Allison Transmission Holdings, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparative figures are for Q1 2017 unless otherwise noted. Allison designs and manufactures fully automatic transmissions for commercial and defense markets, serving customers globally through distributors and dealers.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Net sales | $663 million | $499 million | Up 33% |
| Gross profit / margin | $342 million / 52% | $251 million / 50% | Profit up 36%; margin expanded 130 basis points |
| Operating income | $222 million | $149 million | Up 49% |
| Net income | $151 million | $83 million | Up 82% |
| Diluted EPS | $1.08 | $0.52 | More than doubled |
| Adjusted EBITDA (non-GAAP) | $275 million; 41.5% of sales | $192 million; 38.5% of sales | Margin increased 3.0 percentage points |
| Operating cash flow | $153 million | $111 million | Adjusted free cash flow was $143 million versus $103 million |
Sales growth was broad-based: North America on-highway rose 24% to $315 million; service parts, support equipment and other rose 28% to $151 million; North America off-highway increased to $33 million from $1 million, primarily on hydraulic-fracturing demand. Defense sales rose 37% to $37 million. Management attributed growth across markets to stronger demand, including on-highway demand in Europe, Asia and South America and improved mining and construction activity.
Cash and cash equivalents were $195 million at quarter-end, down from $199 million at December 31, 2017. Debt principal was $2.573 billion, including $1.173 billion of variable-rate term loans and $1.4 billion of fixed-rate senior notes. The company had no revolver borrowings and $533 million of revolver capacity available, net of letters of credit. Total leverage was 2.50x and senior secured leverage was 1.03x; the company reported compliance with debt covenants. Capital expenditures were $10 million. Financing activities included $125 million of share repurchases and $21 million of dividend payments; the declared dividend was $0.15 per share.
Material changes and notable items
- Q1 sales growth and higher gross margin lifted operating income and earnings. Management cited $6 million of price increases, partly offset by $3 million of unfavorable material costs and higher manufacturing costs.
- SG&A rose 16% to $92 million, including $7 million of unfavorable warranty adjustments and $5 million of warranty expense associated with higher sales. R&D rose 22% to $28 million on increased product-initiative spending.
- Cost of sales included a $7 million charge for a retirement incentive program for certain UAW Local 933 employees.
- The effective tax rate fell to 21% from 35%, principally due to the U.S. Tax Cuts and Jobs Act. The company adopted the new revenue standard on January 1, 2018; adoption increased opening retained earnings by $5 million net of tax. The filing reports a $1 million Q1 increase in sales versus prior guidance from the ETC revenue allocation change.
- Interest expense increased to $30 million from $25 million, principally reflecting the 4.75% senior notes issued in September 2017. A March 2018 credit-facility amendment lowered the term loan margin by 0.25%.
- The company repurchased $125 million of stock in Q1, with approximately $428 million remaining under its authorization as of March 31, 2018.
Outlook, risks and contingencies
Management expected increased demand for global on-highway and off-highway products in 2018 and price increases on certain products. It stated that cash from operations, cash balances and revolver capacity were expected to be sufficient for requirements over the next 12 months. The filing does not provide a quantified full-year revenue or earnings forecast.
Key risks include cyclical end markets and macroeconomic conditions, customer concentration, adoption of automatic transmissions outside North America, government defense spending and hybrid-vehicle subsidies, product defects and warranty costs, labor disruptions, international operations, substantial indebtedness, and commodity, interest-rate and foreign-exchange exposure. The company estimated that a 10% move in key currencies could change annual after-tax earnings by about $7 million; a 10% change in aluminum and steel prices could affect annual earnings by about $3 million and $6 million, respectively. A 0.125 percentage-point interest-rate move on a fully drawn secured facility would affect interest expense by about $2 million.
The company recorded a $13 million liability for environmental remediation at its Indianapolis facilities. It is also involved in ordinary-course legal and administrative matters, including product liability and personal injury claims; management did not expect any liability beyond recorded amounts or insurance to materially affect financial position, results or cash flows. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether strong end-market demand—particularly off-highway and on-highway—continues, and how much Q1 growth reflects durable volumes versus timing or unusually low prior-year comparisons.
- How warranty costs, material prices, manufacturing expenses and the UAW retirement incentive affect margins in subsequent periods.
- The company’s ability to generate cash while funding debt service, dividends and substantial share repurchases; confirm remaining authorization and covenant headroom.
- Exposure to variable interest rates, foreign exchange and aluminum and steel prices, including the effects of hedging and customer cost-sharing arrangements.
- Progress on environmental remediation and any changes to warranty, tax, litigation or other contingency estimates.
- Effects of the Tax Act and new revenue accounting, and whether the stated 2018 demand expectations translate into measurable full-year results.