Allison Transmission Q2 2025 Earnings Report

Allison Transmission EPS Results

• Actual EPS: $2.29
• Consensus EPS: $2.20
• Beat/Miss: Beat by +$0.09
• One Year Ago EPS: $2.13

Allison Transmission Revenue Results

• Actual Revenue: $814.00 million
• Expected Revenue: $811.05 million
• Beat/Miss: Beat by +$2.95 million
• YoY Revenue Growth: -0.20%

Allison Transmission Announcement Details

• Quarter: Q2 2025
• Date: 8/4/2025
• Time: After Market Closes
• Conference Call Date: Monday, August 4, 2025
• Conference Call Time: 5:00PM ET

Allison Transmission (NYSE:ALSN), together with its subsidiaries, designs, manufactures, and sells fully automatic transmissions for medium- and heavy-duty commercial vehicles and medium- and heavy-tactical U.S. defense vehicles, and electrified propulsion systems worldwide. It provides commercial-duty on-highway, off-highway and defense fully automatic transmissions, and electric hybrid and fully electric systems. The company offers transmissions for various applications, including distribution, refuse, construction, fire, and emergency on-highway trucks; school and transit buses; motor homes; energy, mining, and construction off-highway vehicles and equipment; and wheeled and tracked defense vehicles. It provides its transmissions and electric propulsion solutions under the Allison Transmission brand name; and remanufactured transmissions under the ReTran brand name. The company also sells branded replacement parts, support equipment, aluminum die cast components, and other products necessary to service the installed base of vehicles utilizing its solutions, as well as defense kits, engineering services, and extended transmission coverage services to various original equipment manufacturers, distributors, and the U.S. government. It serves customers through an independent network of approximately 1,600 independent distributor and dealer locations. The company was formerly known as Clutch Holdings, Inc. Allison Transmission Holdings, Inc. was founded in 1915 and is headquartered in Indianapolis, Indiana.

Allison Transmission Q2 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Allison agreed to acquire Dana’s Off Highway business for approximately $2.7 billion (6.8× 2024 adjusted EBITDA), targeting $120 million of annual run-rate synergies and closing in late Q4 2025.
• Positive Sentiment: Second-quarter net sales were flat at $814 million, driven by a 47% defense sales jump and record $142 million in on-highway revenue outside North America, while adjusted EBITDA rose 4% with a 38.5% margin and record EPS of $2.29.
• Negative Sentiment: Allison trimmed its full-year 2025 guidance, now expecting net sales of $3.75 billion to $3.175 billion and adjusted EBITDA of $1.13 billion to $1.18 billion, reflecting softer end markets and acquisition costs.
• Neutral Sentiment: North American on-highway demand softened as medium-duty and vocational OEMs cut build rates amid elevated dealer inventories, prompting Allison to optimize production and cost initiatives.
• Positive Sentiment: Allison secured multiple non-acquisition wins, including CNG and hybrid eGen Flex powertrains for waste trucks and transit buses, plus defense awards for 3,040 MX cross-drive units in Poland and Phase 2 of the U.S. Army’s NGEV program.

Presentation

[Operator]

Good afternoon. Thank you for standing by. Welcome to Allison Transmission's Second Quarter twenty twenty five Earnings Conference Call. My name is Paul, and I will be your conference call operator today. At this time, all participants are in a listen only mode.

[Operator]

After prepared remarks, Allison Transmission executives will conduct a question and answer session, and conference call participants will be given instructions at that time. As a reminder, this conference call is being recorded. As a reminder, this conference is being recorded. I would now like to turn the conference call over to Jackie Bowles, Executive Director of Treasury and Investor Relations. Please go ahead, Jackie.

[Jackie Bolles, Executive Director, Treasury and IR at Allison Transmission]

Thank you, Paul. Good afternoon, and thank you for joining us for our second quarter twenty twenty earnings conference call. With me this afternoon are Dave Graziosi, our chair and chief executive officer Fred Bohley, our chief operating officer and Scott Melt, our Chief Financial Officer and Treasurer. As a reminder, this conference call, webcast, and this afternoon's presentation are available on the Investor Relations section of allicentransmission.com. A replay of this call will be available through August 18.

