Allegion plc — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Allegion is a global security-products and solutions provider, reporting through Allegion Americas and Allegion International.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net revenue | $723.6 million | $694.3 million | Up 4.2% |
| Operating income | $117.0 million | $131.3 million | Down $14.3 million |
| Operating margin | 16.2% | 18.9% | Down 2.7 percentage points |
| Net earnings attributable to Allegion | $93.0 million | $108.0 million | Down 13.9% |
| Diluted EPS | $1.05 | $1.18 | Down 11.0% |
| Operating cash flow | $20.5 million | $111.8 million | Down $91.3 million |
Revenue growth was driven primarily by pricing, which contributed 6.0 percentage points, and volume, which contributed 0.4 points; currency reduced growth by 1.9 points. Cost of goods sold rose to 60.1% of revenue from 57.2%, reflecting cost and productivity pressures.
- Americas: Revenue rose 5.9% to $528.2 million, while segment operating income fell 8.5% to $123.9 million and margin declined to 23.5% from 27.1%.
- International: Revenue was flat at $195.4 million. Segment operating income increased 27.3% to $19.6 million, and margin improved to 10.0% from 7.9%.
Liquidity, debt and capital allocation
At March 31, 2022, cash and cash equivalents were $305.1 million, total debt was $1,439.4 million, and total liabilities were $2,262.6 million. The company had no revolver borrowings and reported $492.5 million of unused availability under its $500 million revolving facility. It reported compliance with debt covenants.
Cash from operations was $20.5 million, capital expenditures were $8.7 million, and cash used in financing was $104.9 million. Financing uses included $61.0 million for share repurchases and $35.8 million of dividends paid. Operating cash flow fell mainly because of lower earnings and working-capital changes. Cash declined by $92.8 million during the quarter.
Changes, outlook and risks
- Revenue increased, but earnings and margins declined as commodity, component, packaging, freight and labor inflation, supply-chain disruption, and productivity challenges exceeded pricing improvements. Higher investment spending and currency movements also weighed on operating income.
- Management reported strong demand but said shortages of materials, electronic components and supplier labor constrained its ability to fulfill orders, caused production and logistical inefficiencies, and increased inventory and working-capital needs. Pricing initiatives had improved pricing across major businesses; management was pursuing alternate components and suppliers.
- The company said operating cash flows, existing cash and revolver availability should be sufficient to meet financing needs for at least the next 12 months. The filing provides no specific full-year revenue or earnings guidance.
- Management described its direct exposure to Russia and Ukraine as limited and expected minimal direct business impact, while monitoring possible sanctions-related effects, cyber risks, supply disruption and inflation. COVID-19 and broader macroeconomic uncertainty also remain risks.
- On April 22, 2022, Allegion agreed to acquire Stanley Access Technologies and related automatic-entrance assets for $900 million in cash. The business generated approximately $340 million of 2021 revenue. Closing was expected in Q3 2022, subject to regulatory approval and customary conditions. Allegion planned to use cash, revolver borrowings and new debt; it said committed financing had been obtained and the deal was not subject to a financing condition.
- Environmental reserves were $15.4 million and standard product warranty liabilities were $18.3 million at quarter-end. Management said pending legal matters were not expected to have a material adverse effect; ultimate environmental costs remain uncertain.
Investor verification priorities
- Track whether pricing continues to offset inflation and whether supply constraints ease enough to convert strong demand into revenue.
- Review working-capital trends and cash conversion, given the substantial year-over-year decline in operating cash flow.
- Verify the acquisition’s closing, final financing mix, resulting leverage and integration performance.
- Monitor Americas margin recovery, International performance, electronic-component availability, and exposure to currency, cyber and geopolitical risks.
- Assess changes in environmental and warranty reserves and the outcome of material legal or regulatory matters.