Allegion plc — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Allegion is a global security products and solutions provider, reporting through its Americas, EMEA and Asia Pacific segments. Amounts below are in millions of dollars except per-share data and percentages.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $728.4 | $748.3 | $1,992.6 | $2,134.5 |
| Operating income | $160.4 | $168.1 | $285.8 | $421.8 |
| Operating margin | 22.0% | 22.5% | 14.3% | 19.8% |
| Net earnings attributable to Allegion | $146.9 | $131.6 | $221.0 | $321.1 |
| Diluted EPS | $1.58 | $1.40 | $2.38 | $3.40 |
| Net cash from operating activities | Not stated for quarter | Not stated for quarter | $289.4 | $279.4 |
Q3 revenue fell 2.7% year over year, primarily on lower volume, partly offset by pricing and favorable currency. Operating margin declined 0.5 percentage points; unfavorable volume and product mix outweighed pricing and productivity. Q3 net earnings rose despite lower operating income, primarily reflecting a $14.0 million foreign-currency translation gain recognized when an EMEA legal entity was liquidated, along with a lower effective tax rate (8.0% versus 12.5%).
For the first nine months, revenue declined 6.6%, while operating income fell 32.2% and diluted EPS declined to $2.38 from $3.40. Results included $98.9 million of goodwill and intangible-asset impairment charges, including an $88.1 million Asia Pacific goodwill impairment. Excluding the impairment charges, reported operating income was still pressured by lower volumes and product mix. The nine-month effective tax rate was 14.8%, versus 14.9%.
Cash, debt and liquidity: Cash and cash equivalents were $428.9 million at September 30, 2020, compared with $355.3 million at year-end 2019. Nine-month operating cash flow was $289.4 million; investing cash outflow was $39.3 million, including $33.3 million of capital expenditures; financing cash outflow was $179.3 million. Cash, cash equivalents and restricted cash ended the period at $430.8 million. Operating cash flow benefited from working-capital improvement and approximately $10 million of deferred U.S. employer Social Security taxes under the CARES Act.
Total debt was $1,429.1 million, principally a $238.8 million term loan and $1,200 million of senior notes due 2024, 2027 and 2029. No revolving-facility borrowings were outstanding; $485 million of the $500 million facility was available after letters of credit. The term facility and revolver mature in September 2022, and the company reported compliance with debt covenants. Current liabilities were $489.1 million versus current assets of $1,121.0 million.
Segments and material changes
- Americas: Q3 revenue decreased 5.1% and segment operating income decreased 6.0%. Non-residential revenue fell low double digits, while residential revenue rose low double digits. Nine-month revenue declined 5.8%.
- EMEA: Q3 revenue increased 7.7%, helped by volume recovery, pricing and currency; segment operating margin improved to 9.1% from 5.4%. Nine-month revenue declined 7.9% and segment operating margin fell to 2.3% from 4.7%.
- Asia Pacific: Q3 revenue decreased 4.2% and the segment recorded a $0.3 million operating loss. Nine-month segment operating loss was $101.8 million, largely due to the $88.1 million goodwill impairment and $9.3 million of intangible-asset impairment charges.
- The company repurchased approximately 0.9 million shares for $94.1 million and paid dividends of $0.96 per share during the first nine months. Share repurchases were lower than the $179.7 million spent in the comparable 2019 period.
Outlook, commentary and risks
The filing provides no specific revenue or earnings guidance. Management said demand rebounded in Q3 across many product categories, particularly residential and portable security, and all facilities were operational throughout the quarter. It expected facilities to remain operational through year-end, subject to government actions, demand, supply-chain stability and safe operating conditions.
Management cautioned that the pandemic continued to affect demand, construction activity, supply chains and the business outlook. Commercial and institutional markets faced declines or delays in new construction, while residential demand improved. Further impairment charges remain possible if the economic impact is more severe or recovery slower than assumed; the EMEA reporting unit’s estimated fair value exceeded carrying value by approximately 9% at the March 2020 interim test.
Restructuring charges were $22.4 million for the nine months. The company anticipated a further $10–$15 million of restructuring costs related to actions initiated in 2020, with $5–$10 million expected in the remainder of 2020 and the balance in 2021; substantially all were expected to be cash expenditures. Other material considerations include a $2.6 million Q3 Asia Pacific brand and related-asset impairment tied to supply-chain disruption, $17.6 million of environmental reserves, and routine litigation and product warranty exposures. Management did not expect pending legal matters to materially adversely affect results, financial condition, liquidity or cash flows.
Investor verification points
- Assess how much of Q3’s earnings improvement reflects the one-time $14.0 million translation gain and lower tax rate, versus recurring operating performance.
- Review the assumptions behind the $98.9 million impairment charges and the sensitivity of goodwill and intangible valuations to recovery, revenue, margin and discount-rate assumptions.
- Track demand and margins by segment, particularly the recovery in EMEA and the performance of Asia Pacific after impairment charges.
- Evaluate cash-flow sustainability, including the benefit from deferred payroll taxes, and the timing of the $238.8 million term-loan balance due in September 2022.
- Monitor expected restructuring spending, pandemic-related operational and supply-chain risks, and environmental and other contingencies.