Allegion plc - Quarter Report: 2017 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-Q
_______________________________
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2017
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-35971
_______________________________
![logoallea02.jpg](https://www.sec.gov/Archives/edgar/data/0001579241/000157924117000039/logoallea02.jpg)
ALLEGION PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
_______________________________
Ireland | 98-1108930 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Block D
Iveagh Court
Harcourt Road
Dublin 2, Ireland
(Address of principal executive offices, including zip code)
+(353) (1) 2546200
(Registrant’s telephone number, including area code)
_______________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |
Non-accelerated filer | ¨ | (Do not check if a smaller reporting company) | ||
Smaller reporting company | ¨ | |||
Emerging growth company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
The number of ordinary shares outstanding of Allegion plc as of July 24, 2017 was 94,984,951.
ALLEGION PLC
FORM 10-Q
INDEX
Item 1 - | ||
Item 2 - | ||
Item 3 - | ||
Item 4 - | ||
Item 1 - | ||
Item 1A - | ||
Item 2 - | ||
Item 6 - | ||
PART I-FINANCIAL INFORMATION
Item 1. | Financial Statements |
ALLEGION PLC
CONDENSED AND CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three months ended | Six months ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
In millions, except per share amounts | 2017 | 2016 | 2017 | 2016 | |||||||||||
Net revenues | $ | 627.0 | $ | 584.9 | $ | 1,175.8 | $ | 1,087.2 | |||||||
Cost of goods sold | 346.0 | 317.5 | 654.0 | 603.5 | |||||||||||
Selling and administrative expenses | 146.9 | 143.1 | 288.9 | 276.9 | |||||||||||
Operating income | 134.1 | 124.3 | 232.9 | 206.8 | |||||||||||
Interest expense | 16.1 | 16.5 | 32.0 | 32.8 | |||||||||||
Other income, net | (5.2 | ) | (8.6 | ) | (4.6 | ) | (17.4 | ) | |||||||
Earnings before income taxes | 123.2 | 116.4 | 205.5 | 191.4 | |||||||||||
Provision for income taxes | 17.4 | 21.0 | 31.0 | 37.2 | |||||||||||
Net earnings | 105.8 | 95.4 | 174.5 | 154.2 | |||||||||||
Less: Net earnings attributable to noncontrolling interests | 0.3 | 0.4 | 0.6 | 1.5 | |||||||||||
Net earnings attributable to Allegion plc | $ | 105.5 | $ | 95.0 | $ | 173.9 | $ | 152.7 | |||||||
Earnings per share attributable to Allegion plc ordinary shareholders: | |||||||||||||||
Basic net earnings | $ | 1.11 | $ | 0.99 | $ | 1.82 | $ | 1.59 | |||||||
Diluted net earnings | $ | 1.10 | $ | 0.98 | $ | 1.81 | $ | 1.58 | |||||||
Weighted-average shares outstanding | |||||||||||||||
Basic | 95.2 | 95.8 | 95.3 | 95.9 | |||||||||||
Diluted | 95.9 | 96.8 | 96.0 | 96.8 | |||||||||||
Dividends declared per ordinary share | $ | 0.16 | $ | 0.12 | $ | 0.32 | $ | 0.24 | |||||||
Total comprehensive income | $ | 153.1 | $ | 69.0 | $ | 234.8 | $ | 155.9 | |||||||
Less: Total comprehensive income (loss) attributable to noncontrolling interests | 0.7 | (0.4 | ) | 1.2 | 2.2 | ||||||||||
Total comprehensive income attributable to Allegion plc | $ | 152.4 | $ | 69.4 | $ | 233.6 | $ | 153.7 |
See accompanying notes to condensed and consolidated financial statements.
1
ALLEGION PLC
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(Unaudited)
In millions | June 30, 2017 | December 31, 2016 | |||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 245.5 | $ | 312.4 | |||
Accounts and notes receivable, net | 310.9 | 260.0 | |||||
Inventories | 247.8 | 220.6 | |||||
Other current assets | 35.0 | 36.3 | |||||
Total current assets | 839.2 | 829.3 | |||||
Property, plant and equipment, net | 241.3 | 226.6 | |||||
Goodwill | 745.7 | 716.8 | |||||
Intangible assets, net | 386.8 | 357.4 | |||||
Other noncurrent assets | 121.6 | 117.3 | |||||
Total assets | $ | 2,334.6 | $ | 2,247.4 | |||
LIABILITIES AND EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 194.6 | $ | 179.9 | |||
Accrued expenses and other current liabilities | 195.3 | 201.5 | |||||
Short-term borrowings and current maturities of long-term debt | 46.9 | 48.2 | |||||
Total current liabilities | 436.8 | 429.6 | |||||
Long-term debt | 1,394.1 | 1,415.6 | |||||
Other noncurrent liabilities | 234.3 | 285.8 | |||||
Total liabilities | 2,065.2 | 2,131.0 | |||||
Equity: | |||||||
Allegion plc shareholders’ equity: | |||||||
Ordinary shares, $0.01 par value (94,980,455 and 95,273,927 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively) | 0.9 | 1.0 | |||||
Retained earnings | 468.9 | 376.6 | |||||
Accumulated other comprehensive loss | (204.5 | ) | (264.3 | ) | |||
Total Allegion plc shareholders’ equity | 265.3 | 113.3 | |||||
Noncontrolling interests | 4.1 | 3.1 | |||||
Total equity | 269.4 | 116.4 | |||||
Total liabilities and equity | $ | 2,334.6 | $ | 2,247.4 |
See accompanying notes to condensed and consolidated financial statements.
2
ALLEGION PLC
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended | |||||||
June 30, | |||||||
In millions | 2017 | 2016 | |||||
Cash flows from operating activities: | |||||||
Net earnings | $ | 174.5 | $ | 154.2 | |||
Adjustments to arrive at net cash provided by operating activities: | |||||||
Depreciation and amortization | 32.7 | 33.5 | |||||
Discretionary pension plan contribution | (50.0 | ) | — | ||||
Changes in assets and liabilities and other non-cash items | (93.2 | ) | (86.5 | ) | |||
Net cash provided by operating activities | 64.0 | 101.2 | |||||
Cash flows from investing activities: | |||||||
Capital expenditures | (21.4 | ) | (16.5 | ) | |||
Acquisition of and equity investments in businesses, net of cash acquired | (20.8 | ) | (31.4 | ) | |||
Proceeds from sale of marketable securities | — | 14.1 | |||||
Proceeds from sale of equity investment | 15.2 | — | |||||
Other investing activities, net | 1.1 | (4.7 | ) | ||||
Net cash used in investing activities | (25.9 | ) | (38.5 | ) | |||
Cash flows from financing activities: | |||||||
Short-term borrowings, net | (1.3 | ) | — | ||||
Payments of long-term debt | (23.5 | ) | (40.5 | ) | |||
Debt repayments, net | (24.8 | ) | (40.5 | ) | |||
Dividends paid to ordinary shareholders | (30.4 | ) | (22.9 | ) | |||
Acquisition/divestiture of noncontrolling interests | — | (0.4 | ) | ||||
Repurchase of ordinary shares | (60.0 | ) | (30.0 | ) | |||
Other financing activities, net | 4.7 | (1.2 | ) | ||||
Net cash used in financing activities | (110.5 | ) | (95.0 | ) | |||
Effect of exchange rate changes on cash and cash equivalents | 5.5 | 1.7 | |||||
Net decrease in cash and cash equivalents | (66.9 | ) | (30.6 | ) | |||
Cash and cash equivalents - beginning of period | 312.4 | 199.7 | |||||
Cash and cash equivalents - end of period | $ | 245.5 | $ | 169.1 |
See accompanying notes to condensed and consolidated financial statements.
3
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Basis of Presentation
The accompanying condensed and consolidated financial statements of Allegion plc, an Irish public limited company, and its consolidated subsidiaries ("Allegion" or the "Company"), reflect the consolidated operations of the Company and have been prepared in accordance with United States Securities and Exchange Commission ("SEC") interim reporting requirements. Accordingly, the accompanying condensed and consolidated financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America ("GAAP") for full financial statements and should be read in conjunction with the consolidated financial statements included in the Allegion Annual Report on Form 10-K for the year ended December 31, 2016. In the opinion of management, the accompanying condensed and consolidated financial statements contain all adjustments, which include normal recurring adjustments, necessary to state fairly the consolidated unaudited results for the interim periods presented.
Note 2 – Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements:
In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory." ASU 2015-11 changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. The standard defines net realizable value as estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. The 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 condensed and 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 adopt early 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 current assets and other noncurrent assets.
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"). This guidance will be effective for the Company January 1, 2018. The FASB has also issued the following standards which clarify ASU 2014-09 and have the same effective date as the original standard: ASU No. 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 has completed an assessment of the new standard’s impact and a technical assessment of material customer contracts. The Company will choose the modified retrospective method upon adoption in 2018. The adoption of the new standard will not have a material impact on the Company's condensed and consolidated statements of comprehensive income, balance sheets or statements of cash flows. The Company will expand the condensed and consolidated financial statement disclosures in order to comply with ASU 2014-09.
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
4
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
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 anticipates that the adoption of ASU 2016-02 will materially affect its condensed and consolidated balance sheets and will require changes to its systems and processes. The Company is assessing what impact ASU 2016-02 will have on the condensed and consolidated financial statements upon adoption.
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, including interim periods within those fiscal years. Early adoption is permitted. The Company is assessing what impact ASU 2016-13 will have on the condensed and consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Clarification of Certain Cash Receipts and Cash Payments." ASU 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues. The ASU will be effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. The amendments in this update will be applied retrospectively to all periods presented, unless deemed impracticable, in which case, prospective application is permitted. The Company is assessing what impact ASU 2016-15 will have on the condensed and consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, "Intangibles– Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment." The amended guidance simplifies 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 its fair value, not to exceed the carrying amount of goodwill.
The ASU will be effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for any impairment tests after January 1, 2017. The Company is assessing what impact ASU 2017-04 will have on the condensed and consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, "Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." ASU 2017-07 requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the statement of comprehensive income separately from the service cost component and outside a subtotal of operating income. ASU 2017-07 also allows only the service cost component to be eligible for capitalization when applicable (for example, as a cost of internally manufactured inventory or a self-constructed asset). The ASU is effective for annual periods beginning after December 15, 2017. The ASU should 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 income statement 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 is still assessing the impact of ASU 2017-07 but does not believe it will have a material impact on the condensed and consolidated financial statements.
Note 3 – Inventories
Inventories are stated at the lower of cost or net realizable value using the first-in first-out (FIFO) method.
5
The major classes of inventory were as follows:
In millions | June 30, 2017 | December 31, 2016 | |||||
Raw materials | $ | 70.3 | $ | 56.7 | |||
Work-in-process | 28.4 | 23.6 | |||||
Finished goods | 149.1 | 140.3 | |||||
Total | $ | 247.8 | $ | 220.6 |
Note 4 – Goodwill
The changes in the carrying amount of goodwill for the six months ended June 30, 2017 were as follows:
In millions | Americas | EMEIA | Asia Pacific | Total | |||||||||||
December 31, 2016 (gross) | $ | 372.9 | $ | 736.1 | $ | 93.3 | $ | 1,202.3 | |||||||
Accumulated impairment | — | (478.6 | ) | (6.9 | ) | (485.5 | ) | ||||||||
December 31, 2016 (net) | 372.9 | 257.5 | 86.4 | 716.8 | |||||||||||
Acquisitions and settlements | 3.3 | (1.7 | ) | 1.3 | 2.9 | ||||||||||
Currency translation | — | 21.5 | 4.5 | 26.0 | |||||||||||
June 30, 2017 (net) | $ | 376.2 | $ | 277.3 | $ | 92.2 | $ | 745.7 |
Note 5 – Intangible Assets
The gross amount of the Company’s intangible assets and related accumulated amortization were as follows:
June 30, 2017 | December 31, 2016 | |||||||||||||||||||||||
In millions | Gross carrying amount | Accumulated amortization | Net carrying amount | Gross carrying amount | Accumulated amortization | Net carrying amount | ||||||||||||||||||
Completed technologies/patents | $ | 51.2 | $ | (28.1 | ) | $ | 23.1 | $ | 48.0 | $ | (25.3 | ) | $ | 22.7 | ||||||||||
Customer relationships | 309.4 | (63.3 | ) | 246.1 | 278.9 | (51.6 | ) | 227.3 | ||||||||||||||||
Trademarks (finite-lived) | 85.2 | (42.2 | ) | 43.0 | 78.5 | (37.3 | ) | 41.2 | ||||||||||||||||
Other | 12.6 | (10.5 | ) | 2.1 | 11.0 | (9.4 | ) | 1.6 | ||||||||||||||||
Total finite-lived intangible assets | 458.4 | $ | (144.1 | ) | 314.3 | 416.4 | $ | (123.6 | ) | 292.8 | ||||||||||||||
Trademarks (indefinite-lived) | 72.5 | 72.5 | 64.6 | 64.6 | ||||||||||||||||||||
Total | $ | 530.9 | $ | 386.8 | $ | 481.0 | $ | 357.4 |
Intangible asset amortization expense was $10.6 million and $10.2 million for the six months ended June 30, 2017 and 2016. Future estimated amortization expense on existing intangible assets in each of the next five years amounts to approximately $21.7 million for full year 2017, $21.7 million for 2018, $20.8 million for 2019, $20.8 million for 2020, and $20.8 million for 2021.
Note 6 – Acquisitions
On January 3, 2017, the Company acquired Republic Doors & Frames, LLC. through one of its subsidiaries. In 2016, we completed one business acquisition (Trelock GmbH). These acquisitions did not have a material impact on the condensed and consolidated financial statements.
6
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Note 7 – Divestitures
On April 5, 2017, iDevices LLC, including the Company's equity investment, was acquired by a third party. The Company recorded a $4.9 million gain in the second quarter of 2017 within Other income, net.
As previously disclosed, the Company sold a majority stake of Bocom Wincent Technologies Co., Ltd. ("Systems Integration") in the fourth quarter of 2015, retaining 15% of the shares. The Company currently estimates the fair value of the consideration to be $2.7 million, which is classified within Other noncurrent assets within the Condensed and Consolidated Balance Sheets. The Company does not expect to incur any material charges in future periods related to Systems Integration.
