Allison Transmission Holdings, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. Allison designs and manufactures commercial, off-highway and defense vehicle transmissions and hybrid/electric propulsion systems; approximately 77% of 2019 revenue came from North America.
Financial performance
- Revenue: $2.698 billion, down 1% from $2.713 billion in 2018. North America on-highway sales increased 12% to $1.474 billion, while service parts, support equipment and other declined 14% to $544 million; North America off-highway fell 68% to $30 million.
- Profit and margins: Gross profit was $1.394 billion (51.7% margin, versus 52.4% in 2018); operating income was $892 million (33.1% margin, versus $923 million); net income was $604 million, down 5%, while diluted EPS increased to $4.91 from $4.78. The EPS increase occurred alongside lower weighted-average shares, 123 million versus 134 million.
- Fourth quarter: Revenue was $617 million versus $647 million in Q4 2018; net income was $107 million versus $147 million; diluted EPS was $0.90 versus $1.14. Q4 2019 gross profit was $298 million and operating income was $165 million.
- Cash flow: Operating cash flow was $847 million, up from $837 million. Capital expenditures/additions of long-lived assets were $172 million, producing company-defined adjusted free cash flow of $675 million, down from $737 million. Investing cash outflow was $405 million, including $232 million for acquisitions.
- Debt and liquidity: Gross debt was $2.544 billion at year-end; cash and equivalents were $192 million, down from $231 million. The company had $595 million available on its $600 million revolving facility, with no year-end revolver borrowings. Current assets were $686 million and current liabilities $417 million. The filing states it expected cash, operating cash flow and borrowing capacity to cover requirements over the next 12 months.
- Capital returns: Allison repurchased $393 million of stock and paid $73 million in dividends during 2019. The declared annual dividend was $0.60 per share.
Material changes and unusual items
- North America on-highway growth, including higher demand for Rugged Duty and Highway Series models and Class 4/5 share gains, was offset by weaker service-parts demand and lower off-highway demand, especially hydraulic fracturing.
- Interest expense rose 11% to $134 million. During 2019, Allison refinanced debt, issued $500 million of 5.875% notes due 2029, and extended term-loan maturity to 2026; it also repaid the prior term loan. The new term loan carried a 3.54% all-in rate at year-end and variable-rate exposure.
- Research and development expense increased 18% to $154 million. Allison completed acquisitions of AxleTech’s electric vehicle systems division, Walker Die Casting/C&R Tool and Engineering, and Vantage Power, for approximately $232 million in aggregate cash consideration/payments during the year. The AxleTech purchase included $50 million of in-process research and development intangible assets.
- An $8 million environmental liability benefit was recorded after EPA acceptance of a proposal reducing ongoing remediation responsibilities. The company also recorded $2 million of TC10-related impairment; production of TC10 had ceased in 2018.
Outlook, risks and contingencies
- Management expected lower 2020 demand in global on-highway and off-highway markets, partly offset by increased service-parts, support-equipment and defense demand, as well as price increases on certain products. The filing does not provide numerical 2020 guidance.
- Key risks include cyclical end markets, customer concentration (top five OEMs represented 54% of 2019 sales), competition and OEM in-sourcing, raw-material and supplier disruptions, and uncertainty in adoption of automatic transmissions outside North America and electric propulsion technologies.
- Debt service, variable interest rates, restrictive covenants and refinancing needs remain relevant risks. Allison reported covenant compliance and a 0.42x first-lien net leverage ratio at year-end.
- Other exposures include product warranty claims (year-end liability $52 million), environmental remediation, government-contract and defense-budget uncertainty, labor disruption, cybersecurity, foreign exchange and dependence on Indianapolis facilities, which produce approximately 90% of transmissions.
- Management and the auditor concluded internal control over financial reporting was effective as of year-end. The auditor identified product warranty liabilities and AxleTech acquired in-process R&D valuation as critical audit matters; these do not modify the audit opinion.
Important facts for investors to verify
- Whether the 2020 demand outlook and end-market trends translated into subsequent results, particularly service-parts and off-highway demand.
- The contribution, integration progress and return on investment from the 2019 acquisitions, especially electric propulsion initiatives.
- Debt maturity, variable-rate exposure, cash generation, capital spending and the sustainability of dividends and share repurchases.
- Warranty reserve assumptions and claims experience, including whether field actions or product issues change the $52 million liability.
- Customer concentration, OEM sourcing decisions, and progress in international automatic-transmission adoption and electrification.