UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No.
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification Number) |
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(Address of Principal Executive Offices) |
(Zip Code) |
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(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of April 13, 2023, there were
INDEX
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Item 1. |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 6. |
38 |
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39 |
2
PART I. FINANCIAL INFORMATION |
ITEM 1. Financial Statements
Allison Transmission Holdings, Inc.
Condensed Consolidated Balance Sheets
(unaudited, dollars in millions, except share and per share data)
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March 31, |
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December 31, |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable – net of allowance for doubtful accounts of $ |
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Inventories |
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Other current assets |
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Total Current Assets |
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Property, plant and equipment, net |
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Intangible assets, net |
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Goodwill |
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Marketable securities |
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Other non-current assets |
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TOTAL ASSETS |
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$ |
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$ |
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LIABILITIES |
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Current Liabilities |
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Accounts payable |
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$ |
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$ |
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Product warranty liability |
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Current portion of long-term debt |
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Deferred revenue |
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Other current liabilities |
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Total Current Liabilities |
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Product warranty liability |
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Deferred revenue |
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Long-term debt |
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Deferred income taxes |
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Other non-current liabilities |
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TOTAL LIABILITIES |
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(see Note P) |
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STOCKHOLDERS’ EQUITY |
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Common stock, $ |
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Non-voting common stock, $ |
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Preferred stock, $ |
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Paid in capital |
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Accumulated deficit |
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( |
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( |
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Accumulated other comprehensive loss, net of tax |
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( |
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( |
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TOTAL STOCKHOLDERS’ EQUITY |
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TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY |
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$ |
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$ |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
3
Allison Transmission Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Income
(unaudited, dollars in millions, except per share data)
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Three Months Ended March 31, |
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2023 |
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2022 |
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Net sales |
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$ |
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$ |
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Cost of sales |
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Gross profit |
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Selling, general and administrative |
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Engineering — research and development |
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Operating income |
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Interest expense, net |
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( |
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Other income (expense), net |
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( |
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Income before income taxes |
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Income tax expense |
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( |
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( |
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Net income |
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$ |
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$ |
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Basic earnings per share attributable to common stockholders |
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$ |
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$ |
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Diluted earnings per share attributable to common stockholders |
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$ |
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$ |
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Comprehensive income, net of tax |
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$ |
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$ |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
4
Allison Transmission Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited, dollars in millions)
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Three Months Ended March 31, |
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2023 |
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2022 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation of property, plant and equipment |
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Amortization of intangible assets |
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Deferred income taxes |
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Stock-based compensation |
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Unrealized (gain) loss on marketable securities |
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( |
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Technology-related investments gain |
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( |
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( |
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Other |
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Changes in assets and liabilities: |
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Accounts receivable |
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( |
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( |
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Inventories |
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( |
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Accounts payable |
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Other assets and liabilities |
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( |
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Net cash provided by operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Additions of long-lived assets |
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( |
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Proceeds from technology-related investments |
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Business acquisitions |
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( |
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Investment in equity method investee |
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( |
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Net cash used for investing activities |
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( |
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( |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Repurchases of common stock |
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( |
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( |
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Dividend payments |
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Proceeds from exercise of stock options |
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Taxes paid related to net share settlement of equity awards |
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( |
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( |
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Payments on long-term debt |
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( |
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( |
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Borrowings on revolving credit facility |
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Payments on revolving credit facility |
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( |
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Net cash used for financing activities |
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( |
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( |
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Effect of exchange rate changes on cash |
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Net increase in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
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$ |
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$ |
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
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Cash paid during period for: |
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Interest |
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$ |
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Income taxes |
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$ |
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Non-cash investing activities: |
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Capital expenditures in liabilities |
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$ |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
5
Allison Transmission Holdings, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(unaudited, dollars in millions)
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Three months ended |
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Common Stock |
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Non-voting Common Stock |
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Preferred Stock |
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Paid-in Capital |
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Accumulated (Deficit) Income |
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Accumulated Other Comprehensive (Loss) Income, net of tax |
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Stockholders' Equity |
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Balance at December 31, 2021 |
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$ |
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$ |
— |
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$ |
— |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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Pension and OPEB liability adjustment |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Interest rate swaps |
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— |
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— |
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— |
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— |
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— |
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Issuance of common stock |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
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Repurchase of common stock |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Dividends on common stock |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Net income |
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— |
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— |
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— |
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— |
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— |
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Balance at March 31, 2022 |
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$ |
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$ |
— |
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$ |
— |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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Balance at December 31, 2022 |
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$ |
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$ |
— |
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$ |
— |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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Pension and OPEB liability adjustment |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Foreign currency translation adjustment |
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— |
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— |
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— |
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— |
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— |
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Interest rate swaps |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Issuance of common stock |
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— |
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— |
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— |
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— |
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— |
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Repurchase of common stock |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Dividends on common stock |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Net income |
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— |
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— |
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— |
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— |
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— |
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Balance at March 31, 2023 |
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$ |
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$ |
— |
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$ |
— |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
6
Allison Transmission Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(UNAUDITED)
NOTE A. OVERVIEW
Overview
Allison Transmission Holdings, Inc. and its subsidiaries (“Allison” or the “Company”) design and manufacture vehicle propulsion solutions, including commercial-duty on-highway, off-highway and defense fully automatic transmissions and electric hybrid and fully electric systems. The business was founded in 1915 and has been headquartered in Indianapolis, Indiana since inception. Allison is traded on the New York Stock Exchange under the symbol, “ALSN”.
Although approximately
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The condensed consolidated financial statements have been prepared in accordance with accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the condensed consolidated financial statements do not include all information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. The information herein reflects all normal recurring material adjustments, which are, in the opinion of management, necessary for the fair statement of the results for the periods presented. The condensed consolidated financial statements herein consist of all wholly-owned domestic and foreign subsidiaries with all significant intercompany transactions eliminated.
7
These condensed consolidated financial statements present the financial position, results of comprehensive income, cash flows and statements of stockholders’ equity of the Company. Certain immaterial reclassifications have been made in the condensed consolidated financial statements of prior periods to conform to the current period presentation. These reclassifications had no material impact on previously reported net income, total stockholders’ equity or cash flows. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the Securities and Exchange Commission on February 16, 2023. The interim period financial results for the three-month periods presented are not necessarily indicative of results to be expected for any other interim period or for the entire year.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Estimates include, but are not limited to, sales incentives, government price adjustments, fair market values and future cash flows associated with goodwill, indefinite-lived intangibles, definite-lived intangibles, long-lived asset impairment tests, useful lives for depreciation and amortization, warranty liabilities, core deposit liabilities, environmental liabilities, determination of discount rate and other assumptions for pension and other post-retirement benefit ("OPEB") expense, determination of discount rate and period for leases, income taxes and deferred tax valuation allowances, derivative valuation, assumptions for business combinations and contingencies. The Company’s accounting policies involve the application of judgments and assumptions made by management that include inherent risks and uncertainties. Due to the uncertainty surrounding global economic conditions, including as a result of government actions to control inflation, the war in Ukraine and the ongoing effects of the COVID-19 pandemic, and the resulting impacts on the Company's supply chain, demand for its products, foreign exchange rates, interest rates and the cost and availability of raw materials, labor, energy and transport, actual results could differ materially from these estimates and assumptions used in preparation of the financial statements including, but not limited to, future cash flows associated with goodwill, indefinite-lived intangibles, definite-lived intangibles, long-lived asset impairment tests, determination of discount rate and other assumptions for pension and OPEB expense and income taxes. Changes in estimates are recorded in results of operations in the period that the events or circumstances giving rise to such changes occur.
