Allegion plc — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports unaudited fourth-quarter results. Allegion is an Ireland-incorporated global maker of mechanical and electronic security products, operating through the Americas, EMEIA, and Asia Pacific segments.
Financial performance
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue | $2,068.1 million | $2,118.3 million |
| Operating income / margin | $358.6 million / 17.3% | $326.3 million / 15.4% |
| Net earnings attributable to Allegion | $153.9 million | $175.2 million |
| Diluted earnings per share | $1.59 | $1.80 |
| Cash from continuing operations | $257.4 million | $259.0 million |
| Capital expenditures | $35.2 million | $51.5 million |
| Total debt at year-end | $1,545.4 million | $1,264.6 million |
| Cash and cash equivalents at year-end | $199.7 million | $290.5 million |
Gross margin was approximately 42.0% in 2015, compared with 40.3% in 2014, based on reported cost of goods sold. Revenue fell 2.4%; management attributed the decline mainly to currency movements (negative 6.8 percentage points) and divestitures, partly offset by volume growth and pricing. Operating margin improved as productivity and volume/mix gains, along with lower Venezuelan inventory impairment, outweighed currency impacts, investment spending, and acquisition/divestiture effects.
Net earnings included a $104.2 million loss on divestitures, principally related to Bocom and the Venezuelan operation. The reported effective tax rate was 26.1%; management noted that divestiture and Venezuela-related charges affected the rate.
Fourth-quarter results
Q4 2015 revenue was $545.4 million, versus $573.5 million in Q4 2014. Operating income was $81.5 million, versus $63.0 million; net earnings attributable to Allegion were $71.9 million, versus $35.4 million. Diluted EPS was $0.74, versus $0.37. Q4 2015 included the full-quarter impact of the SimonsVoss, AXA, and Milre acquisitions.
Liquidity, debt, and capital allocation
- Continuing operating cash flow was $257.4 million; investing activities used $533.8 million, including $511.3 million net cash paid for acquisitions. Financing activities provided $195.0 million.
- Year-end cash was $199.7 million, approximately 62% held outside the U.S. The $500 million revolving facility had no borrowings outstanding; $26.6 million of letters of credit reduced availability.
- Debt comprised a $926.7 million variable-rate term loan, $300 million of 5.75% notes due 2021, $300 million of 5.875% notes due 2023, and other debt. The company reported compliance with its debt covenants.
- The company paid $38.3 million in ordinary-share dividends and repurchased $30.0 million of shares in 2015. The board declared a quarterly dividend of $0.12 per share in February 2016, payable March 31, 2016.
Material changes and business developments
- Allegion completed six acquisitions or investments, including SimonsVoss, AXA, and Milre, targeting electronic security and related products. Acquisitions contributed $74.5 million of revenue after their respective closing dates.
- Allegion sold its Venezuelan operation and its majority stake in Bocom, a China-based security systems integrator. Bocom revenue was $38.5 million in 2015 versus $97.3 million in 2014; its 2015 pretax loss was $63.4 million.
- Segment results diverged: Americas revenue was essentially flat at $1,558.4 million, with operating margin rising to 26.8%; EMEIA revenue fell 1.8% to $386.3 million, with margin of 2.2%; Asia Pacific revenue fell 25.2% to $123.4 million and posted a $3.4 million operating loss, reflecting primarily the Bocom divestiture and currency and volume effects.
- Allegion issued $300 million of 5.875% senior notes due 2023 and amended its credit agreement, lowering applicable borrowing margins and extending the term loan and revolver maturity to 2020.
Outlook, commentary, and risks
Management did not provide specific numerical earnings or revenue guidance in the supplied filing text. It described uneven global commercial construction, improving U.S. residential and replacement markets, cautious commercial/institutional growth, slight European growth, and continuing unfavorable foreign exchange. Management expects electronic security categories to grow faster than the overall security products market, citing technology adoption and connectivity trends.
- Key exposures include construction-market cyclicality, competition and technology shifts, foreign currency movements, commodity prices, acquisition integration, and execution of the EMEIA restructuring plan.
- Debt totaled approximately $1.5 billion, including $927 million of floating-rate term loans. The company estimated that a 100-basis-point increase in LIBOR would add approximately $6.5 million to annual interest expense; $300 million of term loans was covered by interest-rate swaps.
- Environmental remediation reserves were $15.2 million at year-end, up from $8.8 million, with increased reserves primarily reflecting liabilities assumed in the AXA acquisition. Management said pending legal matters were not expected to have a material adverse impact.
- Pension funded status declined to 81.7% overall from 87.2% in 2014. Management projected approximately $10.8 million of pension contributions in 2016.
- Management reported effective disclosure controls and internal control over financial reporting. Newly acquired Zero, Brio, Milre, SimonsVoss, and AXA entities, representing 5% of assets and 4% of revenue, were excluded from the internal-control assessment while being integrated.
Most important facts for investors to verify
- Whether the $75.3 million estimated Bocom consideration is collected as expected: payment may take about two years, depends on future cash collections, and could be delayed or reduced.
- How much of the 2015 earnings decline reflects the $104.2 million divestiture loss versus underlying operating performance, and whether acquired businesses deliver anticipated returns.
- Whether EMEIA restructuring improves profitability and whether Asia Pacific returns to positive operating income after the Bocom sale.
- The effect of currency changes, interest rates, and debt service on future cash generation and the company’s capacity to fund acquisitions, dividends, and share repurchases.
- Developments in environmental obligations, tax positions and deferred-tax-asset valuation allowances, and the integration of acquired companies into financial controls.