Allegion plc — Q2 2014 Form 10-Q
Business context and period. Allegion is a global security-products and solutions provider, reporting three segments: Americas, EMEIA, and Asia Pacific. This unaudited quarterly report covers the three and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $531.5m | $528.7m | $998.1m | $996.9m |
| Operating income | $89.7m | $100.0m | $157.1m | $169.5m |
| Operating margin | 16.9% | 18.9% | 15.7% | 17.0% |
| Continuing-operations earnings | $55.1m | $63.3m | $93.2m | $105.0m |
| Net earnings attributable to Allegion | $43.5m | $60.3m | $79.1m | $99.7m |
| Diluted EPS | $0.45 | $0.63 | $0.81 | $1.04 |
| Interest expense | $12.5m | $0.5m | $25.6m | $0.9m |
- Revenue and margins: Q2 revenue rose 0.5%; first-half revenue rose 0.1%. Pricing, volume, acquisitions, and currency gains were largely offset by the changed order flow through the Asia joint venture. Margin contraction reflected spin-off costs, restructuring and investment spending, a bad-debt allowance charge in Asia Pacific, and unfavorable mix; pricing and productivity provided partial offsets.
- Cash flow: Continuing operating cash flow was $65.4m for the first half, versus $61.0m a year earlier. Capital expenditures were $26.0m versus $8.7m; acquisitions used $23.0m. Financing used $85.8m, including $55.2m of debt repayments, $30.3m of share repurchases, and shareholder dividends. Cash and cash equivalents ended at $193.2m, down from $227.4m at year-end 2013.
- Debt and liquidity: Total debt was $1,287.6m, down from $1,343.9m at December 31, 2013; long-term debt was $1,256.9m. No revolver borrowings were outstanding; $28.9m of letters of credit reduced availability under the $500m facility. The company reported compliance with its leverage and interest-coverage covenants. Current assets were $887.6m and current liabilities $437.4m; total equity remained negative at $11.2m.
Material changes and segment results
- Q2 Americas revenue was $400.7m, up 0.7%, and segment operating income was $111.3m, essentially flat. First-half revenue declined 0.4%, while operating income increased 2.1%.
- Q2 EMEIA revenue increased 3.0% to $101.2m, but the segment operating loss widened to $4.1m from $1.3m. The first-half operating loss narrowed to $4.7m from $6.0m.
- Q2 Asia Pacific revenue declined 9.2% to $29.6m and the operating loss widened to $3.5m from $0.8m. A $2.5m increase in the allowance for doubtful accounts, related to delayed customer payments, was a significant factor. First-half revenue fell 4.3%; the operating loss widened to $6.5m from $1.9m.
- Interest expense increased substantially following the 2013 spin-off financing, which included $1.0bn in term loans and $300m of senior notes. Lower first-half other losses partly offset the earnings pressure; 2013 included a $6.2m Venezuela currency-translation loss.
Outlook, management commentary, risks and unusual items
- The filing gives no specific numerical revenue, earnings, or margin guidance. Management said operating cash flow, available cash, and access to borrowing facilities and capital markets were expected to provide adequate resources for operating and financing needs.
- Management committed to sell its UK Door businesses, classified them as discontinued operations, and recorded a $6.6m after-tax asset write-down. The sale was expected to close in Q3 2014. The businesses recorded first-half revenue of $11.8m and discontinued-operations losses of $8.3m, including the write-down.
- First-half spin-off separation costs were $15.7m. A new EMEIA restructuring plan generated $4.4m of severance and related charges plus $0.4m of other charges in Q2. Management also cited increased investment spending.
- Venezuela’s net monetary assets were measured at the official rate of 6.3 bolivars per U.S. dollar. Management estimated a one-time charge of about $6.6m if the rate moved to SICAD 1 (10 bolivars) or $15.6m at SICAD 2 (49.98 bolivars), based on $17.8m of net monetary assets, including $9.7m cash. A devaluation could materially affect results.
- Other risks include substantial leverage and interest-rate exposure, foreign-exchange movements, delayed customer collections, execution of acquisitions and restructuring, and environmental, warranty, and other legal contingencies. Environmental reserves were $10.4m; management did not expect pending legal matters to have a material adverse effect. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the UK Door business sale closed as expected, and its ultimate proceeds and effect on continuing operations.
- Whether margin pressure and losses in EMEIA and Asia Pacific improved, including collection of delayed customer receivables.
- Venezuela’s applicable exchange rate and any resulting remeasurement charge or continuing earnings impact.
- Cash conversion and working-capital movements, capital spending, and the company’s capacity to service approximately $1.29bn of debt.
- The amount and duration of spin-off and restructuring costs, and whether expected operational efficiencies materialized.
- Interpret first-half comparisons in light of the Asia joint-venture order-flow change, which reduced reported revenue but management said did not materially affect operating income or cash flows.