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 ," "the Company", "we," "our," or "us") is a leading global provider of security products and solutions operating in three geographic regions:Americas , EMEA 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. The impacts of the COVID-19 pandemic have negatively affected the global economy, disrupted supply chains and created significant volatility and disruption in financial markets. The outbreak and continuing spread of COVID-19 has resulted in a substantial curtailment of business activities worldwide, including all major geographic markets that we serve. As part of the efforts to contain the spread of COVID-19, federal, state and local governments have imposed various restrictions on the conduct of business and travel, such as stay-at-home orders and quarantines. These measures, as well as changes in employee health and safety concerns and consumer spending patterns, trends and preferences, have led to widespread business closures and lower demand. In addition, changes in commercial real estate occupancy, constraints on government and institutional budgets and the uncertain business climate have led to declines and delays in new construction activity, including in many of the commercial and institutional construction markets we serve. As the pandemic and resulting economic challenges have adversely impacted and will likely continue to adversely impactAllegion , we continue to closely monitor their effects on all aspects of our business and the markets in which we operate. While the events surrounding the pandemic continued to unfold during the first and second quarters of 2020,Allegion's primary focus was, and continues to be, the health and safety of employees, our business continuity plan, evolving customer needs and the well-being of the many communities around the world in which we operate. Further, in order to continue our operations, as permitted by respective federal, state and local governments,Allegion has adopted numerous health and safety measures in accordance with best-practice safe hygiene guidelines issued by recognized health experts like theU.S. Centers for Disease Control and Prevention ("CDC"), theEuropean Centre for Disease Prevention and Control ("ECDC") and theWHO , as well as any applicable government mandates, in order to protect our employees, customers, suppliers and other business partners. These health and safety measures include, but are not limited to: •Work-from-home arrangements for employees, where possible; •Continuous safe hygiene education in accordance with evolving guidelines; •Daily and weekly communication updates to leadership and team members; •Aggressive and regular deep cleaning and disinfecting schedules; •Social distancing measures, such as signage and physical barriers or reconfigurations of work spaces; •Reduced density measures, such as staggering work shifts and breaks; •Mask use requirements and expectations at our facilities; •Temperature and health screenings prior to entering facilities; •Increased supplies available for employees, like masks, cleaning solutions, hand sanitizers, thermometers and gloves; and •Temporary travel and in-person meeting restrictions 23 -------------------------------------------------------------------------------- Table of Contents Periodically during the pandemic,Allegion did experience temporary production shut-downs due either to government mandate or to help ensure employee safety, most notably inItaly and theBaja region ofMexico . However, the vast majority of our manufacturing facilities have remained open and operational throughout the pandemic, in part due to the above noted measures and because many of our global operations have been deemed essential businesses. All of our facilities are operational as ofJune 30, 2020 , and we remain focused on business continuity and ensuring our facilities remain operational where safe and appropriate to do so. We will also continue to serve our customers when needed through our channel partners or inventory on hand.Allegion currently expects that our global manufacturing facilities will remain operational throughout the remainder of 2020; however, such expectation is dependent upon future governmental actions, demand for our products, the stability of our global supply chain and our ability to continue to operate in a safe manner. To the extent any additional temporary closures or adjustments to production are necessary, such measures will be implemented in a way that allows us to resume operations in an efficient and safe manner, while also minimizing disruption to customers and our overall business, including prudent measures to mitigate, to the extent possible, any financial impacts. While the temporary closures we experienced during the first six months of 2020 have 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. In response to the pandemic, its resulting negative economic impacts and softer markets, we have implemented a business continuity plan with actions to address these negative impacts to our business, including a temporary freeze on non-critical hiring, non-essential travel and share repurchases; actions to reduce our temporary and permanent workforce; reductions to discretionary spending; elimination of non-essential investments; and, re-prioritization of capital expenditures. We continue to monitor, evaluate and manage our operating plans, including our inventory levels and supply of materials around the world, and we will continue to closely monitor the impact of COVID-19 on our business, employees, customers, suppliers, distribution channels and other business partners. The pandemic will likely continue to impactAllegion in numerous and evolving ways that we may not be able to accurately predict; however, we believe that our actions taken to date, our financial flexibility and certain potential measures within our control will allow us to maintain a sound financial position, as well as provide for adequate resources to fund our on-going operating and financing needs.
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.
