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 , and under Part II, Item 1A - Risk Factors of the Company's Form 10-Q for the quarterly period endedJune 30, 2020 . 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 OrganizationAllegion 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 facilities 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 negatively affected the global economy, disrupted supply chains and created significant volatility and disruption in financial markets. The outbreak and spread of COVID-19 also resulted in a substantial curtailment of business activities worldwide, including the major geographic markets 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, travel restrictions 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 for our products, although the negative impacts of these measures on our results of operations have been less pronounced in the third quarter, as we have not experienced any closures of our production facilities during the quarter and have seen demand rebound for many of our product categories, most notably our residential and portable security products. However, 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. Throughout the pandemic, our primary focus has been, 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. We have 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; •Regular 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, touchless and viral-resistant solutions at perimeter access points and throughout our buildings; •Increased supplies available for employees, like masks, cleaning solutions, hand sanitizers, thermometers and gloves; and •Temporary travel and in-person meeting restrictions. 23
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During the early months of 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 ofSeptember 30, 2020 , and have been operational throughout the entirety of the third quarter. 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, although any additional local orders or decrees resulting in new temporary shut-downs will drive further unfavorable impacts to our operations, ability to serve our customers, and potentially, our financial position and liquidity. 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 potential measures within our control will allow us to maintain a sound financial position, as well as provide for adequate resources to fund our ongoing operating and financing needs. Additionally, as a response to the COVID-19 pandemic, onMarch 27, 2020 , the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was enacted and signed into law, which included measures to assist companies in response to the COVID-19 pandemic. One of these measures was a provision allowing companies to defer the remittance of the employer portion of the social security tax, with half the amount deferred in 2020 required to be paid byDecember 31, 2021 and the other half byDecember 31, 2022 . ThroughSeptember 30, 2020 , we have elected to defer approximately$10 million under this provision, which is classified in Other noncurrent liabilities within our Condensed and Consolidated Balance Sheet. This deferral has also resulted in a benefit to our cash flows from operations for the nine months endedSeptember 30, 2020 . We do not currently anticipate any of the provisions of the CARES Act to impact our annual effective tax rate, and no income tax effects have been recorded during the nine months endedSeptember 30, 2020 .
The Company updated its Risk Factors in Part II, Item 1A of the Company's Form
10-Q for the quarterly period ended
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 intangible asset impairment charges totaling$96.3 million were recorded during the first quarter. 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. Additional impairment charges were recorded during the third quarter relating to supply chain disruptions for a subsidiary in theAsia Pacific segment, which reduced one of its brand's expected future cash flows. As a result, an impairment charge of$2.6 million was recorded, consisting of the write-off of the brand's indefinite-lived trade name and other related assets.
2020 Dividends
During the nine months ended
Share Repurchases
During the nine 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 $ 728.4 $ 748.3
Cost of goods sold 409.2 56.2 % 412.8 55.2 %
Selling and administrative expenses 156.2 21.4 % 167.4 22.4 %
Impairment of goodwill and indefinite-lived
trade names 2.6 0.4 % - - %
Operating income 160.4 22.0 % 168.1 22.5 %
Interest expense 12.9 15.6
Other (income) expense, net (12.2) 2.0
Earnings before income taxes 159.7 150.5
Provision for income taxes 12.8 18.8
Net earnings 146.9 131.7
Less: Net earnings attributable to
noncontrolling interests - 0.1
Net earnings attributable to Allegion plc $ 146.9 $ 131.6
Diluted net earnings per ordinary share
attributable to Allegion plc ordinary
shareholders: $ 1.58 $ 1.40
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 September 30, 2020 , decreased by 2.7%,
or $19.9 million , compared with the same period in 2019, due to the following:
Pricing 0.8 %
Volume (4.2) %
Divestitures (0.3) %
Currency exchange rates 1.0 %
Total (2.7) %
The decrease in Net revenues was principally driven by lower volumes primarily
due to the economic challenges stemming from the ongoing COVID-19 pandemic, as
well as the impact of the divestitures of our Colombia and Turkey businesses in
2019. These decreases were partially offset by improved pricing and the impact
of foreign currency exchange rate movements.