8
NOTE C. REVENUE
Revenue is recognized as each distinct performance obligation within a contract is satisfied. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. The Company enters into long-term agreements (“LTAs”) and distributor agreements with certain customers. The LTAs and distributor agreements do not include committed volumes until underlying purchase orders are issued; therefore, the Company determined that purchase orders are the contract with a customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when the performance obligation is satisfied, as there is no right of return.
Some of the Company's contracts include multiple performance obligations, most commonly the sale of both a transmission and extended transmission coverage ("ETC"). The Company allocates the contract’s transaction price to each performance obligation based on the standalone selling price of each distinct good or service in the contract.
The Company may also use volume-based discounts and rebates as marketing incentives in the sales of both vehicle propulsion solutions and service parts, which are accounted for as variable consideration. The Company records the impact of the incentives as a reduction to revenue when it is determined that the adjustment is not likely to reverse, historically on a quarterly basis. The Company estimates the impact of all other incentives based on the related sales and market conditions in the end market vocation. The Company recorded
Net sales are made on credit terms, generally
The Company has
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Three Months Ended March 31, |
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2023 |
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2022 |
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North America On-Highway |
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$ |
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$ |
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North America Off-Highway |
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Defense |
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Outside North America On-Highway |
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Outside North America Off-Highway |
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Service Parts, Support Equipment and Other |
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Total Net Sales |
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$ |
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$ |
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9
NOTE D. INVENTORIES
Inventories consisted of the following components (dollars in millions):
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March 31, |
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December 31, |
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Purchased parts and raw materials |
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$ |
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$ |
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Work in progress |
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Service parts |
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Finished goods |
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Total inventories |
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$ |
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$ |
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Inventory components shipped to third parties, primarily cores, parts to re-manufacturers, and parts to contract manufacturers, which the Company has an obligation to buy back, are included in purchased parts and raw materials, with an offsetting liability in Other current liabilities. See "Note L. Other Current Liabilities” for more information.
NOTE E. GOODWILL AND OTHER INTANGIBLE ASSETS
As of both March 31, 2023 and December 31, 2022, the carrying value of the Company’s Goodwill was $
The following presents a summary of other intangible assets (dollars in millions):
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March 31, 2023 |
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December 31, 2022 |
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Intangible |
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Accumulated |
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Intangible |
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Intangible |
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Accumulated |
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Intangible |
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Other intangible assets: |
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|
|
|
|
||||||
Trade name |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||||
In-process research and development |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||
Customer relationships — commercial |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Proprietary technology |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Customer relationships — defense |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Non-compete agreements |
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
— |
|
||
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
As of March 31, 2023 and December 31, 2022, the carrying value of the Company’s Goodwill and Intangible assets, net was $
Amortization expense related to other intangible assets for the next five fiscal years is expected to be (dollars in millions):
|
|
2024 |
|
|
2025 |
|
|
2026 |
|
|
2027 |
|
|
2028 |
|
|||||
Amortization expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
NOTE F. FAIR VALUE OF FINANCIAL INSTRUMENTS
10
Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reporting date.
Level 2 — Inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes financial instruments that are valued using quoted prices in markets that are not active and those financial instruments that are valued using models or other valuation methodologies in which all significant value-drivers are observable in active markets or are supported by observable levels at which transactions are executed in the marketplace.
Level 3 — Certain inputs are unobservable or have little or no market data available. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. At each balance sheet date, the Company performs an analysis of all instruments subject to authoritative accounting guidance and includes, in Level 3, all of those whose fair value is based on significant unobservable inputs. As of March 31, 2023 and December 31, 2022, the Company did
The Company’s assets and liabilities that are measured at fair value include cash equivalents, marketable securities, derivative instruments, assets held in a rabbi trust and a deferred compensation obligation. The Company’s cash equivalents consist of short-term U.S. government backed securities. The Company's marketable securities consist of publicly traded stock of Jing-Jin Electric Technologies Co. Ltd., which has a readily determinable fair value. The Company’s derivative instruments consist of interest rate swaps. The Company’s assets held in the rabbi trust consist principally of publicly available mutual funds and target date retirement funds. The Company’s deferred compensation obligation is directly related to the fair value of assets held in the rabbi trust.
The Company’s valuation techniques used to calculate the fair value of cash equivalents, marketable securities, assets held in the rabbi trust and the deferred compensation obligation represent a market approach in active markets for identical assets that qualify as Level 1 in the fair value hierarchy.
The Company’s valuation techniques used to calculate the fair value of derivative instruments represent a market approach with observable inputs that qualify as Level 2 in the fair value hierarchy. The Company uses valuations from the issuing financial institutions for the fair value measurement of interest rate swaps. The floating-to-fixed interest rate swaps are based on the London Interbank Offered Rate ("LIBOR"), which is observable at commonly quoted intervals. The fair values are included in other current and non-current assets and liabilities in the Condensed Consolidated Balance Sheets. See "Note H. Derivatives” for more information regarding the Company's interest rate swaps.
The following table summarizes the fair value of the Company’s financial assets and (liabilities) as of March 31, 2023 and December 31, 2022 (dollars in millions):
|
|
Fair Value Measurements Using |
|
|||||||||||||||||||||
|
|
Quoted Prices in Active |
|
|
Significant Other |
|
|
TOTAL |
|
|||||||||||||||
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
December 31, |
|
||||||
Cash equivalents |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Rabbi trust assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Deferred compensation obligation |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
11
NOTE G. DEBT
Long-term debt and maturities are as follows (dollars in millions):
|
|
March 31, |
|
|
December 31, |
|
||
Long-term debt: |
|
|
|
|
|
|
||
Senior Secured Credit Facility Term Loan, variable, due |
|
$ |
|
|
$ |
|
||
Senior Notes, fixed |
|
|
|
|
|
|
||
Senior Notes, fixed |
|
|
|
|
|
|
||
Senior Notes, fixed |
|
|
|
|
|
|
||
Total long-term debt |
|
$ |
|
|
$ |
|
||
Less: current maturities of long-term debt |
|
|
|
|
|
|
||
deferred financing costs, net |
|
|
|
|
|
|
||
Total long-term debt, net |
|
$ |
|
|
$ |
|
||
As of March 31, 2023, the Company had $
The fair value of the Company’s long-term debt obligations as of March 31, 2023 was $
Senior Secured Credit Facility
In February 2023, the Company and ATI entered into Amendment No. 3 (the "Amendment") to the Credit Agreement. The Amendment replaced the LIBOR interest rate benchmark with the Secured Overnight Financing Rate ("SOFR") and included a
The borrowings under the Senior Secured Credit Facility are collateralized by a lien on substantially all assets of the Company, ATI and certain existing and future U.S. subsidiary guarantors, as provided in the Credit Agreement. Interest on the Term Loan, as of March 31, 2023, is either (a)
12
of non-ordinary course asset sales and casualty and condemnation events. The remaining principal balance is due upon maturity.