Impairment of
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 EMEA 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 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, as well as three indefinite-lived trade names in the EMEA andAsia Pacific segments, were impaired. Consequently, goodwill and indefinite-lived trade name impairment charges totaling$96.3 million were recorded during the first quarter. While no further triggering events were identified by management as ofJune 30, 2020 , if the ongoing economic impact of the pandemic proves to be more severe than estimated, or if the economic recovery takes longer to materialize or does not materialize as strongly as anticipated, this could result in future impairment charges. 2020 Dividends
During the six months ended
Share repurchases
During the six 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 $ 589.5 $ 731.2
Cost of goods sold 342.9 58.2 % 410.5 56.1 %
Selling and administrative expenses 150.1 25.5 % 175.0 23.9 %
Operating income 96.5 16.4 % 145.7 19.9 %
Interest expense 13.0 13.4
Other (income) expense, net (4.4) 0.7
Earnings before income taxes 87.9 131.6
Provision for income taxes 14.2 22.2
Net earnings 73.7 109.4
Less: Net earnings attributable to
noncontrolling interests - 0.1
Net earnings attributable to Allegion plc $ 73.7 $ 109.3
Diluted net earnings per ordinary share
attributable to Allegion plc ordinary
shareholders: $ 0.80 $ 1.16
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 June 30, 2020 , decreased by 19.4%, or
$141.7 million , compared with the same period in 2019, due to the following:
Pricing 0.6 %
Volume (19.1) %
Divestitures (0.3) %
Currency exchange rates (0.6) %
Total (19.4) %
The decrease in Net revenues was principally driven by lower volumes across all
regions primarily due to the economic challenges stemming from the ongoing
COVID-19 pandemic. Additional decreases were due to foreign currency exchange
rate movements and the impact of the divestitures of our Colombia and Turkey
businesses in 2019. These decreases were slightly offset by improved pricing.
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 June 30, 2020 , decreased $49.2
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 June 30, 2020 , decreased to 16.4% from 19.9% for the same period in 2019,
due to the following:
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In millions Operating Income Operating Margin
June 30, 2019 $ 145.7 19.9 %
Pricing and productivity in excess of inflation 21.6 2.9 %
Volume / product mix (70.8) (7.1) %
Restructuring / acquisition expenses (3.1) (0.3) %
Currency exchange rates 1.7 0.5 %
Investment spending 1.1 0.3 %
Divestitures 0.3 0.2 %
June 30, 2020 $ 96.5 16.4 %
The decreases were primarily due to unfavorable volume/product mix, as well as
increased restructuring and acquisition expenses. These decreases were partially
offset by pricing improvements and productivity in excess of inflation, foreign
currency exchange rate movements, decreased investment spending and the impact
of the divestitures of our Colombia and Turkey businesses 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 ongoing selling
and administrative functions compared by the same ongoing 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. As a result
of the ongoing COVID-19 pandemic, certain of our facilities experienced
productivity challenges during the second quarter due to temporary closures and
lower volume and demand; however, these productivity decreases were more than
offset by the benefits of certain non-U.S. government incentives, reductions in
both variable and share-based compensation and reductions or delays of other
business spending.
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 June 30, 2020 , decreased $0.4
million compared with the same period in 2019, primarily due to a lower
weighted-average interest rate on our outstanding indebtedness.
Other (Income) Expense, Net
The components of Other (income) expense, net for the three months ended
June 30, 2020 and 2019, were as follows:
In millions 2020 2019
Interest income $ (0.1) $ (0.4)
Foreign currency exchange (gain) loss (0.1) 0.5
Loss from equity method investments - 0.3
Net periodic pension and postretirement benefit (income) cost,
less service cost (0.5) 0.9
Other (3.7) (0.6)
Other (income) expense, net $ (4.4) $ 0.7
For the three months ended June 30, 2020 , Other (income) expense, net was
favorable $5.1 million compared with the same period in 2019, primarily due to
higher unrealized investment gains, which are reflected in Other in the table
above, as well as favorable Net periodic pension and postretirement benefit
(income) cost, less service cost.
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Provision for Income Taxes
The effective income tax rates for the three months ended June 30, 2020 and
2019, were 16.2% and 16.9%, respectively. The decrease in the effective tax rate
compared to 2019 is primarily due to the favorable mix of income earned in lower
tax rate jurisdictions.
