Allison Transmission Holdings, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; filed July 25, 2014. Dollar amounts are in millions unless stated otherwise. Allison designs and manufactures fully automatic commercial and defense transmissions and related products and services.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $536.1 | $512.1 | $1,029.7 | $969.5 |
| Gross profit / margin | $238.5 / 44.5% | $226.1 / 44.2% | $461.0 / 44.8% | $424.4 / 43.8% |
| Operating income / margin | $132.2 / 24.7% | $117.7 / 23.0% | $247.0 / 24.0% | $199.1 / 20.5% |
| Net income / diluted EPS | $57.2 / $0.31 | $50.5 / $0.26 | $109.3 / $0.59 | $78.0 / $0.41 |
- Six-month Adjusted EBITDA was $351.9, up from $312.3; Adjusted EBITDA margin was 34.2%, versus 32.2%. These are non-GAAP measures.
- Cash from operations for the first six months was $242.0, versus $184.4. Investing activities used $24.7, including $22.7 for long-lived assets. Financing activities used $273.1, including $249.8 for share repurchases and $43.4 in dividends.
- Cash and cash equivalents were $126.7 at June 30, down from $184.7 at year-end 2013. The company reported $453.0 of unused revolver availability, net of letters of credit; no revolver borrowings were outstanding at quarter-end.
- Total debt was $2,669.4, including current maturities; long-term debt less current portion was $2,651.5. The total leverage ratio was 3.82x and senior secured leverage ratio was 3.11x. The company reported compliance with debt covenants.
- Current assets were $647.5 and current liabilities $378.3. Management said cash, operating cash flow and borrowing capacity should be sufficient for requirements over the next 12 months.
Changes versus comparable periods
- Q2 sales grew 4.7% year over year; first-half sales grew 6.2%. First-half net income increased 40.1%, supported by higher sales, improved gross margin and lower operating expenses as a share of sales.
- Q2 demand was stronger in North American on-highway (+13%), North American off-highway (+188%) and service parts/support equipment/other (+16%). Defense sales fell 16%; outside-North-America on-highway sales fell 17% and off-highway sales fell 33%.
- For the first half, North American on-highway sales rose 18%, while defense sales declined 28%. Management cited weakness in Europe and South America and lower energy-sector demand outside North America.
- Interest expense increased year over year in both the quarter and first half, chiefly because of less favorable mark-to-market adjustments on interest-rate derivatives, partly offset by lower debt-related costs.
Outlook, commentary and risks
- Management expected second-half 2014 sales to increase year over year, principally on improved North American on-highway and off-highway demand, partly offset by weakness outside North America and previously anticipated defense reductions. No quantified full-year guidance was provided in the supplied filing text.
- During Q2 the company recognized approximately $15.8 of previously deferred U.S. government transmission sales after shipment at the government’s request.
- In the second quarter, the company amended/refinanced its Term B-2 loan; the reported rate was approximately 2.91%. Term B-3 debt was approximately 3.75%, and the weighted average Senior Secured Credit Facility rate was approximately 3.59%. Revolver commitments had been increased to $465.0.
- The company repurchased and retired 5.0 million shares in June for approximately $150.0; first-half repurchases totaled $249.8. The repurchases occurred alongside secondary offerings by Sponsor-affiliated funds, whose ownership fell to approximately 3% by quarter-end. Sponsors or their nominees retained the ability to designate a board majority, creating potential conflicts with other shareholders.
- Key risks cited include substantial indebtedness and refinancing/cash-generation needs; cyclical and competitive markets; customer concentration; changes in U.S. defense spending and hybrid-vehicle support; international demand and currency exposure; commodity costs; product defects, warranty claims and labor disruptions. The filing reported ordinary-course litigation and claims, but management did not expect unprovided or uninsured exposure to materially affect the company.
- Interest-rate swaps, foreign-currency forwards and commodity swaps are used as economic hedges, not for speculation. The filing notes possible collateral requirements and derivative-related earnings volatility. Estimated annual earnings sensitivity to a 10% currency movement was about $2; to 10% aluminum and steel price movements, about $1 and $4, respectively.
- The company was assessing the impact of the new revenue-recognition standard, effective for fiscal years beginning after December 15, 2016. Disclosure controls were deemed effective; no material change in internal control was reported.
Investor verification points
- Verify whether second-half demand improved as projected, especially in North American end markets, and whether weakness in overseas markets and defense persisted.
- Track operating cash conversion, working-capital movements, capital spending and cash remaining after dividends and repurchases.
- Review debt maturities, interest-rate exposure, leverage covenant terms and any collateral obligations under derivative contracts.
- Assess the sustainability of margin and earnings gains, including the effects of derivative mark-to-market changes, tax items and lower R&D spending.
- Monitor customer concentration, defense-related deferred revenue, warranty liabilities, commodity pass-through arrangements and Sponsor influence over governance.