The Senior Secured Credit Facility also provides a Revolving Credit Facility, net of an allowance for up to $
The Senior Secured Credit Facility requires the Company to maintain a specified maximum first lien net leverage ratio of
In addition, the Credit Agreement, among other things, includes customary restrictions (subject to certain exceptions) on the Company’s ability to incur certain indebtedness, grant certain liens, make certain investments, engage in acquisitions, consolidations and mergers, declare or pay certain dividends or repurchase shares of the Company’s common stock. As of March 31, 2023, the Company was in compliance with all covenants under the Credit Agreement.
Senior Notes
Each series of the Senior Notes is unsecured and is guaranteed by each of ATI’s domestic subsidiaries that is a borrower under or guarantees the Senior Secured Credit Facility and is unconditionally guaranteed, jointly and severally, by any of ATI’s future domestic subsidiaries that are borrowers under or guarantee the Senior Secured Credit Facility. None of ATI’s domestic subsidiaries currently guarantee its obligations under the Senior Secured Credit Facility, and therefore none of ATI’s domestic subsidiaries currently guarantee any series of the Senior Notes. The indentures governing the Senior Notes contain negative covenants restricting or limiting the Company’s ability to, among other things: incur or guarantee additional indebtedness, incur liens, pay dividends on, redeem or repurchase the Company’s capital stock, make certain investments, permit payment or dividend restrictions on certain of the Company’s subsidiaries, sell assets, engage in certain transactions with affiliates, and consolidate or merge or sell all or substantially all of the Company’s assets. As of March 31, 2023, the Company was in compliance with all covenants under the indentures governing the Senior Notes.
ATI may from time to time seek to retire its Senior Notes through cash purchases, exchanges for equity securities, open market purchases, privately negotiated transactions, contractual redemptions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors and will be in accordance with the respective indenture governing such notes. The
13
amounts involved may be material. Some or all of the
NOTE H. DERIVATIVES
As of March 31, 2023, the reference rates for the Company's Senior Secured Credit Facility and interest rate swaps were Adjusted Term SOFR and LIBOR, respectively. Although there is a mismatch in reference rates, the Company continues to qualify for hedge accounting through temporary relief provided through reference rate reform accounting guidance. The Company plans to transition the interest rate swaps' reference rates to Adjusted Term SOFR prior to the
As of March 31, 2023, the Company held interest rate swaps as follows (dollars in millions):
Effective Dates |
|
Notional Amount |
|
|
Weighted Average LIBOR Fixed Rate |
|
||
September 2019 - September 2025 |
|
$ |
|
|
|
% |
||
September 2022 - September 2025 |
|
$ |
|
|
|
% |
||
The following tabular disclosures further describe the Company’s interest rate derivatives qualifying and designated for hedge accounting and their impact on the financial condition of the Company (dollars in millions):
|
|
|
|
Fair Value |
|
|||||
|
|
Balance Sheet Location |
|
March 31, |
|
|
December 31, |
|
||
Derivative Assets: |
|
|
|
|
|
|
|
|
||
Interest rate swaps |
|
Other current assets |
|
$ |
|
|
$ |
|
||
|
|
Other non-current assets |
|
|
|
|
|
|
||
|
|
|
$ |
|
|
$ |
|
|||
The balance of net derivative gains recorded in AOCL as of March 31, 2023 and December 31, 2022 was $
14
NOTE I. PRODUCT WARRANTY LIABILITIES
As of March 31, 2023, current and non-current product warranty liabilities were $
Product warranty liability activities consist of the following (dollars in millions):
|
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Beginning balance |
|
$ |
|
|
$ |
|
||
Payments |
|
|
( |
) |
|
|
( |
) |
Increase in liability (warranty issued during period) |
|
|
|
|
|
|
||
Net adjustments to liability |
|
|
|
|
|
|
||
Ending balance |
|
$ |
|
|
$ |
|
||
NOTE J. DEFERRED REVENUE
As of March 31, 2023, current and non-current deferred revenue was $
Deferred revenue activity consists of the following (dollars in millions):
|
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Beginning balance |
|
$ |
|
|
$ |
|
||
Increases |
|
|
|
|
|
|
||
Revenue earned |
|
|
( |
) |
|
|
( |
) |
Ending balance |
|
$ |
|
|
$ |
|
||
Deferred revenue recorded in current and non-current liabilities related to ETC as of March 31, 2023 was $
15
NOTE K. LEASES
Certain lease contracts may contain an option to extend or terminate the lease. The Company considers the economic impact of extension and termination options by contract. If the Company concludes it is reasonably certain an option will be exercised, that option is included in the lease term and impacts the amount recorded as an ROU asset and lease liability at inception of the contract.
The Company's lease liability is determined by discounting the future cash flows over the lease period. The Company determines its discount rates utilizing current secured financing rates based on the length of the lease period plus the Company's margin over Adjusted Term SOFR on the Term Loan. The Company believes this rate effectively represents a borrowing rate the Company could obtain on a debt instrument possessing similar terms as the lease. Lease liabilities are classified between current and non-current liabilities based on the terms of the underlying leases. The weighted average discount rate on operating leases as of March 31, 2023 and December 31, 2022 was
As of March 31, 2023, the Company recorded and operating lease liabilities of $
|
|
March 31, |
|
|
2023 |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
Thereafter |
|
|
|
|
Total lease payments |
|
$ |
|
|
Less: Interest |
|
|
|
|
|
$ |
|
||
ROU assets are calculated as the related lease liability adjusted for lease incentives, prepayments and the effect of escalating lease payments on period expense.
|
|
March 31, |
|
|
December 31, |
|
||
Buildings |
|
$ |
|
|
$ |
|
||
Land |
|
|
|
|
|
|
||
Equipment |
|
|
|
|
|
|
||
Vehicles |
|
|
|
|
|
|
||
|
$ |
|
|
$ |
|
|||
16
The weighted average remaining lease term as of March 31, 2023 and March 31, 2022 was
Operating lease expense was $
The calculation of the Company's ROU assets and lease liabilities did not include cash consideration as of either March 31, 2023 or December 31, 2022. During the three months ended March 31, 2023, there were $
NOTE L. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (dollars in millions):
|
|
March 31, |
|
|
December 31, |
|
||
Taxes payable |
|
$ |
|
|
$ |
|
||
Sales incentives |
|
|
|
|
|
|
||
Payroll and related costs |
|
|
|
|
|
|
||
Accrued interest payable |
|
|
|
|
|
|
||
Vendor buyback obligation |
|
|
|
|
|
|
||
OPEB liability |
|
|
|
|
|
|
||
Construction holdback |
|
|
|
|
|
|
||
Lease liability |
|
|
|
|
|
|
||
Other accruals |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
17
NOTE M. EMPLOYEE BENEFIT PLANS
Components of net periodic benefit cost (credit) consist of the following (dollars in millions):
|
|
Pension Plans |
|
|
Post-retirement Benefits |
|
||||||||||
|
|
For the Three Months |
|
|
For the Three Months |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Net periodic benefit cost (credit): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Service cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Expected return on assets |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
||
Prior service credit |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||
Recognized actuarial gain |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|||
The components of net periodic benefit cost (credit) other than the service cost component are included in Other income (expense), net in the Condensed Consolidated Statements of Comprehensive Income.
