10-K 1 alle-10kx12312014doc.htm 10-K FOR THE YEAR ENDED DECEMBER 31, 2014 ALLE-10K-12.31.2014 DOC
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to          
Commission File No. 001-35971
ALLEGION PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
 
Ireland
 
98-1108930
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Block D
Iveagh Court
Harcourt Road
Dublin 2, Ireland
(Address of principal executive offices)
Registrant’s telephone number, including area code: +(353) (1) 2546200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Ordinary Shares,
 
New York Stock Exchange
Par Value $0.01 per Share
 
 
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES  X       NO       
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES            NO  X  
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer    X  
Accelerated filer             
Non-accelerated filer ___
Smaller reporting company             
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES             NO  X  
The aggregate market value of ordinary shares held by nonaffiliates on June 30, 2014 was approximately $5.4 billion based on the closing price of such stock on the New York Stock Exchange.
The number of ordinary shares outstanding as of February 24, 2015 was 96,009,137.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement to be filed within 120 days of the close of the registrant’s fiscal year in connection with the registrant’s Annual General Meeting of Shareholders to be held June 10, 2015 (the "Proxy Statement") are incorporated by reference into Part II and Part III of this Form 10-K.




ALLEGION PLC

Form 10-K
For the Fiscal Year Ended December 31, 2014
TABLE OF CONTENTS
 
 
 
 
Page
Part I
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 1B.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
Part II
Item 5.
 
 
 
 
 
Item 6.
 
 
 
 
 
Item 7.
 
 
 
 
 
Item 7A.
 
 
 
 
 
Item 8.
 
 
 
 
 
Item 9.
 
 
 
 
 
Item 9A.
 
 
 
 
 
Item 9B.
 
 
 
 
Part III
Item 10.
 
 
 
 
 
Item 11.
 
 
 
 
 
Item 12.
 
 
 
 
 
Item 13.
 
 
 
 
 
Item 14.
 
 
 
 
Part IV
Item 15.
 
 
 
 
 
 



CAUTIONARY STATEMENT FOR FORWARD LOOKING STATEMENTS
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 our expectations and projections. We do not undertake to update any forward-looking statements.
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
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;
the ability to achieve cost savings in connection with our productivity programs;
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;
our ability to fully realize the expected benefits of our spin-off from Ingersoll Rand;
the impact of potential technology or data security breaches; 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 Item 1A “Risk Factors.” You should read that information in conjunction with “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this report and our Combined and Consolidated Financial Statements and related notes in Item 8 of this report. We note such information for investors as permitted by the Private Securities Litigation Reform Act of 1995.


2


PART I
Item 1.    BUSINESS
Overview

Allegion plc ("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.
Allegion Principal Products
Door closers and controls
Door and door frames (steel)
Electronic security products
Electronic and biometric access control systems
Exit devices
Locks, locksets and key systems
Time, attendance and workforce productivity systems
Video analytics systems
Other accessories
 

Access control security products and solutions are critical elements in every building. Most door openings are custom-configured to maximize a room’s particular form and function while also meeting local and national building and safety code requirements and end-user security needs. Most buildings have multiple door openings, each serving its own purpose and requiring different specific access-control solutions. Each door must fit exactly within its frame, be prepared precisely for its hinges, synchronize with its specific lockset and corresponding latch and align with a specific key to secure the door. Moreover, security products are increasingly linked electronically, creating additional functionality and complexity.

We believe our ability to deliver a wide range of solutions that can be custom-configured to meet end-users’ security needs is a key driver of our success. We accomplish this with:

Our extensive and versatile product portfolio, combined with our deep expertise, which enables us to deliver the right products and solutions to meet diverse security and functional specifications;
Our consultative approach and expertise, which enables us to develop the most efficient and appropriate building security and access-control specifications to fulfill the unique needs of our end-users and their partners, including architects, contractors, home-builders and engineers; and
Our operational excellence capabilities, including our global manufacturing operations and agile supply chain, which facilitate our ability to deliver specific product and system configurations to end-users worldwide, quickly and efficiently.

Based on information derived from third party sources, we estimate that the size of the global markets we serve was more than $30 billion in revenue in 2014, comprised of $25 billion for mechanical hardware and electronic security products and more than $5 billion for time, attendance, and workforce productivity systems and systems integration. We believe that the security products industry will benefit from several global macroeconomic and long-term demographic trends, including:
recovery of construction markets in key North American markets
heightened awareness of security requirements,
increased global urbanization, and
the shift to a digital, interconnected environment.

In the more established economies of North America and Europe, the security products industry’s compound annual growth rate was 1 to 2% per year due to uneven economic conditions experienced over the past three years. We believe our markets are poised for a cyclical recovery driven in part by accelerating growth in the underlying commercial and residential construction markets and improved consumer confidence in the United States offsetting unfavorable foreign currency exchange rates. Additionally, we expect growth in the global electronic product categories we serve to outperform the security products industry as end-users adopt newer technologies in their facilities.

We operate in three geographic regions: Americas; Europe, Middle East, India and Africa ("EMEIA"); and Asia Pacific. We sell our products and solutions under the following brands:

3


Allegion Brands
(listed alphabetically for each region)
Product Category
Americas
EMEIA
Asia Pacific
Locks/Locksets/Key Systems
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Door Closers and Controls/Exit Devices
 
 
 
 
 
 
 
Electronic Products and Access Control Systems, including Time, Attendance and Workforce Productivity and Video Analytics Systems
 
 
Doors and Door Frames
 
 
 
 
Other Accessories
 
 


4


We sell a wide range of security products and solutions for end-users in commercial, institutional and residential facilities worldwide, including into the education, healthcare, government, hospitality, commercial office and single and multi-family residential markets. Our strategic brands are Schlage®, Von Duprin®, LCN®, CISA® and Interflex®. We believe Schlage, Von Duprin and LCN hold the No. 1 position in their primary product categories in North America and CISA and Interflex hold the No.1 or No. 2 position in their primary product categories in certain European markets.
    
For the year ended December 31, 2014, we generated revenues of $2,118.3 million and operating income of $326.3 million.

Revenue By Geographic Destination
 
Revenue By Product Category
 

History and Developments

Allegion plc was incorporated in Ireland on May 9, 2013, to hold Ingersoll Rand’s commercial and residential security businesses. On December 1, 2013, Allegion became a stand-alone public company after Ingersoll Rand completed the separation of these businesses from the rest of Ingersoll Rand via the transfer of these businesses from Ingersoll Rand to Allegion and the issuance by Allegion of ordinary shares directly to Ingersoll Rand’s shareholders (the "Spin-off"). Our security businesses have long and distinguished operating histories. Several of our brands were established more than 75 years ago, and many of our brands originally created their categories:

Von Duprin, established in 1908, was awarded the first exit device patent;
Schlage, established in 1920, was awarded the first patents granted for the cylindrical lock and the push button lock;
LCN, established in 1926, created the first door closure;
CISA, established in 1926, devised the first electronically controlled lock; and
Steelcraft Doors, established in 1927, developed the first mass-produced hollow metal door in 1942.

We have built upon these founding legacies since our entry into the security products market through the acquisition of Schlage, Von Duprin and LCN in 1974. Today, we continue to develop and introduce innovative and market-leading products. Recent examples include: Schlage NDE series wireless commercial lock with the ENGAGE connectivity platform; Schlage Touchscreen Deadbolt, a residential lock; CISA eSigno, a hotel locking platform; eVayo, a European electronics security platform; Von Duprin Concealed Vertical Cable System that significantly reduces total installation time and ongoing maintenance requirements; aptiQ, a versatile and multi-technology card reader platform; and Schlage’s AD/CO, an electronic locking platform that allows end-users to add additional features without lock replacement.

Industry and Competition

Based on third party sources, we estimate that the size of the global markets we serve was more than $31 billion in revenue in 2014, comprised of $26 billion for mechanical hardware and electronic security products and more than $5 billion for time, attendance, and workforce productivity systems and systems integration, with compound annual growth of about 1 to 2% per year over the past three years. This growth rate primarily reflects cyclical challenges in the commercial and residential construction markets throughout North America and Europe as certain developing economies experienced higher growth rates during this period. Additionally, growth in electronic security products and solutions continues to outperform the industry as a whole as end-users adopt newer technologies in their facilities. We expect the security products industry will benefit from favorable long-term

5


demographic trends such as continued urbanization of the global population, increased concerns about safety and security and technology-driven innovation.

The security products markets are highly competitive and fragmented throughout the world, with a number of large multi-national companies and thousands of smaller regional and local companies. This high fragmentation primarily reflects local regulatory requirements and highly variable end-user needs. We believe our principal global competitors are Assa Abloy AB, DORMA Holding GmbH, Kaba Holding AG, and Stanley Black & Decker Inc. We also face competition in various markets and product categories throughout the world, including from Spectrum Brands Holdings, Inc. in the North American residential market. As we move into more technologically-advanced product categories, we may also compete against smaller, more specialized competitors.

Our success depends on a variety of factors, including brand and reputation, product breadth, quality and delivery capabilities, price and service capabilities. As many of our businesses sell through wholesale distribution, our success also depends on building and partnering with a strong channel network. Although price often serves as an important customer decision criterion, we also compete based on the breadth and quality of our products and solutions, our ability to custom-configure solutions to meet individual end-user requirements and our global supply chain.

Our Reporting Segments

We manufacture and sell mechanical and electronic security products and solutions in approximately 130 countries. Approximately 89% of our 2014 revenues were to customers in the North America, Western Europe and the Asia-Pacific regions.

The following table presents the relative percentages of total segment revenue attributable to each reporting segment for each of the last three fiscal years. See Note 21, “Business Segment Information,” to our annual combined and consolidated financial statements for information regarding net revenues, operating income, and total assets by reportable segment:

 
For the Years Ended December 31,
 
2014
 
2013
 
2012
Americas
74%
 
73%
 
73%
EMEIA
18%
 
19%
 
20%
Asia Pacific
8%
 
8%
 
7%

Our Americas segment provides security products and solutions in approximately 30 countries throughout North America and parts of South America. The segment offers a broad range of products and solutions including locks, locksets, key systems, door closers, exit devices, doors and door frames, electronic product and access control systems to end-users in the commercial, institutional and residential markets, including into the education, healthcare, government, commercial office and single and multi-family residential markets. This segment’s strategic brands are Schlage, Von Duprin and LCN.

Our EMEIA segment provides security products and solutions in approximately 85 countries throughout Europe, the Middle East, India and Africa. The segment offers the same portfolio of products as the Americas segment, as well as time and attendance and workforce productivity solutions. This segment’s strategic brands are Bricard, CISA and Interflex. This segment also resells Schlage, Von Duprin and LCN products, primarily in the Middle East.

Our Asia Pacific segment provides security products and solutions in approximately 14 countries throughout Asia Pacific. The segment offers the same portfolio of products as the Americas segment, as well as video analytics solutions. This segment’s strategic brands are Schlage, CISA, Von Duprin and LCN.

Products and Services

We offer an extensive and versatile portfolio of mechanical and electronic security products across a range of market-leading brands:

Locks, locksets and key systems: A broad array of tubular and mortise door locksets, security levers, and master key systems that are used to protect and control access. We also offer a range of portable security products, including bicycle, small vehicle and travel locks.
Door closers and exit devices: An extensive portfolio of life-safety products generally installed on fire doors and facility entrances and exits. Door closers are devices that automatically close doors after they are opened. Exit

6


devices are generally horizontal attachments to doors and enable rapid exit from the premises.
Electronic Security Products and Access Control Systems: A broad range of electrified locks, door closers, exit devices, access control systems, biometric hand reader systems, key card and reader systems, accessories, and automatic doors.
Time, Attendance and Workforce Productivity Systems: Products and services designed to help business customers manage and monitor workforce access control parameters, attendance and employee scheduling. We offer ongoing aftermarket services in addition to design and installation offerings.
Video Analytics: Electronic video analytics systems and services, primarily for business and government customers in Asia Pacific. We offer ongoing aftermarket services in addition to design and installation offerings.
Doors and Door Frames: A portfolio of hollow metal doors and door frames. In select geographies, we also provide installation and service maintenance services.
Other Accessories: A variety of additional security and product components, including hinges, door levers, door stops and other accessories, as well as certain bathroom fittings products.

Customers

We sell most of our products and solutions through distribution and retail channels, ranging from specialty distribution to wholesalers. We have built a network of more than 7,000 channel partners that help our customers choose the right solution to meet their security needs. Our channel partners that sell to commercial and institutional end-users helped fulfill and install orders to more than 30,000 end-users in 2014. We also sell through a variety of retail channels, ranging from large do-it-yourself home improvement centers to small, specialty showroom outlets. We work with our retail partners on developing marketing and merchandising strategies to maximize their sales per square foot of shelf space.

Through our Interflex and China-based video and systems integration businesses, we provide products and solutions directly to end-users.

Our 10 largest customers represented approximately 21% of our total revenues in 2014. No single customer represented 10% or more of our total revenues in 2014.

Sales and Marketing

In markets where we sell through commercial and institutional distribution channels, we employ sales professionals around the world who work with a combination of end-users, security professionals, architects, contractors, engineers and distribution partners to develop specific custom-configured solutions for our end-users’ needs. Our field sales professionals are assisted by specification writers who work with architects, engineers and consultants to help design door openings and security systems to meet end-users’ functional, aesthetic and regulatory requirements. Both groups are supported by dedicated customer care and technical sales-support specialists worldwide. We also support our sales efforts with a variety of marketing efforts, including trade-specific advertising, cooperative distributor merchandising, digital marketing, and marketing at a variety of industry trade shows.

In markets in which we sell through retail and home-builder distribution channels, we have teams of sales, merchandising and marketing professionals who help drive brand and product awareness through our channel partners and to consumers. We utilize a variety of advertising and marketing strategies, including traditional consumer media, retail merchandising, digital marketing, retail promotions, and builder and consumer trade shows, to support these teams.

We also work actively with several regulatory bodies around the world to help promote effective and consistent safety and security standards. For example, we are members of Builders Hardware Manufacturers Association, Security Industry Association, Smart Card Alliance, American Society of Healthcare Engineering, American Institute of Architects, Construction Specification Institute, ASSOFERMA (Italy), BHE (Germany) and UNIQ (France). We also have established the Safety and Security Institute in China, which helps to educate government officials, architects and builders and advocates for consistent building codes and standards that address end-users’ safety and security.

Production and Distribution

We manufacture our products in our geographic markets around the world. We operate 19 production facilities, including 10 in the Americas region, six in EMEIA and three in Asia Pacific. We own 10 of these facilities and lease the others. Our strategy is to produce in the region of use, wherever appropriate, to allow us to be closer to the end-user and increase efficiency and timely product delivery.


7


In managing our network of production facilities, we focus on eliminating excess capacity, reducing cycle time through productivity, and harmonizing production practices and safety procedures.

We distribute our products through a broad network of channel partners. In addition, third-party logistics providers perform storage and distribution services for us to support certain parts of our distribution network.

Raw Materials

We support our region-of-use production strategy with corresponding region-of-use supplier partners, where available. Our global and regional commodity teams work with production leadership, product management and materials management teams to ensure adequate materials are available for production at the lowest possible cost.

We purchase a wide range of raw materials, including steel, zinc, brass and other non-ferrous metals, to support our production facilities. Where appropriate, we may enter into long-term supply arrangements or fixed-cost contracts to lower overall costs. We do not believe the loss of any particular supplier would be material to our business.

Intellectual Property

Intellectual property, inclusive of certain patents, trademarks, copyrights, know-how, trade secrets and other proprietary rights, is important to our business.  We create, protect and enforce our intellectual property investments in a variety of ways. We work actively in the U.S. and internationally to try to ensure the protection and enforcement of our intellectual property rights. We use trademarks on nearly all of our products and believe that such distinctive marks are an important factor in creating a market for our goods, in identifying us and in distinguishing our products from others. We consider our Schlage, Von Duprin, CISA and other associated trademarks to be among our most valuable assets, and we have registered these trademarks in a number of countries. Although certain proprietary intellectual property rights are important to our success, we do not believe we are materially dependent on any particular patent or license, or any particular group of patents or licenses.

Facilities

We operate through a broad network of sales offices, 19 production facilities and several distribution centers throughout the world. Our active properties represent about 5.1 million square feet, of which approximately 54% is leased.

The following table shows the location of our worldwide production facilities:
Production Facilities
Americas
 
EMEIA
 
Asia Pacific
Blue Ash, Ohio
 
Durchhausen, Germany
 
Auckland, New Zealand
Bogota, Colombia
 
Duzce, Turkey
 
Jinshan, China
Caracas, Venezuela
 
Faenza, Italy
 
Melbourne, Australia
Chino, California
 
Feuquieres, France
 
 
Ensenada, Mexico
 
Renchen, Germany
 
 
Indianapolis, Indiana
 
Monsampolo, Italy
 
 
Princeton, Illinois
 
 
 
 
Security, Colorado
 
 
 
 
Tecate, Mexico
 
 
 
 
Tijuana, Mexico
 
 
 
 

Research and Development
We are committed to investing in highly productive research and development capabilities, particularly in electro-mechanical systems. Our research and development ("R&D") expenditures were approximately $43.3 million, $39.6 million and $38.2 million for the years ended December 31, 2014, 2013 and 2012, respectively.

We concentrate on developing technology innovations that will deliver growth through the introduction of new products and solutions, and also on driving continuous improvements in product cost, quality, safety and sustainability.


