Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
ALSN > SEC Filings for ALSN > Form 10-Q on 30-Jul-2013All Recent SEC Filings

Show all filings for ALLISON TRANSMISSION HOLDINGS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for ALLISON TRANSMISSION HOLDINGS INC


30-Jul-2013

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, liquidity and capital resources. You should read this discussion in conjunction with our condensed consolidated interim financial statements and the related notes contained elsewhere in this Quarterly Report on Form 10-Q.

The statements in this discussion regarding industry trends, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in "Cautionary Note Regarding Forward-Looking Statements" and Part II, Item 1A "Risk Factors" below. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

Overview

Allison Transmission Holdings, Inc. and its subsidiaries ("our," "us" or "we") design and manufacture fully-automatic transmissions for medium- and heavy-duty commercial vehicles, medium- and heavy-tactical U.S. defense vehicles and hybrid-propulsion systems for transit buses. We generate our net sales principally from the sale of transmissions, transmission parts, support equipment, defense kits, engineering services and extended transmission warranty coverage to a wide array of original equipment manufacturers ("OEMs"), distributors and the U.S. government. Although approximately 78% of our net sales were generated in North America in 2012, we have a global presence, serving customers in Europe, Asia, South America and Africa. We have 12 different transmission product lines and serve customers through an established network of approximately 1,400 authorized independent distributors and dealers worldwide. Since the introduction of our first fully-automatic transmission over 60 years ago, our products have gained acceptance in a wide variety of applications, including on-highway trucks (distribution, refuse, construction, fire and emergency), buses (principally school, transit and hybrid-transit), motorhomes, off-highway vehicles and equipment (principally energy, mining and construction) and defense vehicles (wheeled and tracked).


Table of Contents

Trends Impacting Our Business

Our net sales are driven by commercial vehicle production, which tends to be highly correlated to macroeconomic conditions. According to America's Commercial Transportation Research, commercial truck and bus production volumes in our North American on-highway markets are projected to grow, but to remain below the 1998-2008 average production levels through 2015. In the second half of 2013, we expect net sales to stabilize on a year-over-year basis, an improvement relative to the net sales decline in the first half of the year. We believe there are improving trends in the second half of 2013 which we expect to be driven by year-over-year growth in global On-Highway end markets and abating year-over-year declines in the North America Off-Highway end market.

Second Quarter Net Sales by End Market (in millions)



                                                  Q2 2013            Q2 2012
End Market                                       Net Sales          Net Sales          % Variance
North America On-Highway                        $       216        $       217                   0 %
North America Hybrid-Propulsion Systems
for Transit Bus                                 $        27        $        18                  50 %
North America Off-Highway                       $         8        $        44                 (82 %)
Defense                                         $        58        $        80                 (28 %)
Outside North America On-Highway                $        75        $        78                  (4 %)
Outside North America Off-Highway               $        36        $        30                  20 %
Service Parts, Support Equipment & Other        $        92        $        92                   0 %

Total Net Sales                                 $       512        $       559                  (8 %)

North America On-Highway end market net sales were flat for the second quarter 2013 compared to the second quarter 2012, principally driven by higher demand for Rugged Duty and Bus Series models.

North America Hybrid-Propulsion Systems for Transit Bus end market net sales were up 50% for the second quarter 2013 compared to the second quarter 2012, principally driven by intra-year movement in the timing of orders.

North America Off-Highway end market net sales were down 82% for the second quarter 2013 compared to the second quarter of 2012, principally driven by lower demand from hydraulic fracturing applications.

Defense end market net sales were down 28% for the second quarter 2013 compared to the second quarter 2012, principally driven by continued reductions in U.S. defense spending to longer term averages experienced during periods without active conflicts.

Outside North America On-Highway end market net sales were down 4% for the second quarter 2013 compared to the second quarter 2012 reflecting weakness in China, principally driven by the timing of bus tenders, and commercial vehicle production schedule volatility in several other regional end markets, partially offset by improved demand conditions in Europe.

Outside North America Off-Highway end market net sales were up 20% for the second quarter 2013 compared to the second quarter 2012, principally driven by strength in the energy sector, partially offset by weakness in the mining sector.

