 195.0 |
|
Operating activities
: Net cash provided by continuing operating activities for the year ended December 31, 20172022, decreased $30.3by $29.1 million compared to the same period2021, driven primarily by changes in 2016. Operating cash flows for 2017 reflect a discretionary $50.0 million contribution to the U.S. qualified defined benefit pension plan and increased cash paid for taxes, which were partially offset by higher net earnings compared to the same period in the prior year.working capital.
Net cash provided by continuing operating activities for the year ended December 31, 2016 increased $120.1 million compared to the same period in 2015. Operating cash flows for 2016 reflect higher net earnings compared to the same period in 2015.
Investing activities
: Net cash used in investing activities for the year ended December 31, 2017 decreased $13.82022, increased by $962.5 million compared to the same period in the prior year. The decrease in net cash used in investing activities is2021, primarily due to $15.6 million in proceeds from the sale of an equity investment during 2017 that did not occur in the prior year and a $10.6 million decrease of cash payments related to acquisitions. These changes were partially offset by $14.1$923.1 million of cash received frompaid for our acquisition of the saleAccess Technologies business, as well as an increase of marketable securities in 2016 that did not recur in the current year.
Net cash used in investing activities for the year ended December 31, 2016 decreased $469.8$18.6 million compared to the same period in the prior year. During the year ended December 31, 2016, cash used for acquisitions decreased $479.9 million compared to the year ended December 31, 2015. This was partially offset by an increase in capital expenditures of $7.3 million compared to 2015.2021.
Financing activities
: Net cash used inprovided by (used in) financing activities for the year ended December 31, 2017 decreased $45.12022, changed by $966.3 million compared to the same period in the prior year. The decrease in cash used in financing activities is due to net proceeds from debt issuances over debt repayments of $10.1 million in 2017 versus net debt repayments of $64.4 million during 2016. Current year debt financing activity includes the redemption of the 2021, and 2023 Senior Notes for a total of $600.0 million and the settlement of the previously outstanding Term Loan A Facility of $856.3 million, offset by the issuance of the 3.200% and 3.550% Senior Notes in an aggregate amount of $800.0 million and a new term loan facility maturing on September 12, 2022 (the "Term Facility") in the amount of $700.0 million. Additionally, during the year ended December 31, 2017, we repurchased $60.0 million of common shares, compared to $85.1 million during 2016. We also made dividend payments to ordinary shareholders of $60.9 million during the current year, compared to $46.0 million in 2016.
Net cash used in financing activities for the year ended December 31, 2016 increased $391.0 million compared to the same period in the prior year. Net repayments of debt totaled $64.4 million for the year ended December 31, 2016 primarily associated with required amortization payments from our previously outstanding Term Loan A Facility and repayments of other borrowings. Proceeds from long-term debt were $300.0 million for the year ended December 31, 2015. Cash used in other financing activities increased $48.3 million for the year ended December 31, 2016 compared to the prior year primarily due to higher dividend payments and increased repurchasesthe $600.0 million issuance of our ordinary5.411% Senior Notes to help finance the acquisition of the Access Technologies business. Additionally, cash used to repurchase shares partially offset bywas $351.8 million lower debt issuance costs, lower proceeds from shares issued under incentive plans and a reduction in dividends paid2022 compared to noncontrolling interests.2021.
Capitalization
Borrowings atAt December 31, long-term debt and other borrowings consisted of the following:
| | In millions | 2017 | | 2016 | In millions | 2022 | | 2021 |
Term Loan A Facility | $ | — |
| | $ | 879.8 |
| |
Term Facility | 691.3 |
| | — |
| |
Revolving Facility | — |
| | — |
| |
5.750% Senior Notes due 2021 | — |
| | 300.0 |
| |
5.875% Senior Notes due 2023 | — |
| | 300.0 |
| |
2021 Term Facility | | 2021 Term Facility | $ | 237.5 | | | $ | 250.0 | |
2021 Revolving Facility | | 2021 Revolving Facility | 69.0 | | | — | |
3.200% Senior Notes due 2024 | 400.0 |
| | — |
| 3.200% Senior Notes due 2024 | 400.0 | | | 400.0 | |
3.550% Senior Notes due 2027 | 400.0 |
| | — |
| 3.550% Senior Notes due 2027 | 400.0 | | | 400.0 | |
3.500% Senior Notes due 2029 | | 3.500% Senior Notes due 2029 | 400.0 | | | 400.0 | |
5.411% Senior Notes due 2032 | | 5.411% Senior Notes due 2032 | 600.0 | | | — | |
Other debt | 1.0 |
| | 2.3 |
| Other debt | 0.2 | | | 0.3 | |
Total borrowings outstanding | 1,492.3 |
| | 1,482.1 |
| Total borrowings outstanding | 2,106.7 | | | 1,450.3 | |
Less discounts and debt issuance costs, net | (15.0 | ) | | (18.3 | ) | |
Discounts and debt issuance costs, net | | Discounts and debt issuance costs, net | (12.2) | | | (8.2) | |
Total debt | 1,477.3 |
| | 1,463.8 |
| Total debt | 2,094.5 | | | 1,442.1 | |
Less current portion of long term debt | 35.0 |
| | 48.2 |
| |
Less current portion of long-term debt | | Less current portion of long-term debt | 12.6 | | | 12.6 | |
Total long-term debt | $ | 1,442.3 |
| | $ | 1,415.6 |
| Total long-term debt | $ | 2,081.9 | | | $ | 1,429.5 | |
As of December 31, 2017,2022, we have aan unsecured Credit Agreement in place, that provides for up to $1,200.0 million in unsecured financing, consisting of a $700.0the $250.0 million term loan facility (the “Term Facility”)2021 Term Facility, of which $237.5 million was outstanding at December 31, 2022, and a $500.0 million revolving credit facility (the “Revolving Facility” and, togetherthe 2021 Revolving Facility (together with the 2021 Term Facility, the “Credit“2021 Credit Facilities”). The 2021 Credit Facilities mature on September 12, 2022.November 18, 2026. The
2021 Term Facility amortizeswill amortize in quarterly installments at the following rates: 1.25% per quarter starting DecemberMarch 31, 20172022 through DecemberMarch 31, 2020,2025, 2.5% per quarter from March, 31, 2021 throughstarting June 30, 2022,2025 through September 30, 2026, with the balance due on September 12, 2022. November 18, 2026. Principal amounts repaid on the Term Facility may not be reborrowed.
The 2021 Revolving Facility provides aggregate commitments of up to $500.0 million, which includes up to $100.0 million for the issuance of letters of credit. At December 31, 2017, there were noOn July 1, 2022, we borrowed $340.0 million under the 2021 Revolving Facility to partially fund our acquisition of the Access Technologies business. We subsequently repaid $271.0 million, resulting in $69.0 million of borrowings outstanding on the 2021 Revolving Facility and weas of December 31, 2022. We also had $17.4$13.2 million of letters of credit outstanding.
outstanding as of December 31, 2022. Outstanding borrowings under the 2021 Revolving Facility may be repaid at any time without premium or penalty, and amounts repaid may be reborrowed.
Outstanding borrowings under the 2021 Credit Facilities accrue interest at our option of (i) a LIBORBloomberg Short-Term Bank Yield Index (“BSBY”) rate plus thean applicable margin, or (ii) a base rate (as defined in the Credit Agreement) plus thean applicable margin. The applicable margin ranges from 1.125%0.875% to 1.500%1.375% depending on our credit ratings. To manage our exposure to fluctuationsAt December 31, 2022, outstanding borrowings under the 2021 Credit Facilities accrued interest at BSBY plus a margin of 1.125%, resulting in LIBOR rates, we havean interest rate swapsof 5.498%. The Credit Agreement also contains negative and affirmative covenants and events of default that, among other things, limit or restrict our ability to fixenter into certain transactions. In addition, the Credit Agreement requires us to comply with a maximum leverage ratio as defined within the agreement. As of December 31, 2022, our leverage ratio of approximately 2.5 was significantly below the covenant requirement, and we do not anticipate any potential concerns for at least the next 12 months.
On June 22, 2022, we issued $600.0 million aggregate principal amount of 5.411% Senior Notes due 2032 (the “5.411% Senior Notes”). The 5.411% Senior Notes require semi-annual interest rate for $250.0payments on January 1 and July 1, beginning January 1, 2023, and will mature on July 1, 2032. We incurred and deferred $5.9 million of discounts and financing costs associated with the outstanding borrowings (see Note 10).
5.411% Senior Notes, which will be amortized to Interest expense over their 10-year term, as well as $4.3 million of third party financing costs that were recorded within Interest expense.
As of December 31, 2017,2022, we also have $400.0 million outstanding of 3.200% Senior Notes due 2024 (the “3.200% Senior Notes”) and, $400.0 million outstanding of 3.550% Senior Notes due 2027 (the “3.550% Senior Notes”) and together with$400.0 million outstanding of 3.500% Senior Notes due 2029 (the “3.500% Senior Notes”, and all four senior notes collectively, the "Senior Notes"). The 3.200% Senior Notes, the “Notes”), both of which were issued on October 2, 2017. The3.550% Senior Notes and 3.500% Senior Notes all require semi-annual interest payments on April 1 and October 1 of each year, and will mature on October 1, 2024, October 1, 2027, and October 1, 2027,2029, respectively.
Historically, the majority of our earnings were considered to be permanently reinvested in jurisdictions where we have made, and intend to continue to make, substantial investments to support the ongoing development and growth of our global operations. As a result of the Tax Reform Act transition tax,At December 31, 2022, we are currently analyzinganalyzed our global working capital requirements and the potential tax liabilities that would be incurred if certain non-U.S. subsidiaries made distributions and concluded that no material changes to our historic permanent reinvestment assertions were required.
Scheduled future principal repayments on our outstanding indebtedness can be found in Note 9 to the Consolidated Financial Statements. Expected principal and interest payments related to our long-term indebtedness in 2023 amount to $12.6 million and $90.9 million, respectively, given our current level of indebtedness and effective interest rates as of December 31, 2022.
Contractual Obligations and Other Commitments
In addition to the scheduled principal and interest payments discussed above, our material cash requirements include the following contractual and other obligations:
Purchase Commitments – We occasionally enter into short-term, firm purchase commitments to mitigate pricing risk related to certain of our commodity, parts and component purchases, which include local country withholding taxrepresent commitments under enforceable and potential U.S. state taxation. Welegally binding agreements. Such purchase commitments are made in the normal course of business and are not yet ableanticipated to reasonably estimatematerially impact our liquidity or financial position over the effect of this provision ofnext 12 months.
Leases – We have numerous real estate and equipment leasing arrangements for which we are a lessee. See Note 11 to the Tax Reform ActConsolidated Financial Statements for further information as to the short and have not recorded any withholding or state taxlong-term lease liabilities or any deferred taxes attributable to our investment in our non-U.S. subsidiaries. included within the Consolidated Balance Sheets, as well as future minimum lease payments for 2023 and future years.
At December 31, 2017, we had cash and cash equivalents of $466.2 million. Approximately 34% of our cash and cash equivalents were located outside the U.S.
PensionDefined Benefit Plans
– Our investment objective in managing defined benefit plan assets is to ensure that all present and future benefit obligations are met as they come due. We seek to achieve this goal while trying to mitigate volatility in plan funded status, contributioncontributions and expense by better matching the characteristics of the plan assets to that of the plan liabilities. Global asset allocation decisions are based on a dynamic approach whereby a plan's allocation to fixed income assets increases as the funded status increases. We monitor plan funded status, and asset allocation regularly in addition to investment manager performance.
We monitorand the impact of market conditions on our defined benefit plans on a regular basis. In January 2017, we made a discretionary $50.0 million contributionregularly in addition to the U.S. qualifiedinvestment manager performance. None of our defined benefit pension plan. plans have experienced a significant impact on their liquidity due to volatility in the markets.
At December 31, 2017, the funded status of our qualified pension plan for U.S. employees increased to 93.3% from 73.6% at December 31, 2016, primarily as a result of this discretionary contribution. The funded status for our non-U.S. pension plans increased to 100.5% at December 31, 2017 from 92.9% at December 31, 2016. Funded status for all of our pension plans at December 31, 2017 increased to 95.5% from 83.3% at December 31, 2016. For further details on pension plan activity, see Note 11 to the Consolidated Financial Statements.
Contractual Obligations
The following table summarizes our contractual cash obligations by required payment periods, in millions:
|
| | | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2019-2020 | | 2021-2022 | | Thereafter | | Total |
Long-term debt (including current maturities) | | $ | 35.0 |
| | $ | 70.0 |
| | $ | 586.3 |
| | $ | 801.0 |
| | $ | 1,492.3 |
|
Interest payments on long-term debt | | 46.7 |
| | 90.5 |
| | 82.5 |
| | 89.9 |
| | 309.6 |
|
Purchase obligations | | 169.5 |
| | — |
| | — |
| | — |
| | 169.5 |
|
Operating leases | | 20.5 |
| | 30.9 |
| | 12.0 |
| | 13.3 |
| | 76.7 |
|
Total contractual cash obligations | | $ | 271.7 |
| | $ | 191.4 |
| | $ | 680.8 |
| | $ | 904.2 |
| | $ | 2,048.1 |
|
Future expected obligations under our pension and postretirement benefit plans, income taxes, environmental and product liability matters have not been included in the contractual cash obligations table above.
Pensions
At December 31, 2017,2022, we had net pension liabilities of $32.2$12.1 million, which consist of plan assets of $681.6$490.7 million and benefit obligations of $713.8$502.8 million. It is our objective to contribute to theour pension plans in order to ensure adequate funds are available in the plans to make benefit payments to plan participants and beneficiaries when required. At December 31, 2022, the funded status of our U.S. pension plans increased to 97.8% from 97.2% at December 31, 2021. The funded status for our non-U.S. pension plans decreased to 97.4% at December 31, 2022 from 107.7% at December 31, 2021. The funded status for all of our pension plans increased to 95.5% at December 31, 20172022 decreased to 97.6% from 83.3%103.0% at December 31, 2016.2021. We currently project that an additionalexpect to contribute approximately $13.5$12 million will be contributed to our plans worldwide in 2018.Because2023.
Determining the timingcosts and amountsobligations associated with our defined benefit plans is dependent on various actuarial assumptions including discount rates, expected returns on plan assets, employee mortality and turnover rates. Changes in any of long-term funding requirements forthe assumptions can have an impact on the net periodic pension obligations are uncertain, theybenefit cost. An estimated 0.5% rate decline in the discount rate would have been excluded fromincreased net periodic pension benefit cost by approximately $0.6 million in 2022, while a 0.5% rate decline in the preceding table. Seeestimated return on assets would have increased net periodic pension benefit cost by approximately $2.4 million. For further details on defined benefit plan activity, see Note 1112 to the Consolidated Financial Statements for additional information.Statements.
Postretirement Benefits Other than Pensions
Income Taxes – At December 31, 2017, we had postretirement benefit obligations of $9.3 million. We fund postretirement benefit costs principally on a pay-as-you-go basis as medical costs are incurred by covered retiree populations. Benefit payments, which are net of expected plan participant contributions and Medicare Part D subsidy, are expected to be approximately $0.9 million in 2018. Because the timing and amounts of long-term funding requirements for postretirement obligations are uncertain, they have been excluded from the preceding table. See Note 11 to the Consolidated Financial Statements for additional information.
