Allison Transmission Holdings, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; comparative periods are the same periods in 2015. Allison designs and manufactures commercial and defense fully automatic transmissions, with sales driven substantially by commercial vehicle production and economic conditions. Dollar amounts are in millions unless otherwise indicated.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $474.9 | $511.0 | $937.0 | $1,014.6 |
| Gross profit / margin | $226.7 / 47.7% | $236.3 / 46.2% | $441.8 / 47.2% | $475.5 / 46.9% |
| Operating income / margin | $127.1 / 26.8% | $137.5 / 26.9% | $237.8 / 25.4% | $279.8 / 27.6% |
| Net income / diluted EPS | $60.8 / $0.36 | $54.4 / $0.30 | $109.1 / $0.64 | $122.8 / $0.68 |
| Adjusted EBITDA / margin (non-GAAP) | $173.3 / 36.5% | $185.5 / 36.3% | $335.4 / 35.8% | $375.6 / 37.0% |
- Cash flow: First-half operating cash flow was $287.9, versus $242.7 in 2015. Capital additions were $22.6, versus $14.9; reported adjusted free cash flow (non-GAAP) was $269.2, versus $235.8. Financing used $153.0, including $92.3 of share repurchases and $51.0 of dividends.
- Balance sheet and debt: June 30 cash and equivalents were $364.4, up from $251.6 at year-end 2015. Long-term debt was $2,390.6 gross principal ($2,343.9 net carrying amount including financing costs and current maturities); simple gross debt less cash was approximately $2,026.2. The term loan bears variable interest, approximately 3.50% at quarter-end, and matures in 2019. The company had no revolver borrowings and $462.4 of revolver availability.
- Liquidity: The reported total leverage ratio was 2.98x, and the company said it was compliant with credit-facility covenants. Management expected operating cash flow, cash on hand and borrowing capacity to meet cash requirements for the next 12 months.
Material changes versus prior comparable periods
- Sales declined 7% in Q2 and 8% in the first half. Weakness was especially pronounced in North American and international off-highway markets, amid low energy and commodity prices; North America on-highway sales also declined. Outside North America on-highway sales increased in the first half, partly offsetting declines elsewhere.
- Q2 gross margin improved to 47.7% from 46.2%, reflecting favorable material costs and product price increases despite lower sales. First-half gross margin was approximately 47%, broadly stable. First-half operating income fell 15%, as lower sales and higher SG&A more than offset cost savings.
- First-half net income declined 11%, while Q2 net income rose 12%. The comparison benefited from the absence of the $25.1 debt tender-offer and redemption expense recorded in Q2 2015. Interest expense increased in Q2, in part due to unfavorable mark-to-market adjustments on interest-rate swaps and debt issued in 2015.
- First-half SG&A increased 8%, including $3.7 of stockholder-activism expenses and unfavorable adjustments related to the dual power inverter module extended-coverage program; lower R&D spending partly offset the increase.
Outlook, risks and unusual items
- Management anticipated no meaningful relief in global off-highway markets and further weakening in North America on-highway demand. It linked current end-market weakness to low energy and commodity prices and tempering demand. The filing provides no specific revenue or earnings guidance.
- Market risks include cyclical vehicle markets, customer concentration, international demand and currency exposure, product defects and warranty costs, and substantial indebtedness. Variable-rate debt creates interest-rate exposure; interest-rate swaps had a $43.2 liability at June 30 and are not accounted for as hedges. Commodity swaps cover approximately 33% of forecast 2016 and 24% of forecast 2017 aluminum requirements.
- The company assumed responsibility in Q1 2016 for operating, monitoring and maintaining environmental remediation at its Indianapolis facilities. It had recorded an estimated $14.0 liability in 2015, payable over about 30 years; the EPA requested financial assurance, with the amount and method expected to be determined in 2016.
- Ordinary-course legal claims include commercial, product-liability, personal-injury and workers’ compensation matters. Management did not expect liabilities beyond amounts provided or insured to have a material adverse effect. No material risk-factor changes were reported. Disclosure controls were assessed as effective.
- The $500.0 share-repurchase authorization was due to run through December 31, 2016; $92.3 was repurchased in the first half, leaving approximately $102.2 available at June 30. Dividends declared were $0.15 per share in Q2.
- Management noted U.S. federal net operating loss carryforwards could be used by as early as year-end 2016 if taxable income continued. A prior-period cash-flow presentation was revised for foreign-exchange calculation methodology; management said the revision was immaterial and did not affect net income, equity or cash.
Most important facts for investors to verify
- Whether weak off-highway and North American on-highway demand continues, and how it affects sales, operating margins and cash generation.
- Variable-rate debt exposure, swap costs and fair-value movements; covenant headroom, 2019 maturities and the availability of the revolving facility.
- Progress and cost of the Indianapolis remediation, including the financial-assurance requirement expected to be determined in 2016.
- Warranty and extended-coverage claims, particularly the dual power inverter module program, and the assumptions supporting the related liabilities.
- Capital allocation and liquidity implications of continued dividends and share repurchases while carrying substantial debt.