Allison Transmission (ALSN) 8-K Allison Transmission Announces First Quarter 2015 Results

1

Q1 2015 Earnings Release

Published April 27, 2015 (Earnings Conference Call April 28, 2015)

Lawrence Dewey, Chairman, President & Chief Executive Officer

David Graziosi, Executive Vice President & Chief Financial Officer

Exhibit 99.2

2

Safe Harbor Statement

The

following

information

contains,

or

may

be

deemed

to

contain,

“forward-looking

statements”

(as

defined

in

the

U.S.

Private

Securities

Litigation

Reform

Act

of

1995).

The

words

“believe,”

“expect,”

“anticipate,”

“intend,”

“estimate”

and

other

expressions

that

are

predictions

of

or

indicate

future

events

and

trends

and

that

do

not

relate

to

historical

matters

identify

forward-looking

statements.

You

should

not

place

undue

reliance

on

these

forward-looking

statements.

Although

forward-looking

statements

reflect

management’s

good

faith

beliefs,

reliance

should

not

be

placed

on

forward-looking

statements

because

they

involve

known

and

unknown

risks,

uncertainties

and

other

factors,

which

may

cause

the

actual

results,

performance

or

achievements

to

differ

materially

from

anticipated

future

results,

performance

or

achievements

expressed

or

implied

by

such

forward-looking

statements.

Forward-looking

statements

speak

only

as

of

the

date

the

statements

are

made.

We

undertake

no

obligation

to

publicly

update

or

revise

any

forward-looking

statement,

whether

as

a

result

of

new

information,

future

events,

changed

circumstances

or

otherwise.

These

forward-looking

statements

are

subject

to

numerous

risks

and

uncertainties,

including,

but

not

limited

to:

our

participation

in

markets

that

are

competitive;

the

highly

cyclical

industries

in

which

certain

of

our

end

users

operate;

the

failure

of

markets

outside

North

America

to

increase

adoption

of

fully-automatic

transmissions;

risks

related

to

our

substantial

indebtedness;

the

concentration

of

our

net

sales

in

our

top

five

customers

and

the

loss

of

any

one

of

these;

future

reductions

or

changes

in

government

subsidies

and

other

external

factors

impacting

demand

for

hybrid

vehicles;

U.S.

defense

spending;

general

economic

and

industry

conditions;

the

discovery

of

defects

in

our

products,

resulting

in

delays

in

new

model

launches,

recall

campaigns

and/or

increased

warranty

costs

and

reduction

in

future

sales

or

damage

to

our

brand

and

reputation;

our

ability

to

prepare

for,

respond

to

and

successfully

achieve

our

objectives

relating

to

technological

and

market

developments

and

changing

customer

needs;

risks

associated

with

our

international

operations;

and

labor

strikes,

work

stoppages

or

similar

labor

disputes,

which

could

significantly

disrupt

our

operations

or

those

of

our

principal

customers.

Allison

Transmission

cannot

assure

you

that

the

assumptions

made

in

preparing

any

of

the

forward-

looking

statements

will

prove

accurate

or

that

any

long-term

financial

goals

will

be

realized.

All

forward-looking

statements

included

in

this

presentation

speak

only

as

of

the

date

made,

and

Allison

Transmission

undertakes

no

obligation

to

update

or

revise

publicly

any

such

forward-looking

statements,

whether

as

a

result

of

new

information,

future

events,

or

otherwise.

In

particular,

Allison

Transmission

cautions

you

not

to

place

undue

weight

on

certain

forward-looking

statements

pertaining

to

potential

growth

opportunities,

long-term

financial

goals

or

the

value

we

currently

ascribe

to

certain

tax

attributes

set

forth

herein.

Actual

results

may

vary

significantly

from

these

statements.

Allison

Transmission’s

business

is

subject

to

numerous

risks

and

uncertainties,

which

may

cause

future

results

of

operations

to

vary

significantly

from

those

presented

herein.

Important

factors

that

could

cause

actual

results

to

differ

materially

are

discussed

in

Allison

Transmission’s

Annual

Report

on

Form

10-K

for

the

year

ended

December

31,

2014.

3

Non-GAAP Financial Information

We

use

Adjusted

net

income,

Adjusted

EBITDA,

Adjusted

EBITDA

excluding

technology-related

license

expenses,

Adjusted

EBITDA

margin,

Adjusted

EBITDA

margin

excluding

technology-related

license

expenses,

adjusted

free

cash

flow

and

free

cash

flow

to

evaluate

our

performance

relative

to

that

of

our

peers.