Note 8 – Debt and Credit Facilities
Long-term debt and other borrowings consisted of the following:
In millions | June 30, 2017 | December 31, 2016 | |||||
Term Loan A Facility | $ | 856.3 | $ | 879.8 | |||
5.75% Senior notes due 2021 | 300.0 | 300.0 | |||||
5.875% Senior notes due 2023 | 300.0 | 300.0 | |||||
Other debt, including capital leases, maturing in various amounts through 2024 | 1.0 | 2.3 | |||||
Unamortized debt issuance costs, net | (16.3 | ) | (18.3 | ) | |||
Total debt | 1,441.0 | 1,463.8 | |||||
Less current portion of long-term debt | 46.9 | 48.2 | |||||
Total long-term debt | $ | 1,394.1 | $ | 1,415.6 |
Senior Secured Credit Facilities
The Company has credit facilities consisting of a $938.4 million Term Loan Facility due in 2020 (the "Term Loan A Facility") and a $500.0 million Senior Secured Revolving Credit Facility (the "Revolver") maturing in 2020. The Company refers to these credit facilities as its "Senior Secured Credit Facilities."
The applicable margin for LIBOR rate borrowings range from 1.375% to 1.875% and the applicable margin for base rate borrowings range from 0.375% to 0.875%, in each case depending on the corporate credit or family rating. The Senior Secured Credit Facilities mature on October 15, 2020.
Outstanding borrowings under the Senior Secured Credit Facilities currently accrue interest at LIBOR plus an applicable margin. The margin for the Term Loan A Facility borrowings was 1.375% as of June 30, 2017.
To manage the Company's exposure to fluctuations in LIBOR rates, the Company has forward starting interest rate swaps to fix the interest rate paid during the contract period for $525.0 million of the Company's variable rate Term Loan A Facility. Swaps with notional amounts totaling $275.0 million expire in September 2017 and swaps effective September 2017 with notional amounts totaling $250.0 million expire in December 2020.
The Company repaid $23.5 million of principal on its Term Loan A Facility during the six months ended June 30, 2017. At June 30, 2017, the Company did not have any borrowings outstanding under the Revolver and had $19.2 million of letters of credit outstanding. Allegion plc is the primary borrower under the Senior Secured Credit Facilities.
Senior Notes
A wholly-owned subsidiary of the Company has issued $300.0 million of 5.75% senior notes due 2021 (the "2021 Senior Notes"). The 2021 Senior Notes accrue interest at the rate of 5.75% per annum, payable semi-annually on April 1 and October 1 of each year. The 2021 Senior Notes mature on October 1, 2021.
7
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
In September 2015, Allegion plc issued $300.0 million of 5.875% senior notes due 2023 (the "2023 Senior Notes"). The 2023 Senior Notes accrue interest at the rate of 5.875% per annum, payable semi-annually on March 15 and September 15 of each year, beginning March 15, 2016. The 2023 Senior Notes mature on September 15, 2023.
The weighted-average interest rate for borrowings was 2.7% under the Term Loan A Facility (including the effect of interest rate swaps) at June 30, 2017, 5.75% under the 2021 Senior Notes and 5.875% under the 2023 Senior Notes.
Note 9 – Financial Instruments
In the normal course of business, the Company uses various financial instruments, including derivative instruments, to manage the risks associated with interest and currency rate exposures. These financial instruments are not used for trading or speculative purposes.
On the date a derivative contract is entered into, the Company designates the derivative instrument as a cash flow hedge of a forecasted transaction, a cash flow hedge of a recognized asset or liability, or as an undesignated derivative. The Company formally documents its hedge relationships, including identification of the derivative instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. This process includes linking derivative instruments that are designated as hedges to specific assets, liabilities or forecasted transactions.
The fair market value of derivative instruments is determined through market-based valuations and may not be representative of the actual gains or losses that will be recorded when these instruments mature due to future fluctuations in the markets in which they are traded.
The Company assesses at inception and at least quarterly thereafter, whether the derivatives used in cash flow hedging transactions are highly effective in offsetting the changes in the cash flows of the hedged item. To the extent the derivative is deemed to be a highly effective hedge, the fair market value changes of the instrument are recorded to Accumulated other comprehensive income.
Any ineffective portion of a derivative instrument’s change in fair value is recorded in Net earnings in the period of change. If the hedging relationship ceases to be highly effective, or it becomes probable that a forecasted transaction is no longer expected to occur, the hedging relationship will be undesignated and any future gains and losses on the derivative instrument will be recorded in Net earnings.
Currency Hedging Instruments
The gross notional amount of the Company’s currency derivatives was $93.0 million and $132.6 million at June 30, 2017 and December 31, 2016, respectively. At June 30, 2017 and December 31, 2016, gains of $0.2 million and $0.8 million, net of tax, were included in Accumulated other comprehensive loss related to the fair value of the Company’s currency derivatives designated as cash flow hedges. The amount expected to be reclassified into Net earnings over the next twelve months is a gain of $0.2 million. The actual amounts that will be reclassified to Net earnings may vary from this amount as a result of changes in market conditions. Gains and losses associated with the Company’s currency derivatives not designated as hedges are recorded in Net earnings as changes in fair value occur. At June 30, 2017, the maximum term of the Company’s currency derivatives was less than one year.
Interest Rate Swaps
To manage the Company's exposure to fluctuations in LIBOR rates, the Company has forward starting interest rate swaps to fix the interest rate paid during the contract period for $525.0 million of the Company's variable rate Term Loan A Facility. Swaps with notional amounts totaling $275.0 million expire in September 2017 and swaps effective in September 2017 with notional amounts totaling $250.0 million expire in December 2020.
These interest rate swaps met the criteria to be accounted for as cash flow hedges of variable rate interest payments. Consequently, the changes in fair value of the interest rate swaps were recognized in Accumulated other comprehensive loss. At June 30, 2017 and December 31, 2016, gains of $2.1 million and $2.6 million, net of tax, were recorded in Accumulated other comprehensive loss related to these interest rate swaps. No gains are expected to be reclassified into Net earnings over the next twelve months. The actual amounts that will be reclassified to Net earnings may vary from this amount as a result of changes in market conditions.
8
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
The fair values of derivative instruments included within the Condensed and Consolidated Balance Sheets were as follows:
Asset derivatives | Liability derivatives | ||||||||||||||
In millions | June 30, 2017 | December 31, 2016 | June 30, 2017 | December 31, 2016 | |||||||||||
Derivatives designated as hedges: | |||||||||||||||
Currency derivatives | $ | — | $ | 0.7 | $ | 0.8 | $ | 0.1 | |||||||
Interest rate swaps | 3.4 | 4.6 | — | 0.4 | |||||||||||
Derivatives not designated as hedges: | |||||||||||||||
Currency derivatives | 0.2 | 0.3 | 0.4 | 0.2 | |||||||||||
Total derivatives | $ | 3.6 | $ | 5.6 | $ | 1.2 | $ | 0.7 |
Asset and liability currency derivatives included in the table above are recorded within Other current assets and Accrued expenses and other current liabilities, respectively. Asset and liability interest rate swap derivatives included in the table above are recorded within Other noncurrent assets and Accrued expenses and other current liabilities.
The amounts associated with derivatives designated as hedges affecting Net earnings and Accumulated other comprehensive loss for the three months ended June 30 were as follows:
Amount of gain (loss) recognized in Accumulated other comprehensive loss | Location of gain (loss) recognized in Net earnings | Amount of gain (loss) reclassified from Accumulated other comprehensive loss and recognized into Net earnings | |||||||||||||||
In millions | 2017 | 2016 | 2017 | 2016 | |||||||||||||
Currency derivatives | $ | 0.7 | $ | 1.9 | Cost of goods sold | $ | 1.9 | $ | 2.0 | ||||||||
Interest rate swaps | (1.1 | ) | (2.1 | ) | Interest expense | — | — | ||||||||||
Total | $ | (0.4 | ) | $ | (0.2 | ) | $ | 1.9 | $ | 2.0 |
The amounts associated with derivatives designated as hedges affecting Net earnings and Accumulated other comprehensive loss for the six months ended June 30 were as follows:
Amount of gain (loss) recognized in Accumulated other comprehensive loss | Location of gain (loss) recognized in Net earnings | Amount of gain (loss) reclassified from Accumulated other comprehensive loss and recognized into Net earnings | |||||||||||||||
In millions | 2017 | 2016 | 2017 | 2016 | |||||||||||||
Currency derivatives | $ | 1.6 | $ | 2.3 | Cost of goods sold | $ | 3.0 | $ | 5.3 | ||||||||
Interest rate swaps | (0.8 | ) | (3.5 | ) | Interest expense | — | — | ||||||||||
Total | $ | 0.8 | $ | (1.2 | ) | $ | 3.0 | $ | 5.3 |
The gains and losses associated with the Company's non-designated currency derivatives, which are offset by changes in the fair value of the underlying transactions, are included within Other income, net in the condensed and consolidated statements of comprehensive income.
Concentration of Credit Risk
The counterparties to the Company’s forward contracts and swaps consist of a number of investment grade major international financial institutions. The Company could be exposed to losses in the event of nonperformance by the counterparties. However, the credit ratings and the concentration of risk in these financial institutions are monitored on a continuous basis and present no significant credit risk to the Company.
9
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Note 10 – Pensions and Postretirement Benefits Other than Pensions
The Company sponsors several U.S. defined benefit and defined contribution plans covering substantially all of its U.S. employees. Additionally, the Company has non-U.S. defined benefit and defined contribution plans covering eligible non-U.S. employees. Postretirement benefits, other than pensions, provide healthcare benefits, and in some instances, life insurance benefits for certain eligible employees.
Pension Plans
The noncontributory defined benefit pension plans covering non-collectively bargained U.S. employees provide benefits on an average pay formula while most plans for collectively bargained U.S. employees provide benefits on a flat dollar benefit formula. The non-U.S. pension plans generally provide benefits based on earnings and years of service. The Company also maintains additional other supplemental plans for officers and other key employees.
The components of the Company’s net periodic pension benefit costs for the three and six months ended June 30 were as follows:
U.S. | |||||||||||||||
Three months ended | Six months ended | ||||||||||||||
In millions | 2017 | 2016 | 2017 | 2016 | |||||||||||
Service cost | $ | 2.2 | $ | 2.4 | $ | 4.4 | $ | 4.7 | |||||||
Interest cost | 2.6 | 2.5 | 5.1 | 5.0 | |||||||||||
Expected return on plan assets | (3.0 | ) | (2.6 | ) | (5.9 | ) | (5.1 | ) | |||||||
Net amortization of: | |||||||||||||||
Prior service costs | 0.1 | 0.1 | 0.2 | 0.3 | |||||||||||
Plan net actuarial losses | 1.2 | 1.4 | 2.3 | 2.7 | |||||||||||
Net periodic pension benefit cost | $ | 3.1 | $ | 3.8 | $ | 6.1 | $ | 7.6 |
Non-U.S. | |||||||||||||||
Three months ended | Six months ended | ||||||||||||||
In millions | 2017 | 2016 | 2017 | 2016 | |||||||||||
Service cost | $ | 0.8 | $ | 0.9 | $ | 1.6 | $ | 1.7 | |||||||
Interest cost | 2.2 | 2.9 | 4.3 | 5.8 | |||||||||||
Expected return on plan assets | (3.5 | ) | (3.7 | ) | (6.9 | ) | (7.4 | ) | |||||||
Amortization of plan net actuarial losses | 0.5 | 0.5 | 0.9 | 1.1 | |||||||||||
Net periodic pension benefit cost (income) | $ | — | $ | 0.6 | $ | (0.1 | ) | $ | 1.2 |
The Company made employer contributions of $52.1 million (of which $50.0 million was discretionary) and $2.1 million during the six months ended June 30, 2017 and 2016 to its defined benefit pension plans. Additional contributions of approximately $7.4 million are expected during the remainder of 2017.
Postretirement Benefits Other Than Pensions
The Company sponsors a postretirement plan that provides for healthcare benefits, and in some instances, life insurance benefits that cover certain eligible retired employees. The Company funds postretirement benefit obligations principally on a pay-as-you- go basis. Generally, postretirement health benefits are contributory with contributions adjusted annually. Life insurance plans for retirees are primarily noncontributory.
