Allegion plc — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter filing; selected Q4 figures are noted below. Allegion is an Ireland-incorporated global provider of mechanical and electronic security products, operating in the Americas, EMEIA, and Asia Pacific. It became independent of Ingersoll Rand in December 2013, so prior-period results include allocated costs and may not be fully comparable.
Financial performance
| Metric | FY 2014 | FY 2013 | Change / context |
|---|---|---|---|
| Net revenue | $2,118.3 million | $2,069.6 million | Up 2.4% |
| Operating income | $326.3 million | $240.8 million | Operating margin 15.4%, versus 11.6% |
| Earnings from continuing operations | $183.7 million | $48.4 million | 2013 included a $137.6 million goodwill impairment |
| Net earnings attributable to Allegion | $175.2 million | $32.3 million | Includes discontinued-operations losses |
| Diluted EPS | $1.80 | $0.34 | Continuing-operations EPS was $1.92 versus $0.37 |
| Operating cash flow | $255.9 million | $223.9 million | Up $32.0 million |
| Capital expenditures | $51.5 million | $20.2 million | Higher investment in IT, products, and manufacturing |
| Cash and cash equivalents | $290.5 million | $227.4 million | 2014 cash included substantial balances outside the U.S. |
| Total debt | $1,264.6 million | $1,343.9 million | Includes $962.8 million variable-rate term loans and $300 million fixed-rate notes |
Cost of goods sold was 59.7% of revenue, implying a 40.3% gross margin, compared with 58.4% of revenue in 2013. Selling and administrative expenses rose to 24.9% of revenue from 23.3%. The filing reports a 31.4% effective tax rate, down from 78.3%; the prior-year rate was elevated by impairment and discrete tax charges. Total current assets were $973.8 million and current liabilities were $531.3 million. Allegion reported $18.5 million of total equity but a $4.8 million deficit in Allegion shareholders’ equity.
Fourth-quarter figures: Revenue was $573.5 million, operating income $63.0 million, net earnings attributable to Allegion $35.4 million, and diluted EPS $0.37. These figures reflect the retrospective FIFO presentation.
Material changes and significant items
- Revenue growth reflected pricing (2.2 percentage points), volume/product mix (2.8 points), and acquisitions (0.4 points), partly offset by the Asia joint-venture order-flow change (2.5 points) and currency (0.5 points).
- Operating income increased year over year, but the comparison is materially affected by the 2013 goodwill impairment and China property-sale gain. In 2014, Venezuela-related inventory impairment, separation and restructuring costs, and higher investment spending weighed on results.
- Allegion recorded a $45.4 million pre-tax charge from using Venezuela’s SICAD II exchange rate: $12.1 million for remeasurement of monetary assets and $33.3 million for inventory impairment. The company estimated that applying SICAD II throughout 2014 would have reduced revenue by about $95 million and EPS by $0.11.
- In Q4, the company retrospectively changed the costing method for certain Americas inventory from LIFO to FIFO. The change increased 2013 inventory by $33.8 million and adjusted prior-period results; compare figures on a consistent basis.
- Allegion acquired assets of Schlage Lock de Colombia and Australian electromechanical-locking provider FSH for approximately $23 million in total. It sold its UK Door businesses, recording a $7.6 million disposal charge and classifying their results as discontinued operations.
- The October 2014 credit agreement amendment refinanced the Term Loan B with an expanded Term Loan A, lowered the applicable spread by 25 basis points, and extended maturity to 2019. Allegion repaid $37.2 million net on senior secured facilities during 2014.
Liquidity, outlook, and risks
Management said operating cash flow, available cash, and access to borrowing facilities and capital markets should provide adequate resources for operating and financing needs. The $500 million revolving facility had no borrowings outstanding at year-end, subject to $28.5 million of letters of credit. Allegion was in compliance with its debt covenants at December 31, 2014; covenant thresholds tighten in Q1 2015. A 100-basis-point LIBOR increase would have added approximately $7 million to 2014 interest expense before the effect of swaps. Swaps covering $300 million of floating-rate debt were scheduled to become effective in January 2015.
Management described uneven global construction activity and weakness in some international markets, alongside improving U.S. residential, builder, and replacement markets. It expected a cyclical market recovery and continued above-industry growth in electronic products, but provided no specific numerical revenue or earnings guidance in the supplied filing text. The company declared a subsequent quarterly dividend of $0.10 per share, payable March 31, 2015. It also agreed to acquire Zero International on February 26, 2015.
- Venezuela: The government announced the Simadi exchange system in February 2015. Allegion was evaluating the change; adopting the rate could cause additional remeasurement and impairment charges.
- Leverage and rates: Approximately $1.3 billion of debt, variable-rate exposure, scheduled principal payments, and covenant restrictions may constrain investment, dividends, or repurchases.
- Markets and execution: Results are exposed to construction cycles, competition, pricing pressure, commodity costs, currency movements, and execution of EMEIA restructuring and productivity initiatives.
- Other exposures: Risks include environmental remediation, product and other litigation, uncertain tax positions, pension funding, cybersecurity and IT-service disruption, and potential impairment of goodwill or other assets. Management said pending legal matters were not expected to have a material adverse impact; environmental reserves were $8.8 million.
Investor verification priorities
- Assess underlying operating performance excluding the 2013 goodwill impairment and property-sale gain, and the 2014 Venezuela, separation, restructuring, and investment costs.
- Verify the potential financial effects of Venezuela’s Simadi system and the company’s remaining Venezuelan net monetary assets and inventory.
- Review debt amortization, covenant headroom after the Q1 2015 tightening, interest-rate swap coverage, and the availability of the revolving facility.
- Reconcile cash conversion and higher capital spending, and assess the location and accessibility of cash held outside the U.S.
- Check the retrospective FIFO adjustments and discontinued-operations presentation when comparing historical results.
- Monitor EMEIA profitability and restructuring progress, pension funding, environmental and tax contingencies, and integration of acquisitions.