Allegion plc — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Allegion is a global security-products and solutions provider, reporting in the Americas, EMEIA, and Asia Pacific segments. Unless otherwise noted, figures are in millions of U.S. dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net revenue | $731.2 | $704.7 | $1,386.2 | $1,317.8 |
| Operating income | $145.7 | $143.4 | $253.7 | $242.1 |
| Operating margin | 19.9% | 20.3% | 18.3% | 18.4% |
| Net earnings attributable to Allegion | $109.3 | $113.9 | $189.5 | $186.1 |
| Diluted EPS | $1.16 | $1.19 | $2.00 | $1.94 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $107.0 | $118.7 |
Q2 revenue rose 3.8%; management attributed the increase to pricing (+2.2%), volume (+0.8%) and acquisitions (+2.3%), partly offset by currency (-1.5%). For the first half, revenue increased 5.2%, led by volume (+2.2%), pricing (+2.1%) and acquisitions (+2.8%), partly offset by currency (-1.9%).
Q2 operating income increased $2.3 million, but operating margin fell 0.4 percentage points. First-half operating income increased $11.6 million while margin edged down 0.1 percentage points. Q2 net earnings attributable to Allegion declined about 4%; first-half earnings increased about 2%. The effective tax rate increased to 16.9% from 13.4% in Q2 and to 16.4% from 14.4% for the first half.
Segments and material period changes
- Americas: Q2 revenue increased 3.5% to $545.1 million; segment operating income rose 6.1% to $161.2 million and margin improved to 29.6%. First-half revenue rose 5.7% and operating income rose 7.8%.
- EMEIA: Q2 revenue declined 3.8% to $142.2 million, while operating income fell to $1.6 million from $11.2 million and margin to 1.1% from 7.6%. First-half revenue declined 4.4% and operating income fell 37.1%. Currency headwinds and higher restructuring/acquisition expenses weighed on results.
- Asia Pacific: Q2 revenue rose 45.8% to $43.9 million, largely due to prior-year acquisitions; operating income was $1.3 million. First-half revenue rose 49.7%, while the segment recorded a $0.2 million operating loss, improved from a $0.7 million loss.
Pricing and productivity gains supported operating results, but were offset by higher restructuring and acquisition expenses, investment spending, currency effects and acquisition-related margin impacts. Q2 selling and administrative expenses increased to $175.0 million from $162.2 million.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $157.8 million and restricted cash was $3.4 million, versus $283.8 million and $6.8 million, respectively, at December 31, 2018. Current assets were $883.2 million and current liabilities $517.1 million.
- First-half operating cash flow was $107.0 million, down from $118.7 million, primarily due to working-capital changes. Capital expenditures were $29.3 million, compared with $20.9 million.
- First-half investing cash use was $36.2 million, versus $301.3 million, reflecting lower acquisition spending than in 2018. Financing cash use increased to $200.6 million, including $133.6 million of share repurchases and $50.5 million of dividends.
- Total debt, net of discounts and issuance costs, was $1,428.2 million, including $35.1 million current and $1,393.1 million long-term debt. The company had no revolving-facility borrowings and $17.0 million of letters of credit outstanding against its $500 million facility. It reported compliance with debt covenants.
- The company repurchased approximately 1.4 million shares for $133.6 million during the first half. The board’s $500 million authorization had approximately $239.1 million remaining at June 30.
Management stated it expects operating cash generation, available revolving credit and access to capital markets to provide adequate resources for operating and financing needs. This is a liquidity assessment, not quantified earnings or revenue guidance.
Outlook, risks and unusual items
- Allegion closed its Turkey production facility in June to streamline EMEIA operations. It recorded $8.1 million of Q2 restructuring expenses, including approximately $3.6 million of qualified and $2.7 million of non-qualified costs related to the closure. Additional Turkey-related costs in Q3 and Q4 were expected not to exceed $10 million.
- Currency movements were a material headwind, particularly in EMEIA and Asia Pacific. The company also identified demand and construction-market conditions, competition, supply-chain disruption, cyber and IT risks, commodity costs, interest rates, tax changes, acquisitions and litigation among factors that could affect results.
- Environmental reserves were $20.8 million at June 30, including $4.9 million current. Management said pending legal matters were not expected to have a material adverse impact; environmental remediation estimates remain subject to regulatory, technology and other uncertainties.
- Allegion adopted lease accounting standard ASC 842 on January 1, 2019. At June 30, it reported $81.6 million of right-of-use assets and $81.6 million of lease liabilities; comparative periods were not restated.
- Management reported no material changes in market-risk exposure or risk factors during the quarter. Disclosure controls were deemed effective.
Key facts for investors to verify
- Whether EMEIA operating performance recovers after the sharp margin decline and Turkey restructuring.
- Whether revenue and margin trends persist after separating pricing, volume, acquisitions and foreign-exchange effects.
- Working-capital developments and operating cash conversion, given the year-over-year decline in first-half operating cash flow.
- Debt, interest-rate exposure and cash available for repurchases and dividends; $250 million of variable-rate debt was hedged with swaps, which expire in September 2020.
- Actual remaining Turkey closure costs against management’s estimate of no more than $10 million, and any changes in environmental or other contingencies.