Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 ended December 31, 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

Organization

Allegion plc ("Allegion," "the Company", "we," "our," or "us") is a leading global provider of security products and solutions operating in two segments: Allegion Americas and Allegion International. 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 and Industry Trends and Outlook

The COVID-19 pandemic and uneven economic recovery continue to create volatility in the global economy and on our business. During the third quarter of 2021, we continued to see strong and accelerating demand for our products and services in most of the markets we serve. However, we have also experienced an acceleration of several macroeconomic challenges in the current quarter that have negatively impacted our ability to meet this robust demand, such as supply chain disruptions and delays; shortages in materials including reductions in allocations of electronic components and other parts from key suppliers; labor shortages; and increased commodity, material component, packaging, freight and labor inflation. These challenges have also created inefficiencies, including periodic production interruptions, that have negatively impacted our productivity and margin performance during the quarter. While these challenges are impacting all our global businesses, to date they have had a more pronounced impact on our Allegion Americas operating segment.

While we currently anticipate these industry-wide challenges to continue beyond 2021, we are rapidly adapting to navigate these challenges, and we expect to be well-positioned to convert demand to revenue once conditions normalize. We remain focused on providing exceptional service to our customers; implementing measures to mitigate operational and distribution inefficiencies and reduce backlogs, such as aligning resources to re-engineer product designs and configurations and developing alternate sources of supply; implementing pricing initiatives to address rising production, material and freight costs; and investing in business initiatives to drive future growth. We will continue to explore various options to control costs and enhance financial performance, while minimizing disruption to customers and the overall business; however, the full impacts of the pandemic and the on-going macroeconomic challenges on our business, results of operations, financial condition and cash flows remain uncertain.

The pandemic and related macroeconomic challenges stemming from the uneven economic recovery will likely continue to impact us in numerous and evolving ways that we may not be able to accurately predict. The full impact of the pandemic will continue to depend on future developments such as the continued spread and duration of the pandemic, the emergence of future variant strains of the COVID-19 virus which may be more contagious or severe, the availability and distribution of effective medical treatments and vaccines, vaccination rates, as well as any government-imposed restrictions or mandates. Further, any new or strengthened government-imposed restrictions or mandates on the conduct of business and travel could adversely impact our ability to carry out business as usual in certain markets. The challenges and uncertainties related to the COVID-19 pandemic and its potential impact on our business, results of operations, financial condition and cash flows, as well as other challenges and uncertainties that could affect our businesses are described further under Part I, Item 1A. "Risk Factors" contained in our Annual Report on Form 10-K for the year ended December 31, 2020.

Acquisitions

In July 2021, we acquired certain assets of Astrum Benelux B.V. ("Astrum Benelux") as well as 100% of the equity of WorkforceIT B.V. in the Netherlands ("WorkforceIT"), both of which were previously held under common control and offer workforce management technology products and solutions in the Benelux region of Europe. Both WorkforceIT and the assets acquired from Astrum Benelux have been integrated into our Allegion International segment.

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QMI Divestiture

As previously disclosed, during the fourth quarter of 2020, the net assets of our Qatar Metal Industries ("QMI") business, met the criteria to be classified as held for sale, and accordingly, were written down to fair value, resulting in a Loss on assets held for sale in the fourth quarter of 2020 of $37.9 million.

On February 28, 2021, we completed our divestiture of QMI. The impacts of this divestiture on our results of operations for the three and six months ended September 30, 2021 are reflected in the discussions below.

2021 Dividends and Share Repurchases

During the nine months ended September 30, 2021, we paid dividends of $1.08 per ordinary share to shareholders and repurchased approximately 1.8 million shares for $212.7 million.

Results of Operations – Three months ended September 30

In millions, except per share amounts			2021						% of revenues						2020						% of revenues
Net revenues			$	717.0											$	728.4
Cost of goods sold			416.5						58.1		%				409.2						56.2		%
Selling and administrative expenses			162.1						22.6		%				156.2						21.4		%
Impairment of goodwill and intangible assets			—						—		%				2.6						0.4		%
Operating income			138.4						19.3		%				160.4						22.0		%
Interest expense			12.3												12.9
Other income, net			(14.7)												(12.2)
Earnings before income taxes			140.8												159.7
(Benefit from) provision for income taxes			(2.8)												12.8
Net earnings			143.6												146.9
Less: Net earnings attributable to noncontrolling interests			0.1												—
Net earnings attributable to Allegion plc			$	143.5											$	146.9
Diluted net earnings per ordinary share attributable to Allegion plc ordinary shareholders:			$	1.59											$	1.58

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, 2021, decreased by 1.6%, or $11.4 million, compared with the same period in 2020, due to the following:

Pricing			1.4		%
Volume			(3.0)		%
Acquisitions / divestitures			(0.6)		%
Currency exchange rates			0.6		%
Total			(1.6)		%

The decrease in Net revenues was principally due to lower volumes in our Allegion Americas segment, resulting from the supply chain disruptions and delays and shortages in materials, components and labor discussed above. Also contributing to the decrease in Net revenues was the divestiture of our QMI business in February 2021. 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.

