Allegion plc — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Allegion is a global provider of mechanical and electronic security products and solutions, reporting through Americas, EMEIA, and Asia Pacific segments. Amounts are in U.S. dollars; financial statement amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $544.5 | $546.7 | $1,522.7 | $1,544.8 |
| Operating income | $110.4 | $106.1 | $277.1 | $263.2 |
| Operating margin | 20.3% | 19.4% | 18.2% | 17.0% |
| Net earnings (loss) attributable to Allegion | $(27.3) | $60.8 | $82.0 | $139.8 |
| Diluted EPS | $(0.28) | $0.63 | $0.85 | $1.44 |
| Operating cash flow from continuing operations | Not provided for quarter | Not provided for quarter | $126.0 | $174.8 |
Q3 cost of goods sold was 55.9% of revenue, versus 56.7% a year earlier; selling and administrative expense was 23.8%, versus 23.9%. For the first nine months, cost of goods sold was 57.4% of revenue, versus 57.6%, and selling and administrative expense was 24.4%, versus 25.3%.
Cash flow, balance sheet, and debt
- Nine-month cash provided by operating activities was $125.5, including $(0.5) from discontinued operations. Capital expenditures were $27.3; operating cash flow less capital expenditures was $98.2.
- Investing activities used $534.4, mainly reflecting $511.4 of acquisitions and investments, net of acquired cash. Financing activities provided $300.9. Cash declined $115.3 to $175.2 from $290.5 at year-end 2014.
- At September 30, total debt was $1,634.9, versus $1,264.6 at December 31, 2014; cash was $175.2. Long-term debt was $1,575.9 and current debt maturities and short-term borrowings were $59.0.
- Total assets were $2,409.0 and total liabilities were $2,381.0. Total equity was $28.0. Current assets were $875.7 and current liabilities were $517.2.
- The company had $80.0 drawn on its $500.0 revolving facility and $27.4 in letters of credit outstanding. Management reported compliance with its 4.00-to-1.00 maximum leverage and minimum interest coverage covenants.
Material changes versus comparable periods
- Revenue declined 0.4% in Q3 and 1.4% for the nine months. Management attributed the declines primarily to adverse currency movements, partly offset by pricing, volume/product mix, and acquisitions.
- Operating income and margin improved in both comparisons. Management cited pricing and productivity, favorable volume/product mix, and lower prior-year restructuring and spin-related costs; currency headwinds and increased investment spending partly offset gains.
- Reported Q3 results included $106.7 of divestiture losses: a $26.1 non-cash charge on the sale of the Venezuelan operation and an $80.6 pre-tax write-down related to the planned Bocom sale. The filing reports a $110.5 after-tax impact for the combined charges in its Q3 tax discussion. These items drove the quarterly net loss.
- For the nine months, net earnings attributable to Allegion fell to $82.0 from $139.8, despite higher operating income, with the divestiture charges a major factor. Revenue in EMEIA decreased 11.3% for the period; Americas revenue rose 0.5% and Asia Pacific revenue rose 5.4%.
Outlook, commentary, and risks
- The filing provides no specific numerical revenue, earnings, or margin guidance. Management said operating cash flow, cash on hand, revolver availability, and capital-market access were expected to provide adequate resources for operating and financing needs.
- Allegion completed acquisitions of Zero, Brio, Milre, SimonsVoss, and AXA, and invested in iDevices. The total consideration for acquisitions and investments was $511.4; acquisition-related costs were $7.1 for the nine months. SimonsVoss and AXA were acquired in September for approximately $230 and $208, respectively.
- The Bocom transaction, subject to regulatory approvals and customary closing conditions, was expected to close in Q4 2015. Allegion expected consideration with a fair value of $70.4, could receive up to $75 based on future performance, and planned to retain 15%. It estimated additional closing-related charges of $5.5–$7.5.
- An October 2015 agreement under the Italy restructuring plan was expected to result in approximately $8.4 of additional severance charges, with cash payments primarily in 2016. The plan had already incurred $4.4 in charges through September.
- Key stated risks include foreign exchange and interest-rate movements, economic and market conditions, acquisition integration, competition, litigation and regulatory matters, commodity costs, potential asset impairment, technology or data-security breaches, and substantial leverage. Management reported no material changes to previously disclosed risk factors.
- Environmental remediation reserves were $15.1 at September 30, up from $8.8 at year-end, primarily due to liabilities assumed with AXA. Management said pending legal matters were not expected to have a material adverse effect; environmental and product warranty exposures remain subject to estimation uncertainty.
Investor facts to verify
- Underlying earnings and cash generation excluding the $106.7 divestiture charges, and the tax treatment of those charges.
- Whether the Bocom sale closed on expected terms, final proceeds, retained-stake value, and any additional charges.
- Acquisition integration, acquired-business contribution, purchase-price allocation, and the impact of added debt and interest expense.
- Working-capital cash use and the trend in operating cash flow, particularly in the systems integration business.
- Foreign-exchange exposure and the impact of the Italy restructuring, environmental liabilities, and other contingencies.