Allison Transmission Holdings, Inc. — Q3 2015 Form 10-Q
Business context and period. Allison designs and manufactures commercial and defense fully automatic transmissions. This filing covers the quarter and nine months ended September 30, 2015; comparisons are with the same 2014 periods. Amounts are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $493.0 | $553.3 | $1,507.6 | $1,583.0 |
| Gross profit | $236.1 | $259.3 | $711.6 | $720.3 |
| Gross margin | 48% | 47% | 47% | 46% |
| Operating income | $111.9 | $147.3 | $391.7 | $394.3 |
| Net income | $46.5 | $68.8 | $169.3 | $178.1 |
| Diluted EPS | $0.27 | $0.38 | $0.95 | $0.97 |
| Adjusted EBITDA (non-GAAP) | $174.1 | $201.8 | $549.7 | $553.7 |
| Adjusted EBITDA margin (non-GAAP) | 35.3% | 36.5% | 36.5% | 35.0% |
- Q3 sales fell 11%; nine-month sales fell 5%. Q3 gross profit declined 9%, while nine-month gross profit declined 1%.
- Operating cash flow was $390.0 for the first nine months, versus $416.0 a year earlier. Capital expenditures were $30.1; adjusted free cash flow, a non-GAAP measure, was $368.3 versus $394.5.
- At September 30, cash and equivalents were $148.4, down from $263.0 at December 31, 2014. Current assets were $641.8 and current liabilities $316.0.
- Total debt was $2,409.0, compared with $2,520.5 at year-end 2014. The company had $455.3 available on its revolving facility, net of letters of credit, and reported a 3.08x total leverage ratio and compliance with its covenants.
Material changes and drivers
- Q3 sales grew 2% in North America On-Highway, but declined in North America Off-Highway (60%), Outside North America Off-Highway (78%), hybrid transit bus systems (48%), and service parts/support/other (14%). Management cited lower energy-sector and hydraulic-fracturing demand, weaker service-parts demand, and reduced hybrid demand as alternatives and engine emissions improvements affected purchases.
- Nine-month North America On-Highway sales increased 10%, partly offsetting declines in service parts, off-highway markets, defense, and hybrid transit systems.
- Q3 operating income included a $14.0 environmental remediation charge. The quarter also included $10.8 of net warranty-liability adjustments related to specific field action programs.
- Nine-month results included $25.3 of premiums and expenses from tendering and redeeming the 7.125% Senior Notes. Allison issued $470.0 of Term B-3 debt and repurchased/redeemed the remaining $471.3 of notes. Interest expense for the quarter rose to $33.8 from $29.6, in part due to unfavorable interest-rate-derivative valuation changes and the incremental term loan.
- Financing cash outflows were $485.2 for the nine months, including $296.3 of share repurchases, $80.0 of dividends, and debt repayments. The board’s buyback authorization was up to $500.0 through December 31, 2016.
Outlook, risks, and contingencies
- Management expected full-year 2015 sales to decline year over year and Q4 sales to be lower than Q4 2014, citing uncertainty and weak visibility in global Off-Highway and Service Parts, Support Equipment and Other markets, lower Outside North America On-Highway demand, previously reduced U.S. defense spending, and lower North America hybrid transit demand. Q4 weakness was expected particularly in global Off-Highway and Defense. No specific full-year sales or earnings target is provided in the supplied filing text.
- The company said operating cash flow, cash balances, and borrowing capacity should be sufficient for cash requirements over the next 12 months. Liquidity needs remain significant because of debt service and capital allocation.
- After the EPA determined GM’s remediation work at the Indianapolis facilities was complete, Allison assumed ongoing operation, monitoring, and maintenance responsibilities. It recorded an estimated $14.0 of undiscounted costs over 30 years; required EPA financial assurance was expected to be determined by early 2016.
- Warranty estimates may change as field information develops. Ordinary-course legal claims include commercial, product liability, personal injury, and workers’ compensation matters; management did not expect any unprovided or uninsured exposure to materially affect results or cash flows.
- Key disclosed risks include substantial indebtedness, customer concentration, market and industry weakness, international and currency exposure, product defects and warranty costs, commodity prices, and execution on technology and changing customer needs. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether demand weakness in off-highway, service-parts, hybrid, and defense markets persists, and whether North America On-Highway growth continues.
- Actual Q4 and full-year sales versus management’s qualitative decline outlook; the filing provides no specific numerical guidance.
- Future warranty and field-action costs, including the basis for Q3’s $10.8 net warranty adjustment.
- The final cost, timing, and financial-assurance requirements for the 30-year environmental obligations.
- Debt-service capacity, variable-rate and derivative exposure, and continued compliance with credit-facility covenants, alongside ongoing buybacks and dividends.