Allison Transmission Holdings, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. Allison designs and manufactures commercial and defense fully automatic transmissions. Approximately 80% of 2014 revenue came from North America.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $503.6 million | $493.6 million | +2% |
| Gross profit / margin | $239.2 million / 47% | $222.5 million / 45% | Profit +8% |
| Operating income / margin | $142.3 million / 28% | $114.8 million / 23% | +24% |
| Net income / margin | $68.4 million / 14% | $52.1 million / 10% | +31% |
| Diluted EPS | $0.38 | $0.28 | Up $0.10 |
| Operating cash flow | $80.1 million | $98.6 million | Down $18.5 million |
| Adjusted EBITDA / margin | $190.1 million / 37.7% | $165.8 million / 33.6% | Up from prior year |
Gross-profit improvement reflected product price increases, higher sales, and favorable manufacturing performance and material costs. SG&A declined 12% to $73.4 million; R&D declined 9% to $22.2 million. Interest expense, net, rose to $36.9 million from $35.1 million, principally due to unfavorable interest-rate-derivative mark-to-market adjustments. The effective tax rate was 36.8%, versus 34.3%, with the prior-year rate benefiting from discrete tax items.
Cash, liquidity and debt
- Cash and equivalents were $265.1 million at March 31, 2015, versus $263.0 million at year-end 2014. Q1 cash increased $2.1 million after $80.1 million operating inflow, $1.2 million investing outflow and $85.6 million financing outflow.
- Operating cash flow fell year over year, principally reflecting higher inventory and lower accounts payable and other liabilities. Capital additions were $1.3 million, compared with $11.1 million in Q1 2014.
- Long-term debt carrying value was $2.469 billion, including $236.2 million of Term B-2 loans, $1.761 billion of Term B-3 loans and $471.3 million of 7.125% senior notes. Cash less debt was approximately $2.204 billion. The company reported a 2.89x total leverage ratio and compliance with credit-facility covenants.
- Revolver availability was $455.1 million, net of letters of credit, with no revolving borrowings outstanding. The company said cash, operating cash flow and borrowing capacity should meet requirements for the next 12 months.
- Q1 debt principal payments were $51.7 million. The company repurchased approximately $38.9 million of stock and declared dividends of $0.15 per share.
Material changes and business drivers
Sales gains in North America On-Highway (+15%) and North America Off-Highway (+83%) were partly offset by declines in Defense (-26%), North America hybrid transit systems (-25%), Outside North America On-Highway (-11%), Outside North America Off-Highway (-24%), and Service Parts, Support Equipment and Other (-8%). Management attributed declines to lower U.S. defense spending, weaker demand in China and mining, lower North American service-parts demand, and competition from non-hybrid alternatives.
Q1 included a $1.3 million impairment-related loss associated with H3000 and H4000 hybrid-propulsion systems. Other income included a $2.2 million foreign-exchange gain on intercompany financing related to the India facility. Comprehensive income was $56.5 million, versus $54.2 million, as other comprehensive losses increased.
Outlook, risks and contingencies
- Management expected full-year 2015 net sales to decrease year over year, citing uncertainty and limited visibility in global Off-Highway and Service Parts, Support Equipment and Other markets. It also expected Q2 sales below Q2 2014; higher global On-Highway demand was expected to be more than offset by lower demand in other end markets. No numeric sales guidance was provided.
- Risks highlighted include macroeconomic and commercial-vehicle production trends, substantial indebtedness and refinancing needs, customer concentration, international and foreign-exchange exposure, product defects and warranty costs, commodity prices, and labor disruptions.
- Interest-rate swaps had an aggregate $800 million notional amount and a $22.7 million fair-value liability. Commodity and currency hedges were used for exposure management, not speculation. Legal claims and proceedings arise in the ordinary course; management did not expect liabilities beyond recorded amounts or insurance to have a material adverse effect.
- Subsequent to quarter-end, ATI arranged $470 million of additional Term B-3 borrowing and used proceeds to purchase tendered 7.125% notes at $1,042 per $1,000 principal plus accrued interest. On April 15, it announced plans to redeem the remaining $50.4 million principal on May 15 at 103.563% plus accrued interest.
Most important facts for investors to verify
- Whether the expected full-year sales decline and weaker Q2 outlook materialized, particularly across Off-Highway and aftermarket markets.
- Whether stronger reported margins and earnings translated into sustained operating cash flow, given Q1’s year-over-year cash-flow decline and inventory increase.
- The completed refinancing and note redemption terms, resulting debt balance, interest expense and future debt-repayment capacity.
- Performance and demand for hybrid-propulsion products following the H3000/H4000 impairment and lower transit-hybrid sales.
- Exposure to variable interest rates, foreign currencies and commodities, along with warranty estimates and the outcome of ordinary-course claims.