Allison Transmission Holdings Inc., the largest global provider of commercial duty fully-automatic transmissions, has reported net sales for the second quarter of $475 million, a 7% decrease from the same period in 2015. The decrease in net sales was principally driven by lower demand in the global Off-Highway, North America On-Highway and Service Parts, Support Equipment & Other end markets.
Net Income for the quarter was $61 million compared to $54 million for the same period in 2015. Adjusted EBITDA, a non-GAAP financial measure, for the quarter was $173 million, or 36.5% of net sales, compared to $186 million, or 36.3% of net sales, for the same period in 2015. Net Cash Provided by Operating Activities for the quarter was $170 million compared to $152 million for the same period in 2015. Adjusted Free Cash Flow, a non-GAAP financial measure, for the quarter was $157 million compared to $138 million for the same period in 2015.
Lawrence E. Dewey, Chairman and Chief Executive Officer of Allison Transmission comments, "Allison's second quarter 2016 results are within the full year guidance ranges we provided to the market on April 25. The year-over-year reductions in the global Off-Highway, North America On-Highway and Service Parts, Support Equipment & Other end markets net sales are consistent with the previously contemplated impact of low energy and commodity prices and tempering demand conditions in the North America On-Highway end market. Allison continued to demonstrate solid operating margins and free cash flow while executing its prudent and well-defined approach to capital structure and allocation. During the second quarter, we settled $59 million of share repurchases, paid a dividend of $0.15 per share and repaid $6 million of debt. We anticipate no meaningful relief from the global Off-Highway end market challenges and further weakening in North America On-Highway demand and are updating our full year net sales guidance to a decrease in the range of 9.5-10.5% year-over-year."
Second Quarter Highlights
North America On-Highway end market net sales were down 5% from the same period in 2015 principally driven by lower demand for Highway Series and Rugged Duty Series models partially offset by higher demand for Pupil Transport/Shuttle Series models and up 3% on a sequential basis principally driven by higher demand for Pupil Transport/Shuttle Series and Rugged Duty Series models partially offset by lower demand for Highway Series models.
North America Hybrid-Propulsion Systems for Transit Bus end market net sales were down 20% from the same period in 2015 and down 6% sequentially principally driven by lower demand due to engine emissions improvements and non-hybrid alternatives.
North America Off-Highway end market net sales were down 90% from the same period in 2015 and down 80% on a sequential basis principally driven by lower demand from hydraulic fracturing applications.
Defense end market net sales were down 3% from the same period in 2015 principally driven by lower demand for Tracked Defense partially offset by higher demand for Wheeled Defense and up 12% on a sequential basis principally driven by higher demand for Wheeled Defense.
Outside North America On-Highway end market net sales were up 1% from the same period in 2015 principally driven by higher demand in Europe partially offset by lower demand in China and India and up 6% on a sequential basis principally driven by higher demand in Europe.
Outside North America Off-Highway end market net sales were down 63% from the same period in 2015 principally driven by lower demand in the energy and mining sectors and flat sequentially.
Service Parts, Support Equipment & Other end market net sales were down 5% from the same period in 2015 principally driven by lower demand for global Off-Highway service parts and North America support equipment and up 5% on a sequential basis principally driven by higher demand for global On-Highway service parts.
Gross profit for the quarter was $227 million, a decrease of 4% from $236 million for the same period in 2015. Gross margin for the quarter was 47.7%, an increase of 150 basis points from a gross margin of 46.2% for the same period in 2015. The decrease in gross profit from the same period in 2015 was principally driven by decreased net sales partially offset by lower manufacturing expense commensurate with decreased net sales, favorable material costs and price increases on certain products.
Selling, general and administrative expenses for the quarter were $78 million, an increase of $2 million from $76 million for the same period in 2015. The increase was principally driven by 2015 favorable product warranty adjustments partially offset by lower intangible asset amortization.
Engineering – research and development expenses for the quarter were $22 million, a decrease of $1 million from $23 million for the same period in 2015. The decrease was principally driven by decreased product initiatives spending.
Net income for the quarter was $61 million compared to $54 million for the same period in 2015. The increase was principally driven by premiums and expenses on the 2015 tender offer and redemption of long-term debt partially offset by decreased gross profit, unfavorable mark-to-market adjustments for our interest rate derivatives and increased selling general and administrative expense.
Second Quarter Non-GAAP Financial Measures
Adjusted EBITDA for the quarter was $173 million, or 36.5% of net sales, compared to $186 million, or 36.3% of net sales, for the same period in 2015. The decrease was principally driven by decreased net sales and 2015 favorable product warranty adjustments partially offset by lower manufacturing expense commensurate with decreased net sales, favorable material costs and price increases on certain products.
Adjusted Free Cash Flow for the quarter was $157 million compared to $138 million for the same period in 2015, an increase of $19 million. The increase was principally driven by reductions in operating working capital and lower cash interest expense partially offset by decreased net sales and increased capital expenditures.
Full Year 2016 Guidance Update
Updated full year 2016 guidance includes a year-over-year net sales decrease in the range of 9.5-10.5%, an Adjusted EBITDA margin in the range of 33.25-34.0% and Adjusted Free Cash Flow in the range of $415 to $435 million. Allison is affirming the remaining guidance released to the market on April 25: capital expenditures in the range of $65-$75 million and cash income taxes in the range of $10-$15 million.
Although it is not providing specific third quarter 2016 guidance, Allison does expect third quarter net sales to be down sequentially and down from the same period in 2015.