Results of Operations - Six months ended
% of % of
In millions, except per share amounts 2020 revenues 2019 revenues
Net revenues $ 1,264.2 $ 1,386.2
Cost of goods sold 724.5 57.3 % 788.6 56.9 %
Selling and administrative expenses 318.0 25.2 % 343.9 24.8 %
Goodwill impairment charge 96.3 7.6 % - - %
Operating income 125.4 9.9 % 253.7 18.3 %
Interest expense 25.9 27.1
Other income, net (0.4) (0.4)
Earnings before income taxes 99.9 227.0
Provision for income taxes 25.7 37.3
Net earnings 74.2 189.7
Less: Net earnings attributable to
noncontrolling interests 0.1 0.2
Net earnings attributable to Allegion plc $ 74.1 $ 189.5
Diluted net earnings per ordinary share
attributable to Allegion plc ordinary
shareholders: 0.80 2.00
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 six months ended June 30, 2020 , decreased by 8.8%, or
$122.0 million , compared with the same period in 2019, due to the following:
Pricing 0.9 %
Volume (8.6) %
Divestitures (0.3) %
Currency exchange rates (0.8) %
Total (8.8) %
The decrease in Net revenues was principally driven by lower volumes across all
regions primarily due to the economic challenges stemming from the ongoing
COVID-19 pandemic. Additional decreases were due to foreign currency exchange
rate movements and the impact of the divestitures of our Colombia and Turkey
businesses in 2019. These decreases were slightly offset by improved pricing.
Operating Income/Margin
Operating income for the six months ended June 30, 2020 , decreased $128.3
million compared to the same period in 2019, and Operating margin for the six
months ended June 30, 2020 , decreased to 9.9% from 18.3% for the same period in
2019 due to the following:
27-------------------------------------------------------------------------------- Table of Contents In millions Operating Income Operating Margin June 30, 2019$ 253.7 18.3 % Pricing and productivity in excess of inflation 35.1 2.4 % Volume / product mix (66.1) (3.5) % Restructuring / acquisition expenses (2.0) (0.2) % Currency exchange rates 1.4 0.2 % Investment spending (0.9) (0.1) % Divestitures 0.5 0.1 % Impairment of goodwill and trade names (96.3) (7.3) % June 30, 2020$ 125.4 9.9 % These decreases were primarily due to the goodwill and indefinite-lived trade name impairment charges discussed above and unfavorable volume/product mix, and to a lesser extent due to increased restructuring and acquisition expenses and investment spending. These decreases were partially offset by pricing improvements and productivity in excess of inflation, foreign currency exchange rate movements and the impact of the divestitures of ourColombia andTurkey businesses during the prior year. As a result of the ongoing COVID-19 pandemic, certain of our facilities experienced productivity challenges, particularly during the second quarter, due to temporary closures and lower volume and demand; however, these productivity decreases were more than offset by the benefits of certain non-U.S. government incentives, reductions in both variable and share-based compensation and reductions or delays of other business spending. Interest Expense Interest expense for the six months endedJune 30, 2020 , decreased$1.2 million compared with the same period in 2019, primarily due to a lower weighted-average interest rate on our outstanding indebtedness. Other Income, Net The components of Other income, net for the six months endedJune 30, 2020 and 2019, were as follows: In millions 2020 2019 Interest income$ (0.6) $ (0.7) Foreign currency exchange loss 0.8 0.3 Loss from equity method investments 0.5 0.4 Net periodic pension and postretirement benefit (income) cost, less service cost (1.0) 1.8 Other (0.1) (2.2) Other income, net$ (0.4) $ (0.4) Provision for Income Taxes The effective income tax rates for the six months endedJune 30, 2020 and 2019, were 25.7% and 16.4%, 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 and the favorable mix of income earned in lower tax rate jurisdictions.
Review of Business Segments
We operate in and report financial results for three segments:Americas , EMEA 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. 28
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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 and six months ended
Three months ended Six months ended
In millions 2020 2019 % Change 2020 2019 % Change
Net revenues
Americas $ 444.3 $ 545.1 (18.5) % $ 956.4 $ 1,020.4 (6.3) %
EMEA 111.0 142.2 (21.9) % 240.9 285.1 (15.5) %
Asia Pacific 34.2 43.9 (22.1) % 66.9 80.7 (17.1) %
Total $ 589.5 $ 731.2 $ 1,264.2 $ 1,386.2
Segment operating income
(loss)
Americas $ 120.8 $ 161.2 (25.1) % $ 267.4 $ 282.1 (5.2) %
EMEA (5.6) 1.6 (450.0) % (4.5) 12.4 (136.3) %
Asia Pacific (3.6) 1.3 (376.9) % (101.5) (0.2) N/M
Total $ 111.6 $ 164.1 $ 161.4 $ 294.3
Segment operating margin
Americas 27.2 % 29.6 % 28.0 % 27.6 %
EMEA (5.0) % 1.1 % (1.9) % 4.3 %
Asia Pacific (10.5) % 3.0 % (151.7) % (0.2) %
"N/M" = not meaningful
Americas
Our Americas segment is a leading provider of security products and solutions in
approximately 30 countries throughout North America , Central America , the
Caribbean and South 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 , Technical Glass Products ("TGP") and Von Duprin .
