Allison Transmission Holdings Inc - FORM 8-K - EX-99.2

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8-K - 8-K - Allison Transmission Holdings Inc	d712097d8k.htm
EX-99.1 - EX-99.1 - Allison Transmission Holdings Inc	d712097dex991.htm

Q1 2014 Earnings Release

Published

April 16, 2014 (Earnings Conference Call April 17, 2014)

Lawrence Dewey, Chairman, President & Chief Executive Officer

David Graziosi, Executive Vice President & Chief Financial Officer

Exhibit 99.2

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: risks related to our

substantial indebtedness; 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; 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 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, 2013.

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 (loss), 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 (loss), 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.

Call Agenda

Q1 2014 Performance

Full Year 2014 Guidance Update

Q1 2014 Performance Summary

($ in millions)

Q1 2014

Q1 2013

% Variance

Net Sales

$494

$457

7.9%

Gross Margin %

45.1%

43.4%

+170 bps

Adjusted Net Income

(1)

$108

$80

35.7%

Adjusted Free Cash Flow

(1)

$91

$48

88.8%

Commentary

Net Sales: the increase was principally driven by the continued recovery in the North America On-Highway end market, our

largest, and higher demand in the Service Parts, Support Equipment and Other end market partially offset by previously

contemplated reductions in U.S. defense spending.

Gross Margin: the increase was principally driven by increased net sales.

Adjusted Net Income: the increase was principally driven by increased net sales and a $3 million reduction in technology-

related license expenses.

Adjusted Free Cash Flow: the increase was principally driven by increased net cash provided by operating activities,

decreased capital expenditures and a $3 million reduction in technology-related license expenses.

(1)

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

Q1 2014 Sales Performance

($ in millions)

End Markets

Q1 2014

Q1 2013

% Variance

Commentary

North America On-Hwy

$233

$188

24%

Increased demand for Rugged Duty, Highway and Pupil

Transport/Shuttle Series models

North America Hybrid-

Propulsion Systems for

Transit Bus

$24

$31

(23%)

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

50%

Increased demand driven by hydraulic fracturing

applications

Defense

$34

$57

(40%)

Continued reductions in U.S. defense spending to longer

term averages experienced during periods without active

conflicts

Outside North America

On-Hwy

$64

$62

Strength in China bus partially offset by weakness in Europe

truck due to fourth quarter 2013 Euro VI emissions pre-buy

activities

Outside North America

Off-Hwy

$21

Flat with same period in 2013 principally driven by modestly

improved demand conditions in the mining sector offsetting

lower demand from the energy sector

Service Parts, Support

Equipment & Other

$106

$90

18%

Increased demand for global service parts and global On-

Highway support equipment

Total

$494

$457

Q1 2014 Financial Performance

($ in millions, except share data)

Q1 2014

Q1 2013

$ Var

% Var

Commentary

Net Sales

$493.6

$457.4

$36.2

7.9%

Increase was principally driven by the continued recovery in the

North America On-Highway end market and higher demand in the

Service Parts, Support Equipment and Other end market partially

offset by previously contemplated reductions in U.S. defense

spending

Cost of Sales

$271.1

$259.1

($12.0)

(4.6%)

Gross Profit

$222.5

$198.3

$24.2

12.2%

Increase principally driven by increased net sales

Operating Expenses

Selling, general and administrative expenses

$83.2

$87.9

$4.7

5.3%

Decrease principally driven by a $5 million reduction in intangible

asset amortization

Engineering –

research and development

$24.5

$29.0

$4.5

15.5%

Decrease principally driven by a $3 million reduction in

technology-related license expenses

Total operating expenses

$107.7

$116.9

$9.2

7.9%

Operating Income

$114.8

$81.4

$33.4

41.0%

Interest Expense, net

($35.1)

($33.9)

($1.2)

(3.5%)

Increase principally driven by less favorable mark-to-market

adjustments for interest rate derivatives partially offset debt

repayments and lower rates

Other Expense, net

($0.4)

($3.1)

$2.7

87.1%

Decrease principally driven by the 2013 loss on investments in

technology-related initiatives

Income Before Income Taxes

$79.3

$44.4

$34.9

78.6%

Income Tax Expense

($27.2)

