Allegion plc - Quarter Report: 2022 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-Q
_______________________________
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended March 31, 2022
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 Number 001-35971
_______________________________
ALLEGION PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
_______________________________
| Ireland | 98-1108930 | ||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
Block D
Iveagh Court
Harcourt Road
Dublin 2, D02 VH94, Ireland
(Address of principal executive offices, including zip code)
+(353) (1) 2546200
(Registrant’s telephone number, including area code)
_______________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol | Name of exchange on which registered | ||||||
| Ordinary shares, par value $0.01 per share | ALLE | New York Stock Exchange | ||||||
| 3.500% Senior Notes due 2029 | ALLE 3 ½ | New York Stock Exchange | ||||||
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 every Interactive Data File required to be submitted 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 such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||
| Emerging growth company | ☐ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of ordinary shares outstanding of Allegion plc as of April 21, 2022 was 87,804,920.
ALLEGION PLC
FORM 10-Q
INDEX
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PART I-FINANCIAL INFORMATION
Item 1 – Financial Statements
Allegion plc
Condensed and Consolidated Statements of Comprehensive Income
(Unaudited)
| Three months ended | |||||||||||
| March 31, | |||||||||||
| In millions, except per share amounts | 2022 | 2021 | |||||||||
| Net revenues | $ | 723.6 | $ | 694.3 | |||||||
| Cost of goods sold | 434.9 | 396.9 | |||||||||
| Selling and administrative expenses | 171.7 | 166.1 | |||||||||
| Operating income | 117.0 | 131.3 | |||||||||
| Interest expense | 11.9 | 12.3 | |||||||||
| Other income, net | (2.2) | (3.5) | |||||||||
| Earnings before income taxes | 107.3 | 122.5 | |||||||||
| Provision for income taxes | 14.2 | 14.3 | |||||||||
| Net earnings | 93.1 | 108.2 | |||||||||
| Less: Net earnings attributable to noncontrolling interests | 0.1 | 0.2 | |||||||||
| Net earnings attributable to Allegion plc | $ | 93.0 | $ | 108.0 | |||||||
| Earnings per share attributable to Allegion plc ordinary shareholders: | |||||||||||
| Basic net earnings | $ | 1.05 | $ | 1.19 | |||||||
| Diluted net earnings | $ | 1.05 | $ | 1.18 | |||||||
| Weighted-average shares outstanding: | |||||||||||
| Basic | 88.2 | 90.7 | |||||||||
| Diluted | 88.6 | 91.2 | |||||||||
| Total comprehensive income | $ | 72.1 | $ | 76.2 | |||||||
| Less: Total comprehensive income attributable to noncontrolling interests | 0.1 | 0.2 | |||||||||
| Total comprehensive income attributable to Allegion plc | $ | 72.0 | $ | 76.0 | |||||||
See accompanying notes to condensed and consolidated financial statements.
1
Allegion plc
Condensed and Consolidated Balance Sheets
(Unaudited)
| In millions, except share amounts | March 31, 2022 | December 31, 2021 | |||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 305.1 | $ | 397.9 | |||||||
| Accounts and notes receivable, net | 324.3 | 283.3 | |||||||||
| Inventories | 402.9 | 380.4 | |||||||||
| Other current assets | 45.0 | 56.0 | |||||||||
| Total current assets | 1,077.3 | 1,117.6 | |||||||||
| Property, plant and equipment, net | 280.8 | 283.7 | |||||||||
| Goodwill | 796.4 | 803.8 | |||||||||
| Intangible assets, net | 434.0 | 447.5 | |||||||||
| Other noncurrent assets | 419.1 | 398.4 | |||||||||
| Total assets | $ | 3,007.6 | $ | 3,051.0 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 258.4 | $ | 259.1 | |||||||
| Accrued expenses and other current liabilities | 310.5 | 329.5 | |||||||||
| Short-term borrowings and current maturities of long-term debt | 12.6 | 12.6 | |||||||||
| Total current liabilities | 581.5 | 601.2 | |||||||||
| Long-term debt | 1,426.8 | 1,429.5 | |||||||||
| Other noncurrent liabilities | 254.3 | 257.9 | |||||||||
| Total liabilities | 2,262.6 | 2,288.6 | |||||||||
| Equity: | |||||||||||
| Allegion plc shareholders’ equity: | |||||||||||
Ordinary shares, $0.01 par value (87,801,145 and 88,215,625 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively) | 0.9 | 0.9 | |||||||||
| Capital in excess of par value | — | — | |||||||||
| Retained earnings | 956.1 | 952.6 | |||||||||
| Accumulated other comprehensive loss | (215.4) | (194.4) | |||||||||
| Total Allegion plc shareholders’ equity | 741.6 | 759.1 | |||||||||
| Noncontrolling interests | 3.4 | 3.3 | |||||||||
| Total equity | 745.0 | 762.4 | |||||||||
| Total liabilities and equity | $ | 3,007.6 | $ | 3,051.0 | |||||||
See accompanying notes to condensed and consolidated financial statements.
2
Allegion plc
Condensed and Consolidated Statements of Cash Flows
(Unaudited)
| Three months ended | |||||||||||
| March 31, | |||||||||||
| In millions | 2022 | 2021 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net earnings | $ | 93.1 | $ | 108.2 | |||||||
| Adjustments to arrive at net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 20.4 | 21.4 | |||||||||
| Changes in assets and liabilities and other non-cash items | (93.0) | (17.8) | |||||||||
| Net cash provided by operating activities | 20.5 | 111.8 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | (8.7) | (6.3) | |||||||||
| Other investing activities, net | 2.4 | 1.7 | |||||||||
| Net cash used in investing activities | (6.3) | (4.6) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Debt repayments, net | (3.1) | — | |||||||||
| Dividends paid to ordinary shareholders | (35.8) | (32.5) | |||||||||
| Repurchase of ordinary shares | (61.0) | (149.7) | |||||||||
| Other financing activities, net | (5.0) | (5.0) | |||||||||
| Net cash used in financing activities | (104.9) | (187.2) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (2.1) | (6.1) | |||||||||
| Net decrease in cash and cash equivalents | (92.8) | (86.1) | |||||||||
| Cash and cash equivalents - beginning of period | 397.9 | 480.4 | |||||||||
| Cash and cash equivalents - end of period | $ | 305.1 | $ | 394.3 | |||||||
See accompanying notes to condensed and consolidated financial statements.
3
NOTE 1 - BASIS OF PRESENTATION
The accompanying Condensed and Consolidated Financial Statements of Allegion plc, an Irish public limited company, and its consolidated subsidiaries ("Allegion" or "the Company"), reflect the consolidated operations of the Company and have been prepared in accordance with United States ("U.S.") Securities and Exchange Commission ("SEC") interim reporting requirements. Accordingly, the accompanying Condensed and Consolidated Financial Statements do not include all disclosures required by accounting principles generally accepted in the United States of America ("GAAP") for full financial statements and should be read in conjunction with the Consolidated Financial Statements included in the Allegion Annual Report on Form 10-K for the year ended December 31, 2021. In the opinion of management, the accompanying Condensed and Consolidated Financial Statements contain all adjustments, which include normal recurring adjustments, necessary to state fairly the consolidated unaudited results for the interim periods presented.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements:
In October 2021, the FASB issued ASU No. 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers." This ASU requires contract assets and contract liabilities (e.g. deferred revenue) acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, "Revenue from Contracts with Customers". Generally, this new guidance will result in the acquirer recognizing contract assets and contract liabilities at the same amounts recorded by the acquiree. Historically, such amounts were recognized by the acquirer at fair value in purchase accounting. This ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including in interim periods, for any financial statements that have not yet been issued. The Company elected to early adopt ASU 2021-08 on January 1, 2022, and will apply this new guidance to all business combinations consummated subsequent to this date.
NOTE 3 - INVENTORIES
Inventories are stated at the lower of cost and net realizable value using the first-in, first-out (FIFO) method.
The major classes of inventories were as follows:
| In millions | March 31, 2022 | December 31, 2021 | |||||||||
| Raw materials | $ | 166.2 | $ | 144.4 | |||||||
| Work-in-process | 46.2 | 42.2 | |||||||||
| Finished goods | 190.5 | 193.8 | |||||||||
| Total | $ | 402.9 | $ | 380.4 | |||||||
NOTE 4 - GOODWILL
The changes in the carrying amount of goodwill for the three months ended March 31, 2022, were as follows:
| In millions | Allegion Americas | Allegion International | Total | ||||||||||||||
| December 31, 2021 (gross) | $ | 501.2 | $ | 876.2 | $ | 1,377.4 | |||||||||||
| Accumulated impairment | — | (573.6) | (573.6) | ||||||||||||||
| December 31, 2021 (net) | 501.2 | 302.6 | 803.8 | ||||||||||||||
| Currency translation | 0.1 | (7.5) | (7.4) | ||||||||||||||
| March 31, 2022 (net) | $ | 501.3 | $ | 295.1 | $ | 796.4 | |||||||||||
4
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 5 - INTANGIBLE ASSETS
The gross amount of the Company’s intangible assets and related accumulated amortization were as follows:
| March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||
| In millions | Gross carrying amount | Accumulated amortization | Net carrying amount | Gross carrying amount | Accumulated amortization | Net carrying amount | ||||||||||||||||||||||||||||||||
| Completed technologies/patents | $ | 57.2 | $ | (29.5) | $ | 27.7 | $ | 57.9 | $ | (28.8) | $ | 29.1 | ||||||||||||||||||||||||||
| Customer relationships | 389.4 | (143.7) | 245.7 | 395.9 | (141.6) | 254.3 | ||||||||||||||||||||||||||||||||
| Trade names (finite-lived) | 81.8 | (56.2) | 25.6 | 84.0 | (56.9) | 27.1 | ||||||||||||||||||||||||||||||||
| Other | 46.1 | (23.6) | 22.5 | 45.8 | (22.7) | 23.1 | ||||||||||||||||||||||||||||||||
| Total finite-lived intangible assets | 574.5 | $ | (253.0) | 321.5 | 583.6 | $ | (250.0) | 333.6 | ||||||||||||||||||||||||||||||
| Trade names (indefinite-lived) | 112.5 | 112.5 | 113.9 | 113.9 | ||||||||||||||||||||||||||||||||||
| Total | $ | 687.0 | $ | 434.0 | $ | 697.5 | $ | 447.5 | ||||||||||||||||||||||||||||||
Intangible asset amortization expense was $8.2 million and $8.1 million for the three months ended March 31, 2022 and 2021, respectively. Future estimated amortization expense on existing intangible assets in each of the next five years amounts to approximately $32.2 million for full year 2022, $31.8 million for 2023, $31.5 million for 2024, $30.1 million for 2025 and $26.8 million for 2026.
