Allison Transmission Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unless noted, financial amounts are in millions of dollars. Allison designs and manufactures vehicle propulsion systems, including automatic transmissions and hybrid and electric systems.
Financial performance and liquidity
- Q3 revenue: $532, down 20% from $669 a year earlier. Nine-month revenue: $1,546, down 26% from $2,081.
- Q3 profitability: Gross profit was $254 (gross margin 47.7%, versus 52.0%); operating income was $128 (operating margin 24.1%, versus 33.5%); net income was $77, versus $149. Diluted EPS was $0.68, versus $1.23.
- Nine-month profitability: Gross profit was $745 (48.2% margin, versus 52.7%); operating income was $401 (25.9% margin, versus 34.9%); net income was $239, versus $497. Diluted EPS was $2.10, versus $4.01.
- Adjusted EBITDA, non-GAAP: Q3 was $174, or 32.7% of sales, versus $269, or 40.2%. Nine-month adjusted EBITDA was $546, or 35.3% of sales, versus $867, or 41.7%.
- Cash flow: Nine-month operating cash flow was $398, down from $645. Capital expenditures were $80, versus $91. Company-defined adjusted free cash flow, a non-GAAP measure, was $330, versus $554. Q3 operating cash flow was $158, versus $212.
- Cash and liquidity: Cash and equivalents were $251 at September 30, up from $192 at year-end 2019. The company reported $595 available under its $600 revolving facility, net of letters of credit, and said liquidity should meet requirements for the next 12 months.
- Debt: Principal debt totaled $2,540 ($2,510 net carrying value), compared with $2,544 principal at year-end 2019. Cash less principal debt was approximately $2,289. The company reported no revolver borrowings at quarter-end, a 0.51x first-lien net leverage ratio, and compliance with debt covenants.
- Capital returns: Nine-month share repurchases were $196 and dividends were $58. The company had $856 of authorization remaining under its repurchase program.
Material changes and management commentary
- COVID-19 disruptions and weaker demand materially affected results. Q3 sales declined across most end markets; Defense sales increased 40% to $56, principally on tracked-vehicle demand. North America on-highway sales fell 24% to $281.
- Management said demand and results were expected to remain materially affected in Q4 2020 and likely beyond. It cited uncertainty around the pandemic, customer and supplier production, and the global outlook; no specific financial guidance was provided.
- Q3 gross profit fell 27%, faster than sales, and gross margin contracted 4.3 percentage points. Management attributed this mainly to lower sales, partly offset by lower manufacturing and incentive costs and product price increases.
- Q3 SG&A rose 9% to $93, including a $23 warranty adjustment for a shift-quality performance issue affecting a defined product population. Management said the adjustment reflected additional claims and field information; a related field-action program had been established in 2019.
- The company reduced operating costs through employee separation programs, furloughs, reduced overtime, and review of capital and product-development spending. Manufacturing continued, though operating levels and shifts were reduced in some locations.
- Other notable items: nine-month results included $12 of restructuring charges. Goodwill increased to $2,063, including acquisition-related measurement adjustments. The filing reports a $3 environmental liability for long-term remediation work and states ordinary-course legal matters are not expected to materially affect the company.
Key risks and contingencies
- COVID-19 duration and effects remain uncertain, with potential further impacts on demand, facilities, suppliers, sales, cash flow, and financial condition.
- Substantial indebtedness creates debt-service and covenant risks, although the company reported covenant compliance and significant available revolver capacity.
- Other disclosed exposures include cyclical commercial-vehicle markets, customer concentration, supply and commodity costs, foreign currency and interest rates, product defects and warranty claims, and technology and competitive changes.
Important facts for investors to verify
- Whether demand, production, and supply-chain conditions improved or deteriorated after September 30, 2020, and how that affected subsequent guidance and results.
- Claims experience, scope, and remaining cost estimates for the shift-quality warranty field action and the $23 Q3 adjustment.
- Operating cash flow, adjusted free cash flow, capital spending, and liquidity under continued lower sales; review the company’s non-GAAP reconciliations.
- Debt maturities, interest-rate exposure, covenant headroom, and actual revolver availability, particularly if cash generation weakens.
- Whether share repurchases and dividends continued at a pace consistent with the company’s debt and liquidity priorities.