Allison Transmission Holdings, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are to December 31, 2011. Amounts are in U.S. dollars, millions unless stated otherwise. The company designs and manufactures fully automatic transmissions and related products for commercial, military, hybrid-transit and aftermarket applications. It completed its IPO on March 20, 2012; existing stockholders sold the shares, so Allison received no IPO proceeds.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Net sales | $601.9 | $517.0 |
| Gross profit / margin | $283.8 / 47.2% | $230.0 / 44.5% |
| Operating income / margin | $154.7 / 25.7% | $98.8 / 19.1% |
| Net income / margin | $58.0 / 9.6% | $36.9 / 7.1% |
| Diluted EPS | $0.31 | $0.20 |
| Cash provided by operating activities | $139.6 | $109.9 |
| Capital expenditures (additions of long-lived assets) | $35.7 | $11.6 |
| Cash and cash equivalents | $192.9 | $314.0 at Dec. 31, 2011 |
| Total debt | $3,174.0 | $3,376.0 at Dec. 31, 2011 |
| Current assets / current liabilities | $648.8 / $451.0 | $702.7 / $449.9 at Dec. 31, 2011 |
Company-defined non-GAAP measures were Adjusted EBITDA of $223.0 million, or 37.0% of sales, and Adjusted free cash flow of $119.9 million. Adjusted net income was $144.1 million. These measures are not substitutes for GAAP results; the filing provides reconciliations.
Operating cash flow improved year over year, while investing activities used $35.4 million and financing activities used $217.8 million. The resulting $121.1 million cash decrease principally reflects debt redemptions and payments. The company reported $371.7 million of revolver availability in MD&A, net of letters of credit; the debt note reports $371.1 million.
Material changes versus Q1 2011
- Sales rose 16.4%, driven by commercial on-highway and off-highway products, parts and other products. Gross margin increased 2.7 percentage points and operating margin 6.6 points.
- North America on-highway sales increased 34%; North America off-highway rose 16%; outside North America off-highway rose 39%. Service, parts, support equipment and other sales rose 15%.
- Military sales declined 8%, and North American hybrid-propulsion transit-bus sales declined 10%.
- Interest expense, net fell to $40.7 million from $49.6 million, principally reflecting debt repayments and purchases. Other expense swung to $30.8 million from $5.7 million of other income.
Outlook, risks and unusual items
- Management expected cash from operations, cash on hand and borrowing capacity to meet cash requirements for the next 12 months. It anticipated North American commercial truck and bus production growth, but said production was projected to remain below the 1998–2008 average through 2014.
- Management cautioned that Q1 on-highway growth would slow for the remainder of 2012; expected hybrid-transit and military sales to decline for the full year; and said strong Q1 off-highway demand might not persist, citing customer forecast adjustments related to natural-gas prices.
- Q1 other expense included a $16.0 million one-time payment to terminate the Sponsors’ services agreement, $13.5 million related to redeeming $200.0 million of 11.0% notes, and $5.7 million of IPO costs. The 11.0% note balance was $109.8 million at quarter-end; after quarter-end, the company gave notice to redeem the remainder on May 1, 2012.
- Debt is substantial and includes variable-rate borrowings. The company extended approximately $801.1 million of term debt to 2017; it reported a 3.13x senior secured leverage ratio against a 5.50x covenant limit and compliance with debt covenants. Derivative collateral requirements can change with interest rates and credit ratings.
- Other exposures include economic and commercial-vehicle production cycles, customer concentration, competition, product defects and warranty claims, international and currency risks, and commodity-price movements. The company said ordinary-course legal matters were not expected to have a material adverse effect; it reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Confirm revolver availability: $371.7 million in MD&A versus $371.1 million in the debt note.
- Assess the sustainability of sales growth and margins given management’s cautions on on-highway growth, transit hybrids, military demand and energy-related off-highway demand.
- Review debt repayment and refinancing needs, variable interest-rate exposure, covenant headroom and potential derivative collateral calls.
- Separate recurring operating performance from the IPO, Sponsor-termination and debt-redemption charges, and review the assumptions behind company-defined non-GAAP measures.
- Monitor the full valuation allowance on net deferred tax assets; management said continued operating improvement could permit reversal as early as Q2 2012, but no reversal had been recorded at quarter-end.