($16.9)

($10.3)

(60.9%)

Change in effective tax rate principally driven by a 2013 discrete

expense item and a prior period statutory change in a state

apportionment rate recorded in the first quarter 2014

Net Income

$52.1

$27.5

$24.6

89.5%

Diluted Earnings Per Share

$0.28

$0.15

$0.13

86.7%

Q1 2014: 185.9M shares; Q1 2013: 187.8M shares

Adjusted

EBITDA

$165.8

$140.7

$25.1

17.8%

Adjusted EBITDA excluding technology-related

license

expenses

$169.1

$146.7

$22.4

15.3%

Adjusted

Net

Income

$107.9

$79.5

$28.4

35.7%

(1)

See Appendix for a reconciliation from Net Income.

(1)

Q1 2014 Cash Flow Performance

($ in millions)

Q1 2014

Q1 2013

$ Variance

% Variance

Commentary

Net Cash Provided by

Operating Activities

$99

$55

$44

80.3%

Principally driven by increased

net income and deferred

revenue

CapEx

$11

$13

($2)

(11.9%)

Lower product initiatives

spending partially offset by

increased investments in

productivity and replacement

programs

Adjusted Free Cash

Flow

(1)

$91

$48

$43

88.8%

Increased cash provided by

operating activities, decreased

capital expenditures and a $3

million reduction in technology-

related license expenses

($ in millions)

Q1 2014

Q1 2013

$ Variance

% Variance

Commentary

Operating Working

Capital

(2)

Percentage

of LTM Sales

11.7%

10.5%

N/A

120 bps

Principally driven by higher Q1

2014 Net Sales and the

deferral of certain tracked

transmission shipments at the

request of the U.S. government

Cash Paid for Interest

$29

$30

($1)

(2.3%)

Principally driven by debt

repayments and refinancing

Cash Paid for Income

Taxes

75.0%

Foreign payments timing

(1)

See Appendix for a reconciliation of Adjusted Free Cash Flow.

(2)

Operating

Working

Capital

A/R

Inventory

–

A/P.

Full Year 2014 Guidance Update

Guidance

Commentary

Net Sales Growth from 2013

3 to 6 percent

Consistent with our previous guidance we expect a

continued recovery in the North America On-Highway end

market, lower demand in the North America Hybrid-

Propulsion Systems for Transit Bus end market due to

engine emissions improvements and non-hybrid alternative

technologies that generally require a fully-automatic

transmission (e.g. xNG), a slowly emerging improvement in

demand from the North America energy sector’s hydraulic

fracturing market, previously considered reductions in U.S.

defense spending to longer term averages experienced

during periods without active conflicts, growth in the

Outside North America On-Highway end market,

moderately improved second half demand conditions in the

Outside North America Off-Highway end market and higher

demand in the Service Parts, Support Equipment & Other

end market.

Adjusted EBITDA Margin excluding

technology-related license expenses

32 to 34 percent

Principally driven by sales mix and volume timing

Adjusted Free Cash Flow ($ in millions)

$375 to $425

$2.00 to $2.25 per diluted share

CapEx

($ in millions)

Maintenance

New Product Programs

$55 to $60

$5 to $10

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

APPENDIX

Non-GAAP Financial Information

(1) Includes charges or income related to legacy employee benefits, shared income with General Motors, benefit plan adjustments, transitional costs to establish

Allison as a stand-alone entity, pension curtailment 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.

Non-GAAP Reconciliations

(1 of 2)

Adjusted Net Income and Adjusted EBITDA reconciliation

$ in millions, Unaudited

Last twelve

months ended

March 31,

2009

2010

2011

2012

2013

2014

Net (loss) income

($323.9)

$29.6

$103.0

$514.2

$165.4

$27.5

$52.1

$190.0

plus:

Interest expense, net

234.2

277.5

217.3

151.2

132.9

33.9

35.1

134.1

Cash interest expense

(242.5)

(239.1)

(208.6)

(167.3)

(159.2)

(30.0)

(29.4)

(158.6)

Income tax expense (benefit)

41.4

53.7

47.6

(298.0)

100.7

16.9

27.2

111.0

Cash income taxes

(5.5)