10
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
The components of net periodic postretirement benefit income for the three and six months ended June 30 were as follows:
Three months ended | Six months ended | ||||||||||||||
In millions | 2017 | 2016 | 2017 | 2016 | |||||||||||
Interest cost | $ | 0.1 | $ | 0.1 | $ | 0.2 | $ | 0.2 | |||||||
Net amortization of: | |||||||||||||||
Prior service gains | (0.4 | ) | (0.4 | ) | (0.8 | ) | (0.8 | ) | |||||||
Plan net actuarial gains | (0.1 | ) | — | (0.1 | ) | — | |||||||||
Net periodic postretirement benefit income | $ | (0.4 | ) | $ | (0.3 | ) | $ | (0.7 | ) | $ | (0.6 | ) |
Note 11 – Fair Value Measurement
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurements are based on a framework that utilizes the inputs market participants use to determine the fair value of an asset or liability and establishes a fair value hierarchy to prioritize those inputs. The fair value hierarchy is comprised of three levels that are described below:
• | Level 1 – Inputs based on quoted prices in active markets for identical assets or liabilities. |
• | Level 2 – Inputs other than Level 1 quoted prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. |
• | Level 3 – Unobservable inputs based on little or no market activity and that are significant to the fair value of the assets and liabilities. |
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability based on the best information available under the circumstances. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
11
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Assets and liabilities measured at fair value at June 30, 2017 were as follows:
Fair value measurements | Total fair value | ||||||||||||||
In millions | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Recurring fair value measurements | |||||||||||||||
Assets: | |||||||||||||||
Interest rate swaps | $ | — | $ | 3.4 | $ | — | $ | 3.4 | |||||||
Currency derivatives | — | 0.2 | — | 0.2 | |||||||||||
Total asset recurring fair value measurements | $ | — | $ | 3.6 | $ | — | $ | 3.6 | |||||||
Liabilities: | |||||||||||||||
Currency derivatives | $ | — | $ | 1.2 | $ | — | $ | 1.2 | |||||||
Deferred compensation plans | — | 18.9 | — | 18.9 | |||||||||||
Total liability recurring fair value measurements | $ | — | $ | 20.1 | $ | — | $ | 20.1 | |||||||
Financial instruments not carried at fair value | |||||||||||||||
Total debt | $ | — | $ | 1,488.2 | $ | — | $ | 1,488.2 | |||||||
Total financial instruments not carried at fair value | $ | — | $ | 1,488.2 | $ | — | $ | 1,488.2 |
Assets and liabilities measured at fair value at December 31, 2016 were as follows:
Fair value measurements | Total fair value | ||||||||||||||
In millions | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Recurring fair value measurements | |||||||||||||||
Assets: | |||||||||||||||
Interest rate swap | $ | — | $ | 4.6 | $ | — | $ | 4.6 | |||||||
Currency derivatives | — | 1.0 | — | 1.0 | |||||||||||
Total asset recurring fair value measurements | $ | — | $ | 5.6 | $ | — | $ | 5.6 | |||||||
Liabilities: | |||||||||||||||
Currency derivatives | $ | — | $ | 0.3 | $ | — | $ | 0.3 | |||||||
Deferred compensation plans | — | 16.8 | — | 16.8 | |||||||||||
Total liability recurring fair value measurements | $ | — | $ | 17.5 | $ | — | $ | 17.5 | |||||||
Financial instruments not carried at fair value | |||||||||||||||
Total debt | $ | — | $ | 1,510.6 | $ | — | $ | 1,510.6 | |||||||
Total financial instruments not carried at fair value | $ | — | $ | 1,510.6 | $ | — | $ | 1,510.6 |
The Company determines the fair value of its financial assets and liabilities using the following methodologies:
• | Currency derivatives – These instruments include foreign currency contracts for non-functional currency balance sheet exposures. The fair value of the foreign currency contracts are determined based on a pricing model that uses spot rates and forward prices from actively quoted currency markets that are readily accessible and observable. |
• | Interest rate swaps – These instruments include interest rate swap contracts for up to $525.0 million of the Company's variable rate debt. The fair value of the derivative instruments are determined based on quoted prices for the Company's swaps, which are not considered an active market. |
12
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
• | Deferred compensation plans - These include obligations related to deferred compensation adjusted for market performance. The fair value is obtained based on observable market prices quoted on public exchanges for similar instruments. |
• | Debt – These securities are recorded at cost and include debt instruments maturing through 2024. The fair value of the long-term debt instruments is obtained based on observable market prices quoted on public exchanges for similar instruments. |
The carrying values of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings are a reasonable estimate of their fair value due to the short-term nature of these instruments.
These methodologies used by the Company to determine the fair value of its financial assets and liabilities at June 30, 2017 are the same as those used at December 31, 2016. There have been no significant transfers between Level 1 and Level 2 categories.
Note 12 – Equity
The reconciliation of Ordinary shares is as follows:
In millions | Total | |
December 31, 2016 | 95.3 | |
Shares issued under incentive plans, net | 0.5 | |
Repurchase of ordinary shares | (0.8 | ) |
June 30, 2017 | 95.0 |
During the six months ended June 30, 2017, the Company paid $60.0 million to repurchase 0.8 million ordinary shares on the open market under a share repurchase program previously approved by its Board of Directors.
The components of Equity for the six months ended June 30, 2017 were as follows:
In millions | Allegion plc shareholders’ equity | Noncontrolling interests | Total equity | ||||||||
Balance at December 31, 2016 | $ | 113.3 | $ | 3.1 | $ | 116.4 | |||||
Net earnings | 173.9 | 0.6 | 174.5 | ||||||||
Currency translation | 63.5 | 0.6 | 64.1 | ||||||||
Change in value of derivatives qualifying as cash flow hedges, net of tax | (1.5 | ) | — | (1.5 | ) | ||||||
Pension and OPEB adjustments, net of tax | (2.3 | ) | — | (2.3 | ) | ||||||
Total comprehensive income | 233.6 | 1.2 | 234.8 | ||||||||
Cumulative effect of change in accounting principle | (5.0 | ) | — | (5.0 | ) | ||||||
Share-based compensation | 9.0 | — | 9.0 | ||||||||
Dividends to noncontrolling interests | — | (0.1 | ) | (0.1 | ) | ||||||
Dividends to ordinary shareholders | (30.4 | ) | — | (30.4 | ) | ||||||
Repurchase of ordinary shares | (60.0 | ) | — | (60.0 | ) | ||||||
Shares issued under incentive plans, net | 4.8 | — | 4.8 | ||||||||
Other | — | (0.1 | ) | (0.1 | ) | ||||||
Balance at June 30, 2017 | $ | 265.3 | $ | 4.1 | $ | 269.4 |
13
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
The components of Equity for the six months ended June 30, 2016 were as follows:
In millions | Allegion plc shareholders’ equity | Noncontrolling interests | Total equity | ||||||||
Balance at December 31, 2015 | $ | 25.6 | $ | 4.1 | $ | 29.7 | |||||
Net earnings | 152.7 | 1.5 | 154.2 | ||||||||
Currency translation | 8.2 | 0.7 | 8.9 | ||||||||
Change in value of marketable securities and derivatives qualifying as cash flow hedges, net of tax | (19.1 | ) | — | (19.1 | ) | ||||||
Pension and OPEB adjustments, net of tax | 11.9 | — | 11.9 | ||||||||
Total comprehensive income | 153.7 | 2.2 | 155.9 | ||||||||
Share-based compensation | 8.8 | — | 8.8 | ||||||||
Acquisition/divestiture of noncontrolling interests | (0.4 | ) | — | (0.4 | ) | ||||||
Dividends to noncontrolling interests | — | (2.7 | ) | (2.7 | ) | ||||||
Dividends to ordinary shareholders | (23.1 | ) | — | (23.1 | ) | ||||||
Shares issued under incentive plans, net | 4.6 | — | 4.6 | ||||||||
Repurchase of ordinary shares | (30.0 | ) | — | (30.0 | ) | ||||||
Balance at June 30, 2016 | $ | 139.2 | $ | 3.6 | $ | 142.8 |
Other Comprehensive Income (Loss)
The changes in Accumulated other comprehensive income (loss) for the six months ended June 30, 2017 are as follows:
In millions | Cash flow hedges | Pension and OPEB Items | Foreign Currency Items | Total | ||||||||||||
December 31, 2016 | $ | 3.4 | $ | (120.5 | ) | $ | (147.2 | ) | $ | (264.3 | ) | |||||
Other comprehensive income (loss) before reclassifications | 0.9 | (4.1 | ) | 63.5 | 60.3 | |||||||||||
Amounts reclassified from accumulated other comprehensive income | (3.0 | ) | 2.5 | — | (0.5 | ) | ||||||||||
Tax expense (benefit) | 0.6 | (0.6 | ) | — | — | |||||||||||
June 30, 2017 | $ | 1.9 | $ | (122.7 | ) | $ | (83.7 | ) | $ | (204.5 | ) |
The changes in Accumulated other comprehensive income (loss) for the six months ended June 30, 2016 are as follows:
In millions | Cash flow hedges and marketable securities | Pension and OPEB Items | Foreign Currency Items | Total | ||||||||||||
December 31, 2015 | $ | 14.0 | $ | (139.3 | ) | $ | (106.9 | ) | $ | (232.2 | ) | |||||
Other comprehensive income (loss) before reclassifications | (1.0 | ) | 9.4 | 8.2 | 16.6 | |||||||||||
Amounts reclassified from accumulated other comprehensive income | (18.9 | ) | 3.3 | — | (15.6 | ) | ||||||||||
Tax (benefit) expense | 0.8 | (0.8 | ) | — | — | |||||||||||
June 30, 2016 | $ | (5.1 | ) | $ | (127.4 | ) | $ | (98.7 | ) | $ | (231.2 | ) |
14
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Reclassifications out of Accumulated other comprehensive income (loss) for the three and six months ended June 30, 2017 were as follows:
Amount Reclassified from Accumulated Other Comprehensive Income | ||||||||||
In millions | Three months ended | Six months ended | Statement of Comprehensive Income Line Item | |||||||
Reclasses below represent (Income) loss to the Statement of Comprehensive Income | ||||||||||
Gains on cash flow hedges: | ||||||||||
Foreign exchange contracts | $ | (1.9 | ) | $ | (3.0 | ) | Cost of goods sold | |||
(1.9 | ) | (3.0 | ) | Earnings before income taxes | ||||||
0.5 | 0.8 | Provision for income taxes | ||||||||
$ | (1.4 | ) | $ | (2.2 | ) | Net earnings | ||||
Defined benefit pension items: | ||||||||||
Amortization of: | ||||||||||
Prior-service gains | $ | (0.3 | ) | $ | (0.6 | ) | (a) | |||
Actuarial losses | 1.6 | 3.1 | (a) | |||||||
1.3 | 2.5 | Loss before income taxes | ||||||||
(0.3 | ) | (0.6 | ) | Tax benefit | ||||||
$ | 1.0 | $ | 1.9 | Net loss | ||||||
Total reclassifications for the period | $ | (0.4 | ) | $ | (0.3 | ) | Net loss |
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension cost and net periodic postretirement benefit cost (see Note 10 for additional details).
15
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Reclassifications out of Accumulated other comprehensive income (loss) for the three and six months ended June 30, 2016 were as follows:
Amount Reclassified from Accumulated Other Comprehensive Income | ||||||||||
In millions | Three months ended | Six months ended | Statement of Comprehensive Income Line Item | |||||||
Reclasses below represent (Income) loss to the Statement of Comprehensive Income | ||||||||||
Gains on cash flow hedges: | ||||||||||
Foreign exchange contracts | $ | (2.0 | ) | $ | (5.3 | ) | Cost of goods sold | |||
(2.0 | ) | (5.3 | ) | Earnings before income taxes | ||||||
— | 0.8 | Provision for income taxes | ||||||||
$ | (2.0 | ) | $ | (4.5 | ) | Net earnings | ||||
Gains on marketable securities: | ||||||||||
Realized gain on sale of securities | $ | (7.8 | ) | $ | (13.6 | ) | Other, net | |||
(7.8 | ) | (13.6 | ) | Earnings before income taxes | ||||||
— | — | Provision for income taxes | ||||||||
$ | (7.8 | ) | $ | (13.6 | ) | Net earnings | ||||
Defined benefit pension items: | ||||||||||
Amortization of: | ||||||||||
Prior-service gains | $ | (0.3 | ) | $ | (0.5 | ) | (a) | |||
Actuarial losses | 1.9 | 3.8 | (a) | |||||||
1.6 | 3.3 | Loss before income taxes | ||||||||
(0.4 | ) | (0.8 | ) | Tax benefit | ||||||
$ | 1.2 | $ | 2.5 | Net loss | ||||||
Total reclassifications for the period | $ | (8.6 | ) | $ | (15.6 | ) | Net earnings |
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension cost and net periodic postretirement benefit cost (see Note 10 for additional details).
Note 13 – Share-Based Compensation
The Company records share-based compensation awards using a fair value method and recognizes compensation expense for an amount equal to the fair value of the share-based payment issued in its financial statements. The Company’s share-based compensation plans include programs for stock options, restricted stock units ("RSUs"), performance share units ("PSUs") and deferred compensation.
16
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Compensation Expense
Share-based compensation expense is included in selling and administrative expenses within net income. The expenses recognized for the three and six months ended June 30 were as follows:
Three months ended | Six months ended | ||||||||||||||
In millions | 2017 | 2016 | 2017 | 2016 | |||||||||||
Stock options | $ | 0.8 | $ | 0.9 | $ | 2.0 | $ | 2.2 | |||||||
RSUs | 1.8 | 2.1 | 4.2 | 4.1 | |||||||||||
PSUs | 1.4 | 1.2 | 3.1 | 2.5 | |||||||||||
Deferred compensation | 0.6 | 0.2 | 1.4 | 0.4 | |||||||||||
Pre-tax expense | 4.6 | 4.4 | 10.7 | 9.2 | |||||||||||
Tax benefit | (1.5 | ) | (1.3 | ) | (3.5 | ) | (2.7 | ) | |||||||
After-tax expense | $ | 3.1 | $ | 3.1 | $ | 7.2 | $ | 6.5 |
Stock Options/RSUs
Eligible participants may receive (i) stock options, (ii) RSUs or (iii) a combination of both stock options and RSUs. Grants issued during the six months ended June 30 were as follows:
2017 | 2016 | ||||||||||||
Number granted | Weighted- average fair value per award | Number granted | Weighted- average fair value per award | ||||||||||
Stock options | 165,113 | $ | 18.22 | 230,259 | $ | 15.86 | |||||||
RSUs | 107,423 | $ | 72.46 | 109,241 | $ | 58.42 |
The fair value of each of the Company's stock option and RSU awards is expensed on a straight-line basis over the required service period, which is generally the 3-year vesting period. However, for stock options and RSUs granted to retirement eligible employees, the Company recognizes expense for the fair value at the grant date.
The average fair value of the stock options granted is determined using the Black-Scholes option-pricing model. The following assumptions were used during the six months ended June 30:
2017 | 2016 | ||||
Dividend yield | 0.89 | % | 0.83 | % | |
Volatility | 24.93 | % | 28.85 | % | |
Risk-free rate of return | 2.08 | % | 1.38 | % | |
Expected life | 6.0 years | 6.0 years |
Expected volatility is based on the weighted average of the implied volatility of a group of the Company’s peers due to the lack of trading history for the Company's ordinary shares. The risk-free rate of return is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the award is granted with a maturity equal to the expected life of the award. Historical peer data is used to estimate forfeitures within the Company’s valuation model. The expected life of the Company’s stock option awards is derived from the simplified approach based on the weighted average time to vest and the remaining contractual term and represents the period of time that awards are expected to be outstanding.
Performance Shares
The Company has a Performance Share Program for key employees. The program provides awards in the form of PSUs based on performance against pre-established objectives. The annual target award level is expressed as a number of the Company's ordinary
17
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
shares. All PSUs are settled in the form of ordinary shares unless deferred. During the six months ended June 30, 2017, the Company granted PSUs with a maximum award level of approximately 0.1 million shares.