NOTE 6 - DEBT AND CREDIT FACILITIES
Long-term debt and other borrowings consisted of the following:
| In millions | March 31, 2022 | December 31, 2021 | |||||||||
| 2021 Term Facility | $ | 246.9 | $ | 250.0 | |||||||
| 2021 Revolving Facility | — | — | |||||||||
3.200% Senior Notes due 2024 | 400.0 | 400.0 | |||||||||
3.550% Senior Notes due 2027 | 400.0 | 400.0 | |||||||||
3.500% Senior Notes due 2029 | 400.0 | 400.0 | |||||||||
| Other debt | 0.3 | 0.3 | |||||||||
| Total borrowings outstanding | 1,447.2 | 1,450.3 | |||||||||
| Discounts and debt issuance costs, net | (7.8) | (8.2) | |||||||||
| Total debt | 1,439.4 | 1,442.1 | |||||||||
| Less current portion of long-term debt | 12.6 | 12.6 | |||||||||
| Total long-term debt | $ | 1,426.8 | $ | 1,429.5 | |||||||
Unsecured Credit Facilities
As of March 31, 2022, the Company has an unsecured Credit Agreement in place, consisting of a $250.0 million term loan facility (the “2021 Term Facility”), of which $246.9 million was outstanding at March 31, 2022, and a $500.0 million revolving credit facility (the “2021 Revolving Facility” and, together with the 2021 Term Facility, the “2021 Credit Facilities”). The 2021 Credit Facilities mature on November 18, 2026, and are unconditionally guaranteed jointly and severally on an unsecured basis by the Company and Allegion US Holding Company Inc. ("Allegion US Hold Co"), the Company’s wholly-owned subsidiary. The 2021 Term Facility will amortize in quarterly installments at the following rates: 1.25% per quarter starting March 31, 2022 through March 31, 2025, 2.5% per quarter starting June 30, 2025 through September 30, 2026, with the balance due on November 18, 2026. The Company repaid $3.1 million of principal on its 2021 Term Facility during the three months ended March 31, 2022.
The 2021 Revolving Facility provides aggregate commitments of up to $500.0 million, which includes up to $100.0 million for the issuance of letters of credit. At March 31, 2022, there were no borrowings outstanding on the 2021 Revolving Facility, and the Company had $7.5 million of letters of credit outstanding. Commitments under the 2021 Revolving Facility may be reduced at any time without premium or penalty, and amounts repaid may be reborrowed.
Outstanding borrowings under the 2021 Credit Facilities accrue interest, at the option of the Company, of (i) a Bloomberg Short-Term Bank Yield Index ("BSBY") rate plus the applicable margin or (ii) a base rate plus the applicable margin. The
5
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
applicable margin ranges from 0.875% to 1.375% depending on the Company’s credit ratings. At March 31, 2022, the Company's outstanding borrowings under the 2021 Credit Facilities accrue interest at BSBY plus a margin of 1.125%, resulting in an interest rate of 1.493%. The 2021 Credit Facilities also contain negative and affirmative covenants and events of default that, among other things, limit or restrict the Company’s ability to enter into certain transactions. In addition, the 2021 Credit Facilities require the Company to comply with a maximum leverage ratio as defined within the agreement. As of March 31, 2022, the Company was in compliance with all covenants.
Senior Notes
As of March 31, 2022, Allegion US Hold Co has $400.0 million outstanding of its 3.200% Senior Notes due 2024 (the “3.200% Senior Notes”) and $400.0 million outstanding of its 3.550% Senior Notes due 2027 (the “3.550% Senior Notes”), while Allegion plc has $400.0 million outstanding of its 3.500% Senior Notes due 2029 (the “3.500% Senior Notes”). The 3.200% Senior Notes, 3.550% Senior Notes and 3.500% Senior Notes (collectively, the "Senior Notes") all require semi-annual interest payments on April 1 and October 1 of each year and will mature on October 1, 2024, October 1, 2027, and October 1, 2029, respectively. The 3.200% Senior Notes and the 3.550% Senior Notes are senior unsecured obligations of Allegion US Hold Co and rank equally with all of Allegion US Hold Co’s existing and future senior unsecured and unsubordinated indebtedness. The guarantee of the 3.200% Senior Notes and the 3.550% Senior Notes is the senior unsecured obligation of the Company and ranks equally with all of the Company’s existing and future senior unsecured and unsubordinated indebtedness. The 3.500% Senior Notes are senior unsecured obligations of Allegion plc, are guaranteed by Allegion US Hold Co and rank equally with all of the Company’s existing and future senior unsecured indebtedness.
NOTE 7 - FINANCIAL INSTRUMENTS
Currency Hedging Instruments
The gross notional amount of the Company’s currency derivatives was $169.7 million and $164.9 million at March 31, 2022 and December 31, 2021, respectively. Neither the fair values of currency derivatives, which are determined based on a pricing model that uses spot rates and forward prices from actively quoted currency markets that are readily observable, nor the balances included in Accumulated other comprehensive loss were material as of March 31, 2022 and December 31, 2021. Currency derivatives designated as cash flow hedges did not have a material impact to either Net earnings or Other comprehensive income (loss) during the three months ended March 31, 2022 and 2021, nor is the amount to be reclassified into Net earnings over the next twelve months expected to be material, although the actual amounts that will be reclassified to Net earnings may vary as a result of future changes in market conditions. At March 31, 2022, the maximum term of the Company’s currency derivatives, both those that are designated as cash flow hedges and those that are not, was less than one year.
Concentration of Credit Risk
The counterparties to the Company’s forward contracts consist of a number of investment grade major international financial institutions. The Company could be exposed to losses in the event of nonperformance by the counterparties. However, the credit ratings and the concentration of risk in these financial institutions are monitored on a continuous basis and present no significant credit risk to the Company.
NOTE 8 - LEASES
Total rental expense for the three months ended March 31, 2022 and 2021, was $10.7 million and $11.1 million, respectively, and is classified within Cost of goods sold and Selling and administrative expenses within the Condensed and Consolidated Statements of Comprehensive Income. Rental expense related to short-term leases, variable lease payments or other leases or lease components not included within the ROU asset or lease liability totaled $1.6 million and $2.0 million, respectively, for the three months ended March 31, 2022 and 2021. No material lease costs have been capitalized on the Condensed and Consolidated Balance Sheets as of March 31, 2022 or December 31, 2021.
As a lessee, the Company categorizes its leases into two general categories: real estate leases and equipment leases.
6
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Amounts included within the Condensed and Consolidated Balance Sheets related to the Company’s ROU asset and lease liability were as follows:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||
| In millions | Balance Sheet classification | Real estate | Equipment | Total | Real estate | Equipment | Total | ||||||||||||||||||||||||||||||||||
| ROU asset | Other noncurrent assets | $ | 71.1 | $ | 29.8 | $ | 100.9 | $ | 58.2 | $ | 31.7 | $ | 89.9 | ||||||||||||||||||||||||||||
| Lease liability - current | Accrued expenses and other current liabilities | 15.9 | 13.2 | 29.1 | 15.5 | 13.6 | 29.1 | ||||||||||||||||||||||||||||||||||
| Lease liability - noncurrent | Other noncurrent liabilities | 57.7 | 16.6 | 74.3 | 45.1 | 18.2 | 63.3 | ||||||||||||||||||||||||||||||||||
| Other information: | |||||||||||||||||||||||||||||||||||||||||
| Weighted-average remaining term (years) | 6.4 | 2.7 | 6.5 | 2.8 | |||||||||||||||||||||||||||||||||||||
| Weighted-average discount rate | 3.2 | % | 2.0 | % | 3.4 | % | 2.1 | % | |||||||||||||||||||||||||||||||||
The following table summarizes additional information related to the Company’s leases for the three months ended March 31:
| 2022 | 2021 | |||||||||||||||||||||||||||||||||||||
| In millions | Real estate | Equipment | Total | Real estate | Equipment | Total | ||||||||||||||||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | 4.9 | $ | 4.2 | $ | 9.1 | $ | 4.9 | $ | 4.2 | $ | 9.1 | ||||||||||||||||||||||||||
| ROU assets obtained in exchange for new lease liabilities | 18.8 | 1.4 | 20.2 | 3.0 | 2.4 | 5.4 | ||||||||||||||||||||||||||||||||
The Company frequently enters into both real estate and equipment leases in the normal course of business. While there have been lease agreements entered into that have not yet commenced as of March 31, 2022, none of these leases provide new rights or obligations to the Company that are material individually or in the aggregate.
Future Repayments
Scheduled minimum lease payments required under non-cancellable operating leases for both the real estate and equipment lease portfolios for the remainder of 2022 and for each of the years thereafter as of March 31, 2022, are as follows:
| In millions | Remainder of 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | |||||||||||||||||||||||||||||||||||||
| Real estate leases | $ | 13.5 | $ | 16.6 | $ | 13.1 | $ | 11.3 | $ | 8.3 | $ | 19.5 | $ | 82.3 | ||||||||||||||||||||||||||||||
| Equipment leases | 10.6 | 10.4 | 6.3 | 2.8 | 0.4 | 0.1 | 30.6 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 24.1 | $ | 27.0 | $ | 19.4 | $ | 14.1 | $ | 8.7 | $ | 19.6 | $ | 112.9 | ||||||||||||||||||||||||||||||
The difference between the total undiscounted minimum lease payments and the combined current and noncurrent lease liabilities as of March 31, 2022, is due to imputed interest of $9.5 million.
NOTE 9 - DEFINED BENEFIT PLANS
The Company sponsors several U.S. and non-U.S. defined benefit pension plans to eligible employees and retirees. The noncontributory defined benefit pension plans covering non-collectively bargained U.S. employees provide benefits on an average pay formula while most plans for collectively bargained U.S. employees provide benefits on a flat dollar benefit formula. The non-U.S. pension plans generally provide benefits based on earnings and years of service. The Company also maintains other supplemental plans for officers and other key employees.
