Allison Transmission Holdings, Inc. — FY2020 Form 10-K
Business and period. The filing covers the fiscal year ended December 31, 2020; quarterly figures are unaudited. Allison designs and manufactures automatic transmissions and hybrid and electric propulsion systems for commercial, off-highway and defense vehicles, and sells replacement parts and related products. About 79% of 2020 revenue came from North America. COVID-19 disrupted customer demand and supply chains, sharply affecting the second quarter; demand improved in the second half.
Financial performance and liquidity
| Metric ($ millions, except per-share data) | FY2020 | FY2019 |
|---|---|---|
| Net sales | $2,081 | $2,698 |
| Gross profit / gross margin | $998 / 48% | $1,394 / 52% |
| Operating income / margin | $534 / 26% | $892 / 33% |
| Net income / net margin | $299 / 14% | $604 / 22% |
| Diluted earnings per share | $2.62 | $4.91 |
| Operating cash flow | $561 | $847 |
| Capital expenditures | $115 | $172 |
| Adjusted free cash flow (non-GAAP) | $458 | $675 |
Fourth quarter: Net sales were $535 million versus $617 million in Q4 2019; net income was $60 million versus $107 million. Gross profit was $253 million versus $298 million.
Debt and liquidity: Year-end gross debt was $2.538 billion, cash and cash equivalents $310 million, and unused revolving credit availability $645 million (net of letters of credit). The company reported a 0.45x first-lien net leverage ratio and compliance with debt covenants. The balance sheet showed $756 million of current assets and $373 million of current liabilities. The term loan carries variable interest; reported year-end rate was 1.90%.
Other metrics: Adjusted EBITDA, a non-GAAP measure, was $732 million, or 35.2% of sales, compared with $1.083 billion, or 40.1%, in 2019. The company repurchased approximately $225 million of shares and paid $78 million in dividends during 2020.
Changes versus the prior year
- Sales fell 23%, chiefly due to pandemic-related declines in on-highway markets and weaker off-highway and service-related demand. Defense sales increased 21% to $182 million, primarily on tracked-vehicle demand.
- Net income was approximately halved; gross margin declined about 3.7 percentage points. Lower sales and associated gross profit were the main drivers, partly offset by lower incentive compensation, price increases and favorable material costs.
- Operating cash flow declined by $286 million, reflecting lower gross profit and higher cash interest expense, partly offset by lower cash taxes and working-capital needs.
- Debt ended the year at $2.538 billion versus $2.544 billion. Allison issued $1 billion of 3.75% notes due 2031 and redeemed its 5.0% notes due 2024; refinancing-related charges included a $19 million loss.
Outlook, commentary and risks
- Management expected net sales to improve in 2021, while cautioning that further pandemic effects, vaccination delays and supply-chain disruption could weigh on results. No numerical sales or earnings guidance was provided.
- Management expected higher capital expenditures and engineering R&D spending in 2021 than in 2020. It stated that cash, operating cash flow and revolver capacity were expected to cover requirements for the next 12 months.
- A $23 million third-quarter warranty adjustment addressed a shift-quality performance issue in a defined population of transmissions. Year-end product warranty liabilities totaled $66 million, up from $52 million.
- Other notable items included $14 million of restructuring charges related to employee separation programs and a $2 million non-cash pension settlement charge. The 2019 comparison included an $8 million environmental-remediation benefit.
- Key risks include COVID-19 and cyclical end markets; supplier interruptions and commodity costs; reliance on a concentrated OEM customer base (top five were 53% of sales); substantial debt; competition, including electric propulsion and OEM in-sourcing; and product warranty, regulatory and environmental exposures. Approximately 90% of transmissions are produced near Indianapolis, creating a manufacturing-concentration risk.
Important facts for investors to verify
- Whether the expected 2021 sales recovery materialized and whether supplier constraints or renewed pandemic disruption affected production and demand.
- Developments in the shift-quality field action, warranty claims and the adequacy of the $66 million warranty reserve.
- Cash generation, capital and R&D spending, and debt-service capacity as demand recovers; note that adjusted free cash flow is non-GAAP.
- Customer concentration and sales trends by end market, especially North American on-highway and defense.
- Progress and returns from hybrid/electric propulsion investments, alongside the risk of substitution for conventional transmission and aftermarket sales.