Allison Reports 12% Sales Decrease for Fourth Quarter 2015

Allison Transmission Holdings Inc., the largest global provider of commercial duty fully-automatic transmissions, has reported net sales for the fourth quarter of $478 million, a 12% decrease from the same period in 2014. The decrease in net sales was principally driven by lower demand in the global Off-Highway and Defense end markets, partially offset by 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 $117 million for the same period in 2014, an increase of $6 million. Adjusted EBITDA, a non-GAAP financial measure, for the quarter was $170 million, or 35.6% of net sales, compared to $185 million, or 34.0% of net sales, for the same period in 2014. 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 $146 million, or $0.85 per diluted share, compared to $129 million for the same period in 2014, or $0.71 per diluted share.

Lawrence E. Dewey, Chairman and Chief Executive Officer of Allison Transmission comments, "Allison's fourth quarter 2015 results are within the full year guidance ranges we provided to the market on October 26. 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. The year-over-year decrease in Defense end market net sales is commensurate with continued reductions in U.S. defense spending to longer term averages experienced during periods without active conflicts. Allison demonstrated solid operating margins and free cash flow while executing its prudent and well-defined approach to capital structure and allocation. During the fourth quarter, we refinanced all debt maturing in 2017-2019, settled $10 million of share repurchases, paid a dividend of $0.15 per share and repaid $6 million of debt. Given expectations for tempering demand conditions in the North America On-Highway end market, no meaningful relief from the global Off-Highway end markets challenges and divergent global economic environments, Allison is taking a guarded approach to 2016. As we have done during other periods of meaningful uncertainty, Allison will proactively implement initiatives to closely align costs and programs across our business with actual end market conditions and growth opportunities."

Fourth Quarter Highlights

North America On-Highway end market net sales were down 2% from the same period in 2014 and down 4% on a sequential basis principally driven by lower demand for Pupil Transport/Shuttle Series models.

North America Hybrid-Propulsion Systems for Transit Bus end market net sales were up 35% from the same period in 2014 and up 92% sequentially principally driven by intra-year movement in the timing of orders.

North America Off-Highway end market net sales were down 69% from the same period in 2014 and down 8% on a sequential basis principally driven by lower demand from hydraulic fracturing applications.

Defense end market net sales were down 34% from the same period in 2014 and down 26% sequentially principally driven by reductions in U.S. defense spending to longer term averages experienced during periods without active conflicts.

Outside North America On-Highway end market net sales were flat with the same period in 2014 principally driven by higher demand in Europe and Japan offset by lower demand in China and South America and down 3% on a sequential basis principally driven by lower demand in China and South America partially offset by higher demand in Europe and India.

Outside North America Off-Highway end market net sales were down 63% from the same period in 2014 principally driven by lower demand in the energy sector and up 75% sequentially principally driven by higher demand in the energy and mining sectors.

Service Parts, Support Equipment & Other end market net sales were down 16% from the same period in 2014 and down 7% on a sequential basis principally driven by lower demand for North America Off-Highway service parts partially offset by higher demand for global On-Highway service parts.

Gross profit for the quarter was $222 million, a decrease of 13% from $256 million for the same period in 2014. Gross margin for the quarter was 46.5%, a decrease of 50 basis points from a gross margin of 47.0% 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 $82 million, a decrease of 8% from $89 million for the same period in 2014, principally driven by reduced global commercial activities spending and lower incentive compensation expense.

Engineering – research and development expenses for the quarter were $24 million, a decrease of $7 millionafter excluding the 2014 technology-related license expenses of $3 million to expand our position in transmission technologies, from $34 million for the same period in 2014. The decrease was principally driven by reduced product initiatives spending and lower incentive compensation expense.

During the fourth quarter of 2015, the company recorded a trade name impairment charge of $80 million as a result of lower forecasted net sales for certain end markets.  

Fourth Quarter Non-GAAP Financial Measures

Adjusted Net Income for the quarter was $123 million, compared to $117 million for the same period in 2014, an increase of $6 million. The increase was principally driven by decreased cash interest expense, price increases on certain products, favorable material costs, lower incentive compensation expense, reduced global commercial activities spending, reduced product initiatives spending, a favorable vendor settlement and 2014 foreign exchange losses on intercompany financing partially offset by decreased sales volume.

Adjusted EBITDA for the quarter was $170 million, or 35.6% of net sales, compared to $185 million, or 34.0% of net sales, for the same period in 2014. 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 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, reduced global commercial activities spending, reduced product initiatives spending, a $3 million reduction in technology-related license expenses and a favorable vendor settlement.

Adjusted Free Cash Flow for the quarter was $146 million compared to $129 million for the same period in 2014, an increase of $17 million. The increase was principally driven by increased net cash provided by operating activities partially offset by increased capital expenditures.

2016 Guidance Update

Allison expects 2016 net sales to be in the range of down 6.5-9.5% compared to 2015, an Adjusted EBITDA margin in the range of 32.5-34%, and an Adjusted Free Cash Flow in the range of $400-$450 million, or $2.30-$2.60 per diluted share. Capital expenditures are expected to be in the range of $65-$75 million, which includes maintenance spending of approximately $60 million. Cash income taxes are expected to be in the range of $10-$15 million.

The company's 2016 net sales guidance reflects expectations for tempering demand conditions in the North America On-Highway end market, no meaningful relief from the global Off-Highway end markets challenges and divergent global economic environments. Allison's 2016 net sales outlook also assumes previously considered reductions in demand for North America Hybrid-Propulsion Systems for Transit Bus due to engine emissions improvements and non-hybrid alternatives.

Although it is not providing specific first quarter 2016 guidance, Allison does expect first quarter net sales to be lower than the first and fourth quarters of 2015. The anticipated year-over-year decrease in first quarter net sales is expected to occur principally due to lower demand in the North America On-Highway and global Off-Highway end markets.