filings.toolsItem 1. Financial Statements
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Item 1. Financial Statements
Allegion plc
Condensed and Consolidated Statements of Comprehensive Income
(Unaudited)
| Three months ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| In millions, except per share amounts | 2022 | 2021 | |||||||||||||||||||||
| Net revenues | $ | 723.6 | $ | 694.3 | |||||||||||||||||||
| Cost of goods sold | 434.9 | 396.9 | |||||||||||||||||||||
| Selling and administrative expenses | 171.7 | 166.1 | |||||||||||||||||||||
| Operating income | 117.0 | 131.3 | |||||||||||||||||||||
| Interest expense | 11.9 | 12.3 | |||||||||||||||||||||
| Other income, net | (2.2) | (3.5) | |||||||||||||||||||||
| Earnings before income taxes | 107.3 | 122.5 | |||||||||||||||||||||
| Provision for income taxes | 14.2 | 14.3 | |||||||||||||||||||||
| Net earnings | 93.1 | 108.2 | |||||||||||||||||||||
| Less: Net earnings attributable to noncontrolling interests | 0.1 | 0.2 | |||||||||||||||||||||
| Net earnings attributable to Allegion plc | $ | 93.0 | $ | 108.0 | |||||||||||||||||||
| Earnings per share attributable to Allegion plc ordinary shareholders: | |||||||||||||||||||||||
| Basic net earnings | $ | 1.05 | $ | 1.19 | |||||||||||||||||||
| Diluted net earnings | $ | 1.05 | $ | 1.18 | |||||||||||||||||||
| Weighted-average shares outstanding: | |||||||||||||||||||||||
| Basic | 88.2 | 90.7 | |||||||||||||||||||||
| Diluted | 88.6 | 91.2 | |||||||||||||||||||||
| Total comprehensive income | $ | 72.1 | $ | 76.2 | |||||||||||||||||||
| Less: Total comprehensive income attributable to noncontrolling interests | 0.1 | 0.2 | |||||||||||||||||||||
| Total comprehensive income attributable to Allegion plc | $ | 72.0 | $ | 76.0 |
See accompanying notes to condensed and consolidated financial statements.
Allegion plc
Condensed and Consolidated Balance Sheets
(Unaudited)
| In millions, except share amounts | March 31, 2022 | December 31, 2021 | |||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 305.1 | $ | 397.9 | |||||||
| Accounts and notes receivable, net | 324.3 | 283.3 | |||||||||
| Inventories | 402.9 | 380.4 | |||||||||
| Other current assets | 45.0 | 56.0 | |||||||||
| Total current assets | 1,077.3 | 1,117.6 | |||||||||
| Property, plant and equipment, net | 280.8 | 283.7 | |||||||||
| Goodwill | 796.4 | 803.8 | |||||||||
| Intangible assets, net | 434.0 | 447.5 | |||||||||
| Other noncurrent assets | 419.1 | 398.4 | |||||||||
| Total assets | $ | 3,007.6 | $ | 3,051.0 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 258.4 | $ | 259.1 | |||||||
| Accrued expenses and other current liabilities | 310.5 | 329.5 | |||||||||
| Short-term borrowings and current maturities of long-term debt | 12.6 | 12.6 | |||||||||
| Total current liabilities | 581.5 | 601.2 | |||||||||
| Long-term debt | 1,426.8 | 1,429.5 | |||||||||
| Other noncurrent liabilities | 254.3 | 257.9 | |||||||||
| Total liabilities | 2,262.6 | 2,288.6 | |||||||||
| Equity: | |||||||||||
| Allegion plc shareholders’ equity: | |||||||||||
| Ordinary shares, $0.01 par value (87,801,145 and 88,215,625 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively) | 0.9 | 0.9 | |||||||||
| Capital in excess of par value | — | — | |||||||||
| Retained earnings | 956.1 | 952.6 | |||||||||
| Accumulated other comprehensive loss | (215.4) | (194.4) | |||||||||
| Total Allegion plc shareholders’ equity | 741.6 | 759.1 | |||||||||
| Noncontrolling interests | 3.4 | 3.3 | |||||||||
| Total equity | 745.0 | 762.4 | |||||||||
| Total liabilities and equity | $ | 3,007.6 | $ | 3,051.0 |
See accompanying notes to condensed and consolidated financial statements.
Allegion plc
Condensed and Consolidated Statements of Cash Flows
(Unaudited)
| Three months ended | |||||||||||
| March 31, | |||||||||||
| In millions | 2022 | 2021 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net earnings | $ | 93.1 | $ | 108.2 | |||||||
| Adjustments to arrive at net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 20.4 | 21.4 | |||||||||
| Changes in assets and liabilities and other non-cash items | (93.0) | (17.8) | |||||||||
| Net cash provided by operating activities | 20.5 | 111.8 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | (8.7) | (6.3) | |||||||||
| Other investing activities, net | 2.4 | 1.7 | |||||||||
| Net cash used in investing activities | (6.3) | (4.6) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Debt repayments, net | (3.1) | — | |||||||||
| Dividends paid to ordinary shareholders | (35.8) | (32.5) | |||||||||
| Repurchase of ordinary shares | (61.0) | (149.7) | |||||||||
| Other financing activities, net | (5.0) | (5.0) | |||||||||
| Net cash used in financing activities | (104.9) | (187.2) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (2.1) | (6.1) | |||||||||
| Net decrease in cash and cash equivalents | (92.8) | (86.1) | |||||||||
| Cash and cash equivalents - beginning of period | 397.9 | 480.4 | |||||||||
| Cash and cash equivalents - end of period | $ | 305.1 | $ | 394.3 |
See accompanying notes to condensed and consolidated financial statements.
