Allegion plc — Q2 2017 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Allegion is a global provider of mechanical and electronic security products and solutions, reporting through Americas, EMEIA, and Asia Pacific. Unless noted, dollar amounts are in millions.
Financial performance and key metrics
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $627.0 | $584.9 | $1,175.8 | $1,087.2 |
| Operating income | $134.1 | $124.3 | $232.9 | $206.8 |
| Operating margin | 21.4% | 21.3% | 19.8% | 19.0% |
| Net earnings attributable to Allegion | $105.5 | $95.0 | $173.9 | $152.7 |
| Diluted EPS | $1.10 | $0.98 | $1.81 | $1.58 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $64.0 | $101.2 |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $21.4 | $16.5 |
Q2 revenue increased 7.2%; first-half revenue increased 8.1%. Management attributed first-half revenue growth to pricing (+1.8%), volume (+5.2%), and acquisitions (+1.9%), partly offset by currency (-0.8%). Q2 operating margin improved 0.1 percentage point; first-half operating margin improved 0.8 point. Q2 cost of goods sold was 55.2% of revenue versus 54.3% a year earlier, while first-half figures were 55.6% and 55.5%, respectively.
Cash and cash equivalents were $245.5 at June 30, 2017, down from $312.4 at year-end 2016. Total debt was $1,441.0, including $1,394.1 of long-term debt and $46.9 current maturities; cash less total debt was approximately $1,195.5 net debt. The company had no revolver borrowings and $19.2 of letters of credit outstanding against its $500.0 revolving facility. It reported compliance with its debt covenants. Current assets were $839.2 and current liabilities $436.8.
First-half operating cash flow declined $37.2 year over year, primarily because of a discretionary $50.0 pension contribution, partly offset by higher earnings. Investing cash outflow was $25.9; financing cash outflow was $110.5, including $60.0 of share repurchases and $30.4 of dividends paid. Dividends declared were $0.32 per share for the first half, compared with $0.24 in 2016.
Material changes and segment trends
- Americas: First-half revenue rose 9.6% to $876.2; segment operating income rose 12.6% to $247.9 and margin increased to 28.3% from 27.5%. Management cited volume, pricing, productivity, and acquisitions, partly offset by investment spending.
- EMEIA: First-half revenue increased 3.1% to $247.6, but segment operating income fell 8.9% to $15.4 and margin declined to 6.2% from 7.1%. Unfavorable currency, investment spending, restructuring, and acquisition-related results weighed on profit.
- Asia Pacific: First-half revenue rose 9.2% to $52.0; segment operating income increased to $2.9 from $2.0, and margin improved to 5.6% from 4.2%.
On January 3, 2017, Allegion acquired Republic Doors & Frames; management said the acquisition did not materially affect the financial statements. On April 5, iDevices, including Allegion’s equity investment, was sold to a third party, generating a $4.9 gain. Other income also reflects comparison with 2016 gains on marketable securities: $6.6 in Q2 and $12.4 in the first half of 2016.
Outlook, commentary, risks, and unusual items
- The filing provides no specific quantitative earnings or revenue guidance. Management stated that operating cash flow, revolver availability, cash on hand, and access to capital markets are expected to provide adequate resources for operating and financing needs.
- The Q2 effective tax rate was 14.1%, versus 18.0%; the first-half rate was 15.1%, versus 19.4%. The lower rates primarily reflected an $8.6 valuation-allowance release; first-half results also benefited from share-based compensation tax effects. These benefits were partly offset by income mix.
- Allegion contributed $52.1 to defined benefit pension plans in the first half, including the discretionary $50.0 contribution, and expected approximately $7.4 of additional contributions in the remainder of 2017.
- Environmental reserves were $29.4 at June 30, 2017, including $11.5 classified as current. Management cautioned that ultimate remediation costs are uncertain. The company also reported routine litigation, product warranty, and environmental matters, but did not expect pending legal matters to have a material adverse effect.
- Risk factors were reported as unchanged materially from the 2016 Form 10-K. Cited exposures include economic and demand conditions, competition, currency and interest rates, acquisitions, litigation, commodities, tax changes, leverage, and potential asset impairment. Management reported no significant second-quarter change in market-risk exposure.
- The company early-adopted the intra-entity asset-transfer tax accounting standard in January 2017, recording a $5.0 cumulative reduction to retained earnings. It expects the 2018 revenue-recognition standard to have no material financial-statement impact, with expanded disclosures; lease accounting adoption is expected to materially affect the balance sheet.
Important facts for investors to verify
- Whether revenue growth and operating-margin improvement continue, particularly given EMEIA’s declining first-half segment profit and margin.
- Whether operating cash flow recovers after the discretionary pension contribution and working-capital outflows.
- Debt reduction, interest-rate exposure, covenant headroom, and actual availability under the revolving facility.
- The sustainability of the lower effective tax rate after the valuation-allowance release and other tax benefits.
- Future environmental remediation costs and any changes in legal, warranty, or other contingent liabilities.
- The contribution from acquisitions and the extent to which reported earnings include nonrecurring gains, including the iDevices sale.