Income Taxes
At December 31, 2017,2022, we have total unrecognized tax benefits for uncertain tax positions of $29.0$45.2 million and $4.9$11.0 million of related accrued interest and penalties, net of tax. The liability has been excluded from the preceding table astax, although we are unable to reasonably estimate the amount and period intiming over which these liabilities might be paid. See Note 1718 to the Consolidated Financial Statements for additional information regarding matters relating to income taxes, including unrecognized tax benefits and tax authority disputes.
Contingent Liabilities
– We are involved in various litigations,litigation, claims and administrative proceedings, including those related to environmental, asbestos-related and product liability matters. We believe that these liabilities are subject to the uncertainties inherent in estimating future costs for contingent liabilities and will likely be resolved over an extended period of time. Because the timing and amounts of potential future cash flows are uncertain, they have been excluded from the preceding table. See Note 1921 to the Consolidated Financial Statements for additional information.
Guarantor Financial Information
Allegion US Hold Co is the issuer of the 3.200% Senior Notes, 3.550% Senior Notes and 5.411% Senior Notes and is the guarantor of the 3.500% Senior Notes. Allegion plc (the “Parent”) is the issuer of the 3.500% Senior Notes and is the guarantor of the 3.200% Senior Notes, 3.550% Senior Notes and 5.411% Senior Notes. Allegion US Hold Co is directly or indirectly 100% owned by the Parent and each of the guarantees of Allegion US Hold Co and the Parent is full and unconditional and joint and several.
The 3.200% Senior Notes, 3.550% Senior Notes and 5.411% Senior Notes are senior unsecured obligations of Allegion US Hold Co and rank equally with all of Allegion US Hold Co’s existing and future senior unsecured and unsubordinated indebtedness. The guarantee of the 3.200% Senior Notes, 3.550% Senior Notes and 5.411% Senior Notes is the senior unsecured obligation of the Parent and ranks equally with all of the Parent’s existing and future senior unsecured and unsubordinated indebtedness. The 3.500% Senior Notes are senior unsecured obligations of the Parent and rank equally with all of the Parent’s existing and future senior unsecured and unsubordinated indebtedness. The guarantee of the 3.500% Senior Notes is the senior unsecured obligation of Allegion US Hold Co and ranks equally with all of Allegion US Hold Co's existing and future senior unsecured and unsubordinated indebtedness.
Each guarantee is effectively subordinated to any secured indebtedness of the Guarantor to the extent of the value of the assets securing such indebtedness. The Senior Notes are structurally subordinated to indebtedness and other liabilities of the
subsidiaries of the Guarantor, none of which guarantee the notes. The obligations of the Guarantor under its Guarantee are limited as necessary to prevent such Guarantee from constituting a fraudulent conveyance under applicable law and, therefore, are limited to the amount that the Guarantor could guarantee without such Guarantee constituting a fraudulent conveyance; this limitation, however, may not be effective to prevent such Guarantee from constituting a fraudulent conveyance. If the Guarantee was rendered voidable, it could be subordinated by a court to all other indebtedness (including guarantees and other contingent liabilities) of the Guarantor, and, depending on the amount of such indebtedness, the Guarantor’s liability on its Guarantee could be reduced to zero. In such an event, the notes would be structurally subordinated to the indebtedness and other liabilities of the Guarantor.
For further details, terms and conditions of the Senior Notes refer to the Company’s Forms 8-K filed October 2, 2017, September 27, 2019, and June 22, 2022.
The following tables present the summarized financial information specified in Rule 1-02(bb)(1) of Regulation S-X for each issuer and guarantor. The summarized financial information has been prepared in accordance with Rule 13-01 of Regulation S-X.
Selected Condensed Statement of Comprehensive Income Information
| | | | | | | | | | | |
| Year ended December 31, 2022 |
In millions | Allegion plc | | Allegion US Hold Co |
Net revenues | $ | — | | | $ | — | |
Gross profit | — | | | — | |
Operating loss | (6.7) | | | (14.4) | |
Equity earnings in affiliates, net of tax | 505.9 | | | 195.5 | |
Transactions with related parties and subsidiaries(a) | (21.1) | | | (79.6) | |
Net earnings | 458.0 | | | 85.0 | |
Net earnings attributable to the entity | 458.0 | | | 85.0 | |
(a) Transactions with related parties and subsidiaries include intercompany interest and fees.
Selected Condensed Balance Sheet Information
| | | | | | | | | | | |
| December 31, 2022 |
In millions | Allegion plc | | Allegion US Hold Co |
Current assets: | | | |
Amounts due from related parties and subsidiaries | $ | — | | | $ | 380.2 | |
Total current assets | 3.3 | | | 417.4 | |
Noncurrent assets: | | | |
Amounts due from related parties and subsidiaries | — | | | 1,523.9 | |
Total noncurrent assets | 1,792.6 | | | 1,596.6 | |
Current liabilities: | | | |
Amounts due to related parties and subsidiaries | $ | 45.9 | | | $ | 278.8 | |
Total current liabilities | 65.3 | | | 303.5 | |
Noncurrent liabilities: | | | |
Amounts due to related parties and subsidiaries | 659.5 | | | 2,694.5 | |
Total noncurrent liabilities | 1,282.0 | | | 4,166.1 | |
Critical Accounting PoliciesEstimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformityaccordance with those accounting principlesGAAP requires management to use judgment in making estimates and assumptions based on the relevant information available at the end of each period. These estimates and assumptions have a significant effect on reported amounts of assets and liabilities, revenuerevenues and expenses as well as the disclosure of contingent assets and liabilities because they result primarily from the need to make estimates and assumptions on matters that are inherently uncertain. Actual results may differ from estimates. If updated information or actual amounts are different from previous estimates, the revisions are included in our results for the period in which they become known.
The following is a summary of certain accounting estimates and assumptions made by management that we consider critical:
Allowance for doubtful accounts •Goodwill – We have provided an allowance for doubtful accounts receivable, which represents our best estimate of probable loss inherent in our accounts receivable portfolio. This estimateGoodwill is based upon our policy, derived from our knowledge of our end markets, customer base and products.
Goodwill and indefinite-lived intangible assets – We have significant goodwill and indefinite-lived intangible assets on our balance sheet related to acquisitions. Our goodwill and other indefinite-lived intangible assets are tested annually during the fourth quarter for impairment or when there is a significant change in events or circumstances that indicate that the fair value of an asseta reporting unit is, more likely than not, less than theits carrying amount
amount. Recoverability of goodwill is measured at the reporting unit level and starts with a comparison of the carrying amount of thea reporting unit to its estimated fair value. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. To the extent that the carrying value of thea reporting unit exceeds its estimated fair value, a goodwill impairment charge will be recognized for the amount by which the carrying value of the reporting unit exceeds its fair value, not to exceed the carrying amount of the reporting unit's goodwill.
As quoted market prices are not available for our reporting units, the calculation of their estimated fair valuevalues is based on two valuation techniques, a discounted cash flow model (income approach) and a market adjusted multiple of earnings and revenues (market approach), with each method being weighted in the calculation. The income approach relies on the Company’sour estimates of revenue growth rates, margin assumptions and discount rates to estimate future cash flows and explicitly addresses factors such as timing, growth and margins, with due consideration given to forecasting risk. These assumptions are subject to varying degrees of judgment and complexity. Estimates of future revenue growth rates and margin assumptions represent our best estimates of future cash flows given our expectations of market growth for the security products industry in the specific markets in which we operate, as well as factors such as our market positioning, brand strength, pricing and marketing efforts and other growth and productivity opportunities and initiatives. Discount rate assumptions represent our best estimates of market participant adjusted weighted-average costs of capital. Although these assumptions represent our best estimates as of the assessment date, certain factors could potentially create variances in these estimates, including, but not limited to:
•Decreases in estimated market sizes or market growth rates due to greater than expected declines in volumes, pricing pressures or disruptive technology;
•Declines in our market share and penetration assumptions due to increased competition or an inability to develop or launch new products;
•The impacts of market volatility, including but not limited to, impacts of global pandemics, greater than expected inflation, supply chain disruption and delays, declines in pricing, reductions in volumes or fluctuations in foreign currency exchange rates;
•The level of success of on-going and future research and development efforts, including those related to acquisitions, and increases in the research and development costs necessary to obtain regulatory approvals and launch new products; and
•Volatility in market interest rates that could impact the selection of an appropriate discount rate.
The market approach requires determining an appropriate peer group, which is utilized to derive estimated fair values of our reporting units based on selected market multiples. The market approach reflects the market’s expectations for future growth and risk, with adjustments to account for differences between the guideline publicly-tradedselected peer group companies and the subject reporting units.
The estimated fair values for each While market multiples are based on observable, arm’s-length evidence of value, these assumptions are still subject to inherent uncertainty, as the peer-group companies may differ in significant ways from one or more of our reporting units exceeded their carrying values by more than 15% for the 2017 goodwill impairment test. Additionally, a 1% increase in theterms of size, growth or business characteristics.
The critical accounting estimates and assumptions discussed above, include our estimates of revenue growth rates and margin assumptions, discount rate used or a 1% decrease in the terminal growth rate would not result in the carrying valuerates, our selection of any reporting unit exceeding its estimated fair value.
Assessing the fair value of our reporting units includes, among other things, making key assumptions for estimating future cash flowsan appropriate peer group and appropriateselected market multiples. These estimates and assumptions are considered critical, as they are subject to a high degree of judgment and complexity. WeThe selection of an applicable peer group has not significantly changed in recent years. Forecasted revenue growth rates and margin assumptions are updated annually and often fluctuate from year to year due to a myriad of factors, such as our assessment of the macroeconomic conditions throughout the major markets in which we do business, navigating the COVID-19 pandemic, supply chain challenges, elevated levels of inflation in recent years and pricing initiatives to offset inflation, market acceptance of new product innovation, investments in productivity projects, restructuring efforts, among other economic, strategic and operational factors impacting our businesses. Discount rate and market multiple assumptions are similarly updated annually, based on our best estimates of market participants, which typically include observable, arm's length-evidence of value, where possible. While we make every effort to estimate future cash flowsfair value as accurately as possible with the information available at the time the forecast is developed. However,assessment date, changes in assumptions and estimates may affect the estimated fair value of the reporting unit and could result in impairment charges in future periods. FactorsDuring our most recent annual impairment analysis, none of our reporting units were determined to be at risk of impairment.
•Indefinite-lived intangible assets – Similar to goodwill, indefinite-lived intangible assets are tested annually during the fourth quarter for impairment or when there is a significant change in events or circumstances that haveindicate the potential to create variances in the estimated fair value of the reporting unit include but areasset is, more likely than not, limited to the following:
Decreases in estimated market sizes or market growth rates due to greater-than-expected declines in volumes, pricing pressures or disruptive technology;
Declines in our market share and penetration assumptions due to increased competition or an inability to develop or launch new products;
The impactsless than its carrying amount. Recoverability of the market volatility, including greater-than-expected declines in pricing, reductions in volumes, or fluctuations in foreign exchange rates;
The level of success of on-going and future research and development efforts, including those related to recent acquisitions, and increases in the research and development costs necessary to obtain regulatory approvals and launch new products;
Increase in the price or decrease in the availability of key commodities and the impact of higher energy prices; and
Increases in our market-participant risk-adjusted weighted-average cost of capital.
Other Indefinite-lived intangible assets - We performed our annual indefinite-lived intangible asset impairment testing in 2017 and determined our indefinite-lived intangible assets were not impaired. Recoverability of intangible assets with indefinite useful lives is determined on a relief from royalty methodology, (income approach), which is based on the implied royalty paid, at an appropriate discount rate, to license the use of an asset rather than owning the asset. The present value of the after-tax cost savings (i.e. royalty relief) indicates the estimated fair value of the asset. Any excess of the carrying value over the estimated fair value is recognized as an impairment loss equal to that excess.
A significant increase The critical assumptions utilized in our annual impairment analysis for indefinite-lived intangible assets are the royalty rates and discount rates, which often differ amongst our various indefinite-lived assets. We assess the appropriateness of each royalty rate assumption annually, based on our assessment of observable market royalty rates and an analysis of the profitability of the primary business that owns or otherwise uses the indefinite-lived asset. Discount rate assumptions typically consider the discount rate decreaseconclusions for
the reporting unit in which an underlying business operates, plus an incremental spread, where appropriate, to consider size, country or other company-specific risk. A significant change in any or a combination of the long-term growth rate, decrease in the royalty rate or substantial reductions inassumptions used to estimate fair value of our end markets and volume assumptionsindefinite-lived intangible assets could have a negative impact on the estimated fair values of any of our trade names. The estimates of fair value are based on the best information available as of the date of the assessment, which primarily incorporates management assumptions about expected future cash flows.values.
Long-lived assets and finite-lived intangibles – Long-lived assets and finite-lived intangibles are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be fully recoverable. Assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows can be generated. Impairment in the carrying value of an asset could be recognized whenever anticipated future undiscounted cash flows from an asset are less than its carrying value. The impairment is measured as the amount by which the carrying value exceeds the fair value of the asset as determined by an estimate of discounted cash flows. We believe that our use of estimates and assumptions are reasonable and comply with generally accepted accounting principles. Changes in business conditions could potentially require future adjustments to these valuations.
Loss contingencies – Liabilities are recorded for various contingencies arising in the normal course of business, including litigation and administrative proceedings, environmental and asbestos matters and product liability, product warranty, worker’s compensation and other claims. We have recorded reserves in the consolidated financial statements related to these matters, which are developed using input derived from actuarial estimates and historical and anticipated experience
data depending on the nature of the reserve, and in certain instances with consultation of legal counsel, internal and external consultants and engineers. Subject to the uncertainties inherent in estimating future costs for these types of liabilities, we believe our estimated reserves are reasonable and do not believe the final determination of the liabilities with respect to these matters would have a material effect on our financial condition, results of operations, liquidity or cash flows for any year.
Revenue recognition – Revenue is recognized and earned when all of the following criteria are satisfied: (a) persuasive evidence of a sales arrangement exists; (b) the price is fixed or determinable; (c) collectability is reasonably assured; and (d) delivery has occurred or service has been rendered. Delivery generally occurs when the title and the risks and rewards of ownership have transferred to the customer. Both the persuasive evidence of a sales arrangement and fixed or determinable price criteria are deemed to be satisfied upon receipt of an executed and legally binding sales agreement or contract that clearly defines the terms and conditions of the transaction including the respective obligations of the parties. If the defined terms and conditions allow variability in all or a component of the price, revenue is not recognized until such time that the price becomes fixed or determinable. At the point of sale, we validate that existence of an enforceable claim that requires payment within a reasonable amount of time and assesses the collectability of that claim. If collectability is not deemed to be reasonably assured, then revenue recognition is deferred until such time that collectability becomes probable or cash is received. Delivery is not considered to have occurred until the customer has taken title and assumed the risks and rewards of ownership. Service and installation revenue are recognized when earned. In some instances, customer acceptance provisions are included in sales arrangements to give the buyer the ability to ensure the delivered product or service meets the criteria established in the order. In these instances, revenue recognition is deferred until the acceptance terms specified in the arrangement are fulfilled through customer acceptance or a demonstration that established criteria have been satisfied. If uncertainty exists about customer acceptance, revenue is not recognized until acceptance has occurred.