7
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The components of the Company’s Net periodic pension benefit cost (income) for the three months ended March 31 were as follows:
| U.S. | |||||||||||
| In millions | 2022 | 2021 | |||||||||
| Service cost | $ | 1.5 | $ | 1.7 | |||||||
| Interest cost | 2.0 | 1.7 | |||||||||
| Expected return on plan assets | (3.4) | (3.5) | |||||||||
| Administrative costs and other | 0.3 | 0.3 | |||||||||
| Net amortization of: | |||||||||||
| Prior service costs | — | 0.1 | |||||||||
| Plan net actuarial losses | 0.3 | 0.9 | |||||||||
| Net periodic pension benefit cost | $ | 0.7 | $ | 1.2 | |||||||
| Non-U.S. | |||||||||||
| In millions | 2022 | 2021 | |||||||||
| Service cost | $ | 0.3 | $ | 0.6 | |||||||
| Interest cost | 1.8 | 1.3 | |||||||||
| Expected return on plan assets | (3.9) | (3.5) | |||||||||
| Administrative costs and other | 0.5 | 0.5 | |||||||||
| Net amortization of: | |||||||||||
| Plan net actuarial losses | 0.2 | 0.4 | |||||||||
| Net periodic pension benefit income | $ | (1.1) | $ | (0.7) | |||||||
Service cost is recorded in Cost of goods sold and Selling and administrative expenses, while the remaining components of Net periodic pension benefit cost (income) are recorded in Other income, net within the Condensed and Consolidated Statements of Comprehensive Income. Employer contributions were not material during the three months ended March 31, 2022 and 2021. Contributions of approximately $5 million are expected during the remainder of 2022.
NOTE 10 - FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurements are based on a framework that utilizes the inputs market participants use to determine the fair value of an asset or liability and establishes a fair value hierarchy to prioritize those inputs. The fair value hierarchy is comprised of three levels that are described below:
•Level 1 – Inputs based on quoted prices in active markets for identical assets or liabilities.
•Level 2 – Inputs other than Level 1 quoted prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
•Level 3 – Unobservable inputs based on little or no market activity and that are significant to the fair value of the assets and liabilities.
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability based on the best information available under the circumstances. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
8
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Assets and liabilities measured at fair value at March 31, 2022, were as follows:
| Fair value measurements | Total fair value | ||||||||||||||||||||||
| In millions | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||||||||||
| Recurring fair value measurements | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Investments | $ | — | $ | 22.5 | $ | — | $ | 22.5 | |||||||||||||||
| Total asset recurring fair value measurements | $ | — | $ | 22.5 | $ | — | $ | 22.5 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Deferred compensation and other retirement plans | $ | — | $ | 22.7 | $ | — | $ | 22.7 | |||||||||||||||
| Total liability recurring fair value measurements | $ | — | $ | 22.7 | $ | — | $ | 22.7 | |||||||||||||||
| Financial instruments not carried at fair value | |||||||||||||||||||||||
| Total debt | $ | — | $ | 1,418.6 | $ | — | $ | 1,418.6 | |||||||||||||||
| Total financial instruments not carried at fair value | $ | — | $ | 1,418.6 | $ | — | $ | 1,418.6 | |||||||||||||||
Assets and liabilities measured at fair value at December 31, 2021, were as follows:
| Fair value measurements | Total fair value | ||||||||||||||||||||||
| In millions | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||||||||||
| Recurring fair value measurements | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Investments | $ | — | $ | 24.5 | $ | — | $ | 24.5 | |||||||||||||||
| Total asset recurring fair value measurements | $ | — | $ | 24.5 | $ | — | $ | 24.5 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Deferred compensation and other retirement plans | $ | — | $ | 25.9 | $ | — | $ | 25.9 | |||||||||||||||
| Total liability recurring fair value measurements | $ | — | $ | 25.9 | $ | — | $ | 25.9 | |||||||||||||||
| Financial instruments not carried at fair value | |||||||||||||||||||||||
| Total debt | $ | — | $ | 1,510.4 | $ | — | $ | 1,510.4 | |||||||||||||||
| Total financial instruments not carried at fair value | $ | — | $ | 1,510.4 | $ | — | $ | 1,510.4 | |||||||||||||||
The Company determines the fair value of its financial assets and liabilities using the following methodologies:
•Investments – These instruments include equity mutual funds and corporate bond funds. The fair value is obtained based on observable market prices quoted on public exchanges for similar instruments.
•Deferred compensation and other retirement plans – These include obligations related to deferred compensation and other retirement plans adjusted for market performance. The fair value is obtained based on observable market prices quoted on public exchanges for similar instruments.
•Debt – These instruments are recorded at cost and include senior notes maturing through 2029. The fair value of these debt instruments is obtained based on observable market prices quoted on public exchanges for similar instruments.
The methodologies used by the Company to determine the fair value of its financial assets and liabilities at March 31, 2022, are the same as those used at December 31, 2021. The carrying values of Cash and cash equivalents, Accounts and notes receivable, net, Accounts payable and Accrued expenses and other current liabilities are a reasonable estimate of their fair value due to the short-term nature of these instruments.
The Company also had investments in debt and equity securities without readily determinable fair values of $35.8 million as of both March 31, 2022 and December 31, 2021, which are classified as Other noncurrent assets within the Condensed and Consolidated Balance Sheets. These investments are considered to be nonrecurring fair value measurements, and thus, are not included in the fair value tables above.
9
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 11 - EQUITY
The changes in the components of Equity for the three months ended March 31, 2022, were as follows:
| Allegion plc shareholders' equity | |||||||||||||||||||||||||||||||||||||||||
| Ordinary shares | |||||||||||||||||||||||||||||||||||||||||
| In millions, except per share amounts | Total equity | Amount | Shares | Capital in excess of par value | Retained earnings | Accumulated other comprehensive loss | Noncontrolling interests | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | 762.4 | $ | 0.9 | 88.2 | $ | — | $ | 952.6 | $ | (194.4) | $ | 3.3 | ||||||||||||||||||||||||||||
| Net earnings | 93.1 | — | — | — | 93.0 | — | 0.1 | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net | (21.0) | — | — | — | — | (21.0) | — | ||||||||||||||||||||||||||||||||||
| Repurchase of ordinary shares | (61.0) | — | (0.5) | (7.5) | (53.5) | — | — | ||||||||||||||||||||||||||||||||||
| Share-based compensation activity | 7.5 | — | 0.1 | 7.5 | — | — | — | ||||||||||||||||||||||||||||||||||
Dividends to ordinary shareholders ($0.41 per share) | (36.0) | — | — | — | (36.0) | — | — | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | 745.0 | $ | 0.9 | 87.8 | $ | — | $ | 956.1 | $ | (215.4) | $ | 3.4 | ||||||||||||||||||||||||||||
The changes in the components of Equity for the three months ended March 31, 2021, were as follows:
| Allegion plc shareholders' equity | |||||||||||||||||||||||||||||||||||||||||
| Ordinary shares | |||||||||||||||||||||||||||||||||||||||||
| In millions, except per share amounts | Total equity | Amount | Shares | Capital in excess of par value | Retained earnings | Accumulated other comprehensive loss | Noncontrolling interests | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 832.6 | $ | 0.9 | 91.2 | $ | — | $ | 985.6 | $ | (157.1) | $ | 3.2 | ||||||||||||||||||||||||||||
| Net earnings | 108.2 | — | — | — | 108.0 | — | 0.2 | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net | (32.0) | — | — | — | — | (32.0) | — | ||||||||||||||||||||||||||||||||||
| Repurchase of ordinary shares | (149.7) | — | (1.3) | (4.4) | (145.3) | — | — | ||||||||||||||||||||||||||||||||||
| Share-based compensation activity | 4.4 | — | 0.1 | 4.4 | — | — | — | ||||||||||||||||||||||||||||||||||
Dividends to ordinary shareholders ($0.36 per share) | (32.5) | — | — | — | (32.5) | — | — | ||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | 0.1 | — | (0.1) | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | 731.0 | $ | 0.9 | 90.0 | $ | — | $ | 915.9 | $ | (189.1) | $ | 3.3 | ||||||||||||||||||||||||||||
In February 2020, the Company’s Board of Directors approved a share repurchase authorization of up to, and including, $800 million of the Company’s ordinary shares (the "2020 Share Repurchase Authorization"). During the three months ended March 31, 2022 and 2021, the Company paid $61.0 million and $149.7 million, respectively, to repurchase the ordinary shares reflected in the tables above on the open market under the 2020 Share Repurchase Authorization. As of March 31, 2022, the Company has approximately $140.5 million still available to be repurchased under the 2020 Share Repurchase Authorization.
Accumulated Other Comprehensive Loss
The changes in Accumulated other comprehensive loss for the three months ended March 31, 2022, were as follows:
| In millions | Cash flow hedges | Pension and OPEB items | Foreign currency items | Total | ||||||||||||||||||||||
| December 31, 2021 | $ | 0.9 | $ | (96.0) | $ | (99.3) | $ | (194.4) | ||||||||||||||||||
| Other comprehensive (loss) income before reclassifications | (0.3) | 2.3 | (22.5) | (20.5) | ||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss(a) | (0.4) | (0.4) | — | (0.8) | ||||||||||||||||||||||
| Tax benefit | 0.2 | 0.1 | — | 0.3 | ||||||||||||||||||||||
| March 31, 2022 | $ | 0.4 | $ | (94.0) | $ | (121.8) | $ | (215.4) | ||||||||||||||||||
10
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The changes in Accumulated other comprehensive loss for the three months ended March 31, 2021, were as follows:
| In millions | Cash flow hedges | Pension and OPEB items | Foreign currency items | Total | ||||||||||||||||||||||
| December 31, 2020 | $ | (0.9) | $ | (120.3) | $ | (35.9) | $ | (157.1) | ||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | 0.7 | (0.1) | (33.3) | (32.7) | ||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss(a) | (0.3) | 1.2 | — | 0.9 | ||||||||||||||||||||||
| Tax expense | (0.1) | (0.1) | — | (0.2) | ||||||||||||||||||||||
| March 31, 2021 | $ | (0.6) | $ | (119.3) | $ | (69.2) | $ | (189.1) | ||||||||||||||||||
(a) Amounts reclassified from Accumulated other comprehensive loss and recognized into Net earnings related to cash flow hedges are recorded in Cost of goods sold and Interest expense. Amounts reclassified from Accumulated other comprehensive loss and recognized into Net earnings related to pension and postretirement benefits other than pensions ("OPEB") items are recorded in Other income, net.
