Allison Transmission Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts are in millions of dollars except per-share data. Allison designs and manufactures commercial, off-highway and defense vehicle propulsion solutions, including automatic transmissions and electric systems.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $710 | $567 | $2,051 | $1,758 |
| Gross profit | $328 | $261 | $959 | $840 |
| Gross margin | 46% | 46% | 47% | 48% |
| Operating income | $203 | $146 | $592 | $493 |
| Net income | $139 | $94 | $390 | $324 |
| Diluted EPS | $1.45 | $0.89 | $4.02 | $2.97 |
| Adjusted EBITDA (non-GAAP) | $245 | $189 | $716 | $624 |
| Adjusted EBITDA margin (non-GAAP) | 34.5% | 33.3% | 34.9% | 35.5% |
| Operating cash flow | $207 | $196 | $433 | $467 |
| Adjusted free cash flow (non-GAAP) | $182 | $153 | $358 | $355 |
Q3 operating margin was 29%, compared with 26% a year earlier; net margin was 19.6%, versus 16.6%. For the nine-month period, operating margin was 29%, compared with 28%, and net margin was 19.0%, versus 18.4%.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $180 at September 30, 2022, up from $127 at year-end 2021. Cash from operating activities was $433 for the first nine months, down from $467; capital expenditures were $75.
- Debt totaled $2,527 before deferred financing costs, compared with $2,531 at year-end. This comprised a $627 variable-rate term loan and $1,900 of fixed-rate senior notes. The term-loan rate was 4.81%; the fair value of debt was $2,197.
- The company had no revolver borrowings at quarter-end and $645 of availability, net of letters of credit. First-lien net leverage was 0.48x, and the company reported compliance with its debt covenants. Management said available cash, operating cash flow and borrowing capacity were expected to meet known and anticipated needs for the next 12 months and thereafter.
- Nine-month financing uses included $224 of share repurchases and $61 of dividends. The repurchase authorization had $1,089 remaining at quarter-end.
Material changes and drivers
- Q3 sales rose 25% year over year; nine-month sales rose 17%. Growth reflected stronger demand, price increases and gains across most end markets. Q3 North America on-highway sales increased 24%, service parts and support equipment 25%, and outside North America on-highway 27%. Defense sales declined 10% in Q3 and 25% for the nine-month period.
- Q3 gross profit increased 26%, with reported gross margin broadly flat year over year as price increases were offset by higher input and manufacturing costs. Nine-month gross margin declined about 100 basis points, to 47%, amid higher cost of goods sold.
- Q3 other expense was $15, versus $6 of other income a year earlier, mainly reflecting a $9 unrealized investment loss and $5 of unfavorable foreign exchange. Nine-month other expense was $28, versus $12 of other income in 2021, including a $20 unrealized investment loss and unfavorable foreign-exchange impacts.
- Effective tax rates fell to 13% for Q3 from 24%, and to 18% for the nine-month period from 22%, principally due to enacted state tax legislation that generated a deferred tax benefit.
Outlook, risks and notable items
- Management expected higher full-year 2022 sales, citing demand in on-highway, off-highway and service parts, price increases and growth initiatives. The filing provides no numerical full-year guidance.
- Management warned that customer inability to obtain components was reducing commercial vehicle build schedules and expected component availability to continue affecting schedules through the remainder of 2022. The company also cited raw-material and component inflation, higher freight, labor and logistics costs, labor shortages, foreign-exchange volatility, the war in Ukraine and COVID-19-related uncertainty.
- Interest-rate exposure includes variable-rate debt; $500 of term-loan exposure was hedged through September 2025. The filing estimated a $1 annual interest-expense impact from a one-eighth percentage-point rate move if the secured facility were fully drawn. Management did not expect the planned LIBOR transition to materially affect the company.
- The company acquired AVTEC off-highway transmission and component-machining assets for $23 in cash in March 2022. It recorded $13 of goodwill, $8 of intangible assets and $2 of property, plant and equipment.
- Environmental remediation liability was $3. The company was involved in ordinary-course legal claims and proceedings and said any liability beyond recorded amounts or insurance was not expected to materially affect its financial position, results or cash flows. No material risk-factor changes were reported.
Important facts for investors to verify
- Whether supply constraints and customer vehicle build schedules continue to limit sales despite demand, and how input-cost inflation affects margins.
- Whether the Q3 improvement in adjusted EBITDA margin is sustainable; nine-month adjusted EBITDA margin remained below the prior-year level.
- Cash conversion and working-capital needs, including the decline in nine-month operating cash flow.
- Variable-rate borrowing costs, the LIBOR transition and the company’s ability to maintain covenant compliance while funding debt service, dividends and repurchases.
- The impact of investment valuation and foreign-exchange changes, as well as the integration and performance of the AVTEC assets.