# Allegion plc (ALLE) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Allegion plc's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1579241/000157924122000019/alle-20211231.htm
Accession: 0001579241-22-000019
Filing date: 2022-02-15
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/ALLE/
All MD&A years: /company/ALLE/mda/
Next year: /company/ALLE/mda/fy2022/ (FY 2022)

Item 7. 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 might cause a difference include, but are not limited to, those discussed under Item 1A. Risk Factors in this Annual Report on Form 10-K. The following section is qualified in its entirety by the more detailed information, including our consolidated financial statements and the notes thereto, which appears elsewhere in this Annual Report.

Overview

Organization

We are 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. Throughout 2021, we experienced strong and accelerating demand for our products and services in most of the markets we serve. However, especially in the second half of the year, we also experienced an acceleration of several macroeconomic challenges 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 elevated levels of employee absenteeism due to the on-going COVID-19 pandemic; and increased commodity, material component, packaging, freight and labor inflation. These challenges have also created both operational and logistical inefficiencies, which have led to periodic production interruptions and an increased level of inventory, which have negatively impacted our productivity, margin performance, working capital and cash flows. While these challenges are impacting all our global businesses, they had a more pronounced impact on our Allegion Americas operating segment in 2021.

We currently anticipate these challenges to continue in 2022 and are rapidly adapting to navigate them, expecting to be well-positioned to convert demand to revenue as conditions normalize. We remain focused on providing exceptional service to our customers; implementing measures to mitigate operational and distribution inefficiencies and reduce our record high level of backlogs, such as aligning resources to re-engineer product designs and configurations to accept alternate electronic components and developing alternate sources of supply; implementing pricing initiatives to address rising production, material, freight and labor 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 noted above 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".

31

Table of Contents

2021 and 2020 Significant Events

Financing activities

On November 18, 2021, we entered into a new $750.0 million unsecured credit agreement, consisting of the $250.0 million 2021 Term Facility and the $500.0 million 2021 Revolving Facility. The initial proceeds of $250.0 million from the 2021 Term Facility were primarily used to repay in full our previously outstanding unsecured Term Facility. All obligations under the previously outstanding Credit Agreement were satisfied, all commitments thereunder were terminated and all guarantees that had been granted in connection therewith were released.

Acquisitions

In July 2021, we acquired certain assets of Astrum Benelux B.V. ("Astrum Benelux") and 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 Workforce IT and the assets acquired from Astrum Benelux have been integrated into our Allegion International segment.

In December 2020, we acquired Yonomi, Inc. ("Yonomi), a U.S. based smart home integration platform provider and innovation leader in IoT Cloud platforms. Yonomi has been integrated into our Allegion Americas segment.

QMI Divestiture

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 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 year ended December 31, 2021, are reflected in the discussions below.

2020 Impairment of Goodwill and Intangible Assets

As a result of the global economic disruption and uncertainty due to the COVID-19 pandemic, we performed interim impairment tests on the goodwill balances of our former EMEA and Asia Pacific reporting units, as well as on certain indefinite-lived trade name assets in these two regions, during the first quarter of 2020. The results of these interim impairment tests indicated that the estimated fair value of our former Asia Pacific reporting unit and three indefinite-lived trade names were impaired. Consequently, goodwill and intangible asset impairment charges totaling $96.3 million were recorded during the first quarter of 2020. Further intangible asset impairment charges of $5.4 million were recorded in 2020 in our former Asia Pacific segment, relating to supply chain disruptions that reduced a brand's expected future cash flows and declines in volumes and pricing pressure for a separate subsidiary in the region.

2021 Dividends and Share Repurchases

We paid quarterly dividends of $0.36 per ordinary share to shareholders on record as of March 17, 2021, June 16, 2021, September 16, 2021, and December 20, 2021. We paid a total of $129.0 million in cash for dividends to ordinary shareholders and repurchased approximately 3.3 million shares for approximately $412.8 million during the year ended December 31, 2021.

32

Table of Contents

Results of Operations - For the years ended December 31

[[GREPCENT_TABLE]]
[["Dollar amounts in millions, except per share amounts","","2021","","% of Netrevenues","","2020","","% of Netrevenues"],["Net revenues","","$","2,867.4","","","","","$","2,719.9"],["Cost of goods sold","","1,662.5","","","58.0","%","","1,541.1","","","56.7","%"],["Selling and administrative expenses","","674.7","","","23.5","%","","635.7","","","23.4","%"],["Impairment of goodwill and intangible assets","","\u2014","","","\u2014","%","","101.7","","","3.7","%"],["Loss on assets held for sale","","\u2014","","","\u2014","%","","37.9","","","1.4","%"],["Operating income","","530.2","","","18.5","%","","403.5","","","14.8","%"],["Interest expense","","50.2","","","","","51.1"],["Other income, net","","(44.0)","","","","","(13.0)"],["Earnings before income taxes","","524.0","","","","","365.4"],["Provision for income taxes","","40.7","","","","","50.9"],["Net earnings","","483.3","","","","","314.5"],["Less: Net earnings attributable to noncontrolling interests","","0.3","","","","","0.2"],["Net earnings attributable to Allegion plc","","$","483.0","","","","","$","314.3"],["Diluted net earnings per ordinary share attributable to Allegion plc ordinary shareholders:","","$","5.34","","","","","$","3.39"]]
[[/GREPCENT_TABLE]]

