Allison Transmission Holdings, Inc. — Q1 2014 10-Q
Reporting period: Three months ended March 31, 2014; unaudited, compared with Q1 2013. Allison designs and manufactures fully automatic transmissions and related products for commercial, defense, and other vehicle markets.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $493.6 million | $457.4 million | +7.9% |
| Gross profit / margin | $222.5 million / 45.1% | $198.3 million / 43.4% | Margin +1.7 points |
| Operating income / margin | $114.8 million / 23.3% | $81.4 million / 17.8% | Margin +5.5 points |
| Net income | $52.1 million | $27.5 million | +89% |
| Diluted EPS | $0.28 | $0.15 | Increased |
| Operating cash flow | $98.6 million | $54.7 million | Increased |
| Adjusted EBITDA | $165.8 million; 33.6% margin | $140.7 million; 30.8% margin | Non-GAAP measure |
Interest expense, net was $35.1 million, versus $33.9 million. Income tax expense was $27.2 million; the effective tax rate was 34.4%, down from 38.1%, primarily reflecting a prior-period state apportionment benefit and a discrete 2013 tax expense.
Cash, debt, and liquidity
- Cash and equivalents were $159.9 million at March 31, down from $184.7 million at year-end. Operating cash flow of $98.6 million exceeded investing outflows of $15.1 million; financing used $105.7 million, including a $100.0 million share repurchase and $21.7 million of dividends. Net cash declined $24.8 million.
- Total debt carrying value was $2,675.5 million, including $19.5 million current. The company reported a 3.86x total leverage ratio and a 3.14x senior secured leverage ratio, and stated it was in compliance with credit-facility covenants.
- Revolving commitments were increased to $465 million; $453 million was available, net of letters of credit, with no revolver borrowings outstanding. Management expected cash, operating cash generation, and borrowing capacity to meet requirements for the next 12 months.
Changes, outlook, and notable items
- Sales gains were led by North America on-highway (+24%), service parts/support equipment/other (+18%), and North America off-highway (+50%). Defense sales fell 40%; North America hybrid-transit sales fell 23%. Overall net sales rose 8%.
- Management expected Q2 2014 sales to exceed Q2 2013, driven mainly by North America on-highway, North America off-highway, and service parts/support equipment, partly offset by previously anticipated defense declines. No full-year numerical guidance is provided in the filing.
- Improved gross margin reflected higher volumes, favorable material costs, and foreign exchange. Lower SG&A and research and development expenses also supported operating income; interest expense increased modestly.
- In February, the Sponsors sold 28.75 million shares in a secondary offering. Allison received no proceeds and repurchased and retired 3.43 million shares for approximately $100 million. The Sponsors’ ownership fell to about 39% at quarter-end. A further 25 million-share Sponsor offering closed April 25; Sponsors then held about 25.2%.
- After quarter-end, Allison amended its credit facility to refinance approximately $423.5 million of term debt due in 2017, with alternative interest-rate margins described in the filing.
- Key risks include substantial indebtedness, cyclical commercial-vehicle demand, customer concentration, changes in U.S. defense spending and hybrid-vehicle support, competition, product defects/warranty claims, foreign-market adoption, currency and commodity volatility, and labor disruption. The company reported ordinary-course legal claims and said any excess liability was not expected to materially affect its financial condition or results.
Important facts for investors to verify
- Whether the Q2 sales expectation and end-market trends continued beyond the quarter, particularly the recovery in on-highway demand and defense weakness.
- Debt maturities, variable-rate exposure, leverage, covenant terms, and the effect of the April refinancing; assess the adequacy of liquidity against debt service needs.
- Whether the strong operating cash flow is repeatable, given working-capital demands and the quarter’s substantial repurchase and dividend outflows.
- The tax-rate impact of the ownership change and limits on net operating loss utilization; management said it expected to use tax attributes and did not consider a domestic valuation allowance necessary.
- Potential conflicts and influence of the Sponsors, who retained significant ownership and board-designation rights.