UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of report (Date of earliest event reported): April 26, 2017
ALLISON TRANSMISSION HOLDINGS, INC.
(Exact Name of Registrant as Specified in Charter)
| Delaware | 001-35456 |
26-0414014 | ||
| (State or other jurisdiction of incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) | ||
| One Allison Way, Indianapolis, Indiana | 46222 | |||
| (Address of principal executive offices) | (Zip Code) | |||
Registrant’s telephone number, including area code (317) 242-5000
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
| ☐ | Written communication pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
| Item 2.02 | Results of Operations and Financial Condition. |
On April 26, 2017, Allison Transmission Holdings, Inc. (“Allison”) published an earnings release reporting its financial results for the three months ended March 31, 2017. A copy of the earnings release is attached as Exhibit 99.1 hereto. Following the publication of the earnings release, Allison will host an earnings call on April 27, 2017 at 8:00 a.m. ET on which its financial results for the three months ended March 31, 2017 will be discussed. The investor presentation materials that will be used for the call are attached as Exhibit 99.2 hereto.
On April 26, 2017, Allison posted the materials attached as Exhibits 99.1 and 99.2 on its web site (www.allisontransmission.com).
As discussed on page 2 of Exhibit 99.2, the investor presentation contains forward-looking statements within the meaning of the federal securities laws. These statements are present expectations, and are subject to the limitations listed therein and in Allison’s other Securities and Exchange Commission filings, including that actual events or results may differ materially from those in the forward-looking statements.
The foregoing information (including the exhibits hereto) is being furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
| Item 9.01 | Financial Statements and Exhibits. |
(d) Exhibits.
| Exhibit |
Description | |
| 99.1 | Earnings release dated April 26, 2017. | |
| 99.2 | Investor presentation materials dated April 26, 2017. | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Allison Transmission Holdings, Inc. | ||||||
| Date: April 26, 2017 | ||||||
| By: | /s/ Eric C. Scroggins | |||||
| Name: | Eric C. Scroggins | |||||
| Title: | Vice President, General Counsel and Secretary | |||||
EXHIBIT INDEX
| Exhibit Number |
Description | |
| 99.1 | Earnings release dated April 26, 2017. | |
| 99.2 | Investor presentation materials dated April 26, 2017. | |
Exhibit 99.1
Allison Transmission Announces First Quarter 2017 Results
| • | Net Sales $499 million, Net Income $83 million, Adjusted EBITDA $192 million, Net Cash Provided by Operating Activities $111 million, Adjusted Free Cash Flow $103 million |
INDIANAPOLIS, April 26, 2017 – Allison Transmission Holdings Inc. (NYSE: ALSN), the largest global provider of commercial duty fully-automatic transmissions, today reported net sales for the first quarter of $499 million, an 8 percent increase from the same period in 2016. The increase in net sales was principally driven by higher demand in the Service Parts, Support Equipment & Other end market.
Net Income for the quarter was $83 million compared to $48 million for the same period in 2016. Adjusted EBITDA, a non-GAAP financial measure, for the quarter was $192 million, or 38.5 percent of net sales, compared to $162 million, or 35.1 percent of net sales, for the same period in 2016. Net Cash Provided by Operating Activities for the quarter was $111 million compared to $118 million for the same period in 2016. Adjusted Free Cash Flow, a non-GAAP financial measure, for the quarter was $103 million compared to $113 million for the same period in 2016.
Lawrence E. Dewey, Chairman and Chief Executive Officer of Allison Transmission commented, “Allison’s first quarter 2017 results exceeded the full year guidance ranges we provided to the market on February 6 principally driven by stronger than anticipated demand for North America service parts. Allison demonstrated solid operating margins and free cash flow while executing its well-defined approach to capital structure and allocation. During the first quarter, we settled $415 million of share repurchases and paid a dividend of $0.15 per share. Given first quarter 2017 results and current end markets conditions we are updating our full year net sales guidance to an increase in the range of 7.5 to 10.5 percent.”