We offer various sales incentive programs to our customers, dealers, and distributors. Sales incentive programs do not preclude revenue recognition, but do require an accrual for our best estimate of expected activity. Examples of the sales incentives that are accrued for as a contra receivable and sales deduction at the point of sale include, but are not limited to, discounts (i.e. net 30 type), coupons, and rebates where the customer does not have to provide any additional requirements to receive the discount. Sales returns and customer disputes involving a question of quantity or price are also accounted for as a reduction in revenue and a contra receivable. At December 31, 2017 and 2016, we had a customer claim accrual (contra receivable) of $32.5 million and $29.0 million, respectively. All other incentives or incentive programs where the customer is required to reach a certain sales level, remain a customer for a certain period, provide a rebate form or is subject to additional requirements are accounted for as a reduction of revenue and establishment of a liability. At December 31, 2017 and 2016, we had a sales incentive accrual of $31.8 million and $29.6 million, respectively. Each of these accruals represents our best estimate we expect to pay related to previously sold units based on historical claim experience. These estimates are reviewed regularly for accuracy. If updated information or actual amounts are different from previous estimates, the revisions are included in our results for the period in which they become known. Historically, the aggregate differences, if any, between our estimates and actual amounts in any year have not had a material impact on our consolidated financial statements.
•Income taxes – We account for income taxes in accordance with ASC Topic 740. Deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. We recognize future tax benefits, such as net operating losses and non-U.S. tax credits, to the extent that realizing these benefits is considered in our judgment to be more likely than not. We regularly review theThe recoverability of our deferred tax assets, which we consider to be a critical estimate, is reviewed regularly by considering our historic profitability, projected future taxable income, timing of the reversals of existing temporary differences and the feasibility of our tax planning strategies. Where appropriate, we record a valuation allowance with respect to a future tax benefit.benefits. We establish valuation allowances against the realizability of any deferred tax assets based on our consideration of all available evidence, both positive and negative, using a “more likely than not” standard. This assessment considers the nature, frequency and amount of recent losses, the duration of statutory carryforward periods and tax planning strategies. Although our assessments of the valuation and recoverability of our deferred tax assets can change given a change in facts and circumstances (such as a change in a statutory tax rate), in making such judgments and estimates, significant weight is given to evidence that can be objectively verified.
The provision for income taxes also involves a significant amount of management judgment regarding interpretation of relevant facts and laws in the jurisdictions in which we operate. Future changes in applicable laws, projected levels of taxable income and tax planning could change the effective tax rate and tax balances recorded by us. In addition, tax authorities periodically review income tax returns filed by us and can raise issues regarding our filing positions, timing and amount of income or deductions and the allocation of income among the jurisdictions in which we operate. A significant period of time may elapse between the filing of an income tax return and the ultimate resolution of an issue raised by a revenuetax authority with respect to that return. We believe that we have adequately provided for any reasonably foreseeable resolution of these matters. Wematters and will adjust our estimateestimates if significant events so dictate. To the extent that the ultimate results differ from our original or adjusted estimates, the effect will be recorded in the provisionProvision for income taxes in the period that the matter is finally resolved.
The Tax Reform Act constitutes a major change to the U.S. tax system. The estimated impact of the Tax Reform Act is based on current interpretations and related assumptions. As discussed further in Note 17 to the Consolidated Financial
Statements, where applicable, we included provisional estimates in our consolidated financial statements for impacts of the new Tax Reform Act. The actual impact to us may be materially different from current estimates based on regulatory developments and our further analysis of the impacts of the Tax Reform Act. In future periods, our effective tax rate could be subject to additional uncertainty as a result of regulatory developments.
Employee benefit plans – We provide a range of benefits to eligible employees and retirees, including pensions, postretirement and postemployment benefits. Determining the cost associated with such benefits is dependent on various actuarial assumptions including discount rates, expected return on plan assets, compensation increases, employee mortality, turnover rates and healthcare cost trend rates. Actuarial valuations are performed to determine expense in accordance with GAAP. Actual results may differ from the actuarial assumptions and are generally accumulated and amortized into earnings over future periods.
We review our actuarial assumptions at each measurement date and make modifications to the assumptions based on current rates and trends, if appropriate. The discount rate, the rate of compensation increase and the expected long-term rates of return on plan assets are determined as of each measurement date. Discount rates for all plans are established using hypothetical yield curves based on the yields of corporate bonds rated AA quality. Spot rates are developed from the yield curve and used to discount future benefit payments. The rate of compensation increase is dependent on expected future compensation levels. The expected long-term rate of return on plan assets reflects the average rate of returns expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. The expected long-term rate of return on plan assets is based on what is achievable given the plan’s investment policy, the types of assets held and the target asset allocation. The expected long-term rate of return is determined as of each measurement date.
We believe that the assumptions utilized in recording our obligations under our plans are reasonable based on input from our actuaries, outside investment advisors and information as to assumptions used by plan sponsors.
Changes in any of the assumptions can have an impact on the net periodic pension cost or postretirement benefit cost. Estimated sensitivities to the expected 2017 net periodic pension cost of a 0.25% rate decline in the two basic assumptions are as follows: the decline in the discount rate would increase expense by approximately $0.8 million and the decline in the estimated return on assets would increase expense by approximately $0.7 million. A 1.0% increase in the healthcare cost trend rate would have no impact on expense as we have capped the annual maximum amount we will pay for retiree healthcare costs, therefore any additional costs would be assumed by the retiree.
•Business combinations – The fair value of the consideration paid in a business combination is allocated to tangible assets and identifiable intangible assets, liabilities assumed and goodwill. The accounting for acquisitionsbusiness combinations involves a considerable amount of judgment and estimate,estimation, including the identification of and fair valuevalues determined for acquired intangible assets, which typically include trade names, customer relationships and completed technologies. The determination of fair values of acquired intangible assets involvinginvolves projections of future revenues and cash flows that are either discounted at an estimated discount rate or measured at an estimated royalty rate; fair valuevalues of other acquired assets and assumed liabilities, including potential contingencies; and the useful lives of the acquired assets. The assumptions used are determined atDue to the timelevel of judgment and estimation required, in the acquisitioncase of significant acquisitions, we normally obtain the assistance of a third-party valuation specialist in estimating fair values of acquired tangible and intangible assets and assumed liabilities. An income approach or market approach (or both) is utilized in accordance with accepted valuation models. Projections aremodels to determine fair value. The determination of fair value of acquired assets typically requires the use of assumptions that include projections developed using historical information, internal forecasts, available industry and market data, and estimates of long-termrevenue growth rates. rates, profitability, customer attrition and discount and royalty rates, which are estimated at the time of acquisition, considering the perspective of marketplace participants. While we believe expectations and assumptions utilized for historical business combinations have been reasonable, they are inherently uncertain, and unanticipated market or macroeconomic events and circumstances occasionally do occur, and may occur in the future, which could affect the accuracy and validity of such assumptions.
For our acquisition of the Access Technologies business in 2022, we believe the critical assumptions that significantly impacted recorded amounts for identifiable intangible assets include the financial projections of future performance of the business, the royalty rate assumption utilized in determining the fair value of the finite-lived trade name asset and the allocation of revenues by customer type and attrition rate assumptions utilized in determining the fair value of the customer relationship asset. The royalty rate assumption utilized in the valuation of the trade name asset was determined based on a review of market royalty rates and an analysis of the Access Technologies business’ profitability. An increase or decrease of 1% in the royalty rate assumption would have resulted in an approximate $15 million change in the value ascribed to the trade name asset. The attrition rate assumption utilized in the valuation of the customer relationship asset was determined based on a detailed review of customer specific data for the Access Technologies business spanning multiple years, combined with our estimation of the likelihood of these trends continuing for the foreseeable future. An increase or decrease of 1% in the attrition rate assumption would have resulted in an approximate $15-20 million change in the value ascribed to the customer relationship asset.
The impact of prior or future acquisitionsbusiness combinations on our financial condition or results of operations may also be materially impacted by the change in or initial selection of assumptions and estimates.estimates, in addition to events and circumstances
subsequent to the acquisition that are not reasonably anticipated when finalizing our purchase accounting estimates and assumptions.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statementsConsolidated Financial Statements included in Item 158herein for a discussion of recently issued and adopted accounting pronouncements.
Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSUREDISCLOSURES ABOUT MARKET RISK
We are exposed to fluctuations in currency exchange rates, commodity prices and interest rates and commodity prices which could impact our results of operations and financial condition.
Foreign Currency Exposures
We have operations throughout the world that manufacture and sell products in various international markets. As a result, we are exposed to movements in exchange rates of various currencies against the U.S. dollar as well as against other currencies throughout the world. We actively manage material currency exposures that are associated with purchases and sales and other assets and liabilities at the legal entity level,level; however, we do not hedge currency translation risk. We attempt to hedge exposures that cannot be naturally offset to an insignificant amount with foreign currency derivatives. Derivative instruments utilized by us in our hedging activities are viewed as risk management tools, involve little complexity and are not used for trading or speculative purposes. To minimize the risk of counter party non-performance, derivative instrument agreements are made only through major financial institutions with significant experience in such derivative instruments.
We evaluate our exposure to changes in currency exchange rates on our foreign currency derivatives using a sensitivity analysis. The sensitivity analysis is a measurement of the potential loss in fair value based on a percentage change in exchange rates. Based on the firmly committed currency derivative instruments in place at December 31, 2017,2022, a hypothetical change in fair value of those derivative instruments assuming a 10% adverse change in exchange rates would result in an additional unrealized loss of approximately $7.4$1.5 million. This amount, when realized, would be partially offset by changes in the fair value of the underlying transactions.
Commodity Price Exposures
We purchase a wide range of raw material, including steel, zinc, brass and other non-ferrous metals, and are exposed to volatility in the prices of these and other commodities used in some of our products and weproducts. We use fixed price contracts to manage this exposure.exposure where appropriate. We do not have committed commodity derivative instruments in place at December 31, 2017.
2022.
Interest Rate Exposure
OutstandingOf our total outstanding indebtedness of $2.1 billion as of December 31, 2022, approximately 85% incurs fixed-rate interest and is therefore not exposed to the risk of rising variable interest rates. However, outstanding borrowings under our unsecuredthe 2021 Credit Facilities do accrue variable rate interest at theour option of the Company, at a per annum rate of (i) a LIBORBSBY rate plus the applicable margin or (ii) a base rate plus the applicable margin. The applicable margin forranges from 0.875% to 1.375% depending on our credit ratings. At December 31, 2022, the outstanding borrowings of $306.5 million under the 2021 Credit Facilities is subjectaccrue interest at BSBY plus a margin of 1.125%, resulting in an interest rate of 5.498%. Applicable variable interest rates increased throughout 2022, resulting in increased Interest expense. We are also exposed to a ratings-based pricing gridthe risk of rising interest rates to the extent that we fund our operations with the margin ranging from 1.125% to 1.500% depending on the Company's credit ratings. Outstandingshort-term or variable-rate borrowings, as we currently have unused availability of $417.8 million under the Term2021 Revolving Facility as of December 31, 2017, accrue interest at LIBOR plus an2022. If the BSBY or other applicable margin and expose us to interest rate risks.
The Company has entered into interest rate swaps to fix the interest rate paid during the contract period for $250 millionbase rates of the Company's variable rate Term Facility. These swaps expire in September 2020. A 100 basis point2021 Credit Facilities increase in LIBOR would have resulted in incremental 2017 interest expense of approximately $5.6 million. If the base interest rate in our credit facilities increases in the future, our floating-rate debtInterest expense could have a material effect on our interest expense.increase.
Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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(a) | The following Consolidated Financial Statements and Financial Statement Schedule and the report thereon of PricewaterhouseCoopers LLP dated February 20, 2018, are presented following Item 15 of this Annual Report on Form 10-K.(a)The following Consolidated Financial Statements and Financial Statement Schedule and the report thereon of PricewaterhouseCoopers LLP dated February 22, 2023, are presented following Item 16 of this Annual Report on Form 10-K. |
Consolidated Financial Statements:
Report of independent registered public accounting firm (PCAOB ID 238)
Consolidated statementsStatements of comprehensive incomeComprehensive Income for the years ended December 31, 2017, 20162022, 2021 and 20152020
Consolidated balance sheetsBalance Sheets at December 31, 20172022 and 20162021
For the years ended December 31, 2017, 20162022, 2021 and 2015:2020:
Consolidated statementsStatements of equityEquity
Consolidated statementsStatements of cash flowsCash Flows
Notes to Consolidated Financial Statements
Financial Statement Schedule:
Schedule II – Valuation and Qualifying Accounts for the years ended December 31, 2017, 20162022, 2021 and 20152020
| |
(b) | The unaudited selected quarterly financial data for the two years ended December 31, is as follows:
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| | | | | | | | | | | | | | | | |
In millions, except per share amounts | | 2017 |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
Net revenues | | $ | 548.8 |
| | $ | 627.0 |
| | $ | 609.4 |
| | $ | 623.0 |
|
Cost of goods sold | | 308.0 |
| | 346.0 |
| | 335.5 |
| | 348.0 |
|
Operating income | | 98.8 |
| | 134.1 |
| | 126.1 |
| | 129.2 |
|
Net earnings | | 68.7 |
| | 105.8 |
| | 90.1 |
| | 12.1 |
|
Net earnings attributable to Allegion plc | | 68.4 |
| | 105.5 |
| | 89.8 |
| | 9.6 |
|
Earnings per share attributable to Allegion plc ordinary shareholders: | | | | | | | | |
Basic | | $ | 0.72 |
| | $ | 1.11 |
| | $ | 0.95 |
| | $ | 0.10 |
|
Diluted | | $ | 0.71 |
| | $ | 1.10 |
| | $ | 0.94 |
| | $ | 0.10 |
|
| | | | | | | | |
| | | | | | | | |
In millions, except per share amounts | | 2016 |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
Net revenues | | $ | 502.3 |
| | $ | 584.9 |
| | $ | 581.1 |
| | $ | 569.7 |
|
Cost of goods sold | | 286.0 |
| | 317.5 |
| | 317.6 |
| | 331.6 |
|
Operating income | | 82.5 |
| | 124.3 |
| | 121.5 |
| | 97.2 |
|
Net earnings | | 58.8 |
| | 95.4 |
| | 2.0 |
| | 75.0 |
|
Net earnings attributable to Allegion plc | | 57.7 |
| | 95.0 |
| | 1.6 |
| | 74.8 |
|
Earnings per share attributable to Allegion plc ordinary shareholders: | | | | | | | | |
Basic | | $ | 0.60 |
| | $ | 0.99 |
| | $ | 0.02 |
| | $ | 0.78 |
|
Diluted | | $ | 0.60 |
| | $ | 0.98 |
| | $ | 0.02 |
| | $ | 0.77 |
|
| | | | | | | | |
Net earnings from the fourth quarter of 2017 includes a $41.3 million charge related to the refinancing of our senior notes and a net tax charge of $53.5 million related to the U.S. Tax Reform Act.
Net earnings from the third quarter of 2016 includes an after tax $84.4 million loss on divestiture related to the write-down of the carrying value of consideration receivable related to the 2015 divestiture of our systems integration business in China.
Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
Item 9A.CONTROLS AND PROCEDURES
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(a) | Evaluation of Disclosure Controls and Procedures |
The Company's management, including its Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, of 1934, as amended (the Exchange Act)), as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded as of December 31, 2017,2022, that the Company's disclosure controls and procedures were effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act has been recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms, and that such information has been accumulated and communicated to the Company's management including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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(b) | Management's Report on Internal Control Over Financial Reporting |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined under Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:
•pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017.2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). We concluded that our internal control over financial reporting was effective as of December 31, 2017.2022. Management's assessment of and conclusion on the effectiveness of internal controls over financial reporting did not include the internal controls of the Access Technologies business, which we acquired
in July 2022. Due to the timing of this acquisition, and as permitted by SEC guidance, management excluded the Access Technologies business from its December 31, 2022, assessment of internal control over financial reporting.
The effectiveness of our internal control over financial reporting has been audited by PricewaterhouseCoopers LLP, the independent registered public accounting firm, as stated in their report herein.