Net Revenues
Net revenues for the three months ended June 30, 2020 , decreased by 18.5%, or
$100.8 million , compared to the same period in 2019, due to the following:
Pricing 0.7 %
Volume (18.8) %
Divestitures (0.3) %
Currency exchange rates (0.1) %
Total (18.5) %
The decrease in Net revenues was principally driven by lower volumes due to the
economic challenges stemming from the ongoing COVID-19 pandemic. Additional
decreases were due to the impact of the divestiture of our Colombia business in
2019 and foreign currency exchange rate movements. These decreases were slightly
offset by improved pricing. Net revenues from non-residential products for the
three months ended June 30, 2020 , decreased mid-teens compared to the same
period in the prior year, primarily driven by lower volumes. Net revenues from
residential products for the three months ended June 30, 2020 , decreased
mid-twenties compared to the same period in the prior year, also primarily
driven by lower volumes.
Further, 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 ended June 30, 2020 , Net revenues from the sale
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of electronic products in the Americas segment decreased low twenties compared
to the same period in the prior year, primarily driven by lower volumes.
Electronic products include all electrified product categories including, but
not limited to, electronic locks, access controls and electrified exit devices.
Net revenues for the six months ended June 30, 2020 , decreased by 6.3%, or $64.0
million , compared to the same period in 2019, due to the following:
Pricing 1.1 %
Volume (6.9) %
Divestitures (0.4) %
Currency exchange rates (0.1) %
Total (6.3) %
The decrease in Net revenues was principally driven by lower volumes due to the
economic challenges stemming from the ongoing COVID-19 pandemic, particularly
during the three months ended June 30, 2020 . Additional decreases were due to
the impact of the divestiture of our Colombia business in 2019 and foreign
currency exchange rate movements. These decreases were partially offset by
improved pricing. Net revenues from non-residential products for the six months
ended June 30, 2020 , decreased mid-single digits compared to the same period in
the prior year, primarily driven by lower volumes. Net revenues from residential
products for the six months ended June 30, 2020 , decreased high single digits
compared to the same period in the prior year, also primarily driven by lower
volumes. For the six months ended June 30, 2020 , Net revenues from the sale of
electronic products in the Americas segment decreased high single digits
compared to the same period in the prior year.
Operating income/margin
Segment operating income for the three months endedJune 30, 2020 , decreased$40.4 million compared to the same period in 2019, and Segment operating margin for the three months endedJune 30, 2020 , decreased to 27.2% from 29.6%, due to the following: In millions Operating Income Operating Margin June 30, 2019$ 161.2 29.6 % Pricing and productivity in excess of inflation 9.4 1.5 % Volume / product mix (50.3) (4.4) % Currency exchange rates 2.1 0.5 % Investment spending 0.1 0.1 % Divestitures 0.3 0.2 % Restructuring / acquisition expenses (2.0) (0.3) % June 30, 2020$ 120.8 27.2 % The decreases were primarily due to unfavorable volume/product mix, as well as increased restructuring and acquisition expenses. These decreases were partially offset by pricing improvements and productivity in excess of inflation, foreign currency exchange rate movements, decreased investment spending and the impact of the divestiture of ourColombia business in 2019. As a result of the ongoing COVID-19 pandemic, certain of our facilities in theAmericas experienced productivity challenges due to temporary closures and lower volume and demand; however, these productivity decreases were more than offset by reductions in variable compensation and reductions or delays of other business spending. 30 -------------------------------------------------------------------------------- Table of Contents Segment operating income for the six months endedJune 30, 2020 , decreased$14.7 million compared to the same period in 2019, and Segment operating margin for the six months endedJune 30, 2020 , increased to 28.0% from 27.6%, due to the following: In millions Operating Income Operating Margin June 30, 2019$ 282.1 27.6 % Pricing and productivity in excess of inflation 21.1 1.8 % Volume / product mix (37.2) (1.8) % Currency exchange rates 2.4 0.3 % Investment spending (1.8) (0.2) % Divestitures 0.6 0.2 % Restructuring / acquisition expenses 0.2 0.1 % June 30, 2020$ 267.4 28.0 % Segment operating income decreased primarily due to unfavorable volume/product mix, as well as increased investment spending. These decreases were partially offset by pricing improvements and productivity in excess of inflation, foreign currency exchange rate movements, the impact of the divestiture of ourColombia business in 2019 and year-over-year