First Quarter Net Sales by End Market
| End Market |
Q1 2017 Net Sales ($M) |
Q1 2016 Net Sales ($M) |
% Variance | |||||||||
| North America On-Highway |
255 | 257 | (1 | %) | ||||||||
| North America Hybrid-Propulsion Systems for Transit Bus |
20 | 17 | 18 | % | ||||||||
| North America Off-Highway |
1 | 5 | (80 | %) | ||||||||
| Defense |
27 | 25 | 8 | % | ||||||||
| Outside North America On-Highway |
72 | 70 | 3 | % | ||||||||
| Outside North America Off-Highway |
6 | 3 | 100 | % | ||||||||
| Service Parts, Support Equipment & Other |
118 | 85 | 39 | % | ||||||||
| Total Net Sales |
499 | 462 | 8 | % | ||||||||
First Quarter Highlights
North America On-Highway end market net sales were down 1 percent from the same period in 2016 principally driven by lower demand for Highway Series and Rugged Duty Series models partially offset by higher demand in Pupil Transport/Shuttle and Transit/Other Bus models and up 18 percent on a sequential basis principally driven by higher demand for Rugged Duty Series, Pupil Transport/Shuttle Series and Transit/Other Bus models.
1
North America Hybrid-Propulsion Systems for Transit Bus end market net sales were up 18 percent from the same period in 2016 principally driven by the timing of certain transit property orders and flat on a sequential basis.
North America Off-Highway end market net sales were down $4 million from the same period in 2016 and up $1 million on a sequential basis principally driven by the previously contemplated trailing impact of low energy prices.
Defense end market net sales were up 8 percent from the same period in 2016 and down 27 percent sequentially, in both cases principally driven by the intra-year movement in the timing of orders.
Outside North America On-Highway end market net sales were up 3 percent from the same period in 2016 principally driven by higher demand in India partially offset by lower demand in China and down 13 percent on a sequential basis principally driven by lower demand in Europe and China.
Outside North America Off-Highway end market net sales were up $3 million from the same period in 2016 principally driven by higher demand in the mining and energy sectors and up $2 million sequentially principally driven by higher demand in the mining sector.
Service Parts, Support Equipment & Other end market net sales were up 39 percent from the same period in 2016 and up 9 percent on a sequential basis principally driven by higher demand for North America service parts.
Gross profit for the quarter was $251 million, an increase of 17 percent from $215 million for the same period in 2016. Gross margin for the quarter was 50.3 percent, an increase of 380 basis points from a gross margin of 46.5 percent for the same period in 2016. The increase in gross profit from the same period in 2016 was principally driven by increased net sales, price increases on certain products and favorable manufacturing expense partially offset by higher incentive compensation expense.
Selling, general and administrative expenses for the quarter were $79 million, a decrease of $4 million from $83 million for the same period in 2016. The decrease was principally driven by favorable product warranty adjustments and 2016 stockholder activism expense partially offset by higher incentive compensation expense.
Engineering – research and development expenses for the quarter were $23 million, an increase of $2 million from $21 million for the same period in 2016. The increase was principally driven by higher incentive compensation expense.
Net income for the quarter was $83 million compared to $48 million for the same period in 2016. The increase was principally driven by increased gross profit, decreased interest expense and decreased selling, general and administrative expense partially offset by increased income tax expense.
First Quarter Non-GAAP Financial Measures
Adjusted EBITDA for the quarter was $192 million, or 38.5 percent of net sales, compared to $162 million, or 35.1 percent of net sales, for the same period in 2016. The increase was principally driven by increased net sales, price increases on certain products, favorable product warranty adjustments and favorable manufacturing expense partially offset by higher incentive compensation expense.
Adjusted Free Cash Flow for the quarter was $103 million compared to $113 million for the same period in 2016, a decrease of $10 million. The decrease was principally driven by increased accounts receivable commensurate with increased net sales and increased incentive compensation payments partially offset by increased gross profit and decreased cash interest expense.
Full Year 2017 Guidance Update
Our updated full year 2017 guidance includes a year-over-year net sales increase in the range of 7.5 to 10.5 percent, an Adjusted EBITDA margin in the range of 34 to 36 percent, an Adjusted Free Cash Flow in the range of $415 to $455 million, capital expenditures in the range of $70 to $80 million, which includes maintenance spending of approximately $65 million, and cash income taxes in the range of $65 to $75 million.
