Allison Transmission Holdings, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Allison designs and manufactures commercial and defense fully automatic transmissions. Figures below are in millions of dollars except per-share data, percentages, and ratios.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $499 | $462 | Up 8% |
| Gross profit / margin | $251 / 50% | $215 / 47% | Profit up 17% |
| Operating income / margin | $149 / 30% | $111 / 24% | Up 34% |
| Net income | $83 | $48 | Up 73% |
| Diluted EPS | $0.52 | $0.28 | Up 86% |
| Adjusted EBITDA / margin (non-GAAP) | $192 / 38.5% | $162 / 35.1% | Up 19% |
| Operating cash flow | $111 | $118 | Down $7 |
| Adjusted free cash flow (non-GAAP) | $103 | $113 | Down $10 |
Interest expense, net, was $25 versus $34; income tax expense was $44 versus $29, with effective tax rates of 35% and 37%. Q1 2017 tax expense included a $7 excess tax benefit from stock-based compensation accounting. Dividends declared were $0.15 per share in both periods.
Revenue drivers and material changes
- Service parts, support equipment and other sales rose 39% to $118, principally on higher North American service-parts demand.
- North America hybrid propulsion systems for transit bus rose 18% to $20; defense sales rose 8% to $27; outside North America on-highway rose 3% to $72.
- North America off-highway fell 80% to $1, reflecting the continuing effect of low energy prices. North America on-highway declined 1% to $255. Outside North America off-highway increased to $6 from $3.
- Gross margin improved on higher volume, product price increases and favorable manufacturing costs. Cost of sales was nearly flat despite increased sales. SG&A declined 5%, partly because 2016 stockholder-activism costs did not recur and product-warranty adjustments were favorable; R&D expense increased 10%.
- Net income benefited from operating improvement and lower net interest expense, including favorable interest-rate-derivative mark-to-market results and lower interest following term-loan repayments. The share count also declined following repurchases.
Cash, debt and liquidity
- Cash and cash equivalents were $120 at March 31, versus $205 at December 31, 2016. Current assets were $537 and current liabilities $378.
- Gross debt was $2,430, comprising a $1,185 term loan, $245 revolving borrowings and $1,000 of 5.0% senior notes due 2024. Debt net of current maturities and financing costs was $2,390, versus $2,147 at year-end.
- The company had $187 of revolver availability, net of outstanding borrowings and letters of credit. It reported a 1.94x senior secured leverage ratio and 3.43x total leverage ratio and compliance with credit-agreement covenants.
- Operating cash flow was $111; investing activities used $8, principally for long-lived assets; financing activities used $189. Financing included $415 of share repurchases, partly offset by $245 of net revolver borrowings. The company attributed lower operating cash flow mainly to higher receivables, inventories and incentive compensation payments.
- Management expected cash, operating cash generation and available borrowing capacity to meet requirements for the next 12 months. It noted that debt service needs are significant and future debt payments and capital spending depend on cash generation and factors that may be outside its control.
Outlook, risks and other notable items
- No specific full-year sales or earnings guidance figures are provided in the filing. Management’s 2017 outlook assumed stronger North America on-highway and off-highway service-parts demand, price increases on certain products and a modest recovery in global off-highway markets.
- In March 2017, the company amended its term-loan agreement, reducing applicable margins by 0.5 percentage point and removing the minimum LIBOR floor. The reported term-loan borrowing rate was 2.99%; the revolver rate was 2.61%.
- The company repurchased approximately $415 of shares during the quarter under a $1 billion authorization. This included a February purchase of 10.5 million shares from related party ValueAct Capital Master Fund for approximately $363, funded with cash and revolver borrowings.
- An environmental remediation liability of $13 was recorded for work at Indianapolis facilities. The company said ordinary-course legal matters were not expected to have a material adverse effect beyond amounts provided or insured.
- Principal risks identified include cyclical end markets and economic conditions, customer concentration, competition, international operations and currency exposure, product defects and warranty costs, defense spending, labor disruptions, commodity and interest-rate exposure, and substantial indebtedness. Management reported no material change in previously disclosed risk factors.
- Interest-rate swaps had $800 notional value and a net fair-value liability of $25. Commodity swaps covered about 24% of forecast 2017 aluminum requirements and none of 2018 requirements. Management cited estimated annual after-tax earnings sensitivities of $5 for a 10% aggregate currency move and $2 and $4 for 10% aluminum and steel price moves, respectively.
Important facts for investors to verify
- Whether service-parts strength and the assumed recovery in global off-highway markets persist, given weak North America off-highway and slightly lower North America on-highway sales.
- The sustainability of margin and earnings improvement, including the effects of pricing, manufacturing costs, incentive compensation, derivative marks and the lower share count.
- Cash conversion and working-capital trends, particularly receivables and inventory, alongside the large repurchase program and increased revolver debt.
- Debt levels, variable-rate exposure, covenant headroom and the capacity to fund debt service, dividends, repurchases and capital investment.
- Potential developments in the $13 environmental liability, warranty estimates and other legal or product-liability matters.