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 September 30, 2020 , decreased $7.7
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 September 30, 2020 , decreased to 22.0% from 22.5% for the same period in
2019, due to the following:
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In millions Operating Income Operating Margin
September 30, 2019 $ 168.1 22.5 %
Pricing and productivity in excess of inflation 14.2 1.7 %
Volume / product mix (20.7) (1.9) %
Restructuring / acquisition expenses (1.5) (0.2) %
Currency exchange rates 3.3 0.2 %
Investment spending (0.5) (0.1) %
Divestitures 0.1 0.1 %
Impairment of intangible assets (2.6) (0.3) %
September 30, 2020 $ 160.4 22.0 %
The decreases in Operating income and Operating margin were primarily due to
unfavorable volume/product mix, year-over-year increases in restructuring and
acquisition expenses, increased investment spending and an intangible asset
impairment charge in the current quarter. 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 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. Pricing and
productivity in excess of inflation includes the benefits of certain non-U.S.
government incentives, reductions in variable compensation and reductions or
delays of other business spending in response to the COVID-19 pandemic.
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 September 30, 2020 , decreased $2.7
million compared with the same period in 2019, which is a result of a $2.7
million prior year charge related to the write-off of previously deferred
financing costs related to the Term Facility, which did not recur in the current
period.
Other (Income) Expense, Net
The components of Other (income) expense, net for the three months ended
September 30, 2020 and 2019, were as follows:
In millions 2020 2019
Interest income $ (0.2) $ (0.4)
Foreign currency exchange loss 0.2 0.8
Loss from equity method investments 0.1 0.1
Net periodic pension and postretirement benefit (income) cost,
less service cost (1.0) 1.4
Other (11.3) 0.1
Other (income) expense, net $ (12.2) $ 2.0
For the three months ended September 30, 2020 , Other (income) expense, net was
favorable $14.2 million compared with the same period in 2019, primarily due to
a gain of $14.0 million related to the reclassification to earnings of
accumulated foreign currency translation adjustments upon the liquidation of a
legal entity in our EMEA region. This gain is included within Other in the table
above.
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Provision for Income Taxes
The effective income tax rates for the three months ended September 30, 2020 and
2019, were 8.0% and 12.5%, 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 and the favorable year-over-year change in the amounts
recognized for uncertain tax positions.
Results of Operations - Nine months ended
% of % of
In millions, except per share amounts 2020 revenues 2019 revenues
Net revenues $ 1,992.6 $ 2,134.5
Cost of goods sold 1,133.7 56.9 % 1,201.4 56.3 %
Selling and administrative expenses 474.2 23.8 % 511.3 24.0 %
Goodwill impairment charge 98.9 5.0 % - - %
Operating income 285.8 14.3 % 421.8 19.8 %
Interest expense 38.8 42.7
Other (income) expense, net (12.6) 1.6
Earnings before income taxes 259.6 377.5
Provision for income taxes 38.5 56.1
Net earnings 221.1 321.4
Less: Net earnings attributable to
noncontrolling interests 0.1 0.3
Net earnings attributable to Allegion plc $ 221.0 $ 321.1
Diluted net earnings per ordinary share
attributable to Allegion plc ordinary
shareholders: $ 2.38 $ 3.40
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 nine months ended September 30, 2020 , decreased by 6.6%, or
$141.9 million , compared with the same period in 2019, due to the following:
Pricing 0.9 %
Volume (7.1) %
Divestitures (0.3) %
Currency exchange rates (0.1) %
Total (6.6) %
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, particularly during the second quarter. Additional decreases
were due to the impact of the divestitures of our Colombia and Turkey businesses
in 2019 and foreign currency exchange rate movements. These decreases were
slightly offset by improved pricing.
Operating Income/Margin
Operating income for the nine months ended September 30, 2020 , decreased $136.0
million compared to the same period in 2019, and Operating margin for the nine
months ended September 30, 2020 , decreased to 14.3% from 19.8% for the same
period in 2019 due to the following:
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In millions Operating Income Operating Margin
September 30, 2019 $ 421.8 19.8 %
Pricing and productivity in excess of inflation 49.3 2.1 %
Volume / product mix (86.8) (2.8) %
Restructuring / acquisition expenses (3.5) (0.2) %
Currency exchange rates 4.7 0.2 %
Investment spending (1.4) (0.1) %
Divestitures 0.6 0.1 %
Impairment of goodwill and intangible assets (98.9) (4.8) %
September 30, 2020 $ 285.8 14.3 %
These decreases in Operating income and Operating margin were primarily due to
the goodwill and intangible asset impairment charges discussed above and
unfavorable volume/product mix, and to a lesser extent due to year-over-year
increases in restructuring and acquisition expenses and increased 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 our Colombia and Turkey 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 variable compensation and reductions or
delays of other business spending in response to the COVID-19 pandemic.