In February 2015, 2016 and 2017, the Company’s Compensation Committee granted PSUs that were based 50% upon a performance condition, measured at each performance period by earnings per share ("EPS") growth, and 50% upon a market condition, measured by the Company’s relative total shareholder return ("TSR") as compared to the TSR of the industrial group of companies in the S&P 400 Capital Goods Index over the one-year, two-year, and three-year performance periods. The fair values of the market condition were estimated using a Monte Carlo Simulation approach in a risk-neutral framework based upon historical volatility, risk-free rates and correlation matrix.
Deferred Compensation
The Company allows key employees to defer a portion of their eligible compensation into a number of investment choices including its ordinary share equivalents. Any amounts invested in ordinary share equivalents will be settled in ordinary shares of the Company at the time of distribution.
Note 14 – Restructuring Activities
During the three months ended June 30, 2017 and 2016, the Company incurred costs of $0.3 million and $1.6 million, respectively, associated with ongoing restructuring actions. During the six months ended June 30, 2017 and 2016, the Company incurred costs of $1.1 million and $1.9 million, respectively, associated with ongoing restructuring actions. These actions included workforce reductions as well as the closure and consolidation of manufacturing facilities in an effort to increase efficiencies across multiple lines of business.
Restructuring Plans
Restructuring charges recorded during the three and six months ended June 30 as part of restructuring plans were as follows:
Three months ended | Six months ended | ||||||||||||||
In millions | 2017 | 2016 | 2017 | 2016 | |||||||||||
Americas | $ | 0.1 | $ | 1.3 | $ | — | $ | 1.4 | |||||||
EMEIA | 0.2 | 0.2 | 1.1 | 0.4 | |||||||||||
Asia Pacific | — | 0.1 | — | 0.1 | |||||||||||
Total | $ | 0.3 | $ | 1.6 | $ | 1.1 | $ | 1.9 | |||||||
Cost of goods sold | 0.4 | 0.1 | 0.4 | 0.2 | |||||||||||
Selling and administrative expenses | (0.1 | ) | 1.5 | 0.7 | 1.7 | ||||||||||
Total | $ | 0.3 | $ | 1.6 | $ | 1.1 | $ | 1.9 |
The EMEIA charges primarily related to workforce reductions in an effort to increase efficiencies.
The changes in the restructuring reserve during the six months ended June 30, 2017 were as follows:
In millions | Americas | EMEIA | Total | ||||||||
December 31, 2016 | $ | 0.3 | $ | 3.2 | $ | 3.5 | |||||
Additions, net of reversals | — | 1.1 | 1.1 | ||||||||
Cash and non-cash uses | (0.1 | ) | (3.3 | ) | (3.4 | ) | |||||
Currency translation | — | 0.1 | 0.1 | ||||||||
June 30, 2017 | $ | 0.2 | $ | 1.1 | $ | 1.3 |
18
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
The majority of the costs accrued as of June 30, 2017 will be paid within one year.
The Company incurred other non-qualified restructuring charges of $0.7 million and $1.5 million during the three and six months ended June 30, 2017, respectively, in conjunction with restructuring plans, which represent costs that are directly attributable to restructuring activities, but do not fall into the severance, exit or disposal category.
Note 15 – Other Income, Net
The components of Other income, net for the three and six months ended June 30 were as follows:
Three months ended | Six months ended | ||||||||||||||
In millions | 2017 | 2016 | 2017 | 2016 | |||||||||||
Interest income | $ | (0.2 | ) | $ | (0.9 | ) | $ | (0.3 | ) | $ | (1.4 | ) | |||
Exchange loss (gain) | 0.4 | (0.6 | ) | 0.5 | 2.4 | ||||||||||
Earnings from and gains on the sale of equity investments | (5.2 | ) | (0.5 | ) | (4.6 | ) | (4.0 | ) | |||||||
Other | (0.2 | ) | (6.6 | ) | (0.2 | ) | (14.4 | ) | |||||||
Other income, net | $ | (5.2 | ) | $ | (8.6 | ) | $ | (4.6 | ) | $ | (17.4 | ) |
Other income, net for the three and six months ended June 30, 2017 was primarily related to a gain of $4.9 million from the sale of iDevices, LLC.
During the three and six months ended June 30, 2016 the Company recorded gains from the sale of marketable securities of $6.6 million and $12.4 million, which is included in Other in the table above. Additionally, earnings from equity method investments included a gain recognized by an investment during the six months ended June 30, 2016.
Note 16 – Income Taxes
The effective income tax rates for the three months ended June 30, 2017 and 2016 were 14.1% and 18.0%. The decrease in the effective tax rate compared to 2016 is primarily due to the favorable benefit resulting from the release of an $8.6 million valuation allowance, which is partially offset by unfavorable changes in the mix of income earned in lower rate jurisdictions.
The effective income tax rates for the six months ended June 30, 2017 and 2016 were 15.1% and 19.4%. The decrease in the effective tax rate compared to 2016 is primarily due to the favorable benefit of vesting and exercise of share based compensation awards and a favorable benefit resulting from the release of an $8.6 million valuation allowance, which is partially offset by unfavorable changes in the mix of income earned in lower rate jurisdictions.
Note 17 – Earnings Per Share (EPS)
Basic EPS is calculated by dividing Net earnings attributable to Allegion plc by the weighted-average number of ordinary shares outstanding for the applicable period. Diluted EPS is calculated after adjusting the denominator of the basic EPS calculation for the effect of all potentially dilutive ordinary shares, which in the Company’s case, includes shares issuable under share-based compensation plans.
The following table summarizes the weighted-average number of ordinary shares outstanding for basic and diluted earnings per share calculations for the three and six months ended June 30:
Three months ended | Six months ended | ||||||||||
In millions | 2017 | 2016 | 2017 | 2016 | |||||||
Weighted-average number of basic shares | 95.2 | 95.8 | 95.3 | 95.9 | |||||||
Shares issuable under incentive stock plans | 0.7 | 1.0 | 0.7 | 0.9 | |||||||
Weighted-average number of diluted shares | 95.9 | 96.8 | 96.0 | 96.8 |
19
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
At June 30, 2017, 0.1 million stock options were excluded from the computation of weighted average diluted shares outstanding because the effect of including these shares would have been anti-dilutive.
Note 18 – Business Segment Information
The Company classifies its businesses into the following three reportable segments based on industry and market focus: Americas, EMEIA and Asia Pacific.
Segment operating income is the measure of profit and loss that the Company’s chief operating decision maker uses to evaluate the financial performance of the business and as the basis for resource allocation, performance reviews, and compensation. For these reasons, the Company believes that Segment operating income represents the most relevant measure of segment profit and loss. The Company’s chief operating decision maker may exclude certain charges or gains, such as corporate charges and other special charges, from Operating income to arrive at a Segment operating income that is a more meaningful measure of profit and loss upon which to base its operating decisions. The Company defines Segment operating margin as Segment operating income as a percentage of Net revenues.
A summary of operations by reportable segment for the three and six months ended June 30 was as follows:
Three months ended | Six months ended | ||||||||||||||
In millions | 2017 | 2016 | 2017 | 2016 | |||||||||||
Net revenues | |||||||||||||||
Americas | $ | 468.6 | $ | 436.5 | $ | 876.2 | $ | 799.5 | |||||||
EMEIA | 129.2 | 121.6 | 247.6 | 240.1 | |||||||||||
Asia Pacific | 29.2 | 26.8 | 52.0 | 47.6 | |||||||||||
Total | $ | 627.0 | $ | 584.9 | $ | 1,175.8 | $ | 1,087.2 | |||||||
Segment operating income | |||||||||||||||
Americas | $ | 140.3 | $ | 130.0 | $ | 247.9 | $ | 220.2 | |||||||
EMEIA | 8.5 | 8.9 | 15.4 | 16.9 | |||||||||||
Asia Pacific | 2.3 | 2.1 | 2.9 | 2.0 | |||||||||||
Total | 151.1 | 141.0 | 266.2 | 239.1 | |||||||||||
Reconciliation to Operating income | |||||||||||||||
Unallocated corporate expense | (17.0 | ) | (16.7 | ) | (33.3 | ) | (32.3 | ) | |||||||
Operating income | $ | 134.1 | $ | 124.3 | $ | 232.9 | $ | 206.8 | |||||||
Reconciliation to earnings before income taxes | |||||||||||||||
Interest expense | 16.1 | 16.5 | 32.0 | 32.8 | |||||||||||
Other income, net | (5.2 | ) | (8.6 | ) | (4.6 | ) | (17.4 | ) | |||||||
Earnings before income taxes | $ | 123.2 | $ | 116.4 | $ | 205.5 | $ | 191.4 |
Note 19 – Commitments and Contingencies
The Company is involved in various litigations, claims and administrative proceedings, including those related to environmental and product warranty matters. Amounts recorded for identified contingent liabilities are estimates, which are reviewed periodically and adjusted to reflect additional information when it becomes available. Subject to the uncertainties inherent in estimating future costs for contingent liabilities, except as expressly set forth in this note, management believes that any liability which may result from these legal matters would not have a material adverse effect on the financial condition, results of operations, liquidity or cash flows of the Company.
20
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Environmental Matters
The Company is dedicated to an environmental program to reduce the utilization and generation of hazardous materials during the manufacturing process and to remediate identified environmental concerns. As to the latter, the Company is currently engaged in site investigations and remediation activities to address environmental cleanup from past operations at current and former production facilities. The Company regularly evaluates its remediation programs and considers alternative remediation methods that are in addition to, or in replacement of, those currently utilized by the Company based upon enhanced technology and regulatory changes. Changes to the Company's remediation programs may result in increased expenses and increased environmental reserves.
The Company is sometimes a party to environmental lawsuits and claims and from time to time receives notices of potential violations of environmental laws and regulations from the U.S. Environmental Protection Agency and similar state authorities. It has also been identified as a potentially responsible party ("PRP") for cleanup costs associated with off-site waste disposal at federal Superfund and state remediation sites. For all such sites, there are other PRPs and, in most instances, the Company’s involvement is minimal.
In estimating its liability, the Company has assumed it will not bear the entire cost of remediation of any site to the exclusion of other PRPs who may be jointly and severally liable. The ability of other PRPs to participate has been taken into account, based on our understanding of the parties’ financial condition and probable contributions on a per site basis. Additional lawsuits and claims involving environmental matters are likely to arise from time to time in the future.
During the three months ended June 30, 2017 and 2016, the Company recorded $0.7 million and $2.1 million of expenses for environmental remediation at sites presently or formerly owned or leased by us. During the six months ended June 30, 2017 and 2016, the company recorded $1.5 million and $3.1 million of expenses for environmental remediation at sites presently or formerly owned or leased by us.
As of June 30, 2017 and December 31, 2016, the Company has recorded reserves for environmental matters of $29.4 million and $30.6 million. Of the total reserve, $9.1 million and $9.6 million relate to remediation of sites previously disposed by the Company. Environmental reserves are classified as Accrued expenses and other current liabilities or Other noncurrent liabilities based on their expected term. The Company's total current environmental reserve at June 30, 2017 and December 31, 2016 was $11.5 million and $6.1 million, respectively, and the remainder is classified as non-current. Given the evolving nature of environmental laws, regulations and technology, the ultimate cost of future compliance is uncertain.
Warranty Liability
Standard product warranty accruals are recorded at the time of sale and are estimated based upon product warranty terms and historical experience. The Company assesses the adequacy of its liabilities and will make adjustments as necessary based on known or anticipated warranty claims, or as new information becomes available.
The changes in the standard product warranty liability for the six months ended June 30 were as follows:
In millions | 2017 | 2016 | |||||
Balance at beginning of period | $ | 13.3 | $ | 11.7 | |||
Reductions for payments | (3.4 | ) | (2.9 | ) | |||
Accruals for warranties issued during the current period | 3.9 | 3.6 | |||||
Changes to accruals related to preexisting warranties | (0.3 | ) | (0.3 | ) | |||
Translation | 0.3 | — | |||||
Balance at end of period | $ | 13.8 | $ | 12.1 |
Standard product warranty liabilities are classified as Accrued expenses and other current liabilities.
21
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Note 20 – Guarantor Financial Information
Allegion US Holding Company, Inc. ("Allegion US Holding") is the issuer of the 2021 Senior Notes and a guarantor of the 2023 Senior Notes. Allegion plc is the issuer of the 2023 Senior Notes and a guarantor of the 2021 Senior Notes. Schlage Lock Company LLC and Von Duprin LLC (together, the “Other Subsidiary Guarantors”) are all guarantors of the 2021 Senior Notes and the 2023 Senior Notes. The following condensed and consolidated financial information of Allegion plc, Allegion US Holding, the Other Subsidiary Guarantors and the other Allegion subsidiaries that are not guarantors (the “Other Subsidiaries”) on a combined basis as of June 30, 2017 and for the three and six months ended June 30, 2017 and 2016, is being presented in order to meet the reporting requirements under the 2021 Senior Notes and 2023 Senior Notes indentures and Rule 3-10 of Regulation S-X. In accordance with Rule 3-10(d) of Regulation S-X, separate financial statements for Allegion plc, Allegion US Holding and the Other Subsidiary Guarantors are not required to be filed with the SEC, as the subsidiary debt issuer and the guarantors are directly or indirectly 100% owned by the Parent and the guarantees are full and unconditional and joint and several.