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying Condensed and Consolidated Financial Statements of Allegion plc, an Irish public limited company, and its consolidated subsidiaries ("Allegion" or "the Company"), reflect the consolidated operations of the Company and have been prepared in accordance with United States ("U.S.") Securities and Exchange Commission ("SEC") interim reporting requirements. Accordingly, the accompanying Condensed and Consolidated Financial Statements do not include all disclosures required by accounting principles generally accepted in the United States of America ("GAAP") for full financial statements and should be read in conjunction with the Consolidated Financial Statements included in the Allegion Annual Report on Form 10-K for the year ended December 31, 2021. In the opinion of management, the accompanying Condensed and Consolidated Financial Statements contain all adjustments, which include normal recurring adjustments, necessary to state fairly the consolidated unaudited results for the interim periods presented.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements:
In October 2021, the FASB issued ASU No. 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers." This ASU requires contract assets and contract liabilities (e.g. deferred revenue) acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, "Revenue from Contracts with Customers". Generally, this new guidance will result in the acquirer recognizing contract assets and contract liabilities at the same amounts recorded by the acquiree. Historically, such amounts were recognized by the acquirer at fair value in purchase accounting. This ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including in interim periods, for any financial statements that have not yet been issued. The Company elected to early adopt ASU 2021-08 on January 1, 2022, and will apply this new guidance to all business combinations consummated subsequent to this date.
NOTE 3 - INVENTORIES
Inventories are stated at the lower of cost and net realizable value using the first-in, first-out (FIFO) method.
The major classes of inventories were as follows:
| In millions | March 31, 2022 | December 31, 2021 | |||||||||
| Raw materials | $ | 166.2 | $ | 144.4 | |||||||
| Work-in-process | 46.2 | 42.2 | |||||||||
| Finished goods | 190.5 | 193.8 | |||||||||
| Total | $ | 402.9 | $ | 380.4 |
NOTE 4 - GOODWILL
The changes in the carrying amount of goodwill for the three months ended March 31, 2022, were as follows:
| In millions | Allegion Americas | Allegion International | Total | ||||||||||||||
| December 31, 2021 (gross) | $ | 501.2 | $ | 876.2 | $ | 1,377.4 | |||||||||||
| Accumulated impairment | — | (573.6) | (573.6) | ||||||||||||||
| December 31, 2021 (net) | 501.2 | 302.6 | 803.8 | ||||||||||||||
| Currency translation | 0.1 | (7.5) | (7.4) | ||||||||||||||
| March 31, 2022 (net) | $ | 501.3 | $ | 295.1 | $ | 796.4 |
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 5 - INTANGIBLE ASSETS
The gross amount of the Company’s intangible assets and related accumulated amortization were as follows:
| March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||
| In millions | Gross carrying amount | Accumulated amortization | Net carrying amount | Gross carrying amount | Accumulated amortization | Net carrying amount | ||||||||||||||||||||||||||||||||
| Completed technologies/patents | $ | 57.2 | $ | (29.5) | $ | 27.7 | $ | 57.9 | $ | (28.8) | $ | 29.1 | ||||||||||||||||||||||||||
| Customer relationships | 389.4 | (143.7) | 245.7 | 395.9 | (141.6) | 254.3 | ||||||||||||||||||||||||||||||||
| Trade names (finite-lived) | 81.8 | (56.2) | 25.6 | 84.0 | (56.9) | 27.1 | ||||||||||||||||||||||||||||||||
| Other | 46.1 | (23.6) | 22.5 | 45.8 | (22.7) | 23.1 | ||||||||||||||||||||||||||||||||
| Total finite-lived intangible assets | 574.5 | $ | (253.0) | 321.5 | 583.6 | $ | (250.0) | 333.6 | ||||||||||||||||||||||||||||||
| Trade names (indefinite-lived) | 112.5 | 112.5 | 113.9 | 113.9 | ||||||||||||||||||||||||||||||||||
| Total | $ | 687.0 | $ | 434.0 | $ | 697.5 | $ | 447.5 |
Intangible asset amortization expense was $8.2 million and $8.1 million for the three months ended March 31, 2022 and 2021, respectively. Future estimated amortization expense on existing intangible assets in each of the next five years amounts to approximately $32.2 million for full year 2022, $31.8 million for 2023, $31.5 million for 2024, $30.1 million for 2025 and $26.8 million for 2026.
NOTE 6 - DEBT AND CREDIT FACILITIES
Long-term debt and other borrowings consisted of the following:
| In millions | March 31, 2022 | December 31, 2021 | |||||||||
| 2021 Term Facility | $ | 246.9 | $ | 250.0 | |||||||
| 2021 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 | 0.3 | 0.3 | |||||||||
| Total borrowings outstanding | 1,447.2 | 1,450.3 | |||||||||
| Discounts and debt issuance costs, net | (7.8) | (8.2) | |||||||||
| Total debt | 1,439.4 | 1,442.1 | |||||||||
| Less current portion of long-term debt | 12.6 | 12.6 | |||||||||
| Total long-term debt | $ | 1,426.8 | $ | 1,429.5 |
Unsecured Credit Facilities
As of March 31, 2022, the Company has an unsecured Credit Agreement in place, consisting of a $250.0 million term loan facility (the “2021 Term Facility”), of which $246.9 million was outstanding at March 31, 2022, and a $500.0 million revolving credit facility (the “2021 Revolving Facility” and, together with the 2021 Term Facility, the “2021 Credit Facilities”). The 2021 Credit Facilities mature on November 18, 2026, and are unconditionally guaranteed jointly and severally on an unsecured basis by the Company and Allegion US Holding Company Inc. ("Allegion US Hold Co"), the Company’s wholly-owned subsidiary. The 2021 Term Facility will amortize in quarterly installments at the following rates: 1.25% per quarter starting March 31, 2022 through March 31, 2025, 2.5% per quarter starting June 30, 2025 through September 30, 2026, with the balance due on November 18, 2026. The Company repaid $3.1 million of principal on its 2021 Term Facility during the three months ended March 31, 2022.
