Allegion plc (ALLE) 2025 Earnings Quality Report

Grade: F — Major Red Flags

Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles

Data: SEC EDGAR 10-K (Filed 2026-02-17) + Yahoo Finance

Auditor: PricewaterhouseCoopers LLP — Clean opinion (1 Critical Audit Matter on Revenue Recognition)

One-line verdict: Allegion — the global security products maker behind Schlage, Von Duprin, LCN, CISA, SimonsVoss and Interflex — grew net revenues 7.8% to $4.07B on a 3.1% pricing lift, 1.0% volume, 3.1% acquisitions, and 0.6% FX tailwind. Operating margin expanded 40 basis points to 21.1%, delivering 10% operating income growth and 8% EPS growth to $7.44. The Americas segment (79% of sales) grew 6.9% with 27.9% segment margin; International (21% of sales) grew 11.7% driven almost entirely by the ELATEC acquisition. Operating cash flow grew $108.8M to $783.8M and free cash flow comfortably covered dividends ($175.3M) and buybacks ($80M). Two red flags trip the screen: cash of $0.4B covers only 18% of $2.0B debt, and goodwill plus intangibles of $2.7B equals 132% of equity. Two watch flags: inventory grew 22.7% versus COGS growth of 6.0%, and goodwill+intangibles surged 33% year-over-year from the $631.6M ELATEC acquisition. PwC selected Revenue Recognition as its Critical Audit Matter, citing "the high degree of auditor effort in performing procedures and evaluating audit evidence." The 2025 10-K is a decent operational year wrapped around an acquisition-driven balance sheet expansion.

Two Segments, Americas Dominant

Per the MD&A: "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, retail, commercial office and single and multi-family residential markets. Our leading brands include CISA, Interflex, LCN, Schlage, SimonsVoss and Von Duprin."

Segment results:

Americas is 79% of revenue and 92% of segment operating income. International's 11.7% growth looks robust but decomposes to: pricing +1.2%, volume -1.3%, acquisitions +8.2%, FX +3.6%. International volume declined 1.3% — the ELATEC acquisition and FX masked underlying volume weakness.

Revenue Growth Decomposition

Per the MD&A:

Only 1.0% of 7.8% growth came from volume. Price growth of 3.1% is carrying the operational story. Acquisitions (primarily ELATEC, closed July 1, 2025) contributed 3.1% — and in the Americas specifically, acquisitions contributed 1.8% of the 6.9% segment growth. Excluding acquisitions, the Americas business grew 5.1%, or roughly pricing + modest volume.

Per the MD&A: "Excluding Net revenues of businesses acquired in 2025, Net revenues from non-residential products grew by a high-single digits percent compared to the prior year... and Net revenues from residential products decreased by a low-single digits percent compared to the prior year, driven by lower volumes, partially offset by increased pricing."

Residential product volumes fell. Single-family housing construction weakness is flowing through to Schlage/Kwikset residential demand. Non-residential (commercial and institutional) remains the growth engine.

Per the MD&A: "Net revenues from the sale of electronic products increased by a low-double digits percent compared to 2024. We continue to believe electronic products are a long-term growth driver."

Results of Operations

Per the MD&A:

Cost of goods sold as a percentage of revenue decreased 100 bps to 54.8%. Per the MD&A: "Cost of goods sold as a percentage of Net revenues decreased primarily due to favorable product mix, favorable foreign currency exchange rate movements, a year-over-year decrease in restructuring, integration, and acquisition expenses and pricing and productivity, which exceeded the impacts from inflation and investment spending."

SG&A expanded 60 bps to 24.1%. Per the MD&A: "Selling and administrative expenses as a percentage of Net revenues increased due to inflation in excess of productivity and investment spending and a year-over-year increase in restructuring, integration, and acquisition expenses."

Net operating margin improvement of 40 bps to 21.1% is driven by mix (commercial/electronic growing, residential declining — favorable mix).

Effective tax rate rose from 14.5% to 16.2% — "unfavorable mix of income earned in higher tax rate jurisdictions and year over year changes in amounts recognized for uncertain tax positions."

Cash Flow

Per the MD&A:

Per the MD&A: "Net cash provided by operating activities for the year ended December 31, 2025, increased by $108.8 million compared to 2024, driven primarily by higher net earnings and less cash used for working capital."

The investing activities jump is fully explained by acquisitions: "Net cash used in investing activities for the year ended December 31, 2025, increased by $457.1 million compared to 2024, primarily due to higher cash used for acquisitions and an increase in capital expenditures."

Per the MD&A on acquisitions: "The aggregate consideration, inclusive of contingent consideration and net of cash acquired, for all acquisitions completed in 2025 and 2024 was approximately $631.6 million and $147.2 million, respectively. Businesses acquired in 2025 generated $93.0 million of Net revenues since the acquisition dates, which is included within our Consolidated Statements of Comprehensive Income."

CFFO/Net Income of 1.22 is healthy. FCF of approximately $684M covered dividends ($175.3M) + buybacks ($80M) = $255M with plenty of headroom.

Balance Sheet: $2.0B Debt, $0.4B Cash, $2.7B Intangibles

Per the MD&A Capitalization table:

Per the MD&A: "On December 9, 2025, we amended and restated the Revolving Facility which, among other things, increased the total commitment from $750.0 million to $1.0 billion, and extended the maturity from May 20, 2029 to May 20, 2030. We used borrowings under the Revolving Facility to repay our outstanding term loan, which was scheduled to mature in November 2026. Outstanding borrowings under the Revolving Facility were $190.6 million at December 31, 2025."