In

addition,

the

Senior

Secured

Credit

Facility

has

certain

covenants

that

incorporate

Adjusted

EBITDA.

However,

Adjusted

net

income,

Adjusted

EBITDA,

Adjusted

EBITDA

excluding

technology-related

license

expenses,

Adjusted

EBITDA

margin,

Adjusted

EBITDA

margin

excluding

technology-related

license

expenses,

adjusted

free

cash

flow

and

free

cash

flow

are

not

measurements

of

financial

performance

under

GAAP,

and

these

metrics

may

not

be

comparable

to

similarly

titled

measures

of

other

companies.

Adjusted

net

income

is

calculated

as

the

sum

of

net

income,

interest

expense,

net,

income

tax

expense

(benefit),

trade

name

impairment

and

amortization

of

intangible

assets,

less

cash

interest,

net

and

cash

income

taxes,

and

adjusted

for

certain

non-recurring

items.

Adjusted

EBITDA

is

calculated

as

the

sum

of

Adjusted

net

income,

cash

interest,

net,

cash

income

taxes,

depreciation

of

property,

plant

and

equipment

and

other

adjustments

as

defined

by

the

Senior

Secured

Credit

Facility

and

as

further

described

below.

Adjusted

EBITDA

excluding

technology-related

license

expenses

is

calculated

as

Adjusted

EBITDA

less

technology-related

license

expenses.

Adjusted

EBITDA

margin

is

calculated

as

Adjusted

EBITDA

divided

by

net

sales.

Adjusted

EBITDA

margin

excluding

technology-related

license

expenses

is

calculated

as

Adjusted

EBITDA

excluding

technology-related

license

expenses

divided

by

net

sales.

Free

cash

flow

is

calculated

as

net

cash

provided

by

operating

activities

less

capital

expenditures.

Adjusted

free

cash

flow

is

free

cash

flow

adjusted

for

non-

recurring

items.

We

use

Adjusted

net

income

to

measure

our

overall

profitability

because

it

better

reflects

our

cash

flow

generation

by

capturing

the

actual

cash

interest

paid

and

cash

taxes

paid

rather

than

our

interest

expense

and

tax

expense

as

calculated

under

GAAP

and

excludes

the

impact

of

the

non-cash

annual

amortization

of

certain

intangible

assets

that

were

created

at

the

time

of

the

Acquisition

Transaction.

We

use

Adjusted

EBITDA,

Adjusted

EBITDA

excluding

technology-related

license

expenses,

Adjusted

EBITDA

margin

and

Adjusted

EBITDA

margin

excluding

technology-related

license

expenses

to

evaluate

and

control

our

cash

operating

costs

and

to

measure

our

operating

profitability.

We

use

adjusted

free

cash

flow

and

free

cash

flow

to

evaluate

the

amount

of

cash

generated

by

the

business

that,

after

the

capital

investment

needed

to

maintain

and

grow

our

business,

can

be

used

for

strategic

opportunities,

including

investing

in

our

business

and

strengthening

our

balance

sheet.

We

believe

the

presentation

of

Adjusted

net

income,

Adjusted

EBITDA,

Adjusted

EBITDA

excluding

technology-related

license

expenses,

Adjusted

EBITDA

margin,

Adjusted

EBITDA

margin

excluding

technology-related

license

expenses

and

adjusted

free

cash

flow

enhances

our

investors'

overall

understanding

of

the

financial

performance

and

cash

flow

of

our

business.

You

should

not

consider

Adjusted

net

income,

Adjusted

EBITDA,

Adjusted

EBITDA

excluding

technology-related

license

expenses,

Adjusted

EBITDA

margin,

Adjusted

EBITDA

margin

excluding

technology-related

license

expenses,

adjusted

free

cash

flow

and

free

cash

flow

as

an

alternative

to

net

income,

determined

in

accordance

with

GAAP,

as

an

indicator

of

operating

performance,

or

as

an

alternative

to

net

cash

provided

by

operating

activities,

determined

in

accordance

with

GAAP,

as

an

indicator

of

Allison’s

cash

flow.

