Allison Reports Lower Profit

October 30, 2012

News Release

NDIANAPOLIS, Oct. 29, 2012 -- Allison Transmission Holdings, Inc. (NYSE: ALSN), the world's largest manufacturer of fully-automatic transmissions for medium- and heavy-duty commercial vehicles and hybrid-propulsion systems for city buses, today reported net sales for the quarter of $494 million, a 14 percent decrease from the same period in 2011. Net Income for the quarter was $32 million, compared to a net income of $39 million for the same period in 2011, a decrease of $7 million. Adjusted Net Income, a non-GAAP financial measure, for the quarter was $100 million, compared to Adjusted Net Income of $131 million for the same period in 2011, a decrease of $31 million. Diluted earnings per share for the quarter were $0.17.

The decrease in net sales was principally driven by decreased demand for North America Off-Highway products relative to the elevated demand we experienced in the prior year period driven by strength in natural gas pricing. The North America On-Highway, Military and Service Parts, Support Equipment & Other end markets also experienced modest declines which were partially offset by price increases on certain products. Our Outside North America net sales were in line with the prior year due to growth in China offsetting weakness in European end markets.

Adjusted EBITDA, a non-GAAP financial measure, for the quarter was $160 million, or 32.3 percent of net sales, compared to $193 million for the same period in 2011. Excluding $12 million of certain technology-related license expenses Adjusted EBITDA for the quarter was $172 million, or 34.8 percent of net sales. Adjusted Free Cash Flow, also a non-GAAP financial measure, for the quarter was $120 million compared to $176 million for the same period in 2011.

Lawrence E. Dewey, Chairman, President and Chief Executive Officer of Allison Transmission commented, "Despite a year over year decline in third quarter net sales largely attributable to the previously considered cyclicality of the North America energy sector's hydraulic fracturing market, diminished North America On-Highway commercial vehicle production schedules and reduced U.S. defense spending, Allison continued to demonstrate strong operating margins and cash flow while investing in growth opportunities. Consistent with our previous 2012 guidance we expect no meaningful relief from the third quarter North America end markets challenges in the fourth quarter, typically Allison's slowest quarter due to seasonal production downtime taken by many of our customers. We remain committed to prudent capital structure management as evidenced by Allison's third quarter actions which included refinancing approximately half of its Senior Secured Credit Facility Term B-1 Loan due in 2014, $105 million of debt reduction and a quarterly dividend to our shareholders."

Third Quarter Highlights
North America On-Highway end market net sales were down 5 percent from the same period in 2011. The year over year decrease was principally driven by lower demand for Rugged Duty Series and Highway Series models. These reductions were partially offset by increased sales of Pupil Transport/Shuttle Series and Motorhome Series models.

North America Hybrid-Propulsion Systems for Transit Bus end market net sales were up 7 percent from the same period in 2011 principally due to the timing of orders.

North America Off-Highway end market net sales were down 71 percent from the same period in 2011. The year over year decrease was principally driven by lower demand from hydraulic fracturing applications due to weakness in natural gas pricing.

Military end market net sales were down 9 percent from the same period in 2011 principally due to lower wheeled and tracked products requirements consistent with reduced U.S. defense spending.

Outside North America On-Highway end market net sales were flat with the same period in 2011 reflecting strength in China being offset by weaker environments in Europe and Latin America.

Outside North America Off-Highway end market net sales were down 8 percent from the same period in 2011 principally driven by weaker mining sector demand partially offset by stronger demand from the energy sector.

Service Parts, Support Equipment & Other end market net sales were down 10 percent from the same period in 2011. The year over year decrease was principally driven by lower demand for global off-highway service parts and reduced support equipment sales commensurate with decreased transmission unit volumes.

Gross profit for the quarter was $224 million, a decrease of 13 percent over gross profit of $258 million for the same period in 2011. Gross margin for the quarter was 45.5 percent, an increase of 60 basis points over gross margin of 44.9 percent for the same period in 2011. The increase in gross margin was principally driven by improved manufacturing performance, favorable material costs and price increases on certain products.

