ALLEGION PLC The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that may cause a difference include, but are not limited to, those discussed under Part I, Item 1A - Risk Factors in the Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . The following section is qualified in its entirety by the more detailed information, including our Condensed and Consolidated Financial Statements and the notes thereto, which appears elsewhere in this Quarterly Report.
Overview
Organization
Allegion plc ("Allegion ," "we," "our," or "us") is a leading global provider of security products and solutions operating in three geographic regions:Americas , EMEIA andAsia Pacific . We sell a wide range of security products and solutions for end-users in commercial, institutional and residential markets worldwide, including the education, healthcare, government, hospitality, commercial office and single and multi-family residential markets. Our leading brands include CISA®, Interflex®, LCN®, Schlage®, SimonsVoss® and Von Duprin®. Recent Developments
COVID-19 pandemic
InMarch 2020 , a global pandemic was declared by theWorld Health Organization ("WHO") related to COVID-19. This pandemic has created significant uncertainties and disruption in the global economy.Allegion is closely monitoring the most recent developments regarding the pandemic, remaining focused on the health and safety of employees, as well as the health of our business, both in the short and long-term. We continue to monitor, evaluate and manage our operating plans, including our inventory levels and supply of materials around the world, in light of the most recent developments. Further,Allegion is adhering to best-practice safe hygiene guidelines by recognized health experts like the WHO, as well as any applicable government mandates related to the COVID-19 pandemic. We remain focused on business continuity and ensuring our facilities remain operational where safe and appropriate to do so. As ofApril 22, 2020 , we have temporarily suspended operations inItaly andMexico as a result of compliance with general public health decrees. At this time, we expect to reopen these operations upon expiration of the local orders, which are currently set to expire onMay 3, 2020 forItaly andMay 30, 2020 forMexico , or earlier, if permitted.Allegion will continue to comply with all applicable government mandates, if and as they apply to our operations. In addition, periodic work stoppages at certain plants could be possible due to temporary reduction in customer demand, shortage of materials or employee safety. We will continue to serve our customers when possible through our channel partners or inventory on hand. These temporary measures are being implemented in a way that allows prompt production startup when public health and market conditions improve. To the extent any additional temporary closures or adjustments to production are necessary, such measures will be implemented in a way that minimizes disruption to customers and our overall business, including continuing to take prudent measures to mitigate, to the extent possible, any financial impacts. While these temporary closures have already had a negative impact on our business, any additional local orders or decrees resulting in new or extended temporary shut-downs will drive further unfavorable impacts to our operations, ability to serve our customers and potentially our financial position and liquidity. We have also recently implemented several actions to address the COVID-19 impact to our business, including a temporary freeze on hiring and share repurchases, reductions to discretionary spending, elimination of non-essential investments and re-prioritization of capital expenditures. In addition, we have recently announced restructuring initiatives to be implemented across several businesses and functions outside ofthe United States , which are intended to optimize and simplify the Company's non-U.S. operations and cost structure. Further, as a result of the global economic disruption and uncertainty due to the COVID-19 pandemic, we performed interim impairment tests on the goodwill balances for our EMEIA andAsia Pacific reporting units, as well as on certain indefinite-lived trade name assets in these two regions, during the first quarter of 2020. As discussed in more detail in Notes 4 and 5 to the Condensed and Consolidated Financial Statements, the results of these interim impairment tests indicated that the estimated fair value of theAsia Pacific reporting unit was less than its carrying value as ofMarch 31, 2020 . Consequently, a goodwill impairment charge of$88.1 million was recorded. Additionally, it was determined that three indefinite-lived trade names in the EMEIA andAsia Pacific segments were impaired, resulting in an additional$8.2 million of impairment charges. 22 -------------------------------------------------------------------------------- Table of Contents The Company has updated its Risk Factors in Part II, Item 1A, in light of the COVID-19 pandemic and its potential impact on our business, results of operations, financial condition and cash flows.
2020 Dividends
During the three months ended
Share repurchases
During the three months ended
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Results of Operations - Three months ended
% of % of
In millions, except per share amounts 2020 revenues 2019 revenues
Net revenues $ 674.7 $ 655.0
Cost of goods sold 381.6 56.6 % 378.1 57.7 %
Selling and administrative expenses 167.9 24.9 % 168.9 25.8 %
Impairment of goodwill and indefinite-lived trade
names 96.3 14.2 % - - %
Operating income 28.9 4.3 % 108.0 16.5 %
Interest expense 12.9 13.7
Other expense (income), net 4.0 (1.1)
Earnings before income taxes 12.0 95.4
Provision for income taxes 11.5 15.1
Net earnings 0.5 80.3
Less: Net earnings attributable to noncontrolling
interests 0.1 0.1
Net earnings attributable to Allegion plc $ 0.4 $ 80.2
Diluted net earnings per ordinary share
attributable to Allegion plc ordinary
shareholders: $ - $ 0.84
The discussions that follow describe the significant factors contributing to the
changes in our results of operations for the periods presented and form the
basis used by management to evaluate the financial performance of the business.