8


We manage our R&D team as a global group with an emphasis on a global collaborative approach to identify and develop new technologies and worldwide product platforms. We are organized on a regional basis to leverage expertise in local standards and configurations. In addition to regional engineering centers in each geographic region, we also operate a global engineering center of excellence in Bangalore, India.

Seasonality

Our business experiences seasonality that varies by product line. Because more construction and do-it-yourself projects occur during the second and third calendar quarters of each year in the Northern Hemisphere, our security product sales, typically, are higher in those quarters than in the first and fourth calendar quarters. However, our Interflex and Asia Pacific systems integration businesses typically experience higher sales in the fourth calendar quarter due to project timing. Revenue by quarter for the years ended December 31, 2014, 2013 and 2012 are as follows:

First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2014
22%
24%
26%
28%
2013
23%
26%
26%
25%
2012
23%
26%
26%
25%

Employees

As of December 31, 2014, we had more than 8,500 employees, approximately 20% of whom have the terms of their employment covered under collective bargaining agreements. Our non-management European employees are represented by national and local works councils.

Environmental Regulation
We are dedicated to an environmental program intended to reduce the utilization and generation of hazardous materials during the manufacturing process as well as to remediate identified environmental concerns. As to the latter, we are currently engaged in site investigations and remediation activities to address environmental cleanup from past operations at current and former manufacturing facilities.
We are sometimes a party to environmental lawsuits and claims and have received notices of potential violations of environmental laws and regulations from the U.S. Environmental Protection Agency (the "EPA") and similar state authorities. We have also been identified as a potentially responsible party ("PRP") for cleanup costs associated with off-site waste disposal at federal Superfund and state remediation sites. For all such sites, there are other PRPs and, in most instances, our involvement is minimal.
In estimating our liability, we have assumed that we will not bear the entire cost of remediation of any site to the exclusion of other PRPs who may be jointly and severally liable. The ability of other PRPs to participate has been taken into account, based on our understanding of the parties’ financial condition and probable contributions on a per site basis. Additional lawsuits and claims involving environmental matters are likely to arise from time to time in the future.

We incurred $2.9 million, $2.1 million, and $2.9 million of expenses during the years ended December 31, 2014, 2013, and 2012, respectively, for environmental remediation at sites presently or formerly owned or leased by us. As of December 31, 2014 and 2013, we have recorded reserves for environmental matters of $8.8 million and $10.8 million, respectively. Of these amounts $2.4 million and $2.9 million, respectively, relate to remediation of sites previously disposed by us. Given the evolving nature of environmental laws, regulations and technology, the ultimate cost of future compliance is uncertain.

Available Information

We are required to file annual, quarterly, and current reports, proxy statements, and other documents with the SEC. The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The public can obtain any documents that are filed by us at http://www.sec.gov.

In addition, this Annual Report on Form 10-K, as well as future quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to all of the foregoing reports, are made available free of charge on our Internet website (http://www.allegion.com)

9


as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. The contents of the Company’s website are not incorporated by reference in this report.

Item 1A. RISK FACTORS

You should carefully consider the risks below, together with all the other information included in this Form 10-K, in evaluating us and our ordinary shares. If any of the risks below actually occurs, our business, financial conditions, results of operations and cash flows could be materially and adversely affected. Any such adverse effect may cause the trading price of our ordinary shares to decline, and as a result, you could lose all or part of your investment in us. Our business may also be adversely affected by risks and uncertainties not known to us or risks that we currently believe to be immaterial.

Risks Related to Our Business

Our global operations subject us to economic risks.

We are incorporated in Ireland and operate in countries worldwide. Our global operations depend on products manufactured, purchased and sold in the U.S. and internationally, including in Europe, China, Australia, Mexico, Venezuela and Turkey. Accordingly, we are subject to risks that are inherent in operating globally, including:

changes in laws and regulations or imposition of currency restrictions and other restraints in various jurisdictions;
limitation of ownership rights, including expropriation of assets by a local government, and limitation on the ability to repatriate earnings;
sovereign debt crises and currency instability in developed and developing countries;
imposition of burdensome tariffs and quotas;
difficulty in staffing and managing global operations;
difficulty in enforcing agreements, collecting receivables and protecting assets through non-U.S. legal systems;
national and international conflict, including war, civil disturbances and terrorist acts; and
economic downturns and social and political instability.

These risks could increase our cost of doing business internationally, increase our counterparty risk, disrupt our operations, disrupt the ability of suppliers and customers to fulfill their obligations and limit our ability to sell products in certain markets.

Our business relies on the commercial and residential construction and remodeling markets.

We primarily rely on the commercial and residential construction and remodeling markets, which are marked by cyclicality based on overall economic conditions. Weakness or instability in these markets may cause current and potential customers to delay or choose not to make purchases, which could negatively impact the demand for our products and services.

We operate in highly competitive markets.

The markets in which we operate include a large number of participants, including multi-national companies, regional companies and small local companies. We primarily compete on the basis of quality, innovation, expertise, breadth of product offering and price. We may be unable to effectively compete on all these bases. If we are unable to anticipate evolving trends in the market or the timing and scale of our competitors’ activities and initiatives, the demand for our products and services could be negatively impacted.

In addition, we compete in a market that is experiencing the convergence of the mechanical and electronic products. This may lead to increased competition, including with companies with greater financial and other resources than we have. To remain competitive, we must develop new products and respond to new technologies in a timely manner.

10



Our growth is dependent, in part, on the development, commercialization and acceptance of new products and services.

We must develop and commercialize new products and services in order to remain competitive in our current and future markets and in order to continue to grow our business. We cannot provide any assurance that any new product or service will be successfully commercialized in a timely manner, if ever, or, if commercialized, will result in returns greater than our investment. Investment in a product or service could divert our attention and resources from other projects that become more commercially viable in the market. We also cannot provide any assurance that any new product or service will be accepted by the market.

Changes in customer preferences and the inability to maintain beneficial relationships with large customers could adversely affect our business.

We have significant customers, particularly major retailers, although no one customer represented more than 10% of combined net sales in the past three fiscal years. The loss or material reduction of business, the lack of success of sales initiatives or changes in customer preferences or loyalties for our products related to any such significant customer could have a material adverse impact on our business. In addition, major customers who are volume purchasers are much larger than us and have strong bargaining power with suppliers. This limits our ability to recover cost increases through higher selling prices. Furthermore, unanticipated inventory adjustments by these customers can have a negative impact on sales.

Our brands are important assets of our businesses and violation of our trademark rights by imitators could negatively impact revenues and brand reputation.

Our brands and trademarks enjoy a reputation for quality and value and are important to our success and competitive position. Unauthorized use of our trademarks may not only erode sales of our products, but may also cause significant damage to our brand name and reputation, interfere with relationships with our customers and increase litigation costs. There can be no assurance that our on-going effort to protect our brand and trademark rights will prevent all violations.

Currency exchange rate fluctuations may adversely affect our results.

We are exposed to a variety of market risks, including the effects of changes in currency exchange rates. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosure About Market Risk.”

Approximately 37% of our 2014 net revenues were derived outside the U.S., and we expect sales to non-U.S. customers to continue to represent a significant portion of our consolidated net revenues. Although we may enter into currency exchange contracts to reduce our risk related to currency exchange fluctuations, changes in the relative fair values of currencies occur from time to time and may, in some instances, have a material impact on our results of operations. Because we do not hedge against all of our currency exposure, our business will continue to be susceptible to currency fluctuations.

We also translate assets, liabilities, revenues and expenses denominated in non-U.S. dollar currencies into U.S. dollars for our combined and consolidated financial statements based on applicable exchange rates. Consequently, fluctuations in the value of the U.S. dollar compared to other currencies will have a material impact on the value of these items in our consolidated financial statements, even if their value has not changed in their original currency.

Our business strategy includes making acquisitions and investments that complement our existing business. These acquisitions and investments could be unsuccessful or consume significant resources, which could adversely affect our operating results.

We will continue to analyze and evaluate the acquisition of strategic businesses or product lines with the potential to strengthen our industry position or enhance our existing set of products and services offerings. We cannot assure you that we will identify or successfully complete transactions with suitable acquisition candidates in the future, nor can we assure you that completed acquisitions will be successful.

Acquisitions and investments may involve significant cash expenditures, debt incurrence, operating losses and expenses. Acquisitions involve numerous other risks, including:

diversion of management time and attention from daily operations;
difficulties integrating acquired businesses, technologies and personnel into our business;
difficulties in obtaining and verifying the financial statements and other business information of acquired businesses;
inability to obtain regulatory approvals and/or required financing on favorable terms;

11


potential loss of key employees, key contractual relationships or key customers of acquired companies or of us;
assumption of the liabilities and exposure to unforeseen liabilities of acquired companies; and
dilution of interests of holders of our ordinary shares through the issuance of equity securities or equity-linked securities.

We may also expand through acquisitions or investments into international markets in which we may have limited experience or are required to rely on business partners. In addition to the risks outlined above, expansion into international markets may require us to compete with local businesses with greater knowledge of the market, including the tastes and preferences of customers, and businesses with dominant market shares.

It may be difficult for us to complete transactions quickly, integrate acquired operations efficiently into our current business operations or effectively compete in new markets we enter. Any acquisitions or investments may ultimately harm our business or financial condition, as such acquisitions may not be successful and may ultimately result in impairment charges.

Our operational excellence efforts may not achieve the improvements we expect.

We utilize a number of tools to improve operational efficiency and productivity. Implementation of new processes to our operations could cause disruptions and there is no assurance that all of our planned operational excellence projects will be fully implemented, or if implemented will realize the expected improvements.

Our EMEIA restructuring plans may not be successful.

We have implemented a plan to restructure our EMEIA segment to improve efficiencies and regional cost structure. If we are unable to successfully implement our restructuring plan, we may not be able to improve profitability or effectively compete in the region. In addition, our restructuring plans could result in significant restructuring charges and impairment charges.

Material adverse legal judgments, fines, penalties or settlements could adversely affect our business.

We are currently and may in the future become involved in legal proceedings and disputes incidental to the operation of our business. Our business may be adversely affected by the outcome of these proceedings and other contingencies (including, without limitation, environmental matters) that cannot be predicted with certainty. As required by U.S. generally accepted accounting principles ("GAAP"), we establish reserves based on our assessment of contingencies. Subsequent developments in legal proceedings and other contingencies may affect our assessment and estimates of the loss contingency recorded as a reserve and we may be required to make additional material payments.

Allegations that we have infringed the intellectual property rights of third parties could negatively affect us.

We may be subject to claims of infringement of intellectual property rights by third parties. In particular, we often compete in areas having extensive intellectual property rights owned by others and we have become subject to claims alleging infringement of intellectual property rights of others. In general, if it is determined that one or more of our technologies, products or services infringes the intellectual property rights owned by others, we may be required to cease marketing those services, to obtain licenses from the holders of the intellectual property at a material cost or to take other actions to avoid infringing the intellectual property rights. The litigation process is costly and subject to inherent uncertainties, and we may not prevail in litigation matters regardless of the merits of our position. Adverse intellectual property litigation or claims of infringement against us may become extremely disruptive if the plaintiffs succeed in blocking the trade of our products and services and may have a material adverse effect on our business.
 
Our reputation, ability to do business and results of operations could be impaired by improper conduct by any of our employees, agents or business partners.

We are subject to regulation under a variety of U.S. federal and state and non-U.S. laws, regulations and policies including laws related to anti-corruption, export and import compliance, anti-trust and money laundering, due to our global operations. We cannot provide assurance our internal controls will always protect us from the improper conduct of our employees, agents and business partners. Any improper conduct could damage our reputation and subject us to, among other things, civil and criminal penalties, material fines, equitable remedies (including profit disgorgement and injunctions on future conduct), securities litigation and a general loss of investor confidence.


12


We may be subject to risks relating to our information technology systems.

We rely extensively on information technology systems to manage and operate our business. If these systems cease to function properly or if these systems do not provide the anticipated benefits, our ability to manage our operations could be impaired.

We currently rely on a single vendor for many of the critical elements of our global information technology infrastructure and its failure to provide effective support for such infrastructure could negatively impact our business and financial results.

We have outsourced many of the critical elements of our global information technology infrastructure to a third-party service provider in order to achieve efficiencies. If the service provider does not perform or does not perform effectively, we may not be able to achieve the expected efficiencies and may have to incur additional costs to address failures in providing service by the service provider. Depending on the function involved, such non-performance, ineffective performance or failures of service may lead to business disruptions, processing inefficiencies or security breaches.

Our information technology infrastructure is important to our business and data security breaches or disruptions of such infrastructure could negatively impact our business and financial results.

Our information technology infrastructure is subject to cyber-attacks and unauthorized security intrusions. Despite instituting security policies and business continuity plans, our systems and networks may be vulnerable to system damage, malicious attacks from hackers, employee errors or misconduct, viruses, power and utility outages, and other catastrophic events that could cause significant harm to our business by negatively impacting our business operations, compromising the security of our proprietary information and exposing us to litigation that could adversely affect our reputation.

Commodity shortages and price increases could negatively affect our financial results.

We rely on suppliers to secure commodities, including steel, zinc, brass and other non-ferrous metals, required for the manufacture of our products. A disruption of deliveries from our suppliers or decreased availability of commodities could have an adverse effect on our ability to meet our commitments to customers or increase our operating costs. We believe that available sources of supply will generally be sufficient for our needs for the foreseeable future. Nonetheless, the unavailability of some commodities could have a material adverse impact on our business.

Volatility in the prices of these commodities could increase the costs of our products and services, and we may not be able to pass on these costs to our customers. We do not currently use financial derivatives to hedge against this volatility, however, we utilize firm purchase commitments to mitigate risk. The pricing of some commodities we use is based on market prices. To mitigate this exposure, we may use annual and multi-year fixed price contracts to minimize the impact of inflation and to benefit from deflation.

We may be required to recognize impairment charges for our goodwill and other indefinite-lived intangible assets.

At December 31, 2014, the net carrying value of our goodwill and other indefinite-lived intangible assets totaled approximately $506 million and $10.1 million, respectively. In accordance with U.S. generally accepted accounting principles ("GAAP"), we periodically assess these assets to determine whether they are impaired. Negative industry or economic trends, disruptions to our business, unexpected changes or planned changes in use of assets, divestitures and market capitalization declines may result in recognition of impairment charges.

Successful sales and marketing efforts depend on our ability to recruit and retain qualified employees.

Our ability to successfully grow our business depends on the contributions and abilities of key executives, our sales force and other personnel, including the ability of our sales force to adapt to any changes made in the sales organization and achieve adequate customer coverage. We must therefore continue to recruit, retain and motivate management, sales and other personnel sufficiently to maintain our current business and support our projected growth. A shortage of these key employees might jeopardize our ability to grow and expand our business.

Our operations are subject to regulatory risks.

Our U.S. and non-U.S. operations are subject to a number of laws and regulations, including fire and building codes and standards, environmental and health and safety. We have incurred, and will be required to continue to incur, significant expenditures to comply with these laws and regulations. Changes to, or changes in interpretations of, current laws and regulations could require us to increase our compliance expenditures, cause us to significantly alter or discontinue offering existing products and services or cause us to develop new products and services. Altering current products and services or developing new products and services to comply

13


with changes in the applicable laws and regulations could require significant research and development investments, increase the cost of providing the products and services and adversely affect the demand for our products and services.

We may not have been, or we may not at all times be, in full compliance with these laws and regulations. In the event a regulatory authority concludes that we are not or have not at all times been in full compliance with these laws, we could be fined, criminally charged or otherwise sanctioned.

Certain environmental laws assess liability on current or previous owners of real property or operators of manufacturing facilities for the costs of investigation, removal or remediation of hazardous substances or materials at such properties or at properties at which parties have disposed of hazardous substances. Liability for investigative, removal and remedial costs under certain U.S. federal and state laws and certain non-U.S. laws are retroactive, strict and joint and several. In addition to cleanup actions brought by governmental authorities, private parties could bring personal injury or other claims due to the presence of, or exposure to, hazardous substances. We have received notification from U.S. and non-U.S. governmental agencies, including the EPA and similar state environmental agencies, that conditions at a number of current and formerly owned sites where we and others have disposed of hazardous substances require investigation, cleanup and other possible remedial action. These agencies may require that we reimburse the government for its costs incurred at these sites or otherwise pay for the costs of investigation and cleanup of these sites, including by providing compensation for natural resource damage claims from such sites. For more information, see “Business - Environmental Regulation.”

While we have planned for future capital and operating expenditures to maintain compliance with environmental laws and have accrued for costs related to current remedial efforts, our costs of compliance, or our liabilities arising from past or future releases of, or exposures to, hazardous substances may exceed our estimates. We may also be subject to additional environmental claims for personal injury or cost recovery actions for remediation of facilities in the future based on our past, present or future business activities.

The capital and credit markets are important to our business.

Instability in U.S. and global capital and credit markets, including market disruptions, limited liquidity and interest rate volatility, or reductions in the credit ratings assigned to us by independent ratings agencies could reduce our access to capital markets or increase the cost of funding our short and long term credit requirements. In particular, if we are unable to access capital and credit markets on terms that are acceptable to us, we may not be able to make certain investments or fully execute our business plans and strategy.

Our suppliers and customers are also dependent upon the capital and credit markets. Limitations on the ability of customers, suppliers or financial counterparties to access credit could lead to insolvencies of key suppliers and customers, limit or prevent customers from obtaining credit to finance purchases of our products and services and cause delays in the delivery of key products from suppliers.

