Allison Transmission Holdings, Inc. — Q1 2021 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2021, compared with Q1 2020. Allison designs and manufactures commercial, off-highway and defense vehicle propulsion systems, including automatic transmissions and electric systems. It operates as one reportable segment.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $588 million | $637 million |
| Gross profit / margin | $291 million / 49% | $326 million / 51% |
| Operating income / margin | $180 million / 31% | $215 million / 33% |
| Net income / net margin | $120 million / 20% | $139 million / 22% |
| Diluted EPS | $1.07 | $1.20 |
| Operating cash flow | $128 million | $148 million |
| Capital expenditures | $21 million | $21 million |
| Adjusted free cash flow (non-GAAP) | $107 million | $127 million |
| Adjusted EBITDA / margin (non-GAAP) | $222 million / 37.8% | $257 million / 40.3% |
Cash and cash equivalents were $295 million at March 31, 2021, down from $310 million at year-end 2020. Total current assets were $820 million and current liabilities $418 million. Debt was $2.536 billion gross ($2.506 billion reported net of current maturities and financing costs); approximate gross debt less cash was $2.241 billion. The $636 million term loan is due 2026; senior notes total $1.9 billion and mature in 2027, 2029 and 2031. No revolver borrowings were outstanding; $645 million was available net of letters of credit. The company reported a 0.49x first-lien net leverage ratio and compliance with debt covenants.
Changes versus Q1 2020
- Sales fell 8%. Lower North America on-highway demand, service parts, and off-highway demand more than offset growth in outside-North-America on-highway and defense sales.
- Gross profit declined 11%, and gross margin fell about 170 basis points. Lower volume, unfavorable material costs and higher incentive compensation were partly offset by $10 million of price increases.
- Operating income fell 16%; net income declined 14%. Net interest expense improved 12%, principally reflecting lower rates following the 2020 debt refinancing.
- Operating cash flow declined $20 million, attributed mainly to higher working-capital needs and lower gross profit, partly offset by lower cash incentive compensation and taxes. Financing cash outflow was lower, chiefly because share repurchases fell by $84 million.
- The company repurchased $96 million of shares and paid $21 million in dividends during the quarter. It repurchased 2.39 million shares at an average $40.36 per share; $731 million remained authorized.
Outlook, commentary and risks
- Management expected 2021 net sales to increase versus 2020, principally on recovery in global on-highway, service parts/support equipment and other, and North America off-highway markets, plus product price increases. No quantified full-year sales or earnings guidance was provided.
- COVID-19 continued to create demand, market and supply-chain volatility, though operations and deliveries had continued with minimal disruption. Management highlighted the global semiconductor shortage and warned that a prolonged shortage could materially affect the business.
- Other disclosed risks include substantial indebtedness, cyclical end markets, customer concentration, competition, raw-material costs, product defects and warranty exposure, foreign exchange, and uncertainty in defense spending and international markets.
- Interest-rate swaps covered $750 million of notional exposure. Management estimated that a 10% currency move in specified currencies could change annual after-tax earnings by about $6 million; 10% aluminum and steel price changes could affect annual earnings by about $4 million and $5 million, respectively, before considering certain customer cost-sharing arrangements.
- The company recorded a $3 million environmental remediation liability for Indianapolis facilities. It said ordinary-course claims and proceedings were not expected to materially adversely affect financial position, results or cash flows. No material changes to the previously reported risk factors were identified.
- Management believed cash, operating cash generation and available revolver capacity would be sufficient for requirements over the next 12 months. Disclosure controls were considered effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the expected 2021 sales recovery materialized, particularly amid COVID-related uncertainty and semiconductor constraints.
- Whether improving demand and pricing can offset input-cost inflation and restore gross and Adjusted EBITDA margins.
- Working-capital trends and cash conversion, given lower operating cash flow and increased receivables and inventories during the quarter.
- Debt-service capacity and covenant headroom, including the variable-rate term loan, refinancing needs and availability of the revolver.
- Continuation of share repurchases and dividends in light of cash needs, leverage and the remaining repurchase authorization.