Allison Transmission reports 11% sales increase for fourth quarter of 2014

Allison Transmission had an 11% increase in sales during the fourth quarter of 2014, and anticipates 2015 to be in the range from flat to down 5%.

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Allison Transmission Holdings Inc., the largest global provider of commercial duty fully-automatic transmissions, has reported net sales for the fourth quarter of $544 million, an 11% 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 lower demand in the Outside North America On-Highway and North America Hybrid-Propulsion Systems for Transit Bus end markets.

Adjusted Net Income, a non-GAAP financial measure, for the quarter was $117 million, compared to Adjusted Net Income of $78 million for the same period in 2013, an increase of $39 million. Adjusted EBITDA, a non-GAAP financial measure, for the quarter was $185 million, or 34.0% of net sales, compared to $153 million, or 31.1% of net sales, for the same period in 2013. Excluding $3 million of technology-related license expenses, Adjusted EBITDA for the fourth quarter of 2014 was $188 million, or 34.6% of net sales. Adjusted Free Cash Flow, a non-GAAP financial measure, for the quarter was $129 million, or $0.71 per diluted share, compared to $109 million for the same period in 2013, or $0.59 per diluted share.

Lawrence E. Dewey, Chairman, President and Chief Executive Officer of Allison Transmission comments, "Our fourth quarter 2014 results exceed the guidance ranges we provided to the market on October 27. Net sales improved on a year-over-year basis for the fifth 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 lower demand in the Outside North America On-Highway and North America Hybrid-Propulsion Systems for Transit Bus end markets. Allison continued to demonstrate strong operating margins and free cash flow while investing in growth opportunities despite challenging conditions in the Outside North America end markets. During the quarter, highlighting our commitments to cash flow generation and the return of capital to shareholders, Allison's Board of Directors authorized a stock repurchase program for up to $500 million of its common stock and approved an increase in its quarterly cash dividend from $0.12 to $0.15 per share. In addition, we maintained our prudent approach to capital allocation by repaying $69 million of debt during the quarter. Given the heightened level of uncertainty and the lack of near-term visibility and confidence in the global Off-Highway end markets, we are taking a cautious approach to 2015."

Fourth Quarter Highlights

North America On-Highway end market net sales were up 22% from the same period in 2013 principally driven by higher demand for Rugged Duty Series models and flat on a sequential basis principally driven by higher demand for Highway Series models, offset by lower demand for Pupil Transport/Shuttle Series models.

North America Hybrid-Propulsion Systems for Transit Bus end market net sales were down 47% from the same period in 2013 principally driven by intra-year movement in the timing of orders and lower demand due to engine emissions improvements and non-hybrid alternatives that generally require a fully-automatic transmission (e.g. xNG), and down 26% sequentially principally driven by intra-year movement in the timing of orders.

North America Off-Highway end market net sales were up 157% from the same period in 2013 and up 20% on a sequential basis principally driven by higher demand from hydraulic fracturing applications.

Defense end market net sales were up 9% from the same period in 2013 principally driven by revenue deferred in the prior year period for certain tracked transmissions that were not shipped at the request of the U.S. government, partially offset by previously considered reductions in U.S. defense spending to longer term averages experienced during periods without active conflicts, and up 9% sequentially principally driven by the intra-year movement in the timing of tracked transmission orders.

Outside North America On-Highway end market net sales were down 24% from the same period in 2013 reflecting weakness in China Bus and Europe Truck, and down 11% on a sequential basis principally driven by lower demand in China Bus and Truck, and Japan Truck.

Outside North America Off-Highway end market net sales were up 36% from the same period in 2013 principally driven by improved demand in the China energy sector, partially offset by lower demand in the global mining sector, and flat sequentially.

Service Parts, Support Equipment & Other end market net sales were up 13% from the same period in 2013 principally driven by higher demand for North America Off-Highway service parts and down 4% on a sequential basis principally driven by lower demand for North America On-Highway service parts consistent with seasonal aftermarket activity levels and global On-Highway support equipment commensurate with decreased transmission unit volumes, partially offset by higher demand for North America Off-Highway service parts.

Gross profit for the quarter was $256 million, an increase of 21% from $211 million for the same period in 2013. Gross margin for the quarter was 47.0%, an increase of 390 basis points from a gross margin of 43.1% 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.

Selling, general and administrative expenses for the quarter were $89 million, an increase of 2% from $87 million for the same period in 2013, principally driven by increased global commercial spending activities, partially offset by favorable product warranty expense adjustments.

Engineering – research and development expenses for the quarter were $34 million, an increase of $7 million excluding the 2014 technology-related license expenses of $3 million to expand our position in transmission technologies, from $24 million for the same period in 2013. The increase was principally driven by increased product initiatives spending.

Fourth Quarter Non-GAAP Financial Measures

Adjusted Net Income for the quarter was $117 million, compared to $78 million for the same period in 2013, an increase of $39 million. The increase was principally driven by increased Adjusted EBITDA and decreased cash interest expense.

Adjusted EBITDA for the quarter was $185 million, or 34.0% of net sales, compared to $153 million, or 31.1% of net sales, for the same period in 2013. Excluding $3 million of technology-related license expenses, Adjusted EBITDA for the fourth quarter of 2014 was $188 million, or 34.6% of net sales. The increase in Adjusted EBITDA from the same period in 2013 was principally driven by increased net sales, price increases on certain products and favorable product warranty expense adjustments, partially offset by increased global commercial spending activities and product initiatives spending, and $3 million of technology-related license expenses.

Adjusted Free Cash Flow for the quarter was $129 million compared to $109 million for the same period in 2013. The increase was principally driven by increased net cash provided by operating activities, decreased capital expenditures, increased excess tax benefit from stock-based compensation and a $3 million increase in technology-related license expenses.

2015 Guidance

Allison expects 2015 net sales to be in the range of flat to down 5% compared to 2014, an Adjusted EBITDA margin in the range of 34 to 35.5%, and an Adjusted Free Cash Flow in the range of $475 to $525 million, or $2.60 to $2.90 per diluted share. Capital expenditures are expected to be in the range of $60 to $70 million, which includes maintenance spending of approximately $60 million. Cash income taxes are expected to be in the range of $10 to $15 million.

Our 2015 net sales guidance reflects a cautious approach given the heightened level of uncertainty and the lack of near-term visibility and confidence in the global Off-Highway end markets. Allison's 2015 net sales outlook also assumes a continued recovery in the North America On-Highway end market, previously considered reductions in U.S. defense spending, continued weakness in the Outside North America On-Highway end market and lower demand for North America Hybrid-Propulsion Systems for Transit Bus due to engine emissions improvements and non-hybrid alternatives.

Although we are not providing specific first quarter 2015 guidance, Allison does expect first quarter net sales to be higher than the same period in 2014. The anticipated year-over-year increase in first quarter net sales is principally driven by higher demand in the North America On-Highway and Off-Highway end markets, partially offset by previously considered reductions in Defense net sales and lower demand in the North America Hybrid-Propulsion Systems for Transit Bus end market.

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