NOTE N. INCOME TAXES
For the three months ended March 31, 2023 and 2022, the Company recorded total income tax expense of $
The Company continues to provide for a valuation allowance on certain of its foreign deferred tax assets. The Company has determined, based on the evaluation of both objective and subjective evidence available, that this valuation allowance is necessary and that it is more likely than not that the deferred tax assets are not fully realizable.
18
NOTE O. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables reconcile changes in AOCL by component (net of tax, dollars in millions):
|
|
Three months ended |
|
|||||||||||||
|
|
Pension |
|
|
Interest |
|
|
Foreign |
|
|
Total |
|
||||
AOCL as of December 31, 2021 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Other comprehensive income before reclassifications |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Amounts reclassified from AOCL |
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
— |
|
|
Income tax benefit (expense) |
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Net current period other comprehensive (loss) income |
|
$ |
( |
) |
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
AOCL as of March 31, 2022 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
AOCL as of December 31, 2022 |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
||
Other comprehensive (loss) income before reclassifications |
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
— |
|
|
Amounts reclassified from AOCL |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Income tax expense |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|||
Net current period other comprehensive (loss) income |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
AOCL as of March 31, 2023 |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
||
|
|
Amounts reclassified from AOCL |
|
|
|
|||||
AOCL Components |
|
Three months ended |
|
|
Three months ended |
|
|
Affected line item in the Condensed |
||
Interest rate swaps |
|
$ |
|
|
$ |
( |
) |
|
Interest expense, net |
|
Prior service credit |
|
|
|
|
|
|
|
Other income (expense), net |
||
Recognized actuarial gain |
|
|
|
|
|
— |
|
|
Other income (expense), net |
|
Total reclassifications, before tax |
|
$ |
|
|
$ |
— |
|
|
Income before income taxes |
|
Income tax expense |
|
|
( |
) |
|
|
— |
|
|
Income tax expense |
Total reclassifications, net of tax |
|
$ |
|
|
$ |
— |
|
|
|
|
Prior service cost and actuarial loss are included in the computation of the Company’s net periodic benefit cost (credit). See "Note M. Employee Benefit Plans” for additional details.
NOTE P. COMMITMENTS AND CONTINGENCIES
The Company is party to various legal actions and administrative proceedings and subject to various claims arising in the ordinary course of business. These proceedings primarily involve commercial claims, product liability claims, personal injury claims and workers’ compensation claims. The Company believes that the ultimate liability, if any, in excess of amounts already provided for in the condensed consolidated financial statements or covered by insurance on the disposition of these matters will not have a material adverse effect on the financial position, results of operations or cash flows of the Company.
NOTE Q. EARNINGS PER SHARE
The following table reconciles the numerators and denominators used to calculate basic EPS and diluted EPS (dollars in millions, except per share data):
19
|
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Net income |
|
$ |
|
|
$ |
|
||
Weighted average shares of common stock outstanding |
|
|
|
|
|
|
||
Dilutive effect of stock-based awards |
|
|
|
|
|
|
||
Diluted weighted average shares of common stock outstanding |
|
|
|
|
|
|
||
Basic earnings per share attributable to common stockholders |
|
$ |
|
|
$ |
|
||
Diluted earnings per share attributable to common stockholders |
|
$ |
|
|
$ |
|
||
The dilutive impact of stock-based compensation is calculated using the treasury stock method. The treasury stock method assumes that the Company uses the proceeds from the exercise of awards to repurchase common stock at the average market price during the period. For each of the three months ended March 31, 2023 and 2022,
NOTE R. COMMON STOCK
The Company's Board of Directors has authorized the Company to repurchase up to $
20
ITEM 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, liquidity and capital resources. You should read this discussion in conjunction with our condensed consolidated interim financial statements and the related notes contained elsewhere in this Quarterly Report on Form 10-Q.
The statements in this discussion regarding industry trends, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Cautionary Note Regarding Forward-Looking Statements” and Part II, Item 1A “Risk Factors” below, and in Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the Securities and Exchange Commission on February 16, 2023. Our actual results may differ materially from those contained in or implied by any forward-looking statements.
Overview
Allison Transmission Holdings, Inc. and its subsidiaries (“Allison,” the “Company,” “we,” “us” or “our”) design and manufacture vehicle propulsion solutions, including commercial-duty on-highway, off-highway and defense fully automatic transmissions and electric hybrid and fully electric systems. The business was founded in 1915 and has been headquartered in Indianapolis, Indiana since inception. Allison is traded on the New York Stock Exchange under the symbol, “ALSN”.
Although approximately 74% of revenues were generated in North America in 2022, we have a global presence by serving customers in Asia, Europe, South America and Africa. We serve customers through an independent network of approximately 1,600 independent distributor and dealer locations worldwide.
Trends Impacting Our Business
Our net sales are driven by commercial vehicle production, which tends to be highly correlated to macroeconomic conditions and continues to be impacted by global supply chain constraints. In 2023, we expect higher net sales driven by higher customer demand in the Global On-Highway, Global Off-Highway and Service Parts, Support Equipment and Other end markets, price increases on certain products and the continued execution of growth initiatives.
21
First Quarter Net Sales by End Market (dollars in millions)
End Market |
|
Q1 2023 |
|
|
Q1 2022 |
|
|
% Variance |
|
|||
North America On-Highway |
|
$ |
376 |
|
|
$ |
346 |
|
|
|
9 |
% |
North America Off-Highway |
|
|
24 |
|
|
|
18 |
|
|
|
33 |
% |
Defense |
|
|
27 |
|
|
|
35 |
|
|
|
(23 |
)% |
Outside North America On-Highway |
|
|
108 |
|
|
|
109 |
|
|
|
(1 |
)% |
Outside North America Off-Highway |
|
|
23 |
|
|
|
30 |
|
|
|
(23 |
)% |
Service Parts, Support Equipment and Other |
|
|
183 |
|
|
|
139 |
|
|
|
32 |
% |
Total Net Sales |
|
$ |
741 |
|
|
$ |
677 |
|
|
|
9 |
% |
North America On-Highway end market net sales were up 9% for the first quarter 2023 compared to the first quarter 2022, principally driven by strength in customer demand for medium-duty and Class 8 vocational trucks and price increases on certain products.