The 2021 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 March 31, 2022, there were no borrowings outstanding on the 2021 Revolving Facility, and the Company had $7.5 million of letters of credit outstanding. Commitments under the 2021 Revolving Facility may be reduced at any time without premium or penalty, and amounts repaid may be reborrowed.
Outstanding borrowings under the 2021 Credit Facilities accrue interest, at the option of the Company, of (i) a Bloomberg Short-Term Bank Yield Index ("BSBY") rate plus the applicable margin or (ii) a base rate plus the applicable margin. The
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
applicable margin ranges from 0.875% to 1.375% depending on the Company’s credit ratings. At March 31, 2022, the Company's outstanding borrowings under the 2021 Credit Facilities accrue interest at BSBY plus a margin of 1.125%, resulting in an interest rate of 1.493%. The 2021 Credit Facilities also contain negative and affirmative covenants and events of default that, among other things, limit or restrict the Company’s ability to enter into certain transactions. In addition, the 2021 Credit Facilities require the Company to comply with a maximum leverage ratio as defined within the agreement. As of March 31, 2022, the Company was in compliance with all covenants.
Senior Notes
As of March 31, 2022, Allegion US Hold Co has $400.0 million outstanding of its 3.200% Senior Notes due 2024 (the “3.200% Senior Notes”) and $400.0 million outstanding of its 3.550% Senior Notes due 2027 (the “3.550% Senior Notes”), while Allegion plc has $400.0 million outstanding of its 3.500% Senior Notes due 2029 (the “3.500% Senior Notes”). The 3.200% Senior Notes, 3.550% Senior Notes and 3.500% Senior Notes (collectively, the "Senior Notes") all 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. 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 Company and ranks equally with all of the Company’s existing and future senior unsecured and unsubordinated indebtedness. The 3.500% Senior Notes are senior unsecured obligations of Allegion plc, are guaranteed by Allegion US Hold Co and rank equally with all of the Company’s existing and future senior unsecured indebtedness.
NOTE 7 - FINANCIAL INSTRUMENTS
Currency Hedging Instruments
The gross notional amount of the Company’s currency derivatives was $169.7 million and $164.9 million at March 31, 2022 and December 31, 2021, respectively. Neither the fair values of currency derivatives, which are determined based on a pricing model that uses spot rates and forward prices from actively quoted currency markets that are readily observable, nor the balances included in Accumulated other comprehensive loss were material as of March 31, 2022 and December 31, 2021. Currency derivatives designated as cash flow hedges did not have a material impact to either Net earnings or Other comprehensive income (loss) during the three months ended March 31, 2022 and 2021, nor is the amount to be reclassified into Net earnings over the next twelve months expected to be material, although the actual amounts that will be reclassified to Net earnings may vary as a result of future changes in market conditions. At March 31, 2022, the maximum term of the Company’s currency derivatives, both those that are designated as cash flow hedges and those that are not, was less than one year.
Concentration of Credit Risk
The counterparties to the Company’s forward contracts consist of a number of investment grade major international financial institutions. The Company could be exposed to losses in the event of nonperformance by the counterparties. However, the credit ratings and the concentration of risk in these financial institutions are monitored on a continuous basis and present no significant credit risk to the Company.
NOTE 8 - LEASES
Total rental expense for the three months ended March 31, 2022 and 2021, was $10.7 million and $11.1 million, respectively, and is classified within Cost of goods sold and Selling and administrative expenses within the Condensed and Consolidated Statements of Comprehensive Income. Rental expense related to short-term leases, variable lease payments or other leases or lease components not included within the ROU asset or lease liability totaled $1.6 million and $2.0 million, respectively, for the three months ended March 31, 2022 and 2021. No material lease costs have been capitalized on the Condensed and Consolidated Balance Sheets as of March 31, 2022 or December 31, 2021.
As a lessee, the Company categorizes its leases into two general categories: real estate leases and equipment leases.