We may not be able to sustain a competitive worldwide effective corporate tax rate.

We cannot give any assurance as to what our effective tax rate will be in future years, because of, among other things, uncertainty regarding the geographic mix of income and the tax policies of the jurisdictions where we operate. Our actual effective tax rate may vary from our expectation and that variance may be material. Additionally, the tax laws of Ireland and other jurisdictions could change in the future, and such changes could cause a material change in our effective tax rate.

Our operations in Venezuela expose us to several risks.

Venezuela is currently experiencing significant political and civil unrest and economic instability, and in February 2013 the Venezuelan government devalued its currency and the official exchange rate changed from 4.3 to 6.3 Venezuelan bolivars per U.S. dollar. We recognized a $6.2 million realized foreign currency loss related to the devaluation in the first quarter of 2013. In March 2014, the Venezuelan government launched a SICAD II rate to provide a greater supply of U.S. dollars from sources other than the Venezuelan government. All companies located or domiciled in Venezuela may bid for USD for any purpose. The SICAD II exchange rate was approximately 50 bolivars per U.S. dollar on December 31, 2014.

Given accelerated deterioration in economic conditions driven by a significant drop in the price of oil and no expectation of improvement for the foreseeable future, we concluded that the SICAD II exchange rate was the most appropriate rate at which to value bolivar denominated assets and liabilities. As a result, on December 31, 2014, we moved the exchange rate applied to bolivars from the official rate to the SICAD II rate. We recorded a charge of $45.4 million (before tax and non-controlling interest), or $0.28 per diluted share. The charge includes remeasurement of net monetary assets ($12.1 million) and a non-cash impairment

14


charge to adjust Venezuelan inventory balances ($33.3 million). After these charges, we had $4.6 million of bolivar-denominated net monetary assets and $8.9 million of inventory in Venezuela as of December 31, 2014.

On February 9, 2015, the Venezuelan government announced changes to its exchange rate system that included the launch of a new, market-based system called the Marginal Currency System, or “Simadi,” that will replace the SICAD II rate. The Company is currently evaluating this announcement. Adoption of the Simadi rate would result in additional charges to remeasure the net monetary assets and impair other assets.

This current state of affairs could lead to further devaluation of Venezuela's currency, volatility of exchange rates, and disruption of the economy. If the current unrest and instability continues, our ability to acquire necessary goods from suppliers could be limited, our customers may not be able to fulfill their obligations, our ability to manufacture and sell products could be disrupted and our Venezuelan operations could be adversely affected.

Risks Related to Our Indebtedness

Our substantial leverage could harm our business by limiting our available cash and our access to additional capital and, to the extent of our variable rate indebtedness, exposing us to interest rate risk.

We have approximately $1.3 billion of outstanding indebtedness at December 31, 2014. In addition, we have a senior secured revolving credit facility permitting borrowings of up to $500 million. Further volatility in the credit markets would adversely impact our ability to obtain favorable terms on financing in the future. In addition, a substantial portion of our cash flows from operations is dedicated to the payment of principal and interest on our indebtedness and will not be available for other purposes, including our operations, capital expenditures, payment of dividends, share repurchase programs and future business opportunities. We may be more vulnerable than a less leveraged company to a downturn in the general economic conditions or in our business, or we may be unable to carry out capital spending that is important to our growth. We may be vulnerable to interest rate increases, as certain of our borrowings, including those under our senior secured credit facilities, are at variable rates.

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which actions may not be successful.

Our ability to make scheduled payments or to refinance our debt obligations depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flow from operating activities sufficient to permit us to pay the principal and interest on our indebtedness. For more information see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, reduce or eliminate the payment of dividends, sell assets, seek additional capital or seek to restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service and other obligations. The terms of the credit agreement governing our senior secured credit facilities and the indenture governing our senior notes contain customary financial covenants that may restrict our ability to use the proceeds from asset sales. We may not be able to consummate those asset sales to raise capital or sell assets at prices we believe are fair, and proceeds that we do receive may not be adequate to meet any debt service obligations then due.

Despite our levels of indebtedness, we may still be able to incur substantially more debt, which could further exacerbate the risks associated with our substantial leverage.

We may be able to incur substantial additional indebtedness in the future. Although the terms of the credit agreement governing our senior secured credit facilities and the indenture governing our senior notes contain customary restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. In addition, our senior secured revolving credit facility permits borrowings of up to $500 million. If we incur additional debt above the levels we currently have, the risks associated with our leverage, including those described above, would increase.


15


The terms of our debt covenants could limit how we conduct our business and our ability to raise additional funds.

The terms of the credit agreement governing our senior secured credit facilities and the indenture governing our senior notes restrict us from taking certain actions that we may think are in the best interests of our shareholders. A breach of the covenants or restrictions could result in a default under the applicable indebtedness. As a result of these restrictions, we may be:

limited in how we conduct our business;
limited in our ability to pay dividends or make other distributions to our shareholders;
unable to raise additional debt or equity financing to operate during general economic or business downturns; or
unable to compete effectively or to take advantage of new business opportunities.

These restrictions may affect our ability to grow in accordance with our plans.

These covenants and restrictions could affect our ability to operate our business, and may limit our ability to react to market conditions or take advantage of potential business opportunities as they arise. Additionally, our ability to comply with these covenants may be affected by events beyond our control, including general economic and credit conditions and industry downturns, and the other factors described in these “risk factors.”

Our variable rate indebtedness may expose us to interest rate risk, which could cause our debt costs to increase significantly.

A portion of our borrowings at December 31, 2014 is a term loan with a variable rate of interest which exposes us to interest rate risk. We are exposed to the risk of rising interest rates to the extent that we fund our operations with short-term or variable-rate borrowings. At December 31, 2014, we have approximately $1.3 billion of aggregate debt outstanding, and this amount includes $963 million of floating-rate term loans and $300 million of our fixed-rate senior notes. We have the ability to incur up to $500 million of additional floating-rate debt under our senior secured revolving credit facility. A 100 basis point increase in LIBOR would have resulted in incremental 2014 interest expense of approximately $7.0 million, excluding the impact of our forward starting interest rate swaps. In June 2014, we entered into forward starting interest rate swaps for $300.0 million of our floating-rate term loans. Swaps with notional amounts totaling $275.0 million become effective in January 2015 and expire in September 2017 and swaps with notional amounts totaling $25.0 million become effective in January 2015 and expire in December 2016. If the LIBOR or other applicable base rates under our senior secured credit facilities increase in the future then the floating-rate debt could have a material effect on our interest expense.

Risks Relating to the Spin-off

We may be unable to achieve some or all of the benefits that we expect to achieve from our spin-off from Ingersoll Rand.

As an independent, publicly-traded company, we believe that our business will benefit from, among other things, allowing us to better focus our financial and operational resources on our specific business, allowing our Board of Directors and management to design and implement corporate strategies and policies that are based primarily on the characteristics of our business, allowing us to more effectively respond to industry dynamics and allowing the creation of effective incentives for our management and employees that are more closely tied to our business performance. However, we may not be able to achieve some or all of the benefits that we expect to achieve as an independent company in the time we expect, if at all.

We may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as an independent company, and we may experience increased costs.

Prior to 2014, we operated as part of Ingersoll Rand’s corporate organization, and Ingersoll Rand has assisted us by providing certain corporate functions. Ingersoll Rand is obligated contractually to provide to us only those transition services specified in agreements we entered into with Ingersoll Rand. We may be unable to replace in a timely manner or on comparable terms the services or other benefits that Ingersoll Rand previously provided to us that are not specified in any transition services agreement. Upon expiration of any transition services agreement, each of the services that are covered in the agreement will have to be provided internally or by third parties and we may be unable to replace those services in a timely manner or on comparable terms. In addition, if Ingersoll Rand does not continue to perform transition services and the other services that are called for under any transition services agreement, we may not be able to operate our business as effectively.


16


Our historical combined financial data are not necessarily representative of the results we would have achieved as an independent, publicly-traded company and may not be a reliable indicator of our future results.

The historical data prior to our spin-off from Ingersoll Rand presented herein may not reflect what our business, financial condition, results of operations and cash flows would have been had we been an independent, publicly-traded company during the periods presented or what our business, financial condition, results of operations and cash flows will be in the future as an independent company. This is primarily because:

Ingersoll Rand, or one of its affiliates, performed significant corporate functions for us, including tax and treasury administration and certain governance functions, including internal audit and external reporting. Our historical statements reflect allocations of corporate expenses from Ingersoll Rand for these functions and may not reflect the costs we will incur for similar services as an independent company. Furthermore, we are responsible for the additional costs associated with being an independent, publicly-traded company, including costs related to corporate governance and external reporting.
Our working capital requirements and capital for our general corporate purposes, including acquisitions and capital expenditures, historically had been satisfied as part of the company-wide cash management practices of Ingersoll Rand. While our businesses have historically generated sufficient cash to finance our working capital and other cash requirements, we no longer have access to Ingersoll Rand’s cash pool. Without the opportunity to obtain financing from Ingersoll Rand, we may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities or other arrangements.
Other significant changes may occur in cost structure, management, financing and business operations as a result of our operating as a company separate from Ingersoll Rand.

We may have been able to receive better terms from unaffiliated third parties than the terms we receive in our agreements related to the spin-off.

The agreements related to the spin-off, including the Separation and Distribution Agreement, Employee Matters Agreement, Tax Matters Agreement, Transition Services Agreement, agreements with respect to real estate and intellectual property matters and any other agreements, were negotiated in the context of the Spin-off from Ingersoll Rand while we were still part of Ingersoll Rand. Accordingly, these agreements may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties. The terms of the agreements in the context of the Spin-off are related to, among other things, allocations of assets, liabilities, rights, indemnifications and other obligations among Ingersoll Rand and us. We might have received better terms under the agreements relating to the Spin-off had they been negotiated with disinterested third parties who competed with each other to win our business than we received from Ingersoll Rand.

In connection with the Spin-off, Ingersoll Rand indemnified us for certain liabilities and we indemnified Ingersoll Rand for certain liabilities. If we are required to act on these indemnities to Ingersoll Rand, we may need to divert cash to meet those obligations and our financial results could be negatively impacted. The Ingersoll Rand indemnity may not be sufficient to insure us against the full amount of liabilities for which it will be allocated responsibility, and Ingersoll Rand may not be able to satisfy its indemnification obligations in the future.

Pursuant to the Separation and Distribution Agreement, the Employee Matters Agreement and the Tax Matters Agreement with Ingersoll Rand, Ingersoll Rand agreed to indemnify us for certain liabilities, and we agreed to indemnify Ingersoll Rand for certain liabilities, in each case for uncapped amounts. Such indemnities may be significant and could negatively impact our business, particularly indemnities relating to our actions that could impact the tax-free nature of the Spin-off. Third parties could also seek to hold us responsible for any of the liabilities that Ingersoll Rand retained. Further, the indemnity from Ingersoll Rand may not be sufficient to protect us against the full amount of such liabilities, and Ingersoll Rand may not be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from Ingersoll Rand any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves.

If the distribution or certain internal transactions undertaken in anticipation of the spin-off are determined to be taxable for U.S. federal income tax purposes, we, our shareholders that are subject to U.S. federal income tax and/or Ingersoll Rand could incur significant U.S. federal income tax liabilities and, in certain circumstances, we could be required to indemnify Ingersoll Rand for material taxes pursuant to indemnification obligations under the Tax Matters Agreement.

Ingersoll Rand has received an IRS ruling substantially to the effect that, among other things, the distribution of our ordinary shares, together with certain related transactions, qualify under Sections 355 and 368(a) of the Internal Revenue Code ("the Code"), with the result that Ingersoll Rand and Ingersoll Rand’s shareholders will not recognize any taxable income, gain or loss for U.S. federal income tax purposes as a result of the Spin-off, except to the extent of cash received in lieu of fractional shares (the "IRS

17


Ruling"). The IRS Ruling also provided that certain internal transactions undertaken in anticipation of the distribution qualify for favorable treatment under the Code. In addition to obtaining the IRS Ruling, Ingersoll Rand received opinions from the law firm of Simpson Thacher & Bartlett LLP substantially to the effect that certain requirements, including certain requirements that the IRS did not rule on, necessary to obtain tax-free treatment have been satisfied, such that the distribution for U.S. federal income tax purposes and certain other matters relating to the distribution, including certain internal transactions undertaken in anticipation of the distribution, received tax-free treatment under Section 355 of the Code. The receipt and effectiveness of the IRS Ruling and the opinions were conditions to the distribution that were satisfied or waived by Ingersoll Rand. The IRS Ruling and the opinions rely on certain facts and assumptions and certain representations and undertakings from us and Ingersoll Rand regarding the past and future conduct of our respective businesses and other matters. Notwithstanding the IRS Ruling and the opinions, the IRS could determine on audit that the distribution or the internal transactions should be treated as taxable transactions if it determines that any of these facts, assumptions, representations or undertakings is not correct or has been violated, or that the distribution or the internal transactions should be taxable for other reasons, including as a result of significant changes in shares or asset ownership after the distribution. A legal opinion represents the tax adviser’s best legal judgment, is not binding on the IRS or the courts, and the IRS or the courts may not agree with the opinion. In addition, the opinion will be based on current law, and cannot be relied upon if current law changes with retroactive effect. If the distribution is determined to be taxable, the distribution could be treated as a taxable dividend or capital gain for U.S. federal income tax purposes, and our shareholders could incur significant U.S. federal income tax liabilities. In addition, we or Ingersoll Rand could incur significant U.S. federal income tax liabilities if it is ultimately determined that certain internal transactions undertaken in anticipation of the distribution are taxable.

In addition, under the terms of the Tax Matters Agreement, in the event the distribution or the internal transactions were determined to be taxable as a result of actions taken after the distribution by us or Ingersoll Rand, the party responsible for such failure would be responsible for all taxes imposed on us or Ingersoll Rand as a result thereof. If such failure is not the result of actions taken after the distribution by us or Ingersoll Rand, then we would be responsible for any taxes imposed on us or Ingersoll Rand as a result of such determination. Such tax amounts could be significant.

In addition, the amount of our shares that we can issue may be limited because the issuance of our shares may cause the distribution to be a taxable event for Ingersoll Rand under Section 355(e) of the Code, and under the Tax Matters Agreement, we could be required to indemnify Ingersoll Rand for that tax.

We might not be able to engage in desirable strategic transactions and equity issuances following the distribution because of restrictions relating to U.S. federal income tax requirements for tax-free distributions.

Our ability to engage in significant equity transactions could be limited or restricted after the distribution in order to preserve, for U.S. federal income tax purposes, the tax-free nature of the distribution by Ingersoll Rand. Even if the distribution otherwise qualifies for tax-free treatment under Section 355 of the Code, it may result in a corporate-level taxable gain to Ingersoll Rand and certain of its affiliates under Section 355(e) of the Code if 50% or more, by vote or value, of our shares or Ingersoll Rand’s shares are acquired or issued as part of a plan or series of related transactions that includes the distribution. Any acquisitions or issuances of our shares or Ingersoll Rand’s shares within two years after the distribution will generally be presumed to be part of such a plan, although we or Ingersoll Rand may be able to rebut that presumption.

To preserve the tax-free treatment to Ingersoll Rand of the distribution, under the Tax Matters Agreement, we are prohibited from taking or failing to take any action that prevents the distribution and related transactions from being tax-free. Further, for the two-year period following the distribution, without obtaining the consent of Ingersoll Rand, a private letter ruling from the IRS or an unqualified opinion from a nationally recognized law firm or accounting firm, we are prohibited from, among other things:

approving or allowing any transaction that results in a change in ownership of more than 50% of our ordinary shares when combined with any other changes in ownership of our shares,
redeeming or repurchasing certain amounts of equity securities,
selling or otherwise disposing of substantially all of our assets, or
engaging in certain internal transactions.

These restrictions may limit our ability to pursue strategic transactions or engage in new business or other transactions that may maximize the value of our business. Moreover, the Tax Matters Agreement provides that we are responsible for any taxes imposed on Ingersoll Rand or any of its affiliates as a result of the failure of the distribution or the internal transactions to qualify for favorable treatment under the Code unless such failure is attributable to certain actions taken after the distribution by Ingersoll Rand.

In February 2014, our Board of Directors authorized the repurchase of up to $200 million of our ordinary shares. Due to these restrictions, we may not engage in privately negotiated transactions or acquire more than 20% of our outstanding shares within

18


two years after the Distribution. We believe that we will be able to execute the authorized share repurchases and preserve the tax-free treatment of the distribution. However, if we are unable to preserve the tax-free treatment, any taxes imposed on us could be significant.

If the distribution is determined to be taxable for Irish tax purposes, significant Irish tax liabilities may arise.