NOTE 12 - SHARE-BASED COMPENSATION
The Company’s share-based compensation plans include programs for stock options, restricted stock units ("RSUs"), performance stock units ("PSUs") and deferred compensation. Share-based compensation expense is included in Cost of goods sold and Selling and administrative expenses within the Condensed and Consolidated Statements of Comprehensive Income. The following table summarizes the expenses recognized for the three months ended March 31:
| In millions | 2022 | 2021 | |||||||||
| Stock options | $ | 2.9 | $ | 2.8 | |||||||
| RSUs | 7.3 | 5.6 | |||||||||
| PSUs | 1.6 | 1.3 | |||||||||
| Deferred compensation | (1.1) | 0.4 | |||||||||
| Pre-tax expense | 10.7 | 10.1 | |||||||||
| Tax benefit | (0.9) | (1.1) | |||||||||
| After-tax expense | $ | 9.8 | $ | 9.0 | |||||||
Stock Options / RSUs
Eligible participants may receive (i) stock options, (ii) RSUs or (iii) a combination of both stock options and RSUs. Grants issued during the three months ended March 31 were as follows:
| 2022 | 2021 | ||||||||||||||||||||||
| Number granted | Weighted- average fair value per award | Number granted | Weighted- average fair value per award | ||||||||||||||||||||
| Stock options | 157,880 | $ | 28.59 | 179,743 | $ | 24.99 | |||||||||||||||||
| RSUs | 101,609 | $ | 115.33 | 117,864 | $ | 109.49 | |||||||||||||||||
The average fair value of the stock options granted is determined using the Black-Scholes option-pricing model. The following assumptions were used during the three months ended March 31:
| 2022 | 2021 | ||||||||||
| Dividend yield | 1.42 | % | 1.32 | % | |||||||
| Volatility | 27.05 | % | 27.14 | % | |||||||
| Risk-free rate of return | 1.89 | % | 0.75 | % | |||||||
| Expected life (years) | 6.0 | 6.0 | |||||||||
Volatility is based on the Company’s historic volatility. The risk-free rate of return is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the award is granted with a maturity equal to the expected term of the award. The expected life of the Company’s stock option awards is derived from the simplified approach based on the weighted-average time to vest and the remaining contractual term and represents the period of time that awards are expected to be outstanding.
11
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Performance Stock
During the three months ended March 31, 2022, the Company granted PSUs with a maximum award level of approximately 0.1 million shares. In February 2020, 2021 and 2022, the Company’s Compensation Committee granted PSUs that were earned based 50% upon a performance condition, measured at each reporting period by earnings per share ("EPS") performance in relation to pre-established targets set by the Compensation Committee, and 50% upon a market condition, measured by the Company’s relative total shareholder return against the S&P 400 Capital Goods Index over a three-year performance period. The fair values of the market conditions are estimated using a Monte Carlo Simulation approach in a risk-neutral framework to model future stock price movements based upon historical volatility, risk-free rates of return and correlation matrix.
Deferred Compensation
Prior to 2019, the Company allowed key employees to defer a portion of their eligible granted PSUs and/or compensation into a number of investment choices including its ordinary share equivalents. Any amounts invested in ordinary share equivalents will be settled in ordinary shares of the Company at the time of distribution.
NOTE 13 - RESTRUCTURING ACTIVITIES
During the three months ended March 31, 2022 and 2021, the Company recorded $0.2 million and $2.7 million, respectively, of expenses associated with restructuring activities, which are included within Cost of goods sold and Selling and administrative expenses within the Condensed and Consolidated Statements of Comprehensive Income.
The changes in the restructuring reserve during the three months ended March 31, 2022, were as follows:
| In millions | Total | ||||
| December 31, 2021 | $ | 0.4 | |||
| Additions, net of reversals | 0.2 | ||||
| Cash payments | (0.5) | ||||
| March 31, 2022 | $ | 0.1 | |||
The Company also incurred other non-qualified restructuring charges of $0.5 million during the three months ended March 31, 2022, which represent costs that are directly attributable to restructuring activities, but that do not fall into the severance, exit or disposal category. These expenses are included in Cost of goods sold within the Condensed and Consolidated Statements of Comprehensive Income.
NOTE 14 - OTHER INCOME, NET
The components of Other income, net for the three months ended March 31 were as follows:
| In millions | 2022 | 2021 | |||||||||
| Interest income | $ | (0.1) | $ | — | |||||||
| Foreign currency exchange loss | 1.0 | 0.4 | |||||||||
| (Earnings) losses from equity method investments, net | (0.1) | 0.7 | |||||||||
| Net periodic pension and postretirement benefit income, less service cost | (2.6) | (1.9) | |||||||||
| Other | (0.4) | (2.7) | |||||||||
| Other income, net | $ | (2.2) | $ | (3.5) | |||||||
NOTE 15 - INCOME TAXES
The effective income tax rates for the three months ended March 31, 2022 and 2021, were 13.2% and 11.7%, respectively. The increase in the effective tax rate compared to 2021 is primarily due to the unfavorable mix of income earned in higher tax rate jurisdictions, which is partially offset by the favorable year-over-year change in the amounts recognized for uncertain tax positions.
NOTE 16 - EARNINGS PER SHARE (EPS)
Basic EPS is calculated by dividing Net earnings attributable to Allegion plc by the weighted-average number of ordinary shares outstanding for the applicable period. Diluted EPS is calculated after adjusting the denominator of the basic EPS
12
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
calculation for the effect of all potentially dilutive ordinary shares, which in the Company’s case, includes shares issuable under share-based compensation plans.
The following table summarizes the weighted-average number of ordinary shares outstanding for basic and diluted EPS calculations for the three months ended March 31:
| In millions | 2022 | 2021 | |||||||||
| Weighted-average number of basic shares | 88.2 | 90.7 | |||||||||
| Shares issuable under share-based compensation plans | 0.4 | 0.5 | |||||||||
| Weighted-average number of diluted shares | 88.6 | 91.2 | |||||||||
At March 31, 2022, 0.3 million stock options were excluded from the computation of weighted-average diluted shares outstanding because the effect of including these shares would have been anti-dilutive.
NOTE 17 - NET REVENUES
The following tables show the Company’s Net revenues related to both tangible product sales and services for the three months ended March 31, 2022 and 2021, respectively, disaggregated by business segment. Net revenues are shown by tangible product sales and services, as contract terms, conditions and economic factors affecting the nature, amount, timing and uncertainty around revenue recognition and cash flows are substantially similar within each of these two principal revenue streams:
| Three months ended March 31, 2022 | |||||||||||||||||
| In millions | Allegion Americas | Allegion International | Consolidated | ||||||||||||||
| Net revenues | |||||||||||||||||
| Products | $ | 527.7 | $ | 188.8 | $ | 716.5 | |||||||||||
| Services | 0.5 | 6.6 | 7.1 | ||||||||||||||
| Total Net revenues | $ | 528.2 | $ | 195.4 | $ | 723.6 | |||||||||||
| Three months ended March 31, 2021 | |||||||||||||||||
| In millions | Allegion Americas | Allegion International | Consolidated | ||||||||||||||
| Net revenues | |||||||||||||||||
| Products | $ | 498.2 | $ | 189.1 | $ | 687.3 | |||||||||||
| Services | 0.7 | 6.3 | 7.0 | ||||||||||||||
| Total Net revenues | $ | 498.9 | $ | 195.4 | $ | 694.3 | |||||||||||
As of March 31, 2022, neither the contract assets related to the Company’s right to consideration for work completed but not billed, nor the contract liabilities associated with contract revenue were material. The Company does not have any costs to obtain or fulfill a contract that are capitalized on its Condensed and Consolidated Balance Sheets. During the three months ended March 31, 2022 and 2021, no adjustments related to performance obligations satisfied in previous periods were recorded.
NOTE 18 - BUSINESS SEGMENT INFORMATION
The Company classifies its business into the following two reportable segments based on industry and market focus: Allegion Americas and Allegion International. The Company largely evaluates performance based on Segment operating income and Segment operating margins. Segment operating income is the measure of profit and loss that the Company’s chief operating decision maker uses to evaluate the financial performance of the business and as the basis for resource allocation, performance reviews and compensation. For these reasons, the Company believes that Segment operating income represents the most relevant measure of segment profit and loss. The Company’s chief operating decision maker may exclude certain charges or gains, such as corporate charges and other special charges, from Operating income to arrive at a Segment operating income that is a more meaningful measure of profit and loss upon which to base operating decisions. The Company defines Segment operating margin as Segment operating income as a percentage of the segment’s Net revenues.
13
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
A summary of operations by reportable segment for the three months ended March 31 was as follows:
| In millions | 2022 | 2021 | |||||||||
| Net revenues | |||||||||||
| Allegion Americas | $ | 528.2 | $ | 498.9 | |||||||
| Allegion International | 195.4 | 195.4 | |||||||||
| Total | $ | 723.6 | $ | 694.3 | |||||||
| Segment operating income | |||||||||||
| Allegion Americas | $ | 123.9 | $ | 135.4 | |||||||
| Allegion International | 19.6 | 15.4 | |||||||||
| Total | 143.5 | 150.8 | |||||||||
| Reconciliation to Operating income | |||||||||||
| Unallocated corporate expense | (26.5) | (19.5) | |||||||||
| Operating income | 117.0 | 131.3 | |||||||||
| Reconciliation to earnings before income taxes | |||||||||||
| Interest expense | 11.9 | 12.3 | |||||||||
| Other income, net | (2.2) | (3.5) | |||||||||
| Earnings before income taxes | $ | 107.3 | $ | 122.5 | |||||||
NOTE 19 - COMMITMENTS AND CONTINGENCIES
The Company is involved in various litigation, claims and administrative proceedings, including those related to environmental and product warranty matters. Amounts recorded for identified contingent liabilities are estimates, which are reviewed periodically and adjusted to reflect additional information when it becomes available. Subject to the uncertainties inherent in estimating future costs for contingent liabilities, except as expressly set forth in this note, management believes that any liability which may result from these legal matters would not have a material adverse effect on the financial condition, results of operations, liquidity or cash flows of the Company.
