Allegion plc — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Allegion is a global security products and solutions provider, reporting Allegion Americas and Allegion International segments. Amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $746.9 million | $589.5 million | $1,441.2 million | $1,264.2 million |
| Operating income | $145.4 million | $96.5 million | $276.7 million | $125.4 million |
| Operating margin | 19.5% | 16.4% | 19.2% | 9.9% |
| Net earnings attributable to Allegion | $118.7 million | $73.7 million | $226.7 million | $74.1 million |
| Diluted EPS | $1.31 | $0.80 | $2.49 | $0.80 |
- Q2 revenue increased 26.7% year over year, driven by volume (+21.7%), pricing (+2.1%) and currency (+3.7%); divestitures reduced growth by 0.8%.
- Q2 operating margin rose 3.1 percentage points. Higher volume and mix and lower restructuring/acquisition costs helped; inflation exceeding pricing and productivity, and higher investment spending, partly offset gains.
- Six-month revenue rose 14.0%. Operating income improved substantially, but the comparison includes $96.3 million of goodwill and intangible impairment charges in the 2020 period that did not recur in 2021. Six-month diluted EPS also benefited from a lower effective tax rate (12.3% versus 25.7%).
- Q2 segment revenue rose 23.7% in Americas and 36.0% in International. Segment operating margins were 27.4% and 9.2%, respectively; International had a loss in Q2 2020.
Cash flow, balance sheet and capital
- Six-month operating cash flow was $267.5 million, compared with $128.0 million in 2020; management cited higher earnings and improved working capital. Capital expenditures were $17.9 million. Calculated operating cash flow less capital expenditures was $249.6 million.
- Cash was $460.2 million at June 30, 2021. Total debt was $1,430.4 million, implying net debt of approximately $970.2 million based on reported cash and debt.
- Unused revolving credit availability was $485.7 million, after $14.3 million of letters of credit; no revolver borrowings were outstanding. The company reported compliance with credit facility covenants.
- The $238.8 million term facility and revolving facility mature September 12, 2022. Senior notes include $400 million each due in 2024, 2027 and 2029.
- Financing cash use was $265.1 million, including $199.8 million in share repurchases and $64.6 million in dividends. Approximately $414.4 million remained under the repurchase authorization at June 30.
- Inventory increased to $310.0 million from $283.1 million at year-end 2020. Total liabilities were $2,272.7 million and total equity was $787.4 million.
Outlook, risks and notable items
- The filing gives no quantified full-year revenue or earnings guidance. Management said elevated demand had exceeded recent expectations, while warning that growth rates—particularly residential growth—were not expected to remain at Q2 levels.
- Management anticipated supply-chain disruption, electronic-component and labor shortages, production interruptions, and higher commodity, component, packaging, freight and labor costs to continue through the remainder of 2021. Their full effects remained uncertain.
- COVID-19 recovery and restrictions varied by region and could change; further outbreaks or restrictions could adversely affect operations and demand. Management also identified construction-market conditions, competition, foreign exchange, interest rates, cybersecurity, and regulatory and tax changes among forward-looking risks.
- The Qatar Metal Industries divestiture closed February 28, 2021, with no material impact on first-half 2021 financial statements. A $37.9 million write-down had been recorded in Q4 2020.
- Environmental reserves were $17.7 million at June 30, 2021; warranty liabilities were $18.1 million. Management said pending legal matters were not expected to have a material adverse impact, while noting the uncertainty inherent in environmental remediation estimates.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during Q2. No material changes to the previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether pricing and productivity can offset inflation and supply constraints as management expected those pressures to persist through 2021.
- How much reported growth reflects recovery from weak, shutdown-affected Q2 2020 comparisons, versus ongoing underlying demand.
- The sustainability of residential demand and the pace of recovery in non-residential markets, especially given component shortages affecting electronic products.
- The drivers and repeatability of the lower 2021 effective tax rate and the effect of the 2020 impairment charge on year-over-year comparisons.
- Plans for the September 2022 credit facility maturity, alongside continued dividends and share repurchases.
- Potential changes in environmental remediation costs, warranty claims, and other contingencies.