Allegion plc — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022 unless noted. Allegion provides security products, services and solutions through its Allegion Americas and Allegion International segments. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net revenues | $923.0 million | $723.6 million |
| Operating income / margin | $171.0 million / 18.5% | $117.0 million / 16.2% |
| Net earnings attributable to Allegion | $123.5 million | $93.0 million |
| Diluted EPS | $1.40 | $1.05 |
| Operating cash flow | $69.0 million | $20.5 million |
| Capital expenditures | $22.3 million | $8.7 million |
- Revenue increased 27.6%: pricing contributed 10.6 percentage points, volume 4.4 points, acquisitions/divestitures 14.1 points, and currency reduced growth by 1.5 points.
- Gross profit was $391.0 million, equivalent to an approximately 42.4% gross margin, compared with $288.7 million and approximately 39.9% a year earlier. Net margin was approximately 13.4%, versus 12.9%.
- Operating income rose $54.0 million. Management attributed the increase principally to pricing and productivity gains exceeding inflation and investment spending, favorable volume/product mix, and acquisition contributions; higher restructuring/acquisition expenses and unfavorable currency partly offset those gains.
- Interest expense increased to $23.6 million from $11.9 million, primarily reflecting the 2022-issued 5.411% notes, increased revolving-facility borrowing, and higher rates on variable-rate debt. The effective tax rate rose to 16.3% from 13.2%, mainly due to income mix in higher-tax jurisdictions.
Segments and material changes
- Allegion Americas: Revenue rose 42.0% to $740.9 million; segment operating income rose 52.2% to $186.6 million, and margin increased to 25.2% from 23.5%. Growth reflected pricing, higher non-residential volumes and the Access Technologies acquisition. Non-residential revenue excluding that acquisition increased nearly 30%; electronic-product revenue grew more than 30%.
- Allegion International: Revenue fell 9.7% to $182.1 million; segment operating income declined 49.3% to $10.6 million, and margin fell to 5.8% from 10.4%. Lower Global Portable Security volumes, currency impacts and a prior-year divestiture outweighed pricing and the plano acquisition.
- Revenue growth also reflects the Access Technologies business acquired in July 2022 and plano, a German SaaS workforce-management business acquired in January 2023 for initial cash consideration of $36.6 million. Plano’s purchase-price allocation remained preliminary; additional contingent consideration may be payable.
- Q1 operating cash flow improved by $48.5 million, primarily due to increased earnings and working-capital changes. Investing cash use rose to $51.4 million, including the plano purchase and higher capital spending. Financing cash use was $15.4 million, versus $104.9 million, primarily because Q1 2022 included $61.0 million of share repurchases; no shares were repurchased in Q1 2023.
Liquidity, debt and capital
- Cash was $292.8 million at March 31, 2023, compared with $288.0 million at year-end 2022. Current assets were $1,253.4 million and current liabilities $668.5 million.
- Total debt, net of discounts and issuance costs, was $2,121.9 million, up from $2,094.5 million at year-end; long-term debt was $2,109.3 million. The revolving facility had $99.0 million drawn under its $500 million commitment, with $13.4 million of letters of credit outstanding. Revolver borrowings bore a 6.019% rate at quarter-end.
- Approximately 85% of outstanding indebtedness carried fixed rates. Senior notes include $400 million due in 2024, $400 million due in 2027, $400 million due in 2029 and $600 million due in 2032. The company reported compliance with credit-facility covenants.
- Management said operating cash flows, cash balances and available borrowing capacity were expected to support financing needs for at least the next 12 months, with no anticipated covenant-compliance challenges over that period. The company paid $0.45 per share in Q1; the board declared another $0.45 quarterly dividend, payable June 30, 2023.
Outlook, risks and contingencies
- Management expected solid demand for Americas non-residential products through the remainder of 2023 and continued growth in electronic-product revenue, supported by demand, pricing and improved component availability. It expected continued softness in mechanical residential demand until housing-market conditions improve.
- Management reported ongoing softness in Global Portable Security as demand normalized after pandemic-era strength. Electronic-component shortages and supply-chain constraints persisted, although mitigation efforts and availability had improved.
- Pricing was expected to continue mitigating inflationary cost pressures during the remainder of 2023. The filing provides no specific full-year revenue, earnings or cash-flow guidance.
- Key disclosed uncertainties include macroeconomic instability and inflation, construction-market conditions, currencies, supply-chain disruption, interest rates and credit-market access, acquisition integration, competition and technology changes, product quality and liability, cybersecurity, legal matters, taxes, and potential asset impairments.
- Environmental reserves were $23.5 million at quarter-end. Management stated pending legal matters were not expected to materially adversely affect results, financial condition, liquidity or cash flows; ultimate environmental compliance costs remain uncertain.
Important facts for investors to verify
- How much revenue and profit growth is attributable to pricing and acquisitions versus sustainable underlying volume, especially in the Americas?
- Whether International segment volumes and margins stabilize as portable-security demand normalizes, and whether currency movements remain a headwind.
- Whether pricing and productivity continue to offset inflation, and whether electronic-component availability supports the stated growth outlook.
- Debt refinancing plans for the $400 million notes due in 2024, variable-rate exposure, and the effect of interest costs on earnings and cash generation.
- Final plano acquisition accounting and any contingent consideration, along with realized integration benefits and restructuring costs.
- Working-capital trends, capital spending, environmental liabilities and other contingencies; the filing does not provide a specific full-year financial forecast.