Allegion plc — Q1 2018 Form 10-Q
Business context and period: Allegion provides security products and solutions across the Americas, EMEIA, and Asia Pacific. This unaudited report covers the three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. Amounts are in U.S. dollars.
Financial performance
- Revenue: $613.1 million, up 11.7% from $548.8 million. Management attributed growth to pricing (+1.3%), volume (+2.0%), acquisitions (+4.7%), and currency (+3.7%).
- Profit and margins: Operating income was $98.7 million, down $0.8 million; operating margin declined to 16.1% from 18.1%. Net earnings attributable to Allegion were $72.2 million, up from $68.4 million. Diluted EPS was $0.75 versus $0.71. Cost of goods sold rose to 58.0% of revenue from 56.0%.
- Segment results: Americas revenue was $439.1 million (+7.7%) and segment operating income was $109.7 million; its margin fell to 25.0% from 26.7%. EMEIA revenue was $150.3 million (+26.9%) and segment operating income was $8.5 million; margin increased to 5.7% from 5.4%. Asia Pacific revenue was $23.7 million (+3.9%), but segment operating income was a loss of $1.5 million versus income of $0.6 million; margin fell to (6.3%) from 2.6%.
- Cash flow: Operating cash use was $10.1 million, improved from $40.9 million used in Q1 2017. Investing cash use was $284.9 million, mainly reflecting acquisitions and investments; financing cash use was $20.9 million. Cash decreased by $314.4 million to $151.8 million.
- Liquidity and debt: At March 31, cash was $151.8 million and current liabilities were $452.1 million. Total debt was $1,509.4 million, including $40.0 million drawn on the $500 million revolving facility; long-term debt was $1,474.1 million. The company reported covenant compliance. Its $700 million term facility and $500 million revolver mature in September 2022.
- Other metrics: Interest expense declined to $12.9 million from $15.9 million. The effective tax rate was 16.0% versus 16.5%. Dividends declared were $0.21 per share versus $0.16.
Material changes and notable items
- Revenue growth included contributions from four 2018 acquisitions: Technical Glass Products, Hammond assets, Qatar Metal Industries, and AD Systems. Consideration paid at closing was approximately $271 million, net of cash acquired, with estimated future consideration of about $12 million. Acquired businesses contributed $26.0 million of revenue and a $1.1 million pretax loss after their respective acquisition dates.
- Operating income and margin were pressured by inflation exceeding pricing and productivity, increased investment spending, and acquisition-related effects. Favorable volume/product mix and currency partly offset these factors. Asia Pacific moved to an operating loss.
- Management attributed lower interest expense primarily to debt refinancing and note issuances in the second half of 2017. The lower effective tax rate mainly reflected the U.S. Tax Reform Act.
- Operating cash use improved partly because Q1 2017 included a discretionary $50 million pension contribution; working-capital changes partly offset the improvement.
- Allegion repurchased approximately 0.4 million shares for $30 million. It paid a $0.21 quarterly dividend in March and declared another $0.21 dividend payable June 29, 2018.
Outlook, risks, and contingencies
- The filing provides no specific quantitative revenue, earnings, or margin guidance. Management said operating cash flow, revolver availability, cash on hand, and capital-market access are expected to provide adequate resources for operating and financing needs.
- Forward-looking risks include economic and competitive conditions, demand, foreign exchange and interest rates, commodity and energy costs, acquisition integration, cybersecurity, taxes, litigation, impairment of goodwill or other assets, and the effects of outstanding debt.
- The company recorded $28.5 million of environmental reserves at March 31, 2018 and incurred $0.7 million of environmental remediation expense in the quarter. Management said pending legal matters were not expected to materially adversely affect results, financial condition, liquidity, or cash flows.
- The company is still evaluating the tax effects of the 2017 Tax Reform Act, including IRS guidance issued in April 2018. It made no adjustment to previously recorded provisional amounts in Q1; a $22.8 million provisional tax charge had been recorded at year-end 2017.
- Revenue recognition standard ASC 606 was adopted January 1, 2018, with no material financial-statement impact. Management expects the forthcoming lease standard to significantly increase reported assets and liabilities.
Key facts for investors to verify
- Whether acquisition integration and expected contributions support returns commensurate with the purchase outlay, given acquired businesses’ reported post-acquisition pretax loss.
- Whether pricing and productivity can offset inflation and investment costs, and whether Asia Pacific returns to profitability.
- How working capital, acquisition spending, dividends, and repurchases affect cash generation and liquidity after the quarter’s substantial cash decline.
- Debt levels, revolver availability, interest-rate exposure, and continued compliance with credit-facility covenants.
- Updates to provisional tax accounting, environmental reserves, and other legal or product-related contingencies.