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Amounts included within the Condensed and Consolidated Balance Sheets related to the Company’s ROU asset and lease liability were as follows:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||
| In millions | Balance Sheet classification | Real estate | Equipment | Total | Real estate | Equipment | Total | ||||||||||||||||||||||||||||||||||
| ROU asset | Other noncurrent assets | $ | 71.1 | $ | 29.8 | $ | 100.9 | $ | 58.2 | $ | 31.7 | $ | 89.9 | ||||||||||||||||||||||||||||
| Lease liability - current | Accrued expenses and other current liabilities | 15.9 | 13.2 | 29.1 | 15.5 | 13.6 | 29.1 | ||||||||||||||||||||||||||||||||||
| Lease liability - noncurrent | Other noncurrent liabilities | 57.7 | 16.6 | 74.3 | 45.1 | 18.2 | 63.3 | ||||||||||||||||||||||||||||||||||
| Other information: | |||||||||||||||||||||||||||||||||||||||||
| Weighted-average remaining term (years) | 6.4 | 2.7 | 6.5 | 2.8 | |||||||||||||||||||||||||||||||||||||
| Weighted-average discount rate | 3.2 | % | 2.0 | % | 3.4 | % | 2.1 | % |
The following table summarizes additional information related to the Company’s leases for the three months ended March 31:
| 2022 | 2021 | |||||||||||||||||||||||||||||||||||||
| In millions | Real estate | Equipment | Total | Real estate | Equipment | Total | ||||||||||||||||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | 4.9 | $ | 4.2 | $ | 9.1 | $ | 4.9 | $ | 4.2 | $ | 9.1 | ||||||||||||||||||||||||||
| ROU assets obtained in exchange for new lease liabilities | 18.8 | 1.4 | 20.2 | 3.0 | 2.4 | 5.4 |
The Company frequently enters into both real estate and equipment leases in the normal course of business. While there have been lease agreements entered into that have not yet commenced as of March 31, 2022, none of these leases provide new rights or obligations to the Company that are material individually or in the aggregate.
Future Repayments
Scheduled minimum lease payments required under non-cancellable operating leases for both the real estate and equipment lease portfolios for the remainder of 2022 and for each of the years thereafter as of March 31, 2022, are as follows:
| In millions | Remainder of 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | |||||||||||||||||||||||||||||||||||||
| Real estate leases | $ | 13.5 | $ | 16.6 | $ | 13.1 | $ | 11.3 | $ | 8.3 | $ | 19.5 | $ | 82.3 | ||||||||||||||||||||||||||||||
| Equipment leases | 10.6 | 10.4 | 6.3 | 2.8 | 0.4 | 0.1 | 30.6 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 24.1 | $ | 27.0 | $ | 19.4 | $ | 14.1 | $ | 8.7 | $ | 19.6 | $ | 112.9 |
The difference between the total undiscounted minimum lease payments and the combined current and noncurrent lease liabilities as of March 31, 2022, is due to imputed interest of $9.5 million.
NOTE 9 - DEFINED BENEFIT PLANS
The Company sponsors several U.S. and non-U.S. defined benefit pension plans to eligible employees and retirees. The noncontributory defined benefit pension plans covering non-collectively bargained U.S. employees provide benefits on an average pay formula while most plans for collectively bargained U.S. employees provide benefits on a flat dollar benefit formula. The non-U.S. pension plans generally provide benefits based on earnings and years of service. The Company also maintains other supplemental plans for officers and other key employees.
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The components of the Company’s Net periodic pension benefit cost (income) for the three months ended March 31 were as follows:
| U.S. | |||||||||||||||||||||||
| In millions | 2022 | 2021 | |||||||||||||||||||||
| Service cost | $ | 1.5 | $ | 1.7 | |||||||||||||||||||
| Interest cost | 2.0 | 1.7 | |||||||||||||||||||||
| Expected return on plan assets | (3.4) | (3.5) | |||||||||||||||||||||
| Administrative costs and other | 0.3 | 0.3 | |||||||||||||||||||||
| Net amortization of: | |||||||||||||||||||||||
| Prior service costs | — | 0.1 | |||||||||||||||||||||
| Plan net actuarial losses | 0.3 | 0.9 | |||||||||||||||||||||
| Net periodic pension benefit cost | $ | 0.7 | $ | 1.2 |
| Non-U.S. | |||||||||||||||||||||||
| In millions | 2022 | 2021 | |||||||||||||||||||||
| Service cost | $ | 0.3 | $ | 0.6 | |||||||||||||||||||
| Interest cost | 1.8 | 1.3 | |||||||||||||||||||||
| Expected return on plan assets | (3.9) | (3.5) | |||||||||||||||||||||
| Administrative costs and other | 0.5 | 0.5 | |||||||||||||||||||||
| Net amortization of: | |||||||||||||||||||||||
| Plan net actuarial losses | 0.2 | 0.4 | |||||||||||||||||||||
| Net periodic pension benefit income | $ | (1.1) | $ | (0.7) |
Service cost is recorded in Cost of goods sold and Selling and administrative expenses, while the remaining components of Net periodic pension benefit cost (income) are recorded in Other income, net within the Condensed and Consolidated Statements of Comprehensive Income. Employer contributions were not material during the three months ended March 31, 2022 and 2021. Contributions of approximately $5 million are expected during the remainder of 2022.
NOTE 10 - FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurements are based on a framework that utilizes the inputs market participants use to determine the fair value of an asset or liability and establishes a fair value hierarchy to prioritize those inputs. The fair value hierarchy is comprised of three levels that are described below:
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Level 1 – Inputs based on quoted prices in active markets for identical assets or liabilities.
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Level 2 – Inputs other than Level 1 quoted prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
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Level 3 – Unobservable inputs based on little or no market activity and that are significant to the fair value of the assets and liabilities.