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(c) | Changes in Internal Control Over Financial Reporting |
There were no changes in the Company's internal control over financial reporting that occurred during the quarter ended December 31, 20172022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.OTHER INFORMATION
None.
Item 9C.DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
Item 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information regarding our executive officers is included in Part I under the caption "Executive Officers of the Registrant."
The other information required by this item is incorporated herein by reference to the information contained under the headings "Item 1. Election of Directors", "SectionDirectors," "Delinquent Section 16(a) Beneficial Ownership Reporting Compliance"Reports" and "Corporate Governance" in our Proxy Statement.
Item 11.EXECUTIVE COMPENSATION
The other information required by this item is incorporated herein by reference to the information contained under the headings "Compensation Discussion and Analysis",Analysis," "Executive Compensation" and "Compensation Committee Report" in our Proxy Statement.
Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The other information required by this item is incorporated herein by reference to the information contained under the headings "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" of our Proxy Statement.
Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The other information required by this item is incorporated herein by reference to the information contained under the headings "Corporate Governance" and "Certain Relationships and Related Person Transactions" of our Proxy Statement.
Item 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to the information contained under the caption "Fees of the Independent Auditors" in our Proxy Statement.
PART IV
Item 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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(a) 1. and 2. | Financial statements and financial statement schedule See Item 8.
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3. | Exhibits |
| The exhibits listed on the accompanying index to exhibits are filed as part of this Annual Report on Form 10-K. |
ALLEGION PLC
INDEX TO EXHIBITS
(Item 15(a))
Description
Pursuant to the rules and regulations of the SEC, we haveCertain agreements filed certain agreements as exhibits to this Annual Report on Form 10-K. These agreements10-K may contain representations and warranties by the parties.parties thereto. These representations and warranties have been made solely for the benefit of the other party or parties to such agreements and (i) may have been qualified by confidential disclosures made toby parties in connection with such other party or parties,agreements, (ii) were made only as of the date of such agreements or such other date(s) as may be specified in such agreements and are subject to more recent developments, which may or may not be fully reflected in our public disclosure, (iii) maywere included in such agreements solely to reflect the allocation of risk among the parties to such agreements and (iv) may apply materiality standards different from what may be viewed as material to investors. Accordingly,Investors are not third-party beneficiaries under such agreements, and accordingly, should not rely on these representations and warranties may not describeas characterizations of our actual state of affairs at the date hereof and should not be relied upon.thereof or hereof.
(a) Exhibits
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Exhibit Number
| | Exhibit Description | | Method of Filing |
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| | Separation and Distribution Agreement between Ingersoll-Rand plc and Allegion plc, dated November 29, 2013.
| | Incorporated by reference to Exhibit 2.1 toof the Company’s Form 8-K filed with the SEC on December 2, 2013 (File No. 001-35971). |
| | | |
|
| | Amended and Restated Memorandum and Articles of Association of Allegion plc
plc.
| | Incorporated by reference to Exhibit 3.1 toof the Company’s Form 8-K filed with the SEC on June 13, 2016 (File No. 001-35971). |
| | | |
|
| | Certificate of Incorporation of Allegion plc | | Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971). |
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| | Indenture, dated as of October 2, 2017, among Allegion US Holding Company Inc., Allegion plc and Wells Fargo Bank, National Association. | | Incorporated by reference to Exhibit 4.1 of Allegion plc's Current Report onthe Company's Form 8-K filed October 2, 2017.2017 (File No. 001-35971). |
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| | First Supplemental Indenture, dated as of October 2, 2017, among Allegion US Holding Company Inc., Allegion plc and Wells Fargo Bank, National Association. | | Incorporated by reference to Exhibit 4.2 of Allegion plc's Current Report onthe Company's Form 8-K filed October 2, 2017.2017 (File No. 001-35971). |
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| | Form of Global Note representing the 3.200% Senior Notes due 2024. | | Incorporated by reference to Exhibit 4.3 of Allegion plc's Current Report onthe Company's Form 8-K filed October 2, 2017 (included in Exhibit 4.2) (File No. 001-35971). |
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| | Second Supplemental Indenture, dated as of October 2, 2017, among Allegion US Holding Company Inc., Allegion plc and Wells Fargo Bank, National Association. | | Incorporated by reference to Exhibit 4.4 of Allegion plc's Current Report onthe Company's Form 8-K filed October 2, 2017.2017 (File No. 001-35971). |
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| | Form of Global Note representing the 3.550% Senior Notes due 2027. | | Incorporated by reference to Exhibit 4.5 of Allegion plc's Current Report onthe Company's Form 8-K filed October 2, 2017 (included in Exhibit 4.4) (File No. 001-35971). |
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| | Third Supplemental Indenture, dated as of September 27, 2019, among Allegion plc, Allegion US Holding Company Inc. and Wells Fargo Bank, National Association. | | Incorporated by reference to Exhibit 4.2 of the Company’s Form 8-K filed September 27, 2019 (File No. 001-35971). |
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| | Form of Global Note representing the 3.500% Senior Notes due 2029. | | Incorporated by reference to Exhibit 4.3 of the Company's Form 8-K filed September 27, 2019 (included in Exhibit 4.2) (File No. 001-35971). |
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| | Fourth Supplemental Indenture, dated as of June 22, 2022, among Allegion plc, Allegion US Holding Company Inc., and Computershare Trust Company, N.A. as successor to Wells Fargo Bank National Association. | | Incorporated by reference to Exhibit 4.2 of the Company’s Form 8-K filed June 22, 2022 (File No. 001-35971). |
| | Form of Global Note representing the 5.411% Senior Notes due 2032. | | Incorporated by reference to Exhibit 4.3 of the Company's Form 8-K filed June 22,2022 included in Exhibit 4.2) (File No. 001-35971). |
| | Description of the Registrant’s Securities registered pursuant to Section 12 of the Securities Exchange Act of 1934. | | Incorporated by reference to Exhibit 4.8 of the Company’s Form 10-K filed with the SEC on February 18, 2020 (File No. 001-35971). |
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| Form of Separation Agreement and Release. * | | Incorporated by reference to Exhibit 10.1 of the Company’s Form 10-K filed with the SEC on February 19, 2019 (File No. 001-35971). |
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| | Tax Matters Agreement between Ingersoll-Rand plc and Allegion plcplc. | | Incorporated by reference to Exhibit 10.1 toof the Company’s Form 8-K filed with the SEC on December 2, 2013 (File No. 001-35971). |
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| | Credit Agreement, dated as of September 12, 2017.November 18, 2021. | | Incorporated by reference to Exhibit 10.1 of Allegion plc's Current Report onthe Company's Form 8-K filed September 15, 2017.November 18, 2021 (File No. 001-35971). |
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| | Employee Matters Agreement between Ingersoll-Rand plc and Allegion plcplc. | | Incorporated by reference to Exhibit 10.2 toof the Company’s Form 8-K filed with the SEC on December 2, 2013 (File No. 001-35971). |
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| | 2013 Incentive Stock PlanPlan. * | | Incorporated by reference to Exhibit 10.5 toof the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971). |
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| | Executive Deferred Compensation PlanPlan. * | | Incorporated by reference to Exhibit 10.6 toof the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971). |
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| | Supplemental Employee Savings PlanPlan. * | | Incorporated by reference to Exhibit 10.7 of the Company’s Form 10-K filed with the SEC on February 18, 2020 (File No. 001-35971). |
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| | Elected Officer Supplemental Program. * | | Incorporated by reference to Exhibit 10.8 of the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971). |
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| Key Management Supplemental Program. * | Elected Officer Supplemental Program | | Incorporated by reference to Exhibit 10.8 to10.9 of the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971). |
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| Supplemental Pension Plan. * | Key Management Supplemental Program | | Incorporated by reference to Exhibit 10.9 to10.10 of the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971). |
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| Senior Executive Performance Plan. * | Supplemental Pension Plan | | Incorporated by reference to Exhibit 10.10 to10.11 of the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971). |
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| David D. Petratis Offer Letter, dated June 19, 2013. * | Senior Executive Performance Plan | | Incorporated by reference to Exhibit 10.11 to10.14 of the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971). |
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| | David D. PetratisPatrick S. Shannon Offer Letter, dated June 19, 2013April 9, 2013. * | | Incorporated by reference to Exhibit 10.14 to10.15 of the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971). |
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| | Patrick S. ShannonTimothy P. Eckersley Offer Letter, dated April 9, 2013March 3, 2021. * | | Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed with the SEC on March 10, 2021 (File No. 001-35971). |
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| | Jeffrey N. Braun Offer Letter, dated June 13, 2014. * | | Incorporated by reference to Exhibit 10.15 of the Company's Form 10-K filed with the SEC on February 17, 2017 (File No. 001-35971).
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| | Form of Allegion plc Deed Poll Indemnity. | | Incorporated by reference to Exhibit 10.21 of the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971). |
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| Form of Allegion US Holding Company, Inc. Deed Poll Indemnity. | Timothy P. Eckersley Offer Letter, dated October 3, 2013 | | Incorporated by reference to Exhibit 10.16 to10.22 of the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971). |
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| Form of Allegion Irish Holding Company Limited Deed Poll Indemnity. | Lucia V. Moretti, Offer Letter, dated February 19, 2014 | | Incorporated by reference to Exhibit 10.1 to the Company's Form 10-K filed with the SEC on February 26, 2016 (File No. 001-35971).
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| | Jeffrey N. Braun Offer Letter, dated June 13, 2014 | | Incorporated by reference to Exhibit 10.15 to the Company's Form 10-K filed with the SEC on February 17, 2017 (File No. 001-35971).
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| | Form10.23 of Allegion plc Deed Poll Indemnity | | Incorporated by reference to Exhibit 10.21 to the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971). |
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| | Form of Allegion US Holding Company, Inc. Deed Poll Indemnity | | Incorporated by reference to Exhibit 10.22 to the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971). |
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| | Form of Allegion Irish Holding Company Limited Deed Poll Indemnity | | Incorporated by reference to Exhibit 10.23 to the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971). |
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| | Annual Incentive PlanPlan. * | | Incorporated by reference to Exhibit 10.1 toof the Company's Form 10-K filed with the SEC on March 10, 2014 (File No. 001-35971). |
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| | Change in Control Severance PlanPlan. * | | Incorporated by reference to Exhibit 10.2 toof the Company's Form 10-K filed with the SEC on March 10, 2014 (File No. 001-35971). |
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| | Form of Special Global Restricted Stock Unit Award AgreementAgreement. * | | Filed herewithIncorporated by reference to Exhibit 10.21 of the Company's Form 10-K filed with the SEC on February 15, 2022 (File No. 001-35971). |
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| | Form of Stock Option Award Agreement | | Filed herewith |
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| | Form of Performance Share Unit Award Agreement | | Filed herewith |
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| | Form of Special2020 Global Restricted Stock Unit Award AgreementAgreement. * | | Incorporated by reference to Exhibit 10.22 of the Company's Form 10-K filed with the SEC on February 18, 2020 (File No. 001-35971). |
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| | Form of 2020 Global Stock Option Award Agreement. * | | Incorporated by reference to Exhibit 10.23 of the Company's Form 10-K filed with the SEC on February 18, 2020 (File No. 001-35971). |
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| | Form of 2020 Global Performance Stock Unit Award Agreement. * | | Incorporated by reference to Exhibit 10.24 of the Company's Form 10-K filed with the SEC on February 18, 2020 (File No. 001-35971). |
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| | Form of 2021 Global Restricted Stock Unit Award Agreement. * | | Incorporated by reference to Exhibit 10.4 to10.22 of the Company's Form 8-K10-K filed with the SEC on February 9, 201616, 2021 (File No. 001-35971). |
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| Form of 2021 Global Stock Option Award Agreement. * | | Incorporated by reference to Exhibit 10.23 of the Company's Form 10-K filed with the SEC on February 16, 2021 (File No. 001-35971). |
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| | Form of 2021 Global Performance Stock Unit Award Agreement. * | | Incorporated by reference to Exhibit 10.24 of the Company's Form 10-K filed with the SEC on February 16, 2021 (File No. 001-35971). |
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| | Form of 2022 Global Restricted Stock Unit Award Agreement. * | | Incorporated by reference to Exhibit 10.31 of the Company's Form 10-K filed with the SEC on February 15, 2022 (File No. 001-35971). |
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| | Form of 2022 Global Stock Option Award Agreement. * | | Incorporated by reference to Exhibit 10.32 of the Company's Form 10-K filed with the SEC on February 15, 2022 File No. 001-35971). |
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| | Form of 2022 Global Performance Stock Unit Award Agreement. * | | Incorporated by reference to Exhibit 10.33 of the Company's Form 10-K filed with the SEC on February 15, 2022 (File No. 001-35971). |
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| | Form of Non-Employee Director Restricted Stock Unit Award AgreementAgreement. * | | Incorporated by reference to Exhibit 10.1 toof the Company's Form 10-Q filed with the SEC on April 30, 2015 (File No. 001-35971). |
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| | Share Purchase Agreement dated June 26, 2015 between SimonsVoss Luxco S.à r.l., SimonsVoss Co-Invest GmbH & Co. KG, Mr Frank Rövekamp and Allegion Luxembourg Holding & Financing S.à r.l. | | Incorporated by reference to Exhibit 10.1 toof the Company's Form 10-Q filed with the SEC on July 30, 2015 (File No. 001-35971). |
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|
| Timothy P. Eckersley Restricted Stock Unit Award Agreement, dated March 10, 2021. * | Ratio | Incorporated by reference to Exhibit 10.6 of Earnings to Fixed Charges | | Filed herewiththe Company's Form 10-Q filed with the SEC on April 22, 2021 (File No. 001-35971). |
| | | | |
| | | | | | | | | | | | | | |
| | Timothy P. Eckersley Performance Stock Unit Award Agreement, dated March 10, 2021. * | | Incorporated by reference to Exhibit 10.7 of the Company's Form 10-Q filed with the SEC on April 22, 2021 (File No. 001-35971). |
| | | | |
| | Michael J. Wagnes Offer Letter, dated February 14, 2022. * | | Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed with the SEC on February 15, 2022 (File No. 001-35971). |
| | | | |
| | John H. Stone Offer Letter, dated May 24, 2022. * | | Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed with the SEC on May 31, 2022 (File No. 001-35971). |
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| | John H. Stone Restricted Stock Unit Award Agreement, dated August 1, 2022. * | | Incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q filed with the SEC on October 27, 2022 (File No. 001-35971). |
| | | | |
| | John H. Stone Stock Option Award Agreement, dated August 1, 2022. * | | Incorporated by reference to Exhibit 10.2 of the Company's Form 10-Q filed with the SEC on October 27, 2022 (File No. 001-35971). |
| | | | |
| | David S. Ilardi Offer Letter, dated February 14, 2022. * | | Filed herewith. |
| | | | |
| | Transaction Agreement, dated as of April 22, 2022, by and between Allegion US Holding Company Inc. Stanley Black & Decker, Inc., Stanley Black & Decker Canada Corporation, various entities thereto and Stanley Access Technologies LLC. | | Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed with the SEC on April 22, 2022 (File No. 001-35971). |
| | | | |
|
| | List of subsidiaries of Allegion plcplc. | | Filed herewithherewith. |
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|
| | Consent of Independent Registered Public Accounting FirmFirm. | | Filed herewithherewith. |
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|
| | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | Filed herewithherewith. |
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| | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | Filed herewithherewith. |
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|
| | Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | Furnished herewith |
| | | | |
herewith. |
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101.INS | | XBRL Instance Document. | | The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| | | | |
101101.SCH |
| XBRL Taxonomy Extension Schema Document. | The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, formatted | Filed herewith. |
| | | | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. | | Filed herewith. |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. | | Filed herewith. |
| | | | |
101.LAB | | XBRL Taxonomy Extension Labels Linkbase Document. | | Filed herewith. |
| | | | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. | | Filed herewith. |
| | | | |
104 | | Cover Page Interactive Data File. | | Formatted as Inline XBRL and contained in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Comprehensive Income, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statement of Cash Flows, (iv) the Consolidated Statements of Equity and (v) Notes to Consolidated Financial Statements. | | Filed herewithExhibit 101. |
* Compensatory plan or arrangement.