Service parts, support equipment & other end market net sales were flat for the second quarter 2013 compared to the second quarter 2012.


Table of Contents

Key Components of our Results of Operations

Net sales

We generate our net sales principally from the sale of transmissions, transmission parts, support equipment, defense kits, engineering services and extended transmission coverage to a wide array of OEMs, distributors and the U.S. government. Sales are recorded net of provisions for customer allowances and other rebates. Engineering services are recorded as net sales in accordance with the terms of the contract. The associated costs are recorded in cost of sales. We also have royalty agreements with third parties that provide net sales as a result of joint efforts in developing marketable products.

Cost of sales

Our most significant components of cost of sales are purchased parts, the overhead expense related to our manufacturing operations and direct labor associated with the manufacture and assembly of transmissions and parts. For the six months ended June 30, 2013, direct material costs were approximately 68%, overhead costs were approximately 26%, and direct labor costs were approximately 6% of total cost of sales. We are subject to changes in our cost of sales caused by movements in underlying commodity prices. We seek to hedge against this risk by using commodity swap contracts and long-term supply agreements ("LTSAs"). See "Item 3 Quantitative and Qualitative Disclosures about Market Risk-Commodity Price Risk" included below.

Selling, general and administrative expenses

The principal components of our selling, general and administrative expenses are salaries and benefits for our office personnel, advertising and promotional expenses, product warranty expense, expenses relating to certain information technology systems and amortization of our intangibles.

Engineering - research and development

We incur costs in connection with research and development programs that are expected to contribute to future earnings. Such costs are expensed as incurred. In 2009, we were notified by the U.S. Department of Energy ("DOE") that we were selected to receive matching funds up to $62.8 million from a cost-share grant program funded by the American Recovery and Reinvestment Act for the development of hybrid-propulsion system manufacturing capacity in the U.S. (the "Grant Program"). Applicable costs associated with the Grant Program have been charged to Engineering - research and development. The DOE's matching reimbursement is recorded to Other expense, net in the Condensed Consolidated Statements of Comprehensive Income, included in Part I, Item 1 of this Quarterly Report on Form 10-Q, or in the case of capital expenditure, as a reduction in the cost basis of the capital asset.


Table of Contents

Non-GAAP Financial Measures

We use Adjusted net income to measure our overall profitability because we believe it better reflects our cash flow generation by capturing the actual cash interest paid and cash taxes paid rather than our interest expense and tax expense as calculated under accounting principles generally accepted in the United States of America ("GAAP") and excludes the impact of the non-cash annual amortization of certain intangible assets and other certain non-recurring items. We use Adjusted EBITDA, Adjusted EBITDA excluding technology-related license expenses, Adjusted EBITDA margin, Adjusted EBITDA margin excluding technology-related license expenses and Adjusted free cash flow to evaluate and control our cash operating costs and to measure our operating profitability. We believe the presentation of Adjusted net income, Adjusted EBITDA, Adjusted EBITDA excluding technology-related license expenses, Adjusted EBITDA margin, Adjusted EBITDA margin excluding technology-related license expenses and Adjusted free cash flow enhances our investors' overall understanding of the financial performance and cash flow of our business.

You should not consider Adjusted net income, Adjusted EBITDA, Adjusted EBITDA excluding technology-related license expenses, Adjusted EBITDA margin and Adjusted EBITDA margin excluding technology-related license expenses as an alternative to net income, determined in accordance with GAAP, as an indicator of operating performance. You should not consider Adjusted free cash flow as an alternative to net cash provided by operating activities, determined in accordance with GAAP, as an indicator of our cash flow.