Global Off-Highway end market net sales were flat for the first quarter 2023 compared to the first quarter 2022, principally driven by higher demand for hydraulic fracturing applications in the North American energy sector and lower demand in the energy sector outside of North America.
Defense end market net sales were down 23% for the first quarter 2023 compared to the first quarter 2022, principally driven by lower demand for Tracked vehicle applications.
Outside North America On-Highway end market net sales were flat for the first quarter 2023 compared to the first quarter 2022.
Service Parts, Support Equipment and Other end market net sales were up 32% for the first quarter 2023 compared to the first quarter 2022, principally driven by higher demand for global service parts and support equipment, higher demand for aluminum die cast components and price increases on certain products.
Key Components of our Results of Operations
Net sales
We generate our net sales primarily from the sale of vehicle propulsion solutions, service and component parts, support equipment, defense kits, engineering services, royalties and extended transmission coverage to a wide array of original equipment manufacturers, distributors and the U.S. government. Sales are recorded in accordance with the terms of the contract, net of provisions for customer incentives and other rebates. Engineering services are recorded as net sales in accordance with the terms of the contract. The associated costs are recorded in cost of sales. We also have royalty agreements with third parties that provide net sales as a result of joint efforts in developing marketable products.
Cost of sales
Our primary components of cost of sales are purchased parts, the overhead expense related to our manufacturing operations and direct labor associated with the manufacture and assembly of vehicle propulsion solutions and parts. For the three months ended March 31, 2023, direct material costs were approximately 67%, overhead costs were approximately 26%, and direct labor costs were approximately 7% of total cost of sales. We are subject to changes in our cost of sales caused by movements in underlying commodity prices. We seek to hedge against this risk by using LTAs, as appropriate. See Part I, Item 3, “Quantitative and Qualitative Disclosures about Market Risk—Commodity Price Risk” included below.
22
Selling, general and administrative
The principal components of our selling, general and administrative expenses are salaries and benefits for our office personnel, advertising and promotional expenses, product warranty expense, expenses relating to certain information technology systems and amortization of our intangible assets.
Engineering — research and development
We incur costs in connection with research and development programs that are expected to contribute to future earnings. Such costs are expensed as incurred.
23
Non-GAAP Financial Measures
We use Adjusted Earnings before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) and Adjusted EBITDA as a percent of net sales to measure our operating profitability. We believe that Adjusted EBITDA and Adjusted EBITDA as a percent of net sales provide management, investors and creditors with useful measures of the operational results of our business and increase the period-to-period comparability of our operating profitability and comparability with other companies. Adjusted EBITDA as a percent of net sales is also used in the calculation of management’s incentive compensation program. The most directly comparable U.S. generally accepted accounting principles (“GAAP”) measure to Adjusted EBITDA and Adjusted EBITDA as a percent of net sales is Net income and Net income as a percent of net sales, respectively. Adjusted EBITDA is calculated as earnings before interest expense, net, income tax expense, amortization of intangible assets, depreciation of property, plant and equipment and other adjustments as defined by the Second Amended and Restated Credit Agreement dated as of March 29, 2019, as amended (the “Credit Agreement”) governing Allison Transmission, Inc.’s (“ATI”), our wholly-owned subsidiary, term loan facility in the amount of $623 million due March 2026 (“Term Loan”). Adjusted EBITDA as a percent of net sales is calculated as Adjusted EBITDA divided by net sales.
We use Adjusted free cash flow to evaluate the amount of cash generated by our business that, after the capital investment needed to maintain and grow our business and certain mandatory debt service requirements, can be used for repayment of debt, stockholder distributions and strategic opportunities, including investing in our business. We believe that Adjusted free cash flow enhances the understanding of the cash flows of our business for management, investors and creditors. Adjusted free cash flow is also used in the calculation of management’s incentive compensation program. The most directly comparable GAAP measure to Adjusted free cash flow is Net cash provided by operating activities. Adjusted free cash flow is calculated as Net cash provided by operating activities after additions of long-lived assets.
The following is a reconciliation of Net income and Net income as a percent of net sales to Adjusted EBITDA and Adjusted EBITDA as a percent of net sales and a reconciliation of Net cash provided by operating activities to Adjusted free cash flow:
|
|
Three Months Ended |
|
|||||
(unaudited, dollars in millions) |
|
2023 |
|
|
2022 |
|
||
Net income (GAAP) |
|
$ |
170 |
|
|
$ |
129 |
|
plus: |
|
|
|
|
|
|
||
Income tax expense |
|
|
42 |
|
|
|
34 |
|
Interest expense, net |
|
|
28 |
|
|
|
29 |
|
Depreciation of property, plant and equipment |
|
|
26 |
|
|
|
27 |
|
Amortization of intangible assets |
|
|
11 |
|
|
|
11 |
|
Stock-based compensation expense (a) |
|
|
5 |
|
|
|
3 |
|
Unrealized (gain) loss on marketable securities (b) |
|
|
(3 |
) |
|
|
15 |
|
Technology-related investment gain (c) |
|
|
(3 |
) |
|
|
(6 |
) |
Unrealized loss on foreign exchange (d) |
|
|
— |
|
|
|
1 |
|
Acquisition-related earnouts (e) |
|
|
— |
|
|
|
1 |
|
Adjusted EBITDA (Non-GAAP) |
|
$ |
276 |
|
|
$ |
244 |
|
Net sales (GAAP) |
|
$ |
741 |
|
|
$ |
677 |
|
Net income as a percent of net sales (GAAP) |
|
|
22.9 |
% |
|
|
19.1 |
% |
Adjusted EBITDA as a percent of net sales (Non-GAAP) |
|
|
37.2 |
% |
|
|
36.0 |
% |
Net cash provided by operating activities (GAAP) |
|
$ |
193 |
|
|
$ |
162 |
|
Deductions to reconcile to Adjusted free cash flow: |
|
|
|
|
|
|
||
Additions of long-lived assets |
|
|
(24 |
) |
|
|
(20 |
) |
Adjusted free cash flow (Non-GAAP) |
|
$ |
169 |
|
|
$ |
142 |
|
24
25
Results of Operations
Comparison of three months ended March 31, 2023 and 2022
The following table sets forth certain financial information for the three months ended March 31, 2023 and 2022. The following table and discussion should be read in conjunction with the information contained in our condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
|
|
Three Months Ended March 31, |
|
|||||||||||||
(unaudited, dollars in millions) |
|
2023 |
|
|
% |
|
|
2022 |
|
|
% |
|
||||
Net sales |
|
$ |
741 |
|
|
|
100 |
% |
|
$ |
677 |
|
|
|
100 |
% |
Cost of sales |
|
|
380 |
|
|
|
51 |
|
|
|
357 |
|
|
|
53 |
|
Gross profit |
|
|
361 |
|
|
|
49 |
|
|
|
320 |
|
|
|
47 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Selling, general and administrative |
|
|
87 |
|
|
|
12 |
|
|
|
75 |
|
|
|
11 |
|
Engineering — research and development |
|
|
44 |
|
|
|
6 |
|
|
|
43 |
|
|
|
6 |
|
Total operating expenses |
|
|
131 |
|
|
|
18 |
|
|
|
118 |
|
|
|
17 |
|
Operating income |
|
|
230 |
|
|
|
31 |
|
|
|
202 |
|
|
|
30 |
|
Interest expense, net |
|
|
(28 |
) |
|
|
(4 |
) |
|
|
(29 |
) |
|
|
(4 |
) |
Other income (expense), net |
|
|
10 |
|
|
|
2 |
|
|
|
(10 |
) |
|
|
(2 |
) |
Income before income taxes |
|
|
212 |
|
|
|
29 |
|
|
|
163 |
|
|
|
24 |
|
Income tax expense |
|
|
(42 |
) |
|
|
(6 |
) |
|
|
(34 |
) |
|
|
(5 |
) |
Net income |
|
$ |
170 |
|
|
|
23 |
% |
|
$ |
129 |
|
|
|
19 |
% |
Net sales
Net sales for the quarter ended March 31, 2023 were $741 million compared to $677 million for the quarter ended March 31, 2022, an increase of 9%. The increase was principally driven by a $44 million, or 32%, increase in net sales in the Service Parts, Support Equipment and Other end market principally driven by higher demand for global service parts and support equipment, higher demand for aluminum die cast components and price increases on certain products, a $30 million, or 9%, increase in net sales in the North America On-Highway end market principally driven by strength in customer demand for medium-duty and Class 8 vocational trucks and price increases on certain products, partially offset by a $8 million, or 23%, decrease in net sales in the Defense end market principally driven by lower demand for Tracked vehicle applications, a $1 million, or 2%, decrease in net sales in the Global Off-Highway end market principally driven by higher demand for hydraulic fracturing applications in the North American energy sector and lower demand in the energy sector outside of North America, and a $1 million, or 1%, decrease in net sales in the Outside North America On-Highway end market.
