Allison Transmission Holdings Inc: Form 10-Q for the period ended Sep 30, 2025

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, 2024 as filed with the Securities and Exchange Commission on February 13, 2025. 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”) is a leading designer and manufacturer of propulsion solutions for commercial and defense vehicles and the largest global manufacturer of medium- and heavy-duty fully automatic transmissions. 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”.

We have a global presence by serving customers in North America, Asia, Europe, South America, and Africa, with approximately 77% of our revenues being generated in North America in 2024. We serve customers through an independent network of approximately 1,600 independent distributor and dealer locations worldwide.

Recent Developments

On June 11, 2025, we entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Dana Incorporated (“Dana”) to acquire the off-highway business of Dana (the "Acquisition"). Pursuant to the Purchase Agreement, we plan to acquire Dana's off-highway business for a purchase price of approximately $2,732 million, subject to certain adjustments, using a combination of cash on hand and debt. The closing of the transaction is not subject to a financing condition or to the approval of Dana’s or Allison’s stockholders and is projected to occur late in the fourth quarter of 2025, pending customary regulatory approvals. We will be required to pay Dana a termination fee of $120 million if the Purchase Agreement is terminated due to the failure of the transactions contemplated by the Purchase Agreement to be completed by a specified outside date as a result of the failure to obtain required approvals or clearances under, or as a result of an injunction or order relating to, competition and foreign investment laws.

Also on June 11, 2025, in connection with the entry into the Purchase Agreement, we entered into a commitment letter (the “Commitment Letter”) with a group of lenders (the "Lenders"), pursuant to which the Lenders have committed to provide a 364-day senior unsecured bridge term loan facility (the “Bridge Facility”), in an aggregate principal amount of up to $2,000 million, subject to customary conditions, including the execution and delivery of definitive documentation with respect to the Bridge Facility in accordance with the terms set forth in the Commitment Letter. The proceeds of the Bridge Facility may be used to finance a portion of the purchase price under the Purchase Agreement and to pay costs, fees and expenses in connection with the Bridge Facility and the transactions contemplated thereby. We expect to replace the Bridge Facility prior to the closing of the transaction with permanent financing, which may include the issuance of debt securities.

Trends Impacting Our Business

In 2025, we expect decreased net sales in our North America On-Highway end market, partially offset by price increases on certain products and increased demand for Tracked vehicle applications in our Defense end market.

Third Quarter Net Sales by End Market (dollars in millions)

North America On-Highway end market net sales were down 28% for the third quarter 2025 compared to the third quarter 2024, principally driven by lower demand for Class 8 vocational and medium-duty trucks, partially offset by price increases on certain products and market share gains for hybrid propulsion systems for transit buses.

Outside North America On-Highway end market net sales were down 3% for the third quarter 2025 compared to the third quarter 2024, principally driven by lower demand in Asia, partially offset by higher demand in Europe.

Global Off-Highway net sales were down $13 million for the third quarter 2025 compared to the third quarter 2024, principally driven by lower demand from the energy, mining and construction sectors outside of North America.

Defense end market net sales were up 47% for the third quarter 2025 compared to the third quarter 2024, principally driven by increased demand for Tracked vehicle applications, price increases on certain products and the continued execution of our growth initiatives.

Service Parts, Support Equipment and Other end market net sales were down 5% for the third quarter 2025 compared to the third quarter 2024, principally driven by lower demand for aluminum die cast components and support equipment, partially offset by 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 nine months ended September 30, 2025, direct material costs were approximately 66%, overhead costs were approximately 26%, and direct labor costs were approximately 8% of 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 (“LTAs”), as appropriate. See Part I, Item 3, “Quantitative and Qualitative Disclosures about Market Risk—Commodity Price Risk” included below.

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.

