Allison Transmission Holdings, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Allison designs and manufactures fully automatic transmissions and related products for commercial, defense, off-highway, and transit applications. Comparative figures are for Q1 2012 unless otherwise noted. Dollar amounts are in millions.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $457.4 | $601.9 | Down 24.0% |
| Gross profit / margin | $198.3 / 43.4% | $283.8 / 47.2% | Margin down 3.8 percentage points |
| Operating income / margin | $81.4 / 17.8% | $154.7 / 25.7% | Down 47.4% |
| Net income / margin | $27.5 / 6.0% | $58.0 / 9.6% | Down 52.6% |
| Diluted EPS | $0.15 | $0.31 | Down $0.16 |
| Operating cash flow | $54.7 | $139.6 | Down $84.9 |
| Capital expenditures | $12.6 | $35.7 | Down $23.1 |
Non-GAAP Adjusted EBITDA was $140.7, or 30.8% of sales, versus $223.0, or 37.0%; Adjusted net income was $79.5 versus $144.1. These are company-defined non-GAAP measures and should not be treated as substitutes for GAAP results.
Balance sheet and liquidity
- At March 31, cash and cash equivalents were $120.9, up from $80.2 at December 31, 2012. Current assets were $578.7 and current liabilities $396.8.
- Total debt was $2,814.9, including $23.5 current maturities; long-term debt net of current maturities was $2,791.4. Debt was mainly variable-rate term loans, plus $471.3 of 7.125% senior notes due 2019.
- Revolver borrowings were zero at quarter-end; $375.4 was available, net of letters of credit. The company reported a 3.57x senior secured leverage ratio against a 5.50x maximum and stated it complied with its debt covenants.
- Cash from operations less additions of long-lived assets was $42.1. The company reported $48.1 of Adjusted free cash flow, a non-GAAP measure that includes specified adjustments.
- Cash increased by $40.7 during the quarter. Financing cash flow was $2.1, including $11.1 in dividend payments and $15.8 from stock-option exercises.
Changes and management commentary
- Sales declined across all reported end markets. North America Off-Highway fell 89% to $8, principally because of weak hydraulic-fracturing demand amid low natural-gas prices. Outside North America Off-Highway fell 34%, reflecting mining weakness.
- North America On-Highway sales declined 14%; Defense declined 26%, reflecting lower U.S. defense spending; North America hybrid-transit sales declined 11%, citing municipal spending constraints and competing technologies. Global On-Highway sales declined 12% overall.
- Gross profit fell 30.1%, primarily due to lower sales and $2.0 of unfavorable material costs; manufacturing improvement and product price increases partly offset the decline. SG&A decreased 13.1%, while R&D increased 3.9%, including $6.0 of additional technology-related license expense.
- Net interest expense declined to $33.9 from $40.7, helped by debt repayments and more favorable interest-rate derivative mark-to-market adjustments. Other expense was $3.1 versus $30.8, largely because Q1 2012 included debt-redemption costs, IPO expenses, and a sponsor-services termination payment.
- The effective tax rate rose to 38.1% from 30.3%; management attributed the change mainly to greater discrete tax activity in Q1 2012. Q1 2013 included a $2.5 impairment of a technology-related investment, which was written down to zero.
- In February 2013, the company refinanced the Term B-2 loan at a lower applicable margin and extended $411.4 of debt maturity from 2014 to 2017. Management expected cash, operating cash generation, and available borrowing capacity to cover requirements for the next 12 months.
Outlook, risks, and other notable matters
- Management described end-market visibility as limited and uncertainty as heightened. Its 2013 outlook assumed continued cyclically low North American hydraulic-fracturing demand, defense spending nearer longer-term levels, and constrained North American hybrid-transit demand. It expected year-over-year declines in Global Off-Highway, Defense, and North American Hybrid-Propulsion Systems for Transit Bus, partly offset by Global On-Highway growth. The filing provides no clear numerical full-year sales or earnings guidance.
- Key risks include substantial indebtedness and variable interest rates; cyclical and competitive end markets; dependence on major customers; changes in defense spending or hybrid-vehicle subsidies; product defects and warranty costs; foreign-exchange and commodity-price exposure; and labor disruptions.
- Interest-rate swaps had $1,375.0 notional value and a $43.1 fair-value liability. The company had posted $3.4 cash collateral and $20.0 in letters of credit; additional collateral could be required depending on credit ratings and interest-rate movements.
- Ordinary-course legal claims include commercial, product-liability, personal-injury, and workers’ compensation matters. Management said liabilities beyond amounts provided or insured were not expected to materially adversely affect the company.
- Sponsors affiliated with Carlyle and Onex owned approximately 81.3% of equity and could control significant corporate matters. A proposed sponsor secondary offering was withdrawn on April 17, 2013 because of market conditions. On April 15, the board declared a $0.12 quarterly dividend, up from $0.06.
Important facts for investors to verify
- Whether the sharp sales decline, especially in North American off-highway and defense markets, continued beyond Q1 and how much of the decline was volume versus mix.
- Whether operating cash flow and working-capital needs recover, and whether the company maintains sufficient liquidity as debt service continues.
- Debt maturities, variable-rate exposure, covenant headroom, swap collateral requirements, and the effect of future refinancing or interest-rate changes.
- Whether the $0.12 quarterly dividend is sustainable given earnings, free cash flow, leverage, and debt-agreement restrictions.
- Potential effects of sponsor share sales, including ownership changes, governance requirements, and pressure on the public share price.