[Jackie Bolles, Executive Director, Treasury and IR at Allison Transmission]

As noted on slide two of the presentation, many of our remarks today contain forward looking statements based on current expectations. These forward looking statements are subject to known and unknown risks, including those set forth in our second quarter twenty twenty five earnings press release and our annual report on Form 10 ks for the year ended 12/31/2024. Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those that we express today. In addition, as noted on slide three of the presentation, some of our remarks today contain non GAAP financial measures as defined by the SEC. You can find reconciliations of the non GAAP financial measures to the most comparable GAAP measures attached as an appendix to the presentation and to our second quarter twenty twenty five earnings press release.

[Jackie Bolles, Executive Director, Treasury and IR at Allison Transmission]

Today's call is set to end at 05:45 p. M. Eastern Time. In order to maximize participation opportunities on the call, we'll take just one question from each analyst. Please turn to slide four of the presentation for the call agenda.

[Jackie Bolles, Executive Director, Treasury and IR at Allison Transmission]

During today's call, Dave Graziosi and Fred Bohle will review recent announcements across our business, including the recently announced acquisition of Dana Incorporated's off highway business. Scott Mel will then review our second quarter twenty twenty five financial performance and full year 2025 guidance prior to commencing Q and A. Now I'll turn the call over to Dave.

[David Graziosi, Chair & CEO at Allison Transmission]

Thank you, Jackie. Good afternoon, and thank you for joining us. Starting with recent non acquisition related news during the quarter, we were pleased to announce that the Allison 3,000 series is now available in the CNG powered Mac granite truck. Following the successful launch in 2023 of our 4,500 series in the same vehicle, this expanded powertrain option gives customers more flexibility to optimize their trucks, specifically for lighter duty waste applications. As mentioned on previous calls, Allison fully automatic transmissions are fuel agnostic, leveraging our torque converter to ensure peak performance and fuel efficiency pairing well with different fuel types, including diesel, compressed natural gas and other alternatives.

[David Graziosi, Chair & CEO at Allison Transmission]

Unlike manuals and automated manual transmissions, our automatics maintain seamless full power shifts, enabling vehicles to travel farther in less time. This allows fleets to achieve sustainability goals without sacrificing productivity. We are proud to partner with MAC on this initiative, highlighting Allison's ability to deliver optimized performance and capability in demanding vocations indifferent to the fuel source for the powertrain. Also during the quarter, we announced that the Maryland Department of Transportation selected buses equipped with the Allison eGen Flex hybrid propulsion system to operate in metropolitan Baltimore region. Allison remains committed to collaborating with transit agencies nationwide, supporting them in their emission reduction goals by providing innovative solutions to achieve their sustainability goals.

[David Graziosi, Chair & CEO at Allison Transmission]

Over the last few years, we have made numerous announcements of transit properties across The United States, selecting the Allison eGen Flex as the propulsion solution of choice for their city buses. We are excited to add Maryland to the growing list. Finally, within our defense end market, we are excited to announce that Allison has secured a new order for 3,040 MX cross drive transmissions for Poland's pursuit infantry fighting vehicle program. This order maintains the follows the memorandum of understanding announced in 2023 between Allison and PGC, one of the largest defense companies in Europe for the cooperation on tracked vehicle programs and the expansion of our authorized service network in Poland. Our new 3040MX brings Allison's proven durability, reliability, performance and innovation to the medium tracked vehicle segment.

[David Graziosi, Chair & CEO at Allison Transmission]

The 3040MX offers several key improvements that enhance its overall performance, including advanced electronic controls with integrated diagnostics, making it a significant step forward in defense vehicle propulsion. Also in our defense end market, Allison was recently awarded a multimillion dollar contract by the United States Army through their Ground Vehicle Systems Center for the second phase of the Next Generation Electrified Transmission or NGEV program. We also refer to this product as the eGenForce. Following our announcement in 2022, highlighting the award of funding for Phase one of the NGEV program. We are excited to continue our partnership with the Ground Vehicle Systems Center on this vital project.

[David Graziosi, Chair & CEO at Allison Transmission]

Phase two, which will focus on enhancing the e machine and inverter system, will bring us one step closer to delivering propulsion systems that not only meet but exceed the performance and efficiency needs of modern armored combat vehicles. With the e Gen Force, Allison anticipates meeting requirements across a wide spectrum of applications, including the U. S. Army's Optionally Manned Fighting Vehicle or OMFV and main battle tank markets around the world. As a reminder, the OMFV program is expected to replace nearly 3,000 aging legacy Bradley vehicles, making it the U.