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability based on the best information available under the circumstances. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Assets and liabilities measured at fair value at March 31, 2022, were as follows:
| Fair value measurements | Total fair value | ||||||||||||||||||||||
| In millions | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||||||||||
| Recurring fair value measurements | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Investments | $ | — | $ | 22.5 | $ | — | $ | 22.5 | |||||||||||||||
| Total asset recurring fair value measurements | $ | — | $ | 22.5 | $ | — | $ | 22.5 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Deferred compensation and other retirement plans | $ | — | $ | 22.7 | $ | — | $ | 22.7 | |||||||||||||||
| Total liability recurring fair value measurements | $ | — | $ | 22.7 | $ | — | $ | 22.7 | |||||||||||||||
| Financial instruments not carried at fair value | |||||||||||||||||||||||
| Total debt | $ | — | $ | 1,418.6 | $ | — | $ | 1,418.6 | |||||||||||||||
| Total financial instruments not carried at fair value | $ | — | $ | 1,418.6 | $ | — | $ | 1,418.6 |
Assets and liabilities measured at fair value at December 31, 2021, were as follows:
| Fair value measurements | Total fair value | ||||||||||||||||||||||
| In millions | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||||||||||
| Recurring fair value measurements | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Investments | $ | — | $ | 24.5 | $ | — | $ | 24.5 | |||||||||||||||
| Total asset recurring fair value measurements | $ | — | $ | 24.5 | $ | — | $ | 24.5 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Deferred compensation and other retirement plans | $ | — | $ | 25.9 | $ | — | $ | 25.9 | |||||||||||||||
| Total liability recurring fair value measurements | $ | — | $ | 25.9 | $ | — | $ | 25.9 | |||||||||||||||
| Financial instruments not carried at fair value | |||||||||||||||||||||||
| Total debt | $ | — | $ | 1,510.4 | $ | — | $ | 1,510.4 | |||||||||||||||
| Total financial instruments not carried at fair value | $ | — | $ | 1,510.4 | $ | — | $ | 1,510.4 |
The Company determines the fair value of its financial assets and liabilities using the following methodologies:
-
Investments – These instruments include equity mutual funds and corporate bond funds. The fair value is obtained based on observable market prices quoted on public exchanges for similar instruments.
-
Deferred compensation and other retirement plans – These include obligations related to deferred compensation and other retirement plans adjusted for market performance. The fair value is obtained based on observable market prices quoted on public exchanges for similar instruments.
-
Debt – These instruments are recorded at cost and include senior notes maturing through 2029. The fair value of these debt instruments is obtained based on observable market prices quoted on public exchanges for similar instruments.
The methodologies used by the Company to determine the fair value of its financial assets and liabilities at March 31, 2022, are the same as those used at December 31, 2021. The carrying values of Cash and cash equivalents, Accounts and notes receivable, net, Accounts payable and Accrued expenses and other current liabilities are a reasonable estimate of their fair value due to the short-term nature of these instruments.
The Company also had investments in debt and equity securities without readily determinable fair values of $35.8 million as of both March 31, 2022 and December 31, 2021, which are classified as Other noncurrent assets within the Condensed and Consolidated Balance Sheets. These investments are considered to be nonrecurring fair value measurements, and thus, are not included in the fair value tables above.
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 11 - EQUITY
The changes in the components of Equity for the three months ended March 31, 2022, were as follows:
| Allegion plc shareholders' equity | |||||||||||||||||||||||||||||||||||||||||
| Ordinary shares | |||||||||||||||||||||||||||||||||||||||||
| In millions, except per share amounts | Total equity | Amount | Shares | Capital in excess of par value | Retained earnings | Accumulated other comprehensive loss | Noncontrolling interests | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | 762.4 | $ | 0.9 | 88.2 | $ | — | $ | 952.6 | $ | (194.4) | $ | 3.3 | ||||||||||||||||||||||||||||
| Net earnings | 93.1 | — | — | — | 93.0 | — | 0.1 | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net | (21.0) | — | — | — | — | (21.0) | — | ||||||||||||||||||||||||||||||||||
| Repurchase of ordinary shares | (61.0) | — | (0.5) | (7.5) | (53.5) | — | — | ||||||||||||||||||||||||||||||||||
| Share-based compensation activity | 7.5 | — | 0.1 | 7.5 | — | — | — | ||||||||||||||||||||||||||||||||||
| Dividends to ordinary shareholders ($0.41 per share) | (36.0) | — | — | — | (36.0) | — | — | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | 745.0 | $ | 0.9 | 87.8 | $ | — | $ | 956.1 | $ | (215.4) | $ | 3.4 | ||||||||||||||||||||||||||||
The changes in the components of Equity for the three months ended March 31, 2021, were as follows:
| Allegion plc shareholders' equity | |||||||||||||||||||||||||||||||||||||||||
| Ordinary shares | |||||||||||||||||||||||||||||||||||||||||
| In millions, except per share amounts | Total equity | Amount | Shares | Capital in excess of par value | Retained earnings | Accumulated other comprehensive loss | Noncontrolling interests | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 832.6 | $ | 0.9 | 91.2 | $ | — | $ | 985.6 | $ | (157.1) | $ | 3.2 | ||||||||||||||||||||||||||||
| Net earnings | 108.2 | — | — | — | 108.0 | — | 0.2 | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net | (32.0) | — | — | — | — | (32.0) | — | ||||||||||||||||||||||||||||||||||
| Repurchase of ordinary shares | (149.7) | — | (1.3) | (4.4) | (145.3) | — | — | ||||||||||||||||||||||||||||||||||
| Share-based compensation activity | 4.4 | — | 0.1 | 4.4 | — | — | — | ||||||||||||||||||||||||||||||||||
| Dividends to ordinary shareholders ($0.36 per share) | (32.5) | — | — | — | (32.5) | — | — | ||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | 0.1 | — | (0.1) | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | 731.0 | $ | 0.9 | 90.0 | $ | — | $ | 915.9 | $ | (189.1) | $ | 3.3 | ||||||||||||||||||||||||||||
In February 2020, the Company’s Board of Directors approved a share repurchase authorization of up to, and including, $800 million of the Company’s ordinary shares (the "2020 Share Repurchase Authorization"). During the three months ended March 31, 2022 and 2021, the Company paid $61.0 million and $149.7 million, respectively, to repurchase the ordinary shares reflected in the tables above on the open market under the 2020 Share Repurchase Authorization. As of March 31, 2022, the Company has approximately $140.5 million still available to be repurchased under the 2020 Share Repurchase Authorization.