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Operating Income/Margin

Operating income for the three months ended September 30, 2021, decreased $22.0 million compared to the same period in 2020. Operating margin, which we define as Operating income as a percentage of total Net revenues, for the three months ended September 30, 2021, decreased to 19.3% from 22.0% for the same period in 2020, due to the following:

In millions			Operating Income						Operating Margin
September 30, 2020			$	160.4					22.0		%
Inflation in excess of pricing and productivity			(11.2)						(1.9)		%
Volume / product mix			(10.5)						(0.8)		%
Restructuring / acquisition expenses			1.7						0.2		%
Currency exchange rates			0.4						—		%
Investment spending			(6.5)						(0.9)		%
Acquisitions / divestitures			1.5						0.4		%
Impairment of intangible assets			2.6						0.3		%
September 30, 2021			$	138.4					19.3		%

The decrease in Operating income was primarily due to inflation and productivity challenges in excess of pricing improvements, unfavorable volume/product mix and increased investment spending. These decreases were partially offset by a year-over-year decrease in restructuring and acquisition expenses, currency exchange rate movements, the impact of our QMI divestiture and a prior year intangible asset impairment charge that did not recur in the current year.

The decrease in Operating margin was primarily due to inflation and productivity challenges in excess of pricing improvements, unfavorable volume/product mix and increased investment spending. These decreases were partially offset by a year-over-year decrease in restructuring and acquisition expenses, the impact of our QMI divestiture and a prior year intangible asset impairment charge that did not recur in the current year.

Inflation in excess of pricing and productivity 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 other significant spending for strategic initiatives or new product and channel development, are captured in Investment spending in the table above. Inflation in excess of pricing and productivity in the third quarter of 2021 reflects the impacts of the increased commodity, material component, packaging, freight and labor inflation, as well as the inefficiencies caused by more acute supply chain challenges and shortages of materials, components and labor discussed 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 September 30, 2021, decreased $0.6 million compared with the same period in 2020, primarily due to a lower weighted-average interest rate on our outstanding indebtedness.

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Other Income, Net

The components of Other income, net for the three months ended September 30, 2021 and 2020, were as follows:

In millions			2021						2020
Interest income			$	(0.3)					$	(0.2)
Foreign currency exchange loss			0.8						0.2
(Earnings and gains from the sale of) losses from equity method investments			(6.3)						0.1
Net periodic pension and postretirement benefit income, less service cost			(2.1)						(1.0)
Other			(6.8)						(11.3)
Other income, net			$	(14.7)					$	(12.2)

Other income, net for the three months ended September 30, 2021, included a gain of $6.4 million from the sale of the our equity method investment in Nuki Home Solutions GmbH ("Nuki"), which is included within (Earnings and gains from the sale of) losses from equity method investments and $6.8 million of other investment gains and income, which are included in Other in the table above.

Other income, net for the three months ended September 30, 2020, included 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 former EMEA segment, which is included within Other in the table above.

(Benefit from) Provision for Income Taxes

The effective income tax rates for the three months ended September 30, 2021 and 2020, were (2.0)% and 8.0%, respectively. The decrease in the effective tax rate compared to 2020 is primarily due to favorable settlements of uncertain tax positions, a current quarter benefit related to the mix of income earned in lower tax rate jurisdictions and the unfavorable tax impact recognized in 2020 related to the recording of valuation allowances.

Results of Operations – Nine months ended September 30

In millions, except per share amounts			2021						% of revenues						2020						% of revenues
Net revenues			$	2,158.2											$	1,992.6
Cost of goods sold			1,239.8						57.4		%				1,133.7						56.9		%
Selling and administrative expenses			503.3						23.3		%				474.2						23.8		%
Impairment of goodwill and intangible assets			—						—		%				98.9						5.0		%
Operating income			415.1						19.2		%				285.8						14.3		%
Interest expense			37.0												38.8
Other income, net			(21.4)												(12.6)
Earnings before income taxes			399.5												259.6
Provision for income taxes			28.9												38.5
Net earnings			370.6												221.1
Less: Net earnings attributable to noncontrolling interests			0.4												0.1
Net earnings attributable to Allegion plc			$	370.2											$	221.0
Diluted net earnings per ordinary share attributable to Allegion plc ordinary shareholders:			$	4.08											$	2.38

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.