The discussions that follow describe the significant factors contributing to the changes in our results of operations for the years presented and form the basis used by management to evaluate the financial performance of the business. For a discussion of our results of operations for the year ended December 31, 2020, compared to the year ended December 31, 2019, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2020 Annual Report on Form 10-K filed with the SEC on February 16, 2021.

Net Revenues

Net revenues for the year ended December 31, 2021, increased by 5.4%, or $147.5 million, compared to the same period in 2020, due to the following:

[[GREPCENT_TABLE]]
[["Pricing","1.8","%"],["Volume","2.7","%"],["Acquisitions / divestitures","(0.5)","%"],["Currency exchange rates","1.4","%"],["Total","5.4","%"]]
[[/GREPCENT_TABLE]]

The increase in Net revenues was principally driven by higher volumes, improved pricing and the impact of foreign currency exchange rate movements. These increases were slightly offset by the divestiture of our QMI business in February 2021. The increase in sales volumes for the year was principally realized during the second quarter, given the muted demand and temporary plant shut-downs we experienced in the second quarter of 2020 due to the COVID-19 pandemic. However, in addition to the comparative impact of the rebound in demand in the third and fourth quarters of 2020, the supply chain disruptions and delays and shortages in materials, components and labor discussed above resulted in lower volumes during the second half of 2021 within the Allegion Americas segment. While these challenges are expected to continue into 2022, given the current elevated demand we are experiencing, we expect volume growth to resume as conditions improve.

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.

Cost of Goods Sold

For the year ended December 31, 2021, Cost of goods sold as a percentage of Net revenues increased to 58.0% from 56.7%, due to the following:

33

Table of Contents

[[GREPCENT_TABLE]]
[["Inflation in excess of pricing and productivity","1.2","%"],["Volume / product mix","0.7","%"],["Acquisitions / divestitures","(0.2)","%"],["Currency exchange rates","(0.1)","%"],["Restructuring / acquisition expenses","(0.3)","%"],["Total","1.3","%"]]
[[/GREPCENT_TABLE]]

Cost of Goods sold as a percentage of Net revenues increased primarily due to inflation in excess of pricing and productivity improvements, and, to a lesser extent, unfavorable product mix, which exceeded the benefits from sales volume growth during the year. Inflation in excess of pricing and productivity reflects the impacts of increased commodity, material component, packaging, freight and labor inflation, as well as inefficiencies caused by the global supply chain challenges and shortages of materials, components and labor, as discussed above. These increases were partially offset by the year-over-year decrease in restructuring and acquisition expenses, favorable foreign currency exchange rate movements and the beneficial impact of our QMI divestiture.

Inflation in excess of pricing and productivity includes the impact to Costs of goods sold from pricing, as defined above, in addition to productivity and inflation. Productivity represents improvements in unit costs of materials and cost reductions related to improvements to our manufacturing design and processes. Inflation includes unit costs for the current period compared to the average actual cost for the prior period, multiplied by current year volumes.

Volume/product mix represents the impact 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.

Selling and Administrative Expenses

For the year ended December 31, 2021, Selling and administrative expenses as a percentage of Net revenues increased to 23.5% from 23.4%, due to the following:

[[GREPCENT_TABLE]]
[["Inflation in excess of productivity","0.5","%"],["Volume leverage","(0.5)","%"],["Acquisitions / divestitures","(0.1)","%"],["Investment spending","0.7","%"],["Restructuring / acquisition expenses","(0.5)","%"],["Total","0.1","%"]]
[[/GREPCENT_TABLE]]

Selling and administrative expenses as a percentage of Net revenues increased primarily due to inflation in excess of productivity and increased investment spending. These increases were partially offset by favorable volume leverage, a year-over-year decrease in restructuring and acquisition expenses and the beneficial impact of our QMI divestiture on current year operations. Inflation in excess of productivity reflects increases to variable compensation and a return to a more normalized level of other discretionary business spending that was reduced or delayed in the prior year as a result of the COVID-19 pandemic. The increased investment spending similarly reflects a return to a full-year focus of investing in business initiatives to drive future growth and realize our vision of seamless access with a focus on software and connected products. The increase also reflects that certain of these investments were temporarily frozen or delayed in 2020 due to the economic uncertainty surrounding the COVID-19 pandemic.

Volume leverage represents the contribution margin related to changes in sales volume, excluding the impact of price, productivity, mix and inflation. Expenses related to increased head count for strategic initiatives, new facilities or significant spending for strategic initiatives or new product and channel development, are captured in Investment spending in the table above.