A directly comparable GAAP measure to Adjusted net income, Adjusted EBITDA and Adjusted EBITDA excluding technology-related license expenses is Net income. A directly comparable GAAP measure to Adjusted free cash flow is Net cash provided by operating activities. The following is a reconciliation of Net income to Adjusted net income, Adjusted EBITDA, Adjusted EBITDA excluding technology-related license expenses, Adjusted EBITDA margin and Adjusted EBITDA margin excluding technology-related license expenses, and a reconciliation of Net cash provided by operating activities to Adjusted free cash flow:

                                                       For the three                 For the six
                                                       months ended                 months ended
                                                         June 30,                     June 30,
(unaudited, in millions)                            2013          2012           2013          2012
Net income                                        $   50.5      $   412.8      $   78.0      $   470.8
plus:
Interest expense, net                                 33.3           34.1          67.2           74.8
Cash interest expense                                (49.6 )        (52.7 )       (79.6 )        (88.8 )
Income tax expense (benefit)                          31.3         (350.1 )        48.2         (324.9 )
Cash income taxes                                     (1.8 )         (3.5 )        (3.0 )         (6.4 )
Technology-related investments expense (a)              -             8.0           2.5            8.0
Public offering expenses (b)                           0.6            0.4           0.6            6.1
Fee to terminate services agreement with
Sponsors (c)                                            -              -             -            16.0
Amortization of intangible assets                     25.1           37.5          55.0           75.0

Adjusted net income                               $   89.4      $    86.5      $  168.9      $   230.6
Cash interest expense                                 49.6           52.7          79.6           88.8
Cash income taxes                                      1.8            3.5           3.0            6.4
Depreciation of property, plant and equipment         25.0           25.3          49.7           49.9
Loss on repayments and redemptions of long-term
debt (d)                                                -             7.6            -            21.1
Dual power inverter module extended coverage
(e)                                                     -             9.4            -             9.4
Benefit plan re-measurement (f)                         -             2.3            -             2.3
Unrealized loss on hedge contracts (g)                 0.5            1.7           2.4            1.0
Restructuring charge (h)                               1.0             -            1.0             -
Other (i)                                              4.3            1.7           7.7            4.2

Adjusted EBITDA                                   $  171.6      $   190.7      $  312.3      $   413.7
Adjusted EBITDA excluding technology-related
license expenses (j)                              $  171.6      $   190.7      $  318.3      $   413.7

Net sales                                         $  512.1      $   559.4      $  969.5      $ 1,161.3
Adjusted EBITDA margin                                33.5 %         34.1 %        32.2 %         35.6 %
Adjusted EBITDA margin excluding
technology-related licenses expenses (j)              33.5 %         34.1 %        32.8 %         35.6 %
Net cash provided by operating activities         $  129.7      $   106.9      $  184.4      $   246.5
(Deductions) or additions to reconcile to
Adjusted free cash flow:
Additions of long-lived assets                       (13.2 )        (26.8 )       (25.8 )        (62.5 )
Fee to terminate services agreement with
Sponsors (c)                                            -              -             -            16.0
Technology-related license expenses (j)                 -              -            6.0             -

Adjusted free cash flow                           $  116.5      $    80.1      $  164.6      $   200.0

(a) Represents an impairment charge (recorded in Other expense, net) for investments in co-development agreements with various companies to expand our position in transmission technologies.


Table of Contents
(b) Represents fees and expenses (recorded in Other expense, net) related to the initial public offering in March 2012 and proposed secondary offering in April 2013.

(c) Represents a one-time payment (recorded in Other expense, net) to terminate the services agreement with investment funds affiliated with The Carlyle Group and Onex Corporation (collectively, our "Sponsors").

(d) Represents a loss (recorded in Other expense, net) realized on the redemptions and repayments of Allison Transmission, Inc.'s ("ATI") long-term debt.

(e) Represents a charge (recorded in Selling, general and administrative expenses) during the second quarter of 2012 related to an increase in our liability associated with the Dual Power Inverter Module ("DPIM") extended coverage program due to claims data and additional design issues identified during introduction of replacement units.

(f) Represents a settlement charge (recorded in Other expense, net) related to the settlement of pension obligations for certain qualified hourly employees from our hourly defined benefit pension plan to General Motors' pension plan as part of the asset purchase agreement dated June 28, 2007.

(g) Represents unrealized losses (recorded in Other expense, net) on the mark-to-market of our foreign currency and commodities hedge contracts.

(h) Represents a charge (recorded in Selling, general and administrative, and Engineering - research and development) related to an employee headcount reduction program in the second quarter of 2013.