[David Graziosi, Chair & CEO at Allison Transmission]

S. Army's largest armored vehicle procurement since the 1980s. The Allison eGen Force has been selected by American Ryan Mattel for integration into its OMFV offering. Currently in the development and prototype phase, the OMFV program is expected to progress into 2026 with U. S.

[David Graziosi, Chair & CEO at Allison Transmission]

Government testing of vehicles and start of production in 2029. With our expanded portfolio and authorized service network, Allison is well positioned to continue growth in the defense end market. We look forward to further announcements and awards with realization of our over $100,000,000 incremental annual revenue objective this year and future growth opportunities, including products such as the eGenforce. I will now turn the call over to Fred for a recap of our strategic priorities and growth opportunities related to our recently announced acquisition of Dana's off highway business. Fred?

[G. Frederick Bohley, COO at Allison Transmission]

Thank you, Dave. Good afternoon. As we announced in June, Allison has entered into a definitive agreement to acquire Dana's off highway business. Today, I would like to briefly review the transaction while providing additional details on the strategic rationale and future growth opportunities. Please turn to Slide five of the presentation for an overview of the transaction highlights.

[G. Frederick Bohley, COO at Allison Transmission]

The purchase price of approximately $2,700,000,000 to be financed with new debt and cash on hand represents a 6.8 times multiple on 2024 adjusted EBITDA of approximately $400,000,000 including identified annual run rate synergies of $120,000,000 that transaction value represents a 5.2 times multiple on the same metric. The $120,000,000 of identified annual run rate synergies are expected to be primarily are expected to be driven primarily by opportunities in operations, procurement, engineering, IR and D and SG and A. Synergies are expected to ramp with full realization anticipated by year four. We anticipate closing in late Q4 twenty twenty five. Please turn to Slide six of the presentation.

[G. Frederick Bohley, COO at Allison Transmission]

As discussed on prior earnings calls, we believe Allison Merits evaluation that is more aligned with other publicly traded premier industrial assets. Our robust and stable cash generation and comparative margin performance along with current market position and future growth opportunities warrant disbelief. The acquisition of Dana's off highway business will strengthen our position as a premier industrial company, accelerating current growth objectives while multiplying future global growth opportunities. Starting with facilities and people, Allison's global reach will increase significantly with the addition of the Dana Off Highway team and manufacturing presence across the globe. We will leverage Dana's Off Highway global footprint for more local for local production with increased proximity to customers and markets providing advantages in meeting both commercial and government customers' requirements.

[G. Frederick Bohley, COO at Allison Transmission]

One example of this is in the India defense market, where content requirements are critical for program releases and awards. We are excited for the post close welcome of the Dana Off Highway team joining Allison. The combined company will comprise a sophisticated global workforce of nearly 15,000 employees with the addition of Dana's off highway teams, which are located primarily outside of North America. This complements Allison's current workforce demographics where 90% of our employee base is located in The United States. In terms of products and customers, Allison is well positioned for growth within corresponding propulsion categories that will extend the applications of our existing and combined portfolios.

[G. Frederick Bohley, COO at Allison Transmission]

We believe that the combined businesses increased set of capabilities and products will allow Allison to penetrate and expand into markets that are growing yet currently underserved by our core business such as the agricultural and construction markets. In addition, the acquisition allows us to utilize and advance electrified products that are already serving mature, early adopting end markets and segments. Through the combined business, Allison will utilize the Dana Off Highway business global technology centers for local development and realize cost synergies through combined engineering IR and D. We believe that complementary technical knowledge within the combined businesses in areas such as software and controls will accelerate product innovation and progress on key engineering capabilities and initiatives. Allison also expects to reduce costs through greater purchasing scale as well as vertical integration opportunities, while manufacturing locations in best cost countries provides opportunities for cost reduction initiatives within our operations.

[G. Frederick Bohley, COO at Allison Transmission]

With this acquisition, Allison will continue our long history of engineering expertise delivering products known for quality, reliability and durability across diverse drivetrain components and work solutions. Finally, while our focus on day one post close will be the combination of the two businesses, the Dana Off Highway business established M and A playbook and the broader platform of the combined companies expands Allison's opportunities for further inorganic growth. In this transformational moment in Allison's history, we are confident in our abilities combine the two businesses while realizing the identified annual run rate synergies and maintaining our focus on solid financial performance and continued growth as a premier industrial company. We appreciate your support as we move through this period. Thank you and I'll now turn the call over to Scott.