Operating Income/Margin

Operating income for the year ended December 31, 2021, increased $126.7 million from the same period in 2020, and Operating margin increased to 18.5% from 14.8%, due to the following:

34

Table of Contents

[[GREPCENT_TABLE]]
[["In millions","Operating Income","","Operating Margin"],["December 31, 2020","$","403.5","","","14.8","%"],["Inflation in excess of pricing and productivity","(34.9)","","","(1.7)","%"],["Volume / product mix","9.3","","","(0.2)","%"],["Currency exchange rates","8.1","","","0.1","%"],["Investment spending","(19.4)","","","(0.7)","%"],["Acquisitions/ divestitures","4.4","","","0.3","%"],["Restructuring / acquisition expenses","19.6","","","0.8","%"],["Impairment of goodwill and intangible assets","101.7","","","3.7","%"],["Loss on assets held for sale","37.9","","","1.4","%"],["December 31, 2021","$","530.2","","","18.5","%"]]
[[/GREPCENT_TABLE]]

The increase in Operating income was primarily due to the prior year goodwill and intangible asset impairment charges and the loss on assets held for sale related to our QMI business, which did not recur in the current year. Also contributing to the increase in Operating income were favorable volume/product mix, lower year-over-year restructuring and acquisition expenses, favorable foreign currency exchange rate movements and the beneficial impact of our QMI divestiture on current year operations. These increases were partially offset by inflation in excess of pricing and productivity and increased investment spending. As discussed above, inflation in excess of pricing and productivity reflects the impacts of increased commodity, material component, packaging, freight and labor inflation; inefficiencies caused by the global supply chain challenges; and shortages of materials, components and labor, as well as increases in variable compensation and other discretionary business spending to a more normalized level in the current year. Similarly, the increased investment spending reflects a return to a full-year focus of investing in business initiatives to drive future growth and realize our vision of seamless access with a focus on software and connected products. The increase also reflects that certain of these investments were temporarily frozen or delayed in 2020 due to the economic uncertainty surrounding the COVID-19 pandemic.

The increase in Operating margin was also primarily due to the prior year goodwill and intangible asset impairment charges and the loss on assets held for sale related to our QMI business, which did not recur in the current year. Also contributing to the increase in Operating margin were lower year-over-year restructuring and acquisition expenses, favorable foreign currency exchange rate movements and the beneficial impact of our QMI divestiture on current year operations. These increases were partially offset by inflation in excess of pricing and productivity and increased investment spending as discussed above, as well as unfavorable product mix, which exceeded the margin benefits from the sales volume growth during the year.

Interest Expense

Interest expense for the year ended December 31, 2021, decreased $0.9 million compared to 2020, primarily due to a lower weighted-average interest rate on our outstanding indebtedness.

Other Income, net

The components of Other income, net, for the years ended December 31 were as follows:

[[GREPCENT_TABLE]]
[["In millions","","2021","","2020"],["Interest income","","$","(0.4)","","","$","(0.9)"],["Foreign currency exchange loss","","2.7","","","0.7"],["Earnings and gains from the sale of equity method investments, net","","(6.4)","","","(0.3)"],["Net periodic pension and postretirement benefit income, less service cost","","(7.1)","","","(2.2)"],["Other","","(32.8)","","","(10.3)"],["Other income, net","","$","(44.0)","","","$","(13.0)"]]
[[/GREPCENT_TABLE]]

For the year ended December 31, 2021, Other income, net increased $31.0 million compared to 2020, primarily due to a $20.7 million gain in the fourth quarter related to a fair value remeasurement of our investment in VergeSense, Inc. This gain is included within Other in the table above. Also contributing to the increase in Other income, net, are an increase in other realized and unrealized investment gains during the year, favorable net periodic pension and postretirement benefit income, less service cost, and a gain of $6.4 million from the sale of our equity method investment in Nuki Home Solutions GmbH, which is included in Earnings and gains from the sale of equity method investments, net in the table above. These increases are partially

35

Table of Contents

offset by gains of $12.8 million in the prior year, which did not recur in 2021, related to the reclassification to earnings of accumulated foreign currency translation adjustments upon the liquidation of two legal entities in our former EMEA region, and which are included within Other in the table above.

Provision for Income Taxes

For the year ended December 31, 2021, our effective tax rate was 7.8%, compared to 13.9% for the year ended December 31, 2020. The decrease in the effective tax rate was 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 and an unfavorable mix of income earned in lower tax rate jurisdictions.

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 year ended December 31, 2020, has been combined in the segment results of operations presented below to reflect this change in reportable segments.

