Market Overview

Allison Transmission Announces Second Quarter 2018 Results

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* Net Sales for the second quarter 2018 of $711 million, up
23% compared to the same period in 2017

* Net Income for the second quarter of 2018 of $174 million,
up 83% compared to the same period in 2017

* Adjusted EBITDA for the second quarter of 2018 of $297
million, up 32% compared to the same period in 2017

* Allison's board of directors approves a $500 million
increase to the existing stock repurchase program authorization

Allison Transmission Holdings Inc. (NYSE:ALSN), the largest
global provider of commercial duty fully-automatic transmissions, today
reported net sales for the second quarter of $711 million, a 23 percent
increase from the same period in 2017. The increase in net sales was
principally driven by higher demand in the Global On-Highway, Global
Off-Highway and Service Parts, Support Equipment & Other end markets.

Net Income for the quarter was $174 million compared to $95 million for
the same period in 2017. Adjusted EBITDA, a non-GAAP financial measure,
for the quarter was $297 million compared to $225 million for the same
period in 2017. Net Cash Provided by Operating Activities for the
quarter was $213 million compared to $166 million for the same period in
2017. Adjusted Free Cash Flow, a non-GAAP financial measure, for the
quarter was $194 million compared to $154 million for the same period in
2017.

David S. Graziosi, President and Chief Executive Officer of Allison
Transmission commented, "I am very pleased to report that Allison
achieved record net sales in the second quarter of 2018, driven by
increased demand across all of our end markets, and the execution of
growth initiatives throughout our business." Graziosi continued, "Our
year-over-year net sales growth of 23 percent was surpassed by even
stronger growth in Net Income, up 83 percent and Adjusted EBITDA, up 32
percent. Furthermore, our established and well-defined approach to
capital structure and allocation remains intact. During the quarter,
Allison settled $244 million of share repurchases, repaid $25 million of
long-term debt and paid a dividend of $0.15 per share. In addition, the
board of directors has approved an increase to the existing stock
repurchase authorization of up to an additional $500 million. Given
second quarter 2018 results and current end markets conditions, we are
raising our full year 2018 net sales guidance from an increase in the
range of 10 to 14 percent to an increase in the range of 15 to 18
percent."

Second Quarter Net Sales by End Market

  Q2 2018   Q2 2017  
End Market Net Sales Net Sales % Variance
    (NYSE:M)   (NYSE:M)    
North America On-Highway (a)   $343   $314   9%
North America Off-Highway   $31   $5   520%
Defense   $43   $30   43%
Outside North America On-Highway   $101   $85   19%
Outside North America Off-Highway   $24   $10   140%
Service Parts, Support Equipment & Other   $169   $136   24%
Total Net Sales   $711   $580   23%
(a)   North America On-Highway end-market net sales are inclusive of net
sales for North America Electric Hybrid-Propulsion Systems for
Transit Bus.
 

Second Quarter Highlights

North America On-Highway end market net sales were up 9 percent from the
same period in 2017 principally driven by higher demand for Rugged Duty
Series models and up 1 percent on a sequential basis.

North America Off-Highway end market net sales were up $26 million from
the same period in 2017 and down $2 million sequentially, in both cases
principally driven by fluctuations in demand from hydraulic fracturing
applications.

Defense end market net sales were up $13 million from the same period in
2017 principally driven by higher Tracked and Wheeled demand and up $6
million on a sequential basis principally driven by higher Tracked
demand.

Outside North America On-Highway end market net sales were up 19 percent
from the same period in 2017 principally driven by higher demand in Asia
and Europe and up 11 percent sequentially principally driven by higher
demand in Asia.

Outside North America Off-Highway end market net sales were up $14
million from the same period in 2017 and up $12 million on a sequential
basis, in both cases principally driven by improved demand in the
energy, mining and construction sectors.

Service Parts, Support Equipment & Other end market net sales were up 24
percent from the same period in 2017 principally driven by higher demand
for global service parts and support equipment and up 12 percent
sequentially principally driven by higher demand for North America
Off-Highway service parts.

Gross profit for the quarter was $374 million, an increase of 29 percent
from $290 million for the same period in 2017. Gross margin for the
quarter was 52.6 percent, an increase of 260 basis points from a gross
margin of 50.0 percent for the same period in 2017. The increase in
gross profit from the same period in 2017 was principally driven by
increased net sales and price increases on certain products partially
offset by higher manufacturing expenses commensurate with increased net
sales and unfavorable material costs.

Selling, general and administrative expenses for the quarter were $93
million, an increase of $5 million from $88 million for the same period
in 2017. The increase was principally driven by higher warranty expense
commensurate with increased net sales partially offset by lower
incentive compensation expense.