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 $510 million due March 2031 (“Term Loan”) and ATI’s revolving credit facility with commitments in the amount of $750 million due March 2029 ("Revolving Credit Facility" and, together with the Term Loan, the "Senior Secured Credit Facility"). 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:

(unaudited, dollars in millions)

(a) Represents acquisition-related expenses (recorded in Selling, general and administrative), primarily consulting and legal fees, related to our pending Acquisition.

(b) Represents stock-based compensation expense (recorded in Cost of sales, Selling, general and administrative, and Engineering — research and development).

(c) Represents unrealized (gains) losses (recorded in Other income (expense), net) related to an investment in the common stock of Jing-Jin Electric Technologies Co. Ltd.

(d) Represents non-recurring incentives (recorded in Cost of sales, Selling, general and administrative, and Engineering - research and development) to eligible employees as a result of the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America ("UAW") Local 933 represented employees ratifying a four-year collective bargaining agreement effective through November 2027.

(e) Represents a non-cash settlement charge (recorded in Other income (expense), net) for a pro rata portion of previously unrecognized pension plan actuarial net losses associated with the pension risk transfer of a portion of our salaried defined benefit pension plan obligations to a third-party insurance company.

(f) Represents other adjustments as defined by the Credit Agreement.

(g) Net cash provided by operating activities (GAAP) and Adjusted free cash flow (Non-GAAP) include $13 million and $30 million of payments for expenses related to the Acquisition for the three and nine months ended September 30, 2025, respectively. There were no payments for expenses related to the Acquisition in either of the three or nine months ended September 30, 2024.

Results of Operations

Comparison of three months ended September 30, 2025 and 2024

The following table sets forth certain financial information for the three months ended September 30, 2025 and 2024. 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.

(unaudited, dollars in millions)

Net sales

Net sales for the quarter ended September 30, 2025 were $693 million compared to $824 million for the quarter ended September 30, 2024.

The decrease was principally driven by:

• North America On-Highway end market net sales decreased $130 million, or 28%, principally driven by lower demand for Class 8 vocational and medium-duty trucks, partially offset by price increases on certain products and market share gains for hybrid propulsion systems for transit buses.
• Global Off-Highway end market net sales decreased $13 million, or 65%, principally driven by lower demand from the energy, mining and construction sectors outside of North America.
• Service Parts, Support Equipment and Other end market net sales decreased $9 million, or 5%, principally driven by lower demand for aluminum die cast components and support equipment, partially offset by price increases on certain products.
• Outside North America On-Highway end market net sales decreased $4 million, or 3%, principally driven by lower demand in Asia, partially offset by higher demand in Europe.

These decreases were partially offset by:

• Defense end market net sales increased $25 million, or 47%, principally driven by increased demand for Tracked vehicle applications, price increases on certain products and the continued execution of our growth initiatives.

Cost of sales

Cost of sales for the quarter ended September 30, 2025 was $364 million compared to $428 million for the quarter ended September 30, 2024, a decrease of 15%. The decrease was principally driven by lower direct material and manufacturing expense commensurate with decreased net sales and $6 million of lower incentive compensation expense, partially offset by unfavorable direct material costs.

Gross profit

Gross profit for the quarter ended September 30, 2025 was $329 million compared to $396 million for the quarter ended September 30, 2024, a decrease of 17%. The decrease was principally driven by $106 million from decreased net sales and $14 million of unfavorable direct material costs, partially offset by $31 million from price increases on certain products, $16 million of lower manufacturing expense and $6 million of lower incentive compensation expense. Gross profit as a percent of net sales for the three months ended September 30, 2025 decreased 60 basis points compared to the same period in 2024.

Selling, general and administrative

Selling, general and administrative expenses for the quarter ended September 30, 2025 were $82 million compared to $85 million for the quarter ended September 30, 2024, a decrease of 4%. The decrease was principally driven by lower incentive compensation expense and lower commercial activities spending to align costs and programs across our business with end markets demand conditions, partially offset by expenses related to the Acquisition.