Segment Results of Operations - For the years ended December 31

[[GREPCENT_TABLE]]
[["In millions","2021","","2020","","% Change"],["Net revenues"],["Allegion Americas","$","2,072.2","","","$","2,016.7","","","2.8","%"],["Allegion International","795.2","","","703.2","","","13.1","%"],["Total","$","2,867.4","","","$","2,719.9"],["Segment operating income (loss)"],["Allegion Americas","$","525.0","","","$","580.2","","","(9.5)","%"],["Allegion International","82.4","","","(102.1)","","","180.7","%"],["Total","$","607.4","","","$","478.1"],["Segment operating margin"],["Allegion Americas","25.3","%","","28.8","%"],["Allegion International","10.4","%","","(14.5)","%"]]
[[/GREPCENT_TABLE]]

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.

36

Table of Contents

Net revenues

Net revenues for the year ended December 31, 2021, increased by 2.8%, or $55.5 million, compared to the same period in 2020, due to the following: 

[[GREPCENT_TABLE]]
[["Pricing","1.9","%"],["Volume","0.5","%"],["Currency exchange rates","0.4","%"],["Total","2.8","%"]]
[[/GREPCENT_TABLE]]

The increase in Net revenues was principally driven by higher volumes, improved pricing and the impact of foreign currency exchange rate movements. The increase in sales volumes for the year was principally realized during the second quarter, given the muted demand and temporary plant shut-downs we experienced in the second quarter of 2020 due to the COVID-19 pandemic. However, the supply chain disruptions and delays and shortages in materials, components and labor discussed above have resulted in lower volumes during the second half of 2021. While these challenges are expected to continue into 2022, given the current elevated demand we are experiencing, we expect volume growth to resume as conditions improve.

Net revenues from non-residential products were flat compared to the same period in the prior year. While we continue to see strong demand for our non-residential products, the persistent and widespread supply chain challenges and shortages in materials, components (including electronic components) and labor discussed above have led to challenges in converting this elevated demand into Net revenues. Further, the combination of these factors has also culminated in our highest non-residential product backlog to date as a company as of December 31, 2021.

Net revenues from residential products increased by a low double digits percent compared to the prior year, driven significantly by the muted demand and temporary plant shut-downs we experienced in the second quarter of 2020 due to the COVID-19 pandemic. While 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, we also experienced supply chain challenges and electronic component shortages in the second half of 2021, which we expect to continue through 2022.

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 and electrified locks, access controls and electrified exit devices. Net revenues from the sale of electronic products decreased by a low single digits percent compared to 2020. As previously disclosed, a surge in global demand for electronic components has led to supply chain challenges and component shortages. 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 in the second half of 2021. While considered temporary, we expect these challenges around the availability of electronic components to continue through 2022. 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 component supply.

Operating income/margin

Segment operating income for the year ended December 31, 2021, decreased $55.2 million, and Segment operating margin decreased to 25.3% from 28.8% compared to the same period in 2020, due to the following:

[[GREPCENT_TABLE]]
[["In millions","Operating Income","","Operating Margin"],["December 31, 2020","$","580.2","","","28.8","%"],["Inflation in excess of pricing and productivity","(31.5)","","","(2.2)","%"],["Volume / product mix","(17.3)","","","(1.0)","%"],["Currency exchange rates","2.3","","","0.1","%"],["Investment spending","(14.1)","","","(0.7)","%"],["Restructuring / acquisition expenses","5.4","","","0.3","%"],["December 31, 2021","$","525.0","","","25.3","%"]]
[[/GREPCENT_TABLE]]

37

Table of Contents

The decreases in Segment operating income and Segment operating margin were primarily due to inflation in excess of pricing and productivity, unfavorable product mix, which exceeded the benefits from sales volume growth during the year, and increased investment spending. These decreases were partially offset by a year-over-year decrease in restructuring and acquisition expenses and the impact of foreign currency exchange rate movements. Inflation in excess of pricing and productivity reflects the impacts of the increased commodity, material component, packaging, freight and labor inflation; inefficiencies caused by the global supply chain challenges; and shortages of materials, components and labor discussed above, as well as increases in variable compensation and other discretionary business spending to a more normalized level in the current year. Similarly, the increased investment spending reflects a return to a full-year focus of investing in business initiatives to drive future growth and realize our vision of seamless access with a focus on software and connected products. The increase also reflects that certain of these investments were temporarily frozen or delayed in 2020 due to the economic uncertainty surrounding the COVID-19 pandemic.

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 year ended December 31, 2021, increased by 13.1%, or $92.0 million, compared to the same period in 2020, due to the following:

[[GREPCENT_TABLE]]
[["Pricing","1.5","%"],["Volume","8.9","%"],["Acquisitions / divestitures","(2.0)","%"],["Currency exchange rates","4.7","%"],["Total","13.1","%"]]
[[/GREPCENT_TABLE]]

The increase in Net revenues was principally driven by higher volumes and foreign currency exchange rate movements, in addition to improved pricing, and were partially offset by the divestiture of our QMI business in February 2021. The higher volumes, led by our Global Portable Security businesses, were achieved across nearly all of the countries within our Allegion International segment, reflecting in part the global economic rebound in 2021, contrasted with the depressed demand and temporary plant shut-downs we experienced in 2020 due to the COVID-19 pandemic.