Item 16.FORM 10-K SUMMARY
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ALLEGION PLC
(Registrant)
|
| | | | | | | |
By: | | /s/ David D. PetratisJohn H. Stone |
| | David D. PetratisJohn H. Stone |
| | Chief Executive Officer |
Date: | | February 20, 201822, 2023 |
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
Signature | | Title | | Date |
| | | | |
/s/ John H. Stone | | President and Chief Executive Officer (Principal Executive Officer) | | February 22, 2023 |
(John H. Stone) | | | |
| | | | |
Signature | | Title | | Date |
| | | | |
/s/ David D. PetratisMichael J. Wagnes | | Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) | | February 20, 2018 |
(David D. Petratis) | | | |
| | | | |
/s/ Patrick S. Shannon | | Senior Vice President and Chief Financial Officer (Principal Financial Officer) | | February 20, 201822, 2023 |
(Patrick S. Shannon)Michael J. Wagnes) | | | |
| | | | |
/s/ Douglas P. RanckNickolas A. Musial | | Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) | | February 20, 201822, 2023 |
(Douglas P. Ranck)Nickolas A. Musial) | | | |
| | | | |
/s/ Carla Cico | | Director | | February 20, 2018 |
(Carla Cico) | | | |
| | | | |
/s/ Kirk S. Hachigian | | Chairman of the Board and Director | | February 20, 201822, 2023 |
(Kirk S. Hachigian) | | | | |
| | | | |
/s/ Steven C. Mizell | | Director | | February 22, 2023 |
(Steven C. Mizell) | | | | |
| | | | |
/s/ Nicole Parent Haughey | | Director | | February 20, 201822, 2023 |
(Nicole Parent Haughey) | | | | |
| | | | |
/s/ Lauren B. Peters | | Director | | February 22, 2023 |
(Lauren B. Peters) | | | | |
| | | | |
/s/ Dean I. Schaffer | | Director | | February 20, 201822, 2023 |
(Dean I. Schaffer) | | | | |
| | | | |
/s/ Dev Vardhan | | Director | | February 22, 2023 |
(Dev Vardhan) | | | | |
| | | | |
/s/ Martin E. Welch III | | Director | | February 20, 201822, 2023 |
(Martin E. Welch III) | | | | |
| | | | |
ALLEGION PLC
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors and Shareholders of Allegion plc:Public Limited Company
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidatedbalance sheets of Allegion plcand its subsidiaries(the “Company”) as of December 31, 2017 2022and 2016,2021,and the related consolidated statements of comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, 2017,2022, including the related notes and financial statement schedulelisted in the accompanying index (collectively referred to as the “consolidatedfinancial statements”).We also have audited the Company's internal control over financial reporting as of December31, 2017,2022, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of December31,2017 2022and 20162021, and the results of theiritsoperations and theiritscash flows for each of the three years in the period ended December31,2017 2022in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2022, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded the acquisition of Stanley Access Technologies LLC and assets related to the automatic entrance solutions business from Stanley Black & Decker, Inc. (the “Access Technologies business”) from its assessment of internal control over financial reporting as of December 31, 2022, because it was acquired by the Company in a purchase business combination during 2022. We have also excluded the Access Technologies business from our audit of internal control over financial reporting. The Access Technologies business is wholly owned and has total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting that represent approximately 25% and 6%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2022.
Basis for Opinions
The Company's management is responsible for these consolidatedfinancial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management'sManagement’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Acquisition of the Access Technologies business – Valuation of Customer Relationships
As described in Notes 2 and 3 to the consolidated financial statements, on July 5, 2022, the Company completed the acquisition of the Access Technologies business for total preliminary cash consideration of $923.1 million. Of the acquired intangible assets, $137.4 million of customer relationships were recorded. The fair value of consideration paid in a business combination is allocated to the tangible and identifiable intangible assets acquired, liabilities assumed and goodwill using the acquisition method of accounting. As disclosed by management, accounting for business combinations involves a considerable amount of judgment and estimation, including the identification of and fair values determined for acquired intangible assets. The determination of fair values of the acquired intangible assets involves projections of future revenues and cash flows that are discounted at an estimated discount rate. An income approach was utilized to determine fair value. The assumptions used by management to determine the fair value of the acquired intangible assets include projections developed using historical information, internal forecasts, available industry and market data, estimates of revenue growth rates, profitability, customer attrition, discount rates, and the allocation of revenues by customer type which are estimated at the time of acquisition.
The principal considerations for our determination that performing procedures relating to the valuation of the customer relationships acquired in connection with the acquisition of the Access Technologies business is a critical audit matter are (i) the significant judgment by management when developing the fair value estimate of the customer relationships acquired; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the revenue growth rate, profitability, customer attrition, discount rate, and the allocation of revenues by customer type; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the customer relationships acquired. These procedures also included, among others (i) reading the acquisition agreement; (ii) testing management’s process for developing the fair value estimate of the customer relationships acquired; (iii) evaluating the appropriateness of the income approach; (iv) testing the completeness and accuracy of the underlying data used in the income approach; and (v) evaluating the reasonableness of the significant assumptions used by management related to the revenue growth rate, profitability, customer attrition rate, discount rate, and the allocation of revenues by customer type. Evaluating the reasonableness of management’s significant assumptions related to the revenue growth rate, profitability, and the allocation of revenues by customer type involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the Access Technologies business, (ii) the consistency with external market and industry data, and (iii) whether these significant assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the Company’s income approach and evaluating the reasonableness of the discount rate and customer attrition significant assumptions.
/s/ PricewaterhouseCoopers LLP
Indianapolis, Indiana
February 20, 201822, 2023
We have served as the Company’s auditor since 2013.
Allegion plc Consolidated Statements of Comprehensive Income In millions, except per share amounts
|
| | | | | | | | | | | | |
For the years ended December 31, | | 2017 | | 2016 | | 2015 |
Net revenues | | $ | 2,408.2 |
| | $ | 2,238.0 |
| | $ | 2,068.1 |
|
Cost of goods sold | | 1,337.5 |
| | 1,252.7 |
| | 1,199.0 |
|
Selling and administrative expenses | | 582.5 |
| | 559.8 |
| | 510.5 |
|
Operating income | | 488.2 |
| | 425.5 |
| | 358.6 |
|
Interest expense | | 105.7 |
| | 64.3 |
| | 52.9 |
|
Loss on divestitures | | — |
|
| 84.4 |
| | 104.2 |
|
Other income, net | | (13.2 | ) | | (18.2 | ) | | (7.8 | ) |
Earnings before income taxes | | 395.7 |
| | 295.0 |
| | 209.3 |
|
Provision for income taxes | | 119.0 |
| | 63.8 |
| | 54.6 |
|
Earnings from continuing operations | | 276.7 |
| | 231.2 |
| | 154.7 |
|
Discontinued operations, net of tax | | — |
| | — |
| | (0.4 | ) |
Net earnings | | 276.7 |
| | 231.2 |
| | 154.3 |
|
Less: Net earnings attributable to noncontrolling interests | | 3.4 |
| | 2.1 |
| | 0.4 |
|
Net earnings attributable to Allegion plc | | $ | 273.3 |
| | $ | 229.1 |
| | $ | 153.9 |
|
Amounts attributable to Allegion plc ordinary shareholders: | |
| |
| | |
Continuing operations | | $ | 273.3 |
| | $ | 229.1 |
| | $ | 154.3 |
|
Discontinued operations | | — |
| | — |
| | (0.4 | ) |
Net earnings | | $ | 273.3 |
| | $ | 229.1 |
| | $ | 153.9 |
|
Earnings per share attributable to Allegion plc ordinary shareholders: | | | | | | |
Basic: | | | | | | |
Continuing operations | | $ | 2.87 |
| | $ | 2.39 |
| | $ | 1.61 |
|
Discontinued operations | | — |
| | — |
| | (0.01 | ) |
Net earnings | | $ | 2.87 |
| | $ | 2.39 |
| | $ | 1.60 |
|
Diluted: | |
| |
| | |
Continuing operations | | $ | 2.85 |
| | $ | 2.36 |
| | $ | 1.59 |
|
Discontinued operations | | — |
| | — |
| | — |
|
Net earnings | | $ | 2.85 |
| | $ | 2.36 |
| | $ | 1.59 |
|
| | | | | | |
Dividends declared per ordinary share | | $ | 0.64 |
| | $ | 0.48 |
| | $ | 0.40 |
|
Allegion plc Consolidated Statements of Comprehensive Income (continued) In millions, except per share amounts
|
| | | | | | | | | | | | |
For the years ended December 31, | | 2017 | | 2016 | | 2015 |
Net earnings | | $ | 276.7 |
| | $ | 231.2 |
| | $ | 154.3 |
|
Other comprehensive income, net of tax | | | | | | |
Currency translation | | 97.5 |
| | (40.7 | ) | | (60.5 | ) |
Cash flow hedges and marketable securities: | | | | | | |
Unrealized net gains arising during period | | 5.2 |
| | 9.7 |
| | 15.8 |
|
Net gains reclassified into earnings | | (4.7 | ) | | (19.0 | ) | | (17.5 | ) |
Tax expense | | (0.1 | ) | | (1.3 | ) | | — |
|
Total cash flow hedges and marketable securities, net of tax | | 0.4 |
| | (10.6 | ) | | (1.7 | ) |
Pension and OPEB adjustments: | | | | | | |
Prior service costs for the period | | — |
| | — |
| | (0.1 | ) |
Net actuarial gains (losses) for the period | | 25.5 |
| | 3.1 |
| | (37.6 | ) |
Amortization reclassified into earnings | | 5.2 |
| | 6.0 |
| | 5.4 |
|
Settlements/curtailments reclassified to earnings | | 0.1 |
| | 0.3 |
| | 1.1 |
|
Currency translation and other | | 0.7 |
| | 14.4 |
| | 5.0 |
|
Tax (expense) benefit | | (12.2 | ) | | (5.0 | ) | | 3.0 |
|
Total pension and OPEB adjustments, net of tax | | 19.3 |
| | 18.8 |
| | (23.2 | ) |
Other comprehensive income (loss), net of tax | | 117.2 |
| | (32.5 | ) | | (85.4 | ) |
Total comprehensive income, net of tax | | 393.9 |
| | 198.7 |
| | 68.9 |
|
Less: Total comprehensive income (loss) attributable to noncontrolling interests | | 2.8 |
| | 1.7 |
| | (0.9 | ) |
Total comprehensive income attributable to Allegion plc | | $ | 391.1 |
| | $ | 197.0 |
| | $ | 69.8 |
|
Allegion plc
Consolidated Statements of Comprehensive Income
In millions, except per share amounts
| | | | | | | | | | | | | | | | | | | | |
For the years ended December 31, | | 2022 | | 2021 | | 2020 |
Net revenues | | $ | 3,271.9 | | | $ | 2,867.4 | | | $ | 2,719.9 | |
Cost of goods sold | | 1,949.5 | | | 1,662.5 | | | 1,541.1 | |
Selling and administrative expenses | | 736.0 | | | 674.7 | | | 635.7 | |
Impairment of goodwill and intangible assets | | — | | | — | | | 101.7 | |
Loss on assets held for sale | | — | | | — | | | 37.9 | |
Operating income | | 586.4 | | | 530.2 | | | 403.5 | |
Interest expense | | 75.9 | | | 50.2 | | | 51.1 | |
Loss on divestitures | | 7.6 | | | — | | | — | |
Other income, net | | (11.6) | | | (44.0) | | | (13.0) | |
Earnings before income taxes | | 514.5 | | | 524.0 | | | 365.4 | |
Provision for income taxes | | 56.2 | | | 40.7 | | | 50.9 | |
Net earnings | | 458.3 | | | 483.3 | | | 314.5 | |
Less: Net earnings attributable to noncontrolling interests | | 0.3 | | | 0.3 | | | 0.2 | |
Net earnings attributable to Allegion plc | | $ | 458.0 | | | $ | 483.0 | | | $ | 314.3 | |
Amounts attributable to Allegion plc ordinary shareholders: | | | | | | |
Earnings per share attributable to Allegion plc ordinary shareholders: | | | | | | |
Basic net earnings: | | $ | 5.20 | | | $ | 5.37 | | | $ | 3.41 | |
Diluted net earnings: | | $ | 5.19 | | | $ | 5.34 | | | $ | 3.39 | |
| | | | | | |
Net earnings | | $ | 458.3 | | | $ | 483.3 | | | $ | 314.5 | |
Other comprehensive (loss) income, net of tax: | | | | | | |
Currency translation | | (76.2) | | | (63.3) | | | 57.3 | |
Cash flow hedges: | | | | | | |
Unrealized net gains arising during period | | 5.7 | | | 2.6 | | | 3.9 | |
Net gains reclassified into earnings | | (0.3) | | | (0.2) | | | (5.8) | |
Tax (expense) benefit | | (0.2) | | | (0.6) | | | 0.5 | |
Total cash flow hedges, net of tax | | 5.2 | | | 1.8 | | | (1.4) | |
Defined benefit plan adjustments: | | | | | | |
Prior service (costs) gains and net actuarial (losses) gains, net | | (38.7) | | | 25.7 | | | 4.9 | |
Amortization reclassified into earnings | | 0.5 | | | 4.8 | | | 5.0 | |
Settlements/curtailments reclassified into earnings | | — | | | 0.5 | | | 0.1 | |
Currency translation and other | | 7.7 | | | 1.0 | | | (2.1) | |
Tax benefit (expense) | | 9.4 | | | (7.7) | | | (2.0) | |
Total defined benefit plan adjustments, net of tax | | (21.1) | | | 24.3 | | | 5.9 | |
Other comprehensive (loss) income, net of tax | | (92.1) | | | (37.2) | | | 61.8 | |
Total comprehensive income, net of tax | | 366.2 | | | 446.1 | | | 376.3 | |
Less: Total comprehensive (loss) income attributable to noncontrolling interests | | (0.4) | | | 0.4 | | | 0.5 | |
Total comprehensive income attributable to Allegion plc | | $ | 366.6 | | | $ | 445.7 | | | $ | 375.8 | |
See accompanying notes to consolidated financial statements.