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Net revenues

Net revenues for the nine months ended September 30, 2021, increased by 8.3%, or $165.6 million, compared with the same period in 2020, due to the following:

Pricing			1.4		%
Volume			5.2		%
Acquisitions / divestitures			(0.6)		%
Currency exchange rates			2.3		%
Total			8.3		%

The increase in Net revenues was principally driven by higher volumes, particularly during the second quarter given the impact of the comparison to the muted demand and temporary plant shut-downs we experienced in the second quarter of 2020 due to the COVID-19 pandemic. Improved pricing and the impact of foreign currency exchange rate movements also contributed to the increase in Net revenues. These increases were slightly offset by the divestiture of our QMI business in February 2021.

Operating Income/Margin

Operating income for the nine months ended September 30, 2021, increased $129.3 million compared to the same period in 2020, and Operating margin for the nine months ended September 30, 2021, increased to 19.2% from 14.3% for the same period in 2020, due to the following:

In millions			Operating Income						Operating Margin
September 30, 2020			$	285.8					14.3		%
Inflation in excess of pricing and productivity			(11.2)						(0.9)		%
Volume / product mix			27.8						0.3		%
Restructuring / acquisition expenses			15.8						0.8		%
Currency exchange rates			8.6						0.1		%
Investment spending			(13.6)						(0.7)		%
Acquisitions / divestitures			3.0						0.3		%
Impairment of goodwill and intangible assets			98.9						5.0		%
September 30, 2021			$	415.1					19.2		%

The increases in Operating income and Operating margin were primarily due to the prior year goodwill and intangible asset impairment charges, which did not recur in the current year, favorable volume/product mix and a year-over-year decrease in restructuring and acquisition expenses. Also contributing to the increases were foreign currency exchange rate movements and the impact of our QMI divestiture. These increases were partially offset by inflation in excess of pricing and productivity improvements and increased investment spending.

Interest Expense

Interest expense for the nine months ended September 30, 2021, decreased $1.8 million compared with the same period in 2020, primarily due to a lower weighted-average interest rate on our outstanding indebtedness.

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Other Income, Net

The components of Other income, net for the nine months ended September 30, 2021 and 2020, were as follows:

In millions			2021						2020
Interest income			$	(0.4)					$	(0.8)
Foreign currency exchange loss			2.0						1.0
(Earnings and gains from the sale of) losses from equity method investments			(6.0)						0.6
Net periodic pension and postretirement benefit income, less service cost			(6.0)						(2.0)
Other			(11.0)						(11.4)
Other income, net			$	(21.4)					$	(12.6)

For the nine months ended September 30, 2021, Other income, net increased $8.8 million compared with the same period in 2020, primarily due to investment gains and income in 2021, which are reflected in Other in the table above, increased Net periodic pension and postretirement benefit income, less service cost and the gain of $6.4 million on the sale of our equity method investment in Nuki, which exceeded the prior year impact of a $14.0 million gain related to the reclassification to earnings of accumulated foreign currency translation adjustments upon the liquidation of a legal entity in our former EMEA segment.

Provision for Income Taxes

The effective income tax rates for the nine months ended September 30, 2021 and 2020, were 7.2% and 14.8%, respectively. The decrease in the effective tax rate compared to 2020 is primarily due to the unfavorable tax impact recognized in 2020 related to goodwill and intangible asset impairment charges, favorable settlements of uncertain tax positions and the unfavorable tax impact recognized in 2020 related to the recording of valuation allowances, which were partially offset by an unfavorable year-over-year change in share-based compensation deductions.

Review of Business Segments

We operate in and report financial results for two segments: Allegion Americas and Allegion International. These segments represent the level at which our chief operating decision maker reviews our financial performance and makes operating decisions.

Segment operating income 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 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 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. As previously announced, effective January 1, 2021, we combined our previous operations in EMEA and Asia Pacific into a new segment named Allegion International, in addition to renaming our Americas segment "Allegion Americas". Business segment information for EMEA and Asia Pacific for the three and nine months ended September 30, 2020, has been combined in the segment results of operations presented below to reflect this change in reportable segments.

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Segment Results of Operations - For the three and nine months ended September 30

In millions			2021						2020						% Change						2021						2020						% Change
Net revenues
Allegion Americas			$	524.4					$	539.1					(2.7)		%				$	1,572.7					$	1,495.5					5.2		%
Allegion International			192.6						189.3						1.7		%				585.5						497.1						17.8		%
Total			$	717.0					$	728.4											$	2,158.2					$	1,992.6
Segment operating income (loss)
Allegion Americas			$	133.7					$	165.0					(19.0)		%				$	419.5					$	432.4					(3.0)		%
Allegion International			20.5						13.2						55.3		%				54.0						(92.8)						158.2		%
Total			$	154.2					$	178.2											$	473.5					$	339.6
Segment operating margin
Allegion Americas			25.5		%				30.6		%										26.7		%				28.9		%
Allegion International			10.6		%				7.0		%										9.2		%				(18.7)		%

Allegion Americas

Our Allegion Americas segment is a leading provider of security products and solutions 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 September 30, 2021, decreased by 2.7%, or $14.7 million, compared to the same period in 2020, due to the following:

Pricing						1.5		%
Volume						(4.5)		%
Currency exchange rates						0.3		%
Total						(2.7)		%

The decrease in Net revenues was driven by lower volumes resulting from the supply chain disruptions and delays and shortages of materials, components and labor discussed above. This decrease was partially offset by improved pricing and the impact of foreign currency exchange rate movements.