4

Call Agenda

Q1 2015 Performance

Full Year 2015 Guidance Update

5

Q1 2015 Performance Summary

($ in millions)

Q1 2015

Q1 2014

% Variance

Net Sales

$504

$494

2.0%

Gross Margin %

47.5%

45.1%

+240 bps

Adjusted Net Income

(1)

$150

$108

38.7%

Adjusted Free Cash Flow

(1)

$87

$96

(9.6%)

Commentary

Net

Sales:

the

increase

was

principally

driven

by

the

continued

recovery

in

the

North

America

On-Highway

end

market,

higher

demand

in

the

North

America

Off-Highway

end

market

and

price

increases

on

certain

products

partially

offset

by

lower

demand

in

other

end

markets.

Gross

Margin:

the

increase

was

principally

driven

by

price

increases

on

certain

products

and

increased

net

sales.

Adjusted

Net

Income:

the

increase

was

principally

driven

by

decreased

cash

interest

expense,

price

increases

on

certain

products,

increased

net

sales,

lower

warranty

expense,

$3

million

of

2014

technology-related

license

expenses

and

decreased

global

commercial

spending

activities

partially

offset

by

increased

product

initiatives

spending.

Adjusted

Free

Cash

Flow:

the

decrease

was

principally

driven

by

decreased

incentive

compensation

accruals

($14

million),

deferred

revenue

($9

million)

and

miscellaneous

other

current

liabilities

($10

million),

and

2014

technology-related

license

expenses

($3

million)

partially

offset

by

decreased

capital

expenditures,

price

increases

on

certain

products,

increased

net

sales,

decreased

global

commercial

spending

activities

and

increased

excess

tax

benefit

from

stock-based

compensation.

(1)

See Appendix for a reconciliation of Adjusted Net Income and Adjusted Free Cash Flow.

6

Q1 2015 Sales Performance

($ in millions)

End Markets

Q1 2015

Q1 2014

% Variance

Commentary

North America On-Hwy

$268

$233

15%

Principally driven by higher demand for Rugged Duty Series

models

North America Hybrid-

Propulsion Systems for

Transit Bus

$18

$24

(25%)

Principally driven by lower demand due to engine emissions

improvements and non-hybrid alternatives that generally require a

fully-automatic transmission (e.g. xNG)

North America Off-Hwy

$22

$12

83%

Principally driven by higher demand from hydraulic fracturing

applications

Defense

$25

$34

(26%)

Principally driven by reductions in U.S. defense spending to longer

term averages experienced during periods without active conflicts

Outside North America

On-Hwy

$57

$64

(11%)

Principally driven by weakness in China

Outside North America

Off-Hwy

$16

$21

(24%)

Principally driven by lower demand in the mining sector

Service Parts, Support

Equipment & Other

$98

$106

(8%)

Principally driven by lower demand for North America service parts

Total

$504

$494

2%

Q1 2015 Financial Performance

($ in millions, except share data)

Q1 2015

Q1 2014

$ Var

% Var

Commentary

Net Sales

$503.6

$493.6

$10.0

2.0%

Increase principally driven by the continued recovery in the North America

On-Highway end market, higher demand in the North America Off-Highway

end market and price increases on certain products partially offset be lower

demand in other end markets

Cost of Sales

$264.4

$271.1

$6.7

2.5%

Gross Profit

$239.2

$222.5

$16.7

7.5%

Increase principally driven by  price increases on certain products and

increased net sales

Operating Expenses

Selling, General and Administrative Expenses

$73.4

$83.2

$9.8

11.8%

Decrease

principally

driven

by

lower

product

warranty

expense,

a

warranty

expense

reduction

for

the

dual

power

inverter

module

extended

coverage

program

and

decreased

global

commercial

spending

activities

Engineering –

Research and Development

$22.2

$24.5

$2.3

9.4%

After

excluding

the

2014

technology-related

license

expenses

of

$3

million

to

expand

our

position

in

transmission

technologies

the

increase

was

principally

driven

by

increased

product

initiatives

spending

Impairment Loss

(1)

$1.3

$0.0

($1.3)

N/A

Total Operating Expenses

$96.9

$107.7

$10.8

10.0%

Operating Income

$142.3

$114.8

$27.5

24.0%

Interest Expense, net

($36.9)

($35.1)

($1.8)

(5.1%)

Increase principally driven by unfavorable mark-to-market adjustments for

LIBOR swaps partially offset by the expiration of certain LIBOR swaps and

debt repayments

Other Income (Expense), net

$2.8

($0.4)