Net Revenues
Net revenues for the three months ended March 31, 2020 , increased by 3.0%, or
$19.7 million , compared with the same period in 2019, due to the following:
Pricing 1.3 %
Volume 3.0 %
Divestitures (0.4) %
Currency exchange rates (0.9) %
Total 3.0 %
The increase in Net revenues was primarily driven by higher volumes and improved
pricing, partially offset by unfavorable foreign currency exchange rate
movements and the impact of the divestitures of our Colombia and Turkey
businesses in 2019.
Pricing includes increases or decreases of price, including discounts,
surcharges and/or other sales deductions, on our existing products and services.
Volume includes increases or decreases of revenue due to changes in unit volume
of existing products and services, as well as new products and services.
Operating Income/Margin
Operating income for the three months ended March 31, 2020 , decreased $79.1
million compared to the same period in 2019. Operating margin, which we define
as Operating income as a percentage of total Net revenues, for the three months
ended March 31, 2020 , decreased to 4.3% from 16.5% for the same period in 2019,
due to the following:
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In millions Operating Income Operating Margin
March 31, 2019 $ 108.0 16.5 %
Pricing and productivity in excess of inflation 13.5 1.9 %
Volume / product mix 4.7 0.2 %
Restructuring / acquisition expenses 1.1 0.2 %
Currency exchange rates (0.3) 0.1 %
Investment spending (2.0) (0.3) %
Divestitures 0.2 0.1 %
Impairment of goodwill and indefinite-lived trade names (96.3) (14.4) %
March 31, 2020 $ 28.9 4.3 %
Operating income decreased primarily due to the goodwill and indefinite-lived
trade name impairment charges discussed above, foreign currency exchange rate
movements and increased investment spending. These decreases were partially
offset by pricing improvements and productivity in excess of inflation,
favorable volume/product mix, decreases in restructuring and acquisition
expenses and the impact of the divestitures of our Colombia and Turkey
businesses during the prior year.
Operating margin decreased primarily due to the goodwill and indefinite-lived
trade name impairment charges discussed above and increased investment spending.
These decreases were partially offset by pricing improvements and productivity
in excess of inflation, favorable volume/product mix, decreases in restructuring
and acquisition expenses, foreign currency exchange rate movements and the
impact of the divestitures during the prior year.
Pricing and productivity in excess of inflation includes the impact to both
Operating income and Operating margin from pricing, as defined above, in
addition to productivity and inflation. Productivity represents improvements in
unit costs of materials, cost reductions related to improvements to our
manufacturing design and processes and reductions in selling and administrative
expenses due to productivity projects. Inflation includes both unit costs for
the current period compared to the average actual cost for the prior period,
multiplied by current year volumes, and current period costs of on-going selling
and administrative functions compared by the same on-going expenses in the prior
period. Expenses related to increased head count for strategic initiatives, new
facilities or significant improvements for strategic initiatives and new product
development, are captured in Investment spending in the table above.
Volume/product mix represents the impact to both Operating income and Operating
margin due to increases or decreases of revenue due to changes in unit volume,
including new products and services, including the effect of changes in the mix
of products and services sold on Cost of goods sold.
Interest Expense
Interest expense for the three months ended March 31, 2020 , decreased $0.8
million compared with the same period in 2019, primarily due to a lower
weighted-average interest rate on our outstanding indebtedness.
Other Expense (Income), Net
The components of Other expense (income), net for the three months ended
March 31, 2020 and 2019, were as follows:
In millions 2020 2019
Interest income $ (0.5) $ (0.3)
Foreign currency exchange loss (gain) 0.9 (0.2)
Loss from equity method investments 0.5 0.1
Net periodic pension and postretirement benefit (income) cost,
less service cost (0.5) 0.9
Other 3.6 (1.6)
Other expense (income), net $ 4.0 $ (1.1)
For the three months ended March 31, 2020 , Other expense (income), net was
unfavorable $5.1 million compared with the same period in 2019, primarily due to
unrealized losses on investments in 2020 compared to investment income in 2019,
both of which are reflected in Other in the table above.
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Provision for Income Taxes
The effective income tax rates for the three months ended March 31, 2020 and
2019, were 95.8% and 15.8%, respectively. The increase in the effective tax rate
compared to 2019 is primarily due to the unfavorable tax impact related to the
goodwill and indefinite-lived trade name impairment charges, partially offset by
the favorable benefit of excess share-based compensation deductions.
