Business context and reporting period
Allison Transmission Holdings, Inc. designs and manufactures commercial and defense fully automatic transmissions. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Figures are in U.S. dollars unless stated otherwise.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $737 million | $711 million | $1,412 million | $1,374 million |
| Gross profit / margin | $389 million / 52.8% | $374 million / 52.6% | $748 million / 53.0% | $716 million / 52.1% |
| Operating income / margin | $259 million / 35.1% | $248 million / 34.9% | $503 million / 35.6% | $470 million / 34.2% |
| Net income | $181 million | $174 million | $348 million | $325 million |
| Diluted EPS | $1.46 | $1.29 | $2.78 | $2.37 |
| Adjusted EBITDA / margin | $308 million / 41.8% | $297 million / 41.8% | $598 million / 42.4% | $572 million / 41.6% |
For the six months, operating cash flow was $433 million versus $366 million; capital expenditures were $44 million versus $29 million. Adjusted free cash flow, a non-GAAP measure defined as operating cash flow less additions of long-lived assets, was $389 million versus $337 million. Cash and equivalents were $153 million at June 30, down from $231 million at December 31, 2018.
Debt totaled $2.548 billion at face value, with $2.514 billion reported net of deferred financing costs and current maturities. The company had no revolver borrowings at quarter-end and reported $578 million available under its $600 million revolving facility, net of letters of credit. The first-lien net leverage ratio was 0.43x; the company reported compliance with debt covenants. Cash less face-value debt implies net debt of approximately $2.395 billion.
Material changes versus prior comparable periods
- Q2 sales increased 4%; first-half sales increased 3%. Growth was led by North America On-Highway, while North America Off-Highway and Service Parts, Support Equipment and Other declined.
- First-half gross margin rose 90 basis points, supported by higher sales, product price increases, and lower UAW retirement-incentive expense. Q2 gross margin improved 20 basis points.
- First-half net income grew 7%, while interest expense increased to $69 million from $60 million, reflecting the new 5.875% notes and refinancing costs, partly offset by reduced term-loan interest.
- Operating cash flow improved, principally due to lower working-capital requirements and higher gross profit. Investing cash outflow rose to $177 million, including $133 million for acquisitions.
- First-half share repurchases were $285 million, compared with $370 million in the prior-year period; dividends were $37 million versus $41 million.
Outlook, commentary, risks and unusual items
- Management expected lower 2019 demand in Service Parts, Support Equipment and Other and North America Off-Highway, partly offset by stronger North America On-Highway demand, product pricing, and growth initiatives. No specific numerical full-year guidance is provided in the filing.
- Management expected operating cash flow, cash balances, and revolving-credit availability to cover requirements for the next 12 months, while noting significant debt-service needs and dependence on future cash generation.
- In March 2019, the company refinanced its secured facility, extended term-loan maturity to 2026 and revolver maturity to 2024, and issued $500 million of 5.875% notes due 2029. The term loan carried a 4.48% all-in rate at quarter-end; $250 million of interest-rate swaps were entered into during the first quarter.
- Acquisitions included AxleTech’s electric-vehicle systems division for approximately $124 million and Vantage Power for approximately $9 million, with up to $8 million of contingent additional consideration. Purchase accounting for AxleTech remained preliminary.
- The company repurchased approximately $235 million of shares in Q2, including 4,977,043 shares for approximately $232 million from Ashe Capital Management, whose co-founder was a director until May 9, 2019. The transaction was funded with cash and revolver borrowings and the shares were retired.
- Key stated risks include substantial indebtedness, cyclical end markets, customer concentration, international and currency exposure, commodity costs and supply disruptions, product defects and warranty claims, technology and competitive changes, and acquisition execution. A $12 million liability was recorded for environmental remediation at Indianapolis facilities; management said other ordinary-course claims were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether demand weakness in North America Off-Highway and service parts, and strength in North America On-Highway, persist through the rest of 2019.
- Cash conversion and working-capital trends, particularly accounts receivable and inventory, alongside acquisition and capital-spending needs.
- Debt-service capacity, variable-rate exposure, covenant headroom, and the effect of refinancing and interest-rate swaps on future interest expense.
- AxleTech purchase-price allocation, Vantage Power contingent consideration, and the commercial contribution of the electrification businesses.
- Continued scale and timing of share repurchases and dividends relative to liquidity, leverage, and investment requirements.