Allison Transmission Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Allison designs and manufactures commercial, off-highway and defense vehicle propulsion solutions, including automatic transmissions and electric systems. Unless noted otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $664 million | $603 million | $1,341 million | $1,191 million |
| Gross profit / margin | $311 million / 46.8% | $288 million / 47.8% | $631 million / 47.0% | $579 million / 48.6% |
| Operating income / margin | $187 million / 28.2% | $167 million / 27.7% | $389 million / 29.0% | $347 million / 29.1% |
| Net income / margin | $122 million / 18.4% | $110 million / 18.2% | $251 million / 18.7% | $230 million / 19.3% |
| Diluted EPS | $1.26 | $1.01 | $2.56 | $2.07 |
| Adjusted EBITDA / margin | $227 million / 34.2% | $213 million / 35.3% | $471 million / 35.1% | $435 million / 36.5% |
| Operating cash flow | $66 million | $140 million | $229 million | $271 million |
| Adjusted free cash flow | $36 million | $95 million | $179 million | $202 million |
Balance sheet, debt and liquidity
- At June 30, 2022, cash and equivalents were $122 million; current assets were $765 million and current liabilities $431 million.
- Total debt principal was $2.528 billion: $628 million term loan and $1.900 billion senior notes. Net debt, using reported cash, was approximately $2.406 billion. The term loan bears a variable rate; its elected rate was 3.39% at quarter-end. Notes mature in 2027, 2029 and 2031; the term loan matures in 2026.
- The company had no revolving-credit borrowings at quarter-end and reported $645 million of availability, net of letters of credit. Its first-lien net leverage ratio was 0.58x; it reported compliance with debt covenants.
- Six-month capital expenditures were $50 million. The company paid $41 million in dividends and repurchased $115 million of stock during the six-month period.
Changes versus the comparable periods
- Q2 sales increased 10% and net income increased 11%; first-half sales increased 13% and net income increased 9%.
- Higher sales and product price increases supported gross profit, but cost of sales grew faster than revenue. Gross margin declined about 100 basis points in Q2 and 150 basis points for the first half, primarily from higher input costs.
- Q2 sales growth included North America On-Highway (+13%) and Global Off-Highway (+93%); Defense sales fell 40%. For the first half, Defense sales declined 31%.
- First-half operating cash flow fell to $229 million from $271 million, reflecting higher incentive compensation, interest and tax payments, partly offset by higher gross profit and lower working-capital funding needs. Adjusted free cash flow decreased to $179 million from $202 million.
Outlook, commentary and risks
- Management expected higher 2022 demand in Global On-Highway, Global Off-Highway and Service Parts, Support Equipment & Other, and price increases on certain products. No specific full-year financial guidance figures are provided in the supplied filing text.
- Management said customer demand had increased, but customers’ component shortages were reducing commercial-vehicle build schedules; it expected component availability to continue to constrain schedules through the remainder of 2022.
- Risks include supply-chain and labor constraints, raw-material and component inflation, freight and logistics costs, foreign-exchange volatility, COVID-19 impacts and the war in Ukraine. The business is also exposed to cyclical vehicle markets, customer concentration, product-quality and warranty risks, and execution risks in technology and acquisitions.
- Q2 and first-half other expense/income included unfavorable foreign-exchange and rabbi-trust movements; first-half results also included an $11 million unrealized loss on marketable securities, partly offset by a $6 million technology-investment gain.
- The company acquired AVTEC off-highway business assets for $23 million in cash in March 2022. It reported a $3 million environmental remediation liability and said ordinary-course legal matters were not expected to have a material adverse effect. No material changes to previously reported risk factors were identified.
Important facts for investors to verify
- Whether commercial-vehicle component supply and build schedules improve as management expects, and how they affect demand and revenue.
- Whether product price increases can offset continued materials, labor, freight and manufacturing cost inflation and protect margins.
- The persistence of cash-flow pressure from working capital, compensation, interest and taxes, alongside dividends, repurchases and acquisition spending.
- Variable-rate debt exposure, refinancing and maturity plans, and continued compliance with credit-agreement covenants.
- Performance and integration of the AVTEC acquisition, and the eventual impact of marketable-security valuation, foreign exchange, and other identified risks.