Engineering — research and development

Engineering expenses for the quarter ended September 30, 2025 were $43 million compared to $51 million for the quarter ended September 30, 2024, a decrease of 16%. The decrease was principally driven by reduced product initiatives spending to align costs and programs across our business with end markets demand conditions and lower incentive compensation expense.

Interest expense, net

Interest expense, net for the quarter ended September 30, 2025 was $24 million compared to $21 million, an increase of 14%. The increase was principally driven by $3 million of increased interest expense from amortization of deferred financing costs related to the Bridge Facility.

Other income (expense), net

Other income (expense), net for the quarter ended September 30, 2025 was $2 million compared to $10 million for the quarter ended September 30, 2024. The change was principally driven by $6 million of unfavorable foreign exchange.

Income tax expense

Income tax expense for the three months ended September 30, 2025 was $45 million, resulting in an effective tax rate of 25%, compared to $49 million of income tax expense and an effective tax rate of 20% for the three months ended September 30, 2024. The decrease in income tax expense was principally driven by decreased taxable income. The increase in the effective tax rate was principally driven by decreased taxable income as a result of the One Big Beautiful Bill Act.

Comparison of nine months ended September 30, 2025 and 2024

The following table sets forth certain financial information for the nine months ended September 30, 2025 and 2024. 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.

(unaudited, dollars in millions)

Net sales

Net sales for the nine months ended September 30, 2025 were $2,273 million compared to $2,429 million for the nine months ended September 30, 2024, a decrease of 6%.

The decrease was principally driven by:

• North America On-Highway end market net sales decreased $154 million, or 12%, principally driven by lower demand for medium-duty and class 8 vocational trucks, partially offset by price increases on certain products and market share gains for hybrid propulsion systems for transit buses.
• Global Off-Highway end market net sales decreased $48 million, or 54%, principally driven by lower demand from the energy, mining and construction sectors outside of North America.
• Service Parts, Support Equipment and Other end market net sales decreased $11 million, or 2%, principally driven by lower demand for aluminum die cast components and support equipment, partially offset by price increases on certain products and higher demand for service parts.

These decreases were partially offset by:

• Defense end market net sales increased $50 million, or 35%, principally driven by increased demand for Tracked vehicle applications, price increases on certain products and the continued execution of our growth initiatives.
• Outside North America On-Highway end market net sales increased $7 million, or 2%, principally driven by higher demand in South America and price increases on certain products, partially offset by lower demand in Asia.

Cost of sales

Cost of sales for the nine months ended September 30, 2025 was $1,164 million compared to $1,273 million for the nine months ended September 30, 2024, a decrease of 9%. The decrease was principally driven by lower direct material and manufacturing expense commensurate with decreased net sales, $15 million of lower incentive compensation expense and $13 million of UAW Local 933 contract signing incentives recognized in 2024 that did not reoccur in 2025, partially offset by unfavorable direct material costs.

Gross profit

Gross profit for the nine months ended September 30, 2025 was $1,109 million compared to $1,156 million for the nine months ended September 30, 2024, a decrease of 4%. The decrease was principally driven by $168 million from decreased net sales and $31 million of unfavorable direct material costs, partially offset by $104 million of price increases on certain products, $20 million of lower manufacturing expense, $15 million of lower incentive compensation expense and $13 million of UAW Local 933 contract signing incentives recognized in 2024 that did not reoccur in 2025. Gross profit as a percent of net sales for the nine months ended September 30, 2025 increased 120 basis points compared to the same period in 2024, principally driven by price increases on certain products.

Selling, general and administrative

Selling, general and administrative expenses were $270 million for the nine months ended September 30, 2025 compared to $253 million for the nine months ended September 30, 2024, an increase of 7%. The increase was principally driven by expenses related to the Acquisition and higher product warranty expense, partially offset by lower incentive compensation expense and lower commercial activities spending to align costs and programs across our business with end markets demand conditions.