Review of Business Segments
We operate in and report financial results for three segments:Americas , EMEIA andAsia Pacific . These segments represent the level at which our chief operating decision maker reviews our financial performance and makes operating decisions. Segment operating income (loss) is the measure of profit and loss that our chief operating decision maker uses to evaluate the financial performance of the business and as the basis for resource allocation, performance reviews and compensation. For these reasons, we believe that Segment operating income (loss) represents the most relevant measure of Segment profit and loss. Our chief operating decision maker may exclude certain charges or gains, such as corporate charges and other special charges, to arrive at a Segment operating income (loss) that is a more meaningful measure of profit and loss upon which to base our operating decisions. We define Segment operating margin as Segment operating income (loss) as a percentage of the segment's Net revenues.
The segment discussions that follow describe the significant factors contributing to the changes in results for each segment included in Net earnings.
Segment Results of Operations - For the three months endedMarch 31 In millions 2020 2019 % Change Net revenues Americas$ 512.1 $ 475.3 7.7 % EMEIA 129.9 142.9 (9.1) % Asia Pacific 32.7 36.8 (11.1) % Total$ 674.7 $ 655.0 Segment operating income (loss) Americas$ 146.6 $ 120.9 21.3 % EMEIA 1.1 10.8 (89.8) % Asia Pacific (97.9) (1.5) (6,426.7) % Total$ 49.8 $ 130.2 Segment operating margin Americas 28.6 % 25.4 % EMEIA 0.8 % 7.6 % Asia Pacific (299.4) % (4.1) % Americas OurAmericas segment is a leading provider of security products and solutions in approximately 30 countries throughoutNorth America ,Central America , theCaribbean andSouth America . The segment sells a broad range of products and solutions including locks, locksets, portable locks, key systems, door closers, exit devices, doors and door systems, electronic products and access control systems to end-users in commercial, institutional and residential facilities, including the education, healthcare, government, hospitality, commercial office and single and multi-family residential markets. This segment's primary brands are LCN, Schlage,Steelcraft andVon Duprin .
Net Revenues
Net revenues for the three months ended
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--------------------------------------------------------------------------------Table of Contents Pricing 1.6 % Volume 6.6 % Divestitures (0.4) % Currency exchange rates (0.1) % Total 7.7 % The increase in Net revenues was primarily driven by higher volumes and improved pricing, partially offset by foreign currency exchange rate movements and the impact of the divestiture of ourColombia business in 2019. Net revenues from both residential and non-residential products increased high single digits for the three months endedMarch 31, 2020 , compared to the same period in the prior year, primarily driven by higher volumes and improved pricing. Also, as end-users have continued to adopt newer technologies in their facilities and homes, accelerated by the increasing adoption of the Internet of Things ("IoT"), growth in electronic security products and solutions has become an increased metric monitored by management and of focus to our investors. For the three months endedMarch 31, 2020 , Net revenues from the sale of electronic products in theAmericas segment increased low double-digits compared to the same period in the prior year. Electronic products include all electrified product categories including, but not limited to, electronic locks, access controls and electrified exit devices.
Operating income/margin
Segment operating income for the three months endedMarch 31, 2020 , increased$25.7 million compared to the same period in 2019, and Segment operating margin for the three months endedMarch 31, 2020 , increased to 28.6% from 25.4%, due to the following: In millions Operating Income Operating Margin March 31, 2019$ 120.9 25.4 % Pricing and productivity in excess of inflation 11.7 2.0 % Volume / product mix 13.1 1.0 % Currency exchange rates 0.3 0.1 % Investment spending (1.9) (0.4) % Divestitures 0.3 0.1 % Restructuring / acquisition expenses 2.2 0.4 % March 31, 2020$ 146.6 28.6 % The increases were primarily due to pricing improvements and productivity in excess of inflation, favorable volume/product mix, foreign currency exchange rate movements, decreases in restructuring and acquisition expenses and the impact of the divestiture of ourColombia business in 2019. These increases were partially offset by increased investment spending.
EMEIA
Our EMEIA segment provides security products, services and solutions in approximately 85 countries throughoutEurope , theMiddle East ,India andAfrica . The segment offers end-users a broad range of products, services and solutions including locks, locksets, portable locks, key systems, door closers, exit devices, doors and door systems, electronic products and access control systems, as well as time and attendance and workforce productivity solutions. This segment's primary brands are AXA,Bricard , Briton, CISA, Interflex and SimonsVoss. This segment also resells LCN, Schlage andVon Duprin products, primarily in theMiddle East .
