|
|
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” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 as filed with the Securities and Exchange Commission (“SEC”) on April 28, 2022, and in Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC on February 17, 2022. 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 76% of revenues were generated in North America in 2021, we have a global presence by serving customers in Asia, Europe, South America and Africa. We serve customers through an independent network of approximately 1,400 independent distributor and dealer locations worldwide.
Trends Impacting Our Business
Global markets continue to experience supply chain, labor, energy and raw material constraints as a result of global economic volatility, the war in Ukraine and the COVID-19 pandemic that impact our business performance. As a result, during the three and nine months ended September 30, 2022 we experienced raw material and component part price inflation, increased freight and logistics costs, increased labor costs, production constraints due to labor shortages and increased foreign exchange volatility. In addition, despite increased customer demand, our net sales for the three and nine months ended September 30, 2022 were negatively impacted as a result of our customers’ inability to secure components from the broader commercial vehicle supply base which resulted in reduced commercial vehicle build schedules. We expect that commercial vehicle build schedules will continue to be negatively impacted by the availability of components throughout the remainder of 2022.
To limit the spread of variants and sub-variants of COVID-19, governments have taken, and may in the future take, various actions that have impacted, and may in the future impact, our employees, operations, customers and supply base, including the administration or mandate of vaccinations, travel bans and restrictions, quarantines, curfews, stay-at-home orders, social distancing guidelines and business shutdowns and closures.
Our net sales are driven by commercial vehicle production, which tends to be highly correlated to macroeconomic conditions. In 2022, we expect higher net sales principally driven by higher customer demand in the Global On-Highway, Global Off-Highway and Service Parts, Support Equipment & Other end markets, price increases on certain products and the continued execution of our growth initiatives.
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Table of Contents
Third Quarter Net Sales by End Market (dollars in millions)
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|
|
|
|
|
|
|
|
|
|
|
|
End Market |
|
Q3 2022 Net Sales |
|
|
Q3 2021 Net Sales |
|
|
% Variance |
|
North America On-Highway |
|
$ |
340 |
|
|
$ |
275 |
|
|
|
24 |
% |
North America Off-Highway |
|
|
24 |
|
|
|
20 |
|
|
|
20 |
% |
Defense |
|
|
35 |
|
|
|
39 |
|
|
|
(10 |
)% |
Outside North America On-Highway |
|
|
118 |
|
|
|
93 |
|
|
|
27 |
% |
Outside North America Off-Highway |
|
|
36 |
|
|
|
14 |
|
|
|
157 |
% |
Service Parts, Support Equipment and Other |
|
|
157 |
|
|
|
126 |
|
|
|
25 |
% |
Total Net Sales |
|
$ |
710 |
|
|
$ |
567 |
|
|
|
25 |
% |
North America On-Highway end market net sales were up 24% for the third quarter 2022 compared to the third quarter 2021, principally driven by continued strength in customer demand for last mile delivery, regional haul and vocational trucks.
Global Off-Highway end market net sales were up $26 million for the third quarter 2022 compared to the third quarter 2021, principally driven by demand for hydraulic fracturing applications in the energy sector as well as higher demand in the mining and construction sectors.
Defense end market net sales were down 10% for the third quarter 2022 compared to the third quarter 2021, principally driven by lower demand for Wheeled vehicle applications.
Outside North America On-Highway end market net sales were up 27% for the third quarter 2022 compared to the third quarter 2021, principally driven by the continued execution of our growth initiatives in Europe, Asia and South America.
Service Parts, Support Equipment and Other end market net sales were up 25% for the third quarter 2022 compared to the third quarter 2021, principally driven by higher demand for global service parts and support equipment and aluminum die cast components.
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. and other governments. Sales are recorded net of provisions for customer allowances 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, overhead expense related to our manufacturing operations and direct labor associated with the manufacture and assembly of propulsion solutions and parts. For the nine months ended September 30, 2022, direct material costs were approximately 66%, overhead costs were approximately 27%, 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 long-term agreements, as appropriate. See Part I, Item 3, “Quantitative and Qualitative Disclosures about Market Risk—Commodity Price Risk” included below.
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Table of Contents
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 intangibles.
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.
