Allison Transmission Holdings, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Allison designs and manufactures commercial and defense fully automatic transmissions. Unless otherwise noted, financial figures are in millions of dollars.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $675 | $663 |
| Gross profit / margin | $359 / 53% | $342 / 52% |
| Operating income / margin | $244 / 36% | $222 / 34% |
| Net income / net margin | $167 / 24.7% | $151 / 22.8% |
| Diluted EPS | $1.32 | $1.08 |
| Operating cash flow | $194 | $153 |
| Capital expenditures | $19 | $10 |
| Adjusted free cash flow (non-GAAP) | $175 | $143 |
| Adjusted EBITDA / margin (non-GAAP) | $290 / 43.0% | $275 / 41.5% |
Cash and cash equivalents were $324 at quarter-end, up from $231 at December 31, 2018. Current assets were $881 and current liabilities $465. Total debt was $2,548 before $29 of deferred financing costs and $5 of current maturities; reported net long-term debt was $2,514. Cash less gross debt implies approximately $2,224 of net debt. The company reported a 0.28x first-lien net leverage ratio and $578 of availability under its revolving facility, with no revolver borrowings outstanding. The quarterly dividend declared was $0.15 per share.
Changes versus the prior period
- Sales increased 2%. North America On-Highway rose 11% to $377, while North America Off-Highway fell 58% to $14, Defense fell 14% to $32, and Service Parts, Support Equipment and Other declined 13% to $131. Outside North America Off-Highway rose 125% to $27; Outside North America On-Highway increased 3% to $94.
- Gross margin improved by 160 basis points. Management attributed the improvement to lower UAW retirement-incentive expense, higher sales, product price increases, and lower incentive compensation.
- SG&A declined 9% to $84, principally reflecting prior-year warranty adjustments and lower current-period warranty expense. R&D increased 11% to $31 as product initiatives spending rose.
- Net interest expense increased 20% to $36, including $5 of debt-refinancing expenses. Operating cash flow increased to $194, supported by lower working-capital requirements and higher gross profit.
- Diluted weighted-average shares declined to 127 million from 140 million. The company repurchased approximately $50 of shares in the quarter and had $395 of authorization remaining.
Outlook, financing, and other notable items
- Management expected lower 2019 demand in North America Off-Highway and Service Parts, Support Equipment and Other, partly offset by increased North America On-Highway demand, selected price increases, and continued growth initiatives. No quantified full-year financial guidance is provided in the filing.
- In March, Allison refinanced its prior term loan and revolving facility. The new $648 term loan matures in 2026, and the $600 revolving facility matures in 2024. The refinancing also included issuance of $500 of 5.875% senior notes due 2029; the term loan rate was 4.50% at quarter-end. The company reported compliance with debt covenants.
- After quarter-end, Allison acquired AxleTech’s electric vehicle systems division for approximately $123 cash on April 16, and Vantage Power for approximately $9 cash on April 12, with up to an additional $8 potentially payable over three years. Purchase accounting was incomplete at filing date.
- Interest-rate, foreign-exchange, and commodity exposures remain relevant. The filing estimates that a 10% change in certain currencies could change annual after-tax earnings by approximately $5; a 10% aluminum or steel price variation could change annual earnings by approximately $3 or $8, respectively. These sensitivities exclude certain cost-sharing arrangements.
- The company recorded a $12 environmental remediation liability for Indianapolis facilities. It described ordinary-course legal claims and said any liability beyond amounts provided or insured was not expected to materially affect its financial position, results, or cash flows. No material changes to previously reported risk factors were identified.
- Management stated that cash, operating cash generation, and borrowing capacity were expected to meet cash requirements for the next 12 months. The filing cautions that results are exposed to cyclical end markets, substantial indebtedness, customer concentration, raw-material and supply risks, product quality and warranty exposure, international and regulatory uncertainty, and acquisition execution.
Important facts for investors to verify
- Whether the anticipated end-market mix develops as described, particularly the offset between North America On-Highway growth and weakness in Off-Highway and service parts.
- Debt refinancing terms, variable-rate exposure, covenant compliance, and the company’s ability to sustain cash generation while servicing debt and funding shareholder returns.
- Acquisition consideration, integration progress, and the eventual purchase accounting and financial contribution of AxleTech’s division and Vantage Power.
- Whether gross-margin improvement persists and how warranty costs, commodity prices, working capital, and capital spending affect cash flow.
- The status and potential cost of the environmental remediation and other legal or product-liability matters.