Allison Transmission Holdings, Inc. — FY2023 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2023; it is not a standalone fourth-quarter report. Allison designs and manufactures automatic transmissions and hybrid and fully electric propulsion systems for commercial, off-highway and defense vehicles. Approximately 75% of 2023 revenue came from North America.
Financial performance
| Metric ($ millions, except per-share data and percentages) | 2023 | 2022 |
|---|---|---|
| Net sales | $3,035 | $2,769 |
| Gross profit / margin | $1,470 / 48% | $1,297 / 47% |
| Operating income / margin | $919 / 30% | $784 / 28% |
| Net income / net margin | $673 / 22.2% | $531 / 19.2% |
| Diluted EPS | $7.40 | $5.53 |
| Operating cash flow | $784 | $657 |
| Capital expenditures | $125 | $167 |
| Adjusted free cash flow (non-GAAP) | $659 | $490 |
Revenue increased 10%; gross margin expanded 160 basis points. Adjusted EBITDA was $1,108 million, or 36.5% of sales, versus $961 million, or 34.7%, in 2022. These are non-GAAP measures.
Revenue mix and year-over-year changes
- North America on-highway: $1,529 million, up 13%, chiefly from stronger Class 8 vocational and medium-duty demand and price increases.
- Service parts, support equipment and other: $696 million, up 18%, reflecting stronger demand and pricing.
- Defense: $166 million, up 14%, on increased wheeled and tracked vehicle demand.
- Outside North America on-highway: $477 million, up 3%, mainly from pricing and growth initiatives.
- Global off-highway: $167 million combined, down 22%, primarily because of weaker energy-sector demand, partly offset by mining and construction demand outside North America.
Higher prices and sales volumes lifted gross profit; higher manufacturing and material costs partly offset those benefits. SG&A rose 9%, including higher commercial spending, incentive compensation and warranty expense. Research and development expense increased 5% as product initiatives spending grew. Net interest expense declined to $107 million from $118 million; other income was $15 million, compared with a $21 million expense in 2022. The effective tax rate was 19%, versus 18%.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $555 million at year-end, up from $232 million. Operating cash flow was $784 million; investing activities used $129 million and financing activities used $332 million.
- Total debt was $2,518 million, versus $2,525 million a year earlier. Debt included a $618 million variable-rate term loan due 2026 and fixed-rate notes of $400 million due 2027, $500 million due 2029 and $1,000 million due 2031.
- The company had $645 million available under its $650 million revolving facility, net of letters of credit, and no revolver borrowings. It reported a 0.06x first-lien net leverage ratio and compliance with debt covenants.
- In 2023, Allison repurchased approximately $263 million of shares and paid $83 million in dividends. Approximately $773 million remained authorized for repurchases at year-end.
Management said cash, operating cash generation and revolver capacity should meet known and anticipated cash requirements for the next 12 months and thereafter. It expected 2024 capital expenditures and cash income taxes to be comparable to 2023.
Outlook, risks and unusual items
Management expected higher 2024 net sales, supported by price increases on certain products and continued growth initiatives; it did not provide a numerical sales or earnings forecast in the cited discussion. A new four-year UAW Local 933 agreement, ratified in January 2024 and expiring in November 2027, is expected to increase labor costs significantly.
- Key exposures include cyclical commercial-vehicle markets, customer concentration (the top five OEMs represented approximately 52% of 2023 sales), competition and potential faster-than-expected adoption of electric propulsion, and uneven adoption of automatic transmissions outside North America.
- Supply risks include commodity-price volatility, constrained or single-source components, labor availability and geopolitical disruption. Approximately 75% of component spending was sourced from about 40 suppliers; management noted that supply constraints had affected and could continue to affect customer demand fulfillment.
- Manufacturing is concentrated in Indianapolis, which produces approximately 90% of transmissions. A major disruption there could be difficult for other plants to offset.
- Product warranty liabilities totaled $59 million at year-end, including $15 million of net liability adjustments during 2023. Warranty estimation was the auditor’s critical audit matter.
- Routine legal, product-liability and other claims were disclosed; management did not expect existing matters to materially affect financial condition or results. No goodwill or indefinite-lived intangible impairment was identified in 2023.
Important facts for investors to verify
- Whether 2024 sales growth and pricing can offset the expected UAW labor-cost increases and ongoing material and supply-chain pressures.
- Whether strong cash generation is sustainable as inventory rose to $276 million from $224 million and customer demand remains cyclical.
- The assumptions behind the $59 million warranty reserve and the development of warranty claims and field actions.
- Debt refinancing and repayment timing, especially the $606 million of scheduled principal payments in 2026, and the variable-rate term loan’s interest exposure.
- Execution and returns on electrification and other product-development initiatives, alongside customer concentration and Indianapolis production concentration.