Cost of sales
Cost of sales for the quarter ended March 31, 2023 was $380 million compared to $357 million for the quarter ended March 31, 2022, an increase of 6%. The increase was principally driven by increased direct material and manufacturing expense commensurate with increased net sales and higher direct material costs.
Gross profit
Gross profit for the quarter ended March 31, 2023 was $361 million compared to $320 million for the quarter ended March 31, 2022, an increase of 13%. The increase was principally driven by $56 million of price increases on certain products, partially offset by $10 million of higher manufacturing expense and $8 million of higher direct material costs. Gross profit as a percent of net sales for the three months ended March 31, 2023 increased 140 basis points compared to the same period in 2022 principally driven by price increases on certain products, partially offset by increased cost of goods sold.
26
Selling, general and administrative
Selling, general and administrative expenses for the quarter ended March 31, 2023 were $87 million compared to $75 million for the quarter ended March 31, 2022, an increase of 16%. The increase was principally driven by $4 million of higher commercial activities spending and $3 million of increased product warranty expense.
Engineering — research and development
Engineering expenses for the quarter ended March 31, 2023 were $44 million compared to $43 million for the quarter ended March 31, 2022.
Interest expense, net
Interest expense, net for the quarter ended March 31, 2023 was $28 million compared to $29 million for the quarter ended March 31, 2022, a decrease of 3%. The decrease was principally driven by $6 million of favorable impact from interest rate hedges and $2 million of higher interest income on cash and cash equivalents, partially offset by $7 million of higher interest expense on ATI's Term Loan due to higher variable interest rates.
Other income (expense), net
Other income (expense), net for the quarter ended March 31, 2023 was $10 million compared to ($10) million for the quarter ended March 31, 2022. The change was principally driven by $18 million of favorable change in marketable securities.
Income tax expense
Income tax expense for the three months ended March 31, 2023 was $42 million, resulting in an effective tax rate of 20%, compared to $34 million of income tax expense and an effective tax rate of 21% for the three months ended March 31, 2022. The increase in income tax expense was principally driven by increased taxable income.
Liquidity and Capital Resources
We generate cash primarily from our operations to fund our operating, investing and financing activities. Our principal uses of cash are operating expenses, capital expenditures, working capital needs, debt service, dividends on common stock, stock repurchases and strategic growth initiatives, including investments, acquisitions and collaborations. Our ability to generate cash in the future and our future uses of cash are subject to general economic, financial, competitive, legislative, regulatory and other factors that may be beyond our control. We had total available cash and cash equivalents of $344 million and $232 million as of March 31, 2023 and December 31, 2022, respectively. Of the available cash and cash equivalents, $142 million was deposited in operating accounts and $202 million was invested in U.S. government backed securities as of March 31, 2023, compared to $121 million deposited in operating accounts and $111 million invested in U.S. government backed securities as of December 31, 2022.
As of March 31, 2023, the total of cash held by foreign subsidiaries was $71 million, the majority of which was at our subsidiaries located in China, the Netherlands, India and Japan. We manage our worldwide cash requirements considering available funds among the subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. As a result, we do not currently anticipate that local liquidity restrictions will preclude us from funding our targeted initiatives or operating needs with local resources.
We have not recognized any deferred tax liabilities associated with earnings in foreign subsidiaries, except for our subsidiary located in China, as they are intended to be permanently reinvested and used to support foreign operations or have no associated tax requirements. We have recorded a deferred tax liability of $3 million for the tax liability associated with the remittance of previously taxed income and unremitted earnings for our subsidiary located in China. The remaining deferred tax liabilities, if recorded, related to unremitted earnings that are indefinitely reinvested are not material.
27
Our liquidity requirements are significant, primarily due to our debt service requirements. As of March 31, 2023, we had $623 million of indebtedness associated with ATI’s Term Loan, $400 million of indebtedness associated with ATI’s 4.75% Senior Notes due October 2027 (“4.75% Senior Notes”), $500 million of indebtedness associated with ATI’s 5.875% Senior Notes due June 2029 (“5.875% Senior Notes”) and $1,000 million of indebtedness associated with ATI’s 3.75% Senior Notes due January 2031 (“3.75% Senior Notes” and, together with the 4.75% Senior Notes and 5.875% Senior Notes, the “Senior Notes”). Short-term and long-term debt service liquidity requirements consist of $2 million of minimum required quarterly principal payments on ATI’s Term Loan through its maturity date of March 2026 and periodic interest payments on ATI’s Term Loan and the Senior Notes. There are no required quarterly principal payments on the Senior Notes. Long-term debt service liquidity requirements also consist of the payment in full of any remaining principal balance of ATI’s Term Loan and the Senior Notes upon their respective maturity dates.
We made $1 million and $2 million of principal payments on the Term Loan during the three months ended March 31, 2023 and 2022, respectively. Our ability to make payments on and refinance our indebtedness and to fund planned capital expenditures and growth initiatives will depend on our ability to generate cash in the future.