Interest Expense
Interest expense for the nine months ended September 30, 2020 , decreased $3.9
million compared with the same period in 2019, which is due to a lower
weighted-average interest rate during the current year on our outstanding
indebtedness and a $2.7 million prior year charge related to the write-off of
previously deferred financing costs related to the Term Facility, which did not
recur in the current period.
Other (Income) Expense, Net
The components of Other (income) expense, net for the nine months ended
September 30, 2020 and 2019, were as follows:
In millions 2020 2019
Interest income $ (0.8) $ (1.1)
Foreign currency exchange loss 1.0 1.1
Loss from equity method investments 0.6 0.5
Net periodic pension and postretirement benefit (income) cost,
less service cost (2.0) 3.2
Other (11.4) (2.1)
Other (income) expense, net $ (12.6) $ 1.6
For the nine months ended September 30, 2020 , Other (income) expense, net was
favorable $14.2 million compared with the same period in 2019, primarily due to
a gain of $14.0 million related to the reclassification to earnings of
accumulated foreign currency translation adjustments upon the liquidation of a
legal entity in our EMEA region. This gain is included within Other in the table
above.
Provision for Income Taxes
The effective income tax rates for the nine months ended September 30, 2020 and
2019, were 14.8% and 14.9%, respectively. The decrease in the effective tax rate
compared to 2019 is primarily due to the favorable benefit of excess share-based
compensation deductions, the favorable mix of income earned in lower tax rate
jurisdictions, and the favorable year-over-year change in the amounts recognized
for uncertain tax positions, partially offset by the unfavorable tax impact
related to the goodwill and intangible asset impairment charges.
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Review of Business Segments
We operate in and report financial results for three segments: Americas , EMEA
and Asia 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 and nine months endedSeptember 30 Three months ended Nine months ended In millions 2020 2019 % Change 2020 2019 % Change Net revenues Americas$ 539.1 $ 567.8 (5.1) %$ 1,495.5 $ 1,588.2 (5.8) % EMEA 148.4 137.8 7.7 % 389.3 422.9 (7.9) % Asia Pacific 40.9 42.7 (4.2) % 107.8 123.4 (12.6) % Total$ 728.4 $ 748.3 $ 1,992.6 $ 2,134.5 Segment operating income (loss) Americas$ 165.0 $ 175.6 (6.0) %$ 432.4 $ 457.7 (5.5) % EMEA 13.5 7.5 80.0 % 9.0 19.9 (54.8) % Asia Pacific (0.3) 4.1 (107.3) % (101.8) 3.9 N/M Total$ 178.2 $ 187.2 $ 339.6 $ 481.5 Segment operating margin Americas 30.6 % 30.9 % 28.9 % 28.8 % EMEA 9.1 % 5.4 % 2.3 % 4.7 % Asia Pacific (0.7) % 9.6 % (94.4) % 3.2 % "N/M" = not meaningful 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 ,Technical Glass Products ("TGP") andVon Duprin . Net Revenues Net revenues for the three months endedSeptember 30, 2020 , decreased by 5.1%, or$28.7 million , compared to the same period in 2019, due to the following: 29 --------------------------------------------------------------------------------
Table of Contents Pricing 0.8 % Volume (5.4) % Divestitures (0.4) % Currency exchange rates (0.1) % Total (5.1) % 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 ourColombia 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 endedSeptember 30, 2020 , decreased low double digits compared to the same period in the prior year, primarily driven by lower volumes. Net revenues from residential products for the three months endedSeptember 30, 2020 , increased low double digits compared to the same period in the prior year, primarily driven by higher volumes. Additionally, 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 endedSeptember 30, 2020 , Net revenues from the sale of electronic products in theAmericas segment decreased mid-single digits compared to the same period in the prior year, primarily driven by lower volumes due to delays in discretionary projects. Electronic products include all electrified product categories including, but not limited to, electronic locks, access controls and electrified exit devices.
Net revenues for the nine months ended
1.0 %
Volume (6.4) %
Divestitures (0.4) %
Total (5.8) %
The decrease in Net revenues was principally driven by lower volumes due to the
economic challenges stemming from the ongoing COVID-19 pandemic, as well as the
impact of the divestiture of our Colombia business in 2019. These decreases were
partially offset by improved pricing. Net revenues from non-residential products
for the nine months ended September 30, 2020 , decreased high single digits
compared to the same period in the prior year, primarily driven by lower
volumes. Net revenues from residential products for the nine months ended
September 30, 2020 , decreased low single digits compared to the same period in
the prior year, driven by lower pricing and volumes. For the nine months ended
September 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, primarily driven by lower volumes due to delays in discretionary
projects.
