Allegion plc — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Allegion is a global provider of mechanical and electronic security products and solutions, reporting through Americas, EMEIA, and Asia Pacific segments. Amounts below are in millions of U.S. dollars except per-share data.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $546.7 | $529.0 | $1,544.8 | $1,525.9 |
| Operating income (loss) | $105.6 | $(21.4) | $262.7 | $148.1 |
| Operating margin | 19.3% | (4.0)% | 17.0% | 9.7% |
| Net earnings attributable to Allegion | $60.3 | $(78.1) | $139.4 | $21.6 |
| Diluted EPS | $0.62 | $(0.81) | $1.43 | $0.23 |
- Q3 revenue increased 3.3%; nine-month revenue rose 1.2%. Increases reflected pricing, volume and acquisitions, partly offset by the Asian joint-venture order-flow change.
- Comparisons of operating income are affected by the $137.6 million non-cash EMEIA goodwill impairment recorded in Q3 2013. Excluding that impairment, reported operating margin was 22.0% for Q3 2013 and 18.7% for the first nine months of 2013. The 2014 margins were also affected by higher investment and spin-off costs and, versus 2013, the absence of a $21.5 million gain on a China property sale.
- Q3 cost of goods sold was 56.8% of revenue versus 54.9%; selling and administrative expense was 23.9% versus 23.1%. For nine months, these ratios were 57.7% and 25.3%, respectively, versus 57.9% and 23.4%.
Cash flow, balance sheet and capital
- Nine-month cash from continuing operating activities was $174.8, up from $156.7; total operating cash flow was $172.0. Continuing investing activities used $20.9, including $39.8 of capital expenditures and $23.0 for acquisitions. Continuing financing activities used $120.6, including $63.1 of debt repayments, $50.3 of share repurchases and $22.6 of dividends. Cash ended the period at $251.4, up from $227.4 at year-end 2013.
- At September 30, total debt was $1,279.5, including $30.3 current maturities; long-term debt was $1,249.2. The company had no revolver borrowings and $29.2 of letters of credit against its $500 million revolving facility. It reported compliance with its debt covenants.
- Total current assets were $934.0 and current liabilities $464.2. Total equity was $6.0, compared with a deficit of $55.7 at December 31, 2013; Allegion shareholders’ equity remained a deficit of $30.7.
- After quarter-end, on October 15, Allegion refinanced its term loans: increased Term Loan A to $975.0, repaid Term Loan B, reduced the Term Loan A spread by 25 basis points and extended maturity to October 15, 2019. Management expected a non-cash $4.5 charge in Q4 for unamortized Term Loan B issuance costs.
Segments and material developments
- Americas: Q3 revenue $423.1, up 4.5%; segment operating income $122.8, with a 29.0% margin versus 27.0%. Nine-month revenue was up 1.3% and margin was 27.4% versus 26.2%.
- EMEIA: Q3 revenue $89.5, down 2.8%; segment operating income was $0.4 versus a $5.1 loss. Nine-month revenue rose 1.4%, but segment operating loss was $4.3. Management cited productivity and pricing improvements, alongside lower volume, exited unprofitable markets, investment and spin-related costs.
- Asia Pacific: Q3 revenue $34.1, up 6.9%; segment operating loss was $0.5, versus income of $20.6 in Q3 2013, which included the $21.5 China property-sale gain. Nine-month segment operating loss was $7.0 versus income of $18.7; 2014 included a $2.5 increase to the doubtful-account allowance.
- Allegion completed the sale of its UK Door businesses on September 1 and classified their results as discontinued operations. The sale generated a $7.6 impairment/disposal charge; nine-month discontinued operations were a $10.9 net loss, including the UK charge.
- Acquisitions of Schlage Lock de Colombia assets and Australian provider FSH cost approximately $23.0 in aggregate. Nine-month spin-off separation costs were $20.3.
Outlook, risks and contingencies
- The filing provides no numerical revenue or earnings guidance. Management said operating cash generation, cash on hand and access to borrowing facilities and capital markets were expected to provide adequate resources for operating and financing needs.
- Venezuela is treated as highly inflationary, and the company continued to translate net monetary assets at the official rate of 6.3 bolivars per U.S. dollar at September 30. Alternative rates were 12 (SICAD 1) and 49.98 (SICAD 2). Management estimated a one-time devaluation charge of about $6.2 at SICAD 1 or $11.5 at SICAD 2; an exchange-rate change could materially affect results. Pricing gains there were substantially offset by material and other inflation.
- Other cited risks include market demand and economic conditions, currency and interest-rate movements, commodity costs, acquisition integration, litigation, potential asset impairments, cybersecurity, substantial leverage, and realization of spin-off benefits. Management said pending legal matters were not expected to have a material adverse effect; environmental reserves were $9.9.
- The company disclosed an immaterial correction to its guarantor cash-flow presentation: $23.7 of intercompany dividends was reclassified from operating to financing activities. It did not affect consolidated cash or the net change in cash.
Most important facts to verify
- How much of earnings and margin improvement reflects the 2013 goodwill impairment comparison, and how sustainable are underlying operating trends?
- Whether Venezuela’s applicable exchange rate changes, and the resulting translation charge, inflation and pricing impact.
- Post-refinancing debt balances, interest expense, covenant headroom and the effect of leverage on capital allocation.
- Execution and benefits of EMEIA restructuring and the UK Door divestiture, and continued performance in Asia Pacific.
- Cash conversion and working-capital trends, particularly alongside elevated capital spending, dividends and share repurchases.