Allison Transmission Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Allison designs and manufactures commercial, off-highway and defense vehicle propulsion systems, including automatic transmissions and electrified systems. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $567 | $532 | $1,758 | $1,546 |
| Gross profit | $261 | $254 | $840 | $745 |
| Operating income | $146 | $128 | $493 | $401 |
| Net income | $94 | $77 | $324 | $239 |
| Diluted EPS | $0.89 | $0.68 | $2.97 | $2.10 |
| Adjusted EBITDA (non-GAAP) | $189 | $174 | $624 | $546 |
| Adjusted EBITDA margin (non-GAAP) | 33.3% | 32.7% | 35.5% | 35.3% |
| Operating cash flow | $196 | $162 | $467 | $402 |
| Adjusted free cash flow (non-GAAP) | $153 | $136 | $355 | $330 |
Q3 gross margin was approximately 46%, down 170 basis points year over year; nine-month gross margin was approximately 48%, down 40 basis points. At September 30, cash and cash equivalents were $261, compared with $310 at year-end 2020. The company had $645 of undrawn revolving-credit availability, net of letters of credit. Total debt was $2,533 gross and $2,504 net of financing costs and current maturities. Stockholders’ equity was $707.
Changes versus comparable periods
- Q3 sales increased 7%; nine-month sales increased 14%. Growth reflected recovery in on-highway markets outside North America, higher off-highway demand and service-parts sales. Q3 North America on-highway sales fell 2% and defense sales fell 30%.
- Q3 net income rose to $94 from $77; nine-month net income rose to $324 from $239. Lower SG&A and interest costs supported results, while increased R&D spending and higher production costs were offsets.
- Material costs, manufacturing expense and incentive compensation pressured gross margin. Management cited $16 of unfavorable material costs in Q3 and $34 over nine months, partly offset by product price increases.
- Nine-month operating cash flow increased $65, but investing and financing cash outflows also rose. Capital expenditures were $112 versus $84 in the prior-year period.
Debt, capital allocation and developments
Debt comprised a $633 variable-rate term loan due 2026 and fixed-rate notes of $400 at 4.75% due 2027, $500 at 5.875% due 2029 and $1,000 at 3.75% due 2031. No revolving-credit borrowings were outstanding. The company reported a 0.46x first-lien net leverage ratio and compliance with debt covenants. It repurchased $326 of shares and paid $62 in dividends during the first nine months; $501 remained authorized for repurchases at quarter-end.
During the quarter, Allison entered a strategic collaboration framework with Jing-Jin Electric Technologies (JJE) for electrified commercial-vehicle powertrains and loaned $11 to JJE’s U.S. subsidiary. On October 20, 2021, Allison announced an intended approximately $42 investment in JJE’s IPO for a 3.25% stake. A September asset-purchase agreement provides for an approximately $27 acquisition of parts of AVTEC’s Indian off-highway business, subject to conditions.
Outlook, risks and contingencies
The filing provides no numerical earnings or sales guidance. Management said it expected cash, operating cash generation and available revolver capacity to meet requirements for the next 12 months. It also warned that pandemic-related supply-chain, labor, raw-material, freight and logistics constraints were continuing, and could persist. Customer shortages of components—including semiconductors—reduced commercial-vehicle build schedules and limited Allison sales despite stronger demand. Inflation and labor shortages increased costs; vaccination or testing requirements could add labor or expense pressures.
Other stated risks include substantial indebtedness, cyclical and competitive markets, customer concentration, international and currency exposure, product defects and warranty costs, and the uncertain outcomes of R&D and collaborations. The company recorded a $3 environmental remediation liability for its Indianapolis facilities. It is involved in ordinary-course legal claims and proceedings and stated that any liability beyond amounts provided or insured was not expected to materially affect its financial position, results or cash flows.
Important facts for investors to verify
- Whether supply-chain and semiconductor constraints, customer build schedules, and input-cost inflation improve or further affect sales and margins.
- Whether pricing actions and cost controls offset material, manufacturing, freight and labor pressures.
- Cash conversion and working-capital trends, particularly inventory growth and the effect of capital spending.
- Debt service, variable-rate exposure, covenant headroom, and the company’s continued ability to fund repurchases and dividends.
- Progress, funding and terms of the JJE collaboration and proposed investment, and completion and economics of the AVTEC transaction.