Accumulated Other Comprehensive Loss
The changes in Accumulated other comprehensive loss for the three months ended March 31, 2022, were as follows:
| In millions | Cash flow hedges | Pension and OPEB items | Foreign currency items | Total | ||||||||||||||||||||||
| December 31, 2021 | $ | 0.9 | $ | (96.0) | $ | (99.3) | $ | (194.4) | ||||||||||||||||||
| Other comprehensive (loss) income before reclassifications | (0.3) | 2.3 | (22.5) | (20.5) | ||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss(a) | (0.4) | (0.4) | — | (0.8) | ||||||||||||||||||||||
| Tax benefit | 0.2 | 0.1 | — | 0.3 | ||||||||||||||||||||||
| March 31, 2022 | $ | 0.4 | $ | (94.0) | $ | (121.8) | $ | (215.4) |
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The changes in Accumulated other comprehensive loss for the three months ended March 31, 2021, were as follows:
| In millions | Cash flow hedges | Pension and OPEB items | Foreign currency items | Total | ||||||||||||||||||||||
| December 31, 2020 | $ | (0.9) | $ | (120.3) | $ | (35.9) | $ | (157.1) | ||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | 0.7 | (0.1) | (33.3) | (32.7) | ||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss(a) | (0.3) | 1.2 | — | 0.9 | ||||||||||||||||||||||
| Tax expense | (0.1) | (0.1) | — | (0.2) | ||||||||||||||||||||||
| March 31, 2021 | $ | (0.6) | $ | (119.3) | $ | (69.2) | $ | (189.1) |
(a) Amounts reclassified from Accumulated other comprehensive loss and recognized into Net earnings related to cash flow hedges are recorded in Cost of goods sold and Interest expense. Amounts reclassified from Accumulated other comprehensive loss and recognized into Net earnings related to pension and postretirement benefits other than pensions ("OPEB") items are recorded in Other income, net.
NOTE 12 - SHARE-BASED COMPENSATION
The Company’s share-based compensation plans include programs for stock options, restricted stock units ("RSUs"), performance stock units ("PSUs") and deferred compensation. Share-based compensation expense is included in Cost of goods sold and Selling and administrative expenses within the Condensed and Consolidated Statements of Comprehensive Income. The following table summarizes the expenses recognized for the three months ended March 31:
| In millions | 2022 | 2021 | |||||||||||||||||||||
| Stock options | $ | 2.9 | $ | 2.8 | |||||||||||||||||||
| RSUs | 7.3 | 5.6 | |||||||||||||||||||||
| PSUs | 1.6 | 1.3 | |||||||||||||||||||||
| Deferred compensation | (1.1) | 0.4 | |||||||||||||||||||||
| Pre-tax expense | 10.7 | 10.1 | |||||||||||||||||||||
| Tax benefit | (0.9) | (1.1) | |||||||||||||||||||||
| After-tax expense | $ | 9.8 | $ | 9.0 |
Stock Options / RSUs
Eligible participants may receive (i) stock options, (ii) RSUs or (iii) a combination of both stock options and RSUs. Grants issued during the three months ended March 31 were as follows:
| 2022 | 2021 | ||||||||||||||||||||||
| Number granted | Weighted- average fair value per award | Number granted | Weighted- average fair value per award | ||||||||||||||||||||
| Stock options | 157,880 | $ | 28.59 | 179,743 | $ | 24.99 | |||||||||||||||||
| RSUs | 101,609 | $ | 115.33 | 117,864 | $ | 109.49 |
The average fair value of the stock options granted is determined using the Black-Scholes option-pricing model. The following assumptions were used during the three months ended March 31:
| 2022 | 2021 | ||||||||||
| Dividend yield | 1.42 | % | 1.32 | % | |||||||
| Volatility | 27.05 | % | 27.14 | % | |||||||
| Risk-free rate of return | 1.89 | % | 0.75 | % | |||||||
| Expected life (years) | 6.0 | 6.0 |
Volatility is based on the Company’s historic volatility. The risk-free rate of return is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the award is granted with a maturity equal to the expected term of the award. The expected life of the Company’s stock option awards is derived from the simplified approach based on the weighted-average time to vest and the remaining contractual term and represents the period of time that awards are expected to be outstanding.
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Performance Stock
During the three months ended March 31, 2022, the Company granted PSUs with a maximum award level of approximately 0.1 million shares. In February 2020, 2021 and 2022, the Company’s Compensation Committee granted PSUs that were earned based 50% upon a performance condition, measured at each reporting period by earnings per share ("EPS") performance in relation to pre-established targets set by the Compensation Committee, and 50% upon a market condition, measured by the Company’s relative total shareholder return against the S&P 400 Capital Goods Index over a three-year performance period. The fair values of the market conditions are estimated using a Monte Carlo Simulation approach in a risk-neutral framework to model future stock price movements based upon historical volatility, risk-free rates of return and correlation matrix.
