Allegion plc — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited results are compared with the corresponding 2021 periods. Allegion supplies security products and solutions through its Allegion Americas and Allegion International segments. Figures below are in USD millions except per-share amounts.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenue | $913.7 | $717.0 | $2,410.4 | $2,158.2 |
| Operating income | $162.9 | $138.4 | $427.0 | $415.1 |
| Operating margin | 17.8% | 19.3% | 17.7% | 19.2% |
| Net earnings attributable to Allegion | $114.6 | $143.5 | $322.7 | $370.2 |
| Diluted EPS | $1.30 | $1.59 | $3.65 | $4.08 |
| Operating cash flow | Not provided by quarter | $267.1 | $356.4 |
- Q3 revenue grew 27.4%; pricing contributed 12.6 percentage points, volume 6.0 points, acquisitions/divestitures 12.4 points, and currency reduced growth by 3.6 points. Nine-month revenue rose 11.7%.
- Operating income increased, but operating margin contracted. Cost of goods sold was 59.7% of revenue in both the quarter and nine-month period, versus 58.1% and 57.4%, respectively, in 2021.
- Q3 earnings attributable to Allegion fell about 20% year over year; nine-month earnings fell about 13%. Higher interest expense, a $7.6 million Milre divestiture loss, lower other income, and higher taxes weighed on earnings.
- Net cash from operations declined $89.3 million year over year for the first nine months, primarily due to working-capital changes and lower net earnings. Capital expenditures were $41.5 million; operating cash flow less capital expenditures was $225.6 million, a simple calculation rather than a company-defined measure.
- At September 30, cash was $282.2 million, current assets $1,235.9 million, and current liabilities $689.2 million. Total debt was $2,227.1 million, net of discounts and issuance costs; long-term debt was $2,214.5 million. Cash less total debt was approximately negative $1,944.9 million.
- Debt increased from $1,442.1 million at December 31, 2021, largely to fund the Access Technologies acquisition. The company issued $600 million of 5.411% notes due 2032 and had $199 million drawn on its $500 million revolving facility. Including $7.6 million of letters of credit, approximately $293 million of facility capacity remained. The company reported covenant compliance.
Material changes and business developments
- On July 5, 2022, Allegion acquired Stanley Access Technologies for preliminary cash consideration of $923.1 million and integrated it into Allegion Americas. The business contributed $88.7 million of revenue after acquisition and reported a $3.3 million pretax loss; that loss excludes specified acquisition-related costs and acquisition financing interest. Purchase-price allocation remained preliminary, including $616.0 million of goodwill.
- Allegion Americas revenue grew 42.5% in Q3, including the acquisition, while segment operating margin declined to 23.9% from 25.5%. Allegion International revenue declined 13.6%, and its margin declined to 8.9% from 10.6%, amid currency headwinds and weaker Eurozone demand.
- Q3 acquisition and integration expenses were $18.6 million; the company anticipated up to $5 million of additional integration expenses in Q4 2022. Nine-month expenses were $27.4 million.
- Allegion sold South Korean business Milre in September for an immaterial amount, recording a $7.6 million loss. Environmental reserves rose to $24.2 million from $16.4 million at year-end.
- Cash used in investing activities was $965.9 million, mainly reflecting the acquisition. Financing activities provided $606.1 million, including debt issuance and revolving-facility borrowings. Dividends paid during the first nine months were $107.9 million; share repurchases were $61.0 million.
Outlook, commentary, and risks
- Management reported strong demand, particularly for non-residential products in the Americas, and expected pricing initiatives to support revenue growth and offset inflation through the remainder of 2022. It also expected continued growth in Americas electronic-product revenue.
- Supply constraints for electronic components and labor availability continued to limit fulfillment and operating efficiency. Management cited improving availability of other materials, but said electronic-component constraints persisted. Demand had softened in parts of Europe and in residential markets.
- Management expected operating cash flows, cash balances, and revolving-facility availability to support liquidity and financing needs for at least the next 12 months, with no anticipated covenant-compliance challenges. No specific numerical revenue, earnings, or margin guidance is provided in the filing text.
- Risks highlighted include ongoing supply-chain and inflation pressures, foreign-exchange movements, rising interest rates, macroeconomic and construction-market conditions, acquisition integration, cybersecurity and technology risks, and the continuing effects of COVID-19 and geopolitical events. Management said legal matters were not expected to materially adversely affect results, financial condition, liquidity, or cash flows; environmental compliance costs remain uncertain.
Important facts for investors to verify
- Whether Access Technologies delivers expected integration, service-network, revenue, and profitability benefits, and how final purchase accounting changes reported goodwill or amortization.
- Whether pricing continues to offset inflation and costs, and whether supply and labor constraints ease enough to meet demand.
- How International-segment demand and foreign-exchange movements affect revenue and margins.
- Debt-service costs and leverage following the acquisition financing, especially given variable-rate borrowings and higher interest rates.
- Working-capital trends and operating cash conversion, which weakened year over year, alongside cash needs for dividends, investment, and any future repurchases.
- Developments in environmental reserves, litigation, and other contingencies; management’s estimates may change as facts and remediation requirements evolve.