Allegion plc — Q2 2023 Form 10-Q
Business context and reporting period. Allegion is a global security products and solutions provider, reporting through Allegion Americas and Allegion International. This unaudited quarterly filing covers the three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Unless stated otherwise, amounts are in millions of dollars.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net revenue | $912.5 | $773.1 | $1,835.5 | $1,496.7 |
| Operating income | $184.6 | $147.1 | $355.6 | $264.1 |
| Operating margin | 20.2% | 19.0% | 19.4% | 17.6% |
| Net earnings attributable to Allegion | $142.0 | $115.1 | $265.5 | $208.1 |
| Diluted earnings per share | $1.61 | $1.30 | $3.01 | $2.35 |
| Interest expense | $23.7 | $17.2 | $47.3 | $29.1 |
| Effective tax rate | 12.6% | 13.6% | 14.4% | 13.4% |
Q2 revenue rose 18.0%; pricing contributed 8.9 percentage points and acquisitions/divestitures 12.5 points, offset in part by a 3.3-point volume decline. First-half revenue increased 22.6%, driven by pricing, acquisitions and higher Americas volume. Cost of goods sold was 56.0% of Q2 revenue versus 59.3% a year earlier; selling and administrative expense increased to 23.8% of revenue from 21.7%.
Cash flow and liquidity. First-half operating cash flow was $230.1, versus $109.1 in 2022. Capital expenditures were $40.0; investing cash outflow was $61.2, including $28.6 for the plano acquisition. Financing cash outflow was $138.4, including $79.3 of dividends and $19.9 of share repurchases. Cash increased $34.6 to $322.6 from year-end 2022.
At June 30, total debt was $2,059.3, including $2,046.7 of long-term debt; cash was $322.6. Current assets were $1,275.2 and current liabilities $660.8. The $500 million revolving facility had $39.0 outstanding at quarter-end, repaid in July 2023, and $13.4 of letters of credit outstanding. The company reported covenant compliance and said it expects operating cash flows, cash balances and available borrowing capacity to meet financing needs for at least the next 12 months. Approximately 87% of outstanding indebtedness bore fixed rates.
Segments and changes versus prior period
- Allegion Americas: Q2 revenue increased 23.8% to $727.2, while segment operating income rose 27.5% to $195.4 and margin improved to 26.9% from 26.1%. First-half revenue grew 32.4% to $1,468.1 and operating margin increased to 26.0% from 24.9%. Pricing, productivity and Access Technologies contributed; volume/product mix and acquisition-related costs were offsets.
- Allegion International: Q2 revenue was nearly flat at $185.3, down 0.3%; operating margin improved to 7.5% from 6.3%. First-half revenue declined 5.2% to $367.4, and operating income fell 24.8% to $24.5; margin declined to 6.7% from 8.4%. Lower Global Portable Security volumes, foreign exchange and mix weighed on results.
- Q2 operating income increased $37.5. Management attributed the improvement chiefly to pricing and productivity gains exceeding inflation and investment spending; lower volume/mix, foreign exchange, and higher restructuring and acquisition expenses were headwinds. First-half operating income increased $91.5.
Outlook, commentary and notable items
- Management reported stable demand for Americas non-residential products and services in the first half, but noted that customers adjusted ordering patterns as lead times improved, reducing mechanical product volumes. Residential mechanical demand was also soft; electronic security demand remained strong.
- Management expects Americas non-residential demand to remain stable through the rest of 2023, continued softness in residential mechanical products, and continued growth in Americas electronic product revenue. Pricing is expected to help mitigate inflation for the remainder of 2023. No quantified company-wide revenue or earnings guidance is provided in the supplied filing text.
- International Global Portable Security demand remained soft as the market normalized after pandemic-era demand. Allegion cited broader uncertainties including inflation and macroeconomic conditions, construction-market strength, foreign exchange, competition, supply-chain disruption, cybersecurity, product liability, acquisition integration, legal matters and tax/regulatory changes.
- Allegion acquired plano, a German SaaS workforce-management business, on January 3, 2023, for initial cash consideration of $36.6; additional contingent consideration may be payable. Its purchase-price allocation remained preliminary at June 30. The Access Technologies business contributed $199.2 of first-half revenue and $11.5 of earnings before income taxes, excluding specified acquisition/integration expenses and acquisition-financing interest.
- First-half restructuring expenses were $4.5; acquisition and integration expenses were $6.9. Environmental reserves were $23.0 at June 30. Management said pending legal matters were not expected to have a material adverse effect and that there were no material changes to previously disclosed risk factors or market-risk exposure.
Important facts for investors to verify
- Whether pricing and productivity continue to offset inflation and any further deterioration in product volumes, especially Americas mechanical and International portable-security products.
- How much reported growth and margin performance reflects acquisitions, particularly Access Technologies, versus organic performance; also monitor the integration costs and plano contingent consideration.
- Interest expense, variable-rate borrowing costs and refinancing needs, including the $400 million of 3.200% senior notes due in 2024.
- Cash conversion, working-capital movements, capital spending and the continued use of cash for dividends and share repurchases.
- Potential changes to environmental, warranty, litigation and other contingencies, and progress in completing plano’s preliminary acquisition accounting.