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Table of Contents
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 $627 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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
(unaudited, dollars in millions) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Net income (GAAP) |
|
$ |
139 |
|
|
$ |
94 |
|
|
$ |
390 |
|
|
$ |
324 |
|
plus: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
29 |
|
|
|
28 |
|
|
|
88 |
|
|
|
87 |
|
Income tax expense |
|
|
20 |
|
|
|
30 |
|
|
|
86 |
|
|
94 |
|
Depreciation of property, plant and equipment |
|
|
29 |
|
|
|
26 |
|
|
|
82 |
|
|
|
77 |
|
Amortization of intangible assets |
|
|
12 |
|
|
|
12 |
|
|
|
35 |
|
|
|
35 |
|
Unrealized loss on marketable securities (a) |
|
|
9 |
|
|
|
— |
|
|
|
20 |
|
|
|
— |
|
Stock-based compensation expense (b) |
|
|
5 |
|
|
|
3 |
|
|
|
14 |
|
|
|
11 |
|
Technology-related investment gain (c) |
|
|
— |
|
|
|
(3 |
) |
|
|
(6 |
) |
|
|
(3 |
) |
Unrealized loss (gain) on foreign exchange (d) |
|
|
2 |
|
|
|
(1 |
) |
|
|
5 |
|
|
|
(1 |
) |
Acquisition-related earnouts (e) |
|
|
— |
|
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
UAW Local 933 retirement incentive (f) |
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
Adjusted EBITDA (Non-GAAP) |
|
$ |
245 |
|
|
$ |
189 |
|
|
$ |
716 |
|
|
$ |
624 |
|
Net sales (GAAP) |
|
$ |
710 |
|
|
$ |
567 |
|
|
$ |
2,051 |
|
|
$ |
1,758 |
|
Net income as a percent of net sales (GAAP) |
|
|
19.6 |
% |
|
|
16.6 |
% |
|
|
19.0 |
% |
|
|
18.4 |
% |
Adjusted EBITDA as a percent of net sales (Non-GAAP) |
|
|
34.5 |
% |
|
|
33.3 |
% |
|
|
34.9 |
% |
|
|
35.5 |
% |
Net cash provided by operating activities (GAAP) |
|
$ |
207 |
|
|
$ |
196 |
|
|
$ |
433 |
|
|
$ |
467 |
|
Deductions to reconcile to Adjusted free cash flow: |
|
|
|
|
|
|
|
|
|
|
|
|
Additions of long-lived assets |
|
|
(25 |
) |
|
|
(43 |
) |
|
|
(75 |
) |
|
|
(112 |
) |
Adjusted free cash flow (Non-GAAP) |
|
$ |
182 |
|
|
$ |
153 |
|
|
$ |
358 |
|
|
$ |
355 |
|
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Table of Contents
(a)Represents losses (recorded in Other (expense) income, net) related to an investment in the common stock of Jing-Jin Electric Technologies Co. Ltd ("JJE").
(b)Represents stock-based compensation expense (recorded in Cost of sales, Selling, general and administrative, and Engineering—research and development).
(c)Represents a gain (recorded in Other (expense) income, net) related to investments in co-development agreements to expand our position in propulsion solution technologies.
(d)Represents losses (gains) (recorded in Other (expense) income, net) on intercompany financing transactions related to investments in plant assets for our India facility.
(e)Represents expenses (recorded in Selling, general and administrative and Engineering – research and development) for earnouts related to our acquisition of Vantage Power Limited.
(f)Represents adjustments (recorded in Cost of sales) related to a retirement incentive program for certain employees represented by the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (“UAW”) pursuant to the UAW Local 933 collective bargaining agreement effective through November 2023.
