Allegion plc — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Allegion is a global security-products and solutions provider, reporting through Americas, EMEIA, and Asia Pacific segments. Amounts below are in U.S. dollars; financial statement amounts are unaudited.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Net revenues | $704.7 million | $627.0 million | $1,317.8 million | $1,175.8 million |
| Operating income | $143.4 million | $135.0 million | $242.1 million | $234.5 million |
| Operating margin | 20.3% | 21.5% | 18.4% | 19.9% |
| Net earnings attributable to Allegion | $113.9 million | $105.5 million | $186.1 million | $173.9 million |
| Diluted earnings per share | $1.19 | $1.10 | $1.94 | $1.81 |
| Interest expense | $13.4 million | $16.1 million | $26.3 million | $32.0 million |
- Q2 revenue increased 12.4%; management attributed growth to pricing (1.3 percentage points), volume (3.9), acquisitions (5.4), and currency (1.8). H1 revenue rose 12.1%, reflecting pricing (1.3 points), volume (3.0), acquisitions (5.1), and currency (2.7).
- Cash from operations was $118.7 million in H1, versus $64.0 million. Capital expenditures were $20.9 million; operating cash flow less capital expenditures was approximately $97.8 million.
- Investing cash outflow was $301.3 million, including $272.5 million of acquisition payments and $8.0 million invested in unconsolidated entities. Financing cash outflow was $90.4 million, including $39.7 million of dividends and $30.0 million of share repurchases.
- Cash and equivalents were $189.6 million at June 30, down from $466.2 million at year-end 2017. Total debt was $1,461.1 million net of discounts and issuance costs; long-term debt was $1,425.9 million. The $500 million revolving facility had no borrowings at quarter-end, with $17.2 million of letters of credit outstanding.
- Current assets were $852.5 million and current liabilities $473.1 million. The company reported compliance with credit-facility covenants.
Material changes versus the prior comparable period
- Despite higher revenue and earnings, operating margin declined 1.2 percentage points in Q2 and 1.5 points for H1. Management cited inflation exceeding pricing and productivity, investment spending, acquisition effects, and restructuring/acquisition expenses; favorable volume and product mix partly offset these pressures.
- By segment, Q2 revenue increased 12.4% in Americas, 14.4% in EMEIA, and 3.1% in Asia Pacific. H1 segment operating income rose in Americas and EMEIA, while Asia Pacific recorded a $0.7 million operating loss versus $2.9 million income a year earlier.
- Interest expense decreased following the 2017 refinancing and debt transactions. The effective tax rate also declined: 13.4% versus 14.1% in Q2 and 14.4% versus 15.1% for H1, primarily due to the Tax Reform Act and changes in taxes on unremitted earnings.
- H1 operating cash flow benefited from the absence of the prior-year $50 million discretionary U.S. pension contribution and higher earnings, partly offset by working-capital changes. The sharp increase in investing outflows primarily reflected acquisitions.
Outlook, management commentary, risks, and unusual items
- The filing provides no quantified full-year revenue, earnings, or margin guidance. Management said operating cash flow, available revolver capacity, cash on hand, and capital-market access are expected to provide adequate resources for operating and financing needs.
- Four acquisitions closed in the first half; two additional acquisitions, Door and Access Systems and ISONAS, closed in July. Consideration paid for the six acquisitions to date, including July closings, was approximately $361 million net of cash acquired; estimated future consideration, including contingent consideration, was approximately $14 million. The company used cash and drew approximately $75 million on its revolver in July to help fund acquisitions.
- The acquisitions included in Q2 results contributed $34.0 million in revenue and a $0.5 million pretax loss. Purchase-price allocations remained preliminary. Acquisition and integration costs were $4.6 million for H1, versus $1.2 million.
- Environmental reserves were $25.9 million at June 30, including current and noncurrent amounts; the company noted that ultimate remediation costs are uncertain. Management did not expect pending legal matters to have a material adverse effect. Standard product warranty liabilities were $14.8 million.
- The company had recorded a provisional $22.8 million tax charge in 2017 related to the Tax Reform Act and was still assessing IRS guidance; no adjustment to those provisional amounts was made in H1 2018. Adoption of the new revenue standard had no material impact.
- Key stated risks include economic and demand conditions, competition, currency and interest-rate movements, acquisition integration, cybersecurity and IT risks, commodity costs, tax-law changes, litigation, potential asset impairments, and the effects of indebtedness. Management reported no material change in market-risk exposure or risk factors during the quarter.
Important facts for investors to verify
- Whether revenue growth and segment performance persist after separating organic volume and pricing from acquisitions and foreign-currency effects.
- Whether inflation, investment spending, and acquisition-related costs continue to weigh on operating margins, particularly in Americas and Asia Pacific.
- Post-quarter acquisition funding, integration costs, preliminary purchase accounting, and the effect of the additional revolver borrowing on debt and interest expense.
- Cash conversion and working-capital trends, given the decline in cash and substantial acquisition-related investing outflows.
- Final accounting for Tax Reform Act effects and the range and timing of environmental remediation obligations.