Allison Transmission Holdings Inc., the largest global provider of commercial duty fully automatic transmissions, has reported net sales for the quarter of $553 million, a 19% increase from the same period in 2013. Adjusted Net Income, a non-GAAP financial measure, for the quarter was $138 million, compared to Adjusted Net Income of $101 million for the same period in 2013, an increase of $37 million. Diluted earnings per share for the quarter were $0.38, a 58% increase from the same period in 2013.
The increase in net sales was principally driven by the continued recoveries in the North America On-Highway and Off-Highway end markets, and higher demand in the Service Parts, Support Equipment & Other end market partially offset by previously contemplated reductions in U.S. defense spending.
Adjusted EBITDA, a non-GAAP financial measure, for the quarter was $202 million, or 36.5% of net sales, compared to $162 million, or 34.7% of net sales, for the same period in 2013. Adjusted Free Cash Flow, also a non-GAAP financial measure, for the quarter was $159 million, or $0.88 per diluted share, compared to $116 million for the same period in 2013.
Lawrence E. Dewey, Chairman, President and Chief Executive Officer of Allison Transmission comments, "Our third quarter 2014 results exceed the full year guidance ranges we affirmed on July 23. Net sales improved on a year-over-year basis for the fourth consecutive quarter led by the continued recoveries in the North America On-Highway and Off-Highway end markets, and higher demand in the Service Parts, Support Equipment & Other end market partially offset by previously contemplated reductions in U.S. defense spending. We are also pleased with the strong operating margins, level of Adjusted Free Cash Flow and net leverage reduction while Allison continued to invest in growth opportunities. During the quarter, we continued our prudent and well-defined approach to capital allocation by paying a quarterly dividend of $0.12 per share and repaying $80 million of debt. Allison is updating its full year net sales guidance to an increase in the range of 7.5 to 9% year-over-year, incorporating the robust third quarter results and anticipated improvements in fourth quarter demand conditions in the North America On-Highway and Off-Highway end markets partially offset by lower demand in the Outside North America On-Highway and North America Hybrid-Propulsion Systems for Transit Bus end markets."
Third Quarter Highlights
North America On-Highway end market net sales were up 21% from the same period in 2013 and up 5% on a sequential basis principally driven by higher demand for Rugged Duty Series models.
North America Hybrid-Propulsion Systems for Transit Bus end market net sales were up 53% from the same period in 2013 principally driven by intra-year movement in the timing of orders, and down 18% sequentially.
North America Off-Highway end market net sales were up 233% from the same period in 2013 and up 30% on a sequential basis principally driven by higher demand from hydraulic fracturing applications.
Defense end market net sales were down 33% from the same period in 2013 principally driven by previously considered reductions in U.S. defense spending to longer term averages experienced during periods without active conflicts, and down 29% sequentially principally driven by the recognition of previously deferred revenue commensurate with the shipment of certain tracked transmissions at the request of the U.S. government in the second quarter of 2014.
Outside North America On-Highway end market net sales were up 4% from the same period in 2013 reflecting improved demand in all regions other than Europe, and up 18% on a sequential basis reflecting improved demand in China and Japan.
Outside North America Off-Highway end market net sales were up 13% from the same period in 2013 principally driven by improved demand in the China energy sector, and down 25% sequentially principally driven by weak demand from the mining sector partially offset by improved demand in the China energy sector.
Service Parts, Support Equipment & Other end market net sales were up 28% from the same period in 2013 and up 10% on a sequential basis principally driven by higher demand for North America service parts, and global On-Highway support equipment commensurate with increased transmission unit volumes.
Gross profit for the quarter was $259 million, an increase of 26% from $206 million for the same period in 2013. Gross margin for the quarter was 46.9%, an increase of 270 basis points from a gross margin of 44.2% for the same period in 2013. The increase in gross profit from the same period in 2013 was principally driven by increased net sales and price increases on certain products partially offset by higher manufacturing expense commensurate with increased sales.
Selling, general and administrative expenses for the quarter were $88 million, an increase of 18% from $74 million for the same period in 2013, principally driven by favorable product warranty expense adjustments in 2013 and increased global commercial spending activities.
Engineering – research and development expenses for the quarter were $25 million, an increase of 17% from $21 million for the same period in 2013, principally driven by increased product initiatives spending.
Third Quarter Non-GAAP Financial Measures
Adjusted EBITDA for the quarter was $202 million, or 36.5% of net sales, compared to $162 million, or 34.7% of net sales, for the same period in 2013. The increase in Adjusted EBITDA from the same period in 2013 was principally driven by increased net sales and price increases on certain products partially offset by higher manufacturing expense, favorable product warranty expense adjustments in 2013, increased global commercial spending activities and increased product initiatives spending.
Adjusted Net Income for the quarter was $138 million compared to $101 million for the same period in 2013. The increase was principally driven by increased Adjusted EBITDA.
Adjusted Free Cash Flow for the quarter was $159 million compared to $116 million for the same period in 2013. The increase was principally driven by increased net cash provided by operating activities.
Full Year 2014 Guidance Update
Our updated full year 2014 guidance includes a year-over-year net sales increase in the range of 7.5 to 9%, an Adjusted EBITDA margin excluding technology-related license expenses in the range of 33.5 to 35%, an Adjusted Free Cash Flow in the range of $445 to $470 million, capital expenditures in the range of $60 to $70 million and cash income taxes in the range of $10 to $15 million.
In the fourth quarter of 2014, Allison expects net sales to be higher than the same period in 2013. The anticipated year-over-year increase in fourth quarter net sales is expected to be principally driven by higher demand in the North America On-Highway and Off-Highway end markets partially offset by lower demand in the Outside North America On-Highway and North America Hybrid-Propulsion Systems for Transit Bus end markets.