decreases in restructuring and acquisition expenses. As a result of the ongoing COVID-19 pandemic, certain of our facilities in theAmericas experienced productivity challenges due to temporary closures and lower volume and demand, particularly during the second quarter; however, these productivity decreases were more than offset by reductions in variable compensation and reductions or delays of other business spending. Segment operating margin increased primarily due to pricing improvements and productivity in excess of inflation, foreign currency exchange rate movements, the impact of the divestiture of ourColombia business in 2019 and year-over-year decreases in restructuring and acquisition expenses. These increases were partially offset by unfavorable volume/product mix and increased investment spending. EMEA Our EMEA segment provides security products, services and solutions in approximately 85 countries throughoutEurope , theMiddle East 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 endedJune 30, 2020 , decreased by 21.9%, or$31.2 million , compared to the same period in 2019, due to the following: Pricing 0.8 % Volume (21.2) % Divestitures (0.2) % Currency exchange rates (1.3) % Total (21.9) % The decrease in Net revenues was principally driven by lower volumes due to the economic challenges stemming from the ongoing COVID-19 pandemic. Additional decreases were due to unfavorable foreign currency exchange rate movements and the divestiture of ourTurkey business in the prior year. These decreases were slightly offset by improved pricing. 31
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Table of Contents Net revenues for the six months endedJune 30, 2020 , decreased by 15.5%, or$44.2 million , compared to the same period in 2019, due to the following: Pricing 0.7 % Volume (14.0) % Divestitures (0.3) % Currency exchange rates (1.9) % Total (15.5) % The decrease in Net revenues was principally driven by lower volumes due to the economic challenges stemming from the ongoing COVID-19 pandemic. Additional decreases were due to unfavorable foreign currency exchange rate movements and the divestiture of ourTurkey business in the prior year. These decreases were slightly offset by improved pricing.
Operating income (loss)/margin
Segment operating income (loss) for the three months endedJune 30, 2020 , was unfavorable$7.2 million compared to the same period in 2019, and Segment operating margin for the three months endedJune 30, 2020 , decreased to (5.0)% from 1.1%, due to the following: Operating Income In millions (Loss) Operating Margin June 30, 2019 $ 1.6 1.1 % Pricing and productivity in excess of inflation 6.3 4.4 % Volume / product mix (16.7) (13.6) % Currency exchange rates (0.2) (0.1) % Investment spending 0.8 0.7 % Restructuring expenses 2.6 2.5 % June 30, 2020 $ (5.6) (5.0) % The decreases were primarily due to unfavorable volume/product mix, as well as unfavorable foreign currency exchange rate movements. These were partially offset by pricing improvements and productivity in excess of inflation, year-over-year decreases in restructuring expenses and decreased investment spending. As a result of the ongoing COVID-19 pandemic, certain of our facilities in EMEA experienced productivity challenges due to temporary closures and lower volume and demand, particularly inItaly ; however, this was more than offset by the benefits of certain government incentives and reductions in variable compensation and other business spending. Segment operating income (loss) for the six months endedJune 30, 2020 , was unfavorable$16.9 million compared to the same period in 2019, and Segment operating margin for the six months endedJune 30, 2020 , decreased to (1.9)% from 4.3%, due to the following: Operating Income In millions (Loss) Operating Margin June 30, 2019 $ 12.4 4.3 % Pricing and productivity in excess of inflation 5.4 1.8 % Volume / product mix (23.7) (8.9) % Currency exchange rates (0.7) (0.1) % Investment spending 0.8 0.4 % Divestitures (0.1) - % Restructuring / acquisition expenses 2.9 1.1 % Impairment of indefinite-lived trade name (1.5) (0.5) % June 30, 2020 $ (4.5) (1.9) % Segment operating income (loss) decreased primarily due to unfavorable volume/product mix, as well as 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 pricing improvements and productivity in excess of inflation, decreased investment spending and year-over-year decreases in restructuring and acquisition expenses. As a result of the ongoing COVID-19 pandemic, certain of our facilities in EMEA experienced productivity challenges due to temporary 32 -------------------------------------------------------------------------------- Table of Contents closures and lower volume and demand, particularly inItaly ; however, this was more than offset by the benefits of certain government incentives and reductions in variable compensation and other business spending. Segment operating margin decreased primarily due to unfavorable volume/product mix, as well as unfavorable foreign