Allegion plc — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Allegion is a global security-products and solutions provider, reporting in Americas, EMEIA, and Asia Pacific. Financial amounts are in millions except per-share data.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $674.7 | $655.0; up 3.0% |
| Operating income / margin | $28.9 / 4.3% | $108.0 / 16.5% |
| Net earnings attributable to Allegion | $0.4 | $80.2 |
| Diluted earnings per share | Reported as “—” | $0.84 |
| Operating cash flow | $30.8 | $(12.6) |
| Capital expenditures | $11.8 | $12.3 |
| Cash and cash equivalents at quarter-end | $245.3 | $355.3 at Dec. 31, 2019 |
| Total debt at quarter-end | $1,431.4 | $1,427.7 at Dec. 31, 2019 |
Revenue growth reflected pricing (+1.3 percentage points) and volume (+3.0 points), partly offset by currency (-0.9 points) and divestitures (-0.4 points). The $96.3 impairment charge—$88.1 for Asia Pacific goodwill and $8.2 for indefinite-lived trade names—was the principal reason operating income and net earnings fell sharply. The effective tax rate was 95.8%, largely reflecting the tax impact of the impairment charges. EPS is shown as “—” in the filing; no more precise reported value is provided.
Operating cash flow improved by $43.4 year over year, with management citing higher earnings excluding non-cash impairment charges and improved working capital. Investing cash outflow was $18.8; financing cash outflow was $116.8, including $94.1 of share repurchases and $29.0 of dividends. Cash, cash equivalents and restricted cash declined by $110.0 during the quarter.
Segments and material changes
- Americas: Revenue $512.1, up 7.7%; segment operating income $146.6, up from $120.9; margin rose to 28.6% from 25.4%. Growth came from volume and pricing.
- EMEIA: Revenue $129.9, down 9.1%; segment operating income fell to $1.1 from $10.8; margin was 0.8% versus 7.6%. Lower volume, COVID-19 effects, currency, and a trade-name impairment weighed on results.
- Asia Pacific: Revenue $32.7, down 11.1%; segment operating loss was $97.9 versus $1.5. The impairment charges drove most of the loss; lower volume and unfavorable currency also affected performance.
Goodwill and indefinite-lived trade-name impairments were recorded after COVID-19-related economic disruption triggered interim testing. EMEIA’s estimated fair value exceeded carrying value by approximately 9%; Asia Pacific’s did not. Management used a discounted-cash-flow valuation method alone because of market volatility and uncertainty in comparable-company data.
Outlook, risks and unusual items
- The filing provides no quantified revenue, earnings, or margin guidance. Management said COVID-19’s effects were highly uncertain and depended on the duration and severity of the pandemic and the pace of recovery.
- As of April 22, operations in Italy and Mexico were temporarily suspended under public-health decrees. Management warned that additional or extended shutdowns could further affect operations, customer service, financial position, and liquidity. It was monitoring demand, supply, materials, and covenant compliance.
- Actions included a temporary hiring and share-repurchase freeze, lower discretionary spending, elimination of non-essential investment, and reprioritization of capital expenditures. Management also cited $245.3 of cash, low capital intensity, and access to a $500.0 revolving facility; no revolver borrowings were outstanding and $16.3 of letters of credit were issued.
- On April 8, the company committed to non-U.S. restructuring expected to cost $30–$35 in total, with $20–$25 expected in 2020 and the remainder in 2021. Expected cash expenditures are $25–$30. These are subsequent events, not Q1 charges.
- Debt maturities include $400.0 of notes due in each of 2024, 2027, and 2029. The $238.8 term-facility balance is due September 2022; management said no required principal payments on long-term debt were due before then. The company reported compliance with credit-facility covenants at March 31.
- Environmental reserves were $18.6 at March 31. Management did not expect pending legal matters to have a material adverse effect, while noting uncertainty in remediation costs and other contingencies.
Important facts for investors to verify
- How pandemic-driven demand, closures, and supply-chain conditions affected results after March 31, and whether temporary shutdowns were extended.
- The assumptions behind the Asia Pacific impairment test and the risk of further goodwill or intangible-asset impairments; EMEIA’s reported fair-value cushion was approximately 9%.
- Cash conversion and working-capital trends, particularly as operating cash flow benefited from working-capital improvement while cash declined amid buybacks and dividends.
- Execution, timing, cash costs, and expected savings from the announced $30–$35 restructuring program.
- Debt covenant headroom, revolver availability, and exposure to floating rates, including the $200.0 of term debt hedged by swaps that expire in September 2020.