Allison Transmission Holdings, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited results; dollar amounts in millions except per-share data. Allison designs and manufactures fully automatic transmissions, parts and related products for commercial, military and other vehicle markets.
Key financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $559.4 | $555.7 | $1,161.3 | $1,072.7 |
| Gross profit | $251.9 | $244.5 | $535.7 | $474.5 |
| Gross margin | 45.0% | 44.0% | 46.1% | 44.2% |
| Operating income | $119.6 | $119.6 | $274.3 | $218.4 |
| Operating margin | 21.4% | 21.5% | 23.6% | 20.4% |
| Net income (loss) | $412.8 | $(17.2) | $470.8 | $19.7 |
| Diluted EPS | $2.21 | $(0.09) | $2.55 | $0.11 |
| Adjusted EBITDA | $190.7 | $193.0 | $413.7 | $362.3 |
| Adjusted EBITDA margin | 34.1% | 34.7% | 35.6% | 33.8% |
Q2 sales increased 0.7%; six-month sales increased 8.3%. Q2 operating income was flat year over year, while first-half operating income rose 25.6%. Adjusted EBITDA and adjusted free cash flow are non-GAAP measures; first-half adjusted free cash flow was $200.0, versus $166.1 in 2011.
Cash flow, debt and liquidity
- First-half operating cash flow was $246.5, compared with $193.7 a year earlier. Capital additions were $62.5; investing activities used $70.0.
- Financing activities used $388.1, including $326.9 of debt redemptions and $10.9 of dividend payments. Cash fell from $314.0 at year-end 2011 to $112.1 at June 30, 2012.
- Total debt was $3,020.6, including $8.0 current maturities, compared with $3,376.0 at December 31, 2011. Allison redeemed its remaining 11.0% notes during Q2 and extended approximately $801.1 of term debt to 2017. The remaining Term B-1 loan matures in 2014; 7.125% notes mature in 2019.
- Available revolver capacity was $371.7, net of letters of credit; there were no revolver borrowings at quarter-end. The company reported a 3.19x secured leverage ratio against a 5.50x maximum and compliance with debt covenants.
- Management said cash, operating cash flow and borrowing capacity should be sufficient for requirements over the next 12 months. The company declared dividends of $0.06 per common share.
Material changes and unusual items
- Q2 net income included a $350.1 income tax benefit, principally from releasing a $384.8 deferred-tax valuation allowance after management concluded deferred tax assets were more likely than not realizable. This non-cash tax item—not operating performance—was the main driver of the reported profit surge.
- Q2 other expense was $22.8, including an $8.0 impairment of co-development investments, $7.6 of debt-redemption losses, and a $2.3 pension settlement charge. First-half other expense also included the $16.0 termination payment to sponsors and $6.1 of IPO expenses. The March IPO involved sales by existing shareholders; Allison received no proceeds.
- Q2 SG&A rose to $109.1, partly due to a $9.4 charge for the Dual Power Inverter Module (DPIM) extended-coverage program. The warranty review also identified a $10.0 charge for replacement-unit design issues and a $0.6 favorable adjustment. The total warranty liability was $111.1 at June 30.
- Q2 interest expense, net fell to $34.1 from $71.0, reflecting debt reduction and lower derivative mark-to-market expense, partly offset by higher costs on new swaps. First-half interest expense, net was $74.8 versus $120.6.
Markets, outlook and risks
Management cited macroeconomic and commercial-vehicle production conditions as key sales drivers. In Q2, North American on-highway sales rose 15%, military rose 16%, and outside-North-America off-highway rose 43%. Hybrid-propulsion sales fell 55% due largely to order timing; North American off-highway declined 37%, reflecting weaker demand tied to natural-gas-fracturing activity and pricing.
Management expected slower North American on-highway growth in the second half, higher hybrid sales than Q2, continued pressure in North American off-highway, and lower military sales year over year amid anticipated U.S. defense-spending reductions. It expected emerging-market growth to offset European weakness in outside-North-America on-highway, and continued double-digit growth in outside-North-America off-highway. No consolidated numerical earnings or revenue guidance was provided.
Risks include substantial indebtedness and variable rates, changes in vehicle production and customer demand, product defects and warranty costs, customer concentration, international-market exposure, commodity and currency volatility, and possible labor disputes. Interest-rate swaps had $1,375.0 notional value and $66.5 fair-value liabilities; collateral requirements can change with rates or credit ratings. Legal matters arise in the ordinary course, and the company said any exposure beyond reserves or insurance was not expected to materially affect results. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much future earnings and cash generation depend on the one-time valuation-allowance release, and whether deferred tax assets are ultimately realized.
- Whether management’s segment-level second-half expectations hold, especially for North American on-highway, military, hybrid and off-highway demand.
- Debt maturities, refinancing needs, covenant headroom, interest-rate exposure and potential derivative collateral calls.
- Further DPIM warranty claims and the adequacy of the recorded warranty liability.
- Recovery prospects for the impaired $8.0 co-development investments and the timing and spending implications of the India facility expansion.