Allison Transmission Holdings, Inc. — 2013 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. Allison designs and manufactures fully automatic transmissions, related parts and support products for commercial, defense and hybrid-transit applications.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $512.1 | $559.4 | $969.5 | $1,161.3 |
| Gross profit | $226.1 | $251.9 | $424.4 | $535.7 |
| Gross margin | 44.2% | 45.0% | 43.8% | 46.1% |
| Operating income | $117.7 | $119.6 | $199.1 | $274.3 |
| Net income | $50.5 | $412.8 | $78.0 | $470.8 |
| Diluted EPS | $0.26 | $2.21 | $0.41 | $2.55 |
| Adjusted EBITDA (non-GAAP) | $171.6 | $190.7 | $312.3 | $413.7 |
| Adjusted EBITDA margin (non-GAAP) | 33.5% | 34.1% | 32.2% | 35.6% |
| Adjusted free cash flow (non-GAAP) | $116.5 | $80.1 | $164.6 | $200.0 |
Q2 sales fell 8.5% year over year; first-half sales declined 16.5%. Q2 operating income was nearly flat, while first-half operating income decreased 27.4%. GAAP net income comparisons are heavily affected by 2012’s $384.8 million deferred-tax benefit from releasing the domestic valuation allowance. In 2013, income tax expense was $31.3 million for Q2 and $48.2 million for the first half; the filing reports effective tax rates of (38.3%) and (38.2%), respectively.
Cash, liquidity and debt
- First-half operating cash flow was $184.4, down from $246.5. Investing used $30.6, compared with $70.0 in 2012; financing used $17.7, compared with $388.1.
- Cash and cash equivalents were $227.4 at June 30, versus $80.2 at December 31, 2012. Q2 operating cash flow was $129.7, versus $106.9 in Q2 2012.
- Total debt was $2,809.0, including $23.5 current; long-term debt, net of current maturities, was $2,785.5. The $471.3 of senior notes carry a 7.125% fixed rate; term loans are variable-rate.
- Revolver availability was $375.4, net of letters of credit; no revolving borrowings were outstanding at quarter-end. The company reported a 3.50x senior secured leverage ratio against a 5.50x covenant maximum, and a 4.28x total leverage ratio. It reported compliance with all credit-facility covenants.
- Management said cash, operating cash flow and borrowing capacity should be sufficient for requirements over the next 12 months. Dividends declared were $0.12 per common share in Q2 and $0.18 for the first half.
Changes, outlook and notable items
- Q2 end-market sales were mixed: North America on-highway was flat; hybrid-transit increased 50%; North America off-highway fell 82%; defense fell 28%; outside-North-America on-highway fell 4%; outside-North-America off-highway rose 20%; service parts and other were flat. Management attributed weakness chiefly to reduced natural-gas-fracturing demand and lower U.S. defense spending.
- For the second half of 2013, management expected sales to stabilize year over year, an improvement over the first-half decline, supported by anticipated growth in global on-highway markets and abating declines in North America off-highway. This outlook is subject to market conditions.
- Lower sales drove the gross-profit decline. SG&A decreased, partly because of lower intangible amortization and the absence of a $9.4 million 2012 charge for extended coverage on a dual power inverter module. First-half R&D rose slightly, including $6.0 million in additional technology-license expense.
- Allison impaired a $2.5 million technology-related investment to zero, citing the investee’s early-stage status, negative cash flow, undercapitalization and unproven business plan. A proposed sponsor secondary offering was abandoned due to market conditions; the company incurred $0.6 million of related expenses. A $1.0 million employee headcount-reduction charge was recorded in the first half.
- Key risks include cyclical commercial-vehicle markets, substantial indebtedness and variable interest rates, defense-spending changes, customer concentration, product defects and warranty costs, foreign-exchange and commodity exposure, and labor disruptions. Derivative agreements may require additional collateral; $1.7 million cash and $20.0 million in letters of credit were posted for interest-rate swaps.
- Ordinary-course legal claims include commercial, product-liability, personal-injury and workers’ compensation matters; management did not expect any uncovered excess liability to materially affect the company. Sponsors owned approximately 81% of equity and had substantial control over board appointments and shareholder votes.
Important facts for investors to verify
- Whether the projected second-half sales stabilization materialized, particularly in on-highway, North American off-highway and defense markets.
- Underlying operating performance apart from the unusually large 2012 tax benefit, including sales trends, margins and non-GAAP adjustments.
- Debt-service capacity, variable-rate exposure, leverage covenant headroom and potential collateral calls on derivatives.
- The assumptions supporting realization of deferred tax assets and the sensitivity of warranty liabilities to future claims.
- Customer concentration and potential conflicts arising from sponsor control of the company.