Allegion plc — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with the three months ended March 31, 2014. Allegion is a global provider of mechanical and electronic security products and solutions, reporting through Americas, EMEIA, and Asia Pacific segments. Figures are in U.S. dollars; financial amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net revenues | $458.7 | $466.6 |
| Operating income / margin | $71.0 / 15.5% | $67.8 / 14.5% |
| Earnings from continuing operations | $43.9 | $38.4 |
| Net earnings attributable to Allegion plc | $45.4 | $35.8 |
| Diluted earnings per share | $0.47 | $0.37 |
| Cash from continuing operating activities | $4.6 | $0.0 |
Revenue declined 1.7%, while operating income rose $3.2 million and operating margin increased 1.0 percentage point. Cost of goods sold was 59.2% of revenue, versus 58.8% a year earlier. The effective tax rate fell to 22.0% from 29.9%, primarily due to a more favorable mix of income in lower-tax jurisdictions. Interest expense declined to $11.6 million from $13.1 million.
Operating cash flow from continuing operations was $4.6 million; investing activities used $14.4 million and financing activities used $46.7 million. Cash decreased $60.9 million to $229.6 million during the quarter. At March 31, total debt was $1,252.1 million, including $49.4 million current; shareholders’ equity attributable to Allegion was a deficit of $19.8 million and total equity was $1.5 million. The $500 million revolving facility had no borrowings outstanding; $28.6 million of letters of credit were issued. Allegion reported compliance with its credit covenants.
Material changes and segment results
- Revenue was affected by unfavorable currency movements, which reduced revenue by 7.4 percentage points, and lower EMEIA revenue following the exit from certain unprofitable businesses. Higher volumes and pricing, particularly in the Americas, partly offset these factors.
- Americas revenue increased 2.6% to $354.3 million; segment operating income declined to $84.2 million from $86.4 million, and margin fell to 23.8% from 25.0%, partly reflecting increased investment and a Venezuela-related inventory impairment.
- EMEIA revenue declined 17.6% to $81.7 million, primarily from currency effects and exited businesses. Segment operating income improved to $2.6 million from a $0.6 million loss; margin rose to 3.2% from negative 0.6%.
- Asia Pacific revenue increased 3.2% to $22.7 million. The segment’s operating loss narrowed to $2.6 million from $3.0 million.
- Operating income benefited from improved volume/product mix, pricing and productivity, and the absence of prior-year spin-related and restructuring costs. These gains were partly offset by investment spending, currency effects, and a Venezuela inventory charge.
Outlook, commentary, risks, and unusual items
- Management stated that expected operating cash generation, funds on hand, and access to credit and capital markets should provide adequate resources for operating and financing needs. The filing provides no numerical earnings or revenue guidance.
- Venezuela adopted the SIMADI exchange rate in Q1. Allegion recorded a $7.0 million pretax charge: $2.8 million to remeasure monetary assets and $4.2 million for a non-cash inventory impairment. The SIMADI rate was approximately 192 bolivars per U.S. dollar at quarter-end.
- Currency translation reduced other comprehensive income by $38.9 million in the quarter. Currency movements and Venezuelan exchange-rate changes remain relevant risks.
- Allegion invested $9.0 million in iDevices, accounted for under the equity method. It completed the acquisition of certain Zero International assets on April 1, 2015, and signed an agreement on April 24 to acquire Brio assets, with closing expected in Q2 2015.
- The company repurchased 515,000 ordinary shares for $30.0 million and paid a $0.10-per-share quarterly dividend. The board declared another $0.10-per-share dividend for payment in June 2015.
- Environmental reserves were $9.4 million at March 31; standard product warranty liabilities were $10.0 million. Management said pending legal matters were not expected to have a material adverse effect and reported no material changes to the risk factors in its 2014 Form 10-K.
Key facts for investors to verify
- Whether revenue and segment performance stabilize as currency effects and the EMEIA business exits work through reported results.
- How much of the operating-margin improvement reflects sustainable pricing, productivity, and mix versus prior-year costs that did not recur.
- Whether operating cash flow improves from its low Q1 level as working-capital movements normalize, while funding investment, dividends, and repurchases.
- The ongoing financial effects of Venezuela’s SIMADI rate, including potential further currency, inventory, or other impairment charges.
- Debt reduction, covenant headroom, and the effect of the Zero and Brio transactions on cash, leverage, and results.