Allison Transmission Holdings, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed February 19, 2016. The filing also reports fourth-quarter results. Allison designs and manufactures fully automatic transmissions and related products for commercial and defense vehicles. About 81% of 2015 revenue came from North America.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net sales | $1,985.8 million | $2,127.4 million |
| Gross profit / margin | $933.8 million / 47% | $975.9 million / 46% |
| Operating income / margin | $428.9 million / 21% | $512.1 million / 24% |
| Net income / diluted EPS | $182.3 million / $1.03 | $228.6 million / $1.25 |
| Adjusted EBITDA / margin | $719.8 million / 36.2% | $739.0 million / 34.7% |
| Operating cash flow | $579.9 million | $573.3 million |
| Adjusted free cash flow | $530.4 million | $539.9 million |
Revenue fell 7% year over year, while net income declined about 20%. Gross margin increased one percentage point, but operating margin fell three points, including the effect of 2015 charges. Adjusted EBITDA and adjusted free cash flow are non-GAAP measures.
Fourth-quarter net sales were $478.2 million versus $544.4 million a year earlier; operating income was $37.2 million versus $117.8 million, and net income was $13.0 million versus $50.5 million. The quarter included an $80 million trade-name impairment.
Cash and cash equivalents were $251.6 million at year-end. Gross debt was $2,402.8 million, all under the Term B-3 loan due 2019; the reported balance-sheet debt is lower after current maturities and unamortized financing costs. The loan’s stated rate was about 3.50%. Allison had no revolver borrowings and $461 million available, net of letters of credit; its total leverage ratio was 2.99x and it reported compliance with all debt covenants. Management said cash, operating cash flow and borrowing capacity should cover requirements for the next 12 months.
Material changes and drivers
- North America on-highway sales rose 7% to $1.059 billion, driven mainly by Rugged Duty and Highway Series demand.
- Weakness in energy, mining and defense weighed on results: North America off-highway sales fell 45%, outside-North-America off-highway fell 57%, and defense fell 28%. Hybrid transit-bus sales declined 22%; outside-North-America on-highway sales were down 1%.
- Service parts, support equipment and other sales declined 12%. Management cited lower North American service-parts demand.
- Cash from operations was broadly stable. Financing activities used $528.7 million, including $305.8 million of share repurchases and $105.6 million of dividends. The quarterly dividend was $0.15 per share during 2015.
- Allison refinanced or repaid its 7.125% notes during 2015, adding $470 million of Term B-3 borrowing and recording $25.3 million of tender-offer and redemption premiums and expenses. A further $189 million of 2017 Term B-2 debt was refinanced into Term B-3 debt due 2019.
Outlook, risks and unusual items
- For 2016, management expected tempering demand in North American on-highway, continued weakness in global off-highway markets, divergent regional economies, and further pressure on North American hybrid transit-bus demand. The filing provides no specific 2016 revenue or earnings guidance.
- The $80 million trade-name impairment followed lower sales forecasts for certain end markets; the trade name’s estimated fair value was $790 million against an $870 million carrying value. Goodwill testing found no impairment.
- Allison recorded $14 million for estimated Indianapolis environmental monitoring and remediation over approximately 30 years. The EPA issued its final decision in January 2016; required financial assurance was to be determined during 2016.
- Product warranty liabilities totaled $78.3 million. The DPIM extended-coverage liability was $50.3 million, with a $30.7 million receivable from GM; estimates remain subject to claims and field information.
- Key risks include cyclical commercial-vehicle and energy markets, declining defense spending, customer concentration (top five customers represented 52% of sales; Daimler 21%), international adoption of automatic transmissions, product warranty or defect claims, supplier concentration, variable-rate debt, and reliance on Indianapolis, which produces about 90% of transmissions.
- Environmental, product-liability, personal-injury and other ordinary-course claims were disclosed; management did not expect existing proceedings to have a material adverse effect. The filing cautions that forward-looking statements are subject to risks and does not guarantee future dividends or repurchases.
Important facts for investors to verify
- Whether 2016 demand trends, particularly North American on-highway and energy/mining markets, match management’s qualitative outlook.
- How much of the year-over-year earnings decline and Q4 weakness reflects recurring operations versus the impairment, debt-redemption costs and environmental accrual.
- Debt-service capacity, refinancing and interest-rate exposure, including the 2019 Term B-3 maturity and applicable covenants.
- Actual cash costs and financial-assurance requirements for the Indianapolis environmental obligations, and developments in DPIM warranty claims and GM reimbursement.
- Customer concentration, production continuity at Indianapolis, and progress in expanding automatic-transmission adoption outside North America.