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): October 30, 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 October 30, 2017, Allison Transmission Holdings, Inc. (“Allison”) published an earnings release reporting its financial results for the three months ended September 30, 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 October 31, 2017 at 8:00 a.m. ET on which its financial results for the three months ended September 30, 2017 will be discussed. The investor presentation materials that will be used for the call are attached as Exhibit 99.2 hereto.
On October 30, 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 Number |
Description | |
| 99.1 | Earnings release dated October 30, 2017. | |
| 99.2 | Investor presentation materials dated October 30, 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: October 30, 2017 | ||||||
| By: | /s/ Eric C. Scroggins | |||||
| Name: | Eric C. Scroggins | |||||
| Title: | Vice President, General Counsel and Secretary | |||||
Exhibit 99.1
Allison Transmission Announces Third Quarter 2017 Results
| • | Net Sales $595 million, GAAP Net Income $111 million, Adjusted EBITDA $241 million, GAAP Net Cash Provided by Operating Activities $215 million, Adjusted Free Cash Flow $195 million |
INDIANAPOLIS, October 30, 2017 – Allison Transmission Holdings Inc. (NYSE: ALSN), the largest global provider of commercial duty fully-automatic transmissions, today reported net sales for the third quarter of $595 million, a 37 percent increase from the same period in 2016. The increase in net sales was principally driven by higher demand in the North America On-Highway, Service Parts, Support Equipment & Other and Global Off-Highway end markets.
Net Income for the quarter was $111 million compared to $45 million for the same period in 2016. Adjusted EBITDA, a non-GAAP financial measure, for the quarter was $241 million, or 40.5 percent of net sales, compared to $151 million, or 34.7 percent of net sales, for the same period in 2016. Net Cash Provided by Operating Activities for the quarter was $215 million compared to $128 million for the same period in 2016. Adjusted Free Cash Flow, a non-GAAP financial measure, for the quarter was $195 million compared to $115 million for the same period in 2016.
Lawrence E. Dewey, Chairman and Chief Executive Officer of Allison Transmission commented, “Allison’s third quarter 2017 results exceeded the guidance ranges we provided to the market on July 31 principally driven by stronger than anticipated demand for North America service parts and North America Off-Highway products.” Dewey continued, “Allison has demonstrated solid operating margins and free cash flow through the first half of the year, I am pleased to report that this trend continued in the third quarter. Margins and Net Cash Provided by Operating Activities for the third quarter approached all-time highs, while the company maintained its well-defined approach to capital structure and allocation. During the third quarter, we settled $239 million of share repurchases, paid a dividend of $0.15 per share and completed an offering of $400 million in senior notes due in 2027. Given third quarter 2017 results and current end markets conditions, we are raising our full year 2017 net sales guidance from an increase in the range of 15 to 17 percent to an increase in the range of 21 to 22 percent.”
Third Quarter Net Sales by End Market
| End Market |
Q3 2017 Net Sales ($M) |
Q3 2016 Net Sales ($M) |
% Variance | |||||||||
| North America On-Highway |
$ | 282 | $ | 224 | 26 | % | ||||||
| North America Electric Hybrid-Propulsion Systems for Transit Bus |
$ | 19 | $ | 8 | 138 | % | ||||||
| North America Off-Highway |
$ | 17 | $ | 1 | 1600 | % | ||||||
| Defense |
$ | 35 | $ | 25 | 40 | % | ||||||
| Outside North America On-Highway |
$ | 89 | $ | 78 | 14 | % | ||||||
| Outside North America Off-Highway |
$ | 14 | $ | 2 | 600 | % | ||||||
| Service Parts, Support Equipment & Other |
$ | 139 | $ | 96 | 45 | % | ||||||
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| Total Net Sales |
$ | 595 | $ | 434 | 37 | % | ||||||
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Third Quarter Highlights
North America On-Highway end market net sales were up 26 percent from the same period in 2016 principally driven by higher demand for Rugged Duty Series and Highway Series models and down 6 percent on a sequential basis principally driven by lower demand for Rugged Duty Series, Pupil Transport/Shuttle and Highway Series models.
North America Electric Hybrid-Propulsion Systems for Transit Bus end market net sales were up $11 million from the same period in 2016 and up $4 million sequentially, in both cases principally driven by the timing of certain transit property orders.