Operating income (loss)/margin

Segment operating income (loss) for the year ended December 31, 2021, was favorable $184.5 million, and Segment operating margin improved to 10.4% from (14.5)% compared to the same period in 2020, due to the following:

[[GREPCENT_TABLE]]
[["In millions","Operating Income (Loss)","","Operating Margin"],["December 31, 2020","$","(102.1)","","","(14.5)","%"],["Inflation in excess of pricing and productivity","(2.7)","","","(0.5)","%"],["Volume / product mix","26.5","","","2.8","%"],["Currency exchange rates","5.9","","","0.4","%"],["Investment spending","(2.3)","","","(0.4)","%"],["Acquisitions / divestitures","4.4","","","0.8","%"],["Restructuring / acquisition expenses","13.1","","","1.9","%"],["Impairment of goodwill and intangible assets","101.7","","","14.5","%"],["Loss on assets held for sale","37.9","","","5.4","%"],["December 31, 2021","$","82.4","","","10.4","%"]]
[[/GREPCENT_TABLE]]

The improvements in Segment operating income (loss) and Segment operating margin were primarily due to the prior year goodwill and intangible asset impairment charges and the loss on assets held for sale related to our QMI business, which did not recur in the current year. Additional improvements were due to favorable volume/product mix, a year-over-year decrease in

38

Table of Contents

restructuring and acquisition expenses, favorable foreign currency exchange rate movements and the beneficial impacts of our current year acquisition and divestiture in the Allegion International segment. These increases were partially offset by inflation in excess of pricing and productivity and increased investment spending.

Additionally, while our Allegion International segment did not experience the supply chain disruptions and delays and other operational and logistical challenges to the same extent as our Allegion Americas segment in 2021, these challenges have increased during the fourth quarter of 2021, and we currently expect them to continue into 2022.

Liquidity and Capital Resources

Sources and uses of liquidity

The following table reflects the major categories of cash flows for the years ended December 31. For additional details, see the Consolidated Statements of Cash Flows in the Consolidated Financial Statements.

[[GREPCENT_TABLE]]
[["In millions","","2021","","2020"],["Net cash provided by operating activities","","$","488.6","","","$","490.3"],["Net cash used in investing activities","","(31.6)","","","(56.7)"],["Net cash used in financing activities","","$","(529.3)","","","$","(321.9)"]]
[[/GREPCENT_TABLE]]

Operating activities: Net cash provided by operating activities for the year ended December 31, 2021, was nearly flat compared to 2020, decreasing by $1.7 million, as increased Net earnings were offset by working capital challenges, principally stemming from the supply chain disruptions and delays and related operational and logistical interruptions discussed above.

Investing activities: Net cash used in investing activities for the year ended December 31, 2021, decreased $25.1 million compared to 2020, primarily due to cash proceeds from the sales of our equity method investment in Nuki Home Solutions GmbH and other investments, as well as a decrease in cash paid for acquisitions.

Financing activities: Net cash used in financing activities for the year ended December 31, 2021, increased $207.4 million compared to 2020, primarily due to an increase of $204.0 million in cash used to repurchase shares.

Capitalization

At December 31, long-term debt and other borrowings consisted of the following:

[[GREPCENT_TABLE]]
[["In millions","2021","","2020"],["2021 Term Facility","$","250.0","","","$","\u2014"],["Term Facility","\u2014","","","238.8"],["2021 Revolving Facility","\u2014","","","\u2014"],["Revolving Facility","\u2014","","","\u2014"],["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","","","0.6"],["Total borrowings outstanding","1,450.3","","","1,439.4"],["Less discounts and debt issuance costs, net","(8.2)","","","(9.8)"],["Total debt","1,442.1","","","1,429.6"],["Less current portion of long-term debt","12.6","","","0.2"],["Total long-term debt","$","1,429.5","","","$","1,429.4"]]
[[/GREPCENT_TABLE]]

In November 2021, we entered into a new unsecured credit agreement (the “2021 Credit Agreement”), which refinanced in full our previously outstanding unsecured Credit Facilities. The 2021 Credit Agreement consists of a $250.0 million term loan facility (the “2021 Term Facility”) 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. The initial proceeds from the 2021 Term Facility of $250.0 million were used primarily to repay in full the outstanding borrowings under our previously outstanding unsecured Term Facility. All obligations under the previously outstanding Credit Agreement were

39

Table of Contents

satisfied, all commitments thereunder were terminated, and all guarantees that had been granted in connection therewith were released.

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. Any amounts outstanding under the 2021 Term Facility may be voluntarily prepaid at any time without premium or penalty, subject to customary breakage costs. Amounts borrowed under the 2021 Term Facility that are repaid may not be reborrowed.

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 December 31, 2021, there were no borrowings outstanding on the 2021 Revolving Facility and we had $8.7 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. Certain fees are owed with respect to the 2021 Revolving Facility, including an unused commitment fee on the undrawn portion of the 2021 Revolving Facility of between 0.090% and 0.200% per year, depending on our credit rating, as well as certain other fees.