Ingersoll Rand has received an opinion of the Irish Revenue regarding the Irish tax consequences of the distribution to the effect that certain reliefs and exemptions for corporate reorganizations apply. In addition to obtaining the opinion from Irish Revenue, Ingersoll Rand received an opinion from the law firm of Arthur Cox confirming the applicability of the relevant exemptions and reliefs to the distribution and that certain internal transactions will not trigger tax costs. These opinions rely on certain facts and assumptions and certain representations and undertakings from us and Ingersoll Rand regarding the past and future conduct of our respective businesses and other matters. Notwithstanding the opinions, Irish Revenue could determine on audit that the distribution or the internal transactions do not qualify for the relevant exemptions or reliefs if it determines that any of these facts, assumptions, representations or undertakings is not correct or has been violated. A legal opinion represents the tax adviser’s best legal judgment, is not binding on Irish Revenue or the courts and Irish Revenue or the courts may not agree with the legal opinion. In addition, the legal opinion was based on current law, and cannot be relied upon if current law changes with retroactive effect. If the distribution ultimately is determined not to fall within certain exemptions or reliefs, the distribution could result in our shareholders having an Irish tax liability as a result of the distribution (if a shareholder is an Irish resident or holds shares in Ingersoll Rand in an Irish branch or agency), or we or Ingersoll Rand could incur Irish tax liabilities.

In addition, under the terms of the Tax Matters Agreement, in the event the distribution does not qualify for certain reliefs or exemptions, then we would be responsible for any taxes imposed on us or Ingersoll Rand as a result of such determination. Such tax amounts could be significant.

Risks Related to Our Incorporation in Ireland

Irish law differs from the laws in effect in the United States and may afford less protection to holders of our securities.

The United States currently does not have a treaty with Ireland providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters. As such, there is some uncertainty as to whether the courts of Ireland would recognize or enforce judgments of U.S. courts obtained against us or our directors or officers based on U.S. federal or state civil liability laws, including the civil liability provisions of the U.S. federal or state securities laws, or hear actions against us or those persons based on those laws.

As an Irish company, we are governed by the Irish Companies Act, which differs in some material respects from laws generally applicable to U.S. corporations and shareholders, including, among others, differences relating to interested director and officer transactions and shareholder lawsuits. Likewise, the duties of directors and officers of an Irish company generally are owed to the company only. Shareholders of Irish companies generally do not have a personal right of action against directors or officers of the company and may exercise such rights of action on behalf of the company only in limited circumstances. Accordingly, holders of our securities may have more difficulty protecting their interests than would holders of securities of a corporation incorporated in a jurisdiction of the United States.

In addition, Irish law allows shareholders to authorize share capital which then can be issued by a board of directors without shareholder approval. Also, subject to specified exceptions, Irish law grants statutory preemptive rights to existing shareholders to subscribe for new issuances of shares for cash. However, we have opted out of these preemption rights in our Articles of Association as permitted under Irish company law. Irish law provides that this opt-out expires after five years unless renewed by a special resolution of the shareholders. These authorizations must be renewed by the shareholders every five years and we cannot guarantee that these authorizations will always be approved.

Changes in tax laws, regulations or treaties, changes in our status under the tax laws of many jurisdictions or adverse determinations by taxing authorities could increase our tax burden or otherwise affect our financial condition or operating results, as well as subject our shareholders to additional taxes.

The realization of any tax benefit related to our incorporation and tax residence in Ireland could be impacted by changes in tax laws, tax treaties or tax regulations or the interpretation or enforcement thereof by the tax authorities of many jurisdictions. From time to time, proposals have been made and/or legislation has been introduced to change the tax laws of various jurisdictions or limit tax treaty benefits that if enacted could materially increase our tax burden and/or effective tax rate. For instance, recent U.S. legislative proposals could modify or eliminate the tax deductibility of various currently deductible payments, which could materially and adversely affect our effective tax rate and cash tax position. Moreover, other U.S. legislative proposals could have

19


a material adverse impact on us by overriding certain tax treaties and limiting the treaty benefits on certain payments by our U.S. subsidiaries to our non-U.S. affiliates, which could increase our tax liability. We cannot predict the outcome of any specific legislation in any jurisdiction.

While we monitor proposals that would materially impact our tax burden and/or effective tax rate and investigate our options, we could still be subject to increased taxation on a going forward basis no matter what action we undertake if certain legislative proposals are enacted, certain tax treaties are amended and/or our interpretation of applicable tax law is challenged and determined to be incorrect. In particular, any changes and/or differing interpretations of applicable tax law that have the effect of disregarding our incorporation in Ireland, limiting our ability to take advantage of tax treaties between jurisdictions, modifying or eliminating the deductibility of various currently deductible payments, or increasing the tax burden of operating or being resident in a particular country, could subject us to increased taxation.

Dividends received by our shareholders may be subject to Irish dividend withholding tax.

In certain circumstances, we are required to deduct Irish dividend withholding tax (currently at the rate of 20%) from dividends paid to our shareholders. In the majority of cases, shareholders resident in the United States will not be subject to Irish withholding tax, and shareholders resident in a number of other countries will not be subject to Irish withholding tax provided that they complete certain Irish dividend withholding tax forms. However, some shareholders may be subject to withholding tax, which could discourage the investment in our stock and adversely impact on the price of our shares.

Dividends received by our shareholders could be subject to Irish income tax.

Dividends paid in respect of our shares generally are not subject to Irish income tax where the beneficial owner of these dividends is exempt from Irish dividend withholding tax, unless the beneficial owner of the dividend has some connection with Ireland other than his or her shareholding in Allegion.

Our shareholders who receive their dividends subject to Irish dividend withholding tax will generally have no further liability to Irish income tax on the dividends unless the beneficial owner of the dividend has some connection with Ireland other than his or her shareholding in Allegion.

Certain provisions in our Articles of Association, among other things, could prevent or delay an acquisition of us, which could decrease the trading price of our ordinary shares.

Our Memorandum and Articles of Association contain provisions to deter takeover practices, inadequate takeover bids and unsolicited offers. These provisions include, amongst others:

a provision of our Articles of Association which generally prohibits us from engaging in a business combination with an interested shareholder (being (i) the beneficial owner of the relevant percentage of our voting shares or (ii) an affiliate or associate of us that has at any time within the last five years been the beneficial owner of the relevant percentage of our voting shares), subject to certain exceptions;
rules regarding how shareholders may present proposals or nominate directors for election at shareholder meetings;
the right of our Board of Directors to issue preferred shares without shareholder approval in certain circumstances, subject to applicable law; and
the ability of our Board of Directors to fill vacancies on our Board of Directors in certain circumstances.

We believe these provisions will provide some protection to our shareholders from coercive or otherwise unfair takeover tactics. These provisions are not intended to make us immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some shareholders and could delay or prevent an acquisition that our Board of Directors determines is in our best interests and our shareholders' best interests. These provisions may also prevent or discourage attempts to remove and replace incumbent directors.

In addition, several mandatory provisions of Irish law could prevent or delay an acquisition of us. For example, Irish law does not permit shareholders of an Irish public limited company to take action by written consent with less than unanimous consent. We also will be subject to various provisions of Irish law relating to mandatory bids, voluntary bids, requirements to make a cash offer and minimum price requirements, as well as substantial acquisition rules and rules requiring the disclosure of interests in our shares in certain circumstances. Also, Irish companies, including us, may alter their Memorandum of Association and Articles of Association only with the approval of at least 75% of the votes of the company’s shareholders cast in person or by proxy at a general meeting of the company.


20


The agreements that we entered into with Ingersoll Rand in connection with the spin-off generally require Ingersoll Rand’s consent to any assignment by us of our rights and obligations under the agreements. The consent and termination rights set forth in these agreements might discourage, delay or prevent a change of control that shareholders may consider favorable.

Moreover, an acquisition or further issuance of our ordinary shares after the spin-off could trigger the application of Section 355(e) of the Code, even if the distribution and certain related transactions undertaken in connection therewith otherwise qualify for tax-free treatment. Under Section 355(e) of the Code, we and/or Ingersoll Rand could incur tax upon certain transactions undertaken in anticipation of the distribution if 50% or more, by vote or value, of our ordinary shares or Ingersoll Rand ordinary shares are acquired or issued as part of a plan or series of related transactions that include the spin-off. The process for determining whether an acquisition or issuance triggering these provisions has occurred is complex, inherently factual and subject to interpretation. Any acquisitions or issuances of our ordinary shares or Ingersoll Rand ordinary shares within two years after the distribution are presumed to be part of such a plan, although we or Ingersoll Rand, as applicable, may be able to rebut that presumption. Moreover, under the Tax Matters Agreement that we entered into with Ingersoll Rand, we are restricted from engaging in certain transactions within two years of the distribution which potentially could trigger application of Section 355(e) of the Code. During such period, these restrictions may limit the ability that we, or a potential acquirer of Allegion, have to pursue certain strategic transactions that might increase the value of our ordinary shares.

Item 1B.    UNRESOLVED STAFF COMMENTS
None.

Item 2.    PROPERTIES

We operate through a broad network of sales offices, 19 production facilities and several distribution centers throughout the world. Our active properties represent about 5.1 million square feet, of which approximately 54% is leased.
The majority of our plant facilities are owned by us with the remainder under long-term lease arrangements. We believe that our plants have been well maintained, are generally in good condition and are suitable for the conduct of our business.

Item 3. LEGAL PROCEEDINGS
In the normal course of business, we are involved in a variety of lawsuits, claims and legal proceedings, including commercial and contract disputes, employment matters, product liability claims, environmental liabilities, intellectual property disputes, and tax-related matters. In our opinion, pending legal matters are not expected to have a material adverse impact on our results of operations, financial condition, liquidity or cash flows.
Executive Officers of the Registrant
The following is a list of executive officers of the Company as of February 27, 2015.

David D. Petratis, age 57, is our Chairman, President and Chief Executive Officer. Mr Petratis served as the Chairman, President and Chief Executive Officer of Quanex Building Products Corporation (a manufacturer of engineered material and components for the building products markets) from 2008 to July 2013.

Patrick S. Shannon, age 52, is our Senior Vice President and Chief Financial Officer. Mr. Shannon served as the Vice President and Treasurer of Ingersoll-Rand plc (a global diversified company) from August 2012 to August 2013. Mr. Shannon previously served as Ingersoll Rand’s Vice President, Audit Services from February 2010 to August 2012; and Ingersoll Rand’s Vice President, Finance and Information Technology - Trane Commercial Systems from September 2008 to February 2010.

Jeffrey N. Braun, age 55, is our Senior Vice President and General Counsel. Mr. Braun served as our Deputy General Counsel and Chief Compliance Officer from September 2013 to June 2014. Mr. Braun previously served as General Counsel of General Motors China, a subsidiary of General Motors Company (a global automotive company) from April 2010 to June 2013 and as General Motors' Executive Director, Global Ethics and Compliance from January 2009 to April 2010.

Timothy P. Eckersley, age 53, is our Senior Vice President - Americas. Mr. Eckersley served as Ingersoll Rand’s President, Security Technologies - Americas from November 2007 to November 2013.


21


Tracy L. Kemp, age 46, is our Senior Vice President and Chief Information Officer.  Ms. Kemp served as our Vice President and Chief Information Officer from December 2013 to February 2015.  Prior to that, Ms. Kemp served as Ingersoll Rand’s Vice President - Chief Information Officer, Security Technologies and Residential Solutions sectors from September 2011 to December 2013 and Vice President - Chief Information Officer, Residential Solutions sector from 2009 to September 2011.

Raymond H. Lewis Jr., age 50, is our Senior Vice President - Human Resources and Communications. Mr. Lewis served as Ingersoll Rand’s Vice President - Human Resources and Communications, Industrial Technologies from October 2010 to October 2013. Mr. Lewis previously served as Ingersoll Rand’s Vice President - Human Resources for Global Product Management and Integrated Supply Chain, Industrial Technologies from December 2008 to October 2010.

Chris E. Muhlenkamp, age 57, is our Senior Vice President - Global Operations and Integrated Supply Chain. Mr. Muhlenkamp served as Ingersoll Rand's Vice President - Operations and Global Integrated Supply Chain, Security Technologies, from March 2011 to December 2013 and served as General Director, Global Supply Management and Production Control and Logistics of Delphi Automotive (a vehicle components manufacturer) from January 2009 to March 2011.

Douglas P. Ranck, age 56, is our Vice President and Controller. Mr. Ranck served as Ingersoll Rand’s Global Controller and Financial Planning and Analysis Leader - Climate Solutions from June 2008 to October 2013.

Feng (William) Yu, age 50, is our Senior Vice President - Asia Pacific. Mr. Yu served as Ingersoll Rand’s President, Security Technologies - Asia Pacific from February 2011 to November 2013. Mr. Yu previously served as Ingersoll Rand's Vice President, Thermo King - Asia Pacific from 2008 to February 2011.

No family relationship exists between any of the above-listed executive officers of the Company. All officers are elected to hold office for one year or until their successors are elected and qualified.

Item 4. MINE SAFETY DISCLOSURES

Not applicable.


22


PART II
 
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Information regarding the principal market for our ordinary shares and related shareholder matters is as follows:
Our ordinary shares are traded on the NYSE under the symbol ALLE. As of February 24, 2015, the number of record holders of ordinary shares was 3,647. The high and low sales price per share and the dividend declared per share for the following periods were as follows:
 
 
Ordinary shares
2014
 
High
 
Low
 
Dividend
First quarter
 
$
55.35

 
$
43.65

 
$
0.08

Second quarter
 
57.62

 
48.29

 
0.08

Third quarter
 
57.37

 
47.64

 
0.08

Fourth quarter
 
55.91

 
45.06

 
0.08

2013
 
High
 
Low
 
Dividend
First quarter
 
N/A

 
N/A

 
N/A

Second quarter
 
N/A

 
N/A

 
N/A

Third quarter
 
N/A

 
N/A

 
N/A

Fourth quarter (since November 18, 2013)
 
48.00

 
40.70

 
N/A


Information regarding equity compensation plans required to be disclosed pursuant to this Item is incorporated by reference from our Proxy Statement.

Dividend Policy

Our Board of Directors paid dividends of $0.08 per ordinary share on March 31, 2014, June 30, 2014, September 30, 2014 and December 30, 2014. We paid a total of $30.0 million in cash for dividends to ordinary shareholders during the year ended December 31, 2014. Our Board of Directors did not declare any dividends in 2013. Future dividends on our ordinary shares, if any, will be at the discretion of our Board of Directors and will depend on, among other things, our results of operations, cash requirements and surplus, financial condition, contractual restrictions and other factors that the Board of Directors may deem relevant, as well as our ability to pay dividends in compliance with the Irish Companies Act. Under the Irish Companies Act, dividends and distributions may only be made from distributable reserves. Distributable reserves, broadly, means the accumulated realized profits of Allegion plc (ALLE-Ireland). In addition, no distribution or dividend may be made unless the net assets of ALLE-Ireland are equal to, or in excess of, the aggregate of ALLE-Ireland’s called up share capital plus undistributable reserves and the distribution does not reduce ALLE-Ireland’s net assets below such aggregate.

Issuer Purchases of Equity Securities

We did not repurchase any of our ordinary shares during the fourth quarter of 2014. In February 2014, our Board of Directors authorized the repurchase of up to $200 million of our ordinary shares. We paid a total of $50.3 million to repurchase 1.0 million ordinary shares during the year ended December 31, 2014.

To preserve the tax-free treatment to Ingersoll Rand of the Spin-off, under the Tax Matters Agreement, we are prohibited from taking or failing to take any action that prevents the Spin-off and related transactions from being tax-free. We may not engage in privately negotiated transactions or acquire more than 20% of our outstanding shares within two years after the Spin-off. We believe that we will be able to execute the authorized share repurchases and preserve the tax-free treatment of the Spin-off. However, if we are unable to preserve the tax-free treatment, any taxes imposed on us could be significant.

Performance Graph

The annual changes for the period shown November 18, 2013 (when our ordinary shares began trading in the "when-issued" market) to December 31, 2014 in the graph on this page are based on the assumption that $100 had been invested in Allegion plc ordinary shares, the Standard & Poor’s 500 Stock Index ("S&P 500") and the Standard & Poor's 400 Capital Goods Index ("S&P

23


400 Capital Goods") on November 18, 2013, and that all quarterly dividends were reinvested. The total cumulative dollar returns shown on the graph represent the value that such investments would have had on December 31, 2014.
 
 
November 18, 2013
 
December 31, 2013
 
March 31, 2014
 
June 30, 2014
 
September 30, 2014
 
December 31, 2014
Allegion plc
 
100.00
 
91.16
 
107.79
 
117.27
 
98.73
 
115.11
S&P 500
 
100.00
 
103.44
 
105.30
 
110.82
 
112.07
 
117.59
S&P 400 Capital Goods
 
100.00
 
105.46
 
107.85
 
112.66
 
105.74
 
105.72


24



Item 6.     SELECTED FINANCIAL DATA
In millions, except per share amounts:

At and for the years ended December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
 
 
 
 
 
 
 
 
 
Net revenues
 
$
2,118.3

 
$
2,069.6

 
$
2,023.3

 
$
1,998.3

 
$
1,942.4

 
 
 
 
 
 
 
 
 
 
 
Net earnings (loss) attributable to Allegion plc ordinary shareholders:
 
 
 
 
 
 
 
 
 
 
Continuing operations (a)
 
186.3

(b)
35.9

(c)
224.3

 
231.6

 
201.9

Discontinued operations
 
(11.1
)
 
(3.6
)
 
(4.2
)
 
(6.3
)
 
(1.1
)
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
2,015.9

 
2,000.6

 
2,003.2

 
2,055.2

 
2,070.7

 
 
 
 
 
 
 
 
 
 
 
Total debt
 
1,264.6

 
1,343.9

 
5.0

 
4.9

 
6.2

 
 
 
 
 
 
 
 
 
 
 
Total Allegion plc shareholders’ equity (deficit)
 
(4.8
)
 
(66.1
)
 
1,362.6

 
1,432.8

 
1,475.6

 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per share attributable to Allegion plc ordinary shareholders:
 
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
1.94

 
$
0.37

 
$
2.34

 
$
2.41

 
$
2.10

Discontinued operations
 
(0.12
)
 
(0.03
)
 
(0.05
)
 
(0.07
)
 
(0.01
)
 
 
 
 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
1.92

 
$
0.37

 
$
2.34

 
$
2.41

 
$
2.10

Discontinued operations
 
(0.12
)
 
(0.03
)
 
(0.05
)
 
(0.07
)
 
(0.01
)
 
 
 
 
 
 
 
 
 
 
 
Dividends declared per ordinary share
 
$
0.32

 
$

 
$

 
$

 
$


(a)
Net earnings from continuing operations includes $174.5 million, $176.7 million, $160.5 million and $157.8 million of centrally managed service costs and corporate allocations from Ingersoll Rand for the years ended December 31, 2013, 2012, 2011 and 2010.
(b)
Net earnings from continuing operations for the year ended December 31, 2014 includes an after-tax, non-cash inventory impairment charge of $18.7 million and a $9.1 million after-tax, non-cash charge related to the devaluation of the Venezuelan bolivar.
(c)
Net earnings from continuing operations for the year ended December 31, 2013 includes an after-tax, non-cash goodwill impairment charge of $131.2 million and $44.8 million of discrete tax adjustments consisting of $31.5 million of expense related to valuation allowances on deferred tax assets that are no longer expected to be utilized and $13.3 million of net tax expense resulting primarily from transactions occurring to effect the Spin-off.