Selling, general and administrative expenses for the quarter were $97 million, a decrease of 5 percent over selling, general and administrative expenses of $102 million for the same period in 2011. The decrease was principally driven by lower global commercial spending activities partially offset by the elimination of favorable 2011 product warranty expense adjustments.

Engineering – research and development expenses for the quarter were $36 million, compared to $32 million for the same period in 2011, a decrease of $8 million excluding certain technology-related license expenses. The decrease was principally driven by the timing of product initiatives spending.

Third Quarter Non-GAAP Financial Measures
Adjusted EBITDA for the quarter was $160 million, or 32.3 percent of net sales, compared to $193 million, or 33.7 percent of net sales, for the same period in 2011, and Adjusted EBITDA excluding technology-related license expenses for the quarter was $172 million, or 34.8 percent of net sales. The decrease in Adjusted EBITDA was principally driven by decreased gross profit and $12 million of technology-related license expenses partially offset by lower global commercial and engineering – research and development spending activities.

Adjusted Net Income for the quarter was $100 million compared to $131 million for the same period in 2011. The decrease in Adjusted Net Income was principally driven by decreased gross profit, $12 million of technology-related license expenses and increased cash interest expense as a result of debt refinancing and repayments, partially offset by lower global commercial and engineering – research and development spending activities.

Adjusted Free Cash Flow for the quarter was $120 million compared to $176 million for the same period in 2011. The decrease was principally driven by decreased net cash provided by operating activities and increased capital expenditures attributable to increased product initiatives spending and investments in productivity and replacement programs.

Full Year 2012 Guidance Update
Allison expects 2012 net sales to decline in the range of 2.5 to 3.5 percent, an Adjusted EBITDA margin excluding technology-related license expenses in the range of 33.5 to 34.0 percent, and an Adjusted Free Cash Flow in the range of $350 to $380 million, or $1.88 to $2.04 per diluted share. Capital expenditures are expected to be in the range of $120 to $130 million, which includes maintenance spending of approximately $60 million, and are subject to timely completion of development and sourcing milestones for new product programs. Cash income taxes are expected to be in the range of $12 to $15 million.

Our full year guidance maintains a cautious approach to the fourth quarter given heightened market uncertainty by assuming year over year net sales reductions in North America Off-Highway, Global On-Highway, Tracked Military and Service Parts, Support Equipment & Other end markets partially offset by year over year net sales growth in Outside North America Off-Highway and North America Hybrid-Propulsion Systems for Transit Bus end markets. Accordingly, we now expect end market full year net sales growth as follows: NAFTA On-Highway 8 percent, Outside North America On-Highway 1.5 percent and Outside North America Off-Highway 27 percent. We also expect end market full year net sales reductions as follows: North America Hybrid-Propulsion Systems for Transit Bus 16 percent, North America Off-Highway 43 percent, Military 2 percent and Service Parts, Support Equipment & Other 1 percent.

About Allison Transmission
Allison Transmission is the world's largest manufacturer of fully-automatic transmissions for medium- and heavy-duty commercial vehicles, medium- and heavy-tactical U.S. military vehicles and hybrid-propulsion systems for transit buses. Allison transmissions are used in a variety of applications including on-highway trucks (distribution, refuse, construction, fire and emergency), buses (primarily school and transit), motor homes, off-highway vehicles and equipment (primarily energy and mining) and military vehicles (wheeled and tracked). Founded in 1915, the Allison business is headquartered in Indianapolis, Indiana, U.S.A. and employs approximately 2,800 people. Allison has manufacturing facilities and customization centers located in China, The Netherlands, Brazil, India and Hungary. With a global presence, serving customers in North America, Europe, Asia, Australia, South America, and Africa, Allison also has over 1,500 independent distributor and dealer locations worldwide. More information about Allison is available at www.allisontransmission.com .

Source: Allison Transmission Holdings Inc.