28
Table of Contents
Results of Operations
Comparison of three months ended September 30, 2022 and 2021
The following table sets forth certain financial information for the three months ended September 30, 2022 and 2021. 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 September 30, |
|
(unaudited, dollars in millions) |
|
2022 |
|
|
% of net sales |
|
|
2021 |
|
|
% of net sales |
|
Net sales |
|
$ |
710 |
|
|
|
100 |
% |
|
$ |
567 |
|
|
|
100 |
% |
Cost of sales |
|
|
382 |
|
|
|
54 |
|
|
|
306 |
|
|
|
54 |
|
Gross profit |
|
|
328 |
|
|
|
46 |
|
|
|
261 |
|
|
|
46 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
78 |
|
|
|
11 |
|
|
|
73 |
|
|
|
13 |
|
Engineering — research and development |
|
|
47 |
|
|
|
6 |
|
|
|
42 |
|
|
|
7 |
|
Total operating expenses |
|
|
125 |
|
|
|
17 |
|
|
|
115 |
|
|
|
20 |
|
Operating income |
|
|
203 |
|
|
|
29 |
|
|
|
146 |
|
|
|
26 |
|
Interest expense, net |
|
|
(29 |
) |
|
|
(4 |
) |
|
|
(28 |
) |
|
|
(5 |
) |
Other (expense) income, net |
|
|
(15 |
) |
|
|
(3 |
) |
|
|
6 |
|
|
|
1 |
|
Income before income taxes |
|
|
159 |
|
|
|
22 |
|
|
|
124 |
|
|
|
22 |
|
Income tax expense |
|
|
(20 |
) |
|
|
(2 |
) |
|
|
(30 |
) |
|
|
(5 |
) |
Net income |
|
$ |
139 |
|
|
|
20 |
% |
|
$ |
94 |
|
|
|
17 |
% |
Net sales
Net sales for the quarter ended September 30, 2022 were $710 million compared to $567 million for the quarter ended September 30, 2021, an increase of 25%. The increase was principally driven by a $65 million, or 24%, increase in net sales in the North America On-Highway end market principally driven by continued strength in customer demand for last mile delivery, regional haul and vocational trucks, a $31 million, or 25%, 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 and aluminum die cast components, a $26 million, or 76%, increase in net sales in the Global Off-Highway end market principally driven by demand for hydraulic fracturing applications in the energy sector as well as higher demand in the mining and construction sectors and a $25 million, or 27%, increase in net sales in the Outside North America On-Highway end market principally driven by the continued execution of our growth initiatives in Europe, Asia and South America, partially offset by a $4 million, or 10%, decrease in net sales in the Defense end market principally driven by lower demand for Wheeled vehicle applications.
Cost of sales
Cost of sales for the quarter ended September 30, 2022 was $382 million compared to $306 million for the quarter ended September 30, 2021, an increase of 25%. 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 September 30, 2022 was $328 million compared to $261 million for the quarter ended September 30, 2021, an increase of 26%. The increase was principally driven by $71 million related to increased net sales and $29 million of price increases on certain products, partially offset by $20 million of higher direct material costs and $13 million of higher manufacturing expense commensurate with increased net sales. Gross profit as a percent of net sales for the three months ended September 30, 2022 increased 20 basis points compared to the same period in 2021 principally driven by price increases on certain products, partially offset by increased cost of goods sold.
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Table of Contents
Selling, general and administrative
Selling, general and administrative expenses for the quarter ended September 30, 2022 were $78 million compared to $73 million for the quarter ended September 30, 2021, an increase of 7%. The increase was principally driven by higher commercial activities spending.
Engineering — research and development
Engineering expenses for the quarter ended September 30, 2022 were $47 million compared to $42 million for the quarter ended September 30, 2021, an increase of 12%. The increase was principally driven by increased product initiatives spending.
Interest expense, net
Interest expense, net for the quarter ended September 30, 2022 was $29 million compared to $28 million for the quarter ended September 30, 2021, an increase of 4%. The increase was principally driven by $4 million of higher interest expense on ATI's Term Loan due to higher variable interest rates, partially offset by $3 million of lower interest expense on interest rate hedges.
Other (expense) income, net
Other (expense) income, net for the quarter ended September 30, 2022 was ($15) million compared to $6 million for the quarter ended September 30, 2021. The change was principally driven by a $9 million unrealized loss on marketable securities, $5 million of unfavorable foreign exchange and a $4 million gain related to technology-related investments in the third quarter of 2021 that did not reoccur in 2022.
Income tax expense
Income tax expense for the three months ended September 30, 2022 was $20 million, resulting in an effective tax rate of 13%, compared to $30 million of income tax expense and an effective tax rate of 24% for the three months ended September 30, 2021. The decrease in income tax expense was principally driven by enacted state tax rate legislation resulting in a deferred tax benefit, partially offset by increased taxable income. The decrease in the effective tax rate was principally driven by enacted state tax rate legislation that resulted in a deferred tax benefit.
