Allison Transmission Holdings, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report; quarterly figures are included below where relevant.
Business context
Allison designs and manufactures fully automatic transmissions for commercial and defense vehicles, and sells parts, support equipment and related services. Approximately 77% of 2018 revenue came from North America. The company reported one operating and reportable segment.
Financial performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $2.713 billion | $2.262 billion | +20% |
| Gross profit / margin | $1.422 billion / 52% | $1.131 billion / 50% | Margin +240 bps |
| Operating income / margin | $923 million / 34% | $652 million / 29% | +42% |
| Net income / diluted EPS | $639 million / $4.78 | $504 million / $3.36 | Net income +27% |
| Cash from operations | $837 million | $658 million | +$179 million |
| Adjusted free cash flow (non-GAAP) | $737 million | $567 million | +$170 million |
| Cash and cash equivalents at year-end | $231 million | $199 million | +$32 million |
| Gross debt at year-end | $2.548 billion | $2.576 billion | -$28 million |
Capital expenditures were $100 million. The company paid $80 million in dividends and repurchased $609 million of stock during 2018. The declared annual dividend was $0.60 per share. Gross debt consisted primarily of a $1.148 billion variable-rate term loan and fixed-rate notes of $1.0 billion at 5.0% and $400 million at 4.75%. The company had no revolving-credit borrowings and $533 million of available revolving capacity, net of letters of credit. Management reported compliance with debt covenants; total leverage was 2.05x and senior secured leverage was 0.81x.
Material changes and Q4 detail
- Sales rose across all reported end markets. North America on-highway sales increased 12% to $1.317 billion; service parts, support equipment and other rose 19% to $633 million; outside-North-America off-highway sales increased to $129 million from $41 million.
- Gross margin improved on higher volume and product price increases, partly offset by higher manufacturing expense, unfavorable material costs and a $15 million UAW retirement-incentive charge.
- Research and development expense increased 25% to $131 million, reflecting product initiatives. Net interest expense increased 17% to $121 million, including higher expense on the 2027 notes and the variable-rate term loan.
- The effective tax rate was 21% in 2018 versus 4% in 2017. The prior year included a substantial one-time benefit from U.S. tax reform, making year-over-year tax and earnings comparisons less representative of underlying operations.
- In Q4 2018, sales were $647 million versus $588 million in Q4 2017; net income was $147 million versus $215 million. The filing attributes the unusually high Q4 2017 net income principally to tax effects. Q4 2018 included a $4 million impairment charge related to the TC10 transmission, compared with $32 million in Q4 2017; production of TC10 was ceased in Q4 2018.
Outlook, commentary and risks
For 2019, management expected lower demand in North America off-highway and service parts, support equipment and other, partly offset by higher North America on-highway demand, price increases on certain products and continued growth initiatives. Management said operating cash flow, cash balances and available credit were expected to meet cash requirements for the next 12 months.
Key disclosed risks include cyclical end markets, concentrated OEM sales (top five customers represented about 49% of 2018 sales; Daimler 18% and PACCAR 10%), raw-material and supplier exposure, substantial debt and variable interest rates, competition from alternative powertrains and customer in-sourcing, and uncertain adoption of automatic transmissions outside North America. Approximately 90% of transmission production was concentrated in Indianapolis. The company also disclosed product-warranty exposure, environmental remediation obligations, pension and post-retirement liabilities, foreign-exchange exposure and risks from government contracting and international operations.
The Indianapolis EPA remediation liability was $12 million at year-end, with a $15 million letter of credit as financial assurance. Ordinary-course litigation was not expected by management to have a material adverse effect. The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also reported effective controls.
Important facts for investors to verify
- Whether 2019 demand weakness in off-highway and aftermarket-related sales was offset by on-highway growth and pricing.
- Debt maturity, interest-rate sensitivity and capacity to sustain dividends and repurchases; the term loan matures in 2022 and bears a variable rate.
- Warranty claims and reserves: the year-end warranty liability was $66 million, up from $55 million.
- Customer concentration and the durability of demand from major OEMs, especially Daimler and PACCAR.
- Execution and market acceptance of product initiatives, including the implications of ending TC10 production and adoption of automatic transmissions outside North America.