Allison Transmission Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results are compared with the corresponding 2019 periods. Allison designs and manufactures commercial, off-highway and defense vehicle transmissions and electrified propulsion systems.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $377 million | $737 million | $1,014 million | $1,412 million |
| Gross profit / margin | $165 million / 44% | $389 million / 53% | $491 million / 48% | $748 million / 53% |
| Operating income / margin | $58 million / 15% | $259 million / 35% | $273 million / 27% | $503 million / 36% |
| Net income / margin | $23 million / 6% | $181 million / 25% | $162 million / 16% | $348 million / 25% |
| Diluted EPS | $0.20 | $1.46 | $1.41 | $2.78 |
- Q2 Adjusted EBITDA, a non-GAAP measure, was $115 million (30.5% of sales), versus $308 million (41.8%) a year earlier. First-half Adjusted EBITDA was $372 million (36.7%), versus $598 million (42.4%).
- Cash provided by operations was $240 million for the first half, down from $433 million. Capital additions were $49 million, versus $44 million. Adjusted free cash flow, non-GAAP, was $194 million, versus $389 million. For Q2, operating cash flow was $92 million versus $239 million; Adjusted free cash flow was $67 million versus $214 million.
- Cash and cash equivalents were $434 million at June 30, up from $192 million at year-end 2019. Total debt was $2.816 billion, compared with $2.544 billion at year-end; the balance included $275 million drawn on the revolving facility. Net debt, calculated as total debt less cash, was approximately $2.382 billion.
- Available revolving-credit capacity was $319 million, net of loans and letters of credit. The company reported a 0.56x first-lien net leverage ratio against a 5.50x maximum covenant and compliance with its debt covenants.
Material changes and drivers
- Q2 sales fell 49%; first-half sales fell 28%. Management attributed the decline principally to COVID-19-related reductions or stoppages in customer and supplier production, weaker commercial vehicle demand, and lower service-parts demand.
- Q2 sales in North America On-Highway fell 59%; Outside North America On-Highway fell 43%. Defense sales increased 14% in Q2 and 19% in the first half, principally on tracked-vehicle demand.
- Q2 gross margin declined about 900 basis points year over year; first-half gross margin declined about 460 basis points. Lower volume and restructuring charges were key factors, partly offset by lower incentive compensation and favorable material costs.
- First-half operating cash flow declined mainly with lower gross profit, higher cash interest and restructuring payments; lower taxes and lower working-capital requirements partly offset the decrease. Financing cash flow was $49 million provided, including $275 million of net revolving borrowings.
Outlook, risks and unusual items
- No quantified full-year guidance is provided in the filing. Management expected COVID-19 to materially adversely affect sales and results in Q3 2020 and likely beyond; the duration and impact were not reasonably estimable.
- The company continued operating its manufacturing network, but facilities in Hungary, India and Tennessee had suspended operations for varying periods, and facilities reduced operating levels or shifts. Further disruption from government measures, supply constraints or weaker demand remained possible.
- Management said cash, borrowing capacity and expected operating cash flow should be sufficient for requirements over the next 12 months, while warning that pandemic-related pressure on cash flow was material and could continue.
- Q2 included $12 million of restructuring charges related to voluntary and involuntary employee separation programs. The company also reported $180 million of first-half share repurchases, none in Q2, and $39 million of first-half dividends.
- Other risks include substantial indebtedness, variable interest rates, cyclical end markets, customer concentration, supply and commodity costs, product warranty or liability claims, international operations, and cybersecurity. The company reported $3 million of undiscounted environmental remediation liability for future site monitoring and maintenance; it said ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether customer demand, production schedules and supplier availability recover, particularly in North American and international on-highway markets.
- How ongoing volume declines affect margins, operating cash flow and the company’s stated 12-month liquidity outlook.
- Debt balances, revolver usage, variable-rate exposure, covenant headroom and the scale and timing of future shareholder returns.
- Whether pandemic-related assumptions change estimates for goodwill, intangible assets, warranties, pensions or deferred tax assets.