Allison Transmission Holdings, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Amounts are in millions of dollars except per-share data. Allison designs and manufactures commercial and defense fully automatic transmissions.
Financial performance
- Third quarter: Net sales were $669, down 3% from $692. Net income was $149 versus $167; diluted EPS was $1.23 versus $1.27.
- Gross profit was $348, with a 52% gross margin, compared with $368 and 53%. Operating income was $224 versus $246; operating margin was 33% versus 35%. Net interest expense rose to $32 from $30.
- Adjusted EBITDA, a non-GAAP measure, was $269 versus $295; its margin was 40.2% versus 42.6%.
- Nine months: Net sales were $2,081, up 1% from $2,066. Net income was $497 versus $492; diluted EPS was $4.01 versus $3.64.
- Gross profit was $1,096 versus $1,084, and gross margin improved to 53% from 52%. Operating income was $727 versus $716. Adjusted EBITDA was $867 in both periods; margin was 41.7% versus 42.0%.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $645 versus $605. Additions of long-lived assets were $91 versus $52; company-defined adjusted free cash flow was $554 versus $553.
- Cash and cash equivalents were $152 at September 30, down from $231 at December 31, 2018. Current assets were $748 and current liabilities $477.
- Gross debt was $2,546 ($2,513 net of deferred financing costs), compared with $2,548 gross at year-end. Debt comprised $646 under the term loan and $1,900 in senior notes. No revolving-credit borrowings were outstanding; $583 of the $600 revolver was available, net of letters of credit.
- The March refinancing extended term-loan maturity to 2026 and revolver maturity to 2024; the company also issued $500 of 5.875% notes due 2029. The October 11, 2019 amendment reduced the term-loan interest margin by 25 basis points. The company reported covenant compliance.
- Financing cash flows included $331 of share repurchases and $55 of dividends. Investing cash outflows included $232 for acquisitions.
Changes and management commentary
- Q3 sales gains in North America On-Highway (+11%) were more than offset by declines in Service Parts, Support Equipment and Other (-20%), Outside North America Off-Highway (-48%), and North America Off-Highway (-50%). Management cited stronger demand and market-share gains in certain on-highway products, but weaker service-parts, mining, energy and hydraulic-fracturing demand.
- Nine-month sales growth reflected North America On-Highway (+13%), partly offset by lower Service Parts, Support Equipment and Other (-15%), North America Off-Highway (-62%) and Defense (-11%).
- Management expected lower full-year 2019 demand in Service Parts, Support Equipment and Other and North America Off-Highway, partly offset by increased North America On-Highway demand, product price increases and growth initiatives. The filing provides no numeric full-year earnings or sales guidance.
- Research and development expense increased to $39 in Q3 and $107 for nine months, reflecting product initiatives. The company acquired Walker Die Casting and C&R Tool and Engineering, AxleTech’s electric-vehicle systems division, and Vantage Power during 2019; purchase accounting for acquisitions was preliminary.
Risks, contingencies and unusual items
- Risks include substantial indebtedness, cyclical end markets, customer concentration, competition, execution of technology and growth initiatives, acquisition integration, supply and commodity costs, product defects and warranty exposure, foreign-exchange movements, and international and labor risks.
- The company recorded a $12 environmental liability for remediation at its Indianapolis facilities. It also faces ordinary-course legal and administrative matters; management did not expect any additional liability, if any, to materially affect financial position, results or cash flows.
- Interest-rate swaps had a $41 liability at September 30; $6 of derivative losses in accumulated other comprehensive loss was expected to be reclassified to earnings within 12 months. The company estimated that a 10% move in aluminum or steel prices would change annual earnings by approximately $6 or $7, respectively, before the effect of cost-sharing arrangements.
- Quarterly results may not indicate full-year performance. Management stated that cash, operating cash flow and revolver capacity were expected to meet cash needs for the next 12 months.
Important facts for investors to verify
- Whether on-highway growth can offset continued weakness in service parts and off-highway markets.
- How acquisition integration, purchase-price allocations and acquired-business contributions develop.
- Debt costs, variable-rate exposure, interest-rate swap effects, covenant headroom and the impact of the October margin reduction.
- Cash generation relative to capital spending, acquisitions, dividends and the remaining $1,114 of authorized share repurchases.
- Developments in Indianapolis environmental remediation, product warranty obligations and other contingencies.