Allison Transmission (ALSN) 8-K Results of Operations and Financial Condition

1

Q3 2015 Earnings Release

Published October 26, 2015 (Earnings Conference Call October 27, 2015)

Lawrence Dewey, Chairman, President & Chief Executive Officer

David Graziosi, Executive Vice President & Chief Financial Officer

Exhibit 99.1

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

Q3 2015 Performance

Full Year 2015 Guidance Update

5

Q3 2015 Performance Summary

($ in millions)

Q3 2015

Q3 2014

% Variance

Net Sales

$493

$553

-10.9%

Gross

Margin %

47.9%

46.9%

+100 bps

Adjusted Net Income

(1)

$123

$138

-10.6%

Adjusted Free

Cash Flow

(1)

$142

$164

-13.8%

Commentary

Net

Sales:

the

decrease

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.

Gross

Margin:

the

increase

was

principally

driven

by

price

increases

on

certain

products

and

favorable

material

costs.

Adjusted

Net

Income:

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

Free

Cash

Flow:

the

decrease

was

principally

driven

by

decreased

net

cash

provided

by

operating

activities

and

decreased

excess

tax

benefit

from

stock-based

compensation.

(1)

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

6

Q3 2015 Sales Performance

($ in millions)

End

Markets

Q3 2015

Q3 2014

% Variance

Commentary

North

America

On-Hwy

$262

$256

2%

Principally

driven

by

higher

demand

for

Highway

Series

models

North America Hybrid-

Propulsion

Systems for

Transit

Bus

$12

$23

(48%)

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

$12

$30

(60%)

Principally

driven

by

lower

demand

from

hydraulic

fracturing

applications

Defense

$34

$35

(3%)

Principally

driven

by

reductions

in

U.S.

defense

spending

to

longer

term

averages

experienced

during

periods

without

active

conflicts

Outside North America

On-Hwy

$67

$73

(8%)

Principally

driven

by

lower

demand

in

China

partially

offset

by

higher

demand

in

Europe

Outside

North America

Off-Hwy

$4

$18

(78%)

Principally

driven

by

lower

demand

in

the

energy

sector

Service

Parts, Support

Equipment & Other

$102

$118

(14%)

Principally

driven

by

lower

demand

for

North

America

service

parts

Total

$493

$553

(11%)

7

Q3 2015 Financial Performance

Q3 2015

Q3

2014

$ Var

% Var

Commentary

Net

Sales

$493.0

$553.3

($60.3)

(10.9%)

Decrease

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

Cost of Sales

$256.9

$294.0

$37.1

12.6%

Gross Profit

$236.1

$259.3

($23.2)

(8.9%)

Decrease

principally

driven by decreased sales volume partially

offset by price increases on certain products, favorable material

costs and lower incentive compensation expense

Operating Expenses

Selling, General and Administrative Expenses

$86.6

$87.5

$0.9

1.0%

Decrease

principally

driven

by

lower

incentive

and

stock

based

compensation, and reduced global commercial spending

activities partially offset by unfavorable product warranty

adjustments

Engineering

–

Research

and

Development

$23.6

$24.5

$0.9

3.7%

Decrease principally driven by lower incentive compensation

Environmental Remediation

$14.0

$0.0

($14.0)

N/A

Pursuant to the 2007 asset purchase agreement with General

Motors

Total Operating

Expenses

$124.2

$112.0

($12.2)

(10.9%)

Operating Income

$111.9

$147.3

($35.4)

(24.0%)

Interest Expense, net

($33.7)

($29.3)

($4.4)

(15.0%)

Increase

principally driven by unfavorable mark-to-market

adjustments for LIBOR swaps partially offset by debt repayments

and refinancing and the expiration of certain LIBOR swaps

Other Expense, net

($4.4)

($1.7)

($2.7)

(158.8%)

Income Before Income Taxes

$73.8

$116.3

($42.5)

(36.5%)

Income Tax Expense

($27.3)

($47.5)

$20.2

42.5%

Decrease in the effective tax rate is principally driven by the

change

in discrete activity

Net

Income

$46.5

$68.8

($22.3)

(32.4%)

Diluted Earnings Per Share

$0.27

$0.38

($0.11)

(28.9%)

Q3 2015: 175.0M

shares;  Q3 2014: 180.9M shares

Adjusted

Net

Income

(1)

$122.9

$137.5

($14.6)

(10.6%)

Adjusted

EBITDA

(1)

$174.1

$201.8

($27.7)

(13.7%)

Adjusted EBITDA excluding technology-related

license

expenses

(1)

$174.3

$201.8

($27.5)

(13.6%)

(1)

See Appendix for a reconciliation from Net Income.