Allison’s full year 2017 net sales guidance reflects stronger demand for North America Off-Highway service parts and North America On-Highway products. Our full year 2017 net sales outlook also assumes price increases on certain products and a modest recovery in the Global Off-Highway end markets.
2
Although we are not providing specific second quarter 2017 guidance, Allison does expect second quarter net sales to be up sequentially principally driven by increased demand in the Global On-Highway end markets.
Conference Call and Webcast
The company will host a conference call at 8:00 a.m. ET on Thursday, April 27 to discuss its first quarter 2017 results. Dial-in number is 1-201-689-8470 and the U.S. toll-free dial-in number is 1-877-407-9039. 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 April 27 until 11:59 p.m. ET on May 4. 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 13659385.
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 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 2,600 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; uncertainty in the global regulatory and business environments in which we operate; our participation in markets that are competitive; the highly cyclical industries in which certain of our end users 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; future reductions or changes in government subsidies for hybrid vehicles and other external factors impacting demand; U.S. defense spending; general economic and industry conditions; 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 prepare for, respond to and successfully achieve our objectives relating to technological and market developments, competitive threats and changing customer needs; risks associated with our international operations; 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 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.
This press release also contains forward-looking estimates of non-GAAP Adjusted EBITDA Margin and Adjusted Free Cash Flow for fiscal year 2017. We are unable to provide a reconciliation of our forward-looking estimate of non-GAAP Adjusted EBITDA Margin to a forward-looking estimate of GAAP Net Income because certain
3
information needed to make a reasonable forward-looking estimate of GAAP Net Income is difficult to predict and estimate and is often dependent on future events which may be uncertain or outside of our control. These may include unanticipated charges related to asset impairments (fixed assets, investments, intangibles or goodwill) and unanticipated non-recurring items not reflective of ongoing operations. We are unable to provide a reconciliation of our forward-looking estimate of non-GAAP Adjusted Free Cash Flow to a forward-looking estimate of GAAP Net Cash Provided by Operating Activities because certain information needed to make a reasonable forward-looking estimate of GAAP Net Cash Provided by Operating Activities is difficult to predict and estimate and is often dependent on future events which may be uncertain or outside of our control. These may include unanticipated non-recurring items.
Attachment
| • | Condensed Consolidated Statements of Operations |
| • | Condensed Consolidated Balance Sheets |
| • | Condensed Consolidated Statements of Cash Flows |
| • | Reconciliation of GAAP to Non-GAAP Financial Measures |
Contacts
Investor Relations
ir@allisontransmission.com
(317) 242-3078
Media Relations
media@allisontransmission.com
(317) 242-5000
4
Allison Transmission Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited, dollars in millions, except per share data)
| Three months ended March 31, | ||||||||
| 2017 | 2016 | |||||||
| Net sales |
$ | 499 | $ | 462 | ||||
| Cost of sales |
248 | 247 | ||||||
|
|
|
|
|
|||||
| Gross profit |
251 | 215 | ||||||
| Selling, general and administrative |
79 | 83 | ||||||
| Engineering - research and development |
23 | 21 | ||||||
| Operating income |
149 | 111 | ||||||
|
|
|
|
|
|||||
| Interest expense, net |
(25 | ) | (34 | ) | ||||
| Other income, net |
3 | — | ||||||
|
|
|
|
|
|||||
| Income before income taxes |
127 | 77 | ||||||
| Income tax expense |
(44 | ) | (29 | ) | ||||
|
|
|
|
|
|||||
| Net income |
$ | 83 | $ | 48 | ||||
|
|
|
|
|
|||||
| Basic earnings per share attributable to common stockholders |
$ | 0.53 | $ | 0.28 | ||||
|
|
|
|
|
|||||
| Diluted earnings per share attributable to common stockholders |
$ | 0.52 | $ | 0.28 | ||||
|
|
|
|
|
|||||
5
Allison Transmission Holdings, Inc.