The Senior Secured Credit Facility provides for a $650 million Revolving Credit Facility, net of an allowance for up to $75 million in outstanding letter of credit commitments. As of March 31, 2023, we had $644 million available under the Revolving Credit Facility, net of $6 million in letters of credit. As of March 31, 2023, we had no amounts outstanding under the Revolving Credit Facility. If we have commitments outstanding on the Revolving Credit Facility at the end of a fiscal quarter, the Senior Secured Credit Facility requires us to maintain a specified maximum first lien net leverage ratio of 5.50x. Additionally, within the terms of the Senior Secured Credit Facility, a first lien net leverage ratio at or below 4.00x results in the elimination of excess cash flow payments on the Senior Secured Credit Facility for the applicable year. As of March 31, 2023, our first lien net leverage ratio was 0.28x. The Senior Secured Credit Facility also provides certain financial incentives based on our first lien net leverage ratio. A first lien net leverage ratio at or below 4.00x and above 3.50x results in a 25 basis point reduction to the applicable margin on the Revolving Credit Facility. A first lien net leverage ratio at or below 3.50x results in an additional 25 basis point reduction to the applicable margin on the Revolving Credit Facility. These reductions remain in effect as long as we achieve a first lien net leverage ratio at or below the related threshold.
In addition, the Credit Agreement includes, among other things, customary restrictions (subject to certain exceptions) on our ability to incur certain indebtedness, grant certain liens, make certain investments, engage in acquisitions, consolidations and mergers, declare or pay certain dividends, and repurchase shares of our common stock. The indentures governing the Senior Notes contain negative covenants restricting or limiting our ability to, among other things, incur or guarantee additional indebtedness, incur liens, pay dividends on, redeem or repurchase our capital stock, make certain investments, permit payment or dividend restrictions on certain of our subsidiaries, sell assets, engage in certain transactions with affiliates, and consolidate or merge or sell all or substantially all of our assets. As of March 31, 2023, we are in compliance with all covenants under the Senior Secured Credit Facility and indentures governing the Senior Notes.
Our credit ratings and outlook are reviewed periodically by Moody’s Investors Service, Inc. (“Moody’s”) and Fitch Ratings, Inc. (“Fitch”). As of March 31, 2023, our credit ratings from both Moody's and Fitch are shown in the table below:
|
|
March 31, 2023 |
||
Credit Ratings |
|
Moody's |
|
Fitch |
Corporate Credit |
|
Ba1 |
|
BB+ |
Term Loan |
|
Baa2 |
|
BBB- |
4.75% Senior Notes |
|
Ba2 |
|
BB+ |
5.875% Senior Notes |
|
Ba2 |
|
BB+ |
3.75% Senior Notes |
|
Ba2 |
|
BB+ |
28
Our Board of Directors has authorized us to repurchase up to $4,000 million of our common stock pursuant to a stock repurchase program (the "Repurchase Program"). During the three months ended March 31, 2023, we repurchased approximately $40 million of our common stock under the Repurchase Program. All of the repurchase transactions during the three months ended March 31, 2023 were settled in cash during the same period. As of March 31, 2023, we had approximately $995 million available under the Repurchase Program.
29
The following table shows our sources and uses of funds for the three months ended March 31, 2023 and 2022 (dollars in millions):
|
|
Three Months Ended |
|
|||||
Statements of Cash Flows Data |
|
2023 |
|
|
2022 |
|
||
Cash flows provided by operating activities |
|
$ |
193 |
|
|
$ |
162 |
|
Cash flows used for investing activities |
|
$ |
(22 |
) |
|
$ |
(38 |
) |
Cash flows used for financing activities |
|
$ |
(59 |
) |
|
$ |
(106 |
) |
Generally, cash provided by operating activities has been adequate to fund our operations. We have significant liquidity, including $344 million of cash and cash equivalents and $644 million available under the Revolving Credit Facility, net of $6 million of letters of credit, as of March 31, 2023. At this time, we believe cash provided by operating activities, cash and cash equivalents and borrowing capacity under the Revolving Credit Facility will be sufficient to meet our known and anticipated cash requirements for the next twelve months and thereafter.
Cash provided by operating activities
Operating activities for the three months ended March 31, 2023 generated $193 million of cash compared to $162 million for the three months ended March 31, 2022. The increase was principally driven by higher gross profit, partially offset by higher operating working capital requirements.
Cash used for investing activities
Investing activities for the three months ended March 31, 2023 used $22 million of cash compared to $38 million for the three months ended March 31, 2022. The decrease was principally driven by $23 million in cash paid for business acquisitions during the first quarter of 2022 that did not reoccur in the first quarter of 2023, partially offset by a $4 million increase in capital expenditures and $4 million of lower proceeds from technology-related investments.
Cash used for financing activities
Financing activities for the three months ended March 31, 2023 used $59 million of cash compared to $106 million for the three months ended March 31, 2022. The decrease was principally driven by $41 million of decreased stock repurchases under the Repurchase Program and $9 million of higher proceeds from the exercise of stock options.
Contingencies
We are a party to various legal actions and administrative proceedings and subject to various claims arising in the ordinary course of business, including those relating to commercial transactions, product liability, personal injury and workers’ compensation, safety, health, taxes, environmental and other matters. For more information, see "Note P. Commitments and Contingencies” of our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
30
Critical Accounting Policies and Significant Accounting Estimates
A discussion of our critical accounting policies and significant accounting estimates is included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the Securities and Exchange Commission on February 16, 2023. The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of some assets and liabilities and, in some instances, the reported amounts of revenues and expenses during the applicable reporting period. Actual results could differ materially from these estimates. Changes in estimates are recorded in results of operations in the period that the events or circumstances giving rise to such changes occur. Within the context of these critical accounting estimates, we are not currently aware of any reasonably likely events or circumstances that would result in different policies or estimates being reported for the three months ended March 31, 2023.
Recently Issued Accounting Pronouncements
See "Note B. Summary of Significant Accounting Policies” in Part I, Item 1, of this Quarterly Report on Form 10-Q.
31
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. The words “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Although forward-looking statements reflect management’s good faith beliefs, reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements speak only as of the date the statements are made. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to: our participation in markets that are competitive; our ability to prepare for, respond to and successfully achieve our objectives relating to technological and market developments, competitive threats and changing customer needs, including with respect to electric hybrid and fully electric commercial vehicles; increases in cost, disruption of supply or shortage of labor, freight, raw materials, energy or components used to manufacture or transport our products or those of our customers or suppliers, including as a result of geopolitical risks, wars and pandemics; global economic volatility; general economic and industry conditions, including the risk of recession; labor strikes, work stoppages or similar labor disputes, which could significantly disrupt our operations or those of our principal customers or suppliers; the duration and spread of the COVID-19 pandemic, including new variants of the virus and the pace and availability of vaccines and boosters, mitigating efforts deployed by government agencies and the public at large, and the overall impact from such outbreak on economic conditions, financial market volatility and our business, including but not limited to the operations of our manufacturing and other facilities, the availability of labor, our supply chain, our distribution processes and demand for our products and the corresponding impacts to our net sales and cash flow; the highly cyclical industries in which certain of our end users operate; uncertainty in the global regulatory and business environments in which we operate; the concentration of our net sales in our top five customers and the loss of any one of these; the failure of markets outside North America to increase adoption of fully automatic transmissions; the success of our research and development efforts, the outcome of which is uncertain; U.S. and foreign defense spending; risks associated with our international operations, including acts of war and increased trade protectionism; the discovery of defects in our products, resulting in delays in new model launches, recall campaigns and/or increased warranty costs and reduction in future sales or damage to our brand and reputation; our ability to identify, consummate and effectively integrate acquisitions and collaborations; and risks related to our indebtedness.
