Allison Transmission Second Quarter Sales up 23%

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

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

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

Second Quarter Highlights

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

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

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

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

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

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

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

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

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

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

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

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

Second Quarter Non-GAAP Financial Measures

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

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

Full Year 2018 Guidance Update

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

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

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

Stock Repurchase Program Authorization Increased

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