Allegion plc — 2017 Third-Quarter Form 10-Q
Business context and period. Allegion is a global provider of mechanical and electronic security products and solutions. This unaudited quarterly report covers the three and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. Amounts are in U.S. dollars unless stated otherwise.
Financial results and liquidity
- Third quarter: Revenue was $609.4 million, up 4.9% from $581.1 million. Operating income was $126.1 million, up 3.8%, while operating margin eased to 20.7% from 20.9%. Net earnings attributable to Allegion were $89.8 million, versus $1.6 million, and diluted EPS was $0.94 versus $0.02. The comparison is heavily affected by the $84.4 million 2016 divestiture loss.
- Nine months: Revenue was $1,785.1 million, up 7.0%; operating income was $359.0 million, up 9.4%, and operating margin improved to 20.1% from 19.7%. Net earnings attributable to Allegion were $263.7 million versus $154.3 million; diluted EPS was $2.75 versus $1.59. The prior period included the $84.4 million divestiture loss.
- Revenue drivers: Q3 growth reflected pricing (2.4 percentage points), volume (0.3), acquisitions (1.0) and currency (1.2). Nine-month growth reflected pricing (2.0), volume (3.5), acquisitions (1.6) and currency (negative 0.1).
- Segments, Q3: Americas revenue was $455.2 million (+4.4%) and operating income $131.8 million (+0.2%); margin declined to 29.0% from 30.1%. EMEIA revenue was $125.1 million (+7.5%) and operating income $9.1 million versus $3.4 million; margin rose to 7.3%. Asia Pacific revenue was $29.1 million (+2.1%) and operating income $2.2 million versus $1.8 million; margin rose to 7.6%.
- Cash flow: Nine-month operating cash flow was $170.0 million, compared with $178.4 million. The decline primarily reflected a discretionary $50.0 million pension contribution, partly offset by higher earnings. Capital expenditures were $33.7 million. Investing cash outflow was $36.1 million and financing cash outflow $118.7 million. Cash increased $22.5 million to $334.9 million.
- Balance sheet and liquidity: At September 30, cash was $334.9 million, total debt $1,447.0 million, current assets $924.6 million and current liabilities $432.2 million. Total debt less cash was approximately $1,112 million. Stockholders’ equity was $367.2 million, up from $113.3 million at year-end 2016. About 47% of cash was held outside the U.S.
- Capital returns: The company paid $0.48 per share in dividends during the first nine months and repurchased 0.8 million shares for $60.0 million. Approximately $440 million remained under its $500 million repurchase authorization at quarter-end.
Material changes, outlook and notable items
- Pricing and productivity, higher volume/product mix, and currency helped results; increased investment spending and restructuring costs were offsets. Q3 restructuring costs were $7.4 million versus $1.1 million a year earlier; nine-month costs were $8.5 million versus $3.0 million.
- On September 12, Allegion refinanced its prior credit facility with a $700 million term loan and a $500 million revolver, both maturing in 2022. At September 30, $165 million was drawn on the revolver. The company reported compliance with its leverage and interest-coverage covenants.
- After quarter-end, Allegion issued $400 million of 3.20% notes due 2024 and $400 million of 3.55% notes due 2027. Proceeds were used to repay the revolver and redeem its 5.75% 2021 and 5.875% 2023 notes. The company expected to record approximately $33 million of redemption premiums and a $9.4 million write-off of prior debt issuance costs in interest expense.
- Other unusual items included a $2.9 million Q3 gain from a legal-entity liquidation, a $4.9 million gain from the April sale of iDevices during the nine-month period, and the $84.4 million 2016 Systems Integration divestiture write-down. Management estimated the remaining Systems Integration consideration at $2.7 million and did not expect material future charges related to it.
- The filing provides no specific revenue, earnings or margin guidance. Management said operating cash flow, revolver availability, cash on hand and capital-market access were expected to provide adequate resources for operating and financing needs.
- Risks cited include economic and demand conditions, competition, currency and interest-rate movements, commodity costs, acquisition integration, litigation and environmental matters, potential asset impairment, tax changes, IT risks and substantial leverage. Environmental reserves were $29.0 million at quarter-end. Management did not expect pending legal matters to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Key facts for investors to verify
- Assess underlying earnings growth excluding the prior-year $84.4 million divestiture charge and this year’s gains and favorable tax effects.
- Track whether Americas margin pressure from investment, restructuring, acquisition costs and product mix persists, and whether EMEIA’s margin improvement is sustainable.
- Review cash conversion and working-capital trends, particularly after the $50 million pension contribution, and monitor pension funding needs.
- Confirm the realized financing cost and leverage effects of the October refinancing, including redemption premiums, debt-cost write-offs and subsequent interest expense.
- Monitor environmental remediation reserves, litigation and warranty claims, and execution of restructuring and acquisition integration.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.