Important factors that could cause actual results to differ materially from our expectations are disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the Securities and Exchange Commission on February 16, 2023 and Part II, Item 1A of this Quarterly Report on Form 10-Q. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other Securities and Exchange Commission filings or public communications. You should evaluate all forward-looking statements made in this Quarterly Report on Form 10-Q in the context of these risks and uncertainties.
32
ITEM 3. |
Quantitative and Qualitative Disclosures About Market Risk |
Our exposure to market risk consists of changes in interest rates, foreign currency rate fluctuations and movements in commodity prices.
Interest Rate Risk
Our principal interest rate exposure relates to outstanding amounts under our Senior Secured Credit Facility. Our Senior Secured Credit Facility provides for variable rate borrowings of up to $1,267 million, including $644 million under our Revolving Credit Facility, net of $6 million of letters of credit. As of March 31, 2023, we held interest rate swap contracts that, in the aggregate, effectively hedge $500 million of the variable rate debt associated with the Term Loan at the London Interbank Offered Rate fixed rates of 3.04% and 2.82% through September 2025. A one-eighth percent increase or decrease in assumed interest rates for the Senior Secured Credit Facility, if fully drawn as of March 31, 2023, would have an impact of approximately $1 million on interest expense per year. As of March 31, 2023, we had no outstanding borrowings against the Revolving Credit Facility.
Exchange Rate Risk
While our net sales and costs are denominated primarily in U.S. Dollars, net sales, costs, assets and liabilities are generated in other currencies including Brazilian Real, British Pound, Canadian Dollar, Chinese Yuan Renminbi, Euro, Hungarian Forint, Indian Rupee and Japanese Yen. The expansion of our business outside North America may further increase the risk that cash flows resulting from these activities may be adversely affected by changes in currency exchange rates.
Assuming current levels of foreign currency transactions, a 10% aggregate increase or decrease in the Chinese Yuan Renminbi, Euro, Indian Rupee, and Japanese Yen would correspondingly change our earnings, net of tax, by an estimated $7 million per year. We believe our other direct exposure to foreign currencies is immaterial.
33
Commodity Price Risk
We are subject to changes in our cost of sales caused by movements in underlying commodity prices. As of March 31, 2023, approximately 67% of our cost of sales consisted of purchased components with significant raw material content. A substantial portion of the purchased parts are made of aluminum and steel. The cost of aluminum parts includes an adjustment factor on future purchases for fluctuations in aluminum prices based on accepted industry indices. In addition, a substantial amount of steel-based contracts also includes an index-based component. As our costs change, we are able to pass through a portion of the changes in commodity prices to certain of our customers according to our LTAs. We historically have not entered into long-term purchase contracts related to the purchase of aluminum and steel.
Assuming current levels of commodity purchases, a 10% variation in the price of aluminum and steel would correspondingly change our earnings by approximately $9 million and $12 million per year, respectively.
Many of our LTAs have incorporated a cost-sharing arrangement related to potential future commodity price fluctuations. For purposes of the sensitivity analysis above, the impact of these cost sharing arrangements has not been included.
34
ITEM 4. |
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
35
PART II. OTHER INFORMATION |
Item 1. Legal Proceedings
From time to time, we are a party to various legal actions in the normal course of our business, including those related to commercial transactions, product liability, personal injury and workers’ compensation, safety, health, taxes, environmental and other matters. Information pertaining to legal proceedings can be found in "Note P. Commitments and Contingencies” in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which information is incorporated herein by reference.
Item 1A. Risk Factors
There have been no material changes from our risk factors as previously reported in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the Securities and Exchange Commission on February 16, 2023.
36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth information related to our repurchases of our common stock on a monthly basis in the three months ended March 31, 2023:
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|
Total Number |
|
|
Average |
|
|
Total Number |
|
|
Approximate |
|
||||
January 1 – January 31, 2023 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
1,035,130,253 |
|
February 1 – February 28, 2023 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
1,035,130,253 |
|
March 1 – March 31, 2023 |
|
|
894,778 |
|
|
$ |
44.70 |
|
|
|
894,778 |
|
|
$ |
995,131,604 |
|
. |
|
|
894,778 |
|
|
$ |
44.70 |
|
|
|
894,778 |
|
|
|
|
|
37
Item 6. |
Exhibits |
(a) Exhibits
Exhibit Number |
Description |
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10.1 |
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31.1 |
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31.2 |
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32.1 |
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101 |
The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Comprehensive Income; (iii) the Condensed Consolidated Statements of Cash Flows; (iv) the Condensed Consolidated Statements of Stockholders’ Equity; and (v) the Notes to Condensed Consolidated Financial Statements |
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104 |
Cover Page Interactive Data File – The cover page from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in Inline XBRL and contained in Exhibit 101 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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ALLISON TRANSMISSION HOLDINGS, INC. |
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Date: April 28, 2023 |
By: |
/s/ David S. Graziosi |
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|
|
|
|
|
Name: |
David S. Graziosi |
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|
|
Title: |
Chairman, President and Chief Executive Officer (Principal Executive Officer) |
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|
Date: April 28, 2023 |
By: |
/s/ G. Frederick Bohley |
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|
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Name: |
G. Frederick Bohley |
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|
Title: |
Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) |
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39
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, David S. Graziosi, certify that:
Dated: April 28, 2023
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/s/ David S. Graziosi |
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Name: David S. Graziosi |
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Title: Chairman, President and Chief Executive Officer |
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(Principal Executive Officer) |
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Exhibit 31.1
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, G. Frederick Bohley, certify that:
Dated: April 28, 2023 |
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||
|
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||
/s/ G. Frederick Bohley |
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||
Name: G. Frederick Bohley |
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||
Title: Senior Vice President, Chief Financial Officer and Treasurer |
|
||
(Principal Financial Officer)
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||
Exhibit 31.2
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Allison Transmission Holdings, Inc. (the “Company”) on Form 10-Q for the quarter ending March 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, David S. Graziosi, Chairman, President and Chief Executive Officer of the Company, and G. Frederick Bohley, Senior Vice President, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. § 1350 as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
Dated: April 28, 2023 |
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|
|
|
/s/ David S. Graziosi |
|
David S. Graziosi |
|
Chairman, President and Chief Executive Officer |
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(Principal Executive Officer) |
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|
Dated: April 28, 2023 |
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|
|
|
/s/ G. Frederick Bohley |
|
G. Frederick Bohley |
|
Senior Vice President, Chief Financial Officer and Treasurer |
|
(Principal Financial Officer)