Net revenues from non-residential products for the three months ended September 30, 2021, decreased by a low single-digits percent compared to the same period in the prior year. While we continued to see strong demand for our non-residential products during the current quarter, the persistent and widespread supply chain challenges and shortages in material, components (including electronic components) and labor discussed above have led to the current quarter Net revenues decline. Further, the combination of these factors have also culminated in our highest non-residential product backlog to date as a company.

Net revenues from residential products for the three months ended September 30, 2021, decreased by a high single digits percent compared to the same period in the prior year. This decrease was primarily driven by supply chain challenges and shortages in labor, material and components, particularly electronic components, in addition to the comparative impact to the third quarter of 2020, which saw a strong rebound in demand after a muted second quarter due to the COVID-19 pandemic. Nonetheless, we continue to see strong demand for our residential products due to a sustained level of DIY home projects and a robust residential housing construction market.

Additionally, growth in electronic security products and solutions has become an increased metric monitored by management and a focus of our investors. Electronic products encompass both residential and non-residential products, and include all electrified product categories including, but not limited to, electronic locks, access controls and electrified exit devices. For the

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three months ended September 30, 2021, Net revenues from the sale of electronic products in the Allegion Americas segment decreased by a high single digits percent compared to the same period in the prior year. As previously disclosed, a surge in global demand for electronic components has led to supply chain challenges and component shortages, which further accelerated during the third quarter. This has led to a reduction in the allocations of electronic components we receive from key suppliers, periodic production interruptions and delays in our ability to meet the elevated level of demand for our electronic products during the current quarter. While considered temporary, we expect these challenges around the availability of electronic components to continue beyond 2021. As a result, we are actively implementing measures to mitigate the operational and distribution inefficiencies these component shortages and other challenges are creating, such as re-engineering product designs and configurations and developing alternate sources of supply.

Net revenues for the nine months ended September 30, 2021, increased by 5.2%, or $77.2 million, compared to the same period in 2020, due to the following:

Pricing						1.5		%
Volume						3.2		%
Currency exchange rates						0.5		%
Total						5.2		%

The increase in Net revenues was principally driven by higher volumes, particularly during the second quarter given the impact of the comparison to the muted demand and temporary plant shut-downs we experienced in the second quarter of 2020 due to the COVID-19 pandemic. Improved pricing and the impact of foreign currency exchange rate movements also contributed to the increase in Net revenues.

Net revenues from non-residential products for the nine months ended September 30, 2021, decreased by a low-single digits percent compared to the same period in the prior year, while Net revenues from residential products for the nine months ended September 30, 2021, increased by greater than twenty percent compared to the same period in the prior year, driven principally by higher volumes in the second quarter of the current year. Net revenues from the sale of electronic products in the Allegion Americas segment for the nine months ended September 30, 2021, increased by a mid-single digits percent compared to the same period in the prior year.

Operating income/margin

Segment operating income for the three months ended September 30, 2021, decreased $31.3 million compared to the same period in 2020, and Segment operating margin for the three months ended September 30, 2021, decreased to 25.5% from 30.6%, due to the following:

In millions						Operating Income						Operating Margin
September 30, 2020						$	165.0					30.6		%
Inflation in excess of pricing and productivity						(15.6)						(3.4)		%
Volume / product mix						(11.3)						(0.8)		%
Currency exchange rates						(0.4)						(0.2)		%
Investment spending						(5.6)						(1.0)		%
Restructuring / acquisition expenses						1.6						0.3		%
September 30, 2021						$	133.7					25.5		%

The decreases in Segment operating income and Segment operating margin were primarily driven by inflation and productivity challenges in excess of pricing improvements, unfavorable volume/product mix, increased investment spending and foreign currency exchange rate movements. These decreases were partially offset by a year-over-year decrease in restructuring and acquisition expenses. Inflation in excess of pricing and productivity reflects the impacts of the increased commodity, material component, packaging, freight and labor inflation, as well as the inefficiencies caused by more acute supply chain challenges and shortages of materials, components and labor discussed above.