Outstanding borrowings under the 2021 Credit Facilities accrue interest at our option 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 applicable margin ranges from 0.875% to 1.375% depending on our credit ratings. At December 31, 2021, the outstanding borrowings under the 2021 Term Facility accrue interest at BSBY plus a margin of 1.125%, resulting in an interest rate of 1.271%. The 2021 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 2021 Credit Facilities require us to comply with a maximum leverage ratio as defined within the agreement. As of December 31, 2021, our leverage ratio of approximately 1.8 was significantly below the covenant requirement and we do not anticipate any potential covenant concerns for at least the next 12 months.

As of December 31, 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 December 31, 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.

Scheduled principal repayments on indebtedness as of December 31, 2021 can be found in Note 9 to the Consolidated Financial Statements. Expected principal and interest payments related to our long-term indebtedness in 2022 amount to $12.6 million and $45.0 million, respectively, given our current level of indebtedness and effective interest rates as of December 31, 2021.

Liquidity Outlook

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. Our ability to generate cash from our operating activities, our unused availability under our 2021 Revolving Facility and our access to the capital and credit markets enable us to fund these capital needs, as well as execute our long-term growth strategies and return value to our shareholders. As of December 31, 2021, we maintain cash and cash equivalents of $397.9 million and have unused availability of $491.3 million under our 2021 Revolving Facility. Further, our business operates with strong operating cash flows, low leverage and low capital intensity, providing financial flexibility, including sufficient access to credit markets.

Short-term financing needs primarily consist of working capital requirements, restructuring initiatives, capital spending, dividend payments and principal and interest payments on our long-term debt. Long-term financing needs depend largely on potential growth opportunities, including potential acquisitions, repayment or refinancing of our long-term obligations and repurchases of our ordinary shares. Based upon our operations, existing cash balances and availability under our 2021 Credit Facilities, we expect cash flows from operations to be sufficient to maintain a sound financial position and liquidity and to meet our financing needs for at least the next 12 months. Further, we do not anticipate any covenant compliance challenges with any of our outstanding indebtedness for at least the next 12 months. We also believe the availability under our 2021 Credit Facilities and access to credit and capital markets are sufficient to achieve our longer-term strategic plans.

40

Table of Contents

Contractual Obligations and Other Commitments

In addition to the scheduled principal and interest payments discussed above, our material cash requirements include the following contractual and other obligations:

Purchase Commitments – We occasionally enter into short-term, firm purchase commitments to mitigate pricing risk related to certain of our commodity, parts and component purchases, which represent commitments under enforceable and legally binding agreements. Such purchase commitments are made in the normal course of business and are not anticipated to materially impact our liquidity or financial position over the next 12 months.

Leases – We have numerous real estate and equipment leasing arrangements for which we are a lessee. See Note 11 to the Consolidated Financial Statements for further information as to the short and long-term lease liabilities included within the Consolidated Balance Sheets, as well as future minimum lease payments for 2022 and future years.

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. None of our defined benefit pension plans have experienced a significant impact on their liquidity due to volatility in the markets.

At December 31, 2021, we had net pension assets of $22.9 million, which consist of plan assets of $775.9 million and benefit obligations of $753.0 million. It is our objective to contribute to our pension plans in order to ensure adequate funds are available in the plans to make benefit payments to plan participants and beneficiaries when required. At December 31, 2021, the funded status of our U.S. pension plans increased to 97.2% from 92.1% at December 31, 2020. The funded status for our non-U.S. pension plans increased to 107.7% at December 31, 2021 from 101.8% at December 31, 2020. The funded status for all of our pension plans at December 31, 2021 increased to 103.0% from 97.5% at December 31, 2020. While there are no required pension contributions for 2022, we currently expect to contribute approximately $5 million to our plans worldwide in 2022. For further details on pension plan activity, see Note 12 to the Consolidated Financial Statements.

Income Taxes – At December 31, 2021, we have total unrecognized tax benefits for uncertain tax positions of $41.5 million and $7.5 million of related accrued interest and penalties, net of tax, although we are unable to reasonably estimate the timing over which these liabilities might be paid. See Note 18 to the Consolidated Financial Statements for additional information regarding matters relating to income taxes, including unrecognized tax benefits and tax authority disputes.

Contingent Liabilities – We are involved in various litigation, claims and administrative proceedings, including those related to environmental, asbestos-related and product liability matters. We believe that these liabilities are subject to the uncertainties inherent in estimating future costs for contingent liabilities and will likely be resolved over an extended period of time. See Note 21 to the Consolidated Financial Statements for additional information.