Condensed and Consolidated Statement of Comprehensive Income
For the three months ended June 30, 2017
In millions | Allegion plc | Allegion US Holding | Other Subsidiary Guarantors | Other Subsidiaries | Consolidating Adjustments | Total | |||||||||||||||||
Net revenues | $ | — | $ | — | $ | 449.1 | $ | 294.8 | $ | (116.9 | ) | $ | 627.0 | ||||||||||
Cost of goods sold | — | — | 249.4 | 213.5 | (116.9 | ) | 346.0 | ||||||||||||||||
Selling and administrative expenses | 1.4 | — | 88.9 | 56.6 | — | 146.9 | |||||||||||||||||
Operating income (loss) | (1.4 | ) | — | 110.8 | 24.7 | — | 134.1 | ||||||||||||||||
Equity earnings (loss) in affiliates, net of tax | 118.2 | 48.8 | 1.3 | 89.9 | (258.2 | ) | — | ||||||||||||||||
Interest expense | 11.3 | 4.8 | — | — | — | 16.1 | |||||||||||||||||
Intercompany interest and fees | — | 24.7 | (31.1 | ) | 6.4 | — | — | ||||||||||||||||
Other income, net | — | — | (4.7 | ) | (0.5 | ) | — | (5.2 | ) | ||||||||||||||
Earnings (loss) before income taxes | 105.5 | 19.3 | 147.9 | 108.7 | (258.2 | ) | 123.2 | ||||||||||||||||
Provision (benefit) for income taxes | — | (11.3 | ) | 56.4 | (27.7 | ) | — | 17.4 | |||||||||||||||
Net earnings (loss) | 105.5 | 30.6 | 91.5 | 136.4 | (258.2 | ) | 105.8 | ||||||||||||||||
Less: Net earnings attributable to noncontrolling interests | — | — | — | 0.3 | — | 0.3 | |||||||||||||||||
Net earnings (loss) attributable to Allegion plc | $ | 105.5 | $ | 30.6 | $ | 91.5 | $ | 136.1 | $ | (258.2 | ) | $ | 105.5 | ||||||||||
Total comprehensive income (loss) | $ | 152.4 | $ | 29.6 | $ | 92.0 | $ | 184.0 | $ | (304.9 | ) | $ | 153.1 | ||||||||||
Less: Total comprehensive income attributable to noncontrolling interests | — | — | — | 0.7 | — | 0.7 | |||||||||||||||||
Total comprehensive income (loss) attributable to Allegion plc | $ | 152.4 | $ | 29.6 | $ | 92.0 | $ | 183.3 | $ | (304.9 | ) | $ | 152.4 |
22
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Condensed and Consolidated Statement of Comprehensive Income
For the six months ended June 30, 2017
In millions | Allegion plc | Allegion US Holding | Other Subsidiary Guarantors | Other Subsidiaries | Consolidating Adjustments | Total | |||||||||||||||||
Net revenues | $ | — | $ | — | $ | 838.9 | $ | 562.4 | $ | (225.5 | ) | $ | 1,175.8 | ||||||||||
Cost of goods sold | — | — | 473.9 | 405.6 | (225.5 | ) | 654.0 | ||||||||||||||||
Selling and administrative expenses | 2.5 | — | 174.6 | 111.8 | — | 288.9 | |||||||||||||||||
Operating income (loss) | (2.5 | ) | — | 190.4 | 45.0 | — | 232.9 | ||||||||||||||||
Equity earnings in affiliates, net of tax | 198.7 | 66.8 | 1.9 | 157.7 | (425.1 | ) | — | ||||||||||||||||
Interest expense | 22.3 | 9.6 | — | 0.1 | — | 32.0 | |||||||||||||||||
Intercompany interest and fees | — | 49.4 | (62.1 | ) | 12.7 | — | — | ||||||||||||||||
Other income, net | — | — | (4.1 | ) | (0.5 | ) | — | (4.6 | ) | ||||||||||||||
Earnings (loss) before income taxes | 173.9 | 7.8 | 258.5 | 190.4 | (425.1 | ) | 205.5 | ||||||||||||||||
Provision (benefit) for income taxes | — | (22.7 | ) | 98.8 | (45.1 | ) | — | 31.0 | |||||||||||||||
Net earnings (loss) | 173.9 | 30.5 | 159.7 | 235.5 | (425.1 | ) | 174.5 | ||||||||||||||||
Less: Net earnings attributable to noncontrolling interests | — | — | — | 0.6 | — | 0.6 | |||||||||||||||||
Net earnings (loss) attributable to Allegion plc | $ | 173.9 | $ | 30.5 | $ | 159.7 | $ | 234.9 | $ | (425.1 | ) | $ | 173.9 | ||||||||||
Total comprehensive income | 233.6 | 29.8 | 161.1 | 295.4 | (485.1 | ) | 234.8 | ||||||||||||||||
Less: Total comprehensive income attributable to noncontrolling interests | — | — | — | 1.2 | — | 1.2 | |||||||||||||||||
Total comprehensive income attributable to Allegion plc | $ | 233.6 | $ | 29.8 | $ | 161.1 | $ | 294.2 | $ | (485.1 | ) | $ | 233.6 |
23
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Condensed and Consolidated Statement of Comprehensive Income
For the three months ended June 30, 2016
In millions | Allegion plc | Allegion US Holding | Other Subsidiary Guarantors | Other Subsidiaries | Consolidating Adjustments | Total | |||||||||||||||||
Net revenues | $ | — | $ | — | $ | 421.8 | $ | 275.6 | $ | (112.5 | ) | $ | 584.9 | ||||||||||
Cost of goods sold | — | — | 233.9 | 196.1 | (112.5 | ) | 317.5 | ||||||||||||||||
Selling and administrative expenses | 1.3 | — | 84.6 | 57.2 | — | 143.1 | |||||||||||||||||
Operating income (loss) | (1.3 | ) | — | 103.3 | 22.3 | — | 124.3 | ||||||||||||||||
Equity earnings (loss) in affiliates, net of tax | 107.4 | 38.2 | 0.1 | 85.3 | (231.0 | ) | — | ||||||||||||||||
Interest expense | 11.1 | 5.1 | — | 0.3 | — | 16.5 | |||||||||||||||||
Intercompany interest and fees | 0.1 | 23.9 | (33.5 | ) | 9.5 | — | — | ||||||||||||||||
Other income, net | — | — | (0.3 | ) | (8.3 | ) | — | (8.6 | ) | ||||||||||||||
Earnings (loss) before income taxes | 94.9 | 9.2 | 137.2 | 106.1 | (231.0 | ) | 116.4 | ||||||||||||||||
Provision (benefit) for income taxes | — | (11.2 | ) | 51.8 | (19.6 | ) | — | 21.0 | |||||||||||||||
Net earnings (loss) | 94.9 | 20.4 | 85.4 | 125.7 | (231.0 | ) | 95.4 | ||||||||||||||||
Less: Net earnings attributable to noncontrolling interests | — | — | — | 0.4 | — | 0.4 | |||||||||||||||||
Net earnings (loss) attributable to Allegion plc | $ | 94.9 | $ | 20.4 | $ | 85.4 | $ | 125.3 | $ | (231.0 | ) | $ | 95.0 | ||||||||||
Total comprehensive income (loss) | $ | 69.4 | $ | 10.0 | $ | 94.3 | $ | 101.4 | $ | (206.1 | ) | $ | 69.0 | ||||||||||
Less: Total comprehensive income attributable to noncontrolling interests | — | — | — | (0.4 | ) | — | (0.4 | ) | |||||||||||||||
Total comprehensive income (loss) attributable to Allegion plc | $ | 69.4 | $ | 10.0 | $ | 94.3 | $ | 101.8 | $ | (206.1 | ) | $ | 69.4 |
24
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Condensed and Consolidated Statement of Comprehensive Income
For the six months ended June 30, 2016
In millions | Allegion plc | Allegion US Holding | Other Subsidiary Guarantors | Other Subsidiaries | Consolidating Adjustments | Total | |||||||||||||||||
Net revenues | $ | — | $ | — | $ | 769.7 | $ | 533.1 | $ | (215.6 | ) | $ | 1,087.2 | ||||||||||
Cost of goods sold | — | — | 439.8 | 379.3 | (215.6 | ) | 603.5 | ||||||||||||||||
Selling and administrative expenses | 2.3 | — | 163.3 | 111.3 | — | 276.9 | |||||||||||||||||
Operating income (loss) | (2.3 | ) | — | 166.6 | 42.5 | — | 206.8 | ||||||||||||||||
Equity earnings in affiliates, net of tax | 177.8 | 63.6 | 0.6 | 156.4 | (398.4 | ) | — | ||||||||||||||||
Interest expense | 22.2 | 10.2 | — | 0.4 | — | 32.8 | |||||||||||||||||
Intercompany interest and fees | 0.1 | 47.7 | (66.0 | ) | 18.2 | — | — | ||||||||||||||||
Other income, net | — | — | (20.4 | ) | 3.0 | — | (17.4 | ) | |||||||||||||||
Earnings (loss) before income taxes | 153.2 | 5.7 | 253.6 | 177.3 | (398.4 | ) | 191.4 | ||||||||||||||||
Provision (benefit) for income taxes | 0.5 | (22.3 | ) | 96.6 | (37.6 | ) | — | 37.2 | |||||||||||||||
Net earnings (loss) | 152.7 | 28.0 | 157.0 | 214.9 | (398.4 | ) | 154.2 | ||||||||||||||||
Less: Net earnings attributable to noncontrolling interests | — | — | — | 1.5 | — | 1.5 | |||||||||||||||||
Net earnings (loss) attributable to Allegion plc | $ | 152.7 | $ | 28.0 | $ | 157.0 | $ | 213.4 | $ | (398.4 | ) | $ | 152.7 | ||||||||||
Total comprehensive income | $ | 153.7 | $ | 16.2 | $ | 166.6 | $ | 218.1 | $ | (398.7 | ) | $ | 155.9 | ||||||||||
Less: Total comprehensive income attributable to noncontrolling interests | — | — | — | 2.2 | — | 2.2 | |||||||||||||||||
Total comprehensive income attributable to Allegion plc | $ | 153.7 | $ | 16.2 | $ | 166.6 | $ | 215.9 | $ | (398.7 | ) | $ | 153.7 |
25
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Condensed and Consolidated Balance Sheet
June 30, 2017
In millions | Allegion plc | Allegion US Holding | Other Subsidiary Guarantors | Other Subsidiaries | Consolidating Adjustments | Total | |||||||||||||||||
Current assets: | |||||||||||||||||||||||
Cash and cash equivalents | $ | 1.7 | $ | 0.1 | $ | 109.8 | $ | 133.9 | $ | — | $ | 245.5 | |||||||||||
Accounts and notes receivable, net | — | — | 173.3 | 137.6 | — | 310.9 | |||||||||||||||||
Inventories | — | — | 82.1 | 165.7 | — | 247.8 | |||||||||||||||||
Other current assets | 0.8 | 27.0 | 12.6 | 55.3 | (60.7 | ) | 35.0 | ||||||||||||||||
Accounts and notes receivable affiliates | — | 399.4 | 465.4 | 329.6 | (1,194.4 | ) | — | ||||||||||||||||
Total current assets | 2.5 | 426.5 | 843.2 | 822.1 | (1,255.1 | ) | 839.2 | ||||||||||||||||
Investment in affiliates | 1,408.8 | 2,823.2 | 218.1 | 3,579.1 | (8,029.2 | ) | — | ||||||||||||||||
Property, plant and equipment, net | — | — | 120.5 | 120.8 | — | 241.3 | |||||||||||||||||
Goodwill and other intangible assets, net | — | — | 180.4 | 952.1 | — | 1,132.5 | |||||||||||||||||
Notes receivable affiliates | 2.3 | 1,145.4 | 3,444.7 | 1,678.9 | (6,271.3 | ) | — | ||||||||||||||||
Other noncurrent assets | 4.7 | 17.4 | 54.6 | 44.9 | — | 121.6 | |||||||||||||||||
Total assets | $ | 1,418.3 | $ | 4,412.5 | $ | 4,861.5 | $ | 7,197.9 | $ | (15,555.6 | ) | $ | 2,334.6 | ||||||||||
Current liabilities: | |||||||||||||||||||||||
Accounts payable and accruals | $ | 6.7 | $ | 4.3 | $ | 231.8 | $ | 207.8 | $ | (60.7 | ) | $ | 389.9 | ||||||||||
Short-term borrowings and current maturities of long-term debt | 46.9 | — | — | — | — | 46.9 | |||||||||||||||||
Accounts and notes payable affiliates | 0.2 | 35.3 | 673.6 | 485.3 | (1,194.4 | ) | — | ||||||||||||||||
Total current liabilities | 53.8 | 39.6 | 905.4 | 693.1 | (1,255.1 | ) | 436.8 | ||||||||||||||||
Long-term debt | 1,098.1 | 295.0 | — | 1.0 | — | 1,394.1 | |||||||||||||||||
Notes payable affiliate | — | 2,667.3 | 71.4 | 3,532.6 | (6,271.3 | ) | — | ||||||||||||||||
Other noncurrent liabilities | 1.1 | — | 87.6 | 145.6 | — | 234.3 | |||||||||||||||||
Total liabilities | 1,153.0 | 3,001.9 | 1,064.4 | 4,372.3 | (7,526.4 | ) | 2,065.2 | ||||||||||||||||
Equity: | |||||||||||||||||||||||
Total shareholders equity (deficit) | 265.3 | 1,410.6 | 3,797.1 | 2,821.5 | (8,029.2 | ) | 265.3 | ||||||||||||||||
Noncontrolling interests | — | — | — | 4.1 | — | 4.1 | |||||||||||||||||
Total equity (deficit) | 265.3 | 1,410.6 | 3,797.1 | 2,825.6 | (8,029.2 | ) | 269.4 | ||||||||||||||||
Total liabilities and equity | $ | 1,418.3 | $ | 4,412.5 | $ | 4,861.5 | $ | 7,197.9 | $ | (15,555.6 | ) | $ | 2,334.6 |
26
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Condensed and Consolidated Balance Sheet
December 31, 2016
In millions | Allegion plc | Allegion US Holding | Other Subsidiary Guarantors | Other Subsidiaries | Consolidating Adjustments | Total | |||||||||||||||||
Current assets: | |||||||||||||||||||||||
Cash and cash equivalents | $ | 0.5 | $ | 0.1 | $ | 166.0 | $ | 145.8 | $ | — | $ | 312.4 | |||||||||||
Accounts and notes receivable, net | — | — | 140.0 | 120.0 | — | 260.0 | |||||||||||||||||
Inventories | — | — | 77.6 | 143.0 | — | 220.6 | |||||||||||||||||
Other current assets | 0.4 | 49.7 | 9.4 | 145.1 | (168.3 | ) | 36.3 | ||||||||||||||||
Accounts and notes receivable affiliates | — | 331.6 | 395.0 | 320.6 | (1,047.2 | ) | — | ||||||||||||||||
Total current assets | 0.9 | 381.4 | 788.0 | 874.5 | (1,215.5 | ) | 829.3 | ||||||||||||||||
Investment in affiliates | 1,229.4 | 2,814.1 | 193.4 | 3,422.6 | (7,659.5 | ) | — | ||||||||||||||||
Property, plant and equipment, net | — | — | 122.0 | 104.6 | — | 226.6 | |||||||||||||||||
Goodwill and other intangible assets, net | — | — | 180.8 | 893.4 | — | 1,074.2 | |||||||||||||||||
Notes receivable affiliates | 53.2 | 1,149.8 | 3,444.7 | 1,679.8 | (6,327.5 | ) | — | ||||||||||||||||
Other noncurrent assets | 5.4 | 14.8 | 61.9 | 35.2 | — | 117.3 | |||||||||||||||||
Total assets | $ | 1,288.9 | $ | 4,360.1 | $ | 4,790.8 | $ | 7,010.1 | $ | (15,202.5 | ) | $ | 2,247.4 | ||||||||||
