Allegion plc — Q1 2016 Form 10-Q
Business and period: Global security-products and solutions provider, reporting the three months ended March 31, 2016, compared with Q1 2015. Results include the Americas, EMEIA, and Asia Pacific segments.
Financial performance
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $502.3 million | $458.7 million; up 9.5% |
| Operating income / margin | $82.5 million / 16.4% | $71.0 million / 15.5% |
| Earnings attributable to Allegion | $57.7 million | $45.4 million |
| Diluted EPS | $0.60 | $0.47 |
| Operating cash flow | $(0.8) million | $4.6 million from continuing operations |
| Cash and cash equivalents | $125.5 million | $199.7 million at Dec. 31, 2015 |
| Total debt | $1,496.0 million | $1,523.1 million at Dec. 31, 2015 |
Gross margin was approximately 43.1%, versus 40.8% a year earlier, based on revenue less cost of goods sold. Selling and administrative expense rose to $133.8 million from $116.1 million. Interest expense increased $4.7 million to $16.3 million, primarily reflecting the 2023 senior notes. The effective tax rate was 21.6%, compared with 22.0%.
Working-capital changes and other non-cash items used $76.0 million of cash. Investing activities used $2.8 million, including $7.4 million of capital expenditures and $6.6 million of proceeds from marketable securities. Financing activities used $74.8 million, including $28.3 million of net debt repayments, $11.4 million of dividends, and $30.0 million of share repurchases. Cash declined $74.2 million during the quarter.
Changes and segment results
- Revenue growth reflected 7.2% contribution from acquisitions/divestitures, 2.6% volume growth, and 1.0% pricing, partly offset by 1.3% unfavorable currency. Acquisitions and divestitures increased revenue by a net $33.0 million and operating income by about $4.7 million versus Q1 2015.
- Americas: Revenue grew 2.5% to $363.0 million; segment operating income rose 7.1% to $90.2 million and margin improved to 24.8% from 23.8%.
- EMEIA: Revenue grew 45.0% to $118.5 million, chiefly due to the SimonsVoss and AXA acquisitions; segment operating income was $8.0 million versus $2.6 million, with margin up to 6.8% from 3.2%.
- Asia Pacific: Revenue declined 8.4% to $20.8 million, mainly due to the Bocom divestiture and currency effects. Segment operating loss narrowed to $0.1 million from $2.6 million.
Operating-margin improvement was attributed to pricing and productivity, acquisitions, favorable currency effects, and a $4.2 million prior-year Venezuelan-bolivar-related inventory impairment that did not recur. Higher investment spending, restructuring and acquisition costs, and product mix partly offset improvement. Management cited timing delays associated with an ERP implementation at a major manufacturing site as a factor in unfavorable non-residential mix.
Liquidity, debt, outlook, and risks
- Debt comprised a $915.0 million Term Loan A, $300.0 million of 5.75% notes due 2021, and $300.0 million of 5.875% notes due 2023, among other items. The $500 million revolving facility had no borrowings outstanding; $17.7 million of letters of credit were outstanding.
- The company reported compliance with its maximum leverage and minimum interest-coverage covenants at March 31, 2016. It stated that operating cash generation, cash on hand, revolver availability, and capital-market access should provide adequate resources for operating and financing needs. No specific earnings or revenue guidance was provided.
- Nonrecurring or unusual contributors included $5.8 million of gains on marketable-security sales and an equity-method investment gain not expected to recur. Other income also reflected currency and investment items.
- The company estimated $75.3 million of consideration receivable from the Bocom divestiture, with payment expected in about two years but potentially delayed by cash collections; further charges could arise if collections are not expected. Environmental reserves were $15.4 million.
- Management said pending legal matters were not expected to have a material adverse effect and reported no material changes to previously disclosed risk factors. Risks highlighted included foreign exchange, interest rates, acquisition integration, IT systems, substantial leverage, litigation, and potential asset impairments.
The board declared a $0.12-per-share quarterly dividend on April 7, payable June 30, 2016. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Investor verification priorities
- Assess whether the quarter’s revenue and operating-income growth is sustainable apart from acquisition contributions and prior-year impairment comparisons.
- Track working-capital requirements and operating cash conversion, given negative operating cash flow and the $74.2 million cash decline.
- Review debt service, covenant headroom, and exposure to variable rates and refinancing, including the impact of the interest-rate swaps.
- Evaluate the nonrecurring security-sale and equity-investment gains, and the timing and collectability of the Bocom receivable.
- Monitor ERP-related production and mix effects, restructuring execution, and EMEIA/Asia Pacific segment profitability.