Allison Transmission Holdings, Inc. — Q1 2020 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2020. Allison designs and manufactures vehicle propulsion systems, including commercial and defense transmissions and electric systems. Results are compared with Q1 2019; the company cautions that the quarter’s results are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Net sales | $637 million | $675 million; down 6% |
| Gross profit / margin | $326 million / 51% | $359 million / 53% |
| Operating income / margin | $215 million / 33% | $244 million / 36% |
| Net income / net margin | $139 million / 22%; diluted EPS $1.20 | $167 million / 25%; diluted EPS $1.32 |
| Adjusted EBITDA / margin | $257 million / 40.3% | $290 million / 43.0% |
| Operating cash flow | $148 million | $194 million |
| Capital expenditures / adjusted free cash flow | $21 million / $127 million | $19 million / $175 million |
| Cash and cash equivalents | $114 million | $192 million at December 31, 2019 |
| Long-term debt, net of financing costs | $2.512 billion; gross debt $2.543 billion | $2.512 billion net at December 31, 2019 |
Gross margin declined 200 basis points, primarily due to lower sales and unfavorable mix, partly offset by lower material costs. SG&A decreased to $75 million from $84 million; R&D increased to $36 million from $31 million. Interest expense declined to $33 million from $36 million. The effective tax rate was 23%, versus 21%.
Cash used in financing was $203 million, including $180 million of share repurchases and $20 million of dividends. Cash fell by $78 million during the quarter. The company had no revolving-credit borrowings at March 31, and reported $595 million of availability net of letters of credit; its first-lien net leverage ratio was 0.50x and it was in compliance with debt covenants. The filing states that cash, operating cash flow and borrowing capacity are expected to meet requirements for the next 12 months, while noting uncertainty from COVID-19.
Material changes and operating drivers
- North America on-highway sales declined 7%; outside North America on-highway declined 23%; North America off-highway declined 43%.
- Defense sales increased 25%, driven by tracked-vehicle demand. Service parts, support equipment and other sales increased 5%, partly reflecting Walker Die Casting acquisition volumes.
- Net income fell 17% and adjusted EBITDA fell 11%. Weighted-average diluted shares declined to 116 million from 127 million, but diluted EPS also decreased.
- Accumulated other comprehensive loss widened to $81 million from $52 million at year-end, principally reflecting losses on available-for-sale securities and interest-rate swaps.
Outlook, risks and contingencies
- COVID-19: The company said Q1 effects were not materially adverse, but expected a material negative impact on Q2 2020 results and potentially beyond. Production slowdowns or suspensions affected facilities in Hungary, India, Indianapolis and Tennessee; supplier interruptions and reduced customer demand could cause further disruption. The company reported furloughs, a hiring freeze, reduced overtime, and review of spending and investment timing.
- No quantitative full-year guidance is provided. Management said the duration and financial effects of the pandemic could not be reasonably estimated and could materially affect sales, operations, supply chain, financial condition and cash flows.
- Key risks include substantial indebtedness, cyclical commercial-vehicle markets, customer and supplier financial distress, supply concentration and component shortages, commodity-price exposure, international operations, product liability and warranty claims, and uncertainty around demand and production recovery.
- Ordinary-course legal matters are disclosed; management did not expect liabilities beyond amounts provided or insured to have a material adverse effect. The company reported a $3 million undiscounted environmental remediation liability for future monitoring and maintenance over 30 years.
- The company repurchased approximately 5.1 million shares for $180 million during the quarter, leaving about $872 million authorized. Repurchases are discretionary and may be modified, suspended or discontinued.
Important facts for investors to verify
- How materially COVID-19 affected Q2 and subsequent-period sales, production, suppliers, cash flow and customer payment behavior.
- Whether operating cash generation and the $595 million revolving-credit availability remain adequate if the downturn persists.
- Debt-service capacity and continued compliance with credit-facility and note covenants.
- Whether the lower gross margin and adjusted EBITDA margin persist, and how end-market mix and cost actions evolve.
- The sustainability of dividends and repurchases given pandemic-related uncertainty and the company’s debt load.