Allegion plc — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Allegion is a global security-products and solutions provider, reporting through Allegion Americas and Allegion International.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenue | $917.9 million | $913.7 million | $2,753.4 million | $2,410.4 million |
| Operating income | $193.1 million | $162.9 million | $548.7 million | $427.0 million |
| Operating margin | 21.0% | 17.8% | 19.9% | 17.7% |
| Net earnings attributable to Allegion | $156.3 million | $114.6 million | $421.8 million | $322.7 million |
| Diluted EPS | $1.77 | $1.30 | $4.78 | $3.65 |
Q3 revenue rose 0.5%: pricing (+6.5%) and currency (+1.0%) were largely offset by lower volume (-7.1%). For the first nine months, revenue increased 14.2%, driven by pricing (+8.5%) and acquisitions (+8.3%), partly offset by volume (-2.4%). Management attributed higher operating income primarily to pricing and productivity gains exceeding inflation and investment spending.
Q3 segment results: Americas revenue was $740.9 million, with a 27.0% segment operating margin; International revenue was $177.0 million, with an 8.9% margin. For nine months, Americas revenue grew 19.3% and margin increased to 26.4%; International revenue declined 2.7% and margin decreased to 7.4%.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $381.1 million, up from $267.1 million. Capital expenditures were $60.7 million, versus $41.5 million.
- Cash and cash equivalents were $364.3 million at September 30, 2023, compared with $288.0 million at year-end 2022. Net cash used in investing was $83.4 million; net cash used in financing was $219.9 million.
- Total debt was $2,017.7 million, down from $2,094.5 million at December 31, 2022; long-term debt on the balance sheet was $2,005.1 million. No revolving-facility borrowings were outstanding; $13.4 million of letters of credit were outstanding against the $500 million facility.
- Management said operating cash flows, cash balances and available revolving capacity should meet financing needs for at least 12 months and expected no covenant compliance challenges over that period. The company reported compliance with debt covenants; approximately 89% of debt carried fixed rates.
Business trends, outlook and risks
- Management reported stable demand for Americas non-residential products and services, but softer mechanical-product volumes as customers adjusted ordering after lead times improved. Residential demand was also weak. Electronic-security revenue remained strong.
- Management expected stable Americas non-residential demand, continued residential softness, and continued electronic-product revenue growth through the remainder of 2023. Pricing was expected to help offset inflation. The filing does not provide a consolidated numerical earnings or revenue forecast.
- International demand remained soft, particularly in China and Global Portable Security. Nine-month International volume and product mix pressured segment performance.
- Risk factors include construction-market weakness, inflation, currency and credit-market volatility, debt refinancing, competition, product quality and liability, acquisition integration, supply-chain disruption, cybersecurity and tax uncertainty. Allegion expected global minimum tax rules to increase its effective tax rate beginning in 2024, but said the impact could not yet be quantified and could be material.
- Environmental reserves were $22.0 million at quarter-end, including $13.0 million for remediation of previously disposed sites. Management said pending legal matters were not expected to materially affect results or financial condition. Standard product warranty liability was $19.6 million.
Material changes and notable items
- Q3 Americas revenue was nearly flat year over year, while International revenue rose 3.0%; nine-month International revenue and operating income declined.
- The 2022 Access Technologies acquisition materially affects year-over-year comparisons, particularly nine-month revenue and investing cash flows. In January 2023, Allegion acquired German SaaS workforce-management business plano for initial cash consideration of $36.6 million; contingent consideration may also be payable.
- Interest expense rose $18.0 million for the nine-month period, primarily reflecting the 5.411% notes issued in 2022, prior revolving borrowings and higher variable borrowing rates. The $400 million 3.200% notes mature October 1, 2024.
- Allegion paid $119.2 million in dividends and repurchased $19.9 million of shares in the first nine months. A $500 million repurchase authorization remained available at September 30. In October, Allegion Ventures invested $20 million in Ambient.ai.
Important facts for investors to verify
- Whether lower volume—especially in residential products, mechanical products and International markets—persists, and whether pricing and productivity continue to offset inflation.
- How the Access Technologies and plano acquisitions affect growth, margins, integration costs and debt needs; plano purchase accounting remained preliminary.
- Funding or refinancing plans for the $400 million notes due in October 2024, and exposure to variable rates and covenant requirements.
- The eventual effect of global minimum tax implementation on Allegion’s effective tax rate and cash taxes.
- Whether environmental, warranty and other legal contingencies change materially from reported estimates.