Allegion plc
Consolidated Balance Sheets
In millions, except share amounts
| | As of December 31, | | 2017 | | 2016 | As of December 31, | | 2022 | | 2021 |
ASSETS | | | | | ASSETS | | | | |
Current assets: | | | | | Current assets: | |
Cash and cash equivalents | | $ | 466.2 |
| | $ | 312.4 |
| Cash and cash equivalents | | $ | 288.0 | | | $ | 397.9 | |
| Accounts and notes receivable, net | | 296.6 |
| | 260.0 |
| Accounts and notes receivable, net | | 395.6 | | | 283.3 | |
Inventories | | 239.8 |
| | 220.6 |
| Inventories | | 479.0 | | | 380.4 | |
Current tax receivable | | 12.2 |
| | 11.9 |
| Current tax receivable | | 8.3 | | | 29.1 | |
Other current assets | | 17.0 |
| | 22.2 |
| Other current assets | | 40.2 | | | 26.9 | |
Assets held for sale | | 0.9 |
| | 2.2 |
| Assets held for sale | | 3.5 | | | — | |
Total current assets | | 1,032.7 |
| | 829.3 |
| Total current assets | | 1,214.6 | | | 1,117.6 | |
Property, plant and equipment, net | | 252.2 |
| | 226.6 |
| Property, plant and equipment, net | | 308.7 | | | 283.7 | |
Goodwill | | 761.2 |
| | 716.8 |
| Goodwill | | 1,413.1 | | | 803.8 | |
Intangible assets, net | | 394.3 |
| | 357.4 |
| Intangible assets, net | | 608.9 | | | 447.5 | |
Deferred and noncurrent income taxes | | 35.4 |
| | 72.3 |
| Deferred and noncurrent income taxes | | 227.6 | | | 154.5 | |
Other noncurrent assets | | 66.2 |
| | 45.0 |
| Other noncurrent assets | | 218.3 | | | 243.9 | |
Total assets | | $ | 2,542.0 |
| | $ | 2,247.4 |
| Total assets | | $ | 3,991.2 | | | $ | 3,051.0 | |
LIABILITIES AND EQUITY | | | | | LIABILITIES AND EQUITY | | | | |
Current liabilities: | | | | | Current liabilities: | |
Accounts payable | | $ | 188.3 |
| | $ | 179.9 |
| Accounts payable | | $ | 280.7 | | | $ | 259.1 | |
Accrued compensation and benefits | | 84.7 |
| | 81.0 |
| Accrued compensation and benefits | | 134.7 | | | 117.7 | |
Accrued expenses and other current liabilities | | 134.6 |
| | 117.8 |
| Accrued expenses and other current liabilities | | 247.9 | | | 199.9 | |
Current tax payable | | 18.2 |
| | 2.7 |
| Current tax payable | | 27.7 | | | 11.9 | |
Short-term borrowings and current maturities of long-term debt | | 35.0 |
| | 48.2 |
| Short-term borrowings and current maturities of long-term debt | | 12.6 | | | 12.6 | |
| Total current liabilities | | 460.8 |
| | 429.6 |
| Total current liabilities | | 703.6 | | | 601.2 | |
Long-term debt | | 1,442.3 |
| | 1,415.6 |
| Long-term debt | | 2,081.9 | | | 1,429.5 | |
Postemployment and other benefit liabilities | | 85.9 |
| | 134.5 |
| Postemployment and other benefit liabilities | | 40.1 | | | 69.2 | |
Deferred and noncurrent income taxes | | 123.6 |
| | 118.7 |
| Deferred and noncurrent income taxes | | 101.6 | | | 100.8 | |
Other noncurrent liabilities | | 23.9 |
| | 32.6 |
| Other noncurrent liabilities | | 119.5 | | | 87.9 | |
Total liabilities | | 2,136.5 |
| | 2,131.0 |
| Total liabilities | | 3,046.7 | | | 2,288.6 | |
Equity: | | | | | Equity: | | | | |
Allegion plc shareholders’ equity | | | | | Allegion plc shareholders’ equity | |
Ordinary shares, $0.01 par value (95,062,385 and 95,273,927 shares issued and outstanding at December 31, 2017 and 2016, respectively) | | 1.0 |
| | 1.0 |
| |
Ordinary shares, $0.01 par value (87,852,777 and 88,215,625 shares issued and outstanding at December 31, 2022 and 2021, respectively) | | Ordinary shares, $0.01 par value (87,852,777 and 88,215,625 shares issued and outstanding at December 31, 2022 and 2021, respectively) | | 0.9 | | | 0.9 | |
Capital in excess of par value | | 9.1 |
| | — |
| Capital in excess of par value | | 13.9 | | | — | |
Retained earnings | | 544.4 |
| | 376.6 |
| Retained earnings | | 1,212.8 | | | 952.6 | |
Accumulated other comprehensive loss | | (152.9 | ) | | (264.3 | ) | Accumulated other comprehensive loss | | (285.8) | | | (194.4) | |
Total Allegion plc shareholders’ equity | | 401.6 |
| | 113.3 |
| Total Allegion plc shareholders’ equity | | 941.8 | | | 759.1 | |
Noncontrolling interest | | 3.9 |
| | 3.1 |
| |
Noncontrolling interests | | Noncontrolling interests | | 2.7 | | | 3.3 | |
Total equity | | 405.5 |
| | 116.4 |
| Total equity | | 944.5 | | | 762.4 | |
Total liabilities and equity | | $ | 2,542.0 |
| | $ | 2,247.4 |
| Total liabilities and equity | | $ | 3,991.2 | | | $ | 3,051.0 | |
See accompanying notes to consolidated financial statements.
Allegion plc Consolidated Statements of Equity |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Allegion plc Shareholders' equity | |
In millions | | Total equity | | Ordinary Shares | | Capital in excess of par value | | Retained earnings | | Accumulated other comprehensive income (loss) | | Non-controlling Interest |
| | Amount | | Shares | | | |
Balance at December 31, 2014 | | $ | 18.5 |
| | $ | 1.0 |
| | 95.8 |
| | $ | — |
| | $ | 142.4 |
| | $ | (148.2 | ) | | $ | 23.3 |
|
Net earnings | | 154.3 |
| | — |
| | — |
| | — |
| | 153.9 |
| | — |
| | 0.4 |
|
Other comprehensive loss | | (85.4 | ) | | — |
| | — |
| | — |
| | (0.1 | ) | | (84.0 | ) | | (1.3 | ) |
Shares issued under incentive stock plans | | 14.3 |
| | — |
| | — |
| | 14.3 |
| | — |
| | — |
| | — |
|
Repurchase of ordinary shares | | (30.0 | ) | | — |
| | (0.5 | ) | | (4.5 | ) | | (25.5 | ) | | — |
| | — |
|
Share-based compensation | | 14.6 |
| | — |
| | 0.7 |
| | 14.6 |
| | — |
| | — |
| | — |
|
Acquisition/divestiture of noncontrolling interest | | 1.7 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1.7 |
|
Dividends declared to noncontrolling interest | | (20.0 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (20.0 | ) |
Cash dividends declared ($0.40 per share) | | (38.3 | ) | | — |
| | — |
| | — |
| | (38.3 | ) | | — |
| | — |
|
Balance at December 31, 2015 | | 29.7 |
| | 1.0 |
| | 96.0 |
| | 24.4 |
| | 232.4 |
| | (232.2 | ) | | 4.1 |
|
Net earnings | | 231.2 |
| | — |
| | — |
| | — |
| | 229.1 |
| | — |
| | 2.1 |
|
Other comprehensive loss | | (32.5 | ) | | — |
| | — |
| | — |
| | — |
| | (32.1 | ) | | (0.4 | ) |
Shares issued under incentive stock plans | | 5.8 |
| | — |
| | — |
| | 5.8 |
| | — |
| | — |
| | — |
|
Repurchase of ordinary shares | | (85.1 | ) | | — |
| | (1.3 | ) | | (46.4 | ) | | (38.7 | ) | | — |
| | — |
|
Share-based compensation | | 16.6 |
| | — |
| | 0.6 |
| | 16.6 |
| | — |
| | — |
| | — |
|
Acquisition/divestiture of noncontrolling interest | | (0.4 | ) | | — |
| | — |
| | (0.4 | ) | | — |
| | — |
| | — |
|
Dividends declared to noncontrolling interest | | (2.7 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (2.7 | ) |
Cash dividends declared ($0.48 per share) | | (46.0 | ) | | — |
| | — |
| | — |
| | (46.0 | ) | | — |
| | — |
|
Other | | (0.2 | ) | | — |
| | — |
| | — |
| | (0.2 | ) | | — |
| | — |
|
Balance at December 31, 2016 | | 116.4 |
| | 1.0 |
| | 95.3 |
| | — |
| | 376.6 |
| | (264.3 | ) | | 3.1 |
|
Cumulative effect of change in accounting principle | | (5.0 | ) | | — |
| | — |
| | — |
| | (5.0 | ) | | — |
| | — |
|
Net earnings | | 276.7 |
| | — |
| | — |
| | — |
| | 273.3 |
| | — |
| | 3.4 |
|
Other comprehensive income (loss) | | 117.2 |
| | — |
| | — |
| | — |
| | — |
| | 117.8 |
| | (0.6 | ) |
Shares issued under incentive stock plans | | 7.2 |
| | — |
| | — |
| | 7.2 |
| | — |
| | — |
| | — |
|
Repurchase of ordinary shares | | (60.0 | ) | | — |
| | (0.8 | ) | | (13.9 | ) | | (46.1 | ) | | — |
| | — |
|
Share-based compensation | | 15.8 |
| | — |
| | 0.6 |
| | 15.8 |
| | — |
| | — |
| | — |
|
Dividends declared to noncontrolling interest | | (1.8 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1.8 | ) |
Cash dividends declared ($0.64 per share) | | (60.9 | ) | | — |
| | — |
| | — |
| | (60.9 | ) | | — |
| | — |
|
Other (see Note 13) | | (0.1 | ) | | — |
| | — |
| | — |
| | 6.5 |
| | (6.4 | ) | | (0.2 | ) |
Balance at December 31, 2017 | | $ | 405.5 |
| | $ | 1.0 |
| | 95.1 |
| | $ | 9.1 |
| | $ | 544.4 |
| | $ | (152.9 | ) | | $ | 3.9 |
|
Allegion plc
Consolidated Statements of Equity
In millions, except per share amounts
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Allegion plc shareholders' equity | | |
| | Total equity | | Ordinary Shares | | Capital in excess of par value | | Retained earnings | | Accumulated other comprehensive loss | | Noncontrolling interests |
| | Amount | | Shares | | | |
Balance at December 31, 2019 | | $ | 760.4 | | | $ | 0.9 | | | 92.7 | | | $ | — | | | $ | 975.1 | | | $ | (218.6) | | | $ | 3.0 | |
Cumulative effect of adoption of ASC 326, Financial Instruments – Credit Losses | | (2.2) | | | — | | | — | | | — | | | (2.2) | | | — | | | — | |
Net earnings | | 314.5 | | | — | | | — | | | — | | | 314.3 | | | — | | | 0.2 | |
Other comprehensive income, net | | 61.8 | | | — | | | — | | | — | | | — | | | 61.5 | | | 0.3 | |
Repurchase of ordinary shares | | (208.8) | | | — | | | (1.9) | | | (24.8) | | | (184.0) | | | — | | | — | |
Share-based compensation activity | | 24.8 | | | — | | | 0.4 | | | 24.8 | | | — | | | — | | | — | |
| | | | | | | | | | | | | | |
Dividends declared to noncontrolling interests | | (0.3) | | | — | | | — | | | — | | | — | | | — | | | (0.3) | |
Cash dividends declared ($1.28 per share) | | (117.9) | | | — | | | — | | | — | | | (117.9) | | | — | | | — | |
Other | | 0.3 | | | — | | | — | | | — | | | 0.3 | | | — | | | — | |
Balance at December 31, 2020 | | 832.6 | | | 0.9 | | | 91.2 | | | — | | | 985.6 | | | (157.1) | | | 3.2 | |
| | | | | | | | | | | | | | |
Net earnings | | 483.3 | | | — | | | — | | | — | | | 483.0 | | | — | | | 0.3 | |
Other comprehensive (loss) income, net | | (37.2) | | | — | | | — | | | — | | | — | | | (37.3) | | | 0.1 | |
Repurchase of ordinary shares | | (412.8) | | | — | | | (3.3) | | | (25.8) | | | (387.0) | | | — | | | — | |
Share-based compensation activity | | 25.8 | | | — | | | 0.3 | | | 25.8 | | | — | | | — | | | — | |
| | | | | | | | | | | | | | |
Dividends declared to noncontrolling interests | | (0.3) | | | — | | | — | | | — | | | — | | | — | | | (0.3) | |
Cash dividends declared ($1.44 per share) | | (129.0) | | | — | | | — | | | — | | | (129.0) | | | — | | | — | |
| | | | | | | | | | | | | | |
Balance at December 31, 2021 | | 762.4 | | | 0.9 | | | 88.2 | | | — | | | 952.6 | | | (194.4) | | | 3.3 | |
| | | | | | | | | | | | | | |
Net earnings | | 458.3 | | | — | | | — | | | — | | | 458.0 | | | — | | | 0.3 | |
Other comprehensive loss, net | | (92.1) | | | — | | | — | | | — | | | — | | | (91.4) | | | (0.7) | |
Repurchase of ordinary shares | | (61.0) | | | — | | | (0.5) | | | (7.5) | | | (53.5) | | | — | | | — | |
Share-based compensation activity | | 21.4 | | | — | | | 0.2 | | | 21.4 | | | — | | | — | | | — | |
| | | | | | | | | | | | | | |
Dividends declared to noncontrolling interests | | (0.2) | | | — | | | — | | | — | | | — | | | — | | | (0.2) | |
Cash dividends declared ($1.64 per share) | | (144.3) | | | — | | | — | | | — | | | (144.3) | | | — | | | — | |
| | | | | | | | | | | | | | |
Balance at December 31, 2022 | | $ | 944.5 | | | $ | 0.9 | | | 87.9 | | | $ | 13.9 | | | $ | 1,212.8 | | | $ | (285.8) | | | $ | 2.7 | |
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
Allegion plc, an Irish public limited company, and its consolidated subsidiaries ("Allegion" or "the Company") are a leading global company that provides security products and solutions that keep people and assets safe and secure in the places they live, learn, work and visit. Allegion creates peace of mind by pioneering safety and security.security with a vision of seamless access and a safer world. The Company offers an extensive and versatile portfolio of mechanicalsecurity and electronic securityaccess control products and solutions across a range of market-leading brands including CISA®, Interflex®, LCN®, Schlage®, SimonsVoss® and Von Duprin®.
|
| | | | |
Buildings | 10 | to | 50 | years |
Machinery and equipment | 2 | to | 12 | years |
Software | 2 | to | 7 | years |
Repair and maintenance costs that do not extend the useful life of the asset are charged against earningsexpensed as incurred. Major replacements and significant improvements that increase asset values andand/or extend useful lives are capitalized. The range of useful lives used to depreciate property, plant and equipment is as follows:
| | | | | | | | | | | | | | |
Buildings | 10 | to | 50 | years |
Machinery and equipment | 2 | to | 12 | years |
Software | 2 | to | 7 | years |
The Company assesses the recoverability of the carrying value of its property, plant and equipment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. Recoverability is measured by a comparison of the carrying amount of an asset to the future net undiscounted cash flows expected to be generated by the asset. If the undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recognized for the amount by which the carrying value of the asset exceeds its fair value.
Investments: The Company periodically invests in debt or equity securities of start-up companies and/or development stage technology or other companies without acquiring a controlling interest. The Company applies the equity method of accounting when the Company has the ability to exercise significant influence over the operating and financial decision making of the investee. Investments in equity method affiliates totaled $11.8 million and $11.0 million as of December 31, 2022 and 2021, respectively. Equity investments that have readily determinable fair values in which the Company does not have significant influence are measured at fair value, with any unrealized holding gains and losses being recorded to earnings. Investments without readily determinable fair values are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the assets.same issuer and are qualitatively assessed for impairment indicators each reporting period. Investments in debt and equity securities not accounted for under the equity method of accounting totaled $46.8 million and $35.8 million as of December 31, 2022 and 2021, respectively. The Company's investments are recorded within Other noncurrent assets within the Consolidated Balance Sheets.