Environmental Matters
As of March 31, 2022 and December 31, 2021, the Company has recorded reserves for environmental matters of $15.4 million and $16.4 million, respectively. The total reserve at March 31, 2022 and December 31, 2021, included $3.6 million and $4.3 million, respectively, related to remediation of sites previously disposed by the Company. Environmental reserves are classified as Accrued expenses and other current liabilities or Other noncurrent liabilities within the Condensed and Consolidated Balance Sheets based on the timing of their expected future payment. The Company’s total current environmental reserve at March 31, 2022 and December 31, 2021, was $3.1 million and $3.7 million, respectively, and the remainder is classified as noncurrent. Expenses related to environmental remediation were not material during either the three months ended March 31, 2022 or 2021. Given the evolving nature of environmental laws, regulations and technology, the ultimate cost of future compliance is uncertain.
Warranty Liability
The changes in the standard product warranty liability for the three months ended March 31 were as follows:
| In millions | 2022 | 2021 | |||||||||
| Balance at beginning of period | $ | 17.7 | $ | 16.5 | |||||||
| Reductions for payments | (2.4) | (1.8) | |||||||||
| Accruals for warranties issued during the current period | 3.1 | 3.5 | |||||||||
| Changes to accruals related to preexisting warranties | — | (0.1) | |||||||||
| Currency translation | (0.1) | (0.1) | |||||||||
| Balance at end of period | $ | 18.3 | $ | 18.0 | |||||||
Standard product warranty liabilities are classified as either Accrued expenses and other current liabilities or Other noncurrent liabilities within the Condensed and Consolidated Balance Sheets based on the timing of the expected future payments.
14
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 20 - SUBSEQUENT EVENTS
Dividend Declaration
On April 7, 2022, the Company's Board of Directors declared a quarterly dividend of $0.41 per ordinary share. The dividend is payable June 30, 2022, to shareholders of record on June 16, 2022.
Acquisition Agreement
On April 22, 2022, the Company signed a definitive agreement to acquire Stanley Access Technologies LLC ("Access Technologies") and assets related to the automatic entrance solutions business from Stanley Black & Decker, Inc. for $900 million in cash. Access Technologies is a leading manufacturer, installer and service provider of automatic doors in the U.S. and Canada. Its diversified customer base centers on non-residential settings, including retail, healthcare, education, commercial offices, hospitality and government. Access Technologies generated approximately $340 million in Net revenues in 2021.
The planned acquisition will create a more comprehensive portfolio of access solutions, with the addition of automated entrances. Additionally, Access Technologies will add an expansive service and support network throughout the U.S. and Canada, broadening the Company's solutions to better serve a breadth of national, regional and local customers, and complementing the Company's existing strengths in these non-residential markets. The acquisition will help progress the Company's strategy to create value "by securing people and assets with seamless access wherever they reside, work and thrive." Access Technologies is expected to be integrated into the Allegion Americas segment.
The Company intends to finance the transaction through a combination of cash, borrowings under its existing 2021 Revolving Facility and new debt financing. The Company has obtained fully committed financing, and the anticipated acquisition is not subject to a financing condition. The acquisition is expected to close in the third quarter of 2022, subject to regulatory approval and customary closing conditions.
15
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that may cause a difference include, but are not limited to, those discussed under Part I, Item 1A – Risk Factors in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021. The following section is qualified in its entirety by the more detailed information, including our Condensed and Consolidated Financial Statements and the notes thereto, which appears elsewhere in this Quarterly Report.
Overview
Organization
Allegion plc ("Allegion," "the Company", "we," "our," or "us") is a leading global provider of security products and solutions operating in two segments: Allegion Americas and Allegion International. We sell a wide range of security products and solutions for end-users in commercial, institutional and residential facilities worldwide, including the education, healthcare, government, hospitality, commercial office and single and multi-family residential markets. Our leading brands include CISA®, Interflex®, LCN®, Schlage®, SimonsVoss® and Von Duprin®.
Recent Developments
Industry Trends and Outlook
Throughout the first quarter of 2022, we continue to experience strong demand for our products and services in most of the markets we serve. However, the supply chain disruptions and delays, shortages in materials (including reductions in allocations of electronic components and other parts from key suppliers), and labor shortages affecting critical suppliers that became more pronounced in the second half of 2021 are continuing to negatively impact our ability to meet this robust demand. These challenges have also created operational and logistical inefficiencies, which have led to periodic production interruptions and elevated levels of inventory, negatively impacting our productivity, margin performance, working capital and cash flows. Increased commodity, material component, packaging, freight and labor inflation also continues to impact margin performance.
In addition, the recent invasion of Ukraine by Russia has resulted in regional instability and the introduction of heightened economic sanctions against Russia by the U.S. and the international community. Although our presence in both countries is limited, and we expect the direct impact on our business, financial condition and results of operations to be minimal, we are currently monitoring these developments and the potential economic and financial consequences as the situation evolves, including the increased risks of cyber-attacks, further supply chain disruptions and increased inflation.
While we anticipate that fiscal year 2022 will continue to be a dynamic macroeconomic environment, and that each of the above noted factors will continue to impact our global businesses, we are rapidly adapting to navigate these challenges. We remain focused on providing exceptional service to our customers; implementing measures to mitigate operational and distribution inefficiencies, such as re-engineering product designs and configurations to accept alternate electronic components and developing alternate sources of supply; and investing in business initiatives to drive future growth. We have also realized pricing improvements across all of our major businesses during the first quarter of 2022 as a result of recent pricing initiatives to address inflationary pressures. We will continue to explore various options to control costs and enhance financial performance, while minimizing disruption to customers and the overall business.
The on-going COVID-19 pandemic, the Russian invasion of Ukraine and the macroeconomic challenges noted above will likely continue to affect us in numerous and evolving ways. The full impact of these challenges and uncertainties on our business will continue to depend on future developments that we may not be able to accurately predict. These challenges and uncertainties, and their potential or heightened impact on our business, results of operations, financial condition and cash flows, as well as other challenges and uncertainties that could affect our businesses are described further under Part I, Item 1A. "Risk Factors" contained in our Annual Report on Form 10-K for the year ended December 31, 2021.
2022 Dividends and Share Repurchases
During the three months ended March 31, 2022, we paid dividends of $0.41 per ordinary share to shareholders and repurchased approximately 0.5 million shares for $61.0 million.
16
Results of Operations – Three months ended March 31
| In millions, except per share amounts | 2022 | % of revenues | 2021 | % of revenues | |||||||||||||||||||
| Net revenues | $ | 723.6 | $ | 694.3 | |||||||||||||||||||
| Cost of goods sold | 434.9 | 60.1 | % | 396.9 | 57.2 | % | |||||||||||||||||
| Selling and administrative expenses | 171.7 | 23.7 | % | 166.1 | 23.9 | % | |||||||||||||||||
| Operating income | 117.0 | 16.2 | % | 131.3 | 18.9 | % | |||||||||||||||||
| Interest expense | 11.9 | 12.3 | |||||||||||||||||||||
| Other income, net | (2.2) | (3.5) | |||||||||||||||||||||
| Earnings before income taxes | 107.3 | 122.5 | |||||||||||||||||||||
| Provision for income taxes | 14.2 | 14.3 | |||||||||||||||||||||
| Net earnings | 93.1 | 108.2 | |||||||||||||||||||||
| Less: Net earnings attributable to noncontrolling interests | 0.1 | 0.2 | |||||||||||||||||||||
| Net earnings attributable to Allegion plc | $ | 93.0 | $ | 108.0 | |||||||||||||||||||
| Diluted net earnings per ordinary share attributable to Allegion plc ordinary shareholders: | $ | 1.05 | $ | 1.18 | |||||||||||||||||||
The discussions that follow describe the significant factors contributing to the changes in our results of operations for the periods presented and form the basis used by management to evaluate the financial performance of the business.
Net Revenues
Net revenues for the three months ended March 31, 2022, increased by 4.2%, or $29.3 million, compared with the same period in 2021, due to the following:
| Pricing | 6.0 | % | |||
| Volume | 0.4 | % | |||
| Acquisitions / divestitures | (0.3) | % | |||
| Currency exchange rates | (1.9) | % | |||
| Total | 4.2 | % | |||
The increase in Net revenues was primarily driven by improved pricing, as well as higher volumes in our Allegion International segment. These increases were partially offset by foreign currency exchange rate movements and the impact of our QMI divestiture during Q1 of the prior period. As discussed above, in response to the increased inflationary environment, we continue to implement various pricing initiatives across our global businesses, which drove the overall increase in Net revenues compared to the same period in 2021.
Pricing includes increases or decreases of price, including discounts, surcharges and/or other sales deductions, on our existing products and services. Volume includes increases or decreases of revenue due to changes in unit volume of existing products and services, as well as new products and services.
Operating Income/Margin
Operating income for the three months ended March 31, 2022, decreased $14.3 million compared to the same period in 2021. Operating margin, which we define as Operating income as a percentage of total Net revenues, for the three months ended March 31, 2022, decreased to 16.2% from 18.9% for the same period in 2021, due to the following:
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| In millions | Operating Income | Operating Margin | |||||||||
| March 31, 2021 | $ | 131.3 | 18.9 | % | |||||||
| Inflation in excess of pricing and productivity | (7.0) | (2.1) | % | ||||||||
| Volume / product mix | 1.7 | 0.2 | % | ||||||||
| Restructuring / acquisition expenses | (2.8) | (0.4) | % | ||||||||
| Currency exchange rates | (3.1) | (0.1) | % | ||||||||
| Investment spending | (3.9) | (0.5) | % | ||||||||
| Acquisitions / divestitures | 0.8 | 0.2 | % | ||||||||
| March 31, 2022 | $ | 117.0 | 16.2 | % | |||||||
The decreases in Operating income and Operating margin were primarily due to inflation and productivity challenges in excess of pricing improvements, a year-over-year increase in restructuring and acquisition expenses, unfavorable foreign currency exchange rate movements and increased investment spending. These unfavorable movements were partially offset by improved volume/product mix and the impact of our prior year divestiture of QMI. Inflation in excess of pricing and productivity reflects the impacts of increased commodity, material component, packaging, freight and labor inflation, as well as the ongoing supply chain disruptions and delays, shortages in materials and labor shortages affecting critical suppliers as discussed above.