25


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under Item 1A. Risk Factors in this Annual Report on Form 10-K. The following section is qualified in its entirety by the more detailed information, including our combined and consolidated financial statements and the notes thereto, which appears elsewhere in this Annual Report.

Overview

Organization

We are a leading global provider of security products and solutions operating in three geographic regions: Americas; EMEIA; and Asia Pacific. We sell a wide range of security products and solutions for end-users in commercial, institutional and residential markets worldwide, including into the education, healthcare, government, commercial office and single and multi-family residential markets. Our strategic brands include Schlage, Von Duprin, LCN, CISA, and Interflex.

Trends and Economic Events

Current market conditions, including challenges in international markets, continue to impact our financial results. Uneven global commercial new construction activity is negatively impacting our results, however U.S. residential and consumer markets have begun to improve, and we are seeing improvements in the U.S. new builder and replacement markets.

Based on information derived from third party sources, we estimate that the size of the global markets we serve was more than $30 billion in revenue in 2014, comprised of $25 billion for mechanical hardware products and more than $5 billion for time, attendance, and workforce productivity systems and systems integration. We believe that the security products industry will benefit from several global macroeconomic and long-term demographic trends, which include heightened awareness of security requirements, increased global urbanization and the shift to a digital, interconnected environment. In the more established economies of North America and Europe, where the security product industry’s compound annual growth rate was 1 to 2% per year during the uneven economic conditions experienced over the past three years, we believe our markets are poised for a cyclical recovery driven in part by accelerating growth in the underlying commercial and residential construction markets and improved consumer confidence in the United States offsetting currency headwinds overseas. Additionally, we expect growth in the global electronic product categories we serve to continue to outperform the industry as end-users adopt newer technologies in their facilities.

The economic conditions discussed above and a number of other challenges and uncertainties that could affect our business are described under “Risk Factors.”

2014 Significant Events

Venezuela currency devaluation

Venezuela is treated as a highly inflationary economy under GAAP. As a result, the U.S. dollar is the functional currency for our consolidated joint venture in Venezuela. Any currency remeasurement adjustments for non-U.S. dollar denominated monetary assets and liabilities and other transactional foreign exchange gains and losses are reflected in earnings.

The Venezuelan government’s official exchange rate is currently 6.3 Venezuelan bolivars per U.S. dollar. The Venezuelan government re-instituted a secondary exchange rate (SICAD I rate) for select goods and services. The SICAD I rate was 12 bolivars per U.S. Dollar at December 31, 2014. In March 2014, the Venezuelan government launched a SICAD II rate to provide a greater supply of USD from sources other than the Venezuelan government. All companies located or domiciled in Venezuela may bid for USD for any purpose. The SICAD II exchange rate was approximately 50 bolivars per U.S. dollar on December 31, 2014.

Given accelerated deterioration in economic conditions driven by a significant drop in the price of oil and no expectation of improvement for the foreseeable future, we concluded that the SICAD II exchange rate was the most appropriate rate at which to value bolivar denominated assets and liabilities. As a result, on December 31, 2014, we moved the exchange rate applied to bolivars from the official rate to the SICAD II rate. We recorded a charge of $45.4 million (before tax and non-controlling interest), or $0.28 per diluted share. The charge includes remeasurement of net monetary assets ($12.1 million) and a non-cash impairment

26


charge to adjust Venezuelan inventory balances ($33.3 million). Had the SICAD II rate been applied throughout all of 2014, we estimate it would have reduced full-year revenues and EPS by approximately $95 million and $0.11 per share, respectively. After these charges, we had $4.6 million of bolivar-denominated net monetary assets and $8.9 million of inventory in Venezuela as of December 31, 2014.

On February 9, 2015, the Venezuelan government announced changes to its exchange rate system that included the launch of a new, market-based system called the Marginal Currency System, or “Simadi,” that will replace the SICAD II rate. The Company is currently evaluating this announcement. Adoption of the Simadi rate would result in additional charges to remeasure the net monetary assets and impair other assets.

Inventory accounting methodology

In the fourth quarter of 2014 we elected to change our method of accounting for certain inventory from the last-in-first-out (LIFO)method to the first-in-first-out (FIFO) method and now all inventory is accounted for using the FIFO method. We applied this change in method of inventory accounting by retrospectively adjusting the prior period financial statements. Further details about the impact of this change are discussed in Note 2 to the Combined and Consolidated Financial Statements.

Acquisitions

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

2014 Dividends

We paid quarterly dividends of $0.08 per ordinary share to shareholders on March, 31, 2014, June 30, 2014, September 30, 2014, and December 30, 2014. We paid a total of $30.0 million in cash for dividends to ordinary shareholders during the year ended December 31, 2014.

Spin-off related charges

For the year ended December 31, 2014 we incurred $28.6 million of separation costs associated with the spin-off from Ingersoll Rand, of which $28.2 million was recognized in Selling and administrative expenses in our results of operations and $0.4 million was recognized in Cost of goods sold. Separation costs for the year ended December 31, 2014 primarily include professional and consulting fees, system implementation costs and relocation and other personnel related costs. We do not expect separation costs incurred in 2015 to be material. The components of separation costs incurred for the year ended December 31, 2014 are presented below (in millions):
IT related
$
9.6

HR related
8.1

Finance related
3.0

Marketing and re-branding
2.6

Other
5.3

Total
$
28.6


Restructuring charges

In the second quarter of 2014 management committed to a plan to restructure our EMEIA segment to improve efficiencies and regional cost structure. In conjunction with this plan, we incurred severance and other restructuring charges of $6.1 million and other charges of $0.4 million for the year ended December 31, 2014.

Joint venture order flow change

Previously, our consolidated joint venture in Asia acted as a pass-through to the end customer. Beginning in 2013, the consolidated joint venture no longer recognizes the revenue and cost of goods sold on these products because of a revised joint venture operating agreement. Products are shipped direct to the end customer with the joint venture receiving a royalty in an amount that approximates the lost margin. We recognized revenue of approximately $52.0 million related to this business in our Americas segment for the

27


year ended December 31, 2013. The change did not have a material impact on operating income or on cash flows for the year ended December 31, 2014.

Discontinued operations

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



28


Results of Operations - For the years ended December 31
 
Dollar amounts in millions, except per share data
 
2014
 
% of
 
Revenues
 
2013
 
% of
 
Revenues
 
2012
 
% of
 
Revenues
Net revenues
 
$
2,118.3

 

 
$
2,069.6

 

 
$
2,023.3

 

Cost of goods sold
 
1,264.6

 
59.7
%
 
1,208.1

 
58.4
%
 
1,197.7

 
59.2
%
Selling and administrative expenses
 
527.4

 
24.9
%
 
483.1

 
23.3
%
 
454.3

 
22.5
%
Asset impairment
 

 
%
 
137.6

 
6.6
%
 

 
%
Operating income
 
326.3

 
15.4
%
 
240.8

 
11.6
%
 
371.3

 
18.4
%
Interest expense
 
53.8

 

 
10.2

 

 
1.5

 

Other expense (income), net
 
4.6

 
 
 
7.2

 
 
 
3.1

 
 
Earnings before income taxes
 
267.9

 

 
223.4

 

 
366.7

 

Provision for income taxes
 
84.2

 
 
 
175.0

 
 
 
136.7

 
 
Earnings from continuing operations
 
183.7

 

 
48.4

 

 
230.0

 

Discontinued operations, net of tax
 
(11.1
)
 
 
 
(3.6
)
 
 
 
(4.2
)
 
 
Net earnings
 
172.6

 

 
44.8

 

 
225.8

 

Less: Net earnings attributable to noncontrolling interests
 
(2.6
)
 
 
 
12.5

 
 
 
5.7

 
 
Net earnings attributable to Allegion plc
 
$
175.2

 
 
 
$
32.3

 
 
 
$
220.1

 
 
Diluted net earnings per ordinary share attributable to Allegion plc ordinary shareholders:
 

 

 

 

 

 

Continuing operations
 
$
1.92

 

 
$
0.37

 

 
$
2.34

 

Discontinued operations
 
(0.12
)
 
 
 
(0.03
)
 
 
 
(0.05
)
 
 
Net earnings
 
$
1.80

 
 
 
$
0.34

 
 
 
$
2.29

 
 
Net Revenues
Net revenues for the year ended December 31, 2014 increased by 2.4% ($48.7 million) compared to the same period in 2013 due to the following:
 
Pricing
2.2
 %
Volume/product mix
2.8
 %
Acquisitions
0.4
 %
Impact of consolidated Asia joint venture order flow change
(2.5
)%
Currency exchange rates
(0.5
)%
Total
2.4
 %

The increase in net revenues was primarily driven by improved pricing, higher volumes, the acquisition of the Schlage de Colombia assets in January 2014 and the acquisition of FSH in April 2014. The pricing improvements were primarily driven by our consolidated joint venture in Venezuela and were largely offset by material inflation and other inflation in Venezuela. These increases were partially offset by the impact of the change in order flow through our consolidated joint venture in Asia discussed above.

29



Net revenues for the year ended December 31, 2013 increased by 2.3% ($46.3 million) compared to the same period in 2012, due to the following:
Volume/product mix
2.3
 %
Pricing
1.7
 %
Currency exchange rates/other
(0.4
)%
Impact of consolidated Asia joint venture order flow change
(1.3
)%
Total
2.3
 %
The increase in net revenues was primarily driven by improved pricing across all segments as well as increased volumes in the Americas segment due to stronger demand in both the commercial and residential markets as well as new products, particularly from our electronics portfolio. These increases were partially offset by unfavorable currency impacts, lower volume in EMEIA due to weak markets and the impact of the change in order flow through our consolidated joint venture in Asia discussed above.
Cost of Goods Sold
For the year ended December 31, 2014, cost of goods sold as a percentage of revenue increased to 59.7% from 58.4%. Costs of goods sold as a percentage of revenue for the year ended December 31, 2014 increased primarily due to a $33.3 million non-cash inventory impairment charge related to the devaluation of the Venezuelan bolivar (1.6%) discussed above, unfavorable channel/region mix offset by volume (0.3%) and increased investments/other items (0.2%). These increases were partially offset by productivity benefits and pricing improvements in excess of inflation (0.6%) and the impact of foreign currency movements (0.2%).
For the year ended December 31, 2013, cost of goods sold as a percentage of revenue decreased to 58.4% from 59.2%. Cost of goods sold as a percentage of revenue for the year ended December 31, 2013 was favorably impacted by a $21.5 million gain on a property sale in China (1.1%) as well as productivity benefits and other items in excess of inflation (0.2%), partially offset by unfavorable channel/region mix (0.5%).
Selling and Administrative Expenses
For the year ended December 31, 2014, selling and administrative expenses as a percentage of revenue increased to 24.9% from 23.3%. Selling and administrative expenses as a percentage of revenue for the year ended December 31, 2014 was negatively impacted by increased restructuring charges (0.2%), separation costs incurred in connection with the Spin-off (1.2%) increased investments (1.0%), the impact of the change in the order flow through our consolidated joint venture in Asia discussed above (0.8%) and other inflation in excess of productivity (0.3%). These increases were partially offset by favorable volume leverage (0.9%).
For the year ended December 31, 2013, selling and administrative expenses as a percentage of revenue increased to 23.3% from 22.5%. Selling and administrative expenses as a percentage of revenue for the year ended December 31, 2013 was negatively impacted by a $3.2 million increase in restructuring charges and non-recurring separation costs incurred in connection with the Spin-off (0.1%), inflation in excess of productivity benefits and other items (0.3%) and increased investment spending (0.4%).
Operating Income/Margin
Operating income for the year ended December 31, 2014 increased $85.5 million from the same period in 2013. Operating income in the prior year included a $137.6 million goodwill impairment charge, as well as a $21.5 million gain on the sale of property in China. Neither of these items recurred in the current year. Operating income in the current year includes a $33.3 million non-cash inventory impairment related to the devaluation of the bolivar discussed above. The remaining increase in operating income was primarily due to pricing improvements and productivity in excess of inflation ($36.9 million) and increased volume ($17.1 million). These increases were partially offset by increased restructuring charges and non-recurring separation costs incurred in connection with the Spin-off ($24.8 million) and increased investments and other items ($26.5 million).
Operating margin for the year ended December 31, 2014 increased to 15.4% from 11.6% for the same period in 2013. The increase was primarily due to the 2013 goodwill impairment charge discussed above (6.7%), pricing improvements and productivity in excess of inflation (1.5%), favorable volume/product mix (0.5%) and favorable foreign currency exchange rate movements (0.1%). These increases were partially offset by the 2014 non-cash inventory impairment discussed above (1.6%), increased non-recurring separation costs and restructuring charges (1.2%), incremental investment spending primarily associated with new product development and other items (1.4%) and the impact of the change in order flow through our consolidated joint venture in Asia and the 2013 gain on sale of a property in China discussed above (0.8%).

30


Operating income for the year ended December 31, 2013 decreased $130.5 million from the same period in 2012. The decrease in operating income was primarily due to a $137.6 million goodwill impairment charge recorded in 2013, increased investment spending ($12.4 million), unfavorable foreign currency exchange rate movements ($5.5 million) and increased restructuring charges and non-recurring separation costs incurred in connection with the Spin-off ($9.9 million). These decreases were partially offset by the gain on a property sale in China ($21.5 million), pricing improvements and productivity in excess of inflation ($9.9 million) and increased volume ($3.5 million).
Operating margin for the year ended December 31, 2013 increased to 11.6% from 18.4% for the same period in 2012. Operating margin for the year ended December 31, 2013 was negatively impacted by a non-cash goodwill impairment charge (6.8%), incremental investment spending associated with new product development (0.6%), unfavorable product mix (0.5%) and restructuring charges and non-recurring separation costs (0.2%). These decreases were partially offset by the gain on a property sale in China (1.1%) and favorable volume leverage (0.2%).
Interest Expense
Interest expense for the year ended December 31, 2014 increased $43.6 million compared to the same period in 2013 as a result of the full year impact resulting from entering into $1,000 million Senior Secured Credit Facilities and issuing $300 million of senior notes in the fourth quarter of 2013 in conjunction with the spin-off from Ingersoll Rand. In the fourth quarter of 2014, we incurred a non-cash charge of approximately $4.5 million for the write-off of unamortized Term Loan B Facility debt issuance costs.

Interest expense for the year ended December 31, 2013 increased $8.7 million compared with the same period of 2012 due to the issuance of debt in the fourth quarter of 2013 in conjunction with the spin-off from Ingersoll Rand.
Other expense, net
The components of Other expense, net, for the year ended December 31 are as follows:
 
In millions
 
2014
 
2013
 
2012
Interest income
 
$
(1.1
)
 
$
(0.8
)
 
$
(0.1
)
Exchange loss
 
7.6

 
8.0

 
3.2

Other
 
(1.9
)
 

 

Other expense, net
 
$
4.6

 
$
7.2

 
$
3.1

For the year ended December 31, 2014, Other expense, net decreased by $2.6 million compared to the same period in 2013. As discussed above, in the fourth quarter of 2014 we recorded a $12.1 million loss related to write down our Venezuelan bolivar-denominated net monetary assets. This loss is reflected as Exchange loss in the table above. In the prior year, we recorded a $6.2 million loss resulting from the official devaluation of the bolivar from 4.3 bolivars per U.S. dollar to 6.3 bolivars per U.S. dollar. The remaining decrease in Other expense, net for the year ended December 31, 2014 was primarily due to other foreign currency gains in 2014.
For the year ended December 31, 2013, Other expense, net decreased by $3.9 million compared with the same period in 2012 primarily from unfavorable foreign currency impacts.
Provision for Income Taxes
For the year ended December 31, 2014, our effective tax rate of 31.4% compared to 78.3% for the year ended December 31, 2013. The effective tax rate for the year ended December 31, 2013 included the impact of a non-cash pre-tax goodwill impairment charge of $137.6 million ($131.2 million after-tax). Additionally, the effective tax rate included $44.8 million of discrete tax adjustments consisting of $31.5 million of expense related to valuation allowances on deferred tax assets that are no longer expected to be utilized and $13.3 million of net tax expense resulting primarily from transactions occurring to effect the Spin-off. Excluding these items, the effective tax rate was 37.8%. The decrease in our effective tax rate for the year ended December 31, 2014 compared to 2013 was primarily due to favorable changes in the mix of pre-tax income earned in lower rate jurisdictions as well as favorable discrete tax benefits.
Our 2013 tax rate was above the U.S. statutory rate of 35.0% primarily due to U.S. state and local taxes and net increases in our liability for unrecognized tax benefits partially offset by earnings in non-U.S. jurisdictions, which, in aggregate, had a lower effective rate.


