Allison Transmission Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Dollars are in millions, except per-share amounts. Allison designs and manufactures commercial, off-highway and defense vehicle propulsion solutions, including automatic transmissions and electric systems.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $603 | $377 | $1,191 | $1,014 |
| Gross profit | $288 | $165 | $579 | $491 |
| Operating income | $167 | $58 | $347 | $273 |
| Net income | $110 | $23 | $230 | $162 |
| Diluted EPS | $1.01 | $0.20 | $2.07 | $1.41 |
- Q2 sales rose 60%; gross profit rose 75%. Gross margin was 48%, versus 44%, and operating margin was 28%, versus 15%. Net margin was 18%, versus 6%.
- For the first half, sales increased 17%, gross profit 18%, operating income 27% and net income 42%. Gross margin was 49%, versus 48%; operating margin was 29%, versus 27%; net margin was 19%, versus 16%.
- Q2 Adjusted EBITDA, a non-GAAP measure, was $213 (35.3% of sales), versus $115 (30.5%). First-half Adjusted EBITDA was $435 (36.5%), versus $372 (36.7%).
Cash flow, liquidity and debt
- First-half operating cash flow was $271, versus $240; investing cash outflow was $69, versus $45; financing cash outflow was $274, compared with $49 of inflow in 2020. First-half capital additions were $69. Adjusted free cash flow, a non-GAAP measure, was $202, versus $194.
- Cash and equivalents were $238 at June 30, 2021, down from $310 at year-end 2020. The company reported $645 of available revolving-credit capacity, net of letters of credit, and no revolver borrowings.
- Debt principal totaled $2,535: $635 term loan and $1,900 senior notes. Balance-sheet long-term debt, net of current maturities and financing costs, was $2,505. The term loan rate was 1.85%; notes mature in 2027, 2029 and 2031.
- First-lien net leverage was 0.50x; the company reported compliance with debt covenants. Management believes cash, operating cash flow and borrowing capacity are sufficient for requirements over the next 12 months.
- During the first half, Allison repurchased $226 of shares and paid $42 in dividends. $601 remained authorized for repurchases at June 30.
Material changes and management commentary
- Sales growth principally reflected recovery in customer demand after 2020 pandemic disruptions. Q2 North America On-Highway sales rose 84%; Outside North America On-Highway rose 63%; Service Parts, Support Equipment and Other rose 44%. Outside North America Off-Highway sales declined 5%, chiefly due to weaker energy-sector demand.
- Management expects 2021 net sales to increase compared with 2020, primarily from global On-Highway, service parts/support equipment and North America Off-Highway markets, supported by economic recovery and product price increases. No numerical full-year outlook was provided.
- Higher sales, price increases and the absence of 2020 restructuring charges supported margins. These benefits were partly offset by unfavorable material costs, higher manufacturing expense and incentive compensation. Management cited raw-material and component inflation, freight costs and labor-related overtime.
- COVID-19-related supply-chain, labor and raw-material constraints continued in the first half. Allison specifically identified the global semiconductor shortage and possible limits on transmission control module availability; persistent constraints and inflationary costs could materially affect the business.
Risks, contingencies and unusual items
- Key disclosed risks include pandemic effects, supply and labor disruptions, inflation in materials and freight, substantial indebtedness, cyclical end markets, customer concentration, competition, product defects and warranty exposure, international operations, and uncertainty in defense spending and technology development.
- Interest-rate swaps had $750 notional in aggregate and a $45 liability at June 30; $14 of losses were expected to be reclassified to earnings within 12 months. Currency and commodity sensitivity estimates were approximately $4 annual after-tax earnings impact for a 10% aggregate move in specified currencies, and $4 for aluminum and $6 for steel price changes, respectively.
- An environmental remediation liability of $3 was recorded for historical contamination at the Indianapolis facilities. The company is involved in ordinary-course claims and proceedings; management did not expect any unprovided or uninsured exposure to materially affect financial position, results or cash flows.
- Management reported no material change in risk factors from the 2020 Form 10-K, no off-balance-sheet arrangements, effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether semiconductor availability, labor constraints, freight costs and material inflation affect production, margins or the 2021 sales outlook.
- Whether sales recovery and price increases persist across end markets, particularly On-Highway and service parts, and whether Off-Highway energy weakness continues.
- How working-capital needs, capital spending, buybacks and dividends affect cash generation and liquidity.
- Debt maturities, variable-rate exposure, covenant compliance and the effect of LIBOR transition on borrowings and hedges.
- Developments in environmental remediation, product warranty liabilities and ordinary-course litigation.