$3.2

800.0%

Increase principally driven by favorable foreign exchange

Income Before Income Taxes

$108.2

$79.3

$28.9

36.4%

Income Tax Expense

($39.8)

($27.2)

($12.6)

(46.3%)

Change

in

effective

tax

rate

principally

driven

by

the

change

in

discrete

activity

Net Income

$68.4

$52.1

$16.3

31.3%

Diluted Earnings Per Share

$0.38

$0.28

$0.10

35.7%

Q1 2015: 182.4M shares;  Q1 2014: 185.9M shares

Adjusted Net Income

(2)

$149.7

$107.9

$41.8

38.7%

Adjusted EBITDA

(2)

$190.1

$165.8

$24.3

14.7%

Adjusted EBITDA excluding technology-related

license expenses

(2)

$190.1

$169.1

$21.0

12.4%

(1)

Long-lived assets and accrued expenses related to the production of the H3000 and H4000 hybrid-propulsion systems.

(2)

See Appendix for a reconciliation from Net Income.

7

Q1 2015 Cash Flow Performance

(1)

See Appendix for a reconciliation of Adjusted Free Cash Flow.

(2)

Operating

Working

Capital

=

A/R

+

Inventory

–

A/P.

($ in millions)

Q1 2015

Q1 2014

$ Variance

% Variance

Commentary

Net Cash Provided by

Operating Activities

$80

$99

($19)

(18.8%)

Principally driven by decreased

deferred revenue, incentive

compensation accruals and

miscellaneous other liabilities

partially offset by price increases

on certain products, increased net

sales and decreased SG&A and

engineering spending

CapEx

$1

$11

($10)

(88.3%)

Principally driven by timing of

certain 2015 productivity and

replacement programs spending

Adjusted Free Cash

Flow

(1) 

$87

$96

($9)

(9.6%)

Principally driven by decreased

net cash provided by operating

activities partially offset by

decreased capital expenditures

($ in millions)

Q1 2015

Q1 2014

$ Variance

% Variance

Commentary

Operating Working

Capital

(2)

Percentage

of LTM Sales

11.0%

11.7%

N/A

70 bps

In line with prior period after

excluding the 2014 impact of

deferred tracked defense revenue

Cash Paid for Interest

$18

$29

($11)

(37.1%)

Principally driven by expiration of

certain LIBOR swaps and debt

repayments

Cash Paid for Income

Taxes

$2

$2

$0

19.0%

In line with prior period

8

Full Year 2015 Guidance Update

Guidance

Commentary

Net Sales Change from 2014

(4) to (8)

percent

Guidance reflects the increased level of uncertainty and the

lack of near term visibility in the global Off-Highway and

Service Parts, Support Equipment & Other end markets

Adjusted EBITDA Margin

34.5 to 35.5

percent

Principally driven by Net Sales and the execution of several

initiatives to align costs and programs across our business

with challenging end markets demand conditions

Adjusted Free Cash Flow ($ in millions)

$460 to $510

$2.50 to $2.80 per diluted share

CapEx

($ in millions)

Maintenance

New Product Programs

$60 to $65

$0 to $5

Subject to timely completion of development and sourcing

milestones

Cash Income Taxes ($ in millions)

$10 to $15

U.S. income tax shield and net operating loss utilization

9

APPENDIX

Non-GAAP Financial Information

*****

*****

*****

*****

*****

*****

*****

*****

*****

*****

10

Non-GAAP Reconciliations

(1 of 2)

$ in millions, Unaudited

Last twelve

months ended

March 31,

2010

2011

2012

2013

2014

2014

2015

2015

Net income

$29.6

$103.0

$514.2

$165.4

$228.6

$52.1

$68.4

$244.9

plus:

Interest expense, net                         

277.5

217.3

151.2

132.9

138.4

35.1

36.9

140.2

Cash interest expense

(239.1)

(208.6)

(167.3)

(159.2)

(140.0)

(29.4)

(18.5)

(129.1)

Income tax expense (benefit)

53.7

47.6

(298.0)

100.7

139.5

27.2

39.8

152.1

Cash income taxes                          

(2.2)

(5.8)

(10.7)

(3.8)

(5.0)

(2.1)

(2.5)

(5.4)