31


For periods prior to the Spin-off, income tax expense was recorded as if we filed tax returns on a stand-alone basis. This separate return methodology applied the accounting guidance for income taxes to the stand-alone financial statements as if we were a stand-alone enterprise for the periods prior to the Spin-off using statutory rates. These rates did not contemplate certain tax strategies that could lower the effective tax rate in future periods, if executed.   
Discontinued Operations

EMEIA Divestiture

As discussed above, in 2014 we sold our UK Door businesses to an unrelated third party. Historical results of the component have been reclassified to discontinued operations for all periods presented. In conjunction with the sale, we recorded a $7.6 million charge to write the carrying value of the assets sold down to their selling value.

Net revenues and after-tax earnings of the component for the years ended December 31 were as follows:
In millions
2014
 
2013
 
2012
Net revenues
$
16.1

 
$
23.9

 
$
23.3

Pre-tax loss from operations
$
(3.1
)
 
$
(2.8
)
 
$
(1.9
)
Loss on disposal
(7.6
)
 

 

Tax benefit

 

 
0.4

Discontinued operations, net of tax
$
(10.7
)
 
$
(2.8
)
 
$
(1.5
)

Other divestitures

Other discontinued operations recognized a loss of $0.4 million, $0.8 million and $2.7 million for the years ended December 31, 2014, 2013 and 2012, respectively. These losses were mainly related to lease expense and other miscellaneous expenses from previously sold businesses.

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 continuing operations. Effective January 1, 2013, we transferred a product line from our Asia Pacific segment to our Americas segment. This transfer is reflected in the historical segment results for each of the fiscal years in the three-year period ended December 31, 2013.
Americas
Our Americas segment is a leading provider of security products and solutions in approximately 30 countries throughout North America and parts of South America. The segment sells a broad range of products and solutions including, locks, locksets, 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 strategic brands are Schlage, Von Duprin and LCN.
Segment results for the years ended December 31 were as follows:
Dollar amounts in millions
 
2014
 
% change
 
2013
 
% change
 
2012
Net revenues
 
$
1,560.0

 
3.0%
 
$
1,514.7

 
2.9%
 
$
1,471.8

Segment operating income
 
387.3

 
(1.2)%
 
392.1

 
3.7%
 
378.0

Segment operating margin
 
24.8
%
 
 
 
25.9
%
 
 
 
25.7
%

32


2014 vs 2013
Net revenues for the year ended December 31, 2014 increased by 3.0% ($45.3 million) compared to the same period in 2013 due to the following: 
Pricing
2.7
 %
Volume/product mix
3.5
 %
Acquisitions
0.8
 %
Impact of consolidated joint venture order flow change
(3.4
)%
Currency exchange rates/other
(0.6
)%
Total
3.0
 %

The increase in revenues was primarily due to increased residential and commercial volumes as well as new products, the acquisition the assets of of Schlage de Colombia in January 2014 and price increases in Venezuela. These increases were partially offset by unfavorable currency impacts and the impact of the change in order flow through our consolidated joint venture in Asia discussed above.

Segment operating income for the year ended December 31, 2014 decreased $4.8 million compared to the same period in 2013. The decrease was primarily due to the $33.3 million non-cash inventory impairment charge related to the devaluation of the bolivar discussed above and increased investment spending, primarily for new product development ($13.1 million). These decreases were partially offset by pricing improvements and productivity in excess of inflation ($23.2 million), increased volume ($17.0 million) and favorable foreign currency movements and other items ($1.4 million).

Segment operating margin for the year ended December 31, 2014 declined to 24.8% from 25.9% compared to the same period in 2013. The decrease was primarily due to the inventory impairment discussed above (2.1%), incremental investment spending primarily on new product development (0.9%) and unfavorable product/channel mix offset by increased volume (0.1%). These decreases were partially offset by pricing improvements and productivity in excess of inflation (0.8%), the impact of the change in order flow through our consolidated joint venture discussed above (0.9%) and favorable foreign currency exchange rate movements (0.3%).
2013 vs 2012
Net revenues for the year ended December 31, 2013 increased by 2.9% ($42.9 million) compared to the same period in 2012 due to the following:
 
Pricing
2.1
 %
Volume/product mix
3.9
 %
Impact of consolidated joint venture order flow change
(1.8
)%
Currency exchange rates/other
(1.3
)%
Total
2.9
 %

The increase in revenues was primarily due to increased volume due to stronger demand in both the commercial and residential markets as well as new products, particularly from our electronics portfolio and price increases in Venezuela. These increases were partially offset by unfavorable currency impacts and the impact of the change in order flow through our consolidated joint venture discussed above.
Segment operating income for the year ended December 31, 2013 increased $14.1 million compared to the same period in 2012. This increase was primarily due to increased volume ($18.5 million) and pricing improvements and productivity in excess of inflation ($9.8 million). These increases were partially offset by increased investment and other spending ($7.6 million) and unfavorable foreign currency exchange rate movements ($6.6 million).
Segment operating margin for the year ended December 31, 2013 increased to 25.9% from 25.7% compared to the same period in 2012. This increase was primarily due to pricing improvements and productivity in excess of inflation (0.7%) and favorable volume leverage partially offset by unfavorable product/channel mix (0.2%). These increases were partially offset by incremental investment spending (0.5%) and unfavorable foreign currency exchange rate movements (0.2%).

33


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, 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 strategic brands are Bricard, CISA and Interflex. This segment also resells Schlage, Von Duprin and LCN products, primarily in the Middle East.

As discussed above, in 2014 we sold our UK Door businesses to an unrelated third party. Historical results of the component have been reclassified to discontinued operations for all periods presented.

During the year ended December 31, 2013, we recorded a non-cash pre-tax goodwill impairment charge of $137.6 million, which has been excluded from these results.
Segment results for the years ended December 31 were as follows:
Dollar amounts in millions
 
2014
 
% change
 
2013
 
% change
 
2012
Net revenues
 
$
393.4

 
(2.0)%
 
$
401.4

 
(0.9)%
 
$
405.1

Segment operating income (loss)
 
4.9

 
1,733.3%
 
(0.3
)
 
(103.0)%
 
10.1

Segment operating margin
 
1.2
%
 
 
 
(0.1
)%
 
 
 
2.5
%
2014 vs 2013
Net revenues for the year ended December 31, 2014 decreased by 2.0% ($8.0 million) compared to the same period in 2013 due to the following:
 
Pricing
1.0
 %
Currency exchange rates
0.1
 %
Volume/product mix
(1.3
)%
Restructuring actions
(1.8
)%
Total
(2.0
)%

The decrease in revenues was primarily due to decreased volumes due to economic weakness in certain markets as well as lower revenue as a result of managements' actions to exit unprofitable businesses. These decreases were partially offset by improved pricing and favorable foreign currency exchange rate movements.
Segment operating income for the year ended December 31, 2014 increased $5.2 million compared to the same period in 2013. The increase was primarily due to pricing improvements and productivity in excess of inflation ($14.4 million), and favorable foreign currency exchange rate movements and other items ($0.5 million). These increases were partially offset by lower volumes ($3.7 million), increased investment spending ($3.0 million) and increased separation costs incurred in connection with the Spin-off and restructuring charges ($3.0 million).
Segment operating margin for the year ended December 31, 2014 increased to 1.2% from (0.1)% compared to the same period in 2013. The increase was primarily due to pricing improvements and productivity in excess of inflation (3.6%) and favorable foreign currency exchange rate movements and other items (0.2%). These increases were partially offset by unfavorable volume/product mix (0.9%), increased investment spending (0.8%) and increased separation costs incurred in connection with the Spin-off and restructuring charges (0.8%).
2013 vs 2012
Net revenues for the year ended December 31, 2013 decreased by 0.9% ($3.7 million) compared to the same period in 2012 due to following:
 
Volume/product mix
(4.1
)%
Pricing
1.0
 %
Currency exchange rates
2.2
 %
Total
(0.9
)%

34



The decrease in revenues was primarily due to decreased volumes due to economic weakness in most major markets, partially offset by favorable currency impacts and improved pricing.
Segment operating loss for the year ended December 31, 2013 decreased $10.4 million compared to the same period in 2012. This decrease was primarily due to decreased volume ($12.9 million), increased investment spending and other items ($4.3 million) and increased restructuring and non-recurring separation costs ($1.5 million). These decreases were partially offset by pricing improvements and productivity in excess of inflation ($7.4 million) and favorable foreign currency exchange rate movements ($0.9 million).
Segment operating margin for the year ended December 31, 2013 decreased to (0.1)% from 2.5% compared with the same period of 2012. This decrease was primarily due to increased restructuring and non-recurring separation costs (0.4%), unfavorable volume leverage (1.9%), unfavorable mix (0.9%) and increased investment spending and non-operating costs (1.4%), partially offset by pricing improvements in excess of material inflation (0.6%), productivity benefits in excess of other inflation (1.4%) and favorable foreign currency exchange rate movements (0.2%).
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, key systems, door closers, exit devices, electronic product and access control systems, and as well as video analytics solutions. This segment’s strategic brands are Schlage, CISA, Von Duprin and LCN.
Segment results for the years ended December 31 were as follows:
Dollar amounts in millions
 
2014
 
% change
 
2013
 
% change
 
2012
Net revenues
 
$
164.9

 
7.4%
 
$
153.5

 
4.8%
 
$
146.4

Segment operating income
 
2.3

 
(90.9)%
 
25.4

 
124.8%
 
11.3

Segment operating margin
 
1.4
%
 
 
 
16.5
%
 
 
 
7.7
%

2014 vs 2013
Net revenues for the year ended December 31, 2014 increased by 7.4% ($11.4 million) compared to the same period in 2013, due to the following:
 
Volume/product mix
5.6
 %
Pricing
0.3
 %
Acquisitions
2.8
 %
Currency exchange rates
(1.3
)%
Total
7.4
 %

The increase in revenues was mainly due to favorable volume/product mix and revenue from the acquisition of FSH and improved pricing, partially offset by unfavorable foreign currency impacts.
Segment operating income for the year ended decreased $23.1 million. The decrease in operating income was primarily due to the $21.5 million gain on the sale of a property in China in 2013, a $1.9 million one-time benefit related to the closure of our Asia joint venture manufacturing facility in 2013, $2.0 million of non-recurring favorable items in 2013, a $2.5 million charge to increase the allowance for doubtful accounts in the second quarter of 2014, increased investment spending ($1.4 million), unfavorable foreign currency exchange rate movements ($0.7 million) and increased separation costs incurred in connection with the Spin-off ($0.7 million). These decreases were partially offset by increased volume ($5.1 million) and pricing improvements and productivity in excess of inflation ($2.6 million).
Segment operating margin for the year ended December 31, 2014 decreased to 1.4% from 16.5% compared to the same period in 2013. The decrease was primarily due to a $21.5 million in 2013 gain discussed above (14.0%), a $2.5 million charge to increase the allowance for doubtful accounts in the second quarter of 2014 (1.6%), increased investment spending (0.9%) unfavorable foreign currency movements (0.5%), increased separation costs incurred in connection with the Spin-off (0.5%) and a one-time benefit related to the closure of our Asia joint venture manufacturing facility and other items (2.3%). These decreases are partially offset by favorable volume/product mix (3.0%) and pricing improvements and productivity in excess of other inflation (1.7%).

35


2013 vs 2012
Net revenues for the year ended December 31, 2013 increased by 4.8%, ($7.1 million) compared with the same period of 2012, which primarily resulted from the following:
 
Volume/product mix
3.5
%
Pricing
0.5
%
Currency exchange rates
0.8
%
Total
4.8
%

The increase in revenues was due to favorable volume/product mix, pricing improvements and favorable foreign currency impacts.
Segment operating income for the year ended December 31, 2013 increased $14.1 million compared with the same period in 2012. The increase was primarily due to the $21.5 million gain on sale of a property in China and favorable foreign currency exchange rate movements ($0.2 million). These increases were partially offset by lower volumes ($3.8 million), a non-recurring favorable item in 2012 ($2.8 million) and increased investment and other spending ($1.1 million).
Segment operating margin for the year ended December 31, 2013 increased to 16.5% from 7.7% compared with the same period of 2012. The increase was primarily due to the $21.5 million gain in 2013 on sale of a property in China in 2013 (14.2%). This increase was partially offset by unfavorable volume/product mix (2.8%), a non-recurring favorable item in 2012 (1.9%) and increased investment spending (0.7%).

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, together with our 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 years ended December 31, respectively. For additional details, please see the Combined and Consolidated Statements of Cash Flows in the Combined and Consolidated Financial Statements.
In millions
 
2014
 
2013
 
2012
Cash provided by operating activities
 
$
255.9

 
$
223.9

 
$
269.2

Cash used in investing activities
 
(34.8
)
 
(18.7
)
 
(17.5
)
Cash used in financing activities
 
(150.0
)
 
(292.4
)
 
(317.9
)

Operating activities

Net cash provided by operating activities for the year ended December 31, 2014 increased $32.0 million compared to the same period in the prior year. Operating cash flows for 2014 reflect higher earnings from continuing operations compared to the same period in the prior year as well as lower working capital.

Net cash provided by operating activities for the year ended December 31, 2013 decreased $45.3 million compared to the same period in the prior year. Operating cash flows for 2013 reflect lower earnings from continuing operations and an increase in working capital compared to the same period in the prior year.

Investing activities

Net cash used in investing activities for the year ended December 31, 2014 increased $16.1 million compared to the same period in the prior year. Cash used in investing activities for the year ended December 31, 2014 included $51.5 million of capital expenditures, an increase of $31.3 million from the prior year, as we invested in information technology systems, new product

36


development and manufacturing plant investments to support our growth initiatives. In addition, we spent $25.2 million of cash for acquisitions primarily for the acquisition of certain assets of Schlage de Colombia in January 2014 and FSH in April 2014.

Net cash used in investing activities for the year ended December 31, 2013 increased $1.2 million compared to the same period in the prior year. Cash used in investing activities for the year ended December 31, 2013 included $20.2 million of capital expenditures, $40.2 million of cash classified as restricted as it is pledged as collateral against a short-term note payable and $41.7 million of proceeds from the sale of property, plant and equipment primarily related to proceeds from the sale of property in China.

Financing activities

Net cash used in financing activities for the year ended December 31, 2014 decreased $142.4 million compared to the same period in the prior year. In the prior year, $1,300.0 million of proceeds from the issuance of the Senior Notes and the Senior Secured Credit facilities as well as additional cash generated throughout the year were distributed to Ingersoll Rand, net of debt issuance costs. In the current year, we made $37.2 million, net repayments on the Senior Secured Credit Facilities and $40.8 million of repayments of other borrowings, we paid $30.0 million of dividends to our ordinary shareholders and we repurchased $50.3 million of our ordinary shares.

Net cash used in financing activities for the year ended December 31, 2013 decreased $25.5 million compared to the same period in the prior year. Net transfers to Ingersoll Rand increased $1,286.7 million as the $1,300.0 million proceeds from the issuance of the Senior Notes and the Senior Secured Credit Facilities were distributed to Ingersoll Rand, net of debt issuance costs.

Capitalization

Borrowings at December 31 consisted of the following:
In millions
2014

2013
Term Loan A Facility due 2018
$


$
500.0

Term Loan A Facility due 2019
962.8

 

Term Loan B Facility due 2020


500.0

5.75% Senior notes due 2021
300.0


300.0

Other debt, including capital leases, maturing in various amounts through 2016
1.8


43.9

Total debt
$
1,264.6


$
1,343.9

Less current portion of long term debt
49.6

 
71.9

Total long-term debt
$
1,215.0


$
1,272.0


The Term Loan A Facility due 2019 amortizes in quarterly installments at the following rates per year: 5% in 2015; 5% in 2016 and 10% in each year thereafter, with the final installment due on October 15, 2019. The Senior Notes are due in full on October 1, 2021.
At December 31, 2014 and 2013, we did not have any borrowings outstanding under the $500 million Senior Secured Revolving Credit Facility (the "Revolver"). We had $28.5 million and $24.6 million of letters of credit outstanding at December 31, 2014 and 2013, which reduce availability under the Revolver.

Included in the other short-term borrowings at December 31, 2013 is a $40.2 short-term note payable that was repaid in 2014. The $40.2 million of restricted cash presented on the Consolidated Balance Sheet at December 31, 2013 was pledged as collateral for the short-term note payable.

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 (based on a ratio of total consolidated indebtedness, net of unrestricted cash up to $125 million, to consolidated EBITDA). The ratio declines to 3.75 to 1.00 in the first quarter of 2015. In addition, as of December 31, 2014, we are required to have a minimum interest expense coverage ratio of 3.50 to 1.00 based on a ratio of consolidated EBITDA to consolidated interest expense, net of interest income. This ratio increases to 4.00 to 1.00 in the first quarter of 2015.

