Allison Transmission Holdings, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. Allison designs and manufactures fully automatic commercial- and defense-vehicle transmissions; approximately 78% of FY 2016 revenue came from North America.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net sales | $1,840.2 million | $1,985.8 million | Down 7% |
| Gross profit / margin | $864.2 million / 47% | $933.8 million / 47% | Profit down 7%; margin flat |
| Operating income / margin | $451.5 million / 25% | $428.9 million / 21% | Income up 5%; margin improved |
| Net income / diluted EPS | $214.9 million / $1.27 | $182.3 million / $1.03 | Income up 18% |
| Adjusted EBITDA / margin (non-GAAP) | $644.3 million / 35.0% | $719.8 million / 36.2% | Down 10%; margin lower |
| Operating cash flow | $590.8 million | $579.9 million | Up $10.9 million |
| Adjusted free cash flow (non-GAAP) | $530.3 million | $530.4 million | Essentially flat |
- FY 2016 capital expenditures were $70.6 million. Cash and cash equivalents were $204.7 million at year-end, versus $251.6 million a year earlier; the company also had $432.2 million available under its revolving credit facility, with no revolver borrowings at year-end.
- Gross debt was $2,187.6 million at year-end; the balance-sheet carrying amount, net of financing costs, was $2,158.7 million. The debt mix included a $1,187.6 million variable-rate term loan due 2022 and $1,000.0 million of 5.0% notes due 2024. Reported leverage ratios were 1.53x senior secured and 3.08x total; the company reported covenant compliance.
- Current assets were $547.6 million and current liabilities $342.2 million at year-end.
- Fourth-quarter 2016 sales were $468.9 million versus $478.2 million in Q4 2015; net income was $61.2 million versus $13.0 million. Q4 2015 included an $80.0 million trade-name impairment charge.
Material changes versus the prior comparable period
- Sales fell mainly because of weaker North American on-highway demand and sharp declines in off-highway markets amid low energy and commodity prices. North American off-highway sales fell 87%; outside-North-America off-highway fell 66%; North American on-highway fell 9%.
- Outside-North-America on-highway sales rose 16%, led by Europe and Japan; defense sales increased 2%. Service parts, support equipment and other sales declined 3%.
- Operating income increased despite lower sales, partly because 2015 included $80.0 million of trade-name impairment, $14.0 million of environmental remediation expense and $1.3 million of long-lived-asset impairment. Gross margin remained 47%.
- Net income improved, while adjusted EBITDA declined. The company attributed the decline in adjusted EBITDA primarily to lower sales and incentive compensation effects; non-GAAP measures include company-defined adjustments.
- In September 2016, Allison issued $1.0 billion of 5.0% notes and used the proceeds with cash on hand to repay $1.2 billion of term-loan principal, extending the term-loan maturity to 2022 and revolver maturity to 2021.
Outlook, commentary, risks and unusual items
- Management stated that operating cash flow, cash on hand and available revolver capacity were expected to cover cash requirements for the next 12 months. The filing provides no specific quantitative revenue or earnings guidance.
- Management described demand as tempered in North American on-highway markets and cited low energy and commodity prices as pressures on off-highway demand. Hybrid-transit sales faced competition from engine improvements and alternative technologies.
- Concentration and cyclicality are significant risks: the top five customers accounted for approximately 52% of sales; Daimler alone accounted for 21%. Demand depends on cyclical commercial-vehicle, energy, mining and construction markets. Fully automatic transmission adoption outside North America remained below 5% of vehicles in relevant markets.
- Manufacturing is concentrated in Indianapolis, which produces approximately 90% of transmissions. A disruption there could materially affect production. The UAW agreement covering represented U.S. employees was due to expire in November 2017.
- Other disclosed risks include substantial indebtedness and variable-rate exposure, commodity and foreign-exchange volatility, supplier concentration, product defects/warranty claims, defense-spending reductions, and competition from OEMs’ in-house production and alternative transmission technologies.
- Allison assumed responsibility for long-term monitoring and maintenance of historical Indianapolis environmental remediation under an EPA order. It recorded an estimated $14.0 million liability and provided a $14.9 million letter of credit as financial assurance. The company considered existing litigation unlikely to have a material adverse effect.
- On February 3, 2017, after year-end, the company agreed to repurchase 10.5 million shares from related party ValueAct Capital for approximately $363.1 million, funded with cash and revolver borrowings; the shares were retired. The company said it remained covenant-compliant after the transaction.
- Allison declared dividends of $0.15 per share each quarter in 2016 and repurchased $256.2 million of stock during the year. It authorized a further $1.0 billion repurchase program in November 2016, subject to market conditions, corporate needs and debt restrictions.
Most important facts for investors to verify
- Whether commercial-vehicle demand, especially North American on-highway and energy-related off-highway demand, stabilizes or recovers.
- Customer concentration, current OEM supply-agreement terms, and the extent of any customer shift to internally produced transmissions.
- Post-repurchase liquidity, revolver borrowings, leverage and compliance with debt covenants; reconcile the reported gross debt with the net balance-sheet carrying amount.
- Whether margins and cash generation can be sustained despite lower sales, and how the company’s non-GAAP adjustments affect comparisons.
- Exposure to product warranty/field-action costs, environmental remediation estimates and pension/OPEB assumptions.
- Progress on the November 2017 UAW agreement and the company’s ability to maintain operations at its Indianapolis manufacturing base.
Controls and audit: Management and PricewaterhouseCoopers reported effective internal control over financial reporting as of December 31, 2016; the auditor issued an unqualified opinion on the financial statements.