Deferred Compensation
Prior to 2019, the Company allowed key employees to defer a portion of their eligible granted PSUs and/or compensation into a number of investment choices including its ordinary share equivalents. Any amounts invested in ordinary share equivalents will be settled in ordinary shares of the Company at the time of distribution.
NOTE 13 - RESTRUCTURING ACTIVITIES
During the three months ended March 31, 2022 and 2021, the Company recorded $0.2 million and $2.7 million, respectively, of expenses associated with restructuring activities, which are included within Cost of goods sold and Selling and administrative expenses within the Condensed and Consolidated Statements of Comprehensive Income.
The changes in the restructuring reserve during the three months ended March 31, 2022, were as follows:
| In millions | Total | ||||
| December 31, 2021 | $ | 0.4 | |||
| Additions, net of reversals | 0.2 | ||||
| Cash payments | (0.5) | ||||
| March 31, 2022 | $ | 0.1 |
The Company also incurred other non-qualified restructuring charges of $0.5 million during the three months ended March 31, 2022, which represent costs that are directly attributable to restructuring activities, but that do not fall into the severance, exit or disposal category. These expenses are included in Cost of goods sold within the Condensed and Consolidated Statements of Comprehensive Income.
NOTE 14 - OTHER INCOME, N****ET
The components of Other income, net for the three months ended March 31 were as follows:
| In millions | 2022 | 2021 | |||||||||||||||||||||
| Interest income | $ | (0.1) | $ | — | |||||||||||||||||||
| Foreign currency exchange loss | 1.0 | 0.4 | |||||||||||||||||||||
| (Earnings) losses from equity method investments, net | (0.1) | 0.7 | |||||||||||||||||||||
| Net periodic pension and postretirement benefit income, less service cost | (2.6) | (1.9) | |||||||||||||||||||||
| Other | (0.4) | (2.7) | |||||||||||||||||||||
| Other income, net | $ | (2.2) | $ | (3.5) |
NOTE 15 - INCOME TAXES
The effective income tax rates for the three months ended March 31, 2022 and 2021, were 13.2% and 11.7%, respectively. The increase in the effective tax rate compared to 2021 is primarily due to the unfavorable mix of income earned in higher tax rate jurisdictions, which is partially offset by the favorable year-over-year change in the amounts recognized for uncertain tax positions.
NOTE 16 - EARNINGS PER SHARE (EPS)
Basic EPS is calculated by dividing Net earnings attributable to Allegion plc by the weighted-average number of ordinary shares outstanding for the applicable period. Diluted EPS is calculated after adjusting the denominator of the basic EPS
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
calculation for the effect of all potentially dilutive ordinary shares, which in the Company’s case, includes shares issuable under share-based compensation plans.
The following table summarizes the weighted-average number of ordinary shares outstanding for basic and diluted EPS calculations for the three months ended March 31:
| In millions | 2022 | 2021 | |||||||||||||||||||||
| Weighted-average number of basic shares | 88.2 | 90.7 | |||||||||||||||||||||
| Shares issuable under share-based compensation plans | 0.4 | 0.5 | |||||||||||||||||||||
| Weighted-average number of diluted shares | 88.6 | 91.2 |
At March 31, 2022, 0.3 million stock options were excluded from the computation of weighted-average diluted shares outstanding because the effect of including these shares would have been anti-dilutive.
NOTE 17 - NET REVENUES
The following tables show the Company’s Net revenues related to both tangible product sales and services for the three months ended March 31, 2022 and 2021, respectively, disaggregated by business segment. Net revenues are shown by tangible product sales and services, as contract terms, conditions and economic factors affecting the nature, amount, timing and uncertainty around revenue recognition and cash flows are substantially similar within each of these two principal revenue streams:
| Three months ended March 31, 2022 | |||||||||||||||||||||||||||||||||||
| In millions | Allegion Americas | Allegion International | Consolidated | ||||||||||||||||||||||||||||||||
| Net revenues | |||||||||||||||||||||||||||||||||||
| Products | $ | 527.7 | $ | 188.8 | $ | 716.5 | |||||||||||||||||||||||||||||
| Services | 0.5 | 6.6 | 7.1 | ||||||||||||||||||||||||||||||||
| Total Net revenues | $ | 528.2 | $ | 195.4 | $ | 723.6 |
| Three months ended March 31, 2021 | |||||||||||||||||||||||||||||||||||
| In millions | Allegion Americas | Allegion International | Consolidated | ||||||||||||||||||||||||||||||||
| Net revenues | |||||||||||||||||||||||||||||||||||
| Products | $ | 498.2 | $ | 189.1 | $ | 687.3 | |||||||||||||||||||||||||||||
| Services | 0.7 | 6.3 | 7.0 | ||||||||||||||||||||||||||||||||
| Total Net revenues | $ | 498.9 | $ | 195.4 | $ | 694.3 |
As of March 31, 2022, neither the contract assets related to the Company’s right to consideration for work completed but not billed, nor the contract liabilities associated with contract revenue were material. The Company does not have any costs to obtain or fulfill a contract that are capitalized on its Condensed and Consolidated Balance Sheets. During the three months ended March 31, 2022 and 2021, no adjustments related to performance obligations satisfied in previous periods were recorded.
