Allison Transmission Holdings, Inc. — 2023 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; unaudited. Allison designs and manufactures commercial on-highway, off-highway and defense propulsion solutions, including automatic transmissions and hybrid and electric systems. It reports one operating segment.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $736 million | $710 million | $2,260 million | $2,051 million |
| Gross profit | $357 million | $328 million | $1,099 million | $959 million |
| Operating income | $222 million | $203 million | $694 million | $592 million |
| Net income | $158 million | $139 million | $503 million | $390 million |
| Diluted EPS | $1.76 | $1.45 | $5.53 | $4.02 |
- Q3 sales increased 4%; nine-month sales increased 10%. Q3 gross margin was approximately 49% versus 46%; operating margin was 30% versus 29%; net margin was 21.5% versus 19.6%.
- Adjusted EBITDA, a non-GAAP measure, was $267 million in Q3 versus $245 million, with margin of 36.3% versus 34.5%. Nine-month Adjusted EBITDA was $831 million versus $716 million, with margin of 36.8% versus 34.9%.
- Q3 growth reflected North America On-Highway, Defense and Service Parts, Support Equipment and Other; these gains were partly offset by weaker Global Off-Highway sales. For the nine-month period, North America On-Highway and service-related sales were major contributors to growth.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $546 million versus $433 million. Capital additions were $73 million versus $75 million; Adjusted free cash flow, a non-GAAP measure, was $473 million versus $358 million.
- At September 30, 2023, cash and cash equivalents were $501 million, current assets $1,217 million and current liabilities $504 million.
- Debt principal totaled $2,520 million: $620 million term loan and $1,900 million senior notes. The balance sheet reported $2,498 million of long-term debt, net. The term loan carried a 7.17% rate at quarter-end; $500 million of variable-rate debt was hedged through September 2025.
- The company had no revolving-credit borrowings and $645 million available under its $650 million facility, net of letters of credit. First-lien net leverage was 0.11x; the company reported compliance with debt covenants.
- Nine-month financing uses included $157 million of share repurchases and $63 million of dividends. Remaining repurchase authorization was approximately $878 million.
Changes, outlook and key risks
- Q3 price increases were a principal driver of higher gross profit and margin. For the first nine months, gross profit rose 15%, while SG&A increased 15%, partly due to higher warranty expense, commercial activity and incentive compensation.
- Management expected higher 2023 net sales, citing demand in Global On-Highway and Service Parts, Support Equipment and Other markets, product price increases and growth initiatives. The filing provides no numerical full-year guidance.
- Management said operating cash flow, cash balances and revolver capacity should be sufficient for known and anticipated cash needs for the next 12 months and thereafter.
- Warranty liabilities totaled $59 million at September 30, 2023 versus $46 million at September 30, 2022. Management cited increased warranty expense as a factor in higher SG&A.
- Risks include cyclical vehicle markets and macroeconomic conditions, supply or labor disruptions, commodity-price and foreign-exchange exposure, customer concentration, competition and technology shifts including electrification, product defects and warranty claims, international risks, and indebtedness. A 10% move in aluminum or steel prices was estimated to change annual earnings by approximately $9 million or $12 million, respectively; a 10% aggregate currency move in specified currencies was estimated to affect annual after-tax earnings by $5 million.
- The company reported ordinary-course legal claims, including commercial, product-liability, personal-injury and workers’ compensation matters, and did not expect any liability beyond recorded amounts or insurance to materially affect its financial position, results or cash flows. No material changes to previously reported risk factors were disclosed.
Important facts for investors to verify
- Whether price increases and end-market demand continue to support sales and margins, particularly if Global Off-Highway weakness persists.
- Future warranty costs and the development of warranty liabilities, which were higher than a year earlier.
- Variable-rate debt exposure, effectiveness and duration of interest-rate hedges, and refinancing or repayment needs at debt maturities.
- Cash generation and working-capital trends, alongside the company’s continued dividends and share repurchases.
- Any changes to the qualitative 2023 outlook, since the filing gave no numerical full-year sales or earnings guidance.