Allegion plc — FY 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. Allegion is an Ireland-incorporated global provider of mechanical and electronic security products and access solutions, reporting through Americas, EMEIA, and Asia Pacific segments.
Financial performance and position
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Net revenue | $2,731.7 million | $2,408.2 million | +13.4% |
| Operating income | $525.8 million | $492.5 million | +6.8% |
| Operating margin | 19.2% | 20.5% | Down 1.3 percentage points |
| Net earnings attributable to Allegion | $434.9 million | $273.3 million | +59.1% |
| Diluted earnings per share | $4.54 | $2.85 | +59.3% |
| Cash from operating activities | $457.8 million | $347.2 million | +$110.6 million |
| Capital expenditures | $49.1 million | $49.3 million | Approximately unchanged |
| Total debt | $1,444.8 million | $1,477.3 million | Down $32.5 million |
| Cash and cash equivalents | $283.8 million | $466.2 million | Down $182.4 million |
Revenue growth reflected pricing (+1.6%), volume (+4.4%), acquisitions (+6.6%), and currency (+0.8%). Cost of goods sold rose to 57.0% of revenue from 55.4%, reducing gross margin to approximately 43.0% from 44.6%. Selling and administrative expense declined to 23.7% of revenue from 24.1%. Operating income increased, but margin pressure from inflation exceeding pricing and productivity, investment spending, and lower acquired-business margins offset volume and mix benefits.
Net earnings and EPS benefited from the lower U.S. statutory corporate tax rate and a $21.9 million Tax Reform Act-related benefit in 2018; 2017 included a $53.5 million Tax Reform Act tax charge and $44.7 million in refinancing-related costs. The effective tax rate was 8.4% in 2018 versus 30.1% in 2017. Accordingly, earnings growth should be considered alongside these significant tax and prior-year financing effects.
Investing cash outflow was $443.8 million, primarily reflecting approximately $368 million of cash payments for acquisitions; financing cash outflow was $183.4 million. Cash paid for dividends was $79.4 million and share repurchases were $67.3 million. Cash from operations less capital expenditures was approximately $408.7 million. Current assets were $931.6 million and current liabilities $520.8 million at year-end.
Debt comprised $656.3 million under the term facility, $800 million of fixed-rate senior notes due 2024 and 2027, and $1.2 million of other debt before unamortized discounts and issuance costs. The $500 million revolving facility had no year-end borrowings and $17.1 million of letters of credit outstanding. The company repaid $35 million of term-loan principal in 2018 and reported compliance with debt covenants.
Fourth-quarter results
Fourth-quarter 2018 revenue was $702.4 million versus $623.0 million in fourth-quarter 2017. Operating income was $141.4 million versus $130.9 million; net earnings attributable to Allegion were $132.8 million versus $9.6 million; diluted EPS was $1.39 versus $0.10. Fourth-quarter 2018 earnings included an $18.6 million net tax benefit from finalizing provisional Tax Reform Act accounting. Fourth-quarter 2017 included a $41.3 million refinancing charge and the $53.5 million net tax charge related to U.S. tax reform.
Material changes and segment performance
- Allegion completed six acquisitions in 2018, with approximately $368 million of consideration paid net of cash acquired. Acquired businesses contributed approximately $160.2 million of revenue and $2.8 million of operating income for the post-acquisition periods included in 2018 results. The acquisitions generated a $3.2 million loss before income taxes for those periods.
- Americas revenue increased 12.5% to $1,988.6 million; segment operating income rose 7.1% to $544.5 million, while margin fell to 27.4% from 28.8%.
- EMEIA revenue increased 12.7% to $589.9 million; segment operating income rose 11.8% to $49.3 million and margin held at 8.4%.
- Asia Pacific revenue increased 30.7% to $153.2 million, largely due to acquisitions; segment operating income fell 27.4% to $6.9 million and margin declined to 4.5% from 8.1%.
- 2018 operating cash flow improved from 2017, partly because 2017 included a discretionary $50 million pension contribution. Acquisition spending drove the sharp increase in investing cash outflow and the decline in cash balances.
Outlook, management commentary, risks, and unusual items
- Management describes favorable long-term industry trends, including urbanization, heightened security concerns, and the convergence of mechanical and electronic products. It expects electronic product categories to outgrow mechanical products, but the filing does not provide specific 2019 revenue, earnings, or margin guidance.
- Principal business risks include cyclical construction and remodeling markets, competition and rapid technology change, execution and integration of acquisitions, customer and channel concentration, commodity and energy cost inflation, foreign-exchange exposure, and global supply-chain disruption.
- Cybersecurity, information-technology system reliability, third-party technology vendors, and protection of customer and business data are identified risks. The company also cites changing U.S. and international tax rules, tax audits, and uncertainty around tax positions.
- Debt and interest-rate exposure remain relevant: $656 million of term loans were floating-rate, with $250 million hedged by swaps. A 100-basis-point increase in LIBOR would have increased 2018 interest expense by approximately $4.3 million.
- Environmental remediation reserves were $22.6 million at year-end, down from $28.9 million; 2018 remediation expense was $2.4 million. The ultimate costs remain uncertain. The company also reports product, environmental, asbestos-related, and other legal matters; management does not expect pending legal matters to materially adversely affect results, financial condition, liquidity, or cash flow.
- Aggregate pension plans were 94.1% funded at year-end versus 95.5% in 2017; management projected approximately $11.6 million of pension contributions in 2019.
- Goodwill and indefinite-lived intangible assets were $883.0 million and $130.6 million, respectively. The 2018 impairment tests found no impairment; management cautions that weaker results, particularly in EMEIA or Asia Pacific, could trigger future charges.
- Six 2018 acquisitions representing approximately 3% of year-end assets and 6% of 2018 revenue were excluded from management’s and the auditor’s internal-control assessment because they had been recently acquired. Management and the auditor concluded controls were effective for the assessed scope.
Important facts for investors to verify
- Whether underlying operating performance can recover the 1.3-point decline in consolidated operating margin, especially as acquisition integration and cost inflation continue.
- How much of reported earnings growth reflects sustainable operations versus tax benefits in 2018 and unusual tax and refinancing charges in 2017.
- Acquisition integration, returns, and margins, particularly in Asia Pacific, where revenue rose sharply but segment margin declined materially.
- Cash conversion and capital allocation after substantial acquisition spending, dividends, and share repurchases; also monitor year-end cash and debt levels.
- Floating-rate borrowing exposure, covenant headroom, and the company’s capacity to meet debt, pension, environmental, and other obligations.
- Potential changes in tax outcomes, environmental remediation estimates, litigation contingencies, and impairment assumptions.