Engineering – research and development expenses for the quarter were $33
million, an increase of $8 million from $25 million for the same period
in 2017. The increase was principally driven by increased product
initiatives spending.

Income tax expense for the quarter was $48 million, resulting in an
effective tax rate of 22% compared to $51 million of income tax expense
and an effective tax rate of 35% for the same period in 2017. The
decrease in effective tax rate was principally driven by the U.S. Tax
Cuts and Jobs Act enacted into law in 2017.

Net income for the quarter was $174 million compared to $95 million for
the same period in 2017. The increase was principally driven by
increased gross profit partially offset by increased product initiatives
spending and increased selling, general and administrative expenses.

Net cash provided by operating activities was $213 million compared to
$166 million for the same period in 2017. The increase was principally
driven by increased gross profit partially offset by increased defined
benefit pension plans funding payments, increased cash income
taxes, increased product initiatives spending and increased cash
interest expense.

Second Quarter Non-GAAP Financial Measures

Adjusted EBITDA for the quarter was $297 million compared to $225
million for the same period in 2017. The increase in Adjusted EBITDA was
principally driven by increased net sales and price increases on certain
products partially offset by increased product initiatives spending,
increased selling, general and administrative expenses, increased
manufacturing expenses commensurate with increased net sales, and
unfavorable material costs.

Adjusted Free Cash Flow for the quarter was $194 million compared to
$154 million for the same period in 2017, an increase of $40 million.
The increase was principally driven by increased cash provided by
operating activities partially offset by increased capital expenditures.

Full Year 2018 Guidance Update

Our updated full year 2018 guidance includes a year-over-year net sales
increase in the range of 15 to 18 percent, Net Income in the range of
$570 to $600 million, Adjusted EBITDA in the range of $1,040 to $1,080
million, Net Cash Provided by Operating Activities in the range of $765
to $795 million, and Adjusted Free Cash Flow in the range of $670 to
$710 million. Capital expenditures are expected to be in the range of
$85 to $95 million and cash income taxes are expected to be in the range
of $90 to $100 million.

Allison's full year 2018 net sales guidance reflects increased demand in
the Global On-Highway and Global Off-Highway end-markets, price
increases on certain products and continued execution of our growth
initiatives.

Although we are not providing specific third quarter 2018 guidance,
Allison does expect third quarter net sales to be up from the same
period in 2017 principally driven by increased demand for Global
On-Highway products.

Stock Repurchase Program Authorization Increased

Allison's board of directors increased the authorization under the
Company's current stock repurchase program by $500 million. The
remaining authorized amount for stock repurchases prior to the
additional authorization was approximately $184 million as of June 30,
2018. The board of directors also removed the termination date of the
stock repurchase program.

Conference Call and Webcast

The company will host a conference call at 8:00 a.m. ET on Tuesday, July
31 to discuss its second quarter 2018 results. The dial-in number is
1-201-389-0878 and the U.S. toll-free dial-in number is 1-877-425-9470.
A live webcast of the conference call will also be available online at http://ir.allisontransmission.com.

For those unable to participate in the conference call, a replay will be
available from 11:00 a.m. ET on July 31 until 11:59 p.m. ET on August 7.
The replay dial-in number is 1-844-512-2921 and the international replay
dial-in number is 1-412-317-6671. The replay passcode is 13681295.

About Allison Transmission

Allison Transmission (NYSE:ALSN) is the world's largest manufacturer of
fully automatic transmissions for medium- and heavy-duty commercial
vehicles and is a leader in electric hybrid-propulsion systems for city
buses. Allison transmissions are used in a variety of applications
including refuse, construction, fire, distribution, bus, motorhomes,
defense and energy. Founded in 1915, the company is headquartered in
Indianapolis, Indiana, USA and employs approximately 2,700 people
worldwide. With a market presence in more than 80 countries, Allison has
regional headquarters in the Netherlands, China and Brazil with
manufacturing facilities in the U.S., Hungary and India. Allison also
has approximately 1,400 independent distributor and dealer locations
worldwide. For more information, visit allisontransmission.com.

