ALSN

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2026, for Allison Transmission Holdings, Inc. (ALSN). The reporting period is defined by the completion of the acquisition of Dana Incorporated's off-highway business on January 1, 2026, for approximately $2.628 billion. Consequently, the Company now operates through two reportable segments: Allison Transmission and Allison Off-Highway. Prior period data has been reclassified to reflect this new two-segment structure.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 92% year-over-year for the three months ended June 30, 2026 ($1,566M vs. $814M), driven primarily by the inclusion of the new Allison Off-Highway segment ($706M in Q2 sales). The legacy Allison Transmission segment saw a modest 6% increase.
• Margin Compression: Gross profit margin decreased from 50% in Q2 2025 to 33% in Q2 2026. This is attributed to the lower average gross profit profile of the acquired off-highway products and purchase accounting adjustments (stepped-up inventory and depreciation).
• Increased Interest Expense: Net interest expense rose to $54 million in Q2 2026 from $22 million in Q2 2025, reflecting new debt incurred to fund the acquisition (Incremental Term Loan and Senior Notes).
• Balance Sheet Expansion: Total assets grew from $6.08 billion to $8.72 billion, with significant increases in Goodwill ($755M added), Intangible Assets ($876M added), and Property, Plant, and Equipment due to the acquisition.
• Cash Position: Cash and cash equivalents decreased from $1,495 million at year-end 2025 to $399 million at June 30, 2026, primarily due to the $2.664 billion cash consideration paid for the acquisition.

Outlook, Risks, and Unusual Items

• Guidance: Management expects higher net sales in 2026 driven by the addition of Allison Off-Highway and growth in the Defense and On-Highway end markets.
• Acquisition Integration: The Company is in the process of integrating the acquired business. Significant costs related to integration, consulting, and legal fees ($26M YTD) are recorded in SG&A. Purchase accounting adjustments, including $63M in inventory step-up and $31M in depreciation step-up, impacted YTD gross profit.
• Debt Covenants: The Company maintains a first lien net leverage ratio of 1.01x, well below the 5.50x maximum required by the Senior Secured Credit Facility. This low ratio eliminates excess cash flow payments and reduces interest margins.
• Risks: Key risks include the successful integration of the acquired business, realization of synergies, exposure to commodity price fluctuations (aluminum, steel, iron), and global economic volatility. The Company also faces risks related to defense spending and supply chain disruptions.
• Unusual Items: Non-GAAP adjustments include amortization of acquired intangibles, stepped-up basis depreciation, and acquisition-related expenses. Adjusted EBITDA for the six months ended June 30, 2026, was $766 million.

Investor Verification Checklist

• Integration Progress: Verify the timeline and cost realization for integrating the Dana off-highway business and achieving projected synergies.
• Debt Servicing: Confirm the impact of the new $1.2 billion Incremental Term Loan and $500 million Senior Notes on future interest coverage ratios.
• Legacy Segment Performance: Analyze the underlying performance of the Allison Transmission segment excluding the acquisition, noting the 5% decrease in operating profit YTD.
• Working Capital: Monitor the significant increase in Accounts Receivable ($911M) and Inventories ($840M) relative to the prior year to ensure collection and inventory turnover remain healthy.
• Non-GAAP Reconciliations: Review the reconciliation of GAAP Net Income to Adjusted EBITDA and Adjusted Net Income to understand the magnitude of acquisition-related non-cash charges.