North America Off-Highway end market net sales were up $16 million from the same period in 2016 and up $12 million on a sequential basis, in both cases principally driven by higher demand from hydraulic fracturing applications.
Defense end market net sales were up $10 million from the same period in 2016 and up $5 million sequentially, in both cases principally driven by higher demand.
Outside North America On-Highway end market net sales were up 14 percent from the same period in 2016 principally driven by higher demand in Asia and Europe and up 5 percent on a sequential basis principally driven by higher demand in Europe.
Outside North America Off-Highway end market net sales were up $12 million from the same period in 2016 principally driven by improved demand in the mining and energy sectors, and up $4 million sequentially principally driven by improved demand in the mining sector.
Service Parts, Support Equipment & Other end market net sales were up 45 percent from the same period in 2016 principally driven by higher demand for North America Off-Highway service parts, global On-Highway service parts and global support equipment, and up 2 percent on a sequential basis principally driven by higher demand for global On-Highway service parts.
Gross profit for the quarter was $302 million, an increase of 48 percent from $204 million for the same period in 2016. Gross margin for the quarter was 50.8 percent, an increase of 370 basis points from a gross margin of 47.1 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 and price increases on certain products partially offset by unfavorable material costs, higher manufacturing expense commensurate with increased net sales and higher incentive compensation expense.
Selling, general and administrative expenses for the quarter were $78 million, a decrease of $1 million from $79 million for the same period in 2016. The decrease was principally driven by favorable product warranty adjustments partially offset by increased commercial activities spending and higher incentive compensation expense.
Engineering – research and development expenses for the quarter were $26 million, an increase of $5 million from $21 million for the same period in 2016. The increase was principally driven by increased product initiatives spending.
Net income for the quarter was $111 million compared to $45 million for the same period in 2016. The increase was principally driven by increased gross profit, 2016 expense for previously recorded deferred financing costs as a result of the long-term debt refinancing and favorable product warranty adjustments partially offset by increased income tax expense, higher incentive compensation expense, increased interest expense and increased product initiatives and commercial activities spending.
Third Quarter Non-GAAP Financial Measures
Adjusted EBITDA for the quarter was $241 million, or 40.5 percent of net sales, compared to $151 million, or 34.7 percent of net sales, for the same period in 2016. The increase in Adjusted EBITDA was principally driven by increased net sales, price increases on certain products and favorable product warranty adjustments partially offset by higher incentive compensation expense, unfavorable material costs, increased manufacturing expense commensurate with increased net sales, and increased product initiatives and commercial activities spending.
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Adjusted Free Cash Flow for the quarter was $195 million compared to $115 million for the same period in 2016, an increase of $80 million. The increase was principally driven by increased gross profit, increased accounts payable, increased deferred revenue and decreased cash interest expense partially offset by increased cash income taxes, and increased capital expenditures.
Full Year 2017 Guidance Update
Our updated full year 2017 guidance includes a year-over-year net sales increase in the range of 21 to 22 percent, Adjusted EBITDA margin in the range of 37.75 to 38.75 percent, Adjusted Free Cash Flow in the range of $510 to $530 million, capital expenditures in the range of $90 to $95 million, which includes maintenance spending of approximately $85 million, and cash income taxes in the range of $105 to $115 million.
Allison’s full year 2017 net sales guidance reflects stronger demand for North America Off-Highway service parts, Global On-Highway products and Global Off-Highway products. Our full year 2017 net sales outlook also assumes price increases on certain products.
Although we are not providing specific fourth quarter 2017 guidance, Allison does expect fourth quarter net sales to be up from the same period in 2016 and down sequentially.
Conference Call and Webcast
The company will host a conference call at 8:00 a.m. ET on Tuesday, October 31 to discuss its third quarter 2017 results. The 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 October 31 until 11:59 p.m. ET on November 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 13670855.
