Allegion Prices Offering of $400M Senior Notes Due 2029

Allegion plc ALLE, on Sep 19, priced an offering of $400 million of 3.500% senior notes. This offering is anticipated to close on Sep 27, 2019, subjected to customary closing conditions. On the issuance, the notes will be guaranteed by company’s fully-owned subsidiary — Allegion US Holding Company Inc.

As communicated by the company, the notes offered are due to mature on Oct 1, 2029 and have been priced at 99.966% of the principal amount. Notably, interest rates on the notes will be paid semi-annually on Oct 1 and Apr 1, starting from Apr 1, 2020.

Allegion is likely to raise net proceeds of $397,264,000 from the offering of senior notes. Notably, the funds will be utilized for paying down a part of borrowings under the company’s term loan facility.

Debt Profile

Allegion has a highly leveraged balance sheet. Its long-term debt increased roughly 3% (CAGR) in the last five years (2014-2018).

Exiting second-quarter 2019, the company had long-term debt of approximately $1,393.1 million. Its interest expenses were $13.4 million, almost at par with $13.7 million in the first quarter. The current notes offering will not only help in paying down a share of its term loan, we believe that it will also add to Allegion’ existing debt balance. Notably, a unwarranted rise in debt levels can inflate its financial obligations and hurt profitability.

Existing Business Scenario

Allegion has been benefiting from strength in its non-residential business, courtesy of the institutional markets in the Americas and acquisition gains. The company expects these tailwinds to consistently bolster its revenues in the rest of 2019.

Furthermore, Allegion believes that healthy demand for its electronic products backed by Simons Voss and Interflex businesses along with improvement in the residential business will benefit the top line. For 2019, the company expects revenue growth on both reported and organic basis in the band of 4.5-5.5%.

In the past six months, Allegion has yielded a return of 16.1% compared with the industry’s 11.7% growth.

However, rising costs of sales have been a major concern for the company over the past few quarters. For instance, in the first and second quarter of 2019, Allegion’s cost of sales jumped 6.4% and 2.9%, respectively, on a year-over-year basis. Of late, high material cost is escalating its aggregate costs. Rising costs, if unchecked, will continue to dent Allegion's margins in the quarters ahead.

Zacks Rank & Key Picks

Allegion currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks from the same space are Brady Corporation BRC, Johnson Controls International plc JCI and Lakeland Industries, Inc. LAKE, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Brady Corporation delivered a positive average earnings surprise of 9.68% in the trailing four quarters.

Johnson Controls International pulled off a positive average earnings surprise of 4.54% in the trailing four quarters.

Lakeland Industries delivered a positive average earnings surprise of 325.89% in the trailing four quarters.

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