As of December 31, 2014, we were in compliance with these covenants. Additionally, 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

37


to enter into certain transactions. For further details on these covenants, see Note 8 to the Combined 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 December 31, 2014, we had unrestricted cash and cash equivalents of $290.5 million. Approximately 55% of our cash and cash equivalents was located outside the U.S. Included in our cash and cash equivalents located outside the U.S. is approximately $50 million of cash in China, approximately 49% of which will be distributed to a joint venture partner in Asia when we receive regulatory approval for the distribution. We have provided for income taxes on the 51% of cash that we will retain. We do not intend, nor do we foresee a need, to repatriate any other funds located outside the U.S.; however, repatriation of these funds would expose us to additional taxes.

Pension Plans

Our investment objective in managing defined benefit plan assets is to ensure that all present and future benefit obligations are met as they come due. We seek to achieve this goal while trying to mitigate volatility in plan funded status, 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 as the funded status increases. We monitor plan funded status and asset allocation regularly in addition to investment manager performance.

We monitor the impact of market conditions on our defined benefit plans on a regular basis. In December 31, 2014, the funded status of our qualified pension plan for U.S. employees declined to 75.4% from 90.1% at December 31, 2013 as a decline in discount rates and the adoption of revised mortality tables increased pension benefit obligations by approximately $60.1 million. The increase in benefit obligations was partially offset by $31.9 million of pension asset returns. The funded status for our non-U.S. pension plans increased to 95.8% at December 31, 2014 from 84.8% at December 31, 2013. The increase in funded status for the non-U.S. was due to asset returns and employer contributions more than offset an increase in pension benefit obligations resulting from a decline in discount rates. Funded status for all of our pension plans at December 31, 2014 increased to 87.1% from 86.8% at December 31, 2013. For further details on pension plan activity, see Note 10 to the Combined and Consolidated Financial Statements.

Contractual Obligations
The following table summarizes our contractual cash obligations by required payment periods, in millions:
 
 
 
Less than
1 year
 
1 - 3
years
 
3 - 5
years
 
More than
5 years
 
Total
Short-term debt
 
$
49.6

  
$

 
$

 
$

 
$
49.6

Long-term debt
 


146.3

 
767.7

 
300.0

 
1,214.0

Interest payments on long-term debt
 
39.5

  
74.6

 
58.1

 
30.2

 
202.4

Purchase obligations
 
135.8

  

 

 

 
135.8

Operating leases
 
22.8

  
16.3

 
4.5

 
0.9

 
44.5

Total contractual cash obligations
 
$
247.7

  
$
237.2

 
$
830.3

 
$
331.1

 
$
1,646.3

Future expected obligations under our pension and postretirement benefit plans, income taxes, environmental and product liability matters have not been included in the contractual cash obligations table above.
Pensions

At December 31, 2014, we had net obligations of $86.1 million, which consist of noncurrent pension assets of $585.2 million and current and non-current pension benefit liabilities of $671.3 million. It is our objective to contribute to the pension plans to ensure adequate funds are available in the plans to make benefit payments to plan participants and beneficiaries when required. We currently project that we will contribute approximately $5.0 million to our plans worldwide in 2015. Because the timing and amounts of long-term funding requirements for pension obligations are uncertain, they have been excluded from the preceding table. See Note 10 to the Combined and Consolidated Financial Statements for additional information.

38


Postretirement Benefits Other than Pensions

At December 31, 2014, we had postretirement benefit obligations of $13.6 million. We fund postretirement benefit costs principally on a pay-as-you-go basis as medical costs are incurred by covered retiree populations. Benefit payments, which are net of expected plan participant contributions and Medicare Part D subsidy, are expected to be approximately $1.0 million in 2015. Because the timing and amounts of long-term funding requirements for postretirement obligations are uncertain, they have been excluded from the preceding table. See Note 10 to the Combined and Consolidated Financial Statements for additional information.
Income Taxes

At December 31, 2014, we have total unrecognized tax benefits for uncertain tax positions of $25.4 million and $6.2 million of related accrued interest and penalties, net of tax. The liability has been excluded from the preceding table as we are unable to reasonably estimate the amount and period in which these liabilities might be paid. See Note 16 to the Combined and Consolidated Financial Statements for additional information regarding matters relating to income taxes, including unrecognized tax benefits and tax authority disputes.
Contingent Liabilities

We are involved in various litigations, claims and administrative proceedings, including those related to environmental, asbestos-related, and product liability matters. We believe that these liabilities are subject to the uncertainties inherent in estimating future costs for contingent liabilities, and will likely be resolved over an extended period of time. Because the timing and amounts of potential future cash flows are uncertain, they have been excluded from the preceding table. See Note 20 to the Combined and Consolidated Financial Statements for additional information.

Critical Accounting Policies
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our Combined and Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with those accounting principles requires management to use judgment in making estimates and assumptions based on the relevant information available at the end of each period. These estimates and assumptions have a significant effect on reported amounts of assets and liabilities, 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. If updated information or actual amounts are different from previous estimates, the revisions are included in our results for the period in which they become known.
The following is a summary of certain accounting estimates and assumptions made by management that we consider critical.
Allowance for doubtful accounts – We have provided an allowance for doubtful accounts receivable, which represents our best estimate of probable loss inherent in our accounts receivable portfolio. This estimate is based upon our policy, derived from our knowledge of our end markets, customer base and products.
Goodwill and indefinite-lived intangible assets – We have significant goodwill and indefinite-lived intangible assets on our balance sheet related to acquisitions. Our goodwill and other indefinite-lived intangible assets are tested and reviewed annually during the fourth quarter for impairment or when there is a significant change in events or circumstances that indicate that the fair value of an asset is more likely than not less than the carrying amount of the asset.
Recoverability of goodwill is measured at the reporting unit level and begins with a qualitative assessment to determine if it is more likely than not that the fair value of each reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test prescribed by GAAP. For those reporting units where it is required, the first step compares the carrying amount of the reporting unit to its estimated fair value. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. To the extent that the carrying value of the reporting unit exceeds its estimated fair value, a second step is performed, wherein the reporting unit’s carrying value of goodwill is compared to the implied fair value of goodwill. To the extent that the carrying value exceeds the implied fair value, impairment exists and must be recognized.
As quoted market prices are not available for our reporting units, the calculation of their estimated fair value in step one is based on two valuation techniques, a discounted cash flow model (income approach) and a market adjusted multiple of earnings and revenues (market approach), with each method being equally weighted in the calculation. We believe an equal weighting of both approaches is appropriate. The income approach relies on the Company’s estimates of future cash flows and explicitly addresses factors such as timing, growth and margins, with due consideration given to forecasting risk. The

39


market approach reflects the market’s expectations for future growth and risk, with adjustments to account for differences between the guideline publicly-traded companies and the subject reporting units.
In step 2, the implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The estimated fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit, as determined in the first step of the goodwill impairment test, was the price paid to acquire that reporting unit.
Recoverability of other intangible assets with indefinite useful lives is first assessed using a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. This assessment is used as a basis for determining whether it is necessary to calculate the fair value of an indefinite-lived intangible asset. For those indefinite-lived assets where it is required, a fair value is determined on a relief from royalty methodology (income approach), which is based on the implied royalty paid, at an appropriate discount rate, to license the use of an asset rather than owning the asset. The present value of the after-tax cost savings (i.e. royalty relief) indicates the estimated fair value of the asset. Any excess of the carrying value over the estimated fair value is recognized as an impairment loss equal to that excess.
The determination of the estimated fair value and the implied fair value of goodwill and other indefinite-lived intangible assets requires us to make assumptions about estimated cash flows including profit margins, long-term forecasts, discount rates and terminal growth rates. We developed these assumptions based on the market and geographic risks unique to each reporting unit.
2014 Goodwill Impairment Test
The estimated fair values for each of our reporting units exceeded their carrying values by more than 10% for the 2014 goodwill impairment test. Additionally, a 1% increase in the discount rate used or a 1% decrease in the terminal growth rate would not result in any reporting unit failing step 1.
Assessing the fair value of goodwill includes, among other things, making key assumptions for estimating future cash flows and appropriate market multiples. These assumptions are subject to a high degree of judgment and complexity. We make every effort to estimate future cash flows as accurately as possible with the information available at the time the forecast is developed. However, changes in assumptions and estimates may affect the estimated fair value of the reporting unit, and could result in impairment charges in future periods. Factors that have the potential to create variances in the estimated fair value of the reporting unit include but are not limited to the following:
Decreases in estimated market sizes or market growth rates due to greater-than-expected declines in volumes, pricing pressures or disruptive technology;
Declines in our market share and penetration assumptions due to increased competition or an inability to develop or launch new products;
The impacts of the European sovereign debt crisis, including greater-than-expected declines in pricing, reductions in volumes, or fluctuations in foreign exchange rates;
The level of success of on-going and future research and development efforts, including those related to recent acquisitions, and increases in the research and development costs necessary to obtain regulatory approvals and launch new products;
Increase in the price or decrease in the availability of key commodities and the impact of higher energy prices; and
Increases in our market-participant risk-adjusted weighted-average cost of capital;
2013 Goodwill Impairment Test
In the third quarter of 2013, we determined that we were required to complete the first step of the two-step impairment test. Under the income approach we assumed a discount rate of 11.0%, near term growth rates ranging from 2.5% to 4.6% and a terminal growth rate of 2.5%. Under the market approach, we assumed a weighted average multiple of 8.9 and 8.0 times projected 2013 and 2014 EBITDA, respectively, and a multiple of 0.7 and 0.6 times projected 2013 and 2014 revenue, respectively, based on industry market data. The results of our impairment test indicated that the estimated fair value of our EMEIA reporting unit was less than its carrying value; consequently, we performed the second step of the impairment test to quantify the amount of the non-cash, goodwill impairment charge. In the third quarter of 2013 we recorded a non-cash

40


pre-tax goodwill impairment charge of $137.6 million ($131.2 million after-tax). This charge had no impact on our cash flows or our compliance with debt covenants. For our annual goodwill impairment test performed during the fourth quarter of 2013, the fair value of our EMEIA reporting unit exceeded its carrying value by approximately 24%.
During 2013, we renegotiated a significant joint venture contract within our Asia Pacific - Other reporting unit and moved the related product line to our Americas segment. As a result of these business changes, we completed the first step of the two-step impairment test. This reporting unit has goodwill of approximately $57 million.
Our Asia Pacific - Other reporting unit exceeded its carrying value by approximately 7% as of October 1, 2013. We have provided below key assumptions and a sensitivity analysis. Under the income approach we assumed a weighted average discount rate of 13.0%, near term growth rates ranging from (1.3%) to 15.9% and a terminal growth rate of 4.0%. Under the market approach, we assumed a weighted average implied multiple of 0.9 and 10.5 times projected 2013 revenue and earnings before interest, taxes, depreciation and amortization (EBITDA), respectively, based on industry market data. Holding other assumptions constant, a 1.0% increase in the discount rate would result in a $7.8 million decrease in the estimated fair value of the reporting unit, a 1.0% decrease in the long-term growth rate would result in a $5.5 million decrease in the estimated fair value of the reporting unit. Either of these scenarios individually would result in the reporting unit failing step 1, which would lead to any or all of the reporting unit's $57 million of goodwill to be impaired.
Other Indefinite-lived intangible assets - In testing our other indefinite-lived intangible assets for impairment, we assumed forecasted revenues for a period of five years with a discount rate of 11.0%, a terminal growth rate of 2.5%, and a royalty rate of 5.0%. All indefinite-lived intangible assets had a fair value that exceeded their carrying value by more than 15%.
A significant increase in the discount rate, decrease in the long-term growth rate, decrease in the royalty rate or substantial reductions in our end markets and volume assumptions could have a negative impact on the estimated fair values of any of our tradenames. The estimates of fair value are based on the best information available as of the date of the assessment, which primarily incorporates management assumptions about expected future cash flows.
Long-lived assets and finite-lived intangibles – Long-lived assets and finite-lived intangibles are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be fully recoverable. Assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows can be generated. Impairment in the carrying value of an asset could be recognized whenever anticipated future undiscounted cash flows from an asset are less than its carrying value. The impairment is measured as the amount by which the carrying value exceeds the fair value of the asset as determined by an estimate of discounted cash flows. We believe that our use of estimates and assumptions are reasonable and comply with generally accepted accounting principles. Changes in business conditions could potentially require future adjustments to these valuations.
Loss contingencies – Liabilities are recorded for various contingencies arising in the normal course of business, including litigation and administrative proceedings, environmental and asbestos matters and product liability, product warranty, worker’s compensation and other claims. We have recorded reserves in the combined and consolidated financial statements related to these matters, which are developed using input derived from actuarial estimates and historical and anticipated experience data depending on the nature of the reserve, and in certain instances with consultation of legal counsel, internal and external consultants and engineers. Subject to the uncertainties inherent in estimating future costs for these types of liabilities, we believe our estimated reserves are reasonable and do not believe the final determination of the liabilities with respect to these matters would have a material effect on our financial condition, results of operations, liquidity or cash flows for any year.
Revenue recognition – Revenue is recognized and earned when all of the following criteria are satisfied: (a) persuasive evidence of a sales arrangement exists; (b) the price is fixed or determinable; (c) collectability is reasonably assured; and (d) delivery has occurred or service has been rendered. Delivery generally occurs when the title and the risks and rewards of ownership have transferred to the customer. Both the persuasive evidence of a sales arrangement and fixed or determinable price criteria are deemed to be satisfied upon receipt of an executed and legally binding sales agreement or contract that clearly defines the terms and conditions of the transaction including the respective obligations of the parties. If the defined terms and conditions allow variability in all or a component of the price, revenue is not recognized until such time that the price becomes fixed or determinable. At the point of sale, we validate that existence of an enforceable claim that requires payment within a reasonable amount of time and assesses the collectability of that claim. If collectability is not deemed to be reasonably assured, then revenue recognition is deferred until such time that collectability becomes probable or cash is received. Delivery is not considered to have occurred until the customer has taken title and assumed the risks and rewards of ownership. Service and installation revenue are recognized when earned. In some instances, customer acceptance provisions are included in sales arrangements to give the buyer the ability to ensure the delivered product or service meets the criteria established in the order. In these instances, revenue recognition is deferred until the acceptance terms specified

41


in the arrangement are fulfilled through customer acceptance or a demonstration that established criteria have been satisfied. If uncertainty exists about customer acceptance, revenue is not recognized until acceptance has occurred.
We offer various sales incentive programs to our customers, dealers, and distributors. Sales incentive programs do not preclude revenue recognition, but do require an accrual for our best estimate of expected activity. Examples of the sales incentives that are accrued for as a contra receivable and sales deduction at the point of sale include, but are not limited to, discounts (i.e. net 30 type), coupons, and rebates where the customer does not have to provide any additional requirements to receive the discount. Sales returns and customer disputes involving a question of quantity or price are also accounted for as a reduction in revenue and a contra receivable. At December 31, 2014 and 2013, we had a customer claim accrual (contra receivable) of $23.5 million and $21.9 million, respectively. All other incentives or incentive programs where the customer is required to reach a certain sales level, remain a customer for a certain period, provide a rebate form or is subject to additional requirements are accounted for as a reduction of revenue and establishment of a liability. At December 31, 2014 and 2013, we had a sales incentive accrual of $23.2 million and $21.0 million, respectively. Each of these accruals represents our best estimate we expect to pay related to previously sold units based on historical claim experience. These estimates are reviewed regularly for accuracy. If updated information or actual amounts are different from previous estimates, the revisions are included in our results for the period in which they become known. Historically, the aggregate differences, if any, between our estimates and actual amounts in any year have not had a material impact on our combined and consolidated financial statements.
We provide equipment, integrated solutions, and installation designed to customer specifications through construction-type contracts. The term of these types of contracts is typically less than one year, but can be as long as three years. Revenues related to these contracts are recognized using the percentage-of-completion method in accordance with GAAP. This measure of progress toward completion, utilized to recognize sales and profits, is based on the proportion of actual cost incurred to date as compared to the total estimate of contract costs at completion. The timing of revenue recognition often differs from the invoicing schedule to the customer with revenue recognition in advance of customer invoicing recorded to costs in excess of billings on uncompleted contracts and invoicing in advance of revenue recognition recorded to deferred revenue. At December 31, 2014, all recorded accounts receivables are due within one year. We re-evaluate our contract estimates periodically and reflect changes in estimates in the current period using the cumulative catch-up method. These periodic reviews have not historically resulted in significant adjustments. If estimated contract costs are in excess of contract revenues, then the excess costs are accrued and losses are recognized in current period earnings.
We enter into sales arrangements that contain multiple elements, such as equipment, installation and service revenue. For multiple element arrangements, each element is evaluated to determine the separate units of accounting. The total arrangement consideration is then allocated to the separate units of accounting based on their relative selling price at the inception of the arrangement. The relative selling price is determined using vendor specific objective evidence (VSOE) of selling price, if it exists; otherwise, third-party evidence (TPE) of selling price is used. If neither VSOE nor TPE of selling price exists for a deliverable, a best estimate of the selling price is developed for that deliverable. We primarily utilize VSOE to determine its relative selling price. We recognize revenue for delivered elements when the delivered item has stand-alone value to the customer, the basic revenue recognition criteria have been met, and only customary refund or return rights related to the delivered elements exist.
Income taxes – Deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. We recognize future tax benefits, such as net operating losses and non-U.S. tax credits, to the extent that realizing these benefits is considered in our judgment to be more likely than not. We regularly review the recoverability of our deferred tax assets considering our historic profitability, projected future taxable income, timing of the reversals of existing temporary differences and the feasibility of our tax planning strategies. Where appropriate, we record a valuation allowance with respect to a future tax benefit.
The provision for income taxes involves a significant amount of management judgment regarding interpretation of relevant facts and laws in the jurisdictions in which we operate. Future changes in applicable laws, projected levels of taxable income, and tax planning could change the effective tax rate and tax balances recorded by us. In addition, tax authorities periodically review income tax returns filed by us and can raise issues regarding our filing positions, timing and amount of income or deductions, and the allocation of income among the jurisdictions in which we operate. A significant period of time may elapse between the filing of an income tax return and the ultimate resolution of an issue raised by a revenue authority with respect to that return. We believe that we have adequately provided for any reasonably foreseeable resolution of these matters. We will adjust our estimate if significant events so dictate. To the extent that the ultimate results differ from our original or adjusted estimates, the effect will be recorded in the provision for income taxes in the period that the matter is finally resolved.