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
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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 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
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Allison Transmission Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited, dollars in millions, except per share data)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net sales |
$ | 595 | $ | 434 | $ | 1,674 | $ | 1,371 | ||||||||
| Cost of sales |
293 | 230 | 831 | 725 | ||||||||||||
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| Gross profit |
302 | 204 | 843 | 646 | ||||||||||||
| Selling, general and administrative |
78 | 79 | 245 | 240 | ||||||||||||
| Engineering - research and development |
26 | 21 | 74 | 64 | ||||||||||||
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| Operating income |
198 | 104 | 524 | 342 | ||||||||||||
| Interest expense, net |
(26 | ) | (22 | ) | (78 | ) | (84 | ) | ||||||||
| Expenses related to long-term debt refinancing |
— | (12 | ) | — | (12 | ) | ||||||||||
| Other (expense) income, net |
(2 | ) | 1 | (3 | ) | 1 | ||||||||||
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| Income before income taxes |
170 | 71 | 443 | 247 | ||||||||||||
| Income tax expense |
(59 | ) | (26 | ) | (154 | ) | (93 | ) | ||||||||
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| Net income |
$ | 111 | $ | 45 | $ | 289 | $ | 154 | ||||||||
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| Basic earnings per share attributable to common stockholders |
$ | 0.75 | $ | 0.27 | $ | 1.91 | $ | 0.91 | ||||||||
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| Diluted earnings per share attributable to common stockholders |
$ | 0.75 | $ | 0.27 | $ | 1.90 | $ | 0.91 | ||||||||
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Allison Transmission Holdings, Inc.
Condensed Consolidated Balance Sheets
(Unaudited, dollars in millions)
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| ASSETS |
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| Current Assets |
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| Cash and cash equivalents |
$ | 210 | $ | 205 | ||||
| Accounts receivable |
271 | 197 | ||||||
| Inventories |
156 | 126 | ||||||
| Other current assets |
28 | 20 | ||||||
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| Total Current Assets |
665 | 548 | ||||||
| Property, plant and equipment, net |
456 | 464 | ||||||
| Intangible assets, net |
1,175 | 1,242 | ||||||
| Goodwill |
1,941 | 1,941 | ||||||
| Other non-current assets |
24 | 24 | ||||||
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| TOTAL ASSETS |
$ | 4,261 | $ | 4,219 | ||||
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| LIABILITIES |
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| Current Liabilities |
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| Accounts payable |
$ | 184 | $ | 128 | ||||
| Product Warranty Liability |
22 | 25 | ||||||
| Current portion of long-term debt |
12 | 12 | ||||||
| Deferred revenue |
33 | 27 | ||||||
| Other current liabilities |
193 | 150 | ||||||
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| Total Current Liabilities |
444 | 342 | ||||||
| Product Warranty Liability |
27 | 38 | ||||||
| Deferred Revenue |
75 | 66 | ||||||
| Long-term debt |
2,536 | 2,147 | ||||||
| Deferred income taxes |
393 | 312 | ||||||
| Other non-current liabilities |
231 | 233 | ||||||
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| TOTAL LIABILITIES |
3,706 | 3,138 | ||||||
| TOTAL STOCKHOLDERS’ EQUITY |
555 | 1,081 | ||||||
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| TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY |
$ | 4,261 | $ | 4,219 | ||||
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Allison Transmission Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited, dollars in millions)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net cash provided by operating activities |
$ | 215 | $ | 128 | $ | 492 | $ | 416 | ||||||||
| Net cash used for investing activities (a) |
(20 | ) | (15 | ) | (43 | ) | (37 | ) | ||||||||
| Net cash used for financing activities |
(71 | ) | (313 | ) | (447 | ) | (466 | ) | ||||||||
| Effect of exchange rate changes in cash |
1 | — | 3 | — | ||||||||||||
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| Net increase (decrease) in cash and cash equivalents |
125 | (200 | ) | 5 | (87 | ) | ||||||||||
| Cash and cash equivalents at beginning of period |
85 | 365 | 205 | 252 | ||||||||||||
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| Cash and cash equivalents at end of period |
$ | 210 | $ | 165 | $ | 210 | $ | 165 | ||||||||
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| Supplemental disclosures: |
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| Interest paid |
$ | 16 | $ | 21 | $ | 71 | $ | 64 | ||||||||
| Income taxes paid |
$ | 31 | $ | 2 | $ | 65 | $ | 10 | ||||||||
| (a) Additions of long-lived assets |
$ | (20 | ) | $ | (14 | ) | $ | (40 | ) | $ | (36 | ) | ||||
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Allison Transmission Holdings, Inc.
