Allegion plc — Q3 2018 Form 10-Q Summary
Business context and reporting period
Allegion is a global security products and solutions provider serving commercial, institutional and residential markets through its Americas, EMEIA, and Asia Pacific segments. This unaudited quarterly report covers the three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless noted.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenue | $711.5 million | $609.4 million | $2,029.3 million | $1,785.1 million |
| Operating income | $142.3 million | $127.1 million | $384.4 million | $361.6 million |
| Operating margin | 20.0% | 20.9% | 18.9% | 20.3% |
| Net earnings attributable to Allegion | $116.0 million | $89.8 million | $302.1 million | $263.7 million |
| Diluted earnings per share | $1.21 | $0.94 | $3.15 | $2.75 |
- Revenue rose 16.8% in Q3 and 13.7% year to date. Management attributed growth to volume, pricing and acquisitions; currency reduced Q3 growth by 0.7 percentage points and added 1.5 points year to date.
- Operating income increased, but margins declined. Management cited inflation exceeding pricing and productivity, higher investment spending, and lower margins from acquired businesses; volume and product mix helped offset these pressures.
- Q3 interest expense was $14.0 million, down $3.8 million; year-to-date interest expense was $40.3 million, down $9.4 million. Management attributed the reductions primarily to the 2017 debt refinancing.
- Effective tax rates were 10.8% for Q3 and 13.1% year to date, versus 19.6% and 16.7%, respectively, in 2017. The filing cites U.S. tax reform and other tax and geographic income-mix changes; Q3 included a $3.3 million benefit from an adjustment to provisional tax amounts.
- Cash from operations was $260.4 million for the first nine months, versus $170.0 million. Capital expenditures were $31.8 million, implying operating cash flow less capital expenditures of $228.6 million.
- Cash, cash equivalents and restricted cash totaled $196.5 million at September 30, down from $466.2 million at year-end. Investing cash outflow was $408.7 million, chiefly reflecting acquisitions and investments; financing cash outflow was $116.9 million.
- Total debt carrying value was $1,452.7 million, including $35.0 million current maturities; long-term debt was $1,417.7 million. Cash on hand was $189.7 million, plus $6.8 million restricted cash. The $500 million revolving facility had no borrowings and $17.2 million of letters of credit outstanding. The company reported compliance with debt covenants.
- Current assets were $873.3 million and current liabilities $486.9 million. Total assets were $2,730.1 million and equity $599.0 million.
Material changes and segment results
- Allegion completed six acquisitions in 2018, paying approximately $368 million net of cash acquired, and made $8 million of investments in unconsolidated entities. Acquired businesses contributed $55.0 million revenue and $0.9 million pretax earnings in Q3 since their respective acquisition dates; year-to-date contributions were $115.0 million revenue and a $0.7 million pretax loss.
- Americas revenue increased 16.5% in Q3 and 12.4% year to date; segment operating income increased 15.5% and 8.3%, respectively. EMEIA revenue grew 7.4% and 16.0%, while segment income fell 11.6% in Q3 but rose 18.2% year to date. Asia Pacific revenue rose 61.5% and 24.6%, largely reflecting acquisitions, while segment income declined 31.8% in Q3 and 84.3% year to date. Its year-to-date operating margin was 0.8%, versus 6.3% in 2017.
- Acquisition spending contributed to higher goodwill and intangible assets: goodwill increased to $878.0 million from $761.2 million at year-end, and net intangible assets rose to $558.4 million from $394.3 million. Acquisition purchase price allocations remain preliminary.
- Year-to-date dividends paid were $59.6 million; the company repurchased $30.0 million of shares, compared with $60.0 million in the prior-year period. Dividends declared were $0.21 per share in Q3 and $0.63 year to date.
Outlook, commentary and risks
- The filing provides no specific revenue, earnings or margin guidance. Management stated that expected operating cash flow, revolving-facility availability, cash on hand and capital-markets access should provide adequate resources for operating and financing needs.
- Management highlighted risks including demand and economic conditions, competition, foreign exchange and interest rates, commodity prices, acquisition integration, cybersecurity and IT, tax-law changes, litigation, indebtedness, and potential impairment of goodwill or intangible assets.
- Environmental reserves were $24.1 million at September 30, 2018, including $6.4 million current. The company is involved in environmental, product warranty and other legal matters; management did not expect pending legal matters to materially adversely affect results, financial condition, liquidity or cash flows. Environmental remediation costs remain uncertain.
- Allegion anticipated adopting the lease accounting standard on January 1, 2019, and expected recognition of a significant right-of-use asset and lease liability. Management reported no material change in market-risk exposure, no material change in internal control over financial reporting, and effective disclosure controls.
Important facts for investors to verify
- How the six acquisitions integrate, perform against expectations, and affect margins and cash generation; also track final purchase price allocations and acquired goodwill and intangibles.
- Whether pricing and productivity keep pace with inflation and investment spending, and whether operating margins recover, especially in Asia Pacific.
- Working-capital movements and cash conversion, given the substantial decline in cash after acquisition spending.
- Debt servicing capacity, covenant compliance and available revolver capacity, alongside the company’s planned dividends and share repurchases.
- Updates to provisional tax accounting, environmental reserves and the expected balance-sheet effect of lease-standard adoption.