Allegion plc — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Allegion is a global security-products and solutions provider, reporting in the Americas, EMEIA, and Asia Pacific segments. Dollar amounts are in millions except per-share data.
Financial performance
- Q2 revenue: $584.9, up 12.6% from $519.5. Growth reflected volume/product mix (+8.5%), acquisitions and divestitures (+4.1%), pricing (+0.4%), and currency (-0.4%).
- Q2 operating income and margin: $124.3 and 21.3%, versus $95.7 and 18.4%. Gross margin was 45.7%, compared with 42.7%.
- Q2 earnings: Net earnings attributable to Allegion were $95.0, versus $63.9; diluted EPS was $0.98, versus $0.66. Other income included a $6.6 gain on sale of marketable securities.
- First-half revenue: $1,087.2, up 11.1% from $978.2. Volume/product mix contributed 5.7%, acquisitions/divestitures 5.5%, pricing 0.7%, and currency reduced growth by 0.8%.
- First-half operating income and margin: $206.8 and 19.0%, versus $166.7 and 17.0%. Gross margin was 44.5%, versus 41.8%.
- First-half earnings: Net earnings attributable to Allegion were $152.7, versus $109.3; diluted EPS was $1.58, versus $1.13. Other income included $12.4 in securities-sale gains and a nonrecurring equity-method investment gain; the filing does not separately quantify the latter.
- Cash flow, first half: Operating cash flow was $101.2, up from $33.4. Investing used $38.5, including $16.5 of capital expenditures and $31.4 for acquisitions/investments, partly offset by $14.1 from securities sales. Financing used $95.0, including $40.5 of net debt repayments, $22.9 of dividends paid, and $30.0 of share repurchases. Cash declined $30.6 to $169.1.
- Liquidity and debt at June 30: Current assets were $827.9 and current liabilities $469.7. Total debt was $1,485.7, including $903.2 under the Term Loan A Facility and $600.0 of senior notes; cash was $169.1. The $500.0 revolving facility had no borrowings and $17.1 of letters of credit outstanding. Allegion reported compliance with its leverage and interest-coverage covenants.
- Dividends and equity: Dividends declared were $0.12 per share in Q2 and $0.24 per share in the first half. The company repurchased 0.5 million shares for $30.0 during the first half.
Material changes and segment trends
- Revenue and operating profit increased year over year, with volume/product mix, acquisitions, and improved pricing among the main drivers. Lower prior-year inventory impairment and restructuring/acquisition costs also benefited first-half comparisons; investment spending partly offset improvement.
- Americas revenue rose 8.6% in Q2 and 5.7% in the first half; segment operating margin was 29.8% and 27.5%, respectively.
- EMEIA revenue rose 44.9% in Q2 and 45.0% in the first half, primarily reflecting the 2015 SimonsVoss and AXA acquisitions. Segment operating margin improved to 7.3% in Q2 and 7.0% for the first half.
- Asia Pacific revenue fell 20.0% in Q2 and 15.3% in the first half, mainly due to the Bocom divestiture and currency impacts, partly offset by volume, pricing, and acquisitions. Segment operating income returned to positive territory.
- Allegion acquired Trelock GmbH in June 2016. Management estimated that acquisitions/divestitures increased Q2 revenue by approximately $21.4 and operating income by $3.5; first-half increases were approximately $54.3 and $8.3, respectively.
Outlook, commentary, risks, and unusual items
- The filing provides no specific financial guidance or quantified full-year outlook. Management said operating cash flow, cash on hand, unused revolver availability, and capital-markets access should provide adequate resources for operating and financing needs.
- Management cited favorable volume/product mix, pricing, and productivity, while noting inflation in excess of pricing/productivity in Q2, higher investment spending, and foreign-exchange headwinds in parts of the business.
- Interest expense rose year over year, primarily because of debt issued in 2015. The company uses currency derivatives and interest-rate swaps to manage exposures; market movements may affect results.
- A tax-agreement settlement generated a $49.2 current liability payable to Ingersoll Rand and a corresponding $49.2 current asset due from the Canadian Revenue Agency. Payment was expected in Q3 2016; differing settlement timing could create a short-term net cash outflow.
- Environmental remediation reserves were $16.2 at June 30, up from $15.2 at year-end. Allegion is involved in litigation, claims, and administrative proceedings; management did not expect pending legal matters to materially adversely affect results, financial condition, liquidity, or cash flows.
- Key disclosed risks include market and economic conditions, product demand and competition, currency and interest-rate changes, acquisition integration, substantial leverage, commodity costs, litigation, tax changes, potential asset impairment, and information-technology risks. The company reported no material changes to its prior annual-report risk factors.
Investor verification points
- Separate organic growth and operating contribution from acquisitions, divestitures, and currency—especially the EMEIA acquisition effect and Asia Pacific Bocom divestiture.
- Assess the sustainability of margin and earnings gains given lower prior-year charges and 2016 securities-sale and equity-investment gains.
- Track operating cash flow and working-capital needs, including timing of the $49.2 tax-related receivable and payable.
- Monitor debt reduction, interest expense, covenant headroom, and the impact of variable rates despite hedging.
- Review environmental reserve adequacy and developments in legal, product-warranty, and other contingencies.