Allison Transmission Holdings Inc., the largest global provider of commercial duty fully-automatic transmissions, has reported net sales for the third quarter of$493 million, an 11% decrease from the same period in 2014. The decrease in net sales was principally driven by lower demand in the global Off-Highway end markets partially offset by higher demand in the North America On-Highway end market and price increases on certain products.
Adjusted Net Income, a non-GAAP financial measure, for the quarter was $123 million, compared to Adjusted Net Income of $138 million for the same period in 2014, a decrease of $15 million. Adjusted EBITDA, a non-GAAP financial measure, for the quarter was $174 million, or 35.3% of net sales, compared to $202 million, or 36.5% of net sales, for the same period in 2014. Adjusted Free Cash Flow, a non-GAAP financial measure, for the quarter was $142 million, or $0.81 per diluted share, compared to $164 million for the same period in 2014, or $0.91 per diluted share.
Lawrence E. Dewey, Chairman, President and Chief Executive Officer of Allison Transmission comments, "Allison's third quarter 2015 results are within the full year guidance ranges we provided to the market on July 27. Net sales in the North America On-Highway end market improved on a year-over-year basis for the ninth consecutive quarter. The year-over-year reductions in the global Off-Highway and Service Parts, Support Equipment & Other end markets net sales are consistent with the previously contemplated impact of lower energy and commodity prices. We anticipate no meaningful relief from the global Off-Highway end markets challenges in the fourth quarter and are affirming our full year net sales guidance of a decrease in the range of 6 to 8% year-over-year. Allison continued its prudent and well-defined approach to capital allocation during the third quarter by settling $181 million of share repurchases, paying a dividend of $0.15 per share and repaying $6 million of debt."
Third Quarter Highlights
North America On-Highway end market net sales were up 2% from the same period in 2014 principally driven by higher demand for Highway Series models and down 5% on a sequential basis principally driven by lower demand for Rugged Duty Series models.
North America Hybrid-Propulsion Systems for Transit Bus end market net sales were down 48% from the same period in 2014 principally driven by lower demand due to engine emissions improvements and non-hybrid alternatives that generally require a fully-automatic transmission (e.g. xNG) and down 40% sequentially principally driven by intra-year movement in the timing of orders.
North America Off-Highway end market net sales were down 60% from the same period in 2014 principally driven by lower demand from hydraulic fracturing applications and up 20% on a sequential basis principally driven by intra-year movement in the timing of orders.
Defense end market net sales were down 3% from the same period in 2014 principally driven by reductions in U.S. defense spending to longer term averages experienced during periods without active conflicts and up 17% sequentially principally driven by intra-year movement in the timing of orders.
Outside North America On-Highway end market net sales were down 8% from the same period in 2014 principally driven by lower demand in China partially offset by higher demand in Europe, and down 8% on a sequential basis principally driven by lower demand in Europe and India.
Outside North America Off-Highway end market net sales were down 78% from the same period in 2014 principally driven by lower demand in the energy sector and down 50% sequentially principally driven by lower demand in the energy and mining sectors.
Service Parts, Support Equipment & Other end market net sales were down 14% from the same period in 2014 principally driven by lower demand for North America service parts and up 9% on a sequential basis principally driven by higher demand for North America service parts.
Gross profit for the quarter was $236 million, a decrease of 9% from $259 million for the same period in 2014. Gross margin for the quarter was 47.9%, an increase of 100 basis points from a gross margin of 46.9% for the same period in 2014. The decrease in gross profit from the same period in 2014 was principally driven by decreased sales volume partially offset by price increases on certain products, favorable material costs and lower incentive compensation expense.
Selling, general and administrative expenses for the quarter were $87 million, a decrease of 1% from $88 million for the same period in 2014, principally driven by lower incentive and stock based compensation expense, and reduced global commercial spending activities partially offset by unfavorable product warranty adjustments.
Engineering – research and development expenses for the quarter were $24 million, a decrease of $1 million from $25 million for the same period in 2014, principally driven by lower incentive compensation expense.
Third Quarter Non-GAAP Financial Measures
Adjusted Net Income for the quarter was $123 million, compared to $138 million for the same period in 2014, a decrease of $15 million. The decrease was principally driven by decreased sales volume and unfavorable product warranty adjustments partially offset by price increases on certain products, favorable material costs, lower incentive and stock based compensation expense, reduced global commercial spending activities and decreased cash interest expense.
Adjusted EBITDA for the quarter was $174 million, or 35.3% of net sales, compared to $202 million, or 36.5% of net sales, for the same period in 2014. The decrease was principally driven by decreased sales volume and unfavorable product warranty adjustments partially offset by price increases on certain products, favorable material costs, lower incentive compensation expense and reduced global commercial spending activities.
Adjusted Free Cash Flow for the quarter was $142 million compared to $164 million for the same period in 2014, a decrease of $22 million. The decrease was principally driven by decreased net cash provided by operating activities and decreased excess tax benefit from stock-based compensation.
Full Year 2015 Guidance Update
Allison is affirming the full year 2015 guidance ranges released to the market on July 27: net sales decrease of 6 to 8% year-over-year, an Adjusted EBITDA margin of 34.75 to 35.75%, an Adjusted Free Cash Flow of $470 to $500 million, capital expenditures of $60 to $70 million and cash income taxes of $10 to $15 million.
Although it is not providing specific fourth quarter 2015 guidance, Allison does expect fourth quarter net sales to be lower than the same period in 2014. The anticipated year-over-year decrease in fourth quarter net sales is expected to occur due to lower demand in the global Off-Highway and Defense end markets.