Condensed Consolidated Balance Sheets
(Unaudited, dollars in millions)
| March 31, | December 31, | |||||||
| 2017 | 2016 | |||||||
| ASSETS |
||||||||
| Current Assets |
||||||||
| Cash and cash equivalents |
$ | 120 | $ | 205 | ||||
| Accounts receivable |
250 | 197 | ||||||
| Inventories |
144 | 126 | ||||||
| Other current assets |
23 | 20 | ||||||
|
|
|
|
|
|||||
| Total Current Assets |
537 | 548 | ||||||
| Property, plant and equipment, net |
457 | 464 | ||||||
| Intangible assets, net |
3,161 | 3,183 | ||||||
| Other non-current assets |
24 | 24 | ||||||
|
|
|
|
|
|||||
| TOTAL ASSETS |
$ | 4,179 | $ | 4,219 | ||||
|
|
|
|
|
|||||
| LIABILITIES |
||||||||
| Current Liabilities |
||||||||
| Accounts payable |
$ | 158 | $ | 128 | ||||
| Current portion of long term debt |
12 | 12 | ||||||
| Other current liabilities |
208 | 202 | ||||||
|
|
|
|
|
|||||
| Total Current Liabilities |
378 | 342 | ||||||
| Long term debt |
2,390 | 2,147 | ||||||
| Other non-current liabilities |
674 | 649 | ||||||
|
|
|
|
|
|||||
| TOTAL LIABILITIES |
3,442 | 3,138 | ||||||
| TOTAL STOCKHOLDERS’ EQUITY |
737 | 1,081 | ||||||
|
|
|
|
|
|||||
| TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY |
$ | 4,179 | $ | 4,219 | ||||
|
|
|
|
|
|||||
6
Allison Transmission Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited, dollars in millions)
| Three months ended March 31, | ||||||||
| 2017 | 2016 | |||||||
| Net cash provided by operating activities |
$ | 111 | $ | 118 | ||||
| Net cash used for investing activities (a) |
(8 | ) | (6 | ) | ||||
| Net cash used for financing activities |
(189 | ) | (65 | ) | ||||
| Effect of exchange rate changes on cash |
1 | — | ||||||
|
|
|
|
|
|||||
| Net (decrease) increase in cash and cash equivalents |
(85 | ) | 47 | |||||
| Cash and cash equivalents at beginning of period |
205 | 252 | ||||||
|
|
|
|
|
|||||
| Cash and cash equivalents at end of period |
$ | 120 | $ | 299 | ||||
|
|
|
|
|
|||||
| Supplemental disclosures: |
||||||||
| Interest paid |
$ | 14 | $ | 22 | ||||
| Income taxes paid |
$ | 3 | $ | 3 | ||||
| (a) Additions of long-lived assets |
$ | (8 | ) | $ | (6 | ) | ||
7
Allison Transmission Holdings, Inc.
Reconciliation of GAAP to Non-GAAP Financial Measures
(Unaudited, dollars in millions)
| Three months ended | ||||||||
| March 31, | ||||||||
| 2017 | 2016 | |||||||
| Net income (GAAP) plus: |
$ | 83 | $ | 48 | ||||
| Income tax expense |
44 | 29 | ||||||
| Interest expense, net |
25 | 34 | ||||||
| Amortization of intangible assets |
22 | 23 | ||||||
| Depreciation of property, plant and equipment |
19 | 21 | ||||||
| Stock-based compensation expense (a) |
2 | 2 | ||||||
| Unrealized (gain) loss on foreign exchange (b) |
(2 | ) | 1 | |||||
| Unrealized gain on commodity hedge contracts (c) |
(1 | ) | (1 | ) | ||||
| Stockholder activism expenses (d) |
— | 4 | ||||||
| Dual power inverter module units extended coverage (e) |
— | 1 | ||||||
|
|
|
|
|
|||||
| Adjusted EBITDA (Non-GAAP) |
$ | 192 | $ | 162 | ||||
|
|
|
|
|
|||||
| Net sales (GAAP) |
$ | 499 | $ | 462 | ||||
| Adjusted EBITDA margin (Non-GAAP) |
38.5 | % | 35.1 | % | ||||
| Net Cash Provided by Operating Activities (GAAP) |
$ | 111 | $ | 118 | ||||
| (Deductions) or Additions to Reconcile to Adjusted Free Cash Flow: |
||||||||
| Additions of long-lived assets |
(8 | ) | (6 | ) | ||||
| Stockholder activism expenses (d) |
— | 1 | ||||||
|
|
|
|
|
|||||
| Adjusted Free Cash Flow (Non-GAAP) |
$ | 103 | $ | 113 | ||||
|
|
|
|
|
|||||
| (a) | Represents employee stock compensation expense (recorded in Cost of sales, Selling, general and administrative expenses, and Engineering – research and development). |
| (b) | Represents (gains) losses (recorded in Other income, net) on intercompany financing transactions related to investments in plant assets for our India facility. |
| (c) | Represents unrealized gains (recorded in Other income, net) on the mark-to-market of our commodity hedge contracts. |
| (d) | Represents expenses (recorded in Selling, general and administrative) of $4 million and payments of $1 million directly associated with stockholder activism activity including the notice, and subsequent withdrawal, of director nomination and governance proposals by Ashe Capital Management, LP in the first quarter of 2016. |
| (e) | Represents an adjustment (recorded in Selling, general and administrative expenses) associated with the Dual Power Inverter Module (“DPIM”) extended coverage program liability. The DPIM liability will continue to be reviewed for any changes in estimates as additional claims data and field information become available. |