[Scott Mell, CFO & Treasurer at Allison Transmission]

Thank you, Fred. I'll begin on Slide seven with a review of our second quarter financial performance followed by an update to our full year 2025 guidance. Year over year net sales of $814,000,000 were flat from the same period in 2024. In the defense end market, we continue to execute on our growth initiatives with second quarter net sales increasing 47% year over year. Our top line results were further improved by record quarterly net sales of $142,000,000 an 11% increase year over year in the outside North America on highway end market.

[Scott Mell, CFO & Treasurer at Allison Transmission]

The increase was principally driven by higher demand in South America and Europe. Finally, in the service parts, support equipment and other end market, year over year net sales increased 6% in the second quarter, principally driven by higher demand for service parts and price increases on certain products, partially offset by lower demand for aluminum die cast components. The aforementioned year over year net sales increases were offset by a 30% decrease in the global off highway end market and a 9% decrease in the North America on highway end market. Our second quarter results demonstrate the diversity of Allison's end markets and the incremental sales opportunities available from growth initiatives. Moving on with our second quarter financial performance.

[Scott Mell, CFO & Treasurer at Allison Transmission]

Gross profit for the quarter was $4.00 $2,000,000 an increase of $8,000,000 from $394,000,000 for the same period in 2024. The increase was principally driven by price increases on certain products, partially offset by lower volumes and unfavorable direct material costs. Net income for the quarter was $195,000,000 an increase of $8,000,000 from $187,000,000 for the same period in 2024. The increase was principally driven by higher gross profit and unrealized mark to market adjustments for marketable securities, partially offset by increased selling, general and administrative expenses, including $15,000,000 of costs associated with the acquisition of Dana's off highway business. Adjusted EBITDA for the quarter was $313,000,000 an increase of 4% year over year.

[Scott Mell, CFO & Treasurer at Allison Transmission]

Adjusted EBITDA margin for the quarter was 38.5%, an increase of 160 basis points year over year. Diluted earnings per share increased 8% year over year to a quarterly record $2.29 The increase was driven by higher net income and lower total diluted shares outstanding. A detailed overview of our net sales by end market and Q2 twenty twenty five financial performance can be found on Slides eight and nine of the presentation. Please turn to Slide 10 of the presentation for the Q2 twenty twenty five cash flow performance summary. Net cash provided by operating activities for the quarter was $184,000,000 compared to $171,000,000 for the same period in 2024.

[Scott Mell, CFO & Treasurer at Allison Transmission]

The increase was principally driven by lower operating working capital funding requirements and higher gross profit, partially offset by acquisition related expenses. We ended the first quarter with a net leverage ratio of 1.38 times, dollars $778,000,000 of cash and $745,000,000 of available revolving credit facility commitments. We continue to maintain a flexible, long dated and covenant light debt structure with our earliest maturity due in October 2027. Please turn to Slide 11 of the presentation for our 2025 guidance update. Given current end market conditions, anticipated acquisition related expenses and expected favorable cash income tax impacts from the recently passed One Big Beautiful Bill Act, we are revising our full year 2025 guidance provided to the market on May 1.

[Scott Mell, CFO & Treasurer at Allison Transmission]

Allison now expects net sales to be in the range of $3,750,000,000 to $3,175,000,000 In addition to Allison's 2025 net sales guidance, we anticipate net income in the range of $6.40 to $680,000,000 adjusted EBITDA in the range of $1,130,000,000 dollars to $1,180,000,000 dollars net cash provided by operating activities in the range of $785,000,000 to $835,000,000 capital expenditures in the range of $165,000,000 to $175,000,000 and adjusted free cash flow in the range of $620,000,000 to $660,000,000 Finally, I'd like to note that we are maintaining the midpoint of the implied full year adjusted EBITDA margin guidance. This concludes our prepared remarks. Paul, please open the call for questions.

[Operator]

Thank you. We'll now be conducting a question and answer session. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. In the interest of time, we ask the participants limit themselves to one question and one follow-up. One moment please while we poll for questions.

[Operator]

Thank you. Our first question is from Rob Wertheimer with Melius Research. I wanted to see if

[Rob Wertheimer, Founding Partner & Machinery & New Mobility Research Analyst at Melius Research LLC]

you could expand on your comments, I mean, with the acquisition bringing you incremental geographic and other capabilities, you talked about the potential for inorganic growth. Could you characterize that? Does that mean there's bolt ons, tuck ins, etcetera, that could fit? Or do you have in mind any potentially other large assets? Thank you.