Engineering — research and development

Engineering expenses for the nine months ended September 30, 2025 were $130 million compared to $146 million for the nine months ended September 30, 2024, a decrease of 11%. The decrease was principally driven by reduced product initiatives spending to align costs and programs across our business with end markets demand conditions and lower incentive compensation expense.

Interest expense, net

Interest expense, net for the nine months ended September 30, 2025 was $67 million compared to $68 million for the nine months ended September 30, 2024, a decrease of 1%.

Other income (expense), net

Other income (expense), net for the nine months ended September 30, 2025 was $15 million compared to ($2) million for the nine months ended September 30, 2024. The change was principally driven by a $19 million change in unrealized mark-to-market adjustments for marketable securities and a $4 million non-cash defined benefit pension plan settlement charge recognized in 2024 that did not reoccur in 2025, partially offset by $4 million of reduced post-retirement benefit plan credits.

Income tax expense

Income tax expense for the nine months ended September 30, 2025 was $133 million, resulting in an effective tax rate of 20%, compared to $131 million of income tax expense and an effective tax rate of 19% for the nine months ended September 30, 2024.

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 $902 million and $781 million as of September 30, 2025 and December 31, 2024, respectively. Of the available cash and cash equivalents, $164 million was deposited in operating accounts and $738 million was invested primarily in U.S. government backed securities and time deposits as of September 30, 2025, compared to $117 million deposited in operating accounts and $664 million invested primarily in U.S. government backed securities as of December 31, 2024.

As of September 30, 2025, the total of cash held by foreign subsidiaries was $131 million, the majority of which was at our subsidiaries located in the Netherlands, China, Japan and India. 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.

Our liquidity requirements are significant, primarily due to our debt service requirements. As of September 30, 2025, we had $510 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 $1 million of minimum required quarterly principal payments on ATI’s Term Loan through its maturity date of March 2031 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 $4 million and $103 million of principal payments on the Term Loan during the nine months ended September 30, 2025 and 2024, 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 $750 million Revolving Credit Facility, net of an allowance for up to $75 million in outstanding letter of credit commitments. As of September 30, 2025, we had $745 million available under the Revolving Credit Facility, net of $5 million in letters of credit. As of September 30, 2025, 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, 2025, our first lien net leverage ratio was (0.35x). 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, 2025, we are in compliance with all covenants under the Senior Secured Credit Facility and indentures governing the Senior Notes.

In connection with the Acquisition, we entered into the Commitment Letter, which provides for up to $2,000 million of borrowing capacity under the Bridge Facility. The proceeds of the Bridge Facility may be used to finance a portion of the purchase price under the Purchase Agreement and to pay costs, fees and expenses in connection with the Bridge Facility and the transactions contemplated thereby. We expect to replace the Bridge Facility prior to the closing of the Acquisition with permanent financing, which may include the issuance of debt securities.

Our credit ratings and outlook are reviewed periodically by Moody’s Ratings (“Moody’s”) and Fitch Ratings, Inc. (“Fitch”). As of September 30, 2025, our credit ratings from both Moody's and Fitch are shown in the table below:

On February 20, 2025, our Board of Directors authorized us to repurchase an additional $1,000 million of our common stock pursuant to our stock repurchase program (the "Repurchase Program"), bringing the total amount authorized pursuant to the Repurchase Program to $5,000 million. During the nine months ended September 30, 2025, we repurchased $283 million of our common stock under the Repurchase Program. Substantially all of the repurchase transactions during the nine months ended September 30, 2025 were settled in cash during the same period. As of September 30, 2025, we had approximately $1,236 million available under the Repurchase Program.