Forward-Looking Statements

This press release contains forward-looking statements. All statements
other than statements of historical fact contained in this press release
are forward-looking statements, including all statements regarding
future financial results. In some cases, you can identify
forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plans," "project," "anticipate," "believe,"
"estimate," "predict," "intend," "forecast," "could," "potential,"
"continue" or the negative of these terms or other similar terms or
phrases. Forward-looking statements are not guarantees of future
performance and involve known and unknown risks. Factors which may cause
the actual results to differ materially from those anticipated at the
time the forward-looking statements are made include, but are not
limited to: risks related to our substantial indebtedness; our
participation in markets that are competitive; 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
failure of markets outside North America to increase adoption of
fully-automatic transmissions; the concentration of our net sales in our
top five customers and the loss of any one of these; our ability to
prepare for, respond to and successfully achieve our objectives relating
to technological and market developments, competitive threats and
changing customer needs; U.S. and foreign defense spending; general
economic and industry conditions; increases in cost, disruption of
supply or shortage of raw materials or components used in our products;
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; risks
associated with our international operations, including increased trade
protectionism; future reductions or changes in government subsidies for
hybrid vehicles and other external factors impacting demand; labor
strikes, work stoppages or similar labor disputes, which could
significantly disrupt our operations or those of our principal
customers; our intention to pay dividends and repurchase shares of our
common stock and other risks and uncertainties associated with our
business described in our Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q and Current Reports on Form 8-K. Although we believe the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, we can give no assurance that the expectations
will be attained or that any deviation will not be material. All
information is as of the date of this press release, and we undertake no
obligation to update any forward-looking statement to conform the
statement to actual results or changes in expectations.

Use of Non-GAAP Financial Measures

This press release contains information about Allison's financial
results and forward-looking estimates of financial results which are not
presented in accordance with accounting principles generally accepted in
the United States ("GAAP"). Such non-GAAP financial measures are
reconciled to their closest GAAP financial measures at the end of this
press release. Non-GAAP financial measures should not be considered in
isolation or as a substitute for our reported results prepared in
accordance with GAAP and, as calculated, may not be comparable to other
similarly titled measures of other companies.

We use Adjusted 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 GAAP measure to Adjusted EBITDA is Net income. The most
directly comparable GAAP measure to Adjusted EBITDA as a percent of net
sales is Net Income as a percent of net sales. Adjusted EBITDA is
calculated as the earnings before interest expense, income tax expense,
amortization of intangible assets, depreciation of property, plant and
equipment and other adjustments as defined by Allison Transmission,
Inc.'s, the Company's wholly-owned subsidiary, Senior Secured Credit
Facility Term B-3 Loan due 2022. 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 the 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 and certain other
adjustments.

Attachment

  • Condensed Consolidated Statements of Operations
  • Condensed Consolidated Balance Sheets
  • Condensed Consolidated Statements of Cash Flows
  • Reconciliation of GAAP to Non-GAAP Financial Measures
  • Reconciliation of GAAP to Non-GAAP Financial Measures for Full Year
    Guidance
       
Allison Transmission Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited, dollars in millions, except per share data)
 
Three months ended June 30, Six months ended June 30,
2018 2017 2018 2017
 
Net sales $ 711 $ 580 $ 1,374 $ 1,079
Cost of sales   337     290     658     538  
Gross profit 374 290 716 541
Selling, general and administrative 93 88 185 167
Engineering - research and development   33     25     61     48  
Operating income 248 177 470 326
Interest expense, net (30 ) (27 ) (60 ) (52 )
Other income (expense), net   4     (4 )   3     (1 )
Income before income taxes 222 146 413 273
Income tax expense   (48 )   (51 )   (88 )   (95 )
Net income $ 174   $ 95   $ 325   $ 178  
Basic earnings per share attributable to common stockholders $ 1.30   $ 0.63   $ 2.37   $ 1.16  
Diluted earnings per share attributable to common stockholders $ 1.29   $ 0.63   $ 2.37   $ 1.15  
 
   
Allison Transmission Holdings, Inc.
Condensed Consolidated Balance Sheets
(Unaudited, dollars in millions)
 
June 30, December 31,
2018 2017
ASSETS
Current Assets
Cash and cash equivalents $ 96 $ 199
Accounts receivable 328 221
Inventories 170 154
Income taxes receivable 15 33
Other current assets   24   25
Total Current Assets 633 632
 
Property, plant and equipment, net 442 448
Intangible assets, net 1,109 1,153
Goodwill 1,941 1,941
Other non-current assets   46   31
TOTAL ASSETS $ 4,171 $ 4,205
 
LIABILITIES
Current Liabilities
Accounts payable $ 210 $ 159
Product warranty liability 28 22
Current portion of long-term debt - 12
Deferred revenue 38 41
Other current liabilities   166   183
Total Current Liabilities 442 417
 
Product warranty liability 37 33
Deferred revenue 87 75
Long-term debt 2,520 2,534
Deferred income taxes 301 276
Other non-current liabilities   182   181
TOTAL LIABILITIES 3,569 3,516
TOTAL STOCKHOLDERS' EQUITY   602   689
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 4,171 $ 4,205
 
         
Allison Transmission Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited, dollars in millions)
 
