Allegion plc (ALLE Quick QuoteALLE - Free Report) reported better-than-expected results for second-quarter of 2018 with earnings and sales surpassing estimates by 4.2% and 0.7%, respectively.

The company’s adjusted earnings in the quarter were $1.25 per share, topping the Zacks Consensus Estimate of $1.20. Also, the bottom line increased 12.6% year over year on solid sales growth. Inflationary pressures existed but the impact was negated by the company’s pricing, productivity and cost-saving actions.

Segmental Results Solid, Revenues Up Y/Y

Allegion generated revenues of $704.7 million in the reported quarter, reflecting growth of 12.4% from the year-ago tally. The improvement came on the back of 5.2% organic gains, 1.8% positive impact of foreign currency movements and 5.4% positive impact from acquisitions/divestitures.

Also, the top line surpassed the Zacks Consensus Estimate of $699.7 million.
 
Allegion reports its revenues under the segments discussed below:

Revenues in the Americas segment rose 12.4% year over year to $526.8 million. The improvement was driven by 6.6% organic sales growth, 0.2% gain from foreign currency translation and 5.6% positive impact from acquired assets of Technical Glass Products and AD Systems.

Pricing was favorable in the quarter while volumes were solid in residential and non-residential businesses. Also, electronic product business flourished.

The EMEIA (Europe, Middle East, India and Africa) segment’s revenues increased 14.4% to $147.8 million. The year-over-year gain was driven by 1.4% organic sales growth, 7.3% gain from currency translation and 5.7% positive impact from the Qatar Metal Industries buyout.

Revenues in the Asia-Pacific segment rose 3.1% from the year-ago quarter to $30.1 million on the back of 0.7% organic sales growth and 2.4% gain from currency translation.

Margins Weak

In the reported quarter, Allegion’s cost of sales increased 15.4% year over year to $399.1 million. It represented 56.6% of the quarter’s revenues compared with 55.1% in the year-ago quarter. Gross profit grew 8.6% year over year while gross margin declined 150 basis points (bps) to 43.4%.

Selling and administrative expenses jumped 10.9% year over year to $162.2 million. The figure was 23% of revenues compared with 23.3% in the year-ago quarter.

Adjusted operating income in the quarter grew 9.6% year over year to $150.1 million while adjusted operating margin fell 50 bps to 21.3% due mainly to dilution related to acquired assets.

It’s worth noting that, operating margin was flat excluding the impact of acquisitions. The company’s efforts to improve productivity, favorable pricing and cost-reduction efforts were offset by inflationary pressures.

Balance Sheet and Cash Flow

Exiting the second quarter, Allegion had cash and cash equivalents of $189.6 million, up 24.9% from $151.8 million recorded at the end of the last reported quarter. Long-term debt decreased 3.3% sequentially to $1,425.9 million due to repayments made during the quarter.

In the first half of 2018, the company generated net cash of $118.7 million from its operating activities, surging 85.5% from the year-ago period. Capital expenditures totaled $20.9 million against $21.4 million used in the year-ago period. Free cash flow was $97.8 million, reflecting year-over-year growth of 129.6%.

During the first half of the year, the company bought back shares worth $30 million while used $39.7 million for paying dividends.

Outlook

For 2018, Allegion reiterated its adjusted earnings per share guidance in the range of $4.35-$4.50 per share. Total revenues are projected to grow 12.5-13.5%, higher than 10.5-11.5%. Organic sales growth projection remained stable at 4-5%.

Investment spending will be roughly 15 cents per share, tax rate within 15-16% and share count will be $96 million. Free cash flow is predicted to be $380-$400 million.

Allegion PLC Price, Consensus and EPS Surprise