The following table shows our sources and uses of funds for the nine months ended September 30, 2025 and 2024 (dollars in millions):

Generally, cash provided by operating activities has been adequate to fund our operations. We have significant liquidity, including $902 million of cash and cash equivalents and $745 million available under the Revolving Credit Facility, net of $5 million of letters of credit, as of September 30, 2025. In addition, we have $2,000 million available under the Bridge Facility, which may be used to finance a portion of the purchase price of the Acquisition and other related costs, fees and expenses. At this time, we believe cash provided by operating activities, cash and cash equivalents and borrowing capacity under the Revolving Credit Facility and Bridge 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, 2025 generated $593 million of cash compared to $590 million for the nine months ended September 30, 2024. The increase was principally driven by lower cash income taxes, lower operating working capital funding requirements, UAW Local 933 contract signing incentives recognized in 2024 that did not reoccur in 2025 and decreased defined benefit pension plans funding payments, partially offset by lower gross profit, payments for expenses related to the Acquisition, higher cash incentive compensation payments and lower cash interest received on interest rate swaps.

Cash used for investing activities

Investing activities for the nine months ended September 30, 2025 used $108 million of cash compared to $70 million for the nine months ended September 30, 2024. The increase was principally driven by a $33 million increase in capital expenditures.

Cash used for financing activities

Financing activities for the nine months ended September 30, 2025 used $368 million of cash compared to $287 million for the nine months ended September 30, 2024. The increase was principally driven by $149 million of higher stock repurchases under the Repurchase Program, $20 million of lower proceeds from the exercise of stock options and $6 million of higher taxes paid related to the net share settlement of equity awards, partially offset by $99 million of decreased payments on our long-term debt.

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.

Critical Accounting Estimates

A discussion of our critical 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, 2024 as filed with the Securities and Exchange Commission on February 13, 2025. 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 estimates being reported for the three and nine months ended September 30, 2025.

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.

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: risks relating to the pending Acquisition, including: the Acquisition may not be completed in a timely manner or at all; we may experience delays, unanticipated costs or restrictions resulting from regulatory review of the Acquisition, including the risk that we may be unable to obtain governmental and regulatory approvals required for the Acquisition or that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the Acquisition; the financing intended to fund the Acquisition may not be obtained; uncertainties associated with the Acquisition may cause a loss of both companies’ management personnel and other key employees, and cause disruptions to both companies’ business relationships; the Purchase Agreement subjects the Company and Dana to restrictions on business activities prior to the effective time of the Acquisition; we are expected to incur significant costs in connection with the Acquisition and integration; litigation risks relating to the Acquisition; the off-highway business of Dana and its operations may not be integrated successfully in the expected time frame; the Acquisition may result in a loss of customers, vendors, and other business counterparties; and the combined company may fail to realize all of the anticipated benefits of the Acquisition or fail to effectively manage its expanded operations; 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, natural disasters, extreme weather events, wars and public health crises such as pandemics; global economic volatility; general economic and industry conditions, including the risk of prolonged inflation and recession; labor strikes, work stoppages or similar labor disputes, which could significantly disrupt our operations or those of our principal customers or suppliers; 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; cybersecurity risks to our operational systems, security systems or infrastructure owned by us or our third-party vendors and suppliers; 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 and tariffs; 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, 2024 as filed with the Securities and Exchange Commission on February 13, 2025 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.

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 $1,255 million, including our $510 million Term Loan and $745 million available under our Revolving Credit Facility, net of $5 million of letters of credit. A one-eighth percent increase or decrease in assumed interest rates for the Senior Secured Credit Facility, if fully drawn as of September 30, 2025, would have an impact of approximately $2 million on interest expense per year. As of September 30, 2025, we had no amounts outstanding under 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 $6 million per year. We believe our other direct exposure to foreign currencies is immaterial.

Commodity Price Risk

We are subject to changes in our cost of sales caused by movements in underlying commodity prices. As of September 30, 2025, approximately 66% of our cost of sales consisted of purchased components. 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 $7 million and $11 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.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer, who is our principal executive officer, and our Chief Financial Officer, who is our principal 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.

Except as set forth below, 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, 2024 as filed with the Securities and Exchange Commission on February 13, 2025.