Reconciliation of GAAP to Non-GAAP Financial Measures
(Unaudited, dollars in millions)
| Three months ended | Nine months ended | |||||||||||||||
| Sepember 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net income (GAAP) plus: |
$ | 111 | $ | 45 | $ | 289 | $ | 154 | ||||||||
| Income tax expense |
59 | 26 | 154 | 93 | ||||||||||||
| Interest expense, net |
26 | 22 | 78 | 84 | ||||||||||||
| Amortization of intangible assets |
22 | 23 | 67 | 69 | ||||||||||||
| Depreciation of property, plant and equipment |
21 | 21 | 60 | 63 | ||||||||||||
| Stock-based compensation expense (a) |
2 | 2 | 8 | 6 | ||||||||||||
| Dual power inverter module units extended coverage (b) |
(2 | ) | — | (2 | ) | 1 | ||||||||||
| Unrealized loss (gain) on foreign exchange (c) |
2 | (1 | ) | 1 | 1 | |||||||||||
| Technology-related investment expense (d) |
— | 1 | 3 | 1 | ||||||||||||
| Expenses related to long-term debt refinancing (e) |
— | 12 | — | 12 | ||||||||||||
| Unrealized gain on commodity hedge contracts (f) |
— | — | — | (2 | ) | |||||||||||
| Stockholder activism expenses (g) |
— | — | — | 4 | ||||||||||||
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| Adjusted EBITDA (Non-GAAP) |
$ | 241 | $ | 151 | $ | 658 | $ | 486 | ||||||||
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| Net sales (GAAP) |
$ | 595 | $ | 434 | $ | 1,674 | $ | 1,371 | ||||||||
| Adjusted EBITDA margin (Non-GAAP) |
40.5 | % | 34.7 | % | 39.3 | % | 35.4 | % | ||||||||
| Net Cash Provided by Operating Activities (GAAP) |
$ | 215 | $ | 128 | $ | 492 | $ | 416 | ||||||||
| (Deductions) or Additions to Reconcile to Adjusted Free Cash Flow: |
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| Additions of long-lived assets |
(20 | ) | (14 | ) | (40 | ) | (36 | ) | ||||||||
| Stockholder activism expenses (g) |
— | — | — | 4 | ||||||||||||
| Excess tax benefit from stock-based compensation (h) |
— | 1 | — | 1 | ||||||||||||
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| Adjusted Free Cash Flow (Non-GAAP) |
$ | 195 | $ | 115 | $ | 452 | $ | 385 | ||||||||
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| (a) | Represents employee stock compensation expense (recorded in Cost of sales, Selling, general and administrative, and Engineering – research and development). |
| (b) | Represents an adjustment (recorded in Selling, general and administrative) 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. |
| (c) | Represents losses (gains) (recorded in Other (expense) income, net) on intercompany financing transactions related to investments in plant assets for our India facility. |
| (d) | Represents a charge (recorded in Other (expense) income, net) for investments in co-development agreements to expand our position in transmission technologies. |
| (e) | Represents expenses related to the refinancing of Allison Transmission, Inc.’s, our wholly owned subsidiary, Senior Secured Credit Facility in the third quarter of 2016. |
| (f) | Represents unrealized gains (recorded in Other (expense) income, net) on the mark-to-market of our commodity hedge contracts. |
| (g) | Represents expenses (recorded in Selling, general and administrative) directly associated with stockholder activism activity including the notice, and subsequent withdrawal, of director nomination and governance proposals by Ashe Capital Management, LP. |
| (h) | Represents the amount of tax benefit (recorded in Income tax expense) related to stock-based compensation adjusted from cash flows from operating activities to cash flows from financing activities. |
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Q3 2017 Earnings Release Published October 30, 2017 (Earnings Conference Call October 31, 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 Q3 2017 Performance 2017 Guidance Update
Q3 2017 Performance Summary ($ in millions) Q3 2017 Q3 2016 % Variance Net Sales $595 $434 37.1% Gross Margin % 50.8% 47.1% 370 bps Net Income $111 $45 146.7% Adjusted EBITDA(1) $241 $151 59.6% Adjusted Free Cash Flow (1) $195 $115 69.6% See Appendix for a reconciliation of Adjusted EBITDA and Adjusted Free Cash Flow. Commentary Net Sales: increase was principally driven by higher demand in the North America On-Highway, Service Parts, Support Equipment & Other and Global Off-Highway end markets. Gross Margin: increase was principally driven by favorable sales volume and price increases on certain products partially offset by unfavorable material costs and higher incentive compensation expense. Net Income: increase was principally driven by increased gross profit, 2016 expense for previously recorded deferred financing costs as a result of the long-term debt refinancing and favorable product warranty adjustments partially offset by increased income tax expense, higher incentive compensation expense, increased interest expense and increased product initiatives and commercial activities spending. Adjusted EBITDA: increase was principally driven by increased net sales, price increases on certain products and favorable product warranty adjustments partially offset by higher incentive compensation expense, unfavorable material costs, increased manufacturing expense commensurate with increased net sales, and increased product initiatives and commercial activities spending. Adjusted Free Cash Flow: increase was principally driven by increased gross profit, increased accounts payable, increased deferred revenue and decreased cash interest expense partially offset by increased cash income taxes and increased capital expenditures.