8
Q1 2017 Earnings Release Published April 26, 2017 (Earnings Conference Call April 27, 2017) Lawrence Dewey, Chairman & Chief Executive Officer David Graziosi, President & Chief Financial Officer Exhibit 99.2
Safe Harbor Statement The following information contains, or may be deemed to contain, “forward-looking statements” (as defined in the U.S. Private Securities Litigation Reform Act of 1995). 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 the 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: our participation in markets that are competitive; the highly cyclical industries in which certain of our end users operate; the failure of markets outside North America to increase adoption of fully-automatic transmissions; risks related to our substantial indebtedness; 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; future reductions or changes in government subsidies and other external factors impacting demand for hybrid vehicles; U.S. defense spending; general economic and industry conditions; 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 prepare for, respond to and successfully achieve our objectives relating to technological and market developments, competitive threats and changing customer needs; risks associated with our international operations; labor strikes, work stoppages or similar labor disputes, which could significantly disrupt our operations or those of our principal customers; and our intention to pay dividends and repurchase shares of our common stock. Allison Transmission cannot assure you that the assumptions made in preparing any of the forward- looking statements will prove accurate or that any long-term financial goals will be realized. All forward-looking statements included in this presentation speak only as of the date made, and Allison Transmission undertakes no obligation to update or revise publicly any such forward-looking statements, whether as a result of new information, future events, or otherwise. In particular, Allison Transmission cautions you not to place undue weight on certain forward-looking statements pertaining to potential growth opportunities, long-term financial goals or the value we currently ascribe to certain tax attributes set forth herein. Actual results may vary significantly from these statements. Allison Transmission’s business is subject to numerous risks and uncertainties, which may cause future results of operations to vary significantly from those presented herein. Important factors that could cause actual results to differ materially are discussed in Allison Transmission’s Annual Report on Form 10-K for the year ended December 31, 2016.
Non-GAAP Financial Information We use Adjusted EBITDA and Adjusted EBITDA margin to measure our operating profitability. We believe that Adjusted EBITDA and Adjusted EBITDA margin 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 margin 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 is Net income. 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 our debt agreement. Adjusted EBITDA margin 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 and strengthening our balance sheet. 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.
Call Agenda Q1 2017 Performance 2017 Guidance Update
Q1 2017 Performance Summary ($ in millions) Q1 2017 Q1 2016 % Variance Net Sales $499 $462 8.0% Gross Margin % 50.3% 46.5% 380 bps Net Income $83 $48 72.9% Adjusted EBITDA(1) $192 $162 18.5% Adjusted Free Cash Flow (1) $103 $113 (8.8%) See Appendix for a reconciliation of Adjusted EBITDA and Adjusted Free Cash Flow. Commentary Net Sales: increase was principally driven by higher demand in the Service Parts, Support Equipment & Other end market. Gross Margin: increase was principally driven by increased net sales, price increases on certain products and favorable manufacturing expense partially offset by higher incentive compensation expense. Net Income: increase was principally driven by increased gross profit, decreased interest expense and decreased selling, general and administrative expense partially offset by increased income tax expense. Adjusted EBITDA: increase was principally driven by increased net sales, price increases on certain products, favorable product warranty adjustments and favorable manufacturing expense partially offset by higher incentive compensation expense. Adjusted Free Cash Flow: decrease was principally driven by increased accounts receivable commensurate with increased net sales and increased incentive compensation payments partially offset by increased gross profit and decreased cash interest expense.
