Allison Transmission Holdings, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. The company designs and manufactures commercial and defense automatic transmissions and related products. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $466.3 | $493.5 | $1,435.8 | $1,654.8 |
| Gross profit / margin | $206.1 / 44.2% | $224.4 / 45.5% | $630.5 / 43.9% | $760.1 / 45.9% |
| Operating income / margin | $111.2 / 23.8% | $91.8 / 18.6% | $310.3 / 21.6% | $366.1 / 22.1% |
| Net income | $44.5 | $32.2 | $122.5 | $503.0 |
| Diluted EPS | $0.24 | $0.17 | $0.65 | $2.70 |
| Interest expense, net | $37.3 | $40.8 | $104.5 | $115.6 |
- Q3 Adjusted EBITDA was $161.6 versus $159.5; Adjusted EBITDA margin was 34.7% versus 32.3%. Q3 Adjusted net income was $101.3 versus $99.5.
- Nine-month Adjusted EBITDA was $473.9 versus $573.2; Adjusted EBITDA excluding technology-related license expenses was $479.9 versus $585.2. These are non-GAAP measures as defined by the company.
- Nine-month net income comparison is distorted by a $307.9 tax benefit in 2012, principally from releasing the domestic deferred-tax valuation allowance. 2013 recorded $76.1 of tax expense.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $315.4, down from $385.4. Investing used $45.8, including $41.2 for long-lived assets; financing used $207.7.
- Cash was $152.3 at September 30, 2013, versus $80.2 at December 31, 2012. The company had $386.4 available on its revolving facility, net of letters of credit, and no revolver balance outstanding at quarter-end.
- Total debt was $2,731.2, including $11.4 current and $2,719.8 long-term, versus $2,820.8 at year-end 2012. The company reported a 3.48x senior secured leverage ratio against a 5.50x covenant maximum and a 4.26x total leverage ratio; it was in compliance with covenants.
- Management said cash, operating cash flow and revolver capacity were expected to meet requirements for the next 12 months. Dividends paid were $55.2 and common-stock repurchases were $99.5 during the first nine months.
Material changes and management commentary
- Q3 sales declined 5.5% year over year; nine-month sales declined 13.2%. Q3 North America On-Highway sales rose 12% and Service Parts, Support Equipment and Other rose 10%, while Defense fell 30%, North America Hybrid-Propulsion Systems fell 50%, and North America Off-Highway fell 59%.
- Management attributed weakness to lower U.S. defense spending, softer off-highway demand—especially natural-gas fracturing and mining—and weaker or shifted transit-hybrid orders. Q3 operating income increased as SG&A and R&D costs fell, including lower amortization and the absence of prior-year technology-license spending.
- For Q4 2013, management expected sales to stabilize year over year and anticipated improving trends, supported by global On-Highway and Service Parts, Support Equipment and Other, with declines abating in North America Off-Highway and Transit Bus Hybrid. No numerical guidance was provided.
- In August, the company refinanced $1,139.3 of term debt at reduced margins. It also completed a sponsor secondary offering; the company received no proceeds and repurchased and retired 4.7 million shares for $99.5.
Risks, contingencies and unusual items
- Q3 warranty analysis reduced the DPIM extended-coverage liability by $8.2, offset by a $5.8 reduction in the GM receivable, producing a net $2.4 favorable income-statement adjustment. DPIM liability was $44.6 and the related GM receivable was $18.2 at quarter-end; estimates remain subject to claims experience.
- Substantial debt exposes the company to interest-rate risk. Variable-rate debt is partly hedged with swaps; certain swaps may require additional collateral. The company also identifies foreign-exchange and aluminum and steel price exposure.
- Key business risks include cyclical commercial-vehicle markets, defense spending, customer concentration, competition, product defects and warranty costs, international-market adoption, and labor disruptions. Sponsors owned approximately 69.6% of equity and could control or influence significant corporate actions.
- Ordinary-course litigation and claims include commercial, product liability, personal injury and workers’ compensation matters. Management did not expect amounts beyond provisions or insurance to materially affect results or cash flows. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether Q4 sales stabilization and the expected end-market recovery materialized, particularly in defense, off-highway and transit hybrids.
- Underlying profitability and cash generation, considering weaker year-to-date sales and margins, non-GAAP adjustments, and the unusually large 2012 tax benefit.
- Debt repayment capacity, leverage covenant headroom, variable-rate exposure and potential swap collateral requirements.
- Future DPIM warranty claims and GM reimbursements, and the assumptions supporting the liability adjustment.
- Effects of sponsor control, customer concentration and the sponsor-related share offering and repurchase.