Segment operating income for the nine months ended September 30, 2021, decreased $12.9 million compared to the same period in 2020, and Segment operating margin for the nine months ended September 30, 2021, decreased to 26.7% from 28.9%, due to the following:

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In millions						Operating Income						Operating Margin
September 30, 2020						$	432.4					28.9		%
Inflation in excess of pricing and productivity						(13.6)						(1.4)		%
Volume / product mix						3.9						(0.6)		%
Currency exchange rates						1.4						—		%
Investment spending						(9.3)						(0.6)		%
Restructuring / acquisition expenses						4.7						0.4		%
September 30, 2021						$	419.5					26.7		%

The decrease in Segment operating income was primarily driven by inflation in excess of pricing and productivity improvements and increased investment spending. These decreases were partially offset by the impacts of volume/product mix, foreign currency exchange rate movements and a year-over-year decrease in restructuring and acquisition expenses.

The decrease in Segment operating margin was primarily driven by inflation in excess of pricing and productivity improvements, increased investment spending and the dilutive impact of product mix, which exceeded the benefits from higher volumes. These decreases were partially offset by the year-over-year decrease in restructuring and acquisition expenses.

Allegion International

Our Allegion International segment provides security products, services and solutions primarily throughout Europe, Asia and Oceania. 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, Gainsborough, Interflex and SimonsVoss.

Net Revenues

Net revenues for the three months ended September 30, 2021, increased by 1.7%, or $3.3 million, compared to the same period in 2020, due to the following:

Pricing						1.2		%
Volume						1.3		%
Acquisitions / divestitures						(2.4)		%
Currency exchange rates						1.6		%
Total						1.7		%

The increase in Net revenues was driven by higher volumes, improved pricing and foreign currency exchange rate movements. These increases were partially offset by the divestiture of our QMI business in February 2021.

Net revenues for the nine months ended September 30, 2021, increased by 17.8%, or $88.4 million, compared to the same period in 2020, due to the following:

Pricing						0.9		%
Volume						11.4		%
Acquisitions / divestitures						(2.3)		%
Currency exchange rates						7.8		%
Total						17.8		%

The increase in Net revenues was principally driven by higher volumes and foreign currency exchange rate movements, in addition to improved pricing. These increases were partially offset by the divestiture of our QMI business.

Operating income (loss)/margin

Segment operating income for the three months ended September 30, 2021, increased $7.3 million compared to the same period in 2020, and Segment operating margin for the three months ended September 30, 2021, increased to 10.6% from 7.0%, due to the following:

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In millions						Operating Income						Operating Margin
September 30, 2020						$	13.2					7.0		%
Inflation in excess of pricing and productivity						(1.3)						(0.8)		%
Volume / product mix						0.7						0.2		%
Currency exchange rates						0.9						0.2		%
Investment spending						(0.8)						(0.4)		%
Acquisitions / divestitures						1.5						1.1		%
Restructuring expenses						3.7						2.0		%
Impairment of intangible assets						2.6						1.3		%
September 30, 2021						$	20.5					10.6		%

The increases in Segment operating income and Segment operating margin were primarily due to favorable volume/product mix, a year-over-year decrease in restructuring expenses, foreign currency exchange rate movements, the impact of the divestiture of our QMI business in February 2021 and a prior year intangible asset impairment charge that did not recur in the current year. These increases were partially offset by inflation in excess of pricing and productivity improvements and increased investment spending.

Segment operating income (loss) for the nine months ended September 30, 2021, was favorable $146.8 million compared to the same period in 2020, and Segment operating margin for the nine months ended September 30, 2021, improved to 9.2% from (18.7)%, due to the following:

In millions						Operating Income (Loss)						Operating Margin
September 30, 2020						$	(92.8)					(18.7)		%
Pricing and productivity in excess of inflation						2.6						0.5		%
Volume / product mix						23.9						3.8		%
Currency exchange rates						7.2						0.9		%
Investment spending						(1.2)						(0.3)		%
Acquisitions / divestitures						3.0						0.7		%
Restructuring expenses						12.4						2.4		%
Impairment of goodwill and intangible assets						98.9						19.9		%
September 30, 2021						$	54.0					9.2		%

The improvements in Segment operating income (loss) and Segment operating margin were primarily due to the prior year goodwill and intangible asset impairment charges, which did not recur in the current year, favorable volume/product mix and a year-over-year decrease in restructuring expenses. Also contributing to the improvements were pricing and productivity improvements in excess of inflation, foreign currency exchange rate movements and the impact of the divestiture of our QMI business. These improvements were slightly offset by increased 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 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 of September 30, 2021, we maintain cash and cash equivalents of $503.9 million, have no required principal payments on our long-term debt until September 2022, and have unused availability of $485.9 million under our Revolving Facility. Further, our business operates with low capital intensity, providing financial flexibility. We believe that future cash provided by operating activities, availability under our Revolving Facility, access to funds on hand and capital markets, as well as other

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potential measures within our control will provide adequate resources to fund our operating and financing needs and maintain a sound financial position and liquidity.