[G. Frederick Bohley, COO at Allison Transmission]

Hi, Rob. This is Fred. Relative to potential inorganic growth, if you think of us pre acquisition in North American centric, very strong market share, clearly growing outside North America, record quarter. But what we believe is that this transaction with a larger global footprint across on highway, off highway, agricultural construction, in markets, presence in Europe, significant presence in Asia will ultimately provide more opportunities for potential bolt on acquisitions. Obviously, our focus day one is on combining the business, generating the cost synergies.

[G. Frederick Bohley, COO at Allison Transmission]

And then even as we talked to in the prepared remarks, well, we haven't baked any revenue synergies into our business case. We do anticipate, this is very complementary, being able to leverage footprints, engineering capability, local for local. So we're very excited on the potential organic growth opportunities as well.

[Rob Wertheimer, Founding Partner & Machinery & New Mobility Research Analyst at Melius Research LLC]

Okay. Thank you.

[Operator]

Our next question is from Kyle Menges with Oppenheimer.

[Ian Zaffino, Managing Director at Oppenheimer & Co. Inc.]

Hello, can you hear me?

[David Graziosi, Chair & CEO at Allison Transmission]

Yes.

[Ian Zaffino, Managing Director at Oppenheimer & Co. Inc.]

Okay, sorry. It's Ian Zaffino. I just wanted to kind of maybe, drill down a little bit on the guidance change, kind of exactly what kind of what lines are you seeing that? What areas are you seeing that in? Maybe just a little bit more color on that.

[Ian Zaffino, Managing Director at Oppenheimer & Co. Inc.]

And then as a follow-up, as you think about kind of the provisions and the, one big beautiful bill, and I guess you kept CapEx the same, but are there any opportunities there? And then is there a possibility for any additional tax savings from the provision acquisition you did that you didn't know about prior to this bill? Thanks.

[David Graziosi, Chair & CEO at Allison Transmission]

Ian, it's Dave. Good evening and I appreciate the Let me cover that first part in terms of guide change and then I'll turn it over to Scott. So relative to what we've changed in the guide, as you know, from February to May maintained overall guide, what we have certainly seen as the second half is shaped up, and I'm certainly not going to tell you or anybody else things you don't know at this point. But revisions in North America on highway build rates are significant. So as we frankly entered late Q2, early Q3, you started to see announcements of layoffs, shift reductions, down days extended, summer shutdowns, I would observe, we probably haven't seen anything quite like that in several years.

[David Graziosi, Chair & CEO at Allison Transmission]

The fact is OEMs are responding to near term market demand conditions. You'll notice plenty of comments, I think, from the OEMs relative to supporting market demand from dealer inventory. Inventories are relatively elevated. We talked earlier in the year about the expectation of medium duty softening this year. That in fact has been the case.

[David Graziosi, Chair & CEO at Allison Transmission]

OEM comments for Q2 also indicated some level of moderation on the Class eight straight vocational side as well. So that combination, you really look at focus on the overall changes in the guide, that would be probably the most relevant thing to note for the second half as we rolled up everything. So again, we're staying close to the market and are making sure that we can certainly meet customer requirements and timing. But at this point, we're sizing as I think we even talked about in May. Our run rates ourselves in terms of overall manpower and our own production rates.

[David Graziosi, Chair & CEO at Allison Transmission]

So for us, it's really getting back to more lean capacity rate. Operations as we've talked about in the past, very attractive to us in terms of incrementals, also allowing our team to really invest a little bit more time in the day to day operations relative to maintenance and also some of the quality initiatives that we've been pursuing. So that combined with some operational efficiency projects and other things we've been looking to get some time to implement, we will be pursuing in this, I would say, quieter period. But overall, better positioned, we believe, to certainly meet market demand as we've talked about the last few years with the number of investments in capacity, in North America as well as outside North America with projects coming on capacity coming online or coming online shortly. I think it's also very important to us as we think about current market conditions as more of a deferral versus any type of real permanent change in demand.

[David Graziosi, Chair & CEO at Allison Transmission]

So let me turn it over to Scott for the second part.