The following risk factors have been added:

Risks Related to our Pending Acquisition of Dana's Off-Highway Business (the "Acquisition")

The Acquisition may not be completed in a timely manner or at all, and the Purchase Agreement may be terminated in accordance with its terms.

The Acquisition is subject to certain customary closing conditions, including (a) the receipt of specified consents, clearances, authorizations and approvals from governmental entities, (b) the absence of any order, injunction, or other judgment or law that makes illegal or prohibits the closing of the Acquisition (the "Closing") and (c) subject to certain exceptions, the accuracy of the representations and warranties of, and compliance with covenants by, each of the parties to the Purchase Agreement. These conditions may not be satisfied or waived in a timely manner or at all, and, accordingly, the Acquisition may be delayed or may not be completed.

In addition, either we or Dana may terminate the Purchase Agreement based on the customary termination rights for each party included therein. In addition, we will be required to pay Dana a termination fee of $120 million if the termination is due to the failure of the transactions contemplated by the Purchase Agreement to be completed by a specified outside date as a result of failure to obtain required approvals or clearances under, or as a result of an injunction or order relating to, competition and foreign investment laws.

Failure to complete the Acquisition could negatively impact the price of shares of our common stock, as well as our business and results of operations.

If the Acquisition is not completed for any reason, our business and results of operations may be adversely affected and, without realizing any of the benefits of having completed the Acquisition, we would be subject to a number of risks, including:

• we may experience negative reactions from the financial markets, including negative impacts on the market price of our common stock;
• we may experience negative reactions from customers, suppliers, and other third parties with whom we do business, which in turn could result in a decline in our market share or negatively impact our ability to execute our strategic initiatives;
• we may experience negative reactions from employees;
• we will still be required to pay certain significant costs relating to the Acquisition, such as fees to our financial, legal and accounting advisors; and
• we will have expended time and resources that could otherwise have been spent on our existing business and the pursuit of other opportunities that could have been beneficial to us.

Any of the above could negatively impact our ongoing business and results of operations. In addition, if the Purchase Agreement is terminated under certain specified circumstances, we may be required to pay Dana a termination fee as discussed above.

We may fail to obtain financing intended to fund the Acquisition.

As previously disclosed, we expect to replace the Bridge Facility prior to the Closing with permanent financing, which may include the issuance of debt securities. Our ability to obtain any such new debt financing will depend on, among other factors, prevailing market conditions and other factors beyond our control. We cannot assure you that we will be able to obtain new debt financing on terms acceptable to us, and any such failure could materially adversely affect our business, results of operations and financial condition. The consummation of the Acquisition is not conditioned upon the receipt of any financing.

Uncertainties associated with the Acquisition may cause a loss of our and Dana’s management personnel and other key employees, which could adversely affect our business and operations.

We depend on the experience and industry knowledge of our officers and other key employees to execute our business plans. The success of the combined business and operations after the Closing will depend, in part, on our ability to retain key management personnel and other key employees. Our and Dana’s current and prospective employees may experience uncertainty about their roles within Allison following the Acquisition or other concerns regarding the timing and completion of the Acquisition or the operations of Allison following the Acquisition, any of which may have an adverse effect on our ability to retain or attract key management and other key personnel, which could materially adversely affect our business, results of operations and financial condition. No assurance can be given that, following the Acquisition, we will be able to retain or attract our and Dana’s key management personnel and other key employees to the same extent that we and Dana have previously been able to retain or attract personnel.

Our and Dana’s business relationships may be subject to disruption due to uncertainty associated with the Acquisition, which could have a material effect on our business, results of operations and financial condition following the Acquisition.