Net Revenues
Net revenues for the three months ended
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--------------------------------------------------------------------------------Table of Contents Pricing 0.7 % Volume (6.9) % Divestitures (0.4) % Currency exchange rates (2.5) % Total (9.1) % The decrease in Net revenues is primarily due to lower volumes, inclusive of the impact of the COVID-19 pandemic in the region, unfavorable foreign currency exchange rate movements and the divestiture of ourTurkey business in the prior year. These decreases were partially offset by improved pricing.
Operating income/margin
Segment operating income for the three months endedMarch 31, 2020 , decreased$9.7 million compared to the same period in 2019, and Segment operating margin for the three months endedMarch 31, 2020 , decreased to 0.8% from 7.6%, due to the following: In millions Operating Income Operating Margin March 31, 2019 $ 10.8 7.6 % Inflation in excess of pricing and productivity (0.9) (0.7) % Volume / product mix (7.0) (4.7) % Currency exchange rates (0.5) (0.3) % Divestitures (0.1) (0.1) % Restructuring / acquisition expenses 0.3 0.2 % Impairment of indefinite-lived trade name (1.5) (1.2) % March 31, 2020 $ 1.1 0.8 % The decreases were primarily due to inflation in excess of pricing and productivity, unfavorable volume/product mix, unfavorable foreign currency exchange rate movements, the impact of the divestiture of ourTurkey business in 2019 and an impairment of an indefinite-lived trade name. These decreases were partially offset by lower restructuring and acquisition expenses.
OurAsia Pacific segment provides security products, services and solutions in approximately 15 countries throughout theAsia Pacific region. The segment offers end-users a broad range of products, services and solutions including locks, locksets, portable locks, key systems, door closers, exit devices, electronic products and access control systems. This segment's primary brands are Brio, Briton, FSH, Gainsborough, Legge, Milre and Schlage.
Net Revenues
Net revenues for the three months endedMarch 31, 2020 , decreased by 11.1%, or$4.1 million , compared to the same period in 2019, due to the following: Pricing (0.2) % Volume (4.7) % Currency exchange rates (6.2) % Total (11.1) %
The decrease in Net revenues was primarily due to lower volumes, reflecting the impact of the COVID-19 pandemic in the region, and pricing and unfavorable foreign currency exchange rate movements.
Operating loss/margin
Segment operating loss for the three months endedMarch 31, 2020 , increased$96.4 million compared to the same period in 2019, and Segment operating margin for the three months endedMarch 31, 2020 , decreased to (299.4)% from (4.1)%, due to the following: 28 -------------------------------------------------------------------------------- Table of Contents In millions Operating Loss Operating Margin March 31, 2019 $ (1.5) (4.1) % Pricing and productivity in excess of inflation 0.7 1.8 % Volume / product mix (1.5) (4.3) % Currency exchange rates (0.2) (0.7) % Investment spending 0.1 0.3 % Restructuring / acquisition expenses (0.7) (1.8) % Impairment of goodwill and indefinite-lived trade names (94.8) (290.6) % March 31, 2020$ (97.9) (299.4) % The increased Segment operating loss and lower Segment operating margin were primarily due to an$88.1 million goodwill impairment charge for theAsia Pacific reporting unit, as well as indefinite-lived trade name impairment charges of$6.7 million . Additional factors contributing to the increased Segment operating loss and lower Segment operating margin included unfavorable volume/product mix, unfavorable foreign currency exchange rate movements and increased restructuring and acquisition expenses. These factors were partially offset by productivity improvements in excess of inflation and decreased investment spending.
Liquidity and Capital Resources
Sources and uses of liquidity
Our primary source of liquidity is cash provided by operating activities. Cash provided by operating activities is used to invest in new product development, fund capital expenditures and fund working capital requirements and is expected to be adequate to service any future debt, pay any declared dividends and potentially fund acquisitions and share repurchases. Our ability to fund these capital needs depends on our ongoing ability to generate cash provided by operating activities and to access our borrowing facilities (including unused availability under our Revolving Facility) and capital markets. As discussed above, we are closely monitoring the most recent developments regarding the COVID-19 pandemic, including the resulting uncertainties around customer demand, supply chain disruption, the availability and cost of materials, customer and supplier financial condition, levels of liquidity and our ongoing compliance with debt covenants. While the ultimate impact of COVID-19 on our business, financial condition, liquidity and results of operations is dependent on future developments which are highly uncertain, the Company has no required principal payments on its long-term debt untilSeptember 2022 , cash and cash equivalents of$245.3 million and low capital intensity, providing flexibility during this time of uncertainty. We believe that our actions taken to date, future cash provided by operating activities, availability under our Revolving Facility, access to funds on hand and capital markets, as well as certain potential measures within the Company's control that could be put in place to maintain a sound financial position and liquidity will provide adequate resources to fund our operating and financing needs.
The following table reflects the major categories of cash flows for the three
months ended
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