(i) Represents employee stock compensation expense (recorded in Cost of sales, Selling, general and administrative, and Engineering - research and development) and service fees paid to our Sponsors (recorded in Selling, general and administrative expenses).

(j) Represents payments (recorded in Engineering - research and development) for licenses to expand our position in transmission technologies.


Table of Contents

Results of Operations

Comparison of three months ended June 30, 2013 and 2012

The following table sets forth certain financial information for the three months ended June 30, 2013 and 2012. The following table and discussion should be read in conjunction with the information contained in our condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

                                                                 Three months ended June 30,
                                                                    %                                  %
(unaudited, dollars in millions)                 2013          of net sales         2012         of net sales
Net sales                                       $ 512.1                   -        $ 559.4                  -
Gross profit                                      226.1                 44.2 %       251.9                45.0 %
Operating expenses:
Selling, general and administrative expenses       85.6                 16.7         109.1                19.5
Engineering - research and development             22.8                  4.5          23.2                 4.1
Total operating expenses                          108.4                 21.2         132.3                23.6

Operating income                                  117.7                 23.0         119.6                21.4
Other expense, net:
Interest expense, net                             (33.3 )               (6.5 )       (34.1 )              (6.1 )
Other expense, net                                 (2.6 )               (0.5 )       (22.8 )              (4.1 )

Total other expense, net                          (35.9 )               (7.0 )       (56.9 )             (10.2 )

Income before income taxes                         81.8                 16.0          62.7                11.2
Income tax (expense) benefit                      (31.3 )               (6.1 )       350.1                62.6

Net income                                      $  50.5                  9.9 %     $ 412.8                73.8 %

Net sales.

Net sales for the quarter ended June 30, 2013 were $512.1 million compared to $559.4 million for the quarter ended June 30, 2012, a decrease of 8.5%. The decrease was principally driven by a $36.0 million, or 82%, decrease in net sales of North America off-highway products driven by lower demand from natural gas fracturing applications due to weakness in natural gas pricing, a $22.0 million, or 28%, decrease in net sales of defense products due to lower U.S. defense spending and a $3.0 million, or 4%, decrease in net sales of Outside North America on-highway commercial products, partially offset by a $9.0 million, or 50%, increase in net sales of North America hybrid-propulsion systems for transit buses principally driven by intra-year movement in the timing of orders and a $6.0 million, or 20%, increase in net sales of Outside North America off-highway products driven by higher demand in the energy sector partially offset by lower demand in the mining sector.

Gross profit.

Gross profit for the quarter ended June 30, 2013 was $226.1 million compared to $251.9 million for the quarter ended June 30, 2012, a decrease of 10.2%. The decrease was principally driven by $30.0 million related to decreased net sales, partially offset by $2.0 million of favorable foreign exchange, $1.0 million of price increases on certain products and $1.0 million of favorable material costs.

Selling, general and administrative expenses.

Selling, general and administrative expenses for the quarter ended June 30, 2013 were $85.6 million compared to $109.1 million for the quarter ended June 30, 2012, a decrease of 21.5%. The decrease was principally driven by $12.4 million of lower intangible asset amortization, a $9.4 million charge in 2012 related to the DPIM extended coverage program and reduced global commercial spending activities, partially offset by $2.0 million of higher stock compensation expense.

Engineering - research and development.

Engineering expenses for the quarter ended June 30, 2013 were $22.8 million compared to $23.2 million for the quarter ended June 30, 2012, a decrease of 1.7%. The decrease was principally driven by reduced global spending activities.


Table of Contents

Interest expense, net.

Interest expense, net for the quarter ended June 30, 2013 was $33.3 million compared to $34.1 million for the quarter ended June 30, 2012, a decrease of 2.3%. The decrease was principally driven by $2.6 million of lower interest expense as a result of debt repayments, $2.1 million of more favorable mark-to-market adjustments for our interest rate derivatives and $0.3 million of lower amortization of deferred financing charges, partially offset by $3.7 million of higher interest expense as a result of higher interest rates on ATI's Senior Secured Credit Facility (defined as the Term B-2 Loan due 2017 ("Term B-2 Loan"), Term B-3 Loan due 2019 ("Term B-3 Loan") and revolving credit facility) and $0.5 million of higher interest expense related to our interest rate swaps.

