Allegion plc — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Allegion is a global provider of mechanical and electronic security products and solutions, reporting through Americas, EMEIA, and Asia Pacific segments. Unless otherwise stated, amounts are in millions of dollars.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $581.1 | $544.5 | $1,668.3 | $1,522.7 |
| Operating income | $121.5 | $110.4 | $328.3 | $277.1 |
| Operating margin | 20.9% | 20.3% | 19.7% | 18.2% |
| Net earnings attributable to Allegion | $1.6 | $(27.3) | $154.3 | $82.0 |
| Diluted EPS | $0.02 | $(0.28) | $1.59 | $0.85 |
| Operating cash flow | Not stated quarterly | Not stated quarterly | $178.4 | $126.0 |
Q3 revenue increased 6.7%; nine-month revenue increased 9.6%. Management attributed growth primarily to volume, pricing, and acquisitions, partly offset by currency effects. Cost of goods sold was 54.7% of Q3 revenue versus 55.9% a year earlier, and 55.2% for the nine months versus 57.4%.
Q3 earnings were sharply affected by an $84.4 million divestiture loss. The filing reports the charge as $84.4 million before and after tax; excluding it, reported earnings would look materially different, but the filing does not provide a directly comparable adjusted earnings figure here. Nine-month other income included $12.4 million in gains from marketable securities and an investment gain management said was not expected to recur.
Liquidity, debt and capital
- Cash and cash equivalents were $214.5 at September 30, compared with $199.7 at December 31, 2015. Current assets were $802.3 and current liabilities $432.3.
- Total debt was $1,473.6, including $891.5 under the Term Loan A Facility and $600.0 of senior notes due 2021 and 2023. The company repaid $35.2 of term-loan principal during the nine-month period.
- The $500 million revolving facility had no borrowings outstanding; $18.5 of letters of credit was outstanding. Allegion said it complied with its debt covenants.
- Nine-month investing cash outflow was $49.3, including $26.4 of capital expenditures and $31.4 for acquisitions. Financing cash outflow was $116.0, including $53.6 of net debt repayments, $34.5 of shareholder dividends, and $30.0 of share repurchases.
- Dividends declared were $0.12 per share in Q3 and $0.36 per share year to date. The company repurchased 0.5 million shares for $30.0 through September 30.
Changes by segment and versus prior year
- Americas: Q3 revenue rose 4.1% to $436.2 and segment operating income rose 8.1% to $131.5. Nine-month revenue increased 5.1% to $1,235.7; operating income increased 10.7% to $351.7.
- EMEIA: Q3 revenue rose 27.2% to $116.4, largely from acquisitions, while segment operating income fell to $3.4 from $5.0 and margin declined to 2.9% from 5.5%. Nine-month revenue increased 38.7% to $356.5 and operating income rose to $20.3 from $8.1.
- Asia Pacific: Q3 revenue fell 16.4% to $28.5, primarily reflecting the China systems-integration divestiture; operating income was $1.8 versus $0.3. Nine-month revenue declined 15.7% to $76.1, while operating income improved to $3.8 from a $3.7 loss.
Company-wide operating margin improved in both comparison periods, reflecting volume and mix, pricing and productivity, and lower prior-year charges, partly offset by increased investment spending. Acquisitions and divestitures contributed an estimated net $9.7 of Q3 revenue but reduced operating income by about $1.9; for the nine months, they added about $64.0 of revenue and $7.7 of operating income.
Outlook, unusual items and risks
- The filing provides no specific full-year revenue, earnings, or margin guidance. Management stated that operating cash generation, cash on hand, unused revolver capacity, and capital-market access were expected to provide adequate resources for operating and financing needs.
- The principal unusual Q3 item was an $84.4 million charge related to the Bocom China divestiture: the company impaired the sale consideration and working-capital receivable, reducing its carrying value from $85.9 to $4.5, and accrued $3.0 of contractual obligations. Management did not expect material future Bocom charges.
- A tax-matter settlement required a $49.2 payment to Ingersoll Rand. Allegion recorded a $48.7 receivable from Canadian tax authorities and expected collection by December 31, 2016; the cash had not been collected by quarter-end.
- Environmental remediation reserves were $17.2, up from $15.2 at year-end. The company described ordinary-course litigation, product warranty and environmental exposures, and said pending legal matters were not expected to have a material adverse effect.
- Management identified risks including economic and market conditions, demand and competition, foreign exchange, acquisition integration, interest rates and substantial leverage, taxes, litigation, commodities, IT risks, and possible asset impairments. It reported no material change in risk factors from the 2015 Form 10-K.
Important facts for investors to verify
- Whether the $48.7 Canadian tax receivable was collected as expected and how the related tax settlement affects subsequent cash flows.
- The final recoverability of the Bocom consideration, given the $81.4 impairment and Level 3 valuation of the remaining $4.5 receivable.
- Whether EMEIA can improve its low Q3 operating margin as acquisition-related revenue grows, and whether Asia Pacific revenue stabilizes after the China divestiture.
- Debt-service capacity and covenant headroom, particularly given $1,473.6 of reported debt and variable-rate term-loan exposure.
- The extent to which nine-month earnings benefited from the $12.4 securities gain and the nonrecurring equity-investment gain.