Q3 2017 Sales Performance ($ in millions) End Markets Q3 2017 Q3 2016 % Variance Commentary North America On-Hwy $282 $224 26% Principally driven by higher demand for Rugged Duty Series and Highway Series models North America Electric Hybrid-Propulsion Systems for Transit Bus $19 $8 138% Principally driven by the timing of certain transit property orders North America Off-Hwy $17 $1 1600% Principally driven by higher demand from hydraulic fracturing applications Defense $35 $25 40% Principally driven by higher demand Outside North America On-Hwy $89 $78 14% Principally driven by higher demand in Asia and Europe Outside North America Off-Hwy $14 $2 600% Principally driven by improved demand in the mining and energy sectors Service Parts, Support Equipment & Other $139 $96 45% Principally driven by higher demand for North America Off-Highway service parts, global On-Highway service parts and global support equipment Total $595 $434 37%
Q3 2017 Financial Performance ($ in millions, except per share data) Q3 2017 Q3 2016 $ Var % Var Commentary Net Sales $595 $434 $161 37.1% Increase was principally driven by higher demand in the North America On-Highway, Service Parts, Support Equipment & Other and Global Off-Highway end markets Cost of Sales $293 $230 ($63) (27.4%) Gross Profit $302 $204 $98 48.0% Increase was principally driven by increased net sales and price increases on certain products partially offset by unfavorable material costs, higher manufacturing expense commensurate with increased net sales and higher incentive compensation expense Operating Expenses Selling, General and Administrative $78 $79 $1 1.3% Decrease was principally driven by favorable product warranty adjustments partially offset by increased commercial activities spending and higher incentive compensation expense Engineering – Research and Development $26 $21 ($5) (23.8%) Increase was principally driven by increased product initiatives spending Total Operating Expenses $104 $100 ($4) (4.0%) Operating Income $198 $104 $94 90.4% Interest Expense, net ($26) ($22) ($4) (18.2%) Increase was principally driven by refinancing activities and revolving credit facility borrowings Expenses related to Long-Term Debt Refinancing $0 ($12) $12 100.0% Decrease driven by 2016 expense for previously recorded deferred financing costs as a result of the long-term debt refinancing completed in September 2016 Other (Expense) Income, net ($2) $1 ($3) (300.0%) Income Before Income Taxes $170 $71 $99 139.4% Income Tax Expense ($59) ($26) ($33) (126.9%) Net Income $111 $45 $66 146.7% Diluted Earnings Per Share $0.75 $0.27 $0.48 177.8% Q3 2017: 147M shares; Q3 2016: 168M shares Adjusted EBITDA(1) $241 $151 $90 59.6% Adjusted EBITDA Margin(1) 40.5% 34.7% - 5.8% See Appendix for a reconciliation from Net Income.