($ in millions, except share data)

8

Q3 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)

Q3 2015

Q3 2014

$ Variance

%

Variance

Commentary

Net Cash Provided by

Operating

Activities

$156

$174

($18)

(10.2%)

Principally driven by decreased sales

volume partially offset by price

increases on certain products,

favorable material costs, reduced

global commercial spending activities,

decreased cash interest expense and

reduced  excess tax benefit from

stock-based compensation

CapEx

$15

$15

$0

2.0%

In

line with prior period

Adjusted Free Cash

Flow

(1) 

$142

$164

($22)

(13.8%)

Principally driven by decreased

net

cash provided by operating activities

and  reduced excess tax benefit from

stock-based compensation

($ in millions)

Q3 2015

Q3 2014

$ Variance

%

Variance

Commentary

Operating Working

Capital

(2)

Percentage

of LTM Sales

11.6%

10.5%

N/A

110 bps

Principally

driven by reduced Accounts

Payable due to payment timing

Cash Paid for Interest

$22

$35

($13)

(37.2%)

Principally driven by expiration of

certain

LIBOR swaps, and debt

repayments and refinancing

Cash Paid for Income

Taxes

$1

$0

$1

175%

In line with prior period

9

Full Year 2015 Guidance Update

Guidance

Commentary

Net Sales Change from 2014

(6) to (8)

percent

Guidance

reflects

the

elevated

level

of

uncertainty

and

a

dearth

of

near-term

visibility

in

the

global

Off-Highway

and

Service

Parts,

Support

Equipment

&

Other

end

markets

Adjusted EBITDA Margin

34.75 to 35.75

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)

$470 to $500

$2.65

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

10

APPENDIX

Non-GAAP Financial Information

11

Non-GAAP Reconciliations

(1 of 2)

$ in millions, Unaudited

Last twelve

months ended

September 30,

2010

2011

2012

2013

2014

2014

2015

2015

Net income

$29.6

$103.0

$514.2

$165.4

$228.6

$68.8

$46.5

$219.8

plus:

Interest expense, net                         

277.5

217.3

151.2

132.9

138.4

29.3

33.7

131.1

Cash interest expense, net

(239.1)

(208.6)

(167.3)

(159.2)

(140.0)

(34.7)

(21.8)

(112.1)

Income tax expense (benefit)

53.7

47.6

(298.0)

100.7

139.5

47.5

27.3

127.1

Cash income taxes                          

(2.2)

(5.8)

(10.7)

(3.8)

(5.0)

(0.4)

(1.1)

(6.5)

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

—

—

Impairments

—

—

—

—

15.4

—

—

16.7

Environmental Remediation

—

—

—

—

—

—

14.0

14.0

Amortization of intangible assets               

154.2

151.9

150.0

105.3

98.8

24.7

24.3

97.6

Adjusted net income                          

$273.7

$305.4

$375.9

$347.9

$479.1

$137.5

$122.9

$487.7

Cash interest expense

239.1

208.6

167.3

159.2

140.0

34.7

21.8

112.1

Cash income taxes                          

2.2

5.8

10.7

3.8

5.0

0.4

1.1

6.5

Depreciation of property, plant and equipment    

99.6

103.8

102.5

98.7

93.8

23.6

22.4

88.6

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

(3.3)

16.0

22.1

0.8

0.5

0.3

—

0.4

Dual power inverter module extended coverage

(1.9)

—

9.4

(2.4)

1.0

—

(0.3)

(1.1)

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)

(0.6)

0.7

1.4

Unrealized (gain) loss on foreign exchange

(0.2)

0.3

0.1

2.3

5.2

2.0

2.8

3.4

Premiums and expenses on tender offer and redemption of long-term debt

—

56.9

—

—

—

—

0.2

25.3

Restructuring charges

—

—

—

1.0

0.7

—

—

—

Reduction of supply contract liability

(3.4)

—

—

—

—

—

—

—

Other, net

(1)

10.9

8.6

7.0

13.8

14.7

3.9

2.5

10.7

Adjusted EBITDA                           

$617.0

$711.9

$705.1

$626.6

$739.0

$201.8

$174.1

$735.0

Adjusted EBITDA excluding technology-related license expenses

$617.0

$711.9

$717.1

$632.6

$745.1

$201.8

$174.3

$738.0

Net Sales

$1,926.3

$2,162.8

$2,141.8

$1,926.8

$2,127.4

$553.3

$493.0

$2,052.0

Adjusted EBITDA margin               

32.0%

32.9%

32.9%

32.5%

34.7%

36.5%

35.3%

35.8%

Adjusted EBITDA margin excl technology-related license expenses

32.0%

32.9%

33.5%

32.8%

35.0%

36.5%

35.4%

36.0%

Three months ended

September 30,

For the year ended December 31,

(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.

Adjusted Net Income and Adjusted EBITDA reconciliation

12

Non-GAAP Reconciliations

(2 of 2)

$ in millions, Unaudited

Last twelve

months ended

September 30,

2010

2011

2012

2013

2014

2014

2015

2015

Net Cash Provided by Operating Activities

$388.9

$469.2

$497.5

$453.5

$556.9

$174.0

$156.3

$530.9

(Deductions) or Additions:

Long-lived assets

(73.8)

(96.9)

(123.9)

(74.4)

(64.1)

(14.9)

(15.2)

(56.6)

Fee to terminate services agreement with Sponsors

—

—

16.0

—

—

—

—

—

Technology-related license expenses

—

—

12.0

6.0

6.1

—

0.2

3.0

Excess tax benefit from stock-based compensation

—

—

5.3

13.7

24.6

5.0

0.2

20.0

Adjusted Free Cash Flow

$315.1

$372.3

$406.9

$398.8

$523.5

$164.1

$141.5

$497.3

Net Sales                                    

$1,926.3

$2,162.8

$2,141.8

$1,926.8

$2,127.4

$553.3

$493.0

$2,052.0

Adjusted Free Cash Flow (% to Net Sales)

16.4%

17.2%

19.0%

20.7%

24.6%

29.7%

28.7%

24.2%

Three months ended

September 30,

For the year ended December 31,

Adjusted Free Cash Flow reconciliation