Inflation in excess of pricing and productivity includes the impact to both Operating income and Operating margin from pricing, as defined above, in addition to productivity and inflation. Productivity represents improvements in unit costs of materials, cost reductions related to improvements to our manufacturing design and processes and reductions in selling and administrative expenses due to productivity projects. Inflation includes both unit costs for the current period compared to the average actual cost for the prior period, multiplied by current year volumes, and current period costs of ongoing selling and administrative functions compared by the same ongoing expenses in the prior period. Expenses related to increased head count for strategic initiatives, new facilities or other significant spending for strategic initiatives or new product and channel development, are captured in Investment spending in the table above.
Volume/product mix represents the impact to both Operating income and Operating margin due to increases or decreases of revenue due to changes in unit volume, including new products and services, including the effect of changes in the mix of products and services sold on Cost of goods sold.
Interest Expense
Interest expense for the three months ended March 31, 2022, decreased $0.4 million compared with the same period in 2021, primarily due to a lower weighted-average interest rate on our outstanding indebtedness.
Other Income, Net
The components of Other income, net for the three months ended March 31, 2022 and 2021, were as follows:
| In millions | 2022 | 2021 | |||||||||
| Interest income | $ | (0.1) | $ | — | |||||||
| Foreign currency exchange loss | 1.0 | 0.4 | |||||||||
| (Earnings) losses from equity method investments, net | (0.1) | 0.7 | |||||||||
| Net periodic pension and postretirement benefit income, less service cost | (2.6) | (1.9) | |||||||||
| Other | (0.4) | (2.7) | |||||||||
| Other income, net | $ | (2.2) | $ | (3.5) | |||||||
Provision for Income Taxes
The effective income tax rates for the three months ended March 31, 2022 and 2021, were 13.2% and 11.7%, respectively. The increase in the effective tax rate compared to 2021 is primarily due to the unfavorable mix of income earned in higher tax rate jurisdictions, which is partially offset by the favorable year-over-year change in the amounts recognized for uncertain tax positions.
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Review of Business Segments
We operate in and report financial results for two segments: Allegion Americas and Allegion International. These segments represent the level at which our chief operating decision maker reviews our 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, 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 the segment’s Net revenues.
The segment discussions that follow describe the significant factors contributing to the changes in results for each segment included in Net earnings.
Segment Results of Operations - For the three months ended March 31
| In millions | 2022 | 2021 | % Change | ||||||||||||||
| Net revenues | |||||||||||||||||
| Allegion Americas | $ | 528.2 | $ | 498.9 | 5.9 | % | |||||||||||
| Allegion International | 195.4 | 195.4 | — | % | |||||||||||||
| Total | $ | 723.6 | $ | 694.3 | |||||||||||||
| Segment operating income | |||||||||||||||||
| Allegion Americas | $ | 123.9 | $ | 135.4 | (8.5) | % | |||||||||||
| Allegion International | 19.6 | 15.4 | 27.3 | % | |||||||||||||
| Total | $ | 143.5 | $ | 150.8 | |||||||||||||
| Segment operating margin | |||||||||||||||||
| Allegion Americas | 23.5 | % | 27.1 | % | |||||||||||||
| Allegion International | 10.0 | % | 7.9 | % | |||||||||||||
Allegion Americas
Our Allegion Americas segment is a leading provider of security products and solutions throughout North America, Central America, the Caribbean and South America. The segment sells a broad range of products and solutions including locks, locksets, portable locks, key systems, door closers, exit devices, doors, door systems, electronic products and access control systems to customers in commercial, institutional and residential facilities, including the education, healthcare, government, hospitality, commercial office and single and multi-family residential markets. This segment’s primary brands are LCN, Schlage, Steelcraft, Technical Glass Products ("TGP") and Von Duprin.
Net Revenues
Net revenues for the three months ended March 31, 2022, increased by 5.9%, or $29.3 million, compared to the same period in 2021, due to the following:
| Pricing | 6.7 | % | ||||||
| Volume | (0.8) | % | ||||||
| Total | 5.9 | % | ||||||
The increase in Net revenues was driven by improved pricing and partially offset by lower volumes. As discussed above, the Allegion Americas segment has implemented various pricing initiatives to help offset increased inflationary pressures, driving the overall increase in Net revenues compared to the same period in 2021.
Net revenues from non-residential products for the three months ended March 31, 2022, increased by a low double digits percent compared to the same period in the prior year, driven by improved pricing and higher volumes. In spite of this increase, our non-residential businesses continue to experience the persistent and widespread supply chain challenges and shortages in materials and components (including reductions in allocations of electronic components and other parts from key suppliers) as discussed above, which will continue to slow our ability to convert the continued strong demand into revenue until conditions normalize.
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Although our residential businesses continue to see positive market demand, Net revenues from residential products for the three months ended March 31, 2022, decreased by a mid-single digits percent compared to the same period in the prior year. This decrease was primarily driven by lower volumes, due in part to continued supply chain challenges and shortages in electronic components, and was partially offset by improved pricing.
Growth in electronic security products and solutions is a metric that is actively monitored by management and a focus of our investors. Electronic products encompass both residential and non-residential products and include all electrified product categories including, but not limited to, electronic locks, access controls and electrified exit devices and door controls. For the three months ended March 31, 2022, Net revenues from the sale of electronic products in the Allegion Americas segment increased by a low single digits percent compared to the same period in the prior year. In spite of this modest increase, we continue to experience supply chain challenges around shortages and reduced allocations of electronic components from key suppliers, which is impacting our ability to meet the elevated level of demand for our electronic products. We expect these challenges around the availability of electronic components to continue throughout the year, and as a result, we are actively implementing measures to mitigate the operational and distribution inefficiencies these component shortages and other challenges are creating, such as re-engineering product designs and configurations to accept alternate electronic components and developing alternate sources of supply.
Operating income/margin
Segment operating income for the three months ended March 31, 2022, decreased $11.5 million compared to the same period in 2021, and Segment operating margin for the three months ended March 31, 2022, decreased to 23.5% from 27.1%, due to the following:
| In millions | Operating Income | Operating Margin | ||||||||||||
| March 31, 2021 | $ | 135.4 | 27.1 | % | ||||||||||
| Inflation in excess of pricing and productivity | (7.4) | (3.2) | % | |||||||||||
| Volume / product mix | (1.5) | (0.1) | % | |||||||||||
| Currency exchange rates | 0.1 | 0.1 | % | |||||||||||
| Investment spending | (2.9) | (0.5) | % | |||||||||||
| Restructuring / acquisition expenses | 0.2 | 0.1 | % | |||||||||||
| March 31, 2022 | $ | 123.9 | 23.5 | % | ||||||||||
The decreases in Segment operating income and Segment operating margin were primarily driven by inflation and productivity challenges in excess of pricing improvements, unfavorable volume/product mix and increased investment spending. These decreases were partially offset by a year-over-year decrease in restructuring and acquisition expenses and foreign currency exchange rate movements. Inflation in excess of pricing and productivity reflects the impacts of increased commodity, material component, packaging, freight and labor inflation, as well as the ongoing supply chain disruptions and delays, shortages in materials and components and labor shortages affecting critical suppliers as discussed above.
Allegion International
Our Allegion International segment provides security products, services and solutions primarily throughout Europe, Asia and Oceania. The segment offers end-users a broad range of products, services and solutions including locks, locksets, portable locks, key systems, door closers, exit devices, doors and door systems, electronic products and access control systems, as well as time and attendance and workforce productivity solutions. This segment’s primary brands are AXA, Bricard, Briton, CISA, Gainsborough, Interflex and SimonsVoss.
Net Revenues
Net revenues were flat for the three months ended March 31, 2022, compared to the same period in 2021 as higher volumes and improved pricing were offset by foreign currency exchange rate movements and the divestiture of our QMI business in Q1 of the prior period, summarized as follows:
| Pricing | 4.3 | % | ||||||
| Volume | 3.3 | % | ||||||
| Acquisitions / divestitures | (0.8) | % | ||||||
| Currency exchange rates | (6.8) | % | ||||||
| Total | — | % | ||||||
As discussed above, the Allegion International segment has implemented various pricing initiatives to help offset increased inflationary pressures which resulted in the increased pricing reflected above.
20
Operating income/margin
Segment operating income for the three months ended March 31, 2022, increased $4.2 million compared to the same period in 2021, and Segment operating margin for the three months ended March 31, 2022, increased to 10.0% from 7.9%, due to the following:
| In millions | Operating Income | Operating Margin | ||||||||||||
| March 31, 2021 | $ | 15.4 | 7.9 | % | ||||||||||
| Pricing and productivity in excess of inflation | 2.6 | 0.8 | % | |||||||||||
| Volume / product mix | 3.2 | 1.4 | % | |||||||||||
| Currency exchange rates | (3.2) | (1.1) | % | |||||||||||
| Investment spending | (1.0) | (0.5) | % | |||||||||||
| Acquisitions / divestitures | 0.8 | 0.5 | % | |||||||||||
| Restructuring / acquisition expenses | 1.8 | 1.0 | % | |||||||||||
| March 31, 2022 | $ | 19.6 | 10.0 | % | ||||||||||
The increases in Segment operating income and Segment operating margin were primarily driven by pricing and productivity improvements in excess of inflation, favorable volume/product mix, the impact of our prior year divestiture of QMI and a year-over-year decrease in restructuring and acquisition expenses. These improvements were partially offset by unfavorable foreign currency exchange rate movements and increased investment spending.
Liquidity and Capital Resources
Liquidity Outlook, Sources and Uses
Our primary source of liquidity is cash provided by operating activities. Cash provided by operating activities is used to invest in new product development and fund capital expenditures and working capital requirements. Our ability to generate cash from our operating activities, our unused availability under our 2021 Revolving Facility and our access to the capital and credit markets enable us to fund these capital needs, execute our long-term growth strategies and return value to our shareholders. As of March 31, 2022, we maintain cash and cash equivalents of $305.1 million and have unused availability of $492.5 million under our 2021 Revolving Facility. Further, our business operates with strong operating cash flows, low leverage and low capital intensity, providing financial flexibility, including sufficient access to credit markets.