Q3 2017 Cash Flow Performance See Appendix for a reconciliation of Adjusted Free Cash Flow. Operating Working Capital = A/R + Inventory – A/P. ($ in millions) Q3 2017 Q3 2016 $ Variance % Variance Commentary Net Cash Provided by Operating Activities $215 $128 $87 68.0% Principally driven by increased gross profit, increased accounts payable, increased deferred revenue and decreased cash interest expense partially offset by increased cash income taxes CapEx $20 $14 $6 42.9% Principally driven by increased productivity and replacement programs spending Adjusted Free Cash Flow (1) $195 $115 $80 69.6% Principally driven by increased Net Cash Provided by Operating Activities partially offset by increased capital expenditures ($ in millions) Q3 2017 Q3 2016 $ Variance % Variance Commentary Operating Working Capital(2) Percentage of LTM Sales 11.3% 12.1% N/A (80 bps) Principally driven by increased net sales Cash Paid for Interest $16 $21 ($5) (23.8%) Principally driven by refinancing activities Cash Paid for Income Taxes $31 $2 $29 1450.0% Principally driven by the 2016 exhaustion of net operating losses
2017 Guidance Update Guidance Commentary Net Sales Change from 2016 21 to 22 percent Full year 2017 net sales guidance reflects stronger demand for North America Off-Highway service parts, Global On-Highway products and Global Off-Highway products. Our full year 2017 net sales outlook also assumes price increases on certain products. Adjusted EBITDA Margin 37.75 to 38.75 percent Adjusted Free Cash Flow ($ in millions) $510 to $530 CapEx ($ in millions) Maintenance New Products $85 $5 to $10 Subject to timely completion of development and sourcing milestones Cash Income Taxes ($ in millions) $105 to $115
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 September 30, 2012 2013 2014 2015 2016 2016 2017 2017 Net income $514 $165 $229 $182 $215 $45 $111 $350 plus: Interest expense, net 151 133 138 114 101 22 26 95 Income tax (benefit) expense (298) 101 139 107 126 26 59 187 Fee to terminate services agreement with Sponsors 16 — — — — — — — Technology-related investment expenses 14 5 2 — 1 1 — 3 Public offering expenses 6 2 1 — — — — — Impairments — — 15 81 — — — — Environmental remediation — — — 14 — — — — Amortization of intangible assets 150 105 99 97 92 23 22 90 Depreciation of property, plant and equipment 103 99 94 88 84 21 21 81 Loss on redemptions and repayments of long-term debt 22 1 1 1 — — — — Stockholder activism expenses — — — — 4 — — — Dual power inverter module extended coverage 9 (2) 1 (2) 1 — (2) (2) UAW Local 933 signing bonus 9 — — — — — — — Benefit plan re-measurement 2 — — — — — — — Unrealized (gain) loss on commodity hedge contracts (1) 2 (1) 1 (2) — — — Unrealized loss (gain) on foreign exchange — 2 5 1 1 (1) 2 1 Expenses related to long-term debt refinancing — — — 25 12 12 — — Restructuring charges — 1 1 — — — — — Other, net (1) 8 13 15 11 9 2 2 11 Adjusted EBITDA $705 $627 $739 $720 $644 $151 $241 $816 Net Sales $2,142 $1,927 $2,127 $1,986 $1,840 $434 $595 $2,143 Adjusted EBITDA margin 32.9% 32.5% 34.7% 36.2% 35.0% 34.7% 40.5% 38.1% September 30, For the year ended December 31, Three months ended
Non-GAAP Reconciliations (2 of 2) Adjusted Free Cash Flow reconciliation Last twelve months ended $ in millions, Unaudited September 30, 2012 2013 2014 2015 2016 2016 2017 2017 Net Cash Provided by Operating Activities $498 $464 $573 $580 $591 $128 $215 $667 (Deductions) or Additions: Long-lived assets (124) (75) (64) (58) (71) (14) (20) (75) Fee to terminate services agreement with Sponsors — 16 — — — — — — — Technology-related license expenses — 12 6 6 — — — — — Stockholder activism expenses — — — — — 4 — — — Excess tax benefit from stock-based compensation — 5 14 25 8 6 1 — 4 Adjusted Free Cash Flow $407 $409 $540 $530 $530 $115 $195 $596 Net Sales $2,142 $1,927 $2,127 $1,986 $1,840 $434 $595 $2,143 Adjusted Free Cash Flow (% to Net Sales) 19.0% 21.2% 25.4% 26.7% 28.8% 26.5% 32.8% 27.8% September 30, Three months ended For the year ended December 31,