The following table reflects the major categories of cash flows for the nine months ended September 30. For additional details, see the Condensed and Consolidated Statements of Cash Flows in the Condensed and Consolidated Financial Statements.

In millions			2021						2020
Net cash provided by operating activities			$	356.4					$	289.4
Net cash used in investing activities			(14.9)						(39.3)
Net cash used in financing activities			(309.3)						(179.3)

Operating Activities

Net cash provided by operating activities during the nine months ended September 30, 2021, increased $67.0 million compared to the same period in 2020, primarily driven by increased Net earnings and improvements in working capital.

Investing Activities

Net cash used in investing activities during the nine months ended September 30, 2021, decreased $24.4 million compared to the same period in 2020, primarily due to cash proceeds from the sales of our equity method investment in Nuki and other investments, as well as a decrease in capital expenditures. Partially offsetting these decreases was an increase due to cash paid for our acquisition of Workforce IT and the assets acquired from Astrum Benelux.

Financing Activities

Net cash used in financing activities during the nine months ended September 30, 2021, increased $130.0 million compared to the same period in 2020, primarily due to an increase of $118.6 million in cash used to repurchase shares.

Capitalization

Long-term debt and other borrowings consisted of the following:

In millions			September 30, 2021						December 31, 2020
Term Facility			$	238.8					$	238.8
Revolving Facility			—						—
3.200% Senior Notes due 2024			400.0						400.0
3.550% Senior Notes due 2027			400.0						400.0
3.500% Senior Notes due 2029			400.0						400.0
Other debt			0.4						0.6
Total borrowings outstanding			1,439.2						1,439.4
Discounts and debt issuance costs, net			(8.3)						(9.8)
Total debt			1,430.9						1,429.6
Less current portion of long-term debt			238.4						0.2
Total long-term debt			$	1,192.5					$	1,429.4

As of September 30, 2021, we have an unsecured Credit Agreement in place, consisting of a $700.0 million term loan facility (the “Term Facility”), of which $238.8 million is outstanding at September 30, 2021, and a $500.0 million revolving credit facility (the “Revolving Facility” and, together with the Term Facility, the “Credit Facilities”). The Credit Facilities mature on September 12, 2022. Principal amounts repaid on the Term Facility may not be reborrowed, and we have satisfied our obligation to make quarterly installments on the Term Facility up to the maturity date, with the remaining outstanding balance due on September 12, 2022.

The Revolving Facility provides aggregate commitments of up to $500.0 million, which includes up to $100.0 million for the issuance of letters of credit. At September 30, 2021, there were no borrowings outstanding on the Revolving Facility, and we

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had $14.1 million of letters of credit outstanding. Commitments under the Revolving Facility may be reduced at any time without premium or penalty, and amounts repaid may be reborrowed.

Outstanding borrowings under the Credit Facilities accrue interest at our option of (i) a LIBOR rate plus the applicable margin or (ii) a base rate plus the applicable margin. The applicable margin ranges from 1.125% to 1.500% depending on our credit ratings. At September 30, 2021, outstanding borrowings under the Credit Facilities accrue interest at LIBOR plus a margin of 1.250%, resulting in an interest rate of 1.34%. The Credit Facilities also contain negative and affirmative covenants and events of default that, among other things, limit or restrict our ability to enter into certain transactions. In addition, the Credit Facilities require us to comply with a maximum leverage ratio and a minimum interest expense coverage ratio, as defined within the agreement. As of September 30, 2021, we were in compliance with all covenants.

As of September 30, 2021, we also have $400.0 million outstanding of 3.200% Senior Notes due 2024 (the "3.200% Senior Notes"), $400.0 million outstanding of 3.550% Senior Notes due 2027 (the "3.550% Senior Notes") and $400.0 million outstanding of 3.500% Senior Notes due 2029 (the "3.500% Senior Notes", and all three senior notes collectively, the "Senior Notes"). The Senior Notes require semi-annual interest payments on April 1 and October 1 of each year, and will mature on October 1, 2024, October 1, 2027 and October 1, 2029, respectively.

Historically, the majority of our earnings were considered to be permanently reinvested in jurisdictions where we have made, and intend to continue to make, substantial investments to support the ongoing development and growth of our global operations. At September 30, 2021, we analyzed our working capital requirements and the potential tax liabilities that would be incurred if certain subsidiaries made distributions and concluded that no material changes to our historic permanent reinvestment assertions are required.

Defined Benefit Plans

Our investment objective in managing defined benefit plan assets is to ensure that all present and future benefit obligations are met as they come due. We seek to achieve this goal while trying to mitigate volatility in plan funded status, contributions and expense by better matching the characteristics of the plan assets to that of the plan liabilities. Global asset allocation decisions are based on a dynamic approach whereby a plan’s allocation to fixed income assets increases as the funded status increases. We monitor plan funded status, asset allocation and the impact of market conditions on our defined benefit plans regularly in addition to investment manager performance. For further details on pension plan activity, see Note 11 to the Condensed and Consolidated Financial Statements.