currency exchange rate movements and an impairment of an indefinite-lived trade name. These decreases were partially offset by pricing improvements and productivity in excess of inflation, decreased investment spending and year-over-year decreases in restructuring and acquisition expenses. Asia Pacific 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 endedJune 30, 2020 , decreased by 22.1%, or$9.7 million , compared to the same period in 2019, due to the following: Pricing (1.1) % Volume (16.9) % Currency exchange rates (4.1) % Total (22.1) % The decrease in Net revenues was principally driven by lower volumes due to the economic challenges stemming from the ongoing COVID-19 pandemic and weakness in theChina residential and Australian markets, as well as unfavorable foreign currency exchange rate movements and lower pricing. Net revenues for the six months endedJune 30, 2020 , decreased by 17.1%, or$13.8 million , compared to the same period in 2019, due to the following: Pricing (0.7) % Volume (11.3) % Currency exchange rates (5.1) % Total (17.1) % The decrease in Net revenues was principally driven by lower volumes due to the economic challenges stemming from the ongoing COVID-19 pandemic and weakness in theChina residential and Australian markets, as well as unfavorable foreign currency exchange rate movements and lower pricing.
Operating income (loss)/margin
Segment operating income (loss) for the three months endedJune 30, 2020 , was unfavorable$4.9 million compared to the same period in 2019, and Segment operating margin for the three months endedJune 30, 2020 , decreased to (10.5)% from 3.0%, due to the following: Operating Income In millions (Loss) Operating Margin June 30, 2019 $ 1.3 3.0 % Pricing and productivity in excess of inflation 0.5 1.2 % Volume / product mix (3.7) (10.1) % Currency exchange rates (0.2) (0.4) % Investment spending 0.3 0.8 % Restructuring / acquisition expenses (1.8) (5.0) % June 30, 2020 $ (3.6) (10.5) % 33
-------------------------------------------------------------------------------- Table of Contents The decreases were primarily due to unfavorable volume/product mix, as well as increased restructuring and acquisition expenses and unfavorable foreign currency exchange rate movements. These were partially offset by productivity improvements in excess of lower pricing and inflation and decreased investment spending. Pricing and productivity in excess of inflation includes a combination of government incentives and reductions in variable compensation and other business spending in response to the COVID-19 pandemic, as well as a$1.8 million charge related to a product quality dispute. Segment operating loss for the six months endedJune 30, 2020 , increased$101.3 million compared to the same period in 2019, and Segment operating margin for the six months endedJune 30, 2020 , decreased to (151.7)% from (0.2)%, due to the following: In millions Operating Loss Operating Margin June 30, 2019$ (0.2) (0.2) % Pricing and productivity in excess of inflation 1.2 1.5 % Volume / product mix (5.2) (7.1) % Currency exchange rates (0.4) (0.5) % Investment spending 0.4 0.5 % Restructuring / acquisition expenses (2.5) (3.1) % Impairment of goodwill and indefinite-lived trade names (94.8) (142.8) % June 30, 2020$ (101.5) (151.7) % 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 and indefinite-lived trade name impairment charges of$6.7 million in the first quarter of 2020. Additional factors contributing to the increased Segment operating loss and lower Segment operating margin include unfavorable volume/product mix, increased restructuring and acquisition expenses and unfavorable foreign currency exchange rate movements. These factors were partially offset by productivity improvements in excess of lower pricing and inflation and decreased investment spending. Pricing and productivity in excess of inflation includes a combination of government incentives and reductions in variable compensation and other business spending in response to the COVID-19 pandemic, as well as a$1.8 million charge related to a product quality dispute.
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 and fund capital expenditures and 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 continue to closely monitor 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 COVID-19 pandemic and the resulting global economic slowdown has negatively impacted our business and results of operations, we have no required principal payments on our long-term debt untilSeptember 2022 , maintain cash and cash equivalents of$302.4 million and have unused availability of$483.7 million under our Revolving Facility as ofJune 30, 2020 . Further, our business operates with low capital intensity, providing flexibility during this time of continued 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 other potential measures within the Company's control 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 six
months ended
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