30
Table of Contents
Comparison of nine months ended September 30, 2022 and 2021
The following table sets forth certain financial information for the nine months ended September 30, 2022 and 2021. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
(unaudited, dollars in millions) |
|
2022 |
|
|
% of net sales |
|
|
2021 |
|
|
% of net sales |
|
Net sales |
|
$ |
2,051 |
|
|
|
100 |
% |
|
$ |
1,758 |
|
|
|
100 |
% |
Cost of sales |
|
|
1,092 |
|
|
|
53 |
|
|
|
918 |
|
|
|
52 |
|
Gross profit |
|
|
959 |
|
|
|
47 |
|
|
|
840 |
|
|
|
48 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
231 |
|
|
|
11 |
|
|
|
226 |
|
|
|
13 |
|
Engineering — research and development |
|
|
136 |
|
|
|
7 |
|
|
|
121 |
|
|
|
7 |
|
Total operating expenses |
|
|
367 |
|
|
|
18 |
|
|
|
347 |
|
|
|
20 |
|
Operating income |
|
|
592 |
|
|
|
29 |
|
|
|
493 |
|
|
|
28 |
|
Interest expense, net |
|
|
(88 |
) |
|
|
(4 |
) |
|
|
(87 |
) |
|
|
(5 |
) |
Other (expense) income, net |
|
|
(28 |
) |
|
|
(2 |
) |
|
|
12 |
|
|
|
1 |
|
Income before income taxes |
|
|
476 |
|
|
|
23 |
|
|
|
418 |
|
|
|
24 |
|
Income tax expense |
|
|
(86 |
) |
|
|
(4 |
) |
|
|
(94 |
) |
|
|
(6 |
) |
Net income |
|
$ |
390 |
|
|
|
19 |
% |
|
$ |
324 |
|
|
|
18 |
% |
Net sales
Net sales for the nine months ended September 30, 2022 were $2,051 million compared to $1,758 million for the nine months ended September 30, 2021, an increase of 17%. The increase was principally driven by a $130 million, or 15%, increase in net sales in the North America On-Highway end market principally driven by continued strength in customer demand for last mile delivery, regional haul and vocational trucks, an $81 million, or 103%, increase in net sales in the Global Off-Highway end market principally driven by demand for hydraulic fracturing applications in the energy sector as well as higher demand in the mining and construction sectors, a $58 million, or 15%, increase in net sales in the Service Parts, Support Equipment and Other end market principally driven by global service parts and support equipment and a $57 million, or 21%, increase in net sales in the Outside North America On-Highway end market principally driven by the continued execution of our growth initiatives in Europe, Asia and South America, partially offset by a $33 million, or 25%, decrease in net sales in the Defense end market principally driven by lower demand for Tracked and Wheeled vehicle applications.
Cost of sales
Cost of sales for the nine months ended September 30, 2022 was $1,092 million compared to $918 million for the nine months ended September 30, 2021, an increase of 19%. 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 nine months ended September 30, 2022 was $959 million compared to $840 million for the nine months ended September 30, 2021, an increase of 14%. The increase was principally driven by $139 million related to increased net sales and $82 million of price increases on certain products, partially offset by $77 million of higher direct material costs and $24 million of higher manufacturing expense commensurate with increased net sales. Gross profit as a percent of net sales for the nine months ended September 30, 2022 decreased 100 basis points compared to the same period in 2021 principally driven by increased cost of goods sold, partially offset by price increases on certain products.
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Table of Contents
Selling, general and administrative
Selling, general and administrative expenses for the nine months ended September 30, 2022 was $231 million compared to $226 million for the nine months ended September 30, 2021, an increase of 2%. The increase was principally driven by higher commercial activities spending, partially offset by lower incentive compensation expense.
Engineering — research and development
Engineering expenses for the nine months ended September 30, 2022 were $136 million compared to $121 million for the nine months ended September 30, 2021, an increase of 12%. The increase was principally driven by increased product initiatives spending.
Interest expense, net
Interest expense, net for the nine months ended September 30, 2022 was $88 million compared to $87 million for the nine months ended September 30, 2021, an increase of 1%. The increase was principally driven by $5 million of higher interest expense on ATI's Term Loan due to higher variable interest rates, partially offset by $4 million of lower interest expense on interest rate hedges.
Other (expense) income, net
Other (expense) income, net for the nine months ended September 30, 2022 was ($28) million compared to $12 million for the nine months ended September 30, 2021. The change was principally driven by a $20 million unrealized loss on marketable securities, $10 million of unfavorable foreign exchange, $5 million of unfavorable change associated with assets held in a rabbi trust and $5 million of unfavorable foreign exchange on intercompany financing.
Income tax expense
Income tax expense for the nine months ended September 30, 2022 was $86 million, resulting in an effective tax rate of 18%, compared to $94 million of income tax expense and an effective tax rate of 22% for the nine months ended September 30, 2021. The decrease in income tax expense and effective tax rate was principally driven by enacted state tax rate legislation that resulted in a deferred tax benefit, partially offset by increased taxable income. The decrease in the effective tax rate was principally driven by enacted state tax rate legislation that resulted in a deferred tax benefit.