Parties with whom we or Dana do business may experience uncertainty associated with the Acquisition, including with respect to current or future business relationships with us or Dana following the Acquisition. Our and Dana’s business relationships may be subject to disruption as customers, suppliers, and other third parties with whom we or Dana do business may attempt to delay or defer entering into new business relationships with us or Dana, negotiate changes in their existing business relationships with us or Dana or consider entering into business relationships with parties other than us or Dana. These disruptions could have a material and adverse effect on our business, results of operations and financial condition, regardless of whether the Acquisition is completed, as well as a material and adverse effect on our ability to realize the expected opportunities, cost savings, operating synergies and other benefits of the Acquisition. The adverse impacts could be exacerbated by a delay in completion of the Acquisition or termination of the Purchase Agreement.

We expect to incur significant costs in connection with the Acquisition and integration of Dana's off-highway business (the "Business").

We have incurred and expect to continue to incur costs associated with completing the Acquisition and integrating the Business. These costs have been, and will continue to be, substantial and include, among others, fees paid to financial, legal and accounting advisors. Many of these costs will be borne by us even if the Acquisition is not completed.

We have incurred and will continue to incur costs related to formulating and implementing integration plans, including facilities, systems and service contract consolidation costs and employment‑related costs. We will continue to assess the magnitude of these costs, and additional unanticipated costs may be incurred in connection with the Acquisition and the integration of the Business. The costs described above, as well as other unanticipated costs and expenses, could adversely affect our business, results of operations and financial condition.

Litigation relating to the Acquisition, if any, could result in an injunction preventing the completion of the Acquisition and/or substantial costs to us.

Securities class action lawsuits and derivative lawsuits are often brought against public companies that have entered into acquisition, merger or other business combination agreements like the Purchase Agreement. Even if such a lawsuit is without merit, defending against these claims can result in substantial costs and divert management time and resources. Any adverse judgment in such a lawsuit could result in monetary damages, which could have a negative impact on our results of operations and financial condition. Lawsuits that may be brought against us, Dana, or our or their directors could also seek, among other things, injunctive relief or other equitable relief, including a request to enjoin the parties from completing the Acquisition. One of the conditions to the closing of the Acquisition is the absence of any order, injunction, or other judgment or law that makes illegal or prohibits the Closing. Consequently, if a plaintiff is successful in obtaining an injunction prohibiting completion of the Acquisition, that injunction may delay or prevent the Acquisition from being completed within the expected timeframe or at all.

The failure to integrate the Business and its operations with ours successfully in the expected time frame may adversely affect our results of operations and financial condition.

Following the completion of the Acquisition, the Business and its operations may not be integrated successfully with ours. It is possible that the integration process could result in the loss of our or Dana’s key employees, the loss of customers, suppliers, service providers or other business counterparties, the disruption of our ongoing businesses, inconsistencies in standards, controls, procedures and policies, potential unknown liabilities and unforeseen expenses, delays, or regulatory conditions associated with and following completion of the Acquisition, higher‑than‑expected integration costs and an overall post‑Closing integration process that takes longer than originally anticipated. In addition, the attention of our management team and our resources may be focused on the integration process, which may harm our day-to-day business operations or prevent us from pursuing other opportunities that may be beneficial.

We may fail to realize all of the anticipated benefits from the integration of the Business and its operations after the Acquisition.

The success of the Acquisition will depend, in part, on our ability to achieve the expected opportunities, cost savings, operating synergies and other benefits from integrating the Business. However, the anticipated benefits of the Acquisition may not be realized fully or at all, may take longer to realize than expected, or may result in other adverse effects that we do not currently foresee. In addition, the estimates and assumptions that we and Dana have made when evaluating the anticipated benefits from the Acquisition may not be accurate, and there could be potential unknown liabilities and unforeseen expenses associated with the Acquisition that could adversely impact us.

Our future results following the Acquisition may suffer if we do not effectively manage our expanded operations.

Following the Acquisition, the size and complexity of our businesses and operations will increase significantly. Our future success will depend, in part, upon our ability to manage the expanded business. There can be no assurances that the combined businesses and operations will be successful or that we will realize the expected operating synergies, cost savings or other benefits currently anticipated from the Acquisition.