Leases: As a lessee, the Company categorizes its leases into two general categories: real estate and equipment leases. The Company's real estate leases include leased production and assembly facilities, warehouses and distribution centers and office space, while the Company's equipment leases primarily include vehicles, material handling and other equipment utilized in the Company's production and assembly facilities, warehouses and distribution centers and laptops and other IT equipment. The Company records a right-of-use ("ROU") asset and lease liability for substantially all leases for which it is a lessee. At inception of a contract, the Company considers all relevant facts and circumstances to assess whether or not the contract represents a lease by determining whether or not the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company assesses the specific terms and conditions of each lease to determine the appropriate classification as either an operating or finance lease and the lease term. Substantially all of the Company's leases for which the Company is a lessee are classified as operating leases. If at lease commencement date, a lease has a term of less than 12 months and does not include a purchase option that is reasonably certain to be exercised, the Company does not include the lease as part of its ROU asset or lease liability. If the Company enters into a large number of leases in the same month with the same terms and conditions, these are considered a group (portfolio). There are no material residual value guarantees provided by the Company nor any restrictions or covenants imposed by any leases to which the Company is a party.
GoodwillThe Company assesses the specific terms and Intangible Assets: conditions of each real estate lease, which can vary significantly from lease to lease, to determine the amount of the lease payments and the length of the lease term, which includes the minimum period over which lease payments are required plus any renewal options that are both within the Company's control to exercise and reasonably certain of being exercised upon lease commencement. When available, the Company will utilize the rate implicit in the lease as the discount rate to determine the lease liability; however, as this rate is not available for most leases, the Company will use its incremental borrowing rate for debt instruments with terms approximating the weighted-average term of its real estate or equipment leases to discount the future lease payments over the lease term to present value. The Company does incur variable lease payments for certain of its real estate leases, such as reimbursements of property taxes, maintenance and other operational costs to the lessor. In general, these variable lease payments are not captured as part of the lease liability or ROU asset, but rather are expensed as incurred. Most of the Company's equipment leases are for terms ranging from two to five years, although terms and conditions can vary from lease to lease. The Company applies similar estimates and judgments to its equipment lease portfolio in determining the lease payments, lease term and incremental borrowing rate as it does to its real estate lease portfolio. The Company does not typically incur variable lease payments related to its equipment leases.
Goodwill: The Company records as goodwill the excess of the purchase price of an acquired business over the fair value of the net assets acquired.
In accordance with GAAP, goodwill and other indefinite-lived intangible assets are Once the final valuation has been performed for each acquisition, adjustments may be recorded. Goodwill is tested and reviewed annually for impairment during the fourth quarter or whenever there is a significant change in events or circumstances that indicate that the fair value of thea reporting unit or indefinite-lived intangible asset is more likely than not less than theits carrying amount of the reporting unit or indefinite-lived intangible asset.
amount. Recoverability of goodwill is measured at the reporting unit level. The carrying amount of thea reporting unit is compared to its estimated fair value. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is
not impaired. To the extent that the carrying value of the reporting unit exceeds its estimated fair value, a goodwill impairment charge will be recognized for the amount by which the carrying value of the reporting unit exceeds its fair value, not to exceed the carrying amount of the reporting unit's goodwill. Estimated fair value of the Company's reporting units is based on two valuation techniques, a discounted cash flow model (income approach) and a market adjusted multiple of earnings and revenues (market approach), with each method being weighted in the calculation.
Intangible Assets: Similar to Goodwill, indefinite-lived intangible assets are not amortized, but are tested and reviewed annually for impairment during the fourth quarter or whenever there is a significant change in events or circumstances that indicate the asset is more likely than not less than its carrying amount. Recoverability of otherindefinite-lived intangible assets with indefinite useful lives (i.e. Trademarks)Trade names) is determined on a relief from royalty methodology, (income approach), which is based on the implied royalty paid, at an appropriate discount rate, to license the use of an asset rather than owning the asset. The present value of the after-tax cost savings (i.e. royalty relief) indicates the estimated fair value of the asset. Any excess of the carrying value over the estimated fair value is recognized as an impairment loss equal to that excess.
Intangible assets such as completed technologies, patents, customer-related intangible assets and other intangible assets with finite useful lives are amortized on a straight-line basis over their estimated economic lives. The weighted-average useful lives approximate the following:
|
| | | | | | | |
Customer relationships | 2520 | years |
TrademarksTrade names (finite-lived) | 2515 | years |
Completed technology/technologies/patents | 10 | years |
Other | 255 | years |
Recoverability of intangible assets with finite useful lives is assessed in the same manner as property, plant and equipment, as described above.
Business Combinations: The fair value of consideration paid in a business combination is allocated to the tangible and identifiable intangible assets acquired, liabilities assumed and goodwill using the acquisition method of accounting. Acquired intangible assets typically include trade names, customer relationships and completed technologies. The accounting for business combinations involves a considerable amount of judgment and estimation, and as a result, for significant acquisitions the Company normally obtains the assistance of a third-party valuation specialist in estimating fair values of acquired tangible and intangible assets and assumed liabilities. The allocation of consideration paid to assets acquired and liabilities assumed may be subject to revision based on the final determination of fair values during the measurement period, which in some cases, may be up to one year from the acquisition date. Business acquisition and integration costs are expensed as incurred.
Income Taxes: The calculation of the Company’s income taxes involves considerable judgment and the use of both estimates and allocations. Deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. The Company recognizes future tax benefits, such as net operating losses and tax credits, to the extent that
realizing these benefits is considered in its judgment to be more likely than not. The Company regularly reviews the recoverability of its deferred tax assets considering its historic profitability, projected future taxable income, timing of the reversals of existing temporary differences and the feasibility of its tax planning strategies. Where appropriate, the Company records a valuation allowance with respect to a future tax benefit.
benefits.
Cash paid for income taxes, net of refunds, for the twelve months ended December 31, 20172022, 2021 and 20162020 was $86.7$81.7 million, $89.1 million and $10.4$82.6 million, respectively.
Product Warranties: The 2016 net cash income taxes paid includesCompany offers a refundstandard warranty with most product sales, and the value of $46.2 million received from the Canadian Tax Authorities.
On December 22, 2017, the President of the United States signed comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Reform Act”), whichsuch warranty is discussed in greater detail in Note 17. The Tax Reform Act includes a provision termed the global intangible low-taxed income ("GILTI"). The GILTI provisions will require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the non-U.S. subsidiary's tangible assets. Although it is uncertain whether we will incur a GILTI liability, to the extent a GILTI tax is incurred, the Company has elected to account for GILTI taxincluded in the period in which it is incurred.
Product Warranties: contractual sales price. Standard product warranty accruals are recorded at the time of sale and are estimated based upon product warranty terms and historical experience. The Company regularly assesses the adequacy of its liabilities and will makemakes adjustments as necessary based on known or anticipated warranty claims, or as new information becomes available. Refer to Note 19 for further details of product warranties.
Revenue Recognition: Revenue isNet revenues are recognized and earned when allbased on the satisfaction of performance obligations under the following criteria are satisfied: (a) persuasive evidenceterms of a contract. A performance obligation is a promise in a contract to transfer control of a distinct product or to provide a service, or a bundle of products or services, to a customer. The Company has two principal revenue streams, tangible product sales arrangement exists; (b)and services. Product sales involve contracts with a single performance obligation, the price is fixedtransfer of control of a product or determinable; (c) collectability is reasonably assured; and (d) delivery has occurred or service has been rendered. Delivery generallybundle of products to a customer. Transfer of control typically occurs when goods are shipped from the titleCompany's facilities or at other predetermined control transfer points (for instance, destination terms). Service offerings include inspection, maintenance and repair, aftermarket, design and installation and locksmith services, as well as software as a service ("SaaS") solutions. Unlike the risks and rewardssingle performance obligation to ship a product or bundle of ownership have transferred to the customer. Both the persuasive evidence of a sales arrangement and fixed or determinable price criteria are deemed to be satisfied upon receipt of an executed and legally binding sales agreement or contract that clearly defines the terms and conditions of the transaction including the respective obligations of the parties. If the defined terms and conditions allow variability in all or a component of the price, revenue is not recognized until such time that the price becomes fixed or determinable. At the point of sale, the Company validates the existence of an enforceable claim that requires payment within a reasonable amount of time and assesses the collectability of that claim. If collectability is not deemed to be reasonably assured, thenproducts, revenue recognition related to services is deferred until such time that collectability becomes probable or cash is received. Delivery is not considered to have occurreddelayed until the customer has taken title and assumed the risks and rewards of ownership. Service and installation revenueservice based performance obligations are recognized when earned.satisfied. In some instances, customer acceptance provisions are included in sales arrangements to give the buyer the ability to ensure the delivered product or service meets the criteriaany established in the order.criteria. In these instances, revenue
recognition is deferred until the performance obligations are satisfied, which could include acceptance terms specified in the arrangement arebeing fulfilled through customer acceptance or a demonstration that established criteria have been satisfied. If uncertainty exists about customer acceptance, revenue is not recognized until acceptance has occurred.
The Company offers variousNet revenues are measured as the amount of consideration expected to be received in exchange for transferring control of the products or providing the services and takes into account variable consideration, such as sales incentive programs to our customers, dealers,including discounts and distributors. Sales incentivevolume rebates. The existence of these programs dodoes not preclude revenue recognition but dodoes require an accrual for the Company’sCompany's best estimate of the variable consideration to be made based on expected activity. Examples of the sales incentives thatactivity, as these items are accruedreserved for as a contra receivablededuction to Net revenues based on the Company's historical rates of providing these incentives and annual forecasted sales deduction at the point of sale include, but are not limited to, discounts (i.e. net 30 type), coupons, and rebates where the customer does not have to provide any additional requirements to receive the discount.volumes. Sales returns and customer disputes involving a question of quantity or price are also accounted for as variable consideration, and therefore, as a reduction in revenueto Net revenues and as a contra receivable. At December 31, 20172022 and 2016,2021, the Company had a reserve for customer claim accrual (contra receivable)claims of $32.5$43.5 million and $29.0$47.7 million, respectively. All other incentives or incentive programs where the customer is required to reach a certain level of purchases, remain a customer for a certain period, provide a rebate form or is subject to additional requirements are also considered variable consideration and are accounted for as a reduction of revenue and establishment of a liability. At December 31, 20172022 and 2016,2021, the Company had a sales incentive accrual of $31.8$60.4 million and $29.6$38.0 million, respectively. Each of these accruals represents the Company’s best estimate it expects to pay related to previously sold units based on historical claim experience. These estimates are reviewed regularly for accuracy. Ifaccuracy, and if updated information or actual amounts are different from previous estimates, the revisions are included in the Company’s results for the period in which they become known. Historically,
As a practical expedient, the aggregate differences,Company recognizes incremental costs of obtaining a contract, if any, as an expense when incurred if the amortization period of the asset would have been one year or less. The Company also applies the practical expedients allowed under ASC 606, "Revenue from Contracts with Customers", to omit the disclosure of remaining performance obligations for contracts with an original expected duration of one year or less and for contracts where the Company has the right to invoice for performance completed to date. The transaction price is not adjusted for the effects of a significant financing component, as the time period between control transfer of goods and services is less than one year. Sales, value-added and other similar taxes collected by the Company’s estimatesCompany are excluded from Net revenues. The Company has also elected to account for shipping and actual amountshandling activities that occur after control of the related goods transfers as fulfillment activities instead of performance obligations. These activities are included in any year have not had a material impact onCost of goods sold in the Consolidated Financial Statements.Statements of Comprehensive Income. The Company’s payment terms are generally consistent with the industries in which its businesses operate.
Environmental Costs: The Company is subject to laws and regulations relating to protecting the environment. environment and 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. 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 also sometimes a party to environmental lawsuits and claims and has, from time to time, received notices of potential violations of environmental laws and regulations from the U.S. Environmental Protection Agency and similar state authorities. It has also been identified as a potentially responsible party ("PRP") for cleanup costs associated with off-site waste disposal at federal Superfund and state remediation sites for past operations. For all such sites, there are other PRPs and, in most instances, the Company’s involvement is minimal. In estimating its liability, the Company has assumed it will not bear the entire cost of remediation of any site to the exclusion of other PRPs who may be jointly and severally liable. The ability of other PRPs to participate has been taken into account, based on the Company's understanding of the parties’ financial condition and probable contributions on a per site basis. The Company regularly evaluates its remediation programs and considers alternative remediation methods that are in addition to, or in replacement of, those currently utilized by the Company based upon enhanced technology and regulatory changes.
Environmental expenditures relating to current operations are expensed or capitalized as appropriate. Expenditures relating to existing conditions caused by past operations, which do not contribute to current or future revenues, are expensed. Liabilities for remediation costs are recorded when they are probable and can be reasonably estimated, generally no later than the completion of feasibility studies or the Company’s commitment to a plan of action. The assessment of this liability, which is calculated based on existing technology,
does not reflect any offset for possible recoveries from insurance companies and is not discounted. Refer to Note 19 for further details of environmental matters.
Research and Development Costs: The Company conducts research and development activities for the purpose of developing and improving new products and services. These expenditurescosts are expensed when incurred. For the years ended December 31, 2017, 20162022, 2021 and 2015, these expenditures2020, expenses related to research and development activities amounted to approximately $48.3$74.5 million,, $47.3 $73.3 million and $45.2$54.4 million,, respectively, and consistprimarily consisted of salaries, wages, benefits, buildingfacility costs and other overhead expenses.
Software Costs: The Company capitalizes certain qualified internal-use software costs during the application development stage and subsequently amortizes those costs over the software's useful life, which ranges from 2 to 7 years.
EmployeeDefined Benefit Plans:Plans: The Company provides a range of benefits, including pensions, postretirementU.S. and postemploymentnon-U.S. defined benefit plan benefits to eligible current and former employees. Noncontributory defined benefit pension plans covering non-collectively bargained U.S. employees provide benefits based on an average pay formula while most plans for collectively bargained U.S. employees provide benefits based on a flat dollar benefit formula. The non-U.S. defined benefit plans generally provide benefits based on earnings and years of service. Determining the costcosts associated with such benefits is dependent on various actuarial assumptions, including
discount rates, expected returnreturns on plan assets, compensation increases, employee mortality and turnover rates, and healthcare cost trend rates. Actuaries perform the required calculationsActuarial valuations are performed to determine the plan obligations and expense in accordance with GAAP. Actual results may differ from the actuarial estimates and assumptions, and when they do, are generally accumulated intorecorded to Accumulated other comprehensive loss and amortized into Net earnings over future periods.
The Company reviews its actuarial assumptions at each measurement date and makes modifications to the assumptions as appropriate. Discount rates are generally established using hypothetical yield curves based on currentthe yields of corporate bonds rated AA quality. Spot rates are developed from the yield curve and trends, if appropriate. Referused to Note 11discount future benefit payments. The expected return on plan assets reflects the average rate of returns expected on the funds invested or to be invested to provide for further detailsthe benefits included in the projected benefit obligation. The expected return on employee benefit plans.plan assets is based on what is achievable given the plan’s investment policy, the types of assets held and the target asset allocation.
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 award issued. The Company’s share-based compensation plans include programs for stock options, restricted stock units ("RSUs"), performance stock units ("PSUs") and deferred compensation. 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 of these awards at the grant date. The Company's Performance Stock Program ("PSP") provides awards for key employees 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.
