Allison Transmission Holdings, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Allison designs and manufactures commercial and defense fully automatic transmissions. Unless otherwise stated, amounts are in millions of dollars.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $434.3 | $493.0 | $1,371.3 | $1,507.6 |
| Gross profit / margin | $204.7 / 47% | $236.1 / 48% | $646.5 / 47% | $711.6 / 47% |
| Operating income | $104.0 | $111.9 | $341.8 | $391.7 |
| Net income | $44.6 | $46.5 | $153.7 | $169.3 |
| Diluted EPS | $0.27 | $0.27 | $0.91 | $0.95 |
| Adjusted EBITDA and margin (non-GAAP) | $150.5 / 34.7% | $174.1 / 35.3% | $485.9 / 35.4% | $549.7 / 36.5% |
| Operating cash flow | $127.7 | $162.4 | $415.6 | $405.1 |
- Q3 sales declined 12%; nine-month sales declined 9%. Operating income and net income also fell in both comparisons. Q3 net income was partly supported by lower interest expense and the absence of the prior-year $14.0 environmental remediation charge.
- Q3 adjusted free cash flow (non-GAAP) was $115.5 versus $147.6; nine-month adjusted free cash flow was $384.7 versus $383.4. Nine-month capital expenditures were $36.7 versus $30.1.
- Cash was $164.7 at September 30, down from $251.6 at year-end 2015. Current assets were $549.9 and current liabilities $335.7.
- Debt obligations totaled $2,190.6: $1,190.6 of term loan and $1,000.0 of 5.0% notes due 2024. Balance-sheet debt, net of financing costs, was $2,148.8 long-term plus $11.9 current. The company had $447.4 available on its revolving facility, no revolver borrowings, and reported total leverage of 3.09x and senior secured leverage of 1.56x.
- Dividends declared were $0.15 per share in Q3 and $0.45 for the nine months. The company repurchased $169.0 of stock in the nine-month period; $25.5 remained available under its authorization.
Material changes and management commentary
- Sales weakness reflected lower North America on-highway demand and sharp declines in off-highway markets, which management linked to low energy and commodity prices and softer demand. Q3 North America off-highway sales fell 92%; defense sales fell 26%. Outside North America on-highway sales increased 16%, led by Europe and Japan, partly offset by China.
- Management attributed the lower gross profit mainly to reduced sales volume. Favorable materials costs and lower manufacturing expense partly offset the decline. Nine-month gross margin was broadly unchanged year over year.
- In September, the company issued $1.0 billion of 5.0% senior notes and used proceeds plus cash to repay $1.2 billion of term debt. The term loan maturity was extended from 2019 to September 2022, its LIBOR floor was reduced to 0.75%, and the revolving facility maturity was extended to September 2021. The transaction resulted in $11.6 of refinancing expense.
- Management said operating cash flow, cash on hand and borrowing capacity were expected to be sufficient for cash requirements over the next 12 months. No numeric revenue or earnings guidance was provided. Management described demand conditions as tempered and noted continued exposure to cyclical end markets.
Risks, contingencies and unusual items
- The company assumed responsibility in 2016 for operating, monitoring and maintaining environmental remediation at its Indianapolis facilities. It had recorded an estimated $14.0 liability in 2015, payable over approximately 30 years; the EPA financial-assurance amount and form were expected to be determined in Q4 2016.
- Ordinary-course claims include commercial, product-liability, personal-injury and workers’ compensation matters. Management did not expect any unprovided or uninsured exposure to materially affect financial position, results or cash flows.
- Key stated risks include cyclical markets, customer concentration, foreign-market adoption, defense spending, product defects and warranty costs, international operations, substantial indebtedness, and the company’s dividend and repurchase plans. The filing reported no material changes to previously disclosed risk factors.
- Interest-rate, foreign-exchange and commodity exposures remain. Interest-rate swaps had $800.0 notional and a $40.0 fair-value liability; commodity swaps covered approximately 35% of forecast 2016 aluminum needs and 24% of 2017 needs.
- Other notable items included $3.7 of nine-month stockholder-activism expenses and $3.4 of unfavorable adjustments related to the dual power inverter module extended-coverage program.
Most important facts for investors to verify
- Whether commercial vehicle and off-highway demand, especially North America on-highway and energy- and mining-related markets, stabilizes or deteriorates further.
- Whether operating cash flow and liquidity remain sufficient alongside debt service, capital spending, dividends and repurchases.
- The effective economics and covenant flexibility of the September refinancing, including variable-rate exposure and future debt maturities.
- The final EPA financial-assurance requirements and any changes to environmental, warranty or extended-coverage estimates.
- How much of reported performance depends on non-GAAP adjustments; compare adjusted EBITDA and adjusted free cash flow with their GAAP reconciliations.