Short-term financing needs primarily consist of working capital requirements, restructuring initiatives, capital spending, dividend payments and principal and interest payments on our long-term debt. Long-term financing needs depend largely on potential growth opportunities, including potential acquisitions, repayment or refinancing of our long-term obligations and repurchases of our ordinary shares. Based upon our operations, existing cash balances and availability under our 2021 Revolving Facility, we expect cash flows from operations to be sufficient to maintain a sound financial position and liquidity and to meet our financing needs for at least the next 12 months. Further, we do not anticipate any covenant compliance challenges with any of our outstanding indebtedness for at least the next 12 months. We also believe the availability under our 2021 Credit Facilities and access to credit and capital markets are sufficient to achieve our longer-term strategic plans.
As discussed in Note 20 to the Condensed and Consolidated Financial Statements, on April 22, 2022, we signed a definitive agreement to acquire Stanley Access Technologies LLC ("Access Technologies") and assets related to the automatic entrance solutions business from Stanley Black & Decker, Inc. for $900 million in cash. We intend to finance this transaction through a combination of cash, borrowings under our 2021 Revolving Facility and new debt financing. We have obtained fully committed financing, and the anticipated acquisition is not subject to a financing condition. We do not anticipate the consummation of this acquisition or the related financing of it to diminish our sound financial position or our ability to meet our financing needs for at least the next 12 months.
The following table reflects the major categories of cash flows for the three months ended March 31. For additional details, see the Condensed and Consolidated Statements of Cash Flows in the Condensed and Consolidated Financial Statements.
| In millions | 2022 | 2021 | |||||||||
| Net cash provided by operating activities | $ | 20.5 | $ | 111.8 | |||||||
| Net cash used in investing activities | (6.3) | (4.6) | |||||||||
| Net cash used in financing activities | (104.9) | (187.2) | |||||||||
Operating Activities: Net cash provided by operating activities during the three months ended March 31, 2022, decreased $91.3 million compared to the same period in 2021, primarily driven by decreased Net earnings and changes in working capital.
21
Investing Activities: Net cash used in investing activities during the three months ended March 31, 2022, increased $1.7 million compared to the same period in 2021, primarily due to an increase in capital expenditures.
Financing Activities: Net cash used in financing activities during the three months ended March 31, 2022, decreased $82.3 million compared to the same period in 2021, primarily due to a decrease of $88.7 million in cash used to repurchase shares.
Capitalization
Long-term debt and other borrowings consisted of the following:
| In millions | March 31, 2022 | December 31, 2021 | |||||||||
| 2021 Term Facility | $ | 246.9 | $ | 250.0 | |||||||
| 2021 Revolving Facility | — | — | |||||||||
| 3.200% Senior Notes due 2024 | 400.0 | 400.0 | |||||||||
| 3.550% Senior Notes due 2027 | 400.0 | 400.0 | |||||||||
| 3.500% Senior Notes due 2029 | 400.0 | 400.0 | |||||||||
| Other debt | 0.3 | 0.3 | |||||||||
| Total borrowings outstanding | 1,447.2 | 1,450.3 | |||||||||
| Discounts and debt issuance costs, net | (7.8) | (8.2) | |||||||||
| Total debt | 1,439.4 | 1,442.1 | |||||||||
| Less current portion of long-term debt | 12.6 | 12.6 | |||||||||
| Total long-term debt | $ | 1,426.8 | $ | 1,429.5 | |||||||
As of March 31, 2022, we have an unsecured Credit Agreement in place, consisting of a $250.0 million term loan facility (the “2021 Term Facility”), of which $246.9 million is outstanding at March 31, 2022, and a $500.0 million revolving credit facility (the “2021 Revolving Facility” and, together with the 2021 Term Facility, the “2021 Credit Facilities”). The 2021 Credit Facilities mature on November 18, 2026. The 2021 Term Facility will amortize in quarterly installments at the following rates: 1.25% per quarter starting March 31, 2022 through March 31, 2025, 2.5% per quarter starting June 30, 2025 through September 30, 2026, with the balance due on November 18, 2026. Principal amounts repaid on the Term Facility may not be reborrowed.
The 2021 Revolving Facility provides aggregate commitments of up to $500.0 million, which includes up to $100.0 million for the issuance of letters of credit. At March 31, 2022, there were no borrowings outstanding on the 2021 Revolving Facility, and we had $7.5 million of letters of credit outstanding. Commitments under the 2021 Revolving Facility may be reduced at any time without premium or penalty, and amounts repaid may be reborrowed.
Outstanding borrowings under the 2021 Credit Facilities accrue interest at our option of (i) a Bloomberg Short-Term Bank Yield Index ("BSBY") rate plus the applicable margin or (ii) a base rate plus the applicable margin. The applicable margin ranges from 0.875% to 1.375% depending on our credit ratings. At March 31, 2022, outstanding borrowings under the 2021 Credit Facilities accrue interest at BSBY plus a margin of 1.125%, resulting in an interest rate of 1.493%. The 2021 Credit Facilities also contain negative and affirmative covenants and events of default that, among other things, limit or restrict our ability to enter into certain transactions. In addition, the 2021 Credit Facilities require us to comply with a maximum leverage ratio as defined within the agreement. As of March 31, 2022, we were in compliance with all covenants.
As of March 31, 2022, we also have $400.0 million outstanding of 3.200% Senior Notes due 2024 (the "3.200% Senior Notes"), $400.0 million outstanding of 3.550% Senior Notes due 2027 (the "3.550% Senior Notes") and $400.0 million outstanding of 3.500% Senior Notes due 2029 (the "3.500% Senior Notes", and all three senior notes collectively, the "Senior Notes"). The Senior Notes require semi-annual interest payments on April 1 and October 1 of each year, and will mature on October 1, 2024, October 1, 2027 and October 1, 2029, respectively.
Historically, the majority of our earnings were considered to be permanently reinvested in jurisdictions where we have made, and intend to continue to make, substantial investments to support the ongoing development and growth of our global operations. At March 31, 2022, we analyzed our working capital requirements and the potential tax liabilities that would be incurred if certain subsidiaries made distributions and concluded that no material changes to our historic permanent reinvestment assertions are required.
22
Defined Benefit Plans
Our investment objective in managing defined benefit plan assets is to ensure that all present and future benefit obligations are met as they come due. We seek to achieve this goal while trying to mitigate volatility in plan funded status, contributions and expense by better matching the characteristics of the plan assets to that of the plan liabilities. Global asset allocation decisions are based on a dynamic approach whereby a plan’s allocation to fixed income assets increases as the funded status increases. We monitor plan funded status, asset allocation and the impact of market conditions on our defined benefit plans regularly in addition to investment manager performance. For further details on pension plan activity, see Note 9 to the Condensed and Consolidated Financial Statements.
For a further discussion of Liquidity and Capital Resources, refer to Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," contained in our Annual Report on Form 10-K for the year ended December 31, 2021.
Guarantor Financial Information
Allegion US Holding Company Inc. ("Allegion US Hold Co") is the issuer of the 3.200% Senior Notes and 3.550% Senior Notes and is the guarantor of the 3.500% Senior Notes. Allegion plc (the “Parent”) is the issuer of the 3.500% Senior Notes and is the guarantor of the 3.200% Senior Notes and 3.550% Senior Notes. Allegion US Hold Co is directly or indirectly 100% owned by the Parent and each of the guarantees of Allegion US Hold Co and the Parent is full and unconditional and joint and several.
The 3.200% Senior Notes and the 3.550% Senior Notes are senior unsecured obligations of Allegion US Hold Co and rank equally with all of Allegion US Hold Co’s existing and future senior unsecured and unsubordinated indebtedness. The guarantee of the 3.200% Senior Notes and the 3.550% Senior Notes is the senior unsecured obligation of the Parent and ranks equally with all of the Parents’s existing and future senior unsecured and unsubordinated indebtedness. The 3.500% Senior Notes are senior unsecured obligations of the Parent and rank equally with all of the Parent’s existing and future senior unsecured and unsubordinated indebtedness. The guarantee of the 3.500% Senior Notes is the senior unsecured obligation of Allegion US Hold Co and ranks equally with all of Allegion US Hold Co's existing and future senior unsecured and unsubordinated indebtedness.
Each guarantee is effectively subordinated to any secured indebtedness of the Guarantor to the extent of the value of the assets securing such indebtedness. The Senior Notes are structurally subordinated to indebtedness and other liabilities of the subsidiaries of the Guarantor, none of which guarantee the notes. The obligations of the Guarantor under its Guarantee are limited as necessary to prevent such Guarantee from constituting a fraudulent conveyance under applicable law and, therefore, are limited to the amount that the Guarantor could guarantee without such Guarantee constituting a fraudulent conveyance; this limitation, however, may not be effective to prevent such Guarantee from constituting a fraudulent conveyance. If the Guarantee was rendered voidable, it could be subordinated by a court to all other indebtedness (including guarantees and other contingent liabilities) of the Guarantor, and, depending on the amount of such indebtedness, the Guarantor’s liability on its Guarantee could be reduced to zero. In such an event, the notes would be structurally subordinated to the indebtedness and other liabilities of the Guarantor.
For further details, terms and conditions of the Senior Notes refer to the Company’s Form 8-K filed October 2, 2017 and Form 8-K filed September 27, 2019.
The following tables present the summarized financial information specified in Rule 1-02(bb)(1) of Regulation S-X for each issuer and guarantor. The summarized financial information has been prepared in accordance with Rule 13-01 of Regulation S-X.