Other expense, net.

Other expense, net for the quarter ended June 30, 2013 was $2.6 million compared to $22.8 million for the quarter ended June 30, 2012, a decrease of 88.6%. The decrease in expense was principally driven by an $8.0 million impairment of technology-related investments in 2012, $7.6 million of premiums and expenses in 2012 related to redemptions of long-term debt, $2.3 million related to the hourly pension plan settlement in 2012, $1.2 million of lower unrealized losses on derivative contracts, $1.2 million of lower unfavorable foreign exchange and $0.7 million of increased Grant Program income, partially offset by $0.7 million of expenses related to realized losses on derivative contracts and $0.1 million of increased public offering expenses related to our proposed secondary offering in the second quarter of 2013.

Income tax (expense) benefit.

Income tax expense for the second quarter of 2013 was ($31.3) million resulting in an effective tax rate of (38.3%) versus an effective tax rate of 558% in the second quarter of 2012. The change in the effective tax rate was principally driven by the release of the domestic valuation allowance on our deferred tax assets in the second quarter of 2012 resulting in an income tax benefit of $384.8 million.


Table of Contents

Comparison of six months ended June 30, 2013 and 2012

The following table sets forth certain financial information for the six months ended June 30, 2013 and 2012. The following table and discussion should be read in conjunction with the information contained in our condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

                                                                     Six months ended June 30,
                                                                      %                                     %
(unaudited, dollars in millions)                  2013           of net sales           2012          of net sales
Net sales                                       $   969.5                   -        $  1,161.3                  -
Gross profit                                        424.4                 43.8 %          535.7                46.1 %
Operating expenses:
Selling, general and administrative expenses        173.5                 17.9            210.3                18.1
Engineering - research and development               51.8                  5.4             51.1                 4.4
Total operating expenses                            225.3                 23.3            261.4                22.5

Operating income                                    199.1                 20.5            274.3                23.6
Other expense, net:
Interest expense, net                               (67.2 )               (6.9 )          (74.8 )              (6.4 )
Other expense, net                                   (5.7 )               (0.6 )          (53.6 )              (4.6 )

Total other expense, net                            (72.9 )               (7.5 )         (128.4 )             (11.0 )

Income before income taxes                          126.2                 13.0            145.9                12.6
Income tax (expense) benefit                        (48.2 )               (5.0 )          324.9                27.9

Net income                                      $    78.0                  8.0 %     $    470.8                40.5 %

Net sales.

Net sales for the six months ended June 30, 2013 were $969.5 million compared to $1,161.3 million for the six months ended June 30, 2012, a decrease of 16.5%. The decrease was principally driven by a $107.0 million, or 59%, decrease in net sales of global off-highway products driven by lower demand from North America natural gas fracturing applications due to weakness in natural gas pricing and lower global demand in the mining sector, a $42.0 million, or 27%, decrease in net sales of defense products due to lower U.S. defense spending, a $39.0 million, or 7%, decrease in net sales of global on-highway commercial products and a $9.0 million, or 5%, decrease in net sales of parts and other products, partially offset by a $5.0 million, or 9%, increase in net sales of North America hybrid-propulsion systems for transit buses principally driven by intra-year movements in the timing of orders.

Gross profit.

Gross profit for the six months ended June 30, 2013 was $424.4 million compared to $535.7 million for the six months ended June 30, 2012, a decrease of 20.8%. The decrease was principally driven by $119.0 million related to decreased net sales and $1.0 million of unfavorable material costs, partially offset by $3.0 million attributable to improved manufacturing performance, $3.0 million of price increases on certain products and $2.0 million of favorable foreign exchange.

Selling, general and administrative expenses.

Selling, general and administrative expenses for the six months ended June 30, 2013 were $173.5 million compared to $210.3 million for the six months ended June 30, 2012, a decrease of 17.5%. The decrease was principally driven by $20.0 million of lower intangible asset amortization, a $9.4 million charge in 2012 related to the DPIM extended coverage program and reduced global commercial spending activities, partially offset by higher stock compensation expense.

. . .

  Add ALSN to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for ALSN - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.