Current liabilities: | |||||||||||||||||||||||
Accounts payable and accruals | $ | 7.0 | $ | 4.7 | $ | 353.2 | $ | 184.8 | $ | (168.3 | ) | $ | 381.4 | ||||||||||
Short-term borrowings and current maturities of long-term debt | 46.9 | — | — | 1.3 | — | 48.2 | |||||||||||||||||
Accounts and notes payable affiliates | 0.4 | 36.4 | 629.6 | 380.8 | (1,047.2 | ) | — | ||||||||||||||||
Total current liabilities | 54.3 | 41.1 | 982.8 | 566.9 | (1,215.5 | ) | 429.6 | ||||||||||||||||
Long-term debt | 1,120.2 | 294.4 | — | 1.0 | — | 1,415.6 | |||||||||||||||||
Notes payables affiliate | — | 2,690.7 | 53.3 | 3,583.5 | (6,327.5 | ) | — | ||||||||||||||||
Other noncurrent liabilities | 1.1 | — | 138.7 | 146.0 | — | 285.8 | |||||||||||||||||
Total liabilities | 1,175.6 | 3,026.2 | 1,174.8 | 4,297.4 | (7,543.0 | ) | 2,131.0 | ||||||||||||||||
Equity: | |||||||||||||||||||||||
Total shareholders equity (deficit) | 113.3 | 1,333.9 | 3,616.0 | 2,709.6 | (7,659.5 | ) | 113.3 | ||||||||||||||||
Noncontrolling interests | — | — | — | 3.1 | — | 3.1 | |||||||||||||||||
Total equity (deficit) | 113.3 | 1,333.9 | 3,616.0 | 2,712.7 | (7,659.5 | ) | 116.4 | ||||||||||||||||
Total liabilities and equity | $ | 1,288.9 | $ | 4,360.1 | $ | 4,790.8 | $ | 7,010.1 | $ | (15,202.5 | ) | $ | 2,247.4 |
27
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Condensed and Consolidated Statement of Cash Flows
For the six months ended June 30, 2017
In millions | Allegion plc | Allegion US Holding | Other Subsidiary Guarantors | Other Subsidiaries | Consolidating Adjustments | Total | |||||||||||||||||
Net cash provided by (used in) operating activities | $ | 59.4 | $ | 19.0 | $ | 114.5 | $ | 243.3 | $ | (372.2 | ) | $ | 64.0 | ||||||||||
Cash flows from investing activities: | |||||||||||||||||||||||
Capital expenditures | — | — | (8.9 | ) | (12.5 | ) | — | (21.4 | ) | ||||||||||||||
Acquisition of and equity investments in businesses, net of cash acquired | — | — | (22.2 | ) | 1.4 | — | (20.8 | ) | |||||||||||||||
Proceeds from sale of equity investment | — | — | 15.2 | — | — | 15.2 | |||||||||||||||||
Other investing activities, net | — | — | — | 1.1 | — | 1.1 | |||||||||||||||||
Net cash used in investing activities | — | — | (15.9 | ) | (10.0 | ) | — | (25.9 | ) | ||||||||||||||
Cash flows from financing activities: | |||||||||||||||||||||||
Debt repayments, net | (23.5 | ) | — | — | (1.3 | ) | — | (24.8 | ) | ||||||||||||||
Net inter-company proceeds (payments) | 50.9 | (19.0 | ) | 27.9 | (59.8 | ) | — | — | |||||||||||||||
Dividends paid | — | — | (182.7 | ) | (189.5 | ) | 372.2 | — | |||||||||||||||
Dividends paid to shareholders | (30.4 | ) | — | — | — | — | (30.4 | ) | |||||||||||||||
Repurchase of ordinary shares | (60.0 | ) | — | — | — | — | (60.0 | ) | |||||||||||||||
Other financing activities, net | 4.8 | — | — | (0.1 | ) | — | 4.7 | ||||||||||||||||
Net cash provided by (used in) financing activities | (58.2 | ) | (19.0 | ) | (154.8 | ) | (250.7 | ) | 372.2 | (110.5 | ) | ||||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | — | 5.5 | — | 5.5 | |||||||||||||||||
Net increase (decrease) in cash and cash equivalents | 1.2 | — | (56.2 | ) | (11.9 | ) | — | (66.9 | ) | ||||||||||||||
Cash and cash equivalents - beginning of period | 0.5 | 0.1 | 166.0 | 145.8 | — | 312.4 | |||||||||||||||||
Cash and cash equivalents - end of period | $ | 1.7 | $ | 0.1 | $ | 109.8 | $ | 133.9 | $ | — | $ | 245.5 |
28
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Condensed and Consolidated Statement of Cash Flows
For the six months ended June 30, 2016
In millions | Allegion plc | Allegion US Holding | Other Subsidiary Guarantors | Other Subsidiaries | Consolidating Adjustments | Total | |||||||||||||||||
Net cash provided by (used in) operating activities | $ | 69.3 | $ | (9.3 | ) | $ | 195.4 | $ | 153.4 | $ | (307.6 | ) | $ | 101.2 | |||||||||
Cash flows from investing activities: | |||||||||||||||||||||||
Capital expenditures | — | — | (3.8 | ) | (12.7 | ) | — | (16.5 | ) | ||||||||||||||
Acquisition of businesses, net of cash acquired | — | — | — | (31.4 | ) | — | (31.4 | ) | |||||||||||||||
Proceeds from sales of marketable securities | — | — | — | 14.1 | — | 14.1 | |||||||||||||||||
Other investing activities, net | — | — | — | (4.7 | ) | — | (4.7 | ) | |||||||||||||||
Net cash used in investing activities | — | — | (3.8 | ) | (34.7 | ) | — | (38.5 | ) | ||||||||||||||
Cash flows from financing activities: | |||||||||||||||||||||||
Debt repayments, net | (23.5 | ) | — | — | (17.0 | ) | — | (40.5 | ) | ||||||||||||||
Net inter-company proceeds (payments) | — | 9.2 | (8.5 | ) | (0.7 | ) | — | — | |||||||||||||||
Dividends (paid) received | — | — | (193.1 | ) | (114.5 | ) | 307.6 | — | |||||||||||||||
Dividends paid to shareholders | (22.9 | ) | — | — | — | — | (22.9 | ) | |||||||||||||||
Acquisition/divestiture of noncontrolling interests | — | — | — | (0.4 | ) | — | (0.4 | ) | |||||||||||||||
Repurchase of ordinary shares | (30.0 | ) | — | — | — | — | (30.0 | ) | |||||||||||||||
Other financing activities, net | 4.2 | — | — | (5.4 | ) | — | (1.2 | ) | |||||||||||||||
Net cash provided by (used in) financing activities | (72.2 | ) | 9.2 | (201.6 | ) | (138.0 | ) | 307.6 | (95.0 | ) | |||||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | — | 1.7 | — | 1.7 | |||||||||||||||||
Net increase (decrease) in cash and cash equivalents | (2.9 | ) | (0.1 | ) | (10.0 | ) | (17.6 | ) | — | (30.6 | ) | ||||||||||||
Cash and cash equivalents - beginning of period | 3.3 | 0.3 | 73.8 | 122.3 | — | 199.7 | |||||||||||||||||
Cash and cash equivalents - end of period | $ | 0.4 | $ | 0.2 | $ | 63.8 | $ | 104.7 | $ | — | $ | 169.1 |
29
Item 2 – 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 the Annual Report on Form 10-K for the fiscal year ended December 31, 2016. The following section is qualified in its entirety by the more detailed information, including our condensed and consolidated financial statements and the notes thereto, which appears elsewhere in this Quarterly Report.
Overview
Organizational
Allegion plc and its consolidated subsidiaries ("Allegion," "we," "us" or the "Company") is a leading global provider of security products and solutions that keep people safe, secure and productive. We make the world safer as a company of experts, securing the places where people thrive and we create peace of mind by pioneering safety and security. We offer an extensive and versatile portfolio of mechanical and electronic security products across a range of market-leading brands. Our experts across the globe deliver high-quality security products, services and systems and we use our deep expertise to serve as trusted partners to end-users who seek customized solutions to their security needs. Our leading brands include CISA, Interflex, LCN, Schlage, SimonsVoss and Von Duprin.
Recent Developments
2017 and 2016 Acquisitions and Divestitures
On January 3, 2017, we acquired Republic Doors & Frames, LLC. On April 5, 2017, iDevices LLC, including our equity investment, was acquired by a third party. In 2016, we completed one business acquisition (Trelock GmbH).
2017 Dividends
Through June 30, 2017, we paid quarterly dividends of $0.32 per ordinary share to shareholders.
Share repurchases
Through June 30, 2017, we repurchased approximately 0.8 million shares for approximately $60.0 million.
30
Results of Operations – Three months ended June 30
In millions, except per share amounts | 2017 | % of revenues | 2016 | % of revenues | |||||||||
Net revenues | $ | 627.0 | $ | 584.9 | |||||||||
Cost of goods sold | 346.0 | 55.2 | % | 317.5 | 54.3 | % | |||||||
Selling and administrative expenses | 146.9 | 23.4 | % | 143.1 | 24.5 | % | |||||||
Operating income | 134.1 | 21.4 | % | 124.3 | 21.3 | % | |||||||
Interest expense | 16.1 | 16.5 | |||||||||||
Other income, net | (5.2 | ) | (8.6 | ) | |||||||||
Earnings before income taxes | 123.2 | 116.4 | |||||||||||
Provision for income taxes | 17.4 | 21.0 | |||||||||||
Net earnings | 105.8 | 95.4 | |||||||||||
Less: Net earnings attributable to noncontrolling interests | 0.3 | 0.4 | |||||||||||
Net earnings attributable to Allegion plc | $ | 105.5 | $ | 95.0 | |||||||||
Diluted net earnings per ordinary share attributable to Allegion plc ordinary shareholders: | |||||||||||||
Net earnings | $ | 1.10 | $ | 0.98 |
The discussions that follow describe the significant factors contributing to the changes in our results of operations for the periods presented.
Net Revenues
Net revenues for the three months ended June 30, 2017 increased by 7.2%, or $42.1 million, compared with the same period in 2016, which resulted from the following:
Pricing | 2.4 | % |
Volume | 3.8 | % |
Acquisitions | 1.9 | % |
Currency exchange rates | (0.9 | )% |
Total | 7.2 | % |
The increase in net revenues was primarily driven by higher volumes, improved pricing and acquisitions in all three segments. These increases were partially offset by unfavorable foreign currency exchange rate movements primarily due to the strengthening of the US dollar against currencies in EMEIA.
31
Operating Income/Margin
Operating income for the three months ended June 30, 2017 increased $9.8 million compared to the same period in 2016 and operating margin for the three months ended June 30, 2017 increased to 21.4% from 21.3% for the same period in 2016 due to the following:
in millions | Operating Income | Operating Margin | |||||
June 30, 2016 | $ | 124.3 | 21.3 | % | |||
Pricing and productivity in excess of inflation | 12.2 | 1.5 | % | ||||
Volume/product mix | 4.4 | — | % | ||||
Restructuring / acquisition expenses | (0.4 | ) | (0.1 | )% | |||
Currency exchange rates | (1.1 | ) | — | % | |||
Investment spending and other items | (5.8 | ) | (1.0 | )% | |||
Acquisitions | 0.5 | (0.3 | )% | ||||
June 30, 2017 | $ | 134.1 | 21.4 | % |
Operating income increased primarily due to favorable volume/product mix, pricing improvements and productivity in excess of inflation and acquisitions. These increases were partially offset by increased investment spending, unfavorable foreign currency exchange rate movements and restructuring and acquisition expenses.
Operating margin increased primarily due to favorable pricing improvements and productivity in excess of inflation. The increase was partially offset by increased investment spending, restructuring and acquisition expenses and acquisitions.
Interest Expense
Interest expense for the three months ended June 30, 2017 decreased $0.4 million compared with the same period of 2016 primarily due to lower debt balances resulting from scheduled amortization of the Term Loan A Facility.
Other Income, Net
The components of Other income, net for the three months ended June 30, 2017 and 2016 were as follows:
In millions | 2017 | 2016 | ||||||
Interest income | $ | (0.2 | ) | $ | (0.9 | ) | ||
Exchange loss (gain) | 0.4 | (0.6 | ) | |||||
Earnings from and gains on the sale of equity investments | (5.2 | ) | (0.5 | ) | ||||
Other | (0.2 | ) | (6.6 | ) | ||||
Other income, net | $ | (5.2 | ) | $ | (8.6 | ) |
Other income, net for the three months ended June 30, 2017 was unfavorable $3.4 million compared to the same period in 2016. Other income, net for the three months ended June 30, 2017 was primarily related to a gain of $4.9 million from the sale of iDevices, LLC. During the three months ended June 30, 2016 we recorded gains from the sale of marketable securities of $6.6 million, which is included in Other in the table above.
Provision for Income Taxes
The effective income tax rates for the three months ended June 30, 2017 and 2016 were 14.1% and 18.0%. The decrease in the effective tax rate compared to 2016 is primarily due to the favorable benefit resulting from the release of an $8.6 million valuation allowance, which is partially offset by unfavorable changes in the mix of income earned in lower rate jurisdictions.
