Allison Transmission Holdings, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; compared with Q1 2015. Allison designs and manufactures commercial and defense fully automatic transmissions, serving global markets through a worldwide distributor and dealer network.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $462.1 million | $503.6 million | Down 8% |
| Gross profit / margin | $215.1 million / 47% | $239.2 million / 47% | Profit down 10% |
| Operating income / margin | $110.7 million / 24% | $142.3 million / 28% | Down 22% |
| Net income / diluted EPS | $48.3 million / $0.28 | $68.4 million / $0.38 | Down 29% / 26% |
| Adjusted EBITDA / margin | $162.1 million / 35.1% | $190.1 million / 37.7% | Down 15%; margin down 2.6 points |
| Operating cash flow | $117.9 million | $91.0 million | Up 30% |
| Adjusted free cash flow | $112.5 million | $97.5 million | Up 15% |
Interest expense, net, was $34.1 million versus $36.9 million. The effective tax rate was 36.9%, broadly unchanged from 36.8%. The company declared dividends of $0.15 per share, unchanged from the prior-year quarter.
Balance sheet and liquidity
- Cash and cash equivalents were $299.1 million at March 31, up from $251.6 million at December 31, 2015. Current assets were $690.3 million and current liabilities $319.5 million.
- Debt was $2,396.7 million principal under the Term B-3 Loan, due 2019; reported long-term debt, net, was $2,348.3 million. The company had $461.0 million of revolving capacity available and no revolver borrowings.
- Total leverage ratio was 3.03x; the company reported compliance with all credit-facility covenants. Quarterly principal payments were $6.1 million.
- Q1 financing uses included $33.3 million for share repurchases and $25.7 million for dividends. Cash increased by $47.5 million during the quarter.
Material changes and management commentary
Sales declines were concentrated in off-highway markets: North America Off-Highway fell 77%, and Outside North America Off-Highway fell 81%, reflecting weaker hydraulic-fracturing, energy, and mining demand. North America On-Highway sales declined 4%; Outside North America On-Highway rose 23%, supported by Europe and Japan. Defense sales were flat, while service parts, support equipment, and other sales fell 13%.
Management attributed lower gross profit primarily to lower sales volume, partly offset by favorable material costs and lower manufacturing expense. SG&A rose 12%, including $3.6 million of stockholder-activism expenses and unfavorable warranty-related adjustments. Adjusted EBITDA and adjusted net income are non-GAAP measures; the filing provides reconciliations.
Outlook, risks, and unusual items
- Management expected continued tempered demand in North America On-Highway, no meaningful recovery in global Off-Highway, divergent global economic conditions, and reduced North America transit-bus hybrid demand. No quantified full-year sales or earnings guidance is provided in the filing text.
- Management expected operating cash flow, cash on hand, and available revolver capacity to meet cash requirements for the next 12 months. It noted that future debt payments and capital spending depend on cash generation and factors beyond its control.
- In Q1 2016, the company assumed responsibility for long-term monitoring and maintenance of environmental remediation at its Indianapolis facilities after EPA issued a final decision. An administrative consent order will require financial assurance; its amount and form were expected to be determined during 2016. The company had recorded approximately $14.0 million of estimated undiscounted environmental liabilities in 2015.
- Other notable items include a $10.6 million loss on interest-rate derivatives recorded in interest expense, higher DPIM extended-coverage liability adjustments, and the absence of the $1.3 million long-lived-asset impairment recorded in Q1 2015.
- Key risks include substantial indebtedness and variable interest rates, cyclical vehicle and end-market demand, customer concentration, product defects and warranty costs, foreign exchange and commodity price exposure, and ordinary-course legal and environmental matters. Management reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether weak global Off-Highway demand and lower sales volumes persist, and the pace of recovery in North America and international On-Highway markets.
- Debt amortization, interest-rate exposure, swap-related losses, covenant headroom, and continued access to the $461.0 million revolver.
- The eventual amount and form of EPA-required financial assurance for Indianapolis remediation, and whether estimated environmental costs change.
- Warranty and DPIM claims experience, including the adequacy of recorded liabilities.
- Use of cash for repurchases and dividends relative to debt reduction and operating needs; the repurchase authorization was up to $500 million through December 31, 2016.