NOTE 18 - BUSINESS SEGMENT INFORMATION
The Company classifies its business into the following two reportable segments based on industry and market focus: Allegion Americas and Allegion International. The Company largely evaluates performance based on Segment operating income and Segment operating margins. Segment operating income is the measure of profit and loss that the Company’s 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, the Company believes that Segment operating income represents the most relevant measure of segment profit and loss. The Company’s chief operating decision maker may exclude certain charges or gains, such as corporate charges and other special charges, from Operating income to arrive at a Segment operating income that is a more meaningful measure of profit and loss upon which to base operating decisions. The Company defines Segment operating margin as Segment operating income as a percentage of the segment’s Net revenues.
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
A summary of operations by reportable segment for the three months ended March 31 was as follows:
| In millions | 2022 | 2021 | |||||||||||||||||||||
| Net revenues | |||||||||||||||||||||||
| Allegion Americas | $ | 528.2 | $ | 498.9 | |||||||||||||||||||
| Allegion International | 195.4 | 195.4 | |||||||||||||||||||||
| Total | $ | 723.6 | $ | 694.3 | |||||||||||||||||||
| Segment operating income | |||||||||||||||||||||||
| Allegion Americas | $ | 123.9 | $ | 135.4 | |||||||||||||||||||
| Allegion International | 19.6 | 15.4 | |||||||||||||||||||||
| Total | 143.5 | 150.8 | |||||||||||||||||||||
| Reconciliation to Operating income | |||||||||||||||||||||||
| Unallocated corporate expense | (26.5) | (19.5) | |||||||||||||||||||||
| Operating income | 117.0 | 131.3 | |||||||||||||||||||||
| Reconciliation to earnings before income taxes | |||||||||||||||||||||||
| Interest expense | 11.9 | 12.3 | |||||||||||||||||||||
| Other income, net | (2.2) | (3.5) | |||||||||||||||||||||
| Earnings before income taxes | $ | 107.3 | $ | 122.5 |
NOTE 19 - COMMITMENTS AND CONTINGENCIES
The Company is involved in various litigation, claims and administrative proceedings, including those related to environmental and product warranty matters. Amounts recorded for identified contingent liabilities are estimates, which are reviewed periodically and adjusted to reflect additional information when it becomes available. Subject to the uncertainties inherent in estimating future costs for contingent liabilities, except as expressly set forth in this note, management believes that any liability which may result from these legal matters would not have a material adverse effect on the financial condition, results of operations, liquidity or cash flows of the Company.
Environmental Matters
As of March 31, 2022 and December 31, 2021, the Company has recorded reserves for environmental matters of $15.4 million and $16.4 million, respectively. The total reserve at March 31, 2022 and December 31, 2021, included $3.6 million and $4.3 million, respectively, related to remediation of sites previously disposed by the Company. Environmental reserves are classified as Accrued expenses and other current liabilities or Other noncurrent liabilities within the Condensed and Consolidated Balance Sheets based on the timing of their expected future payment. The Company’s total current environmental reserve at March 31, 2022 and December 31, 2021, was $3.1 million and $3.7 million, respectively, and the remainder is classified as noncurrent. Expenses related to environmental remediation were not material during either the three months ended March 31, 2022 or 2021. Given the evolving nature of environmental laws, regulations and technology, the ultimate cost of future compliance is uncertain.
Warranty Liability
The changes in the standard product warranty liability for the three months ended March 31 were as follows:
| In millions | 2022 | 2021 | |||||||||
| Balance at beginning of period | $ | 17.7 | $ | 16.5 | |||||||
| Reductions for payments | (2.4) | (1.8) | |||||||||
| Accruals for warranties issued during the current period | 3.1 | 3.5 | |||||||||
| Changes to accruals related to preexisting warranties | — | (0.1) | |||||||||
| Currency translation | (0.1) | (0.1) | |||||||||
| Balance at end of period | $ | 18.3 | $ | 18.0 |
Standard product warranty liabilities are classified as either Accrued expenses and other current liabilities or Other noncurrent liabilities within the Condensed and Consolidated Balance Sheets based on the timing of the expected future payments.
ALLEGION PLC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 20 - SUBSEQUENT EVENTS
Dividend Declaration
On April 7, 2022, the Company's Board of Directors declared a quarterly dividend of $0.41 per ordinary share. The dividend is payable June 30, 2022, to shareholders of record on June 16, 2022.
Acquisition Agreement
On April 22, 2022, the Company signed a definitive agreement to acquire Stanley Access Technologies LLC ("Access Technologies") and assets related to the automatic entrance solutions business from Stanley Black & Decker, Inc. for $900 million in cash. Access Technologies is a leading manufacturer, installer and service provider of automatic doors in the U.S. and Canada. Its diversified customer base centers on non-residential settings, including retail, healthcare, education, commercial offices, hospitality and government. Access Technologies generated approximately $340 million in Net revenues in 2021.
The planned acquisition will create a more comprehensive portfolio of access solutions, with the addition of automated entrances. Additionally, Access Technologies will add an expansive service and support network throughout the U.S. and Canada, broadening the Company's solutions to better serve a breadth of national, regional and local customers, and complementing the Company's existing strengths in these non-residential markets. The acquisition will help progress the Company's strategy to create value "by securing people and assets with seamless access wherever they reside, work and thrive." Access Technologies is expected to be integrated into the Allegion Americas segment.
The Company intends to finance the transaction through a combination of cash, borrowings under its existing 2021 Revolving Facility and new debt financing. The Company has obtained fully committed financing, and the anticipated acquisition is not subject to a financing condition. The acquisition is expected to close in the third quarter of 2022, subject to regulatory approval and customary closing conditions.
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