Allison Transmission Holdings, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Allison designs and manufactures fully automatic transmissions and related products for commercial, defense, and hybrid-transit applications.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $553.3 million | $466.3 million | $1,583.0 million | $1,435.8 million |
| Gross profit / margin | $259.3 million / 46.9% | $206.1 million / 44.2% | $720.3 million / 45.5% | $630.5 million / 43.9% |
| Operating income / margin | $147.3 million / 26.7% | $111.2 million / 23.8% | $394.3 million / 24.9% | $310.3 million / 21.6% |
| Net income / diluted EPS | $68.8 million / $0.38 | $44.5 million / $0.24 | $178.1 million / $0.97 | $122.5 million / $0.65 |
| Adjusted EBITDA / margin | $201.8 million / 36.5% | $161.6 million / 34.7% | $553.7 million / 35.0% | $473.9 million / 33.0% |
Q3 sales rose 18.7%; net income increased 54.6%. For the first nine months, sales rose 10.3% and net income rose 45.4%. Management attributed growth principally to higher North American on-highway demand, service parts and support equipment, and off-highway demand, partly offset by lower defense sales. Q3 net sales by end market included North America on-highway $256 million (+21%), North America off-highway $30 million (+233%), defense $35 million (−33%), and parts, support equipment and other $118 million (+28%).
Cash flow and liquidity: Nine-month operating cash flow was $416.0 million, versus $315.4 million; investing cash outflow was $41.4 million, and financing cash outflow was $357.6 million. Cash increased to $208.1 million from $184.7 million at year-end 2013. Q3 operating cash flow was $174.0 million versus $131.0 million. The company reported $455.1 million available on its revolving facility, with no revolving loans outstanding. Management expected operating cash flow, cash, and borrowing capacity to cover requirements for the next 12 months.
Debt: Total debt was $2,589.9 million at September 30, 2014, down from $2,678.3 million at December 31, 2013. Debt comprised variable-rate term loans and 7.125% senior notes due 2019. The company made $88.4 million of debt payments during the first nine months, including a $75 million Term B-2 prepayment in Q3. Reported total leverage was 3.37x; the company stated it was in compliance with credit-facility covenants.
Material changes, outlook, and risks
- Margins improved year over year, supported by higher sales and product price increases. Q3 interest expense fell to $29.3 million from $37.5 million, principally reflecting the maturity of interest-rate swaps and debt repayments.
- Q3 demand was particularly strong in North American off-highway, driven by hydraulic fracturing, and transit hybrid sales rose partly because of order timing. Defense sales declined with lower U.S. defense spending. For the first nine months, Outside North America on-highway and off-highway sales also weakened.
- Management expected Q4 2014 sales to increase year over year, driven mainly by North America on-highway and off-highway markets, partly offset by lower Outside North America on-highway and North America hybrid-transit demand. No numerical guidance was provided.
- Unusual Q3 items included a $2.0 million technology-investment impairment loss and a $2.0 million gain from negotiating a commercial agreement. Nine-month financing cash use included $249.8 million of stock repurchases and $64.7 million of dividends. The company completed four secondary offerings of sponsor-held shares; sponsors no longer held company shares at quarter-end.
- Key risks cited include substantial indebtedness, cyclical commercial-vehicle markets, customer concentration, changes in U.S. defense spending and hybrid-vehicle support, product defects and warranty costs, international exposure, and labor disruptions. The filing reported no material change in previously disclosed risk factors. Ordinary-course legal claims were not expected to have a material adverse effect.
- Interest-rate, foreign-exchange, and commodity exposures remain relevant. Derivatives were used as economic hedges, not for speculation. Management estimated a 10% move in aluminum and steel prices would change annual earnings by approximately $1 million and $4 million, respectively, after partial hedging effects.
Most important facts for investors to verify
- Whether Q4 sales growth materialized, particularly given demand volatility and order-timing effects in hybrid transit.
- Whether improved gross and operating margins persist as volumes, product mix, pricing, and manufacturing costs change.
- Debt reduction, leverage, variable-rate exposure, covenant compliance, and the availability of the revolving facility.
- Cash conversion and working-capital trends; higher accounts receivable used cash as sales increased.
- Warranty claims, defense-market exposure, customer concentration, and the effect of commodity and foreign-exchange movements.
- Management’s non-GAAP Adjusted EBITDA and Adjusted free cash flow reconciliations, and the impact of exclusions and unusual items.