Allegion plc — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Allegion is an Ireland-incorporated global security-products provider, operating in the Americas, EMEIA and Asia Pacific. Its portfolio includes mechanical and electronic locks, access control, door closers, exit devices, doors and workforce-productivity systems.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $2,408.2 million | $2,238.0 million | +7.6% |
| Operating income | $488.2 million | $425.5 million | +14.7% |
| Operating margin | 20.3% | 19.0% | +1.3 percentage points |
| Net earnings attributable to Allegion | $273.3 million | $229.1 million | +19.3% |
| Diluted EPS | $2.85 | $2.36 | +20.8% |
| Cash from operating activities | $347.2 million | $377.5 million | −8.0% |
| Capital expenditures | $49.3 million | $42.5 million | +$6.8 million |
Cost of goods sold was 55.5% of revenue, versus 56.0% in 2016, implying gross margin of 44.5% versus 44.0%. Management attributed the improvement chiefly to pricing and productivity gains exceeding inflation, higher volume and favorable currency effects, partly offset by product mix, investment and acquisition impacts. Cash from operations declined in part because of a discretionary $50 million U.S. pension contribution and higher cash taxes. Operating cash flow less capital expenditures was approximately $297.9 million, a simple derived measure.
Revenue increased through pricing (+1.8 percentage points), volume (+3.9), acquisitions (+1.4) and currency (+0.5). By segment, Americas revenue was $1,767.5 million (+7.4%) and operating margin 28.5%; EMEIA revenue was $523.5 million (+7.7%) and margin 8.6%; Asia Pacific revenue was $117.2 million (+10.2%) and margin 8.1%. Each segment reported higher revenue and operating income.
Balance sheet, liquidity and capital allocation
- Cash and equivalents were $466.2 million at year-end, up from $312.4 million; approximately 34% was held outside the U.S. Current assets were $1,032.7 million and current liabilities $460.8 million.
- Total debt was $1,477.3 million, versus $1,463.8 million a year earlier; cash less total debt implies net debt of about $1,011.1 million. The company had no revolving-facility borrowings and $17.4 million of letters of credit outstanding against its $500 million revolving facility.
- Debt refinancing replaced prior facilities and $600 million of 2021/2023 notes with a $700 million term facility and $800 million of notes due 2024 and 2027. Refinancing charges were $44.7 million, including redemption premiums and deferred-cost write-offs. A $250 million portion of floating-rate term debt was swapped to fixed rates; management estimated a 100-basis-point LIBOR increase would add about $5.6 million to 2017 interest expense.
- Cash dividends paid were $60.9 million; declared dividends totaled $0.64 per share for 2017. A $500 million repurchase authorization was approved, with $60 million spent and approximately $440 million remaining at year-end.
Material changes, unusual items and outlook
- FY2017 net earnings included a provisional $53.5 million net tax charge related to the U.S. Tax Reform Act; the effective tax rate rose to 30.1% from 21.6%. The charge included deferred-tax remeasurement and realizability adjustments, plus a $5 million estimated transition-tax obligation. The company said its accounting and assessment remained subject to further analysis and guidance.
- Fourth-quarter revenue was $623.0 million versus $569.7 million in Q4 2016; operating income was $129.2 million versus $97.2 million. Net earnings attributable to Allegion fell to $9.6 million from $74.8 million, principally reflecting the refinancing charge and Tax Reform Act charge.
- Republic Doors & Frames was acquired in January 2017. The company incurred $12.3 million of restructuring charges and $1.5 million of other restructuring costs, mainly associated with workforce reductions and facility consolidation. Environmental remediation expense was $3.2 million, compared with $23.3 million in 2016, which included a $15 million charge for a revised cleanup approach.
- Management cited improved market conditions, continued growth in commercial, institutional and residential markets, and expects electronic security categories to outgrow the broader industry as customers adopt newer technologies. The filing gives no specific 2018 revenue, earnings or margin guidance. Three acquisitions completed in January–February 2018 for approximately $215 million at closing, with up to about $10 million of additional consideration; these were funded with cash on hand.
Risks and contingencies
Key exposures include construction-market cyclicality; intense competition and rapid mechanical/electronic/digital technology change; foreign-exchange movements (about 30% of revenue was outside the U.S.); commodity and energy-price volatility; variable interest rates and substantial debt; cyber and IT-system disruption; acquisition integration; tax-law and tax-authority uncertainty; and environmental, product-liability and other legal claims. Goodwill and indefinite-lived intangibles were $761.2 million and $75.4 million, respectively; management reported no impairment in 2017, but identified EMEIA and Asia Pacific performance deterioration as potential impairment triggers. Environmental reserves were $28.9 million. Management said pending legal matters were not expected to materially adversely affect results, financial condition, liquidity or cash flows. The company reported compliance with debt covenants and effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Whether operating cash generation remains adequate after the 2017 pension contribution, capital spending, dividends, repurchases and post-year-end acquisitions.
- The final tax impact of U.S. tax reform, including transition-tax calculations, deferred-tax realizability, and potential withholding or state taxes on foreign earnings.
- Debt-service capacity and sensitivity to interest-rate changes, including facility covenants and scheduled maturities.
- Progress in EMEIA and Asia Pacific margins, and whether their results and assumptions continue to support goodwill valuations.
- Potential changes to environmental remediation estimates, product and other legal contingencies, and integration outcomes for the 2018 acquisitions.