[Scott Mell, CFO & Treasurer at Allison Transmission]

Yeah, hi Carl, it's Scott. So we, like many, have been quickly assessing the anticipated impact of the OBUBA on our cash taxes, as I mentioned in my comments. This year we're expecting it to be a substantial item given really the catch up on the full amortization of the R and D tax credits. That's going be something in the mid triple digits for the year. That includes both the R and D amortization as well as the fixed asset bonus depreciation and some of the changes in the foreign derived intangible income rates.

[Scott Mell, CFO & Treasurer at Allison Transmission]

And then going forward, less of an impact primarily just because there's a one time gain related to the amortization of the R and D this year. That's going to be, I would say, in the mid to upper teens on an annualized basis, at least for the near term.

[G. Frederick Bohley, COO at Allison Transmission]

So expected benefit this year in the mid double digit millions, right?

[Scott Mell, CFO & Treasurer at Allison Transmission]

Yeah, mid double digit.

[Ian Zaffino, Managing Director at Oppenheimer & Co. Inc.]

Okay, thank you very much.

[Operator]

Our next question is from Kyle Menzies with Citi.

[Kyle Menges, VP - Equity Research Analyst at Citi]

Thank you. Can we just talk about what's embedded in the margin guidance a little bit for the back half and maybe some of the key puts and takes? Curious how strong pricing was in the quarter and expectations for pricing in the back half? Then any incremental steel cost headwinds or other cost headwinds or tailwinds assumed in the back half? Would love to just hear you guys unpack what's in the assumed margin guidance. Thank you.

[Scott Mell, CFO & Treasurer at Allison Transmission]

Yes, it's Scott. So as we've guided toward pricing in the quarter, as we've done previously, it was north of 400 basis points. As we look at the second half of the year, we anticipate to see some of the same positive tailwinds from pricing. But obviously, we're going to see some volume deterioration relative to what we've seen in the same quarter last year. Really some of that's going to be driven by the vocational, activity, in terms of the mix component.

[Scott Mell, CFO & Treasurer at Allison Transmission]

Then obviously, the tariff impact, which is changing daily, but we do anticipate some meaningful impact from tariffs in the second half of the year, although we do anticipate to be able to recover a substantial amount of that from our customers. So that's really I mean, there's really no meaningful material impact. It's really the volume story in the second half of the year. I don't know, Fred, if you have some other thoughts on that.

[G. Frederick Bohley, COO at Allison Transmission]

I think as we think about what we talked about last quarter, our overall exposure to tariffs is limited as 85% of our direct materials spend is with suppliers based in North America. Majority of those are located in The United States and those in Canada and Mexico are currently under USMCA exemptions. We do also with our agreements with our OEM customers have, passed through, for the majority of our costs on steel and aluminum. Now those do tend to lag six to twelve months. So again, pretty fluid environment, but we continue to monitor and plan to offset the impact.

[Kyle Menges, VP - Equity Research Analyst at Citi]

Got it. Thank you, guys.

[Operator]

Our next question is from Tim Fine with Raymond James.

[Tim Thein, Managing Director & Research Analyst at Raymond James Financial]

Thank you. Good evening. I just had a question on just thinking about the incremental change to guidance, so call it a mid-30s or your ability rather to hold decrementals to kind of a mid-thirty percent number in context of you know, with the vocational market being a lot heavier, obviously, that there's some good margin in that 4,000 series. So, I'm just curious, are there other segments or benefits beyond North America On Highway coming off? I don't know, is the parts business a little better?

[Tim Thein, Managing Director & Research Analyst at Raymond James Financial]

I'm just curious if there are other factors. I think all else equal, I would think that if when you see that level of step down in that business, North American Highway, I would normally think of it as carrying a little heavier decremental. So maybe just if there's any color on that. Thank you.

[Scott Mell, CFO & Treasurer at Allison Transmission]

Yeah, I mean, we do and we are anticipating and seeing some improvement in our defense business in the second half of the year relative to both the second half of last year as well as the first half of this year in terms of both our wheeled and tracked vehicles. So we do have some real tailwinds there helping to offset what you're circling around on the North American on highway. We also continue to see some stability in the outside North America on highway segment as well. So those two combined are helping, not completely offsetting what we're seeing in North America, but are mitigating some of the impact. And obviously, we're also managing our costs very closely here over the second half of the year.