For a further discussion of Liquidity and Capital Resources, refer to Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," contained in our Annual Report on Form 10-K for the year ended December 31, 2020.

Guarantor Financial Information

Allegion US Holding Company Inc. ("Allegion US Hold Co") is the issuer of the 3.200% Senior Notes and 3.550% Senior Notes and is the guarantor of the 3.500% Senior Notes. Allegion plc (the “Parent”) is the issuer of the 3.500% Senior Notes and is the guarantor of the 3.200% Senior Notes and 3.550% Senior Notes. Allegion US Hold Co is 100% owned by the Parent and each of the guarantees of Allegion US Hold Co and the Parent is full and unconditional and joint and several.

The 3.200% Senior Notes and the 3.550% Senior Notes are senior unsecured obligations of Allegion US Hold Co and rank equally with all of Allegion US Hold Co’s existing and future senior unsecured and unsubordinated indebtedness. The guarantee of the 3.200% Senior Notes and the 3.550% Senior Notes is the senior unsecured obligation of the Parent and ranks equally with all of Allegion plc’s existing and future senior unsecured and unsubordinated indebtedness. The 3.500% Senior Notes are senior unsecured obligations of the Parent, are guaranteed by Allegion US Hold Co and rank equally with all of Allegion plc’s existing and future senior unsecured indebtedness.

Each guarantee is effectively subordinated to any secured indebtedness of the Guarantor to the extent of the value of the assets securing such indebtedness. The Senior Notes are structurally subordinated to indebtedness and other liabilities of the subsidiaries of the Guarantor, none of which guarantee the notes. The obligations of the Guarantor under its Guarantee are limited as necessary to prevent such Guarantee from constituting a fraudulent conveyance under applicable law and, therefore, are limited to the amount that the Guarantor could guarantee without such Guarantee constituting a fraudulent conveyance; this limitation, however, may not be effective to prevent such Guarantee from constituting a fraudulent conveyance. If the Guarantee was rendered voidable, it could be subordinated by a court to all other indebtedness (including guarantees and other contingent liabilities) of the Guarantor, and, depending on the amount of such indebtedness, the Guarantor’s liability on its

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Guarantee could be reduced to zero. In such an event, the notes would be structurally subordinated to the indebtedness and other liabilities of the Guarantor.

For further details, terms and conditions of the Senior Notes refer to the Company’s Form 8-K filed October 2, 2017 and Form 8-K filed September 27, 2019.

The following tables present the summarized financial information specified in Rule 1-02(bb)(1) of Regulation S-X for each issuer and guarantor. The summarized financial information has been prepared in accordance with Rule 13-01 of Regulation S-X.

Selected Condensed Statement of Comprehensive Income Information

			Nine months ended September 30, 2021												Year ended December 31, 2020
In millions			Allegion plc						Allegion US Hold Co						Allegion plc						Allegion US Hold Co
Net revenues			$	—					$	—					$	—					$	—
Gross profit			—						—						—						—
Operating loss			(5.3)						(0.4)						(7.5)						(0.2)
Equity earnings in affiliates, net of tax			396.2						111.5						358.8						216.5
Transactions with related parties and subsidiaries(a)			(5.8)						(63.6)						(15.3)						(39.3)
Net earnings			370.2						47.0						314.3						164.7
Net earnings attributable to the entity			370.2						47.0						314.3						164.7

(a) Transactions with related parties and subsidiaries include intercompany interest and fees.

Selected Condensed Balance Sheet Information

			September 30, 2021												December 31, 2020
In millions			Allegion plc						Allegion US Hold Co						Allegion plc						Allegion US Hold Co
Current assets:
Amounts due from related parties and subsidiaries			$	—					$	713.4					$	—					$	20.0
Total current assets			20.6						750.0						19.0						38.7
Noncurrent assets:
Amounts due from related parties and subsidiaries			—						1,240.9						—						1,644.2
Total noncurrent assets			1,792.7						1,324.8						1,793.3						1,671.8
Current liabilities:
Amounts due to related parties and subsidiaries			$	33.0					$	233.4					$	197.5					$	183.9
Total current liabilities			282.1						247.5						204.4						190.7
Noncurrent liabilities:
Amounts due to related parties and subsidiaries			516.4						2,624.3						507.3						2,463.9
Total noncurrent liabilities			914.0						3,427.7						1,143.2						3,267.3

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our Condensed and Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with those accounting principles requires management to use judgments in making estimates and assumptions based on the relevant information available at the end of each period. These estimates and assumptions have a significant effect on reported amounts of assets and liabilities, revenue and expenses, as well as the disclosure of contingent assets and liabilities because they result primarily from the need to make estimates and assumptions on matters that are inherently uncertain. Actual results may differ from estimates.

