Allison Transmission Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. All financial amounts are in millions of dollars, except per-share data. Allison designs and manufactures commercial, off-highway and defense vehicle propulsion systems, including automatic transmissions and electric hybrid and fully electric systems.
Financial and operating performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $783 | $664 | $1,524 | $1,341 |
| Gross profit / margin | $381 / 49% | $311 / 47% | $742 / 49% | $631 / 47% |
| Operating income / margin | $242 / 31% | $187 / 28% | $472 / 31% | $389 / 29% |
| Net income / net margin | $175 / 22% | $122 / 18% | $345 / 23% | $251 / 19% |
| Diluted EPS | $1.92 | $1.26 | $3.75 | $2.56 |
| Adjusted EBITDA (non-GAAP) | $288 | $227 | $564 | $471 |
| Adjusted EBITDA margin (non-GAAP) | 36.8% | 34.2% | 37.0% | 35.1% |
Second-quarter sales rose 18%; first-half sales rose 14%. For the first half, operating cash flow was $334 versus $226, capital expenditures were $43 versus $50, and adjusted free cash flow (non-GAAP, operating cash flow less additions of long-lived assets) was $291 versus $176. Second-quarter operating cash flow was $141 versus $64; adjusted free cash flow was $122 versus $34.
At June 30, cash and cash equivalents were $351, total assets $4,856, and stockholders’ equity $1,056. Gross debt was $2,522, including a $622 variable-rate term loan and $1,900 of fixed-rate notes; balance-sheet long-term debt, net of current maturities and financing costs, was $2,499. The company had $645 of revolver capacity available, net of letters of credit, and no revolver borrowings. It reported a 0.26x first-lien net leverage ratio and compliance with debt covenants. The term loan rate was 6.93%; swaps hedged $500 of variable-rate debt through September 2025.
For the first half, Allison repurchased $137 of stock, paid $43 in dividends, and made $3 of term-loan principal payments. Inventory was $278, up from $224 at year-end 2022; accounts receivable was $381, versus $363.
Material changes versus the prior comparable period
- Q2 sales growth was led by North America On-Highway (+17%), Service Parts, Support Equipment and Other (+31%), and Outside North America On-Highway (+17%). Defense sales increased 14%; Global Off-Highway sales declined 6%.
- Management attributed higher sales to stronger demand in key markets, price increases, and growth initiatives. Q2 price increases contributed $45 to gross profit; higher sales contributed $43, partly offset by $17 of higher manufacturing expense. Gross margin improved about 190 basis points.
- First-half gross margin improved about 160 basis points. SG&A increased 17% for the half, mainly from higher commercial spending, incentive compensation, and warranty expense.
- Net interest expense declined, while other income improved to $12 for the first half from a $13 expense, principally reflecting changes in marketable securities and foreign exchange. The effective tax rate was 19%, versus 21%.
- First-half operating cash flow increased, driven mainly by higher gross profit and lower operating working-capital requirements, partly offset by higher cash income taxes. Financing cash use increased to $174 from $162, principally due to greater stock repurchases.
Outlook, risks and unusual items
Management expected higher 2023 net sales, citing stronger demand in Global On-Highway and Service Parts, Support Equipment and Other, price increases, and continued growth initiatives. The filing provides no numerical full-year guidance. Management stated that cash, operating cash generation, and revolver availability should be sufficient for known and anticipated requirements for the next twelve months and thereafter.
Risks highlighted include cyclical and macroeconomic conditions, supply-chain and input-cost disruptions, labor availability or disputes, customer concentration, competition and technology shifts including electrification, international and currency exposure, product defects and warranty costs, defense spending, and indebtedness. A 10% move in aluminum or steel prices was estimated to affect annual earnings by approximately $9 or $12, respectively; a 10% aggregate currency move in specified currencies was estimated to affect annual after-tax earnings by $6. A one-eighth percentage-point interest-rate move, assuming the secured facility were fully drawn, was estimated to affect annual interest expense by about $1. These sensitivities exclude certain offsets or cost-sharing arrangements as described in the filing.
Ordinary-course legal matters include commercial, product-liability, personal-injury and workers’ compensation claims; management did not expect any unprovided or uninsured amounts to have a material adverse effect. The company reported no material changes to previously disclosed risk factors. It also completed the LIBOR-to-SOFR transition for its term loan and interest-rate swaps.
Most important facts for investors to verify
- Whether demand and pricing in the principal on-highway and service-parts markets persist, and whether off-highway weakness deepens.
- Whether price increases continue to offset material, manufacturing, warranty and other cost pressures and sustain improved margins.
- Whether cash conversion and inventory levels improve, given the increase in inventory and the effect of working capital on operating cash flow.
- Variable-rate debt exposure, swap coverage and refinancing or repayment requirements; confirm covenant compliance and available revolver capacity.
- The pace of share repurchases and dividends relative to cash generation, debt service and investment needs.
- Developments in customer concentration, supply availability, product claims and other contingencies; the filing does not quantify potential exposure for individual legal matters.