Allison Transmission Holdings, Inc. (ALSN) Earnings

Management highlights

### New Customer & Stakeholder Engagement Platform - Launched the new "Allison in Action" content platform on the corporate website, featuring customer stories, product testimonials, and multimedia content to highlight value delivery across industries, with an option for email alerts for updates. ### Defense Business Wins - Secured three major defense program wins: the 4500 Specialty Series transmission for France's 7,000+ vehicle PL-6T tactical truck program; a landmark $250 million contract to supply the new 4040MX cross-drive transmission for the CV90 Mark IV infantry fighting vehicle, the largest tracked defense order in company history; and an order for 2500 Specialty Series transmissions for General Dynamics European Land Systems' 3,000 Eagle armored vehicles (with an option for 2,000 additional units). - Global defense market outlook is positive, supported by rising NATO defense budgets, heightened geopolitical tensions, and industry-wide record backlogs and capacity expansion. ### Synergy Capture from Off-Highway Acquisition - Total targeted annual run-rate synergies of $120 million by the end of 2029, broken into three categories: 60% from procurement and logistics, 20% from manufacturing footprint optimization, 20% from organizational efficiency. - Procurement initiatives: consolidate supplier spend for better pricing, simplify bills of material to reduce complexity, qualify multiple suppliers for critical components to improve resilience. - Manufacturing initiatives: local-for-local production to reduce costs and trade risk, expand capacity in best-cost countries to improve competitiveness. - Organizational initiatives: integrate redundant corporate functions, align talent with regional expertise centers to reduce complexity. - Synergy realization timeline: 40% of target by end of 2027, an additional 40% by end of 2028, full realization by end of 2029. All initiatives are planned, funded, and underway, with potential for additional incremental synergies beyond the current target. ### Financial & Capital Allocation Highlights - Consolidated adjusted EBITDA hit $404 million ($91 million year-over-year increase) for a 25.8% margin; adjusted diluted EPS was $2.73 (8% year-over-year increase); record adjusted free cash flow of $281 million (84% year-over-year increase) despite commodity cost inflation headwinds. - Capital allocation priorities: 1) fund organic growth initiatives, 2) reduce debt to a target leverage ratio of 2x, 3) return excess cash to shareholders via dividends and share repurchases. In Q2 2026, the company repaid the remaining $150 million on its revolving credit facility, repurchased $46 million in common stock, and paid a $0.29 per share quarterly dividend.

Guidance

Allison upwardly revised its full-year 2026 guidance driven by stronger-than-expected second quarter performance and improving end market conditions, with the majority of the increase coming from the legacy Allison Transmission business unit: - Consolidated net sales guidance: $5.8 billion to $6.0 billion - Consolidated net income guidance: $600 million to $700 million, including ~$140 million in one-time pre-tax separation-related expenses and pending purchase price accounting completion for the Off-Highway acquisition - Consolidated adjusted EBITDA guidance: $1.465 billion to $1.575 billion, implying a ~26% adjusted EBITDA margin at the midpoint; no material synergies are included in this 2026 EBITDA guidance - Cash flow guidance: net cash from operating activities of $1.025 billion to $1.125 billion (including ~$55 million in one-time acquisition-related cash outlays); capital expenditures of $260 million to $280 million (including ~$30 million in one-time separation/integration spending); adjusted free cash flow of $745 million to $865 million - Management expects sequential volume improvement in North America on-highway (medium-duty and Class 8 vocational trucks) in the second half of 2026, while Off-Highway will see seasonal softness in the second half driven by typical European summer and year-end holiday shutdowns.