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 directly or indirectly 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,

41

Table of Contents

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 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

[[GREPCENT_TABLE]]
[["","Year ended December 31, 2021"],["In millions","Allegion plc","","Allegion US Hold Co"],["Net revenues","$","\u2014","","","$","\u2014"],["Gross profit","\u2014","","","\u2014"],["Operating loss","(6.6)","","","(0.5)"],["Equity earnings in affiliates, net of tax","521.6","","","173.6"],["Transactions with related parties and subsidiaries(a)","(12.5)","","","(85.0)"],["Net earnings","483.0","","","87.1"],["Net earnings attributable to the entity","483.0","","","87.1"]]
[[/GREPCENT_TABLE]]

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

Selected Condensed Balance Sheet Information

[[GREPCENT_TABLE]]
[["","December 31, 2021"],["In millions","Allegion plc","","Allegion US Hold Co"],["Current assets:"],["Amounts due from related parties and subsidiaries","$","0.6","","","$","753.7"],["Total current assets","60.8","","","785.5"],["Noncurrent assets:"],["Amounts due from related parties and subsidiaries","\u2014","","","1,240.9"],["Total noncurrent assets","1,793.1","","","1,292.7"],["Current liabilities:"],["Amounts due to related parties and subsidiaries","$","62.8","","","$","233.9"],["Total current liabilities","82.6","","","241.3"],["Noncurrent liabilities:"],["Amounts due to related parties and subsidiaries","761.8","","","2,660.5"],["Total noncurrent liabilities","1,396.5","","","3,466.9"]]
[[/GREPCENT_TABLE]]

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with those accounting principles requires management to use judgment 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, revenues 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. If updated information or actual amounts are different from previous estimates, the revisions are included in our results for the period in which they become known.

42

Table of Contents

The following is a summary of certain accounting estimates and assumptions made by management that we consider critical:

•Goodwill – Goodwill is tested annually during the fourth quarter for impairment or when there is a significant change in events or circumstances that indicate the fair value of a reporting unit is more likely than not less than its carrying amount. Recoverability of goodwill is measured at the reporting unit level and starts with a comparison of the carrying amount of a reporting unit to its estimated fair value. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. To the extent that the carrying value of a reporting unit exceeds its estimated fair value, a goodwill impairment charge will be recognized for the amount by which the carrying value of the reporting unit exceeds its fair value, not to exceed the carrying amount of the reporting unit's goodwill.

As quoted market prices are not available for our reporting units, the calculation of their estimated fair values is based on two valuation techniques, a discounted cash flow model (income approach) and a market multiple of earnings (market approach), with each method being weighted in the calculation. The income approach relies on our estimates of revenue growth rates, margin assumptions and discount rates to estimate future cash flows and explicitly addresses factors such as timing, with due consideration given to forecasting risk. These assumptions are subject to varying degrees of judgment and complexity. Estimates of future revenue growth rates and margin assumptions represent our best estimates of future cash flows given our expectations of market growth for the security products industry in the specific markets in which we operate, as well as factors such as our market positioning, brand strength, pricing and marketing efforts and other growth and productivity opportunities and initiatives. Discount rate assumptions represent our best estimates of market participant adjusted weighted-average costs of capital. Although these assumptions represent our best estimates as of the assessment date, certain factors could potentially create variances in these estimates, including but not limited to:

•Decreases in estimated market sizes or market growth rates due to greater than expected declines in volumes, pricing pressures or disruptive technology;

•Declines in our market share and penetration assumptions due to increased competition or an inability to develop or launch new products;

•The impacts of market volatility, including but not limited to, impacts of global pandemics, greater than expected inflation, supply chain disruption and delays, declines in pricing, reductions in volumes or fluctuations in foreign exchange rates;

•The level of success of on-going and future research and development efforts, including those related to acquisitions, and increases in the research and development costs necessary to obtain regulatory approvals and launch new products; and

•Volatility in market interest rates that could impact the selection of an appropriate discount rate.

The market approach requires determining an appropriate peer group, which is utilized to derive estimated fair values of our reporting units based on selected market multiples. The market approach reflects the market’s expectations for future growth and risk, with adjustments to account for differences between the selected peer group companies and the subject reporting units. While market multiples are based on observable, arm’s-length evidence of value, these assumptions are still subject to inherent uncertainty, as the peer-group companies may differ in significant ways from one or more of our reporting units in terms of size, growth or business description characteristics.

All critical accounting estimates and assumptions utilized in determining the fair values of our reporting units are subject to a high degree of judgment and complexity. While we make every effort to estimate fair value as accurately as possible with the information available at the assessment date, changes in assumptions and estimates may affect the estimated fair value of the reporting unit and could result in impairment charges in future periods.

•Indefinite-lived intangible assets – Similar to goodwill, indefinite-lived intangible assets are tested annually during the fourth quarter for impairment or when there is a significant change in events or circumstances that indicate the fair value of the asset is more likely than not less than its carrying amount. Recoverability of indefinite-lived intangible assets is determined on a relief from royalty methodology, which is based on the implied royalty paid, at an appropriate discount rate, to license the use of an asset rather than owning the asset. The present value of the after-tax cost savings (i.e. royalty relief) indicates the estimated fair value of the asset. Any excess of the carrying value over the estimated fair value is recognized as an impairment loss equal to that excess. A significant change in any or a combination of the assumptions used to estimate fair value of our indefinite-lived intangible assets could have a negative impact on the estimated fair values.

