Allegion plc — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. Allegion is a global security products and solutions provider, reporting in the Americas, EMEA and Asia Pacific.
Financial performance
Unless noted otherwise, amounts are in millions of dollars. Q2 revenue fell 19.4%, mainly on lower volume amid COVID-19 disruption. First-half revenue declined 8.8% for the same principal reason.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $589.5 | $731.2 | $1,264.2 | $1,386.2 |
| Operating income | $96.5 | $145.7 | $125.4 | $253.7 |
| Operating margin | 16.4% | 19.9% | 9.9% | 18.3% |
| Net earnings attributable to Allegion | $73.7 | $109.3 | $74.1 | $189.5 |
| Diluted EPS | $0.80 | $1.16 | $0.80 | $2.00 |
- Q2 cost of goods sold was 58.2% of revenue, versus 56.1% a year earlier; selling and administrative expense was 25.5%, versus 23.9%.
- First-half results included a $96.3 million impairment charge: $88.1 million for Asia Pacific goodwill and $8.2 million for three indefinite-lived trade names. There was no impairment charge in Q2.
- Q2 revenue declined across all regions: Americas 18.5%, EMEA 21.9%, and Asia Pacific 22.1%. First-half declines were 6.3%, 15.5%, and 17.1%, respectively.
- Americas remained profitable, with Q2 segment operating margin of 27.2% and first-half margin of 28.0%. EMEA and Asia Pacific reported segment operating losses in Q2; first-half segment losses were $4.5 million and $101.5 million, respectively, with Asia Pacific’s result dominated by impairment charges.
Cash flow, debt and liquidity
- First-half operating cash flow was $128.0 million, up from $107.0 million in 2019, primarily due to working-capital improvements. Investing cash outflow was $30.6 million; financing cash outflow was $149.2 million.
- Cash, cash equivalents and restricted cash totaled $304.3 million at June 30, 2020, down $54.4 million from the start of the year. The company paid $58.7 million in dividends and repurchased $94.1 million of shares during the half.
- Total debt was $1,429.3 million, compared with $1,427.7 million at year-end 2019. Cash was $302.4 million, excluding restricted cash. No required principal payments on long-term debt are due before September 2022.
- The $500 million revolving facility had no borrowings outstanding; $16.3 million of letters of credit left $483.7 million available. Allegion reported compliance with its debt covenants at June 30.
Outlook, commentary and risks
- Management did not provide numerical revenue or earnings guidance in the supplied filing text. It expected manufacturing facilities to remain operational through the rest of 2020, conditional on government actions, demand, supply-chain stability and safe operations.
- COVID-19 had reduced demand, disrupted supply chains and caused temporary production shutdowns, including in Italy and the Baja region of Mexico. Management cited uncertainty around the duration of the pandemic and the pace of economic recovery.
- In response, the company froze non-critical hiring, travel and share repurchases; reduced workforce and discretionary spending; and reprioritized capital expenditures. It also reported benefits from certain non-U.S. government incentives and lower variable compensation and other spending.
- Allegion recorded $16.5 million of restructuring charges in the first half and anticipated an additional $30–$35 million, including $20–$25 million in the remainder of 2020; related future cash expenditures were estimated at $20–$25 million. Most initiatives were expected to finish in 2020, with all expected by year-end 2021.
- Further impairment charges remain possible if economic conditions or recovery prove worse than management’s assumptions. Other disclosed exposures include environmental remediation reserves of $18.3 million and ordinary-course litigation; management did not expect pending legal matters to materially adversely affect the company.
Important facts for investors to verify
- Whether demand and operating conditions recover as assumed, especially in EMEA and Asia Pacific, and whether further goodwill or intangible impairments are required.
- How much of the year’s expected restructuring expense and cash outlay is ultimately incurred, and whether anticipated savings materialize.
- Whether operating cash flow and revolver availability remain adequate if pandemic-related disruption continues; monitor debt covenants and the September 2022 term-loan maturity.
- Whether buybacks remain paused and how dividends, share repurchases and other capital allocation affect cash and leverage.
- Whether environmental, warranty or other legal contingencies change materially from the amounts disclosed.