Operating income/margin
Segment operating income for the three months ended September 30, 2020 ,
decreased $10.6 million compared to the same period in 2019, and Segment
operating margin for the three months ended September 30, 2020 , decreased to
30.6% from 30.9%, due to the following:
In millions Operating Income Operating Margin
September 30, 2019 $ 175.6 30.9 %
Pricing and productivity in excess of inflation 7.5 1.1 %
Volume / product mix (18.2) (1.6) %
Currency exchange rates 2.0 0.4 %
Investment spending (0.3) (0.1) %
Divestitures 0.1 0.1 %
Restructuring expenses (1.7) (0.2) %
September 30, 2020 $ 165.0 30.6 %
The decreases in Segment operating income and Segment operating margin were primarily due to unfavorable volume/product mix, as well as year-over-year increases in restructuring 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
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impact of the divestiture of our Colombia business in 2019. Pricing and
productivity in excess of inflation includes the benefits of reductions in
variable compensation and reductions or delays of other business spending in
response to the COVID-19 pandemic.
Segment operating income for the nine months ended September 30, 2020 , decreased
$25.3 million compared to the same period in 2019, and Segment operating margin
for the nine months ended September 30, 2020 , increased to 28.9% from 28.8%, due
to the following:
In millions Operating Income Operating Margin
September 30, 2019 $ 457.7 28.8 %
Pricing and productivity in excess of inflation 28.6 1.5 %
Volume / product mix (55.4) (1.7) %
Currency exchange rates 4.4 0.3 %
Investment spending (2.1) (0.1) %
Divestitures 0.7 0.2 %
Restructuring / acquisition expenses (1.5) (0.1) %
September 30, 2020 $ 432.4 28.9 %
Segment operating income decreased primarily due to unfavorable volume/product
mix, as well as increased investment spending and year-over-year increases in
restructuring and acquisition expenses. These decreases were partially offset by
pricing improvements and productivity in excess of inflation, foreign currency
exchange rate movements and the impact of the divestiture of our Colombia
business in 2019. As a result of the ongoing COVID-19 pandemic, certain of our
facilities in the Americas 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
and the impact of the divestiture of our Colombia business in 2019. These
increases were partially offset by unfavorable volume/product mix, increased
investment spending and year-over-year increases in restructuring and
acquisition expenses.
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 endedSeptember 30, 2020 , increased by 7.7%, or$10.6 million , compared to the same period in 2019, due to the following: Pricing 1.0 % Volume 1.9 % Divestitures (0.1) % Currency exchange rates 4.9 % Total 7.7 % The increase in Net revenues was driven by higher volumes, improved pricing and favorable foreign currency exchange rate movements. These increases were slightly offset by the divestiture of ourTurkey business in the prior year. During the third quarter, our EMEA segment experienced a rebound in demand from the second quarter and the related economic challenges from the COVID-19 pandemic across most product categories, most notably portable security products. 31 -------------------------------------------------------------------------------- Table of Contents Net revenues for the nine months endedSeptember 30, 2020 , decreased by 7.9%, or$33.6 million , compared to the same period in 2019, due to the following: Pricing 0.8 % Volume (8.8) % Divestitures (0.3) % Currency exchange rates 0.4 % Total (7.9) % 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 second quarter, as well as the divestiture of ourTurkey business in the prior year. These decreases were slightly offset by improved pricing and favorable foreign currency exchange rate movements.