90% of debt is fixed-rate — the MD&A notes: "Of our total outstanding indebtedness as of December 31, 2025, approximately 90% incurs fixed-rate interest and is therefore not exposed to the risk of rising variable interest rates." That is prudent capital structure management.

Cash of $0.4B against debt of $2.0B produces the C4 red flag (18% coverage). Goodwill + intangibles of $2.7B against equity of ~$2.05B = 132% — the D1 red flag. ELATEC added most of the 2025 goodwill surge — the E2 watch flag shows goodwill+intangibles grew 33% year-over-year.

Tariffs: Managed, For Now

Per the MD&A: "Throughout 2025, the U.S. government announced tariffs on imports from several countries from which we manufacture and/or import products and components. In 2025, we offset inflation due to tariffs with pricing actions. We continue to analyze the impact of changes in tariffs and what, if any, steps, including pricing actions, we may take to mitigate the impact of the tariffs. We estimate we source approximately 20-25% of cost of goods sold ("COGS") from Mexico, less than 5% of COGS from China, and 5-10% of COGS from all other non-US countries. Additionally, this could impact future demand."

Mexico is Allegion's biggest exposed supplier base — 20-25% of COGS. USMCA exemptions have so far limited the tariff pass-through, but any change in Mexico-specific tariff policy would directly hit margins. The MD&A states Allegion offset 2025 tariff impact with pricing, which explains the 3.1% price growth.

The Inventory Watch Flag

The screening engine flagged B1: "Inventory growth 22.7% exceeds COGS 6.0%." This is a significant mismatch.

The ELATEC acquisition explains a portion — July 2025 acquisition closings bring inventory onto the balance sheet at year-end. But a 22.7% inventory increase against 6.0% COGS growth is 17 points of mismatch that ELATEC alone ($93M in post-acquisition revenue, roughly $46M in COGS) cannot fully explain.

The MD&A does not provide a detailed explanation for the inventory build — which is notable for an MD&A of this length. Typical reasons include tariff preloading (stocking up ahead of potential tariff increases), supply chain stabilization after 2022-2024 disruptions, or slower sell-through in residential channels. Q1 2026 inventory levels will show whether the build normalizes.

The 18-Point Screening

Key Risks from the 10-K

1. Construction and Remodeling Cycle

Per Item 1A Risk Factors: "Our business performance is impacted by the strength of the institutional, commercial and residential construction and remodeling markets and global macroeconomic factors. Demand for our security products and solutions relies on the institutional, commercial, and residential construction and remodeling markets, which are marked by cyclicality based on national, regional and local economic conditions, including consumer confidence and disposable income, corporate and government spending, work-from-home trends, availability of credit and demand for new housing and infrastructure."

2025 residential product volume declines reflect this cycle.

2. Tariffs and Trade Policy

Per Item 1A: "Negative macroeconomic trends, future market disruptions or uncertainty related to potential changes to fiscal and monetary policy and/or trade policy, including the imposition, or threatened imposition, of tariffs and potential retaliatory trade restrictions, may make it more challenging for us to manufacture and deliver products to our customers, could cause periodic production interruptions and supply constraints."

20-25% of COGS from Mexico makes Allegion highly exposed to USMCA changes.

3. Raw Material and Component Cost Inflation

Per Item 1A: "Higher prices for raw materials, parts and components, freight, packaging, labor and energy, whether caused by inflationary pressures or other geopolitical factors, such as new or increased tariffs, duties, or other charges as a result of changes to U.S. or international trade policies or trade agreements, increase our costs to manufacture and distribute our products and services."

4. Acquisition Integration

With ELATEC ($631M in aggregate 2025 acquisitions) recently closed, integration execution is material. ELATEC's German manufacturing and access technology platform requires systems integration and cultural harmonization.

5. Currency Volatility

2025 saw a 0.6% FX tailwind to revenue. Reversal in 2026 would pressure International segment growth.

6. Electronic Product Competitive Dynamics

Electronic security products are a growth engine but face increased competition from tech-native players (Google Nest, Amazon Ring, and others in residential; various cloud-first access control platforms in commercial).

7. Revenue Recognition Complexity

PwC's CAM on Revenue Recognition highlights the complexity: "The Company has two principal revenue streams, tangible product sales and services and software. For the year ended December 31, 2025, the Company's net revenues were $4,067.3 million. Net revenues are recognized based on the satisfaction of performance obligations under the terms of a contract... Product sales involve contracts with a single performance obligation. Transfer of control typically occurs when goods are shipped from the Company's facilities or at other predetermined control transfer points (for instance, destination terms). Services and software offerings include inspection, maintenance and repair, aftermarket, design and installation services, as well as on-premise, software maintenance and software as a service solutions."

Key Financial Trends (3-Year)

Summary

Grade: F. Two red flags and two watch flags against a healthy 7.8% revenue growth year.

Allegion's 2025 operating performance was solid:

Two structural red flags trip the screen:

Two watch flags:

Yellow flags:

Important context:

What to watch:

Allegion is a quality operator in a cyclical industry with a fortress-like non-residential product portfolio. The 2025 report shows the classic pattern of a healthy operator whose balance sheet has been stretched by acquisition-driven growth. The earnings quality metrics suggest no manipulation — the screening failures are structural leverage characteristics.

**Disclaimer**: This report is based on Allegion plc's fiscal year 2025 10-K filed with the SEC on February 17, 2026. This is NOT investment advice.

**About EarningsGrade**: We screen earnings reports for financial red flags using an 18-point forensic framework. Grade F means major red flags were detected that warrant thorough investigation.