Three months ended June 30, Six months ended June 30,
2018 2017 2018 2017
 
Net cash provided by operating activities $ 213 $ 166 $ 366 $ 277
Net cash used for investing activities (a) (19 ) (15 ) (29 ) (23 )
Net cash used for financing activities (290 ) (187 ) (439 ) (376 )
Effect of exchange rate changes in cash   (3 )   1     (1 )   2  
Net decrease in cash and cash equivalents (99 ) (35 ) (103 ) (120 )
Cash and cash equivalents at beginning of period   195     120     199     205  
Cash and cash equivalents at end of period $ 96   $ 85   $ 96   $ 85  
Supplemental disclosures:
Interest paid $ 47 $ 41 $ 57 $ 55
Income taxes paid $ 45 $ 31 $ 46 $ 34
 
(a) Additions of long-lived assets $ (19 ) $ (12 ) $ (29 ) $ (20 )
 
       
Allison Transmission Holdings, Inc.
Reconciliation of GAAP to Non-GAAP Financial Measures
(Unaudited, dollars in millions)
 
Three months ended Six months ended
June 30, June 30,
2018 2017 2018 2017
Net income (GAAP) $ 174 $ 95 $ 325 $ 178
plus:
Income tax expense 48 51 88 95
Interest expense, net 30 27 60 52
Amortization of intangible assets 22 23 44 45
Depreciation of property, plant and equipment 19 20 39 39
UAW Local 933 retirement incentive (a) - - 7 -
Stock-based compensation expense (b) 3 4 6 6
Unrealized loss (gain) on foreign exchange (c) 1 1 3 (1 )
Technology-related investment expense (d) - 3 - 3
Unrealized loss on commodity hedge contracts (e)   -     1     -     -  
Adjusted EBITDA (Non-GAAP) $ 297   $ 225   $ 572   $ 417  
Net sales (GAAP) $ 711 $ 580 $ 1,374 $ 1,079
Net income as a percent of net sales (GAAP) 24.5 % 16.4 % 23.7 % 16.5 %
Adjusted EBITDA as a percent of net sales (Non-GAAP) 41.8 % 38.8 % 41.6 % 38.6 %
 
Net Cash Provided by Operating Activities (GAAP) $ 213 $ 166 $ 366 $ 277
Deductions to Reconcile to Adjusted Free Cash Flow:
Additions of long-lived assets   (19 )   (12 )   (29 )   (20 )
Adjusted Free Cash Flow (Non-GAAP) $ 194   $ 154   $ 337   $ 257  
(a)   Represents a charge (recorded in Cost of sales) related to a
retirement incentive program for certain employees represented by
the International Union, United Automobile, Aerospace and
Agricultural Implement Workers of America ("UAW") pursuant to the
UAW Local 933 collective bargaining agreement effective through
November 2023.
(b) Represents employee stock compensation expense (recorded in Cost of
sales, Selling, general and administrative, and Engineering –
research and development).
(c) Represents losses (gains) (recorded in Other income (expense), net)
on intercompany financing transactions related to investments in
plant assets for our India facility.
(d) Represents a charge (recorded in Other income (expense), net) for
investments in co-development agreements to expand our position in
transmission technologies.
(e) Represents unrealized losses (recorded in Other income (expense),
net) on the mark-to-market of our commodity hedge contracts.
 
     
Allison Transmission Holdings, Inc.
Reconciliation of GAAP to Non-GAAP Financial Measures for Full Year
Guidance
(Unaudited, dollars in millions)
 
Guidance
Year Ending December 31, 2018
Low High
Net Income (GAAP) $ 570 $ 600
plus:
Income tax expense 154 161
Interest expense, net 119 122
Depreciation and amortization 166 166
UAW Local 933 retirement incentive (a) 15 15
Stock-based compensation expense (b) 13 13
Unrealized loss on foreign exchange (c)   3     3  
Adjusted EBITDA (Non-GAAP) $ 1,040   $ 1,080  
 
Net Cash Provided by Operating Activities (GAAP) $ 765 $ 795
Deductions to Reconcile to Adjusted Free Cash Flow:
Additions of long-lived assets   (95 )   (85 )
Adjusted Free Cash Flow (Non-GAAP) $ 670   $ 710  
(a)   Represents a charge (recorded in Cost of sales) related to a
retirement incentive program for certain employees represented by
the International Union, United Automobile, Aerospace and
Agricultural Implement Workers of America ("UAW") pursuant to the
UAW Local 933 collective bargaining agreement effective through
November 2023.
(b) Represents employee stock compensation expense (recorded in Cost of
sales, Selling, general and administrative, and Engineering –
research and development).
(c) Represents losses (gains) (recorded in Other income (expense), net)
on intercompany financing transactions related to investments in
plant assets for our India facility.

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