Q1 2017 Sales Performance ($ in millions) End Markets Q1 2017 Q1 2016 % Variance Commentary North America On-Hwy $255 $257 (1%) Principally driven by lower demand for Highway Series and Rugged Duty Series models partially offset by higher demand in Pupil Transport/Shuttle and Transit/Other Bus models North America Hybrid-Propulsion Systems for Transit Bus $20 $17 18% Principally driven by the timing of certain transit property orders North America Off-Hwy $1 $5 (80%) Principally driven by the previously contemplated trailing impact of low energy prices Defense $27 $25 8% Principally driven by the intra-year movement in the timing of orders Outside North America On-Hwy $72 $70 3% Principally driven by higher demand in India partially offset by lower demand in China Outside North America Off-Hwy $6 $3 100% Principally driven by higher demand in the mining and energy sectors Service Parts, Support Equipment & Other $118 $85 39% Principally driven by higher demand for North America service parts Total $499 $462 8%
Q1 2017 Financial Performance ($ in millions, except per share data) Q1 2017 Q1 2016 $ Var % Var Commentary Net Sales $499 $462 $37 8.0% Increase was principally driven by higher demand in the Service Parts, Support Equipment & Other end market Cost of Sales $248 $247 ($1) (0.4%) Gross Profit $251 $215 $36 16.7% Increase was principally driven by increased net sales, price increases on certain products and favorable manufacturing expense partially offset by higher incentive compensation expense Operating Expenses Selling, General and Administrative $79 $83 $4 4.8% Decrease was principally driven by favorable product warranty adjustments and 2016 stockholder activism expense partially offset by higher incentive compensation expense Engineering – Research and Development $23 $21 ($2) (9.5%) Increase was principally driven by higher incentive compensation expense Total Operating Expenses $102 $104 $2 1.9% Operating Income $149 $111 $38 34.2% Interest Expense, net ($25) ($34) $9 26.5% Decrease principally driven by favorable mark-to-market adjustments for our interest rate derivatives partially offset by interest expense for our interest rate derivatives that became effective in August 2016 and interest expense for revolving loans borrowing Other Income, net $3 $0 $3 N/A Income Before Income Taxes $127 $77 $50 64.9% Income Tax Expense ($44) ($29) ($15) (51.7%) Decrease in effective tax rate principally driven by 2017 discrete activity related to the excess tax benefit from stock-based compensation Net Income $83 $48 $35 72.9% Diluted Earnings Per Share $0.52 $0.28 $0.24 85.7% Q1 2017: 159M shares; Q1 2016: 172M shares Adjusted EBITDA(1) $192 $162 $30 18.5% Adjusted EBITDA Margin(1) 38.5% 35.1% - 3.4% See Appendix for a reconciliation from Net Income.