32
Results of Operations – Six months ended June 30
In millions, except per share amounts | 2017 | % of revenues | 2016 | % of revenues | |||||||||
Net revenues | $ | 1,175.8 | $ | 1,087.2 | |||||||||
Cost of goods sold | 654.0 | 55.6 | % | 603.5 | 55.5 | % | |||||||
Selling and administrative expenses | 288.9 | 24.6 | % | 276.9 | 25.5 | % | |||||||
Operating income | 232.9 | 19.8 | % | 206.8 | 19.0 | % | |||||||
Interest expense | 32.0 | 32.8 | |||||||||||
Other income, net | (4.6 | ) | (17.4 | ) | |||||||||
Earnings before income taxes | 205.5 | 191.4 | |||||||||||
Provision for income taxes | 31.0 | 37.2 | |||||||||||
Net earnings | 174.5 | 154.2 | |||||||||||
Less: Net earnings attributable to noncontrolling interests | 0.6 | 1.5 | |||||||||||
Net earnings attributable to Allegion plc | $ | 173.9 | $ | 152.7 | |||||||||
Diluted net earnings per ordinary share attributable to Allegion plc ordinary shareholders: | |||||||||||||
Net earnings | $ | 1.81 | $ | 1.58 |
The discussions that follow describe the significant factors contributing to the changes in our results of operations for the periods presented.
Net Revenues
Net revenues for the six months ended June 30, 2017 increased by 8.1%, or $88.6 million, compared with the same period in 2016, which resulted from the following:
Pricing | 1.8 | % |
Volume | 5.2 | % |
Acquisitions | 1.9 | % |
Currency exchange rates | (0.8 | )% |
Total | 8.1 | % |
The increase in net revenues was primarily driven by higher volumes, improved pricing and acquisitions in all three segments. These increases were partially offset by unfavorable foreign currency exchange rate movements primarily due to the strengthening of the US dollar against currencies in EMEIA.
33
Operating Income/Margin
Operating income for the six months ended June 30, 2017 increased $26.1 million compared to the same period in 2016 and operating margin for the six months ended June 30, 2017 increased to 19.8% from 19.0% for the same period in 2016 due to the following:
in millions | Operating Income | Operating Margin | |||||
June 30, 2016 | $ | 206.8 | 19.0 | % | |||
Pricing and productivity in excess of inflation | 15.6 | 1.1 | % | ||||
Volume/product mix | 21.2 | 0.9 | % | ||||
Acquisitions | (0.3 | ) | (0.4 | )% | |||
Restructuring / acquisition expenses | (0.2 | ) | — | % | |||
Currency exchange rates | 0.2 | 0.2 | % | ||||
Investment spending and other items | (10.4 | ) | (1.0 | )% | |||
June 30, 2017 | $ | 232.9 | 19.8 | % |
Operating income and operating margin increased primarily due to favorable volume/product mix, pricing improvements and productivity in excess of inflation and favorable foreign currency exchange rate movements. These increases were partially offset by increased investment spending and acquisitions.
Interest Expense
Interest expense for the six months ended June 30, 2017 decreased $0.8 million compared with the same period of 2016 primarily due to lower debt balances resulting from scheduled amortization of the Term Loan A Facility.
Other Income, Net
The components of Other income, net for the six months ended June 30, 2017 and 2016 were as follows:
In millions | 2017 | 2016 | |||||
Interest income | $ | (0.3 | ) | $ | (1.4 | ) | |
Exchange loss | 0.5 | 2.4 | |||||
Earnings from and gains on the sale of equity investments | (4.6 | ) | (4.0 | ) | |||
Other | (0.2 | ) | (14.4 | ) | |||
Other income, net | $ | (4.6 | ) | $ | (17.4 | ) |
Other income, net for the six months ended June 30, 2017 was unfavorable $12.8 million compared to the same period in 2016. Other income, net for the six months ended June 30, 2017 was primarily related to a gain of $4.9 million from the sale of iDevices, LLC. During the six months ended June 30, 2016, we recorded gains from the sale of marketable securities of $12.4 million, which is included in Other in the table above.
Provision for Income Taxes
The effective income tax rates for the six months ended June 30, 2017 and 2016 were 15.1% and 19.4%. The decrease in the effective tax rate compared to 2016 is primarily due to the favorable benefit of vesting and exercise of share based compensation awards and a favorable benefit resulting from the release of an $8.6 million valuation allowance, which is partially offset by unfavorable changes in the mix of income earned in lower rate jurisdictions.
34
Review of Business Segments
We operate in and report financial results for three segments: Americas, EMEIA, and Asia Pacific. These segments represent the level at which our chief operating decision maker reviews company financial performance and makes operating decisions.
Segment operating income is the measure of profit and loss that our chief operating decision maker uses to evaluate the financial performance of the business and as the basis for resource allocation, performance reviews, and compensation. For these reasons, we believe that Segment operating income represents the most relevant measure of segment profit and loss. Our chief operating decision maker may exclude certain charges or gains, such as corporate charges and other special charges 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 Net revenues.
The segment discussions that follow describe the significant factors contributing to the changes in results for each segment included in net earnings.
Segment Results of Operations - For the three and six months ended June 30
Three months ended | Six months ended | ||||||||||||||||||||
in millions | 2017 | 2016 | % Change | 2017 | 2016 | % Change | |||||||||||||||
Net revenues | |||||||||||||||||||||
Americas | $ | 468.6 | $ | 436.5 | 7.4 | % | $ | 876.2 | $ | 799.5 | 9.6 | % | |||||||||
EMEIA | 129.2 | 121.6 | 6.3 | % | 247.6 | 240.1 | 3.1 | % | |||||||||||||
Asia Pacific | 29.2 | 26.8 | 9.0 | % | 52.0 | 47.6 | 9.2 | % | |||||||||||||
Total | $ | 627.0 | $ | 584.9 | $ | 1,175.8 | $ | 1,087.2 | |||||||||||||
Segment operating income | |||||||||||||||||||||
Americas | $ | 140.3 | $ | 130.0 | 7.9 | % | $ | 247.9 | $ | 220.2 | 12.6 | % | |||||||||
EMEIA | 8.5 | 8.9 | (4.5 | )% | 15.4 | 16.9 | (8.9 | )% | |||||||||||||
Asia Pacific | 2.3 | 2.1 | 9.5 | % | 2.9 | 2.0 | 45.0 | % | |||||||||||||
Total | $ | 151.1 | $ | 141.0 | $ | 266.2 | $ | 239.1 | |||||||||||||
Segment operating margin | |||||||||||||||||||||
Americas | 29.9 | % | 29.8 | % | 28.3 | % | 27.5 | % | |||||||||||||
EMEIA | 6.6 | % | 7.3 | % | 6.2 | % | 7.1 | % | |||||||||||||
Asia Pacific | 7.9 | % | 7.8 | % | 5.6 | % | 4.2 | % |
Americas
Our Americas segment is a leading provider of security products and solutions in approximately 30 countries throughout North America, Central America, the Caribbean and South America. The segment sells a broad range of products and solutions including, locks, locksets, portable locks, key systems, door closers, exit devices, doors and door frames, electronic product and access control systems to end users in commercial, institutional and residential facilities, including into the education, healthcare, government, commercial office and single and multi-family residential markets. This segment’s primary brands are Schlage, Von Duprin and LCN.
35
Net Revenues
Net revenues for the three months ended June 30, 2017 increased by 7.4%, or $32.1 million, compared to the same period in 2016 due to the following:
Pricing | 2.7 | % | |
Volume | 3.4 | % | |
Acquisitions | 1.5 | % | |
Currency exchange rates | (0.2 | )% | |
Total | 7.4 | % |
The increase is primarily due to higher volumes, improved pricing and an acquisition in the current year partially offset by unfavorable foreign currency exchange movements. Net revenues from non-residential products for the three months ended June 30, 2017 increased mid single digits compared to the same period in the prior year. Net revenues from residential products for the three months ended June 30, 2017 increased low double-digits compared to the same period in the prior year primarily due to channel initiatives.
Net revenues for the six months ended June 30, 2017 increased by 9.6%, or $76.7 million, compared to the same period in 2016 due to the following:
Pricing | 2.0 | % | |
Volume | 6.0 | % | |
Acquisitions | 1.6 | % | |
Total | 9.6 | % |
The increase is primarily due to higher volumes, improved pricing and an acquisition in the current year. Net revenues from non-residential products for the six months ended June 30, 2017 increased low double-digits compared to the same period in the prior year. Net revenues from residential products for the six months ended June 30, 2017 increased high single digits compared to the same period in the prior year primarily due to channel initiatives.
Operating income/margin
Segment operating income for the three months ended June 30, 2017 increased $10.3 million and segment operating margin increased to 29.9% from 29.8% compared to the same period in 2016 due to the following:
in millions | Operating Income | Operating Margin | |||||
2016 | $ | 130.0 | 29.8 | % | |||
Pricing and productivity in excess of inflation | 10.4 | 1.5 | % | ||||
Volume/product mix | 3.6 | (0.2 | )% | ||||
Currency exchange rates | (0.2 | ) | — | % | |||
Investment spending | (4.1 | ) | (0.9 | )% | |||
Acquisitions | 0.8 | (0.3 | )% | ||||
Restructuring / acquisition expenses | (0.2 | ) | — | % | |||
2017 | $ | 140.3 | 29.9 | % |
The increase in operating income was primarily due to favorable volume/product mix, pricing improvements and productivity in excess of inflation and an acquisition in the current year. These increases were partially offset by increased investment spending primarily for new product development and channel led initiatives, restructuring and unfavorable foreign currency exchange rate movements.
The increase in operating margin was primarily due to pricing improvements and productivity in excess of inflation partially offset by volume/product mix, increased investment spending primarily for new product development and channel led initiatives and acquisitions.
36
Segment operating income for the six months ended June 30, 2017 increased $27.7 million and segment operating margin increased to 28.3% from 27.5% compared to the same period in 2016 due to the following:
in millions | Operating Income | Operating Margin | |||||
2016 | $ | 220.2 | 27.5 | % | |||
Pricing and productivity in excess of inflation | 11.6 | 0.9 | % | ||||
Volume/product mix | 20.0 | 0.8 | % | ||||
Currency exchange rates | 2.0 | 0.3 | % | ||||
Investment spending | (7.6 | ) | (1.0 | )% | |||
Acquisitions | 0.7 | (0.3 | )% | ||||
Restructuring / acquisition expenses | 1.0 | 0.1 | % | ||||
2017 | $ | 247.9 | 28.3 | % |
The increase in operating income was primarily due to favorable volume/product mix, pricing improvements and productivity in excess of inflation, favorable foreign currency exchange rate movements, an acquisition in the current year and restructuring in the prior year. These increases were partially offset by increased investment spending primarily for new product development and channel led initiatives.
The increase in operating margin was primarily due to volume/product mix, pricing improvements and productivity in excess of inflation, favorable foreign currency exchange rate movements and restructuring and acquisition expenses. These increases were partially offset by increased investment spending primarily for new product development and channel led initiatives and an acquisition in the current year.
EMEIA
Our EMEIA segment provides security products and solutions in approximately 85 countries throughout Europe, the Middle East, India and Africa. The segment offers end-users a broad range of products, services and solutions including, locks, locksets, portable locks, key systems, door closers, exit devices, doors and door frames, electronic product and access control systems, as well as time and attendance and workforce productivity solutions. This segment’s primary brands are AXA, Bricard, CISA, Interflex and SimonsVoss. This segment also resells Schlage, Von Duprin and LCN products, primarily in the Middle East.
Net Revenues
Net revenues for the three months ended June 30, 2017 increased by 6.3%, or $7.6 million compared to the same period in 2016 due to the following:
Pricing | 1.6 | % | |
Volume | 4.7 | % | |
Acquisitions | 3.4 | % | |
Currency exchange rates | (3.4 | )% | |
Total | 6.3 | % |
The increase was due to higher volumes and improved pricing and an acquisition in the prior year partially offset by unfavorable foreign currency exchange rate movements.
Net revenues for the six months ended June 30, 2017 increased by 3.1%, or $7.5 million, compared to the same period in 2016 due to the following:
Pricing | 1.4 | % | |
Volume | 2.4 | % | |
Acquisitions | 3.2 | % | |
Currency exchange rates | (3.9 | )% | |
Total | 3.1 | % |
37
The increase was due to higher volumes and improved pricing and an acquisition in the prior year partially offset by unfavorable foreign currency exchange rate movements.
Operating income/margin
Segment operating income for the three months ended June 30, 2017 decreased $0.4 million and segment operating margin decreased to 6.6% from 7.3% compared to the same period in 2016 due to the following:
in millions | Operating Income | Operating Margin | |||||
2016 | $ | 8.9 | 7.3 | % | |||
Pricing and productivity in excess of inflation | 1.0 | 0.7 | % | ||||
Volume/product mix | 0.9 | 0.3 | % | ||||
Currency exchange rates | (0.9 | ) | (0.3 | )% | |||
Investment spending | (0.7 | ) | (0.6 | )% | |||
Acquisitions | (0.3 | ) | (0.5 | )% | |||
Restructuring expenses | (0.4 | ) | (0.3 | )% | |||
2017 | $ | 8.5 | 6.6 | % |
The decrease was primarily due to unfavorable foreign currency exchange rate movements, increased investment spending, increased restructuring expenses and an operating loss from an acquisition in the prior year. These decreases were partially offset by pricing improvements and productivity in excess of inflation and favorable volume/product mix.
Segment operating income for the six months ended June 30, 2017 decreased $1.5 million and segment operating margin decreased to 6.2% from 7.1% compared to the same period in 2016 due to the following:
in millions | Operating Income | Operating Margin | |||||
2016 | $ | 16.9 | 7.1 | % | |||
Pricing and productivity in excess of inflation | 3.0 | 1.1 | % | ||||
Volume/product mix | 1.0 | 0.2 | % | ||||
Currency exchange rates | (2.0 | ) | (0.5 | )% | |||
Investment spending | (1.0 | ) | (0.4 | )% | |||
Acquisitions | (0.9 | ) | (0.6 | )% | |||
Restructuring expenses | (1.6 | ) | (0.7 | )% | |||
2017 | $ | 15.4 | 6.2 | % |
The decrease was primarily due to unfavorable foreign currency exchange rate movements, increased investment spending, increased restructuring expenses and an operating loss from an acquisition in the prior year. These decreases were partially offset by pricing improvements and productivity in excess of inflation and favorable volume/product mix.
