Allegion plc — Q2 2015 Form 10-Q
Business context and period: Global security products and solutions provider, reporting the quarter and six months ended June 30, 2015. Amounts are in U.S. dollars; financial statements are unaudited.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $519.5 million | $531.5 million | $978.2 million | $998.1 million |
| Operating income | $95.7 million | $89.3 million | $166.7 million | $157.1 million |
| Operating margin | 18.4% | 16.8% | 17.0% | 15.7% |
| Continuing-operations earnings | $65.0 million | $54.7 million | $108.9 million | $93.1 million |
| Net earnings attributable to Allegion | $63.9 million | $43.2 million | $109.3 million | $79.0 million |
| Diluted EPS | $0.66 | $0.44 | $1.13 | $0.81 |
For the six-month period, continuing operating cash flow was $33.4 million, down from $65.4 million. Investing used $66.5 million and financing used $52.6 million; cash declined $89.5 million to $201.0 million. Management attributed weaker operating cash flow mainly to working-capital timing.
At June 30, cash was $201.0 million, current assets $923.2 million and current liabilities $479.0 million. Total debt was $1,252.3 million, including $61.8 million current and $1,190.5 million long term; the company had no Revolver borrowings and $27.3 million of letters of credit outstanding. The $500 million Revolver matures in 2018. The company reported compliance with its debt covenants.
Changes versus comparable periods
- Q2 revenue fell 2.3%; six-month revenue fell 2.0%. Currency effects were the primary drag, partly offset by volume, pricing and acquisitions.
- Operating income and margins improved in both periods. Management cited favorable volume/product mix, productivity and pricing, and lower prior-year restructuring and spin-related costs. Increased investment spending, currency effects and acquisition costs offset some gains.
- Q2 diluted EPS rose to $0.66 from $0.44; the prior-year quarter included an $8.0 million after-tax discontinued-operations loss. Six-month EPS increased to $1.13 from $0.81; the prior-year period included an $8.8 million discontinued-operations loss.
- The effective tax rate declined to 22.6% from 29.7% in Q2 and to 22.4% from 29.8% for six months, mainly due to a more favorable mix of income in lower-tax jurisdictions.
Segments, outlook and notable items
- Americas: Q2 revenue was $402.1 million, up 0.3%, with operating income of $111.9 million. Six-month revenue rose 1.4%, while operating income edged down to $196.1 million.
- EMEIA: Q2 revenue declined 17.1% to $83.9 million; segment operating income was $0.5 million versus a $4.1 million loss. Six-month revenue declined 17.4% to $165.6 million; operating income was $3.1 million versus a $4.7 million loss. Currency and exited unprofitable markets weighed on revenue; restructuring-related productivity supported profit.
- Asia Pacific: Q2 revenue rose 13.2% to $33.5 million and operating loss narrowed to $1.4 million. Six-month revenue rose 8.9% to $56.2 million; operating loss narrowed to $4.0 million.
- The filing gives no specific 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, including announced acquisitions.
- Zero International and Brio were acquired for $43.0 million total; the company also invested in iDevices. A definitive agreement to acquire SimonsVoss for approximately $236 million was signed in June, with closing expected in Q3 subject to regulatory approval. After quarter-end, agreements were signed for Milre and AXA; AXA consideration was approximately $208 million, with closing expected in Q3 subject to regulatory approval. The company planned to use cash and Revolver borrowings for acquisitions.
- Venezuela’s adoption of the SIMADI exchange rate resulted in a $7.0 million pre-tax charge: $2.8 million remeasurement loss and $4.2 million non-cash inventory impairment. The SIMADI rate was about 198 bolivars per U.S. dollar at quarter-end.
- A new Italy restructuring plan generated $3.8 million of Q2 charges, primarily severance. Environmental reserves were $9.3 million. Management said pending legal matters were not expected to materially affect results, financial condition, liquidity or cash flows; it noted environmental-cost uncertainty.
Investor verification priorities
- Assess whether currency headwinds, particularly in EMEIA and Venezuela, persist and whether reported revenue trends improve.
- Track working-capital movements and cash conversion, given the decline in operating cash flow and cash balance.
- Verify closing, financing, integration costs and realized contribution from SimonsVoss, AXA, Milre and the completed Zero and Brio acquisitions.
- Monitor debt, Revolver use and covenant headroom as acquisition spending proceeds.
- Separate recurring operating improvement from prior-year comparison benefits, acquisition costs, restructuring charges and Venezuela-related items.
- Review environmental remediation exposure and the outcome of legal, product-warranty and other contingencies.