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Selected Condensed Statement of Comprehensive Income Information
| Three months ended March 31, 2022 | Year ended December 31, 2021 | ||||||||||||||||||||||
| In millions | Allegion plc | Allegion US Hold Co | Allegion plc | Allegion US Hold Co | |||||||||||||||||||
| Net revenues | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
| Gross profit | — | — | — | — | |||||||||||||||||||
| Operating loss | (1.6) | (0.1) | (6.6) | (0.5) | |||||||||||||||||||
| Equity earnings in affiliates, net of tax | 102.8 | 6.4 | 521.6 | 173.6 | |||||||||||||||||||
Transactions with related parties and subsidiaries(a) | (3.5) | (21.2) | (12.5) | (85.0) | |||||||||||||||||||
| Net earnings | 93.0 | (15.0) | 483.0 | 87.1 | |||||||||||||||||||
| Net earnings attributable to the entity | 93.0 | (15.0) | 483.0 | 87.1 | |||||||||||||||||||
(a) Transactions with related parties and subsidiaries include intercompany interest and fees.
Selected Condensed Balance Sheet Information
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| In millions | Allegion plc | Allegion US Hold Co | Allegion plc | Allegion US Hold Co | |||||||||||||||||||
| Current assets: | |||||||||||||||||||||||
| Amounts due from related parties and subsidiaries | $ | — | $ | 762.7 | $ | 0.6 | $ | 753.7 | |||||||||||||||
| Total current assets | 17.7 | 778.1 | 60.8 | 785.5 | |||||||||||||||||||
| Noncurrent assets: | |||||||||||||||||||||||
| Amounts due from related parties and subsidiaries | — | 1,240.9 | — | 1,240.9 | |||||||||||||||||||
| Total noncurrent assets | 1,793.0 | 1,305.8 | 1,793.1 | 1,292.7 | |||||||||||||||||||
| Current liabilities: | |||||||||||||||||||||||
| Amounts due to related parties and subsidiaries | $ | 69.3 | $ | 241.2 | $ | 62.8 | $ | 233.9 | |||||||||||||||
| Total current liabilities | 92.1 | 255.5 | 82.6 | 241.3 | |||||||||||||||||||
| Noncurrent liabilities: | |||||||||||||||||||||||
| Amounts due to related parties and subsidiaries | 817.8 | 2,689.5 | 761.8 | 2,660.5 | |||||||||||||||||||
| Total noncurrent liabilities | 1,449.5 | 3,494.8 | 1,396.5 | 3,466.9 | |||||||||||||||||||
Critical Accounting Policies
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our Condensed and Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with those accounting principles requires management to use judgments in making estimates and assumptions based on the relevant information available at the end of each period. These estimates and assumptions have a significant effect on reported amounts of assets and liabilities, revenue and expenses, as well as the disclosure of contingent assets and liabilities because they result primarily from the need to make estimates and assumptions on matters that are inherently uncertain. Actual results may differ from estimates.
Management believes there have been no significant changes during the three months ended March 31, 2022, to the items we disclosed as our critical accounting policies in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2021.
Recent Accounting Pronouncements
See Note 2 to our Condensed and Consolidated Financial Statements for a discussion of recently issued and adopted accounting pronouncements.
24
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,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” or the negative thereof or variations thereon or similar expressions generally intended to identify forward-looking statements.
Forward-looking statements may relate to such matters as: statements regarding the continued impacts of the global COVID-19 pandemic, supply chain constraints, electronic component and labor shortages, inflation, rising freight and material costs, impacts of Russia's invasion of Ukraine, including further supply chain disruptions and the increased risk of cyber-attacks in connection with such invasion, 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:
•adverse impacts to our business operations due to the global COVID-19 pandemic and our ability to predict the full extent of such impacts;
•competitive factors in the industry in which we compete, including technological developments and increased competition from private label brands;
•the development, commercialization and acceptance of new products and services that meet the varied and evolving needs of our customers;
•the demand for our products and services, including changes in customer and consumer preferences, and our ability to maintain beneficial relationships with large customers;
•our products or solutions fail to meet certification and specification requirements, are defective or otherwise fall short of customers’ needs and expectations;
•the ability to complete and integrate any acquisitions and/or losses related to our investments in external companies;
•business opportunities that diverge from our core business;
•our ability to operate efficiently and productively;
•our ability to effectively manage and implement restructuring initiatives or other organizational changes;
•the effects of global climate change or other unexpected events, including global health crises, that may disrupt our operations;
•our ability to manage risks related to our information technology and operational technology systems and cybersecurity, including implementation of new processes that may cause disruptions and be more difficult, costly or time consuming than expected;
•our reliance on third-party vendors for many of the critical elements of our global information and operational technology infrastructure and their failure to provide effective support for such infrastructure;
•disruption and breaches of our information systems;
•ability to recruit and retain a highly qualified and diverse workforce;
•disruptions in our global supply chain, including supply chain constraints, electronic component and labor shortages and product manufacturing and logistical services provided by our supplier partners;
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•availability of and increased inflation impacting the prices of raw materials, parts and components, freight, packaging, labor and energy;
•economic, political and business conditions in the markets in which we operate, including changes to trade agreements, sanctions, import and export regulations and custom duties;
•conditions of the institutional, commercial and residential construction and remodeling markets, including the impact of work-from-home trends;
•fluctuations in currency exchange rates;
•potential impairment of our goodwill, indefinite-lived intangible assets and/or our long-lived assets;
•interest rate fluctuations and other changes in borrowing costs, in addition to risks associated with our outstanding and future indebtedness;
•the impact our outstanding indebtedness may have on our business and operations and other capital market conditions, including availability of funding sources and currency exchange rate fluctuations;
•risks related to corporate social responsibility and reputational matters;
•the ability to protect our brand reputation and trademarks;
•the outcome of any litigation, governmental investigations or proceedings;
•claims of infringement of intellectual property rights by third parties;
•adverse publicity or improper conduct by any of our employees, agents or business partners;
•changes to, or changes in interpretations of, current laws and regulations;
•uncertainty and inherent subjectivity related to transfer pricing regulations;
•changes in tax requirements, including tax rate changes, the adoption of new tax legislation or exposure to additional tax liabilities and revised tax law interpretations; and
•risks related to our incorporation in Ireland, including the possible effects on us of future legislation or interpretations 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.
Some of the significant risks and uncertainties that could cause actual results to differ materially from our expectations and projections are described more fully in the “Risk Factors” section of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. There may also be other factors that have not been anticipated or that are not described in our periodic filings with the SEC, generally because we did not believe them to be significant at the time, which could cause results to differ materially from our expectations.
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in our exposure to market risk during the first quarter of 2022. For a discussion of the Company’s exposure to market risk, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Item 4 – Controls and Procedures
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded as of March 31, 2022, that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this Quarterly Report on Form 10-Q has been recorded, processed, summarized and reported when required and the information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There have not been any changes in the Company’s internal control over financial reporting that occurred during the first quarter of 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
In the normal course of business, we are involved in a variety of lawsuits, claims and legal proceedings, including commercial and contract disputes, labor and employment matters, product liability claims, environmental liabilities, antitrust and trade regulation matters, intellectual property disputes and tax-related matters. In our opinion, pending legal matters are not expected to have a material adverse impact on our results of operations, financial condition, liquidity or cash flows.
Item 1A – Risk Factors
There have been no material changes to our risk factors contained in our Annual Report on Form 10-K for the period ended December 31, 2021. For a further discussion of our Risk Factors, refer to the “Risk Factors” discussion contained in our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
| Period | Total number of shares purchased (000s) | Average price paid per share | Total number of shares purchased as part of the 2020 Share Repurchase Authorization (000s) | Approximate dollar value of shares still available to be purchased under the 2020 Share Repurchase Authorization (000s) | ||||||||||||||||||||||
| January 1 - January 31 | — | $ | — | — | $ | 201,435 | ||||||||||||||||||||
| February 1 - February 28 | 190 | 113.09 | 190 | 179,941 | ||||||||||||||||||||||
| March 1 - March 31 | 343 | 114.98 | 343 | 140,454 | ||||||||||||||||||||||
| Total | 533 | $ | 114.31 | 533 | $ | 140,454 | ||||||||||||||||||||
On February 6, 2020, our Board of Directors approved a share repurchase authorization of up to, and including, $800 million of the Company’s ordinary shares (the "2020 Share Repurchase Authorization"). The 2020 Share Repurchase Authorization does not have a prescribed expiration date. Based on market conditions, share repurchases are made from time to time in the open market at the discretion of management.
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Item 6 – Exhibits
(a) Exhibits
| Exhibit No. | Description | Method of Filing | ||||||||||||
| Amended and restated Memorandum and Articles of Association of Allegion plc. | Incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed with the SEC on June 13, 2016 (File No. 001-35971). | |||||||||||||
| Form of 2022 Global Restricted Stock Unit Award Agreement. * | Incorporated by reference to Exhibit 10.31 to the Company’s Form 10-K filed with the SEC on February 15, 2022 (File No. 001-35971). | |||||||||||||
| Form of 2022 Global Stock Option Award Agreement. * | Incorporated by reference to Exhibit 10.32 to the Company’s Form 10-K filed with the SEC on February 15, 2022 (File No. 001-35971). | |||||||||||||
| Form of 2022 Global Performance Stock Unit Award Agreement. * | Incorporated by reference to Exhibit 10.33 to the Company’s Form 10-K filed with the SEC on February 15, 2022 (File No. 001-35971). | |||||||||||||
| Michael J. Wagnes Offer Letter, dated February 14, 2022. * | Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on February 15, 2022 (File No. 001-35971). | |||||||||||||
| Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed herewith. | |||||||||||||
| Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed herewith. | |||||||||||||
| Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | Furnished herewith. | |||||||||||||
| 101.INS | XBRL Instance Document. | The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | Filed herewith. | ||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | Filed herewith. | ||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | Filed herewith. | ||||||||||||
| 101.LAB | XBRL Taxonomy Extension Labels Linkbase Document. | Filed herewith. | ||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | Filed herewith. | ||||||||||||
| 104 | Cover Page Interactive Data File. | Formatted as Inline XBRL and contained in Exhibit 101. | ||||||||||||
| * Compensatory plan or arrangement. | ||||||||||||||
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ALLEGION PLC
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ALLEGION PLC (Registrant) | ||||||||
| Date: | April 26, 2022 | /s/ Michael J. Wagnes | ||||||
| Michael J. Wagnes, Senior Vice President and Chief Financial Officer Principal Financial Officer | ||||||||
| Date: | April 26, 2022 | /s/ Nickolas A. Musial | ||||||
| Nickolas A. Musial, Vice President, Controller and Chief Accounting Officer Principal Accounting Officer | ||||||||
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