Allegion plc — Q3 2021 Form 10-Q
Business context and period: Allegion is a global security-products and solutions provider, reporting through Allegion Americas and Allegion International. This unaudited quarterly report covers the three and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods.
Financial results and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $717.0 million | $728.4 million | $2,158.2 million | $1,992.6 million |
| Operating income / margin | $138.4 million / 19.3% | $160.4 million / 22.0% | $415.1 million / 19.2% | $285.8 million / 14.3% |
| Net earnings attributable to Allegion | $143.5 million | $146.9 million | $370.2 million | $221.0 million |
| Diluted EPS | $1.59 | $1.58 | $4.08 | $2.38 |
| Operating cash flow | Not reported separately for the quarter | $356.4 million | $289.4 million |
- Cash flow and capital returns: Nine-month capital expenditures were $28.7 million; operating cash flow less capital expenditures was $327.7 million (calculated). The company paid $96.9 million in dividends and repurchased $212.7 million of shares during the nine months.
- Liquidity: Cash and cash equivalents were $503.9 million at September 30, 2021. Current assets were $1,202.4 million and current liabilities were $793.9 million.
- Debt: Total debt was $1,430.9 million, including $238.4 million classified as current, principally reflecting the term facility balance due in September 2022. The $500 million revolving facility had no borrowings and $14.1 million of letters of credit; reported unused availability was $485.9 million. Allegion reported compliance with its debt covenants.
Changes versus prior periods
- Q3 revenue fell 1.6%, primarily due to lower Americas volume amid supply constraints; improved pricing and currency effects partly offset the decline. Nine-month revenue rose 8.3%, reflecting higher volume, pricing and foreign exchange.
- Q3 operating margin declined to 19.3% from 22.0%. Management cited inflation and productivity pressures exceeding pricing, unfavorable volume/product mix, and increased investment spending.
- Nine-month operating income rose to $415.1 million from $285.8 million. The prior-year period included $98.9 million of goodwill and intangible-asset impairment charges; the improvement also reflected higher volume and lower restructuring costs.
- Americas Q3 revenue declined 2.7% and segment operating income declined 19.0%. International revenue increased 1.7% and segment operating income increased to $20.5 million from $13.2 million.
- Inventories increased to $345.7 million from $283.1 million at year-end 2020. Total debt was broadly stable, while the current portion increased from $0.2 million to $238.4 million as the term facility approached maturity.
Outlook, commentary, risks, and unusual items
- Management reported strong and accelerating demand in most markets but said supply-chain disruption, shortages of materials and electronic components, labor constraints, and higher commodity, freight, packaging and labor costs were limiting its ability to meet demand and pressuring productivity and margins. Impacts were more pronounced in Americas.
- The company expected industry-wide challenges to persist beyond 2021. It described pricing actions, product redesign, alternate sourcing and other operational measures, but provided no specific financial guidance in the supplied filing text.
- Management noted record-high non-residential product backlog and continuing electronic-component availability constraints, including expected persistence beyond 2021. COVID-19 developments and the uneven recovery add uncertainty.
- Q3 results included a $6.4 million gain from selling the Nuki Home Solutions equity-method investment. The Q3 effective tax rate was negative 2.0%, reflecting favorable tax settlements and income mix, among other factors.
- The QMI divestiture closed February 28, 2021; the prior-year period included a $37.9 million write-down recorded in Q4 2020. July acquisitions of Astrum Benelux assets and WorkforceIT were not material to reported results.
- Environmental reserves were $17.1 million at quarter-end. The company stated pending legal matters were not expected to have a material adverse impact, while noting that environmental remediation costs remain uncertain. It reported no material changes to its previously disclosed risk factors.
Important facts for investors to verify
- Whether supply availability, especially electronic components and labor, improves enough to convert backlog into revenue without further margin deterioration.
- Whether pricing and productivity can offset continuing input-cost inflation, freight costs and operational inefficiencies.
- The September 2022 term-facility maturity, refinancing or repayment plans, and continued covenant compliance.
- The sustainability of earnings comparisons: nine-month 2021 improvement benefited from the absence of substantial 2020 impairment charges and included favorable tax items and investment gains.
- Future cash conversion and working-capital needs, given the increase in inventories alongside elevated demand and supply constraints.