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Management believes there have been no significant changes during the nine months ended September 30, 2021, to the items we disclosed as our critical accounting policies in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2020.

Recent Accounting Pronouncements

See Note 2 to our Condensed and Consolidated Financial Statements for a discussion of recently issued and adopted accounting pronouncements.

Forward-Looking Statements

Certain statements in this report, other than purely historical information, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “forecast,” “outlook,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” or the negative thereof or variations thereon or similar expressions generally intended to identify forward-looking statements.

Forward-looking statements may relate to such matters as: statements regarding the continued impacts of the global COVID-19 pandemic, supply chain constraints, electronic component and labor shortages, inflation, rising freight and material costs, projections of revenue, margins, expenses, tax provisions, earnings, cash flows, benefit obligations, dividends, share purchases or other financial items; any statements of the plans, strategies and objectives of management for future operations, including those relating to any statements concerning expected development, performance or market share relating to our products and services; any statements regarding future economic conditions or our performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. These statements are based on currently available information and our current assumptions, expectations and projections about future events. While we believe that our assumptions, expectations and projections are reasonable in view of the currently available information, you are cautioned not to place undue reliance on our forward-looking statements. You are advised to review any further disclosures we make on related subjects in materials we file with or furnish to the SEC. Forward-looking statements speak only as of the date they are made and are not guarantees of future performance. They are subject to future events, risks and uncertainties - many of which are beyond our control - as well as potentially inaccurate assumptions, that could cause actual results to differ materially from our expectations and projections. We do not undertake to update any forward-looking statements.

Factors that might affect our forward-looking statements include, among other things:

• adverse impacts to our normal business operations due to the global COVID-19 pandemic;

• competitive factors in the industry in which we compete, including technological developments and increased competition from private label brands;

• the development, commercialization and acceptance of new products and services that meet the varied and evolving needs of our customers;

• the demand for our products and services, including changes in customer and consumer preferences, and our ability to maintain beneficial relationships with large customers;

• our products or solutions fail to meet certification and specification requirements, are defective or otherwise fall short of customers’ needs and expectations;

• the ability to complete and integrate any acquisitions and/or losses related to our investments in external companies;

• business opportunities that diverge from our core business;

• our ability to operate efficiently and productively;

• our ability to effectively manage and implement restructuring initiatives and other organizational changes;

• disruptions in our global supply chain, including supply chain constraints, electronic component and labor shortages, inflation and product manufacturing and logistical services provided by supplier partners;

• the effects of global climate change or other unexpected events, including global health crises, that may disrupt our operations;

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• our ability to manage risks related to our information technology and operational technology systems and cybersecurity, including implementation of new processes that may cause disruptions and be more difficult, costly or time consuming than expected;

• our reliance on third-party vendors for many of the critical elements of our global information and operational technology infrastructure and their failure to provide effective support for such infrastructure;

• disruption and breaches of our information systems;

• ability to recruit and retain a highly qualified and diverse workforce;

• economic, political and business conditions in the markets in which we operate, including changes to trade agreements, sanctions, import and export regulations and custom duties;

• conditions of the institutional, commercial and residential construction and remodeling markets, including the impact of work-from-home trends;

• fluctuations in currency exchange rates;

• availability of and fluctuations in the prices of key commodities and the impact of higher energy prices;

• potential further impairment of our goodwill, indefinite-lived intangible assets and/or our long-lived assets;

• interest rate fluctuations and other changes in borrowing costs, in addition to risks associated with our outstanding and future indebtedness;

• the impact our outstanding indebtedness may have on our business and operations and other capital market conditions, including availability of funding sources and currency exchange rate fluctuations;

• risks related to corporate social responsibility and reputational matters;

• the ability to protect our brand reputation and trademarks;

• the outcome of any litigation, governmental investigations or proceedings;

• claims of infringement of intellectual property rights by third parties;

• adverse publicity or improper conduct by any of our employees, agents or business partners;

• changes to, or changes in interpretations of, current laws and regulations;

• uncertainty and inherent subjectivity related to transfer pricing regulations;

• changes in tax requirements, including tax rate changes, the adoption of new tax legislation or exposure to additional tax liabilities and revised tax law interpretations; and

• risks related to our incorporation in Ireland, including the possible effects on us of future legislation or interpretations in the U.S. that may limit or eliminate potential U.S. tax benefits resulting from our incorporation in a non-U.S. jurisdiction, such as Ireland, or deny U.S. government contracts to us based upon our incorporation in such non-U.S. jurisdiction.

Some of the significant risks and uncertainties that could cause actual results to differ materially from our expectations and projections are described more fully in the “Risk Factors” section of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. There may also be other factors that have not been anticipated or that are not described in our periodic filings with the SEC, generally because we did not believe them to be significant at the time, which could cause results to differ materially from our expectations.