Segment performance

Allison reported consolidated second quarter 2026 net sales of $1.566 billion, a 92% year-over-year increase. The Allison Transmission Business Unit (legacy on-highway/defense) delivered record quarterly net sales of $860 million, a 6% year-over-year increase, representing 55% of total consolidated revenue. Within this segment: defense end market revenue grew 57% year-over-year to nearly $100 million, and North America on-highway revenue increased 3% year-over-year, driven primarily by favorable pricing. The Allison Off-Highway Business Unit generated second quarter net sales of $706 million, representing 45% of total consolidated revenue. Within this segment: construction, material handling, and mining end markets saw strong year-over-year growth from prior trough levels; the agriculture end market has not yet posted a positive inflection despite early recovery signals; regionally, Europe and Asia Pacific/India posted year-over-year growth, while the Americas region declined year-over-year driven by construction, material handling, and agriculture end markets.

Risks & headwinds

- Commodity cost inflation (specifically for steel and aluminum) is creating near-term margin headwinds; while most cost increases are recoverable via contractual indexing, there is a 6 to 12 month lag in pass-through that pressures short-term profitability. - Geopolitical tensions, trade policy changes, and tariffs impact end-user purchasing decisions and create supply chain disruption risk, which management is mitigating via dual sourcing and local-for-local manufacturing. - The EPA 2027 emissions proposal is still being assessed by OEMs and end-users, with final market impacts (including potential pre-buy activity or demand shifts between late 2026 and 2027) not yet fully determined. - Weakness in the agriculture end market and year-over-year declines in the Americas Off-Highway end markets create partial offset to growth in other Off-Highway segments. - Actual results may differ materially from forward-looking statements due to unforeseen risks and incorrect underlying assumptions, as disclosed in the company's prior SEC filings.

Analyst Q&A

• Q: Will the legacy Allison Transmission business need additional price increases to offset ongoing material cost inflation and margin compression? /

  A: Year-over-year margin compression in the legacy business is driven primarily by mid-teens material cost headwinds (with aluminum prices up nearly 25% quarter-over-quarter). While most cost increases are recoverable via contractual indexing, recovery lags 6-12 months, so current margin compression reflects recent rapid cost increases. Management has already secured significant pricing post-pandemic, is well-positioned to continue securing pricing above pre-pandemic levels (which averaged 50-75 basis points annually), and has good visibility for 2026 and long-term customer contracts into 2027. The company is confident it can maintain and improve margins.

• Q: What is the breakdown of the revenue guidance increase between the legacy on-highway and Off-Highway segments, and how should we think about second half 2026 sequential performance? /

  A: Almost all of the increase in full-year guidance midpoint comes from a more optimistic outlook for the legacy Allison Transmission business, based on stronger first half performance and customer feedback. The Off-Highway outlook is largely unchanged from prior expectations. Sequentially, the legacy business is expected to improve in the second half, with North America on-highway already seeing sequential revenue growth of 15% quarter-over-quarter in Q2 and early signs of pickup in the medium-duty segment. Off-Highway will see seasonal softness in the second half, as Q3 is typically the weakest quarter due to European summer shutdowns (which make up almost half of Off-Highway revenue) and year-end holiday shutdowns in Q4.

• Q: What are your expectations for pricing, margins, and synergy impacts for the Off-Highway business? /

  A: Off-Highway pricing was relatively flat year-over-year in Q2. Management is pleased with the current margin performance of Off-Highway after two quarters of ownership. Synergies from the combined organization will benefit the Off-Highway business, but additional details on 2027 margin expectations will be provided when management issues 2027 guidance later this year.

• Q: What are the implications of the EPA 2027 emissions proposal for demand in late 2026 and 2027, and what is the defense segment outlook? /

  A: The EPA proposal was largely in line with market expectations, but OEMs and end-users are still assessing impacts on vehicle pricing and demand. Unlike prior large emissions changes, the magnitude of change this time is much smaller, and 2026 build schedules are already largely set with full order books, limiting significant changes to second half 2026 demand. For defense, revenue is up 60% year-over-year, with strong visibility for the second half matching first half performance. The 2027 order book is already nearly full, with multiple large international program wins, and new products like the 4040MX are gaining traction. Management is bullish on long-term defense market growth.