[G. Frederick Bohley, COO at Allison Transmission]

Yeah, Tim. This is Fred. While we are seeing some softness in the Class eight straight truck, the municipal business is still very strong. Really where we've seen the I'd say the most near term softness has been in medium duty. So I think that probably addresses some of your mixed concerns.

[Tim Thein, Managing Director & Research Analyst at Raymond James Financial]

Got it. Thank you.

[Operator]

Our next question is from Tami Jacarea with JPMorgan.

[Tami Zakaria, Executive Director at JP Morgan]

Hey, good afternoon. Thank you so much for taking my question. I wanted to get some color on your intended buyback. It seems like you did buy back some stocks in 2Q. Do you plan to keep buying back while the Dana deal is pending?

[Tami Zakaria, Executive Director at JP Morgan]

And post close of the deal, do you intend to pause buyback or until leverage comes down to two or below? Or do you want to keep buying back as and when cash is available?

[G. Frederick Bohley, COO at Allison Transmission]

Hi, Tammy. This is Fred. Thanks for the question. Our capital allocation policies really haven't changed. I mean, and foremost, it's fund the business for organic revenue, earnings growth, new product and technology development.

[G. Frederick Bohley, COO at Allison Transmission]

We're in a position where this really for us isn't a do you buy back share? Do you pay down debt? I mean, we can do all of those. So, you know, we intend to return cash to shareholders via the dividend. We will use a meaningful amount of cash from the balance sheet in the direction of the transaction.

[G. Frederick Bohley, COO at Allison Transmission]

Obviously, we'll take on some additional debt. And as we've talked about looking at getting to two times net leverage in the near term, but it really is a little bit all of the above and probably most important is we like to be opportunistic. But to your point, we did buy back over $100,000,000 worth of share in the quarter. As we talked about in our prepared remarks and our view on us as a premier industrial company, the really compelling future growth opportunities with the transaction, accelerating the combined businesses current growth objectives, multiplying really future growth objectives. And we think we kind of laid it out, what is a premier industrial?

[G. Frederick Bohley, COO at Allison Transmission]

We've got robust stable cash generation, best in class margins, great market position. We've been growing this business since really our record pre pandemic twenty nineteen revenues up 20% into 2024 up to $500,000,000 We've identified $400,000,000 of growth opportunity. But I think in order to get what we consider a premier industrial multiple, which for us is at least double digits, you know, we need to grow faster and we think the transaction will enable us to. And really is, you know, what we believe is as you look forward at this company, and you take the combined EBITDA, the double digit multiple, the capital allocation priority of paying down debt, repurchasing shares, the current dividend policy. Again, three years out from now, we believe that our stocks should be trading north of $200 And when you have that level of belief, it's very attractive to buy a basket to $90 a share.

[Tami Zakaria, Executive Director at JP Morgan]

Understood. Thank you.

[Operator]

Our next question is from Angel Castillo with Morgan Stanley.

[Angel Castillo, Executive Director - Head of US Machinery & Construction Equity Research at Morgan Stanley]

Hi. Thanks for taking my question. Good afternoon. Just wanted to touch base just based on the backlogs that you see today, the kind of order trends that we've had year to date. I recognize it's early, but I think I heard you say that maybe you kind of see some of these pockets of weakness as maybe more push out of demand versus destruction.

[Angel Castillo, Executive Director - Head of US Machinery & Construction Equity Research at Morgan Stanley]

Could you then are you, I guess, willing to kind of comment on how you see 2026 demand maybe shaping out as you think about some of these markets like medium duty or vocational? And in particular, just kind of any thoughts on Section two thirty two review or kind of the EPA 27 regulation and what that might mean for customers' appetite to buy ahead of that or to wait till 2026 and buy then?

[David Graziosi, Chair & CEO at Allison Transmission]

Angel, would say thank you for those questions. You got a lot in there. Let me try to unpack that one a little bit. So your question or your comment on backlogs, clearly, the industry is catching up with what was a very challenging time for all market participants. So a lot of costs being incurred to get product out the door.

[David Graziosi, Chair & CEO at Allison Transmission]

Clearly, the market's dramatically improved. Suppliers have caught up. The one, I think, portion of the market that really is not it's improved, but I don't think it's really moved yet, thus still a constraint, our bodybuilders. So to your point on backlogs, yes, those have certainly come down. Inventories in a better position at the retail level.