Asia Pacific
Our Asia Pacific segment provides security products and solutions in approximately 14 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, CISA, Von Duprin and LCN.
38
Net Revenues
Net revenues for the three months ended June 30, 2017 increased by 9.0%, or $2.4 million compared to the same period in 2016 due to the following:
Pricing | 0.4 | % | |
Volume | 7.4 | % | |
Acquisitions | 1.3 | % | |
Currency exchange rates | (0.1 | )% | |
Total | 9.0 | % |
The increase in revenues was primarily due to higher volumes, improved pricing and an acquisition in the prior year.
Net revenues for the six months ended June 30, 2017 increased by 9.2%, or $4.4 million compared to the same period in 2016 due to the following:
Pricing | 0.4 | % | |
Volume | 6.1 | % | |
Acquisitions | 1.5 | % | |
Currency exchange rates | 1.2 | % | |
Total | 9.2 | % |
The increase in revenues was primarily due to higher volumes, improved pricing, favorable foreign currency exchange rate movements and an acquisition in the prior year.
Operating income/margin
Segment operating income for the three months ended June 30, 2017 increased $0.2 million and segment operating margin increased to 7.9% from 7.8% compared to the same period in 2016 due to the following:
in millions | Operating Income | Operating Margin | |||||
2016 | $ | 2.1 | 7.8 | % | |||
Pricing and productivity in excess of inflation | 0.2 | 0.6 | % | ||||
Volume/product mix | (0.1 | ) | (0.8 | )% | |||
Investment spending | (0.1 | ) | (0.3 | )% | |||
Acquisitions | — | (0.1 | )% | ||||
Restructuring expenses | 0.2 | 0.7 | % | ||||
2017 | $ | 2.3 | 7.9 | % |
The increase was primarily related to favorable pricing improvements and productivity in excess of inflation and lower restructuring expenses in the prior year. These increases were partially offset by unfavorable volume/product mix and increased investment spending.
39
Segment operating income for the six months ended June 30, 2017 increased $0.9 million and segment operating margin increased to 5.6% from 4.2% compared to the same period in 2016 due to the following:
in millions | Operating Income | Operating Margin | |||||
2016 | $ | 2.0 | 4.2 | % | |||
Pricing and productivity in excess of inflation | 0.4 | 0.9 | % | ||||
Volume/product mix | 0.2 | 0.2 | % | ||||
Currency exchange rates | 0.2 | 0.3 | % | ||||
Investment spending | (0.1 | ) | (0.3 | )% | |||
Acquisitions | (0.1 | ) | (0.2 | )% | |||
Restructuring expenses | 0.3 | 0.5 | % | ||||
2017 | $ | 2.9 | 5.6 | % |
The increase was primarily related to favorable volume/product mix, pricing improvements and productivity in excess of inflation, favorable foreign currency exchange rate movements and lower restructuring expenses in the prior year. These increases were partially offset by an operating loss related to an acquisition in the prior year and increased investment spending.
Liquidity and Capital Resources
Sources and uses of liquidity
Our primary source of liquidity is cash provided by operating activities. Cash provided by operating activities is used to invest in new product development, fund capital expenditures and fund working capital requirements and is expected to be adequate to service any future debt, pay any declared dividends and potentially fund acquisitions and share repurchases. Our ability to fund these capital needs depends on our ongoing ability to generate cash provided by operating activities, and to access our borrowing facilities (including unused availability under our Revolver) and capital markets. We believe that our future cash provided by operating activities, availability under our Revolver and access to funds on hand and capital markets, will provide adequate resources to fund our operating and financing needs.
The following table reflects the major categories of cash flows for the six months ended June 30. For additional details, see the Condensed and Consolidated Statements of Cash Flows in the condensed and consolidated financial statements.
In millions | 2017 | 2016 | |||||
Net cash provided by operating activities | $ | 64.0 | $ | 101.2 | |||
Net cash used in investing activities | (25.9 | ) | (38.5 | ) | |||
Net cash used in financing activities | (110.5 | ) | (95.0 | ) |
Operating Activities
Net cash provided by operating activities during the six months ended June 30, 2017 decreased $37.2 million compared to the same period in 2016. The decrease in net cash provided by operating activities for the six months ended June 30, 2017 was primarily due to a discretionary $50.0 million contribution to the U.S. qualified defined benefit pension plan partially offset by higher earnings.
Investing Activities
Net cash used in investing activities during the six months ended June 30, 2017 decreased $12.6 million compared to the same period in 2016. The decrease in net cash used in investing activities is primarily due to $15.2 million in proceeds from the sale of an equity investment in the six months ended June 30, 2017 that did not occur in the same period last year and a $10.6 million decrease of cash payments related to acquisitions in the six months ended June 30, 2017 compared to the same period last year offset by $14.1 million of cash received from the sale of marketable securities in the same period last year that did not recur in the six months ended June 30, 2017.
40
Financing Activities
Net cash used in financing activities during the six months ended June 30, 2017 increased $15.5 million compared to the same period in 2016. The increase in cash used in financing activities is primarily due to a $30.0 million increase of repurchases of ordinary shares and a $7.5 million increase of dividend payments to ordinary shareholders partially offset by lower debt repayments and other financing activities. During the six months ended June 30, 2017, we repaid $1.3 million of short term borrowings and $23.5 million on the Term Loan A Facility compared to $40.5 million of long-term debt repayments in the prior year. Cash provided by other financing activities increased $5.9 million for the six months ended June 30, 2017 compared to the prior year primarily due to higher proceeds from shares issued under incentive plans, lower dividends paid to noncontrolling interests and payment of contingent consideration related to an acquisition in the same period last year that did not recur in the six months ended June 30, 2017.
Capitalization
Borrowings and current maturities of long-term debt consisted of the following:
In millions | June 30, 2017 | December 31, 2016 | |||||
Term Loan A Facility | $ | 856.3 | $ | 879.8 | |||
5.75% Senior notes due 2021 | 300.0 | 300.0 | |||||
5.875% Senior notes due 2023 | 300.0 | 300.0 | |||||
Other debt, including capital leases, maturing in various amounts through 2024 | 1.0 | 2.3 | |||||
Unamortized debt issuance costs, net | (16.3 | ) | (18.3 | ) | |||
Total debt | 1,441.0 | 1,463.8 | |||||
Less current portion of long-term debt | 46.9 | 48.2 | |||||
Total long-term debt | $ | 1,394.1 | $ | 1,415.6 |
The Term Loan A Facility amortizes in quarterly installments, at the following rates per year: 5% in 2017, 5% in 2018, and 10% in each year thereafter, with the final installment due on October 15, 2020. We repaid $23.5 million on the Term Loan A Facility during the six months ended June 30, 2017. The 2021 Senior Notes are due in full on October 1, 2021 and the 2023 Senior Notes are due in full on September 15, 2023.
We have a 5-year, $500.0 million revolving credit facility maturing on October 15, 2020. At June 30, 2017, we did not have any borrowings outstanding under the Revolver and had $19.2 million of letters of credit outstanding.
We are required to comply with certain covenants under our Senior Secured Credit Facilities. We are required to comply with a maximum leverage ratio of 4.00 to 1.00 based on a ratio of total consolidated indebtedness, net of unrestricted cash up to $150 million, to consolidated EBITDA. Additionally, we are required to have a minimum interest expense coverage ratio of 4.00 to 1.00 based on a ratio of consolidated EBITDA to consolidated interest expense, net of interest income. As of June 30, 2017, we were in compliance with these covenants. The indenture to our senior notes and the senior secured credit facilities contain affirmative and negative covenants that, among other things, limit or restrict our ability to enter into certain transactions. For further details on these covenants, see Note 8 to the condensed and consolidated financial statements.
The majority of our earnings are 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. Accordingly, applicable income taxes have not been accrued on the portion of our earnings that is considered to be permanently reinvested. At June 30, 2017, we had cash and cash equivalents of $245.5 million. Approximately 56% of our cash and cash equivalents were located outside the U.S.
41
Pensions
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, contribution 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. In January 2017 we made a discretionary $50.0 million contribution to the U.S. qualified defined benefit pension plan.
We monitor the impact of market conditions on our defined benefit plans on a regular basis. None of our defined benefit pension plans have experienced a significant impact on their liquidity due to the volatility in the markets. For further details on pension plan activity, see Note 10 to the condensed and consolidated financial statements.
For a further discussion of Liquidity and Capital Resources, refer to Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," contained in the Company’s Annual Report on Form 10-K for the period ended December 31, 2016.
Critical Accounting Policies
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our condensed and consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with those accounting principles requires management to use judgments 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, revenue 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.
Management believes there have been no significant changes during the six months ended June 30, 2017, to the items that we disclosed as our critical accounting policies in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2016.
Recent Accounting Pronouncements
See Note 2 to our condensed and consolidated financial statements for a discussion of recently issued and adopted accounting pronouncements.
Safe Harbor Statement
Certain statements in this report, other than purely historical information, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “forecast,” “outlook,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” or the negative thereof or variations thereon or similar terminology generally intended to identify forward-looking statements.
Forward-looking statements may relate to such matters as projections of revenue, margins, expenses, tax provisions, earnings, cash flows, benefit obligations, dividends, share purchases or other financial items; any statements of the plans, strategies and objectives of management for future operations, including those relating to any statements concerning expected development, performance or market share relating to our products and services; any statements regarding future economic conditions or our performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. These statements are based on currently available information and our current assumptions, expectations and projections about future events. While we believe that our assumptions, expectations and projections are reasonable in view of the currently available information, you are cautioned not to place undue reliance on our forward-looking statements. You are advised to review any further disclosures we make on related subjects in materials we file with or furnish to the SEC. Forward-looking statements speak only as of the date they are made and are not guarantees of future performance. They are subject to future events, risks and uncertainties - many of which are beyond our control - as well as potentially inaccurate assumptions, that could cause actual results to differ materially from those in our forward looking statements. We do not undertake to update any forward-looking statements.
42
Factors that might affect our forward-looking statements include, among other things:
• | economic, political and business conditions in the markets in which we operate; |
• | the demand for our products and services; |
• | competitive factors in the industry in which we compete; |
• | the ability to protect and use intellectual property; |
• | fluctuations in currency exchange rates; |
• | the ability to complete and integrate any acquisitions; |
• | our ability to operate efficiently and productively; |
• | our ability to manage risks related to our information technology; |
• | changes in tax requirements (including tax rate changes, new tax laws and revised tax law interpretations); |
• | the outcome of any litigation, governmental investigations or proceedings; |
• | interest rate fluctuations and other changes in borrowing costs; |
• | other capital market conditions, including availability of funding sources and currency exchange rate fluctuations; |
• | availability of and fluctuations in the prices of key commodities and the impact of higher energy prices; |
• | potential further impairment of our goodwill, indefinite-lived intangible assets and/or our long-lived assets; |
• | the possible effects on us of future legislation in the U.S. that may limit or eliminate potential U.S. tax benefits resulting from our incorporation in a non-U.S. jurisdiction, such as Ireland, or deny U.S. government contracts to us based upon our incorporation in such non-U.S. jurisdiction; and |
• | the impact our substantial leverage may have on our business and operations. |
Some of the significant risks and uncertainties that could cause actual results to differ materially from our expectations and projections are described more fully in the “Risk Factors” section of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. There may also be other factors that have not been anticipated or that are not described in our periodic filings with the SEC, generally because we did not believe them to be significant at the time, which could cause results to differ materially from our expectations.
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
There have been no other significant changes in our exposure to market risk during the second quarter of 2017. For a discussion of the Company’s exposure to market risk, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
Item 4 – Controls and Procedures
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of 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 Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded as of June 30, 2017, that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this Quarterly Report on Form 10-Q has been recorded, processed, summarized and reported when required and the information is 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.
There has been no change in the Company’s internal control over financial reporting that occurred during the second quarter of 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
43
PART II – OTHER INFORMATION
Item 1 – 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.
Item 1A – Risk Factors
There have been no material changes to our risk factors contained in our Annual Report on Form 10-K for the period ended December 31, 2016. For a further discussion of our Risk Factors, refer to the “Risk Factors” discussion contained in our Annual Report on Form 10-K for the period ended December 31, 2016.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
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 program (000s) | Approximate dollar value of shares still available to be purchased under the program (000s) | ||||||||||
April 1 - April 30 | — | — | — | $ | 469,992 | |||||||||
May 1 - May 31 | 379 | $ | 79.20 | 379 | 439,992 | |||||||||
June 1 - June 30 | — | — | — | 439,992 | ||||||||||
Total | 379 | $ | 79.20 | 379 | $ | 439,992 |
In February 2017, our Board of Directors approved a new stock repurchase authorization of up to $500 million of the Company's ordinary shares ("2017 Share Repurchase Authorization"). Based on market conditions, share repurchases are made from time to time in the open market at the discretion of management. The 2017 Share Repurchase Authorization does not have a prescribed expiration date.
44
Item 6 – Exhibits
(a) Exhibits
Exhibit No. | Description | Method of Filing | ||
12.1 | Ratio of Earnings to Fixed Charges. | Filed herewith. | ||
31.1 | 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 herewith. | ||
31.2 | 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 herewith. | ||
32 | Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | Furnished herewith. | ||
101 | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed and Consolidated Statements of Comprehensive Income, (ii) the Condensed and Consolidated Balance Sheets, (iii) the Condensed and Consolidated Statement of Cash Flows, and (iv) Notes to Condensed and Consolidated Financial Statements. | Filed herewith. |
45
ALLEGION PLC
SIGNATURES
Pursuant to the requirements 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) | ||
Date: | July 27, 2017 | /s/ Patrick S. Shannon |
Patrick S. Shannon, Senior Vice President and Chief Financial Officer Principal Financial Officer | ||
Date: | July 27, 2017 | /s/ Douglas P. Ranck |
Douglas P. Ranck, Vice President and Corporate Controller Principal Accounting Officer |
46
EXHIBIT INDEX
Exhibit No. | Description | |
Ratio of Earnings to Fixed Charges. | ||
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
101 | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed and Consolidated Statements of Comprehensive Income, (ii) the Condensed and Consolidated Balance Sheets, (iii) the Condensed and Consolidated Statement of Cash Flows, and (iv) Notes to Condensed and Consolidated Financial Statements. |
47