•Income taxes – We account for income taxes in accordance with ASC Topic 740. Deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. We recognize future tax benefits, such as net operating losses and non-U.S. tax credits, to the extent that realizing these benefits is

43

Table of Contents

considered in our judgment to be more likely than not. We regularly review the recoverability of our deferred tax assets considering our historic profitability, projected future taxable income, timing of the reversals of existing temporary differences and the feasibility of our tax planning strategies. Where appropriate, we record a valuation allowance with respect to future tax benefits. We establish valuation allowances against the realizability of any deferred tax assets, based on our consideration of all available evidence, both positive and negative, using a “more likely than not” standard. This assessment considers the nature, frequency and amount of recent losses, the duration of statutory carryforward periods and tax planning strategies. In making such judgments, significant weight is given to evidence that can be objectively verified.

The provision for income taxes involves a significant amount of management judgment regarding interpretation of relevant facts and laws in the jurisdictions in which we operate. Future changes in applicable laws, projected levels of taxable income and tax planning could change the effective tax rate and tax balances recorded by us. In addition, tax authorities periodically review income tax returns filed by us and can raise issues regarding our filing positions, timing and amount of income or deductions and the allocation of income among the jurisdictions in which we operate. A significant period of time may elapse between the filing of an income tax return and the ultimate resolution of an issue raised by a tax authority with respect to that return. We believe we have adequately provided for any reasonably foreseeable resolution of these matters and will adjust our estimates if significant events so dictate. To the extent that the ultimate results differ from our original or adjusted estimates, the effect will be recorded in the provision for income taxes in the period the matter is finally resolved.

•Defined benefit plans – We provide several U.S. and non-U.S. defined benefit pension plan benefits to eligible employees and retirees. Our 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. Determining the costs associated with such plans is dependent on various actuarial assumptions including discount rates, expected returns on plan assets, employee mortality and turnover rates. Actuarial valuations are performed to determine expense in accordance with GAAP. Actual results may differ from actuarial assumptions and when they do, are generally recorded to Accumulated other comprehensive loss and amortized into earnings over future periods.

We review our actuarial assumptions at each measurement date and make modifications to the assumptions as appropriate. The discount rate and expected return on plan assets are determined as of each measurement date. Discount rates for all plans are established using hypothetical yield curves based on the yields of corporate bonds rated AA quality. Spot rates are developed from the yield curve and used to discount future benefit payments. The expected return on plan assets reflects the average rate of returns expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. The expected return on plan assets is based on what is achievable given the plan’s investment policy, the types of assets held and the target asset allocation. We believe the assumptions utilized in recording our defined benefit obligations are reasonable based on input from our actuaries, outside investment advisors and information as to assumptions used by plan sponsors.

Changes in any of the assumptions can have an impact on the net periodic pension benefit cost. An estimated 0.25% rate decline in the discount rate would have increased net periodic pension benefit cost by approximately $1.2 million in 2021, while a 0.25% rate decline in the estimated return on assets would have increased net periodic pension benefit cost by approximately $1.9 million.

•Business combinations – The fair value of consideration paid in a business combination is allocated to the tangible and identifiable intangible assets acquired, liabilities assumed and goodwill. Acquired intangible assets primarily include indefinite-lived trade names, customer relationships and completed technologies. The accounting for business combinations involves a considerable amount of judgment and estimation, including the fair value of acquired intangible assets involving projections of future revenues and cash flows that are either discounted at an estimated discount rate or measured at an estimated royalty rate; fair value of other acquired assets and assumed liabilities, including potential contingencies; and the useful lives of the acquired assets. As a result, in the case of significant acquisitions, we normally obtain the assistance of a third-party valuation specialist in estimating fair values of acquired tangible and intangible assets and assumed liabilities. An income approach or market approach (or both) is utilized in accordance with accepted valuation models to determine fair value. The assumptions used to determine the fair value of acquired assets include projections developed using historical information and internal forecasts, available industry and market data, estimates of long-term growth rates, profitability, customer attrition and royalty rates, which are estimated at the time of acquisition, considering the perspective of marketplace participants. While we believe expectations and assumptions utilized for historical business combinations have been reasonable, they are inherently uncertain, and unanticipated market or macroeconomic events and circumstances occasionally do occur, and may occur in the future, which could affect the

44

Table of Contents

accuracy and validity of such assumptions. The impact of future business combinations on our financial condition or results of operations may also be materially impacted by the change in or initial selection of assumptions and estimates, in addition to events and circumstances subsequent to the acquisition that are not reasonably anticipated when finalizing our purchase accounting estimates and assumptions.

Recent Accounting Pronouncements

See Note 2 to our Consolidated Financial Statements included in Item 8 herein for a discussion of recently issued and adopted accounting pronouncements.