[David Graziosi, Chair & CEO at Allison Transmission]

There's also a fair amount of chassis sitting at bodybuilders, which is why we believe the North America OEMs, which I think is to your question, why they've made the adjustments. I don't think any of them really want to be in a position of entering 2026 to get to your other point there in really what is an oversupplied market, especially given the amount topics for uncertainty, which seem to be frankly endless and being added to every day, whether it be tariffs, You asked about EPA emissions, financing costs, macroeconomic outlook, etcetera. Pick your item, but it's not unreasonable to appreciate the position of end users, which are really in a highly uncertain wait and see mode. So that reluctance is then translated into this point about deferring investment decisions till more clarity is available. And I think some of the OEMs have talked about that.

[David Graziosi, Chair & CEO at Allison Transmission]

Thus, the reduction in build rates, which I think better positions the overall industry going into 2026. To get to your other points there in terms of February, certainly the commercial vehicle industry has commented on that extensively with public comment letters, etcetera. So we're tracking it as well as everybody else. Having said that, to earlier comments on the call, we believe we're very well positioned in terms of USMCA sourcing. So the vast majority of what we use is actually sourced out of The U.

[David Graziosi, Chair & CEO at Allison Transmission]

S. And to a degree the balance out of Mexico and Canada. But we're, I think, very well placed in that regard and positioned. Also as part of that, as you think about other things that are happening from a regulatory perspective, the most recent announcements from the EPA over the last probably two to three weeks, as you know, are very meaningful in terms of potentially changing the entire missions regimen, if you will, around whether it be greenhouse gas, etcetera. So we, like the rest of the industry, are waiting for clarity there.

[David Graziosi, Chair & CEO at Allison Transmission]

That being said, as I think you're familiar, our products do not require significant meaningful changes with emissions changes. So our product portfolio as it exists today for on highway is very well placed to be compliant, whether that be current regs or future regulations. So the work is done, the products are ready, and I think we'll await more clarity from the market. But as I said earlier, overall, our view right now is North America on highway is more of a defer versus a loss in longer term demand.

[Angel Castillo, Executive Director - Head of US Machinery & Construction Equity Research at Morgan Stanley]

That's very helpful. And if I could just one quick follow-up. I think I heard you say that outside North America and defense continue to be stronger in the second half. What about the service parts business? That seemed to be pretty healthy in the first half as well.

[Angel Castillo, Executive Director - Head of US Machinery & Construction Equity Research at Morgan Stanley]

Just what do you expect there in the second half?

[David Graziosi, Chair & CEO at Allison Transmission]

Yes. Part of obviously that particular end market for us is support equipment. So it follows volume, right? So to my comments in terms of the way the volume breaks first half, second half, we'll have less demand for support equipment. That being said, I think the overall trends in terms of service requirements seem to be somewhat stable at this point.

[David Graziosi, Chair & CEO at Allison Transmission]

So our channel checks would tell us that they're better positioned from a labor perspective. The one item to keep an eye on, as I mentioned, with deferrals or uncertainty with end users is they're deferring capital investments. It's very hard to defer maintenance. At some point that becomes a challenge. So these aging fleets, vehicles are being utilized.

[David Graziosi, Chair & CEO at Allison Transmission]

We feel good about the overall market trends in terms of aftermarket and our continued high capture rate there.

[Angel Castillo, Executive Director - Head of US Machinery & Construction Equity Research at Morgan Stanley]

Very helpful. Thank you.

[Operator]

Thank you. There are no further questions at this time. I would like to hand the floor back over to David Grasiosi for any closing comments.

[David Graziosi, Chair & CEO at Allison Transmission]

Thank you, Paul. And thank all of you for your continued interest in Allison and for participating on today's call. Enjoy your evening.

[Operator]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Participants

Executives

• Jackie Bolles, Executive Director, Treasury and IR
• David Graziosi, Chair & CEO
• G. Frederick Bohley, COO
• Scott Mell, CFO & Treasurer

Analysts

• Rob Wertheimer, Founding Partner & Machinery & New Mobility Research Analyst at Melius Research LLC
• Ian Zaffino, Managing Director at Oppenheimer & Co. Inc.
• Kyle Menges, VP - Equity Research Analyst at Citi
• Tim Thein, Managing Director & Research Analyst at Raymond James Financial
• Tami Zakaria, Executive Director at JP Morgan
• Angel Castillo, Executive Director - Head of US Machinery & Construction Equity Research at Morgan Stanley