42


Employee benefit plans – We provide a range of benefits to eligible employees and retirees, including pensions, postretirement and postemployment benefits. Determining the cost associated with such benefits is dependent on various actuarial assumptions including discount rates, expected return on plan assets, compensation increases, employee mortality, turnover rates and healthcare cost trend rates. Actuarial valuations are performed to determine expense in accordance with GAAP. Actual results may differ from the actuarial assumptions and are generally accumulated and amortized into earnings over future periods.
We review our actuarial assumptions at each measurement date and make modifications to the assumptions based on current rates and trends, if appropriate. The discount rate, the rate of compensation increase and the expected long-term rates of return on plan assets are determined as of each measurement date. A discount rate reflects a rate at which pension benefits could be effectively settled. Discount rates for all plans are established using hypothetical yield curves based on the yields of corporate bonds rated AA quality. Spot rates are developed from the yield curve and used to discount future benefit payments. The rate of compensation increase is dependent on expected future compensation levels. The expected long-term rate of return on plan assets reflects the average rate of returns expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. The expected long-term rate of return on plan assets is based on what is achievable given the plan’s investment policy, the types of assets held and the target asset allocation. The expected long-term rate of return is determined as of each measurement date.
We believe that the assumptions utilized in recording our obligations under our plans are reasonable based on input from our actuaries, outside investment advisors and information as to assumptions used by plan sponsors.
Changes in any of the assumptions can have an impact on the net periodic pension cost or postretirement benefit cost. Estimated sensitivities to the expected 2014 net periodic pension cost of a 0.25% rate decline in the two basic assumptions are as follows: the decline in the discount rate would increase expense by approximately $0.9 million and the decline in the estimated return on assets would increase expense by approximately $0.5 million. A 1.0% increase in the healthcare cost trend rate would increase the cost by approximately $0.1 million.

Recent Accounting Pronouncements

See Note 2 to our combined and consolidated financial statements included in Item 15 herein for a discussion of recently issued and adopted accounting pronouncements.


Item 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to fluctuations in currency exchange rates, interest rates and commodity prices which could impact our results of operations and financial condition.

Foreign Currency Exposures

We have operations throughout the world that manufacture and sell products in various international markets. As a result, we are exposed to movements in exchange rates of various currencies against the U.S. dollar as well as against other currencies throughout the world. We actively manage material currency exposures that are associated with purchases and sales and other assets and liabilities at the legal entity level. We attempt to hedge exposures that cannot be naturally offset to an insignificant amount with foreign currency derivatives. Derivative instruments utilized by us in our hedging activities are viewed as risk management tools, involve little complexity and are not used for trading or speculative purposes. To minimize the risk of counter party non-performance, derivative instrument agreements are made only through major financial institutions with significant experience in such derivative instruments.

We evaluate our exposure to changes in currency exchange rates on our foreign currency derivatives using a sensitivity analysis. The sensitivity analysis is a measurement of the potential loss in fair value based on a percentage change in exchange rates. Based on the firmly committed currency derivative instruments in place at December 31, 2014, a hypothetical change in fair value of those derivative instruments assuming a 10% adverse change in exchange rates would result in an additional unrealized loss of approximately $3.9 million. This amount, when realized, would be partially offset by changes in the fair value of the underlying transactions.


43


Venezuela is treated as a highly inflationary economy under GAAP. As a result, the U.S. dollar is the functional currency for our consolidated joint venture in Venezuela. Any currency remeasurement adjustments for non-U.S. dollar denominated monetary assets and liabilities and other transactional foreign exchange gains and losses are reflected in earnings.

The Venezuelan government’s official exchange rate is currently 6.3 Venezuelan bolivars per U.S. dollar. The Venezuelan government re-instituted a secondary exchange rate (SICAD I rate) for select goods and services. The SICAD I rate was 12 bolivars per U.S. dollar at December 31, 2014. In March 2014, the Venezuelan government launched a SICAD II rate to provide a greater supply of U.S. dollar from sources other than the Venezuelan government. All companies located or domiciled in Venezuela may bid for U.S. dollar for any purpose. The SICAD II exchange rate was approximately 50 bolivars per U.S. dollar on December 31, 2014.

Given accelerated deterioration in economic conditions driven by a significant drop in the price of oil and no expectation of improvement for the foreseeable future, we concluded that the SICAD II exchange rate was the most appropriate rate at which to value bolivar denominated assets and liabilities. As a result, on December 31, 2014, we moved the exchange rate applied to bolivars from the official rate to the SICAD II rate. We recorded a charge of $45.4 million (before tax and non-controlling interest), or $0.28 per diluted share. The charge includes remeasurement of net monetary assets ($12.1 million) and a non-cash impairment charge to adjust Venezuelan inventory balances ($33.3 million). Had the SICAD II rate been applied throughout all of 2014, we estimate it would have reduced full-year revenues and EPS by approximately $95 million and $0.11 per share, respectively. After these charges, we had $4.6 million of bolivar-denominated net monetary assets and $8.9 million of inventory in Venezuela as of December 31, 2014.

On February 9, 2015, the Venezuelan government announced changes to its exchange rate system that included the launch of a new, market-based system called the Marginal Currency System, or “Simadi,” that will replace the SICAD II rate. The Company is currently evaluating this announcement. Adoption of the Simadi rate would result in additional charges to remeasure the net monetary assets and impair other assets.

Commodity Price Exposures

We are exposed to volatility in the prices of commodities used in some of our products and we use fixed price contracts to manage this exposure. We do not have committed commodity derivative instruments in place at December 31, 2014.

Interest Rate Exposure

Outstanding borrowings under our Senior Secured Credit Facilities accrue interest at variable rates and expose us to interest rate risks. A 100 basis point increase in LIBOR would have resulted in incremental 2014 interest expense of approximately $7.0 million, excluding the impact of our forward starting interest rate swaps. In June 2014, we entered into forward starting interest rate swaps for $300.0 million of our variable rate $975.0 million Term Loan Facilities. Swaps with notional amounts totaling $275.0 million become effective in January 2015 and expire in September 2017 and swaps with notional amounts totaling $25.0 million become effective in January 2015 and expire in December 2016. If the base interest rate in our credit facilities increases in the future then the floating-rate debt could have a material effect on our interest expense.


44


Item 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
(a)
The following Combined and Consolidated Financial Statements and Financial Statement Schedules and the report thereon of PricewaterhouseCoopers LLP dated February 27, 2015, are presented following Item 15 of this Annual Report on Form 10-K.
Combined and Consolidated Financial Statements:
Report of independent registered public accounting firm
Combined and consolidated statements of comprehensive income for the years ended December 31, 2014, 2013 and 2012
Consolidated balance sheets at December 31, 2014 and 2013
For the years ended December 31, 2014, 2013 and 2012:
Combined and consolidated statements of equity
Combined and consolidated statements of cash flows
Notes to Combined and Consolidated Financial Statements
Financial Statement Schedule:
Schedule II – Valuation and Qualifying Accounts for the years ended December 31, 2014, 2013 and 2012:
 
(b)
The unaudited selected quarterly financial data for the two years ended December 31, is as follows:

 
 
As adjusted for impact of change to FIFO
In millions, except per share amounts
 
2014
 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Net revenues
 
$
466.6

 
$
531.5

 
$
546.7

 
$
573.5

Cost of goods sold
 
274.4

 
305.5

 
310.1

 
374.6

Operating income
 
67.8

 
89.4

 
106.1

 
63.0

Net earnings
 
37.7

 
46.7

 
66.0

 
22.2

Net earnings attributable to Allegion plc
 
35.9

 
43.2

 
60.7

 
35.4

Earnings per share attributable to Allegion plc ordinary shareholders:
 
 
 
 
 
 
 
 
Basic
 
$
0.37

 
$
0.45

 
$
0.63

 
$
0.37

Diluted
 
$
0.37

 
$
0.44

 
$
0.63

 
$
0.37

 
 
 
 
 
 
 
 
 
 
 
As originally reported
In millions, except per share amounts
 
2014
 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Net revenues
 
$
466.6

 
$
531.5

 
$
546.7

 
$
573.5

Cost of goods sold
 
274.8

 
305.2

 
310.6

 
374.0

Operating income
 
67.4

 
89.7

 
105.6

 
63.6

Net earnings
 
37.4

 
47.0

 
65.6

 
22.9

Net earnings attributable to Allegion plc
 
35.6

 
43.5

 
60.3

 
35.9

Earnings per share attributable to Allegion plc ordinary shareholders:
 
 
 
 
 
 
 
 
Basic
 
$
0.37

 
$
0.45

 
$
0.63

 
$
0.37

Diluted
 
$
0.37

 
$
0.45

 
$
0.62

 
$
0.37

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

45


 
 
 
 
 
 
 
 
 
 
 
As adjusted for impact of change to FIFO
In millions, except per share amounts
 
2013
 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Net revenues
 
$
468.2

 
$
528.7

 
$
529.0

 
$
543.7

Cost of goods sold
 
281.8

 
310.6

 
289.6

 
326.1

Operating income
 
69.9

 
99.6

 
(20.4
)
 
91.7

Net earnings
 
41.4

 
62.1

 
(67.4
)
 
8.7

Net earnings attributable to Allegion plc
 
39.6

 
60.1

 
(77.5
)
 
10.1

Earnings per share attributable to Allegion plc ordinary shareholders:
 
 
 
 
 
 
 
 
Basic
 
$
0.41

 
$
0.63

 
$
(0.81
)
 
$
0.11

Diluted
 
$
0.41

 
$
0.63

 
$
(0.81
)
 
$
0.10

 
 
 
 
 
 
 
 
 
 
 
As originally reported
In millions, except per share amounts
 
2013
 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Net revenues
 
$
468.2

 
$
528.7

 
$
529.0

 
$
543.7

Cost of goods sold
 
282.2

 
310.2

 
290.6

 
327.3

Operating income
 
69.5

 
100.0

 
(21.4
)
 
90.5

Net earnings
 
41.0

 
62.5

 
(68.0
)
 
8.0

Net earnings attributable to Allegion plc
 
39.4

 
60.3

 
(78.1
)
 
9.4

Earnings per share attributable to Allegion plc ordinary shareholders:
 
 
 
 
 
 
 
 
Basic
 
$
0.41

 
$
0.63

 
$
(0.81
)
 
$
0.10

Diluted
 
$
0.41

 
$
0.63

 
$
(0.81
)
 
$
0.10

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

As discussed in Note 2 to our combined and consolidated financial statements, in the fourth quarter of 2014 we changed our method of inventory costing for certain inventory to the first-in first-out (FIFO) method from the last-in first-out (LIFO) method. We applied this change in method of inventory costing by retrospectively adjusting the prior period financial statements.
The 2013 information presented above reflects:

The $137.6 million non-cash pre-tax goodwill impairment charge of ($131.2 million after-tax) recorded in the third quarter.
The $21.5 million gain on a property sale in China recorded in the third quarter.
$44.8 million of discrete tax adjustments consisting of $31.5 million of expense related to valuation allowances on deferred tax assets that are no longer expected to be utilized and $13.3 million of net tax expense resulting primarily from transactions occurring to effect the Spin-off recorded in the fourth quarter.


46


Item 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.

Item 9A.    CONTROLS AND PROCEDURES
(a)
Evaluation of Disclosure Controls and Procedures

The Company's management, including its Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded as of December 31, 2014, that the Company's disclosure controls and procedures were effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act has been recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms, and that such information has been accumulated and communicated to the Company's management including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

(b)
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined under Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). We concluded that our internal control over financial reporting was effective as of December 31, 2014.

The effectiveness of our internal control over financial reporting has been audited by PricewaterhouseCoopers LLP, the independent registered public accounting firm, as stated in their report herein.

(c)
Changes in Internal Control Over Financial Reporting

There were no changes in the Company's internal control over financial reporting that occurred during the quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.    OTHER INFORMATION
None.

47


PART III
Item 10.     DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information regarding our executive officers is included in Part I under the caption “Executive Officers of Registrant.”
The other information required by this item is incorporated herein by reference to the information contained under the headings “Item 1. Election of Directors”, “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance” in Proxy Statement.

Item 11.     EXECUTIVE COMPENSATION
The other information required by this item is incorporated herein by reference to the information contained under the headings “Compensation Discussion and Analysis”, “Executive Compensation” and “Compensation Committee Report” in our Proxy Statement.

Item 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The other information required by this item is incorporated herein by reference to the information contained under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” of our Proxy Statement.

Item 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The other information required by this item is incorporated herein by reference to the information contained under the headings “Corporate Governance” and “Certain Relationships and Related Person Transactions” of our Proxy Statement.

Item 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to the information contained under the caption “Fees of the Independent Auditors” in our Proxy Statement.


48


PART IV
Item 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(a) 1. and 2.
Financial statements and financial statement schedule
See Item 8.
 
 
3.
Exhibits
 
The exhibits listed on the accompanying index to exhibits are filed as part of this Annual Report on Form 10-K.


49


ALLEGION PLC
INDEX TO EXHIBITS
(Item 15(a))
Description
Pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"), Allegion plc (the "Company") has filed certain agreements as exhibits to this Annual Report on Form 10-K. These agreements may contain representations and warranties by the parties. These representations and warranties have been made solely for the benefit of the other party or parties to such agreements and (i) may have been qualified by disclosures made to such other party or parties, (ii) were made only as of the date of such agreements or such other date(s) as may be specified in such agreements and are subject to more recent developments, which may not be fully reflected in our public disclosure, (iii) may reflect the allocation of risk among the parties to such agreements and (iv) may apply materiality standards different from what may be viewed as material to investors. Accordingly, these representations and warranties may not describe our actual state of affairs at the date hereof and should not be relied upon.
(a) Exhibits
 
Exhibit
Number
  
Exhibit Description
 
Method of Filing
 
 
 
 
2.1

  
Separation and Distribution Agreement between Ingersoll-Rand plc and Allegion plc, dated November 29, 2013.

 
Incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed with the SEC on December 2, 2013 (File No. 001-35971).
 
 
 
 
4.1

  
Amended and Restated Memorandum and Articles of Association of Allegion plc 

 
Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971).
 
 
 
 
4.2

 
Certificate of Incorporation of Allegion plc
 
Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971).
 
 
 
 
 
4.1

 
Indenture, dated as of October 4, 2013, among Allegion plc, Allegion US Holding Company Inc., the subsidiary guarantors party thereto and Wells Fargo Bank, National Association
 
Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971).
 
 
 
 
 
4.2

 
Exchange and Registration Rights Agreement, dated as of October 4, 2013, among Allegion plc, Allegion US Holding Company Inc., the subsidiary guarantors party thereto and the Representatives of the Initial Purchasers named therein
 
Incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971).
 
 
 
 
 
10.1

  
Tax Matters Agreement between Ingersoll-Rand plc and Allegion plc
 
Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on December 2, 2013 (File No. 001-35971).
 
 
 
 
10.2

  
Employee Matters Agreement between Ingersoll-Rand plc and Allegion plc
 
Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on December 2, 2013 (File No. 001-35971).
 
 
 
 
10.3

 
Guarantee and Collateral Agreement, among Allegion plc, Allegion US Holding Company Inc., the restricted subsidiaries from time to time party thereto and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent
 
Incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K/A filed with the SEC on December 3, 2013 (File No. 001-35971).
 
 
 
 
 
10.4

  
2013 Incentive Stock Plan
 
Incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971).
 
 
 
 

50


10.5

  
Executive Deferred Compensation Plan
 
Incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971).
 
 
 
 

51


10.6

 
Supplemental Employee Savings Plan
 
Incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971).
 
 
 
 
 
10.7

 
Elected Officer Supplemental Program
 
Incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971).
 
 
 
 
 
10.8

 
Key Management Supplemental Program
 
Incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971).
 
 
 
 
 
10.9

 
Supplemental Pension Plan
 
Incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971).
 
 
 
 
 
10.10

 
Senior Executive Performance Plan
 
Incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971).
 
 
 
 
 
10.11

 
David D. Petratis Offer Letter, dated June 19, 2013
 
Incorporated by reference to Exhibit 10.14 to the Company’s Registration Statement on Form 10 filed with the SEC on June 17, 2013, as amended (File No. 001-35971).
 
 
 
 
 
10.12