Fee to terminate services agreement with Sponsors

—

—

16.0

—

—

—

—

—

Technology-related investment expenses

—

—

14.4

5.0

2.0

—

—

2.0

Public offering expenses

—

—

6.1

1.6

1.4

0.3

—

1.1

Impairments

—

—

—

—

15.4

—

1.3

16.7

Amortization of intangible assets               

154.2

151.9

150.0

105.3

98.8

24.7

24.3

98.4

Adjusted net income                          

$273.7

$305.4

$375.9

$347.9

$479.1

$107.9

$149.7

$520.9

Cash interest expense

239.1

208.6

167.3

159.2

140.0

29.4

18.5

129.1

Cash income taxes                          

2.2

5.8

10.7

3.8

5.0

2.1

2.5

5.4

Depreciation of property, plant and equipment    

99.6

103.8

102.5

98.7

93.8

23.3

21.4

91.9

(Gain)/loss on redemptions and repayments of long-term debt

(3.3)

16.0

22.1

0.8

0.5

—

0.2

0.7

Dual power inverter module extended coverage

(1.9)

—

9.4

(2.4)

1.0

—

(1.8)

(0.8)

UAW Local 933 signing bonus

—

—

8.8

—

—

—

—

—

Benefit plan re-measurement

—

—

2.3

—

—

—

—

—

Unrealized loss (gain) on commodity hedge contracts

0.3

6.5

(1.0)

1.5

(1.0)

0.1

(0.2)

(1.3)

Unrealized (gain) loss on foreign exchange

(0.2)

0.3

0.1

2.3

5.2

(0.3)

(2.3)

3.2

Premiums and expenses on tender offer for long-term debt

—

56.9

—

—

—

—

—

—

Restructuring charges

—

—

—

1.0

0.7

—

—

0.7

Reduction of supply contract liability

(3.4)

—

—

—

—

—

—

—

Other, net

(1)

10.9

8.6

7.0

13.8

14.7

3.3

2.1

13.5

Adjusted EBITDA                           

$617.0

$711.9

$705.1

$626.6

$739.0

$165.8

$190.1

$763.3

Adjusted EBITDA excluding technology-related license expenses

$617.0

$711.9

$717.1

$632.6

$745.1

$169.1

$190.1

$766.1

Net Sales

$1,926.3

$2,162.8

$2,141.8

$1,926.8

$2,127.4

$493.6

$503.6

$2,137.4

Adjusted EBITDA margin               

32.0%

32.9%

32.9%

32.5%

34.7%

33.6%

37.7%

35.7%

Adjusted EBITDA margin excl technology-related license expenses

32.0%

32.9%

33.5%

32.8%

35.0%

34.3%

37.7%

35.8%

Three months ended

March 31,

For the year ended December 31,

Adjusted Net Income and Adjusted EBITDA reconciliation

(1)

Includes

charges

or

income

related

to

benefit

plan

adjustments,

employee

stock

compensation

expense,

service

fees

paid

to

Allison’s

Sponsors

and

an

adjustment

for

the

settlement

of

litigation

which

originated

with

the

Predecessor

but

was

assumed

by

the

Company

as

part

of

the

Acquisition

Transaction.

11

Non-GAAP Reconciliations

(2 of 2)

$ in millions, Unaudited

Last twelve

months ended

March 31,

2010

2011

2012

2013

2014

2014

2015

2015

Net Cash Provided by Operating Activities

$388.9

$469.2

$497.5

$453.5

$556.9

$98.6

$80.1

$538.4

(Deductions) or Additions:

Long-lived assets

(73.8)

(96.9)

(123.9)

(74.4)

(64.1)

(11.1)

(1.3)

(54.3)

Fee to terminate services agreement with Sponsors

—

—

16.0

—

—

—

—

—

Technology-related license expenses

—

—

12.0

6.0

6.1

3.3

—

2.8

Excess tax benefit from stock-based compensation

—

—

5.3

13.7

24.6

5.0

7.8

27.4

Adjusted Free Cash Flow

$315.1

$372.3

$406.9

$398.8

$523.5

$95.8

$86.6

$514.3

Net Sales                                    

$1,926.3

$2,162.8

$2,141.8

$1,926.8

$2,127.4

$493.6

$503.6

$2,137.4

Adjusted Free Cash Flow (% to Net Sales)

16.4%

17.2%

19.0%

20.7%

24.6%

19.4%

17.2%

24.1%

Three months ended

March 31,

For the year ended December 31,

Adjusted Free Cash Flow reconciliation

12