Business context and reporting period
Allegion plc is an Ireland-incorporated global provider of mechanical and electronic security products and access-control solutions, operating in the Americas, Europe, Middle East, India and Africa (EMEIA), and Asia Pacific. This Form 10-K covers the fiscal year ended December 31, 2019; quarterly results are unaudited.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Net revenues | $2,854.0 million | $2,731.7 million | +4.5% |
| Operating income | $565.1 million | $525.8 million | +7.5% |
| Operating margin | 19.8% | 19.2% | +0.6 percentage points |
| Net earnings attributable to Allegion | $401.8 million | $434.9 million | -7.6% |
| Diluted EPS | $4.26 | $4.54 | -6.2% |
| Net cash from operating activities | $488.2 million | $457.8 million | +$30.4 million |
Cost of goods sold fell to 56.1% of revenue from 57.0%, reflecting pricing and productivity gains exceeding inflation. Selling and administrative expenses rose to 24.1% of revenue from 23.7%, including higher investment and restructuring costs and trade-name impairment. Cash from operations less capital expenditures of $65.6 million was approximately $422.6 million; this is a simple derived measure, not a company-reported free-cash-flow figure.
At year-end, cash and cash equivalents were $355.3 million, current assets were $1,001.8 million and current liabilities were $507.0 million. Total debt was $1,427.7 million on the balance sheet (gross borrowings of $1,439.5 million before discounts and issuance costs). The $500 million revolving facility had no borrowings outstanding, with $16.3 million of letters of credit issued. Long-term debt maturities include $238.8 million remaining on the term facility due in 2022 and senior notes due 2024, 2027 and 2029. The company paid $100.6 million in dividends and repurchased $226.0 million of shares during 2019.
Fourth quarter: Revenue was $719.5 million versus $702.4 million in Q4 2018; operating income was $143.3 million versus $141.4 million. Net earnings attributable to Allegion were $80.7 million versus $132.8 million, and diluted EPS was $0.86 versus $1.39.
Material changes versus the prior comparable period
- Full-year revenue growth reflected pricing of 1.8%, volume of 2.8%, acquisitions less divestitures of 1.3%, and a 1.4% currency headwind.
- Operating income increased, led by pricing/productivity and favorable volume and product mix. Currency, increased investment spending, acquisition/divestiture effects, restructuring costs and impairment charges partly offset these gains.
- Net earnings declined despite higher operating income, principally reflecting the $30.1 million pretax divestiture loss and a higher effective tax rate: 15.4% versus 8.4%. The 2018 rate benefited from Tax Reform Act-related adjustments.
- Americas revenue grew 6.3% and segment operating margin increased to 28.9% from 27.4%. EMEIA revenue fell 2.9% and margin declined to 6.0% from 8.4%, partly due to currency, restructuring and impairment. Asia Pacific revenue grew 9.0%, substantially reflecting acquisitions, while margin fell to 0.3% from 4.5%, including a trade-name impairment and weaker volume/mix.
- Operating cash flow increased by $30.4 million, primarily due to working-capital changes. Investing cash outflow declined substantially as 2018 had included significant acquisition spending.
Outlook, risks and unusual items
Management describes favorable long-term industry drivers, including urbanization, heightened security needs, and adoption of connected and electronic products, which it expects to grow faster than mechanical products. The filing provides no specific quantified 2020 revenue, earnings or margin guidance.
Unusual 2019 items included the Turkey facility closure and divestiture and the Colombia operations divestiture, together producing a $30.1 million pretax loss ($31.4 million net of tax), largely associated with currency translation amounts reclassified to earnings. The company also recorded $5.9 million of impairment on two indefinite-lived trade names. It reported no goodwill impairment; the estimated fair values of reporting units exceeded carrying values by more than 15% in the 2019 test.
Key risks include cyclical construction and remodeling demand, competitive and technology shifts, currency and commodity volatility, supply-chain disruption, cybersecurity and IT risks, acquisition integration, taxes, environmental and product-liability exposures, and debt and interest-rate risk. The filing also identifies global health crises, including Coronavirus, as a possible source of operational and financial disruption; it does not quantify an impact. Management said pending legal matters were not expected to have a material adverse effect. Environmental reserves were $19.3 million; unrecognized tax benefits were $37.3 million, with $6.2 million of related accrued interest and penalties. The auditor issued an unqualified opinion on the financial statements and internal controls; goodwill impairment assessment for EMEIA and Asia Pacific was identified as a critical audit matter.
Important facts for investors to verify
- Whether Americas growth and pricing/productivity can offset weaker EMEIA and Asia Pacific margins and currency exposure.
- The outlook for construction markets, electronic-security adoption, and the effects of competition and customer/channel concentration.
- Debt service and refinancing capacity, including the 2022 term-facility maturity, variable-rate exposure and the transition away from LIBOR.
- Assumptions underpinning goodwill valuations, particularly revenue growth and margin forecasts for EMEIA and Asia Pacific.
- Potential changes to environmental, product-liability and tax exposures, and the timing and cash cost of any settlements.
- Execution and capital allocation under the new $800 million share-repurchase authorization approved in February 2020.