Operating income/margin
Segment operating income for the three months endedSeptember 30, 2020 , increased$6.0 million compared to the same period in 2019, and Segment operating margin for the three months endedSeptember 30, 2020 , increased to 9.1% from 5.4%, due to the following: In millions Operating Income Operating Margin September 30, 2019 $ 7.5 5.4 % Pricing and productivity in excess of inflation 4.9 3.5 % Volume / product mix (0.8) (0.7) % Currency exchange rates 1.3 0.5 % Investment spending (0.3) (0.2) % Restructuring expenses 0.9 0.6 % September 30, 2020 $ 13.5 9.1 % The increases in Segment operating income and Segment operating margin were primarily due to pricing improvements and productivity in excess of inflation, favorable foreign currency exchange rate movements and year-over-year decreases in restructuring expenses. These increases were partially offset by unfavorable volume/product mix and increased investment spending. Pricing and productivity in excess of inflation includes the benefits of government incentives and reductions in variable compensation and other business spending in response to the COVID-19 pandemic. Segment operating income for the nine months endedSeptember 30, 2020 , decreased$10.9 million compared to the same period in 2019, and Segment operating margin for the nine months endedSeptember 30, 2020 , decreased to 2.3% from 4.7%, due to the following: In millions Operating Income Operating Margin September 30, 2019 $ 19.9 4.7 % Pricing and productivity in excess of inflation 10.3 2.4 % Volume / product mix (24.5) (5.9) % Currency exchange rates 0.6 0.2 % Investment spending 0.5 0.2 % Divestitures (0.1) - % Restructuring / acquisition expenses 3.8 1.0 % Impairment of intangible assets (1.5) (0.3) % September 30, 2020 $ 9.0 2.3 % Segment operating income decreased primarily due to unfavorable volume/product mix, as well as the impact of the divestiture of ourTurkey business in 2019 and an intangible asset impairment charge. These decreases were partially offset by pricing improvements and productivity in excess of inflation, favorable foreign currency exchange rate movements, 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 closures and 32 -------------------------------------------------------------------------------- Table of Contents lower volume and demand, particularly during the second quarter 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 and an impairment of an indefinite-lived trade name. These decreases were partially offset by pricing improvements and productivity in excess of inflation, favorable foreign currency exchange rate movements, 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 ended
0.4 %
Volume (7.2) %
Currency exchange rates 2.6 %
Total (4.2) %
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
Korea . This decrease was partially offset by favorable foreign currency exchange
rate movements and improved pricing.
Net revenues for the nine months ended September 30, 2020 , decreased by 12.6%,
or $15.6 million , compared to the same period in 2019, due to the following:
Pricing (0.3) %
Volume (9.9) %
Currency exchange rates (2.4) %
Total (12.6) %
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
end markets throughout the region, as well as unfavorable foreign currency
exchange rate movements and lower pricing.
Operating income (loss)/margin
Segment operating income (loss) for the three months endedSeptember 30, 2020 , was unfavorable$4.4 million compared to the same period in 2019, and Segment operating margin for the three months endedSeptember 30, 2020 , decreased to (0.7)% from 9.6%, due to the following: Operating Income In millions (Loss) Operating Margin September 30, 2019 $ 4.1 9.6 % Pricing and productivity in excess of inflation 0.2 0.5 % Volume / product mix (1.7) (3.5) % Currency exchange rates 0.2 0.1 % Investment spending 0.2 0.4 % Restructuring expenses (0.7) (1.8) % Impairment of intangible assets (2.6) (6.0) % September 30, 2020 $ (0.3) (0.7) % 33
-------------------------------------------------------------------------------- Table of Contents The decreases in Segment operating income (loss) and Segment operating margin were primarily due to unfavorable volume/product mix, intangible asset impairment charges and year-over-year increases in restructuring expenses. These decreases were partially offset by pricing improvements and productivity in excess of inflation, favorable foreign currency exchange rate movements and decreased investment spending. Pricing and productivity improvements in excess of inflation were partially offset by the impact of a$1.1 million recovery of previously remitted non-income taxes in the prior year, which did not recur in the current year. Segment operating income (loss) for the nine months endedSeptember 30, 2020 , was unfavorable$105.7 million compared to the same period in 2019, and Segment operating margin for the nine months endedSeptember 30, 2020 , decreased to (94.4)% from 3.2%, due to the following: Operating Income In millions (Loss) Operating Margin September 30, 2019 $ 3.9 3.2 % Pricing and productivity in excess of inflation 1.4 1.2 % Volume / product mix (6.9) (5.7) % Currency exchange rates (0.2) (0.1) % Investment spending 0.6 0.5 % Restructuring / acquisition expenses (3.2) (2.6) % Impairment of goodwill and intangible assets (97.4) (90.9) % September 30, 2020$ (101.8) (94.4) % The decreases in Segment operating income (loss) and Segment operating margin were primarily due to an$88.1 million goodwill impairment charge for theAsia Pacific reporting unit in the first quarter of 2020 and intangible asset impairment charges of$9.3 million in 2020. Additional factors contributing to the decreases include unfavorable volume/product mix, year-over-year increases in restructuring and acquisition expenses and unfavorable foreign currency exchange rate movements. These decreases were partially offset by productivity improvements in excess of lower pricing and inflation and decreased investment spending. Pricing and productivity improvements in excess of inflation includes the benefits of government incentives and reductions in variable compensation and other business spending, particularly in the second quarter, in response to the COVID-19 pandemic, which were partially offset by a$1.8 million charge related to a product quality dispute during the second quarter and the impact of a$1.1 million recovery of previously remitted non-income taxes in the prior year, which did not recur in the current year.
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$428.9 million and have unused availability of$485.0 million under our Revolving Facility as ofSeptember 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 nine
months ended
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