Q1 2017 Cash Flow Performance See Appendix for a reconciliation of Adjusted Free Cash Flow. Operating Working Capital = A/R + Inventory – A/P. ($ in millions) Q1 2017 Q1 2016 $ Variance % Variance Commentary Net Cash Provided by Operating Activities $111 $118 ($7) (5.9%) Principally driven by higher accounts receivable commensurate with increased net sales, higher inventories and increased incentive compensation payments partially offset by increased gross profit, higher accounts payable and decreased cash interest expense as a result of the intra-year timing of debt payments CapEx $8 $6 $2 33.3% Principally driven by timing of productivity and replacement program spending Adjusted Free Cash Flow (1) $103 $113 ($10) (8.8%) Principally driven by decreased Cash Provided by Operating Activities and increased capital expenditures ($ in millions) Q1 2017 Q1 2016 $ Variance % Variance Commentary Operating Working Capital(2) Percentage of LTM Sales 12.6% 11.7% N/A 90 bps Principally driven by increased net sales Cash Paid for Interest $14 $22 ($8) (36.4%) Principally driven by the intra-year timing of debt payments Cash Paid for Income Taxes $3 $3 $0 0.0% Principally driven by increased income before taxes offset by the intra-year timing of income tax payments
2017 Guidance Update Guidance Commentary Net Sales Change from 2016 7.5 to 10.5 percent Guidance reflects stronger demand for North America Off-Highway service parts and North America On-Highway products. Our full year 2017 net sales outlook also assumes price increases on certain products and a modest recovery in the Global Off-Highway end markets. Adjusted EBITDA Margin 34 to 36 percent Adjusted Free Cash Flow ($ in millions) $415 to $455 CapEx ($ in millions) Maintenance New Products $65 to $70 $5 to $10 Subject to timely completion of development and sourcing milestones Cash Income Taxes ($ in millions) $65 to $75
APPENDIX Non-GAAP Financial Information
Non-GAAP Reconciliations (1 of 2) (1) Includes income related to benefit plan adjustments, employee stock compensation expense, service fees paid to Allison’s Sponsors Adjusted EBITDA reconciliation Last twelve months ended $ in millions, Unaudited March 31, 2012 2013 2014 2015 2016 2016 2017 2017 Net income $514 $165 $229 $182 $215 $48 $83 $250 plus: Interest expense, net 151 133 138 114 101 34 25 92 Income tax expense (benefit) (298) 101 139 107 126 29 44 141 Fee to terminate services agreement with Sponsors 16 — — — — — — — Technology-related investment expenses 14 5 2 — 1 — — 1 Public offering expenses 6 2 1 — — — — — Impairments — — 15 81 — — — — Environmental remediation — — — 14 — — — — Amortization of intangible assets 150 105 99 97 92 23 22 91 Depreciation of property, plant and equipment 103 99 94 88 84 21 19 82 Loss on redemptions and repayments of long-term debt 22 1 1 1 — — — — Stockholder activism expenses — — — — 4 4 — — Dual power inverter module extended coverage 9 (2) 1 (2) 1 1 — — UAW Local 933 signing bonus 9 — — — — — — — Benefit plan re-measurement 2 — — — — — — — Unrealized loss (gain) on commodity hedge contracts (1) 2 (1) 1 (2) (1) (1) (2) Unrealized loss (gain) on foreign exchange — 2 5 1 1 1 (2) (2) Expenses related to long-term debt refinancing — — — 25 12 — — 12 Restructuring charges — 1 1 — — — — — Other, net (1) 8 13 15 11 9 2 2 9 Adjusted EBITDA $705 $627 $739 $720 $644 $162 $192 $674 Net Sales $2,142 $1,927 $2,127 $1,986 $1,840 $462 $499 $1,877 Adjusted EBITDA margin 32.9% 32.5% 34.7% 36.2% 35.0% 35.1% 38.5% 35.9% Three months ended March 31, For the year ended December 31,
Non-GAAP Reconciliations (2 of 2) Adjusted Free Cash Flow reconciliation Last twelve months ended $ in millions, Unaudited March 31, 2012 2013 2014 2015 2016 2016 2017 2017 Net Cash Provided by Operating Activities $498 $464 $573 $580 $591 $118 $111 $584 (Deductions) or Additions: Long-lived assets (124) (75) (64) (58) (71) (6) (8) (73) Fee to terminate services agreement with Sponsors 16 — — — — — — — Technology-related license expenses 12 6 6 — — — — — Stockholder activism expenses — — — — 4 1 — 3 Excess tax benefit from stock-based compensation 5 14 25 8 6 — — 6 Adjusted Free Cash Flow $407 $409 $540 $530 $530 $113 $103 $520 Net Sales $2,142 $1,927 $2,127 $1,986 $1,840 $462 $499 $1,877 Adjusted Free Cash Flow (% to Net Sales) 19.0% 21.2% 25.4% 26.7% 28.8% 24.5% 20.6% 27.7% March 31, Three months ended For the year ended December 31,