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Table of Contents
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 $180 million and $127 million as of September 30, 2022 and December 31, 2021, respectively. Of the available cash and cash equivalents, $110 million was deposited in operating accounts and $70 million was invested in U.S. government backed securities as of September 30, 2022, compared to December 31, 2021, when all of the $127 million was deposited in operating accounts.
As of September 30, 2022, the total of cash held by foreign subsidiaries was $70 million, the majority of which was at our subsidiaries located in China, India, the Netherlands 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 any 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.
Our liquidity requirements are significant, primarily due to our debt service requirements. As of September 30, 2022, we had $627 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 ATI’s 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 $5 million of principal payments on the Term Loan during each of the nine months ended September 30, 2022 and 2021. 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.
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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. Throughout the nine months ended September 30, 2022, the Company made periodic withdrawals and payments on the Revolving Credit Facility as part of the Company's cash management plans. The maximum amount outstanding at any time during the nine months ended September 30, 2022 was $75 million. As of September 30, 2022, we had $645 million available under the Revolving Credit Facility, net of $5 million in letters of credit. As of September 30, 2022, 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 September 30, 2022, our first lien net leverage ratio was 0.48x. 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 September 30, 2022, 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 September 30, 2022, our credit ratings and outlook from both Moody's and Fitch are shown in the table below:
|
|
|
|
|
|
|
September 30, 2022 |
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 |
Our current stock repurchase program (the "Repurchase Program") was originally authorized by the Board of Directors in 2016. On February 24, 2022, the Board of Directors authorized us to repurchase an additional $1,000 million of our common stock, bringing the total amount authorized under the Repurchase Program to $4,000 million. During the nine months ended September 30, 2022, we repurchased approximately $224 million of our common stock under the Repurchase Program. As a result of timing between the repurchase transactions and the settlement of the repurchases, $216 million of share repurchases were settled in cash during the nine months ended September 30, 2022, and the remaining $8 million of share repurchases were recorded to Other current liabilities in the Condensed Consolidated Balance Sheets as of September 30, 2022 and settled the following month. As of September 30, 2022, we had approximately $1,089 million available under the Repurchase Program.
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The following table shows our sources and uses of funds for the nine months ended September 30, 2022 and 2021 (in millions):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
Statements of Cash Flows Data |
|
2022 |
|
|
2021 |
|
Cash flows provided by operating activities |
|
$ |
433 |
|
|
$ |
467 |
|
Cash flows used for investing activities |
|
$ |
(93 |
) |
|
$ |
(119 |
) |
Cash flows used for financing activities |
|
$ |
(285 |
) |
|
$ |
(396 |
) |
Generally, cash provided by operating activities has been adequate to fund our operations. We have significant liquidity, including $180 million of cash and cash equivalents and $645 million available under the Revolving Credit Facility, net of $5 million of letters of credit, as of September 30, 2022. At this time, we believe cash provided by operating activities, cash and cash equivalents and borrowing capacity under the Senior Secured 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 nine months ended September 30, 2022 generated $433 million of cash compared to $467 million for the nine months ended September 30, 2021. The decrease was principally driven by higher cash incentive compensation payments, higher cash income taxes, higher operating working capital funding requirements and higher cash interest payments, partially offset by higher gross profit.
Cash used for investing activities
Investing activities for the nine months ended September 30, 2022 used $93 million of cash compared to $119 million for the nine months ended September 30, 2021. The decrease was principally driven by a $37 million decrease in capital expenditures and an $11 million loan to JJE in 2021 that did not recur in 2022, partially offset by $23 million in cash paid for business acquisitions during 2022.
Cash used for financing activities
Financing activities for the nine months ended September 30, 2022 used $285 million of cash compared to $396 million for the nine months ended September 30, 2021. The decrease was principally driven by $110 million of decreased stock repurchases under the Repurchase Program.
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.
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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, 2021 as filed with the U.S SEC on February 17, 2022. 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 and nine months ended September 30, 2022.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements.
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.
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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: 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 the war in Ukraine and the COVID-19 pandemic; global economic volatility; 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; 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; 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; general economic and industry conditions, including the risk of recession; 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; labor strikes, work stoppages or similar labor disputes, which could significantly disrupt our operations or those of our principal customers or suppliers; 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, 2021 as filed with the SEC on February 17, 2022 and Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 as filed with the SEC on April 28, 2022. 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 SEC 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.
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