Loss Contingencies: Liabilities are recorded for various contingencies arising in the normal course of business, including litigation and administrative proceedings, environmental matters, product liability,liabilities, product warranty, worker’swarranties, workers' compensation and other claims. The Company has recorded reserves in the financial statements related to these matters, which are developed using inputs derived from actuarial estimates and historical and anticipated experience data, depending on the nature of the reserve and, in certain instances, with consultation of legal counsel, internal and external consultants and engineers. SubjectAmounts recorded for identified contingent liabilities are estimates, which are reviewed periodically and adjusted to reflect additional information when it becomes available.
Financial Instruments: The Company uses various financial instruments, including derivative instruments, to manage the uncertainties inherent in estimating future costsrisks associated with interest and currency rate exposures. These financial instruments are not used for these types of liabilities,trading or speculative purposes. When a derivative contract is entered into, the Company believesdesignates 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 estimated reserves are reasonable and does not believe the final determinationhedge 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 with respect to these matters would have a material effect onor forecasted transactions.
The Company assesses at inception and at least quarterly thereafter, whether the financial condition, results of operations, liquidity orderivatives used in cash flow hedging transactions are effective in offsetting the changes in the cash flows of the Company for any year. Referhedged item. To the extent the derivative is deemed to Note 19for further details onbe an effective hedge, the fair market value changes of the instrument are recorded to Accumulated other comprehensive loss contingencies.
Derivative Instruments: The Company periodically enters into cash flow and other derivative transactionssubsequently reclassified to specificallyNet earnings when the hedged transaction affects earnings. Changes in the fair market value of derivatives not deemed to be an effective hedge exposure to various risks related to currency and interest rates.are recorded in Net earnings in the period of change. The Company recognizes all derivativesderivative instruments on the Consolidated Balance Sheets at their fair value, as either assets or liabilities. For designated cash flow hedges, the effective portionwhich is determined through market-based valuations and may not be representative of the changesactual gains or losses that will be recorded when these instruments mature due to future fluctuations in fair value ofthe markets in which they are traded. If the hedging relationship ceases to be effective subsequent to inception, or it becomes probable that a forecasted transaction will no longer occur, the hedging relationship will be undesignated, and any future gains or losses on the derivative contract isinstrument will be recorded in Other comprehensive income (loss), net of tax, and in Net earnings at the time earnings are affected by the hedged transaction. For other derivative transactions, the changes in the fair value of the derivative contract are immediately recognized in Net earnings. Refer to Note 10 for further details on derivative instruments.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements:
In July 2015,October 2021, the FASB issued ASU 2015-11, "InventoryNo. 2021-08, "Business Combinations (Topic 330)805): SimplifyingAccounting for Contract Assets and Contract Liabilities from Contracts with Customers." This ASU requires contract assets and contract liabilities (e.g., deferred revenue) acquired in a business combination to be recognized and measured by the Measurement of Inventory." ASU 2015-11 changesacquirer on the measurement principle for inventoryacquisition date in accordance with ASC 606, "Revenue 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 pricesContracts with Customers". Generally, this new guidance will result in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. The Company adopted the provisions of ASU 2015-11 on January 1, 2017. The adoption of ASU 2015-11 did not have a material impact on the consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory." This update addresses the income tax consequences of intra-entity transfers of assets other than inventory. Previously, GAAP prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. In addition, interpretations of this guidance have developed in practice over the years for transfers of certain intangible and tangible assets. The amendments in the update will require recognition of current and deferred income taxes resulting from an intra-entity transfer of an asset other than inventory when the transfer occurs. The Company elected to early adopt on January 1, 2017. As a result, during the first quarter of 2017, the Company recognized a cumulative effect within retained earnings of $5.0 million with an offset to other currentacquirer recognizing contract assets and other noncurrent assets.
In January 2017,contract liabilities at the FASB issued ASU 2017-04, "Intangibles– Goodwill and Other (Topic 350): Simplifyingsame amounts recorded by the Accounting for Goodwill Impairment." The amended guidance simplifiesacquiree. Historically, such amounts were recognized by the accounting for goodwill impairment for all entities by eliminating the requirement to perform a hypothetical purchase price allocation. A goodwill impairment charge will now be recognized for
the amount by which the carrying value of a reporting unit exceeds itsacquirer at fair value not to exceed the carrying amount of goodwill. Thein purchase accounting. This ASU will beis effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for any impairment tests after January 1, 2017. The Company elected to early adopt on October 1, 2017; however, this new standard did not impact our annual impairment test performed on goodwill as of October 1, 2017.
Recently Issued Accounting Pronouncements:
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers" (ASC 606). ASC 606 is a single, comprehensive revenue recognition model for all contracts with customers. The model is based on changes in contract assets (rights to receive consideration) and liabilities (obligations to provide a good or perform a service). Revenue is recognized based on the satisfaction of performance obligations, which occurs when control of a good or service transfers to a customer. ASC 606
contains expanded disclosure requirements relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption ("modified retrospective method"). The FASB has also issued the following standards which clarify ASU 2014-09: ASU 2017-14, Revenue Recognition, Revenue from Contracts with Customers: Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 116 and SEC Release No. 33-10403, ASU 2017-13, Revenue Recognition, Revenue from Contracts with Customers: Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments, ASU 2016-20, Revenue from Contracts with Customers: Technical Corrections and Improvements, ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients and ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing. The Company adopted each of these standards on January 1, 2018 on a modified retrospective basis. The Company has completed an assessment of the new standard’s impact and determined the new standards will not have a material impact on the Company's consolidated statements of comprehensive income, balance sheets or statements of cash flows. The Company will expand the consolidated financial statement disclosures in order to comply with ASU 2014-09 starting in our first quarter 10-Q of 2018. The expanded disclosure will present in a tabular format the split by business segment between 1) product and service revenue, and 2) products transferred at a point in time and services transferred over time.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 requires the identification of arrangements that should be accounted for as leases by lessees. In general, for lease arrangements exceeding a twelve month term, these arrangements will be recognized as assets and liabilities on the balance sheet of the lessee. Under ASU 2016-02, a right-of-use asset and lease obligation will be recorded for all leases, whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. The ASU is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted. ASU 2016-02 is required to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical expedients. The Company is continuing to assess what impact ASU 2016-02 will have on the consolidated financial statements; however, the Company anticipates that this adoption will result in a significant gross-up of assets and liabilities on its consolidated balance sheets and will require changes to its systems and processes.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. The ASU will be effective for fiscal years beginning after December 15, 2019,2022, including interim periods within those fiscal years. Early adoption is permitted.permitted, including in interim periods, for any financial statements that have not yet been issued. The Company is assessing whatelected to early adopt ASU 2021-08 on January 1, 2022, and as such, applied this new guidance to the Access Technologies business combination (see Note 3), which did not result in a material impact ASU 2016-13 will have onto the consolidated financial statements.Consolidated Financial Statements for the year ended December 31, 2022.
In August 2016,
NOTE 3 - ACQUISITIONS
On July 5, 2022, the FASB issued ASU 2016-15, "StatementCompany, through its subsidiaries, completed the acquisition of Cash Flows (Topic 230): Clarification of Certain Cash ReceiptsStanley Access Technologies LLC and Cash Payments." ASU 2016-15 eliminates the diversity in practiceassets related to the classificationautomatic entrance solutions business from Stanley Black & Decker, Inc. (the "Access Technologies business"). The total preliminary cash consideration paid for the acquisition was $923.1 million, and the acquisition was accounted for as a business combination.
The Access Technologies business is a leading manufacturer, installer and service provider of certain cash receipts and paymentsautomatic entrance solutions in North America, primarily in the statementU.S. and Canada. Its diversified customer base centers on non-residential settings, including retail, healthcare, education, commercial offices, hospitality and government. This acquisition helps the Company create a more comprehensive portfolio of cash flows, by adding or clarifying guidance on eight specificaccess solutions with the addition of automated entrances. Additionally, the Access Technologies business adds an expansive service and support network throughout the U.S. and Canada, broadening the Company's solutions to national, regional and local customers and complementing the Company's existing strengths in these non-residential markets. The Access Technologies business has been integrated into the Allegion Americas segment.
The following table summarizes the preliminary allocation of the purchase price to assets acquired and liabilities assumed as of the acquisition date:
| | | | | |
In millions | |
Accounts receivable, net | $ | 69.9 | |
Inventories | 50.8 | |
Other current assets | 0.3 | |
Property, plant and equipment | 14.7 | |
Goodwill | 631.5 | |
Intangible assets | 222.5 | |
Other noncurrent assets | 8.8 | |
Accounts payable | (20.8) | |
Accrued expenses and other current liabilities | (31.5) | |
Other noncurrent liabilities | (23.1) | |
Total net assets acquired and liabilities assumed | $ | 923.1 | |
The valuation of assets acquired and liabilities assumed has not yet been finalized as of December 31, 2022. Finalization of the valuation during the measurement period could result in a change in the amounts recorded for acquired working capital balances, goodwill, income tax assets and liabilities, among other items. The completion of the valuation will occur no later than one year from the acquisition date. Intangible assets recognized as of the acquisition date were comprised of the following:
| | | | | | | | | | | | | | |
| | Value (in millions) | | Useful life (in years) |
Completed technologies/patents | | $ | 6.2 | | | 5 |
Customer relationships | | 137.4 | | | 23 |
Trade names (finite-lived) | | 56.8 | | | 5 |
Backlog revenue | | 22.1 | | | 2 |
Goodwill results from several factors, including Allegion-specific synergies that were excluded from the cash flow issues. projections used in the valuation of intangible assets and intangible assets that do not qualify for separate recognition, such as an assembled workforce. Goodwill resulting from this acquisition is expected to be deductible for tax purposes.
The ASU will be effectivefollowing unaudited pro forma financial information for annualthe years ended December 31, 2022 and interim reporting periods beginning after December 15, 2017, and as such,2021, reflects the consolidated results of operations of the Company adopted ASU 2016-15as if this acquisition had taken place on January 1, 2018. 2021:
| | | | | | | | | | | |
In millions | 2022 | | 2021 |
Net revenues | $ | 3,449.0 | | | $ | 3,203.2 | |
Net earnings attributable to Allegion plc | 479.3 | | | 437.6 | |
The amendments in this update will be applied retrospectively to all periodsunaudited pro forma financial information is presented beginning in 2018, unless deemed impracticable, in which case, prospective application is permitted. The Companyfor informational purposes only and does not expectpurport to be indicative of results of operations that would have occurred had the adoptionpro forma events taken place on the date indicated or the future consolidated results of operations of the combined company. The unaudited pro forma financial information has been calculated after applying the Company's accounting policies and adjusting the historical financial results to reflect additional items directly attributable to the acquisition that would have been incurred assuming the acquisition had occurred on January 1, 2021. Adjustments to historical financial information for the years ended December 31, 2022 and 2021, include:
| | | | | | | | | | | |
In millions | 2022 | | 2021 |
Intangible asset amortization expense, net of tax | $ | (10.1) | | | $ | (23.3) | |
Interest expense, net of tax | (9.4) | | | (27.7) | |
Acquisition and integration costs, net of tax | 21.6 | | | (21.6) | |
Inventory fair value step-up amortization, net of tax | 4.5 | | | (4.5) | |
The following financial information reflects the Net revenues and Earnings before income taxes generated by the Access Technologies business since the acquisition date included within the Company's Consolidated Statement of Comprehensive Income for the year ended December 31, 2022:
| | | | | | | |
In millions | | | |
Net revenues | $ | 185.9 | | | |
Earnings before income taxes | 1.5 | | | |
Intangible asset amortization of $18.1 million and amortization of $6.0 million related to a fair value of inventory step-up are included in the Earnings before income taxes amount presented above, while acquisition and integration related expenses and Interest expense related to acquisition financing are excluded from this standardamount.
In July 2021, the Company acquired, through its subsidiaries, certain assets of Astrum Benelux B.V. ("Astum Benelux") and 100% of the equity of WorkforceIT B.V. in the Netherlands ("WorkforceIT"), both of which were previously held under common control and offer workforce management technology products and solutions in the Benelux region of Europe. Neither the assets from Astrum Benelux nor the acquisition of WorkforceIT had a material impact on the Consolidated Financial Statements. Both WorkforceIT and the assets acquired from Astrum Benelux were accounted for as a business combination and have been integrated into the Allegion International segment.
In December 2020, the Company acquired the remaining interest of Yonomi, Inc. ("Yonomi"), a U.S. based smart home integration platform provider and innovation leader in IoT Cloud platforms, through one of its subsidiaries. Prior to acquisition, the Company held a noncontrolling interest in Yonomi that was considered an equity method investment. This acquisition was accounted for as a business combination and did not have a material impact on the consolidated financial statements.Consolidated Financial Statements. Yonomi has been integrated into the Allegion Americas segment.
In January 2017,During the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifyingyears ended December 31, 2022, 2021 and 2020, the DefinitionCompany incurred $30.5 million, $4.4 million and $2.3 million, respectively, of a Business." This update provides guidance to assist companiesacquisition and integration related expenses, which are included in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The update provides a more robust framework to use in determining when a set of transferred assetsSelling and activities is a business. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017, and requires prospective adoption. The Company adopted ASU 2017-01 on January 1, 2018. The Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, "Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." ASU 2017-07 requires that an employer report the service cost componentadministrative expenses in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other componentsConsolidated Statement of net benefit cost are required to be presented in the statement of comprehensive income separately from the service cost component and outside a subtotal of operating income. ASU 2017-07 also allows only the service cost component to be eligible for capitalization when applicable (for example, as a cost of internally manufactured inventory or a self-constructed asset). The ASU is effective for annual periods beginning after December 15, 2017, and as such, the Company adopted ASU 2017-07 on January 1, 2018. The ASU will be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the consolidated statement of comprehensive income and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The amendments allow a practical expedient that permits an employer to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. The Company intends to apply these practical expedients for prior period presentation. The Company does not believe the adoption of the new standard will have a material impact on the Company's consolidated financial statements.Comprehensive Income.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." ASU 2017-12 addresses previous limitations on how an entity can designate the hedged risk in certain cash flow and fair value hedging relationships by expanding and refining hedge accounting for both nonfinancial and financial risk components and aligning the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The ASU is effective for annual periods beginning after December 15, 2018, with early adoption permitted. The Company elected to early adopt the provisions of ASU 2017-12 on January 1, 2018. The amendments in this update will be applied to hedging relationships existing on the date of adoption. Presentation and disclosure amendments will be applied prospectively. The adoption of ASU 2017-12 is not expected to have a material impact on the Company's consolidated financial statements.
NOTE 34 – INVENTORIES
At December 31, the major classes of inventoryInventories were as follows:
| | | | | | | | | | | | | | |
In millions | | 2022 | | 2021 |
Raw materials | | $ | 212.2 | | | $ | 144.4 | |
Work-in-process | | 41.7 | | | 42.2 | |
Finished goods | | 225.1 | | | 193.8 | |
Total | | $ | 479.0 | | | $ | 380.4 | |
At December 31, the major classes of property, plant and equipment were as follows:
Future estimated amortization expense on existing intangible assets in each of the next five years amounts to approximately $22.7 million for 2018, $21.8$58.8 million for 2019, $21.82023, $54.1 million for 2020, $21.72024, $48.3 million for 2021, and $21.72025, $45.1 million for 2022.2026 and $38.2 million for 2027.
The Company sponsors several U.S. defined benefit and defined contribution plans covering substantially all of our U.S. employees. Additionally, the Company has non-U.S. defined benefit plans to eligible employees and defined contribution plans covering eligible non-U.S. employees. Postretirement benefits, other than pensions, provide healthcare benefits,retirees and in some instances, life insurance benefits for certain eligible employees.