Allegion plc — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Allegion supplies security products and solutions across the Americas, EMEIA, and Asia Pacific. Comparisons are with Q1 2018 unless stated otherwise. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $655.0 | $613.1 |
| Operating income | $108.0 | $98.7 |
| Operating margin | 16.5% | 16.1% |
| Net earnings attributable to Allegion | $80.2 | $72.2 |
| Diluted EPS | $0.84 | $0.75 |
| Net cash used in operating activities | $12.6 | $10.1 |
| Capital expenditures | $12.3 | $8.7 |
- Revenue increased 6.8%, reflecting pricing (+2.1 percentage points), volume (+3.7), and acquisitions (+3.3), partly offset by currency (-2.3).
- Gross margin was approximately 42.3%, versus 42.0% in Q1 2018, based on reported revenue and cost of goods sold. Selling and administrative expenses were $168.9, or 25.8% of revenue, compared with $159.1, or 26.0%.
- Interest expense rose to $13.7 from $12.9, primarily due to higher Term Facility interest rates. The effective tax rate was 15.8%, compared with 16.0%.
- Operating cash flow remained negative, mainly reflecting working-capital changes. Cash used in investing was $17.7, versus $284.9, with the prior-year period including substantially higher acquisition payments. Cash used in financing rose to $99.2, including $63.8 of share repurchases and $25.2 of dividends.
Balance sheet, debt, and liquidity
- At March 31, cash and cash equivalents were $153.8 and restricted cash was $6.8. Total current assets were $850.2; current liabilities were $485.4.
- Total debt was $1,436.4, including $647.5 under the Term Facility and $800.0 of senior notes due 2024 and 2027. Long-term debt, net of current maturities, was $1,401.3. Total debt decreased from $1,444.8 at year-end 2018.
- The $500.0 revolving facility had no borrowings outstanding; $17.1 of letters of credit were outstanding. The facilities mature in September 2022. Allegion reported compliance with debt covenants.
- The company repurchased approximately 0.7 million shares for $63.8 during the quarter; $308.9 remained under the authorization at March 31. The board declared a $0.27-per-share dividend on April 4, payable June 28, 2019.
Material changes and segment results
- Americas revenue increased 8.2% to $475.3, and segment operating income increased 10.2% to $120.9. Non-residential product revenue grew at a low-double-digit rate; residential revenue was flat.
- EMEIA revenue declined 4.9% to $142.9, primarily due to currency movements, while segment operating income rose to $10.8 from $8.5.
- Asia Pacific revenue increased 55.3% to $36.8, mainly reflecting prior-year acquisitions. The segment recorded a $1.5 operating loss, unchanged from Q1 2018.
- Management attributed improved consolidated operating income and margin mainly to volume/product mix, pricing, and productivity gains exceeding inflation. Currency, investment spending, and restructuring/acquisition costs partly offset those gains.
- Comprehensive income attributable to Allegion was $64.9, down from $98.3. Currency translation and other comprehensive items contributed to the difference from net earnings.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific quantified revenue, earnings, or cash-flow guidance. Management stated that operating cash flow, available revolver capacity, cash on hand, and capital-market access are expected to provide adequate resources for operating and financing needs.
- Management highlighted exposure to economic and construction-market conditions, competition and product development, foreign exchange, acquisitions, supply-chain disruption, cybersecurity and IT systems, taxes and trade rules, interest rates and indebtedness, commodity costs, and litigation and environmental matters. Forward-looking statements are subject to uncertainty, and the company undertakes no duty to update them.
- Environmental reserves were $21.6 at March 31, including $5.9 current. Management said pending legal matters were not expected to have a material adverse impact; ultimate environmental costs remain uncertain.
- Restructuring expenses were $1.7, with an additional $1.4 of other restructuring-related charges. Acquisition and integration expenses were $1.0.
- Allegion adopted ASC 842 lease accounting on January 1, 2019, with no opening retained-earnings adjustment. It recorded lease right-of-use assets of $82.4 and lease liabilities of $82.4, including $27.1 current and $55.3 noncurrent.
- Disclosure controls were reported effective, with no material change in internal control over financial reporting. The company reported no material change in market-risk exposure or risk factors during the quarter.
Important facts for investors to verify
- Whether revenue growth and margin improvement persist after separating pricing, volume/mix, acquisition, and currency effects.
- Working-capital drivers behind negative operating cash flow and the timing of a return to positive cash generation.
- Debt repayment capacity, variable-rate exposure, covenant headroom, and refinancing needs as facilities approach maturity.
- Returns from share repurchases and acquisitions, particularly given Asia Pacific’s continuing operating loss and EMEIA’s currency-related revenue decline.
- Potential changes in environmental reserves, legal exposures, and other estimates or contingencies.