(2.2)

(5.8)

(10.7)

(3.8)

(1.2)

(2.1)

(4.7)

Fee to terminate services agreement with Sponsors

—

16.0

—

Technology-related investment expenses

—

14.4

5.0

2.5

—

2.5

Public offering expenses

—

6.1

1.6

—

0.3

1.9

Trade name impairment

190.0

—

Amortization of intangible assets

155.9

154.2

151.9

150.0

105.3

29.9

24.7

100.1

Adjusted net income

$49.6

$273.7

$305.4

$375.9

$347.9

$79.5

$107.9

$376.3

Cash interest expense

242.5

239.1

208.6

167.3

159.2

30.0

29.4

158.6

Cash income taxes

5.5

2.2

5.8

10.7

3.8

1.2

2.1

4.7

Depreciation of property, plant and equipment

105.9

99.6

103.8

102.5

98.7

24.7

23.3

97.3

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

(8.9)

(3.3)

16.0

22.1

0.8

—

0.8

Dual power inverter module extended coverage

11.4

(1.9)

—

9.4

(2.4)

—

(2.4)

UAW Local 933 signing bonus

—

8.8

—

Benefit plan re-measurement

—

2.3

—

Unrealized (gain) loss on commodity hedge contracts

(5.8)

0.3

6.5

(1.0)

1.5

1.3

0.1

0.3

Unrealized (gain) loss on foreign exchange

—

(0.2)

0.3

0.1

2.3

0.6

(0.3)

1.4

Premiums and expenses on tender offer for long-term debt

—

56.9

—

Restructuring charges

47.9

—

1.0

—

1.0

Reduction of supply contract liability

—

(3.4)

—

Other, net

(1)

53.2

10.9

8.6

7.0

13.8

3.4

3.3

13.7

Adjusted EBITDA

$501.3

$617.0

$711.9

$705.1

$626.6

$140.7

$165.8

$651.7

Adjusted EBITDA excluding technology-related license expenses

$501.3

$617.0

$711.9

$717.1

$632.6

$146.7

$169.1

$655.0

Net Sales

$1,766.7

$1,926.3

$2,162.8

$2,141.8

$1,926.8

$457.4

$493.6

$1,963.0

Adjusted EBITDA margin

28.4%

32.0%

32.9%

32.5%

30.8%

33.6%

33.2%

Adjusted EBITDA margin excl technology-related license expenses

28.4%

32.0%

32.9%

33.5%

32.8%

32.1%

34.3%

33.4%

Three months ended

March 31,

For the year ended December 31,

Non-GAAP Reconciliations

(2 of 2)

Adjusted Free Cash Flow reconciliation

$ in millions, Unaudited

Last twelve

months ended

March 31,

2009

2010

2011

2012

2013

2014

Net Cash Provided by Operating Activities

$168.7

$388.9

$469.2

$497.5

$453.5

$54.7

$98.6

$497.4

(Deductions) or Additions:

Long-lived assets

(88.2)

(73.8)

(96.9)

(123.9)

(74.4)

(12.6)

(11.1)

(72.9)

Fee to terminate services agreement with Sponsors

—

16.0

—

Technology-related license expenses

—

12.0

6.0

3.3

2009 Non-Recurring Activity

(1)

61.0

—

Adjusted Free Cash Flow

$141.5

$315.1

$372.3

$401.6

$385.1

$48.1

$90.8

$427.8

Net Sales

$1,766.7

$1,926.3

$2,162.8

$2,141.8

$1,926.8

$457.4

$493.6

$1,963.0

Adjusted Free Cash Flow (% to Net Sales)

8.0%

16.4%

17.2%

18.8%

20.0%

10.5%

18.4%

21.8%

Three months ended

March 31,

For the year ended December 31,

(1)

2009 adjusted for certain non-recurring activity: (a) capitalized accrued interest on Senior Toggle Notes ($29) million, (b) cash restructuring charge

$51 million, (c) accounts payable early payments $3 million, (d) delayed accounts receivable receipts $19 million and (e) Lehman LIBOR swap

settlement $17 million.

Allison Transmission Holdings Inc - FORM 8-K - EX-99.2 - April 16, 2014

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