Allison Transmission Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise stated. Allison designs and manufactures commercial, off-highway and defense vehicle propulsion solutions, including automatic transmissions and electric and hybrid systems.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Net sales | $741 million | $677 million; up 9% |
| Gross profit / margin | $361 million / 49% | $320 million / 47% |
| Operating income | $230 million | $202 million |
| Net income | $170 million | $129 million |
| Diluted EPS | $1.85 | $1.30 |
| Operating cash flow | $193 million | $162 million |
| Adjusted free cash flow (non-GAAP) | $169 million | $142 million |
| Cash and cash equivalents | $344 million | $232 million at Dec. 31, 2022 |
| Long-term debt, net | $2.500 billion | $2.501 billion at Dec. 31, 2022 |
Gross margin expanded 140 basis points. Adjusted EBITDA was $276 million, or 37.2% of sales, versus $244 million, or 36.0%, in Q1 2022. Capital expenditures were $24 million. Investing activities used $22 million and financing activities used $59 million, including $40 million of share repurchases and $22 million of dividends.
At March 31, 2023, Allison had $2.523 billion of debt principal, including a $623 million variable-rate term loan and $1.900 billion of senior notes. The term loan rate was 6.61%; $500 million of variable-rate debt was covered by interest-rate swaps. The company had no revolver borrowings and $644 million of revolver capacity available, net of letters of credit. It reported a 0.28x first-lien net leverage ratio and compliance with debt covenants.
Changes and drivers
- Sales growth was led by Service Parts, Support Equipment and Other, up 32% to $183 million, and North America On-Highway, up 9% to $376 million. Defense sales fell 23% to $27 million. Outside North America On-Highway sales were nearly flat; North America and outside North America Off-Highway sales were $24 million and $23 million, respectively.
- Management attributed improved gross profit principally to $56 million of price increases, partly offset by higher manufacturing expense and direct material costs. Cost of sales rose 6%, slower than sales growth.
- SG&A increased 16% to $87 million, including higher commercial activity spending and warranty expense. Net interest expense edged down to $28 million; higher variable-rate term-loan interest was offset by hedge benefits and interest income.
- Other income was $10 million versus a $10 million expense in Q1 2022, principally reflecting a favorable change in marketable securities.
- Cash increased by $112 million during the quarter. Receivables and inventories increased by $30 million and $32 million, respectively, as operating working capital used cash.
Outlook, risks and contingencies
Management expected higher 2023 sales, citing anticipated demand growth in Global On-Highway, Global Off-Highway and Service Parts, Support Equipment and Other, price increases, and growth initiatives. The filing provides no numerical full-year revenue or earnings guidance. Management believed operating cash flow, cash on hand and revolver capacity would cover known and anticipated needs for the next 12 months and thereafter.
Risks discussed include supply-chain disruption and higher labor, freight, raw-material and energy costs; economic and end-market cyclicality; customer concentration; competition and technology transition, including electrification; product defects and warranty exposure; international and currency risks; and substantial indebtedness. A 10% change in aluminum or steel prices was estimated to affect annual earnings by approximately $9 million or $12 million, respectively; a 10% aggregate change in selected currencies was estimated to affect annual after-tax earnings by $7 million. Legal proceedings and claims arise in the ordinary course; the company stated that any liability beyond amounts provided or insured was not expected to materially affect its financial position, results or cash flows. No material changes to previously reported risk factors were disclosed.
Unusual or notable items include the February 2023 credit-agreement amendment replacing LIBOR with SOFR plus a 0.1% spread adjustment, and favorable marketable-securities results affecting year-over-year other income. Management cited uncertainty from inflation-related actions, the war in Ukraine, COVID-19 effects and resulting supply, demand, currency, rate and input-cost impacts.
Most important facts for investors to verify
- Whether expected demand and price increases continue to support sales and margin gains, particularly as end-market performance differed across segments.
- Whether working-capital needs, especially inventory and receivables, affect future cash conversion and free cash flow.
- Variable-rate debt exposure, hedge effectiveness and the planned transition of swap reference rates to SOFR before the temporary reference-rate relief ends in December 2024.
- Debt service and capital-allocation priorities, including dividends and remaining share-repurchase authorization of approximately $995 million.
- Developments in supply availability, commodity prices, customer demand, warranty claims and ordinary-course legal contingencies.