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Allison Transmission Holdings Inc. reported net sales for the fourth quarter of $647 million, a 10 percent increase from the same period in 2017. The increase in net sales was principally driven by higher demand in the Outside North America Off-Highway and North America On-Highway end markets.
Net Income for the quarter was $147 million compared to $215 million for the same period in 2017. Fourth quarter 2017 included a one-time income tax benefit of $152 million as a result of the U.S. Tax Cuts and Jobs Act enacted into law in December 2017. Adjusted EBITDA, a non-GAAP financial measure, for the quarter was $261 million compared to $210 million for the same period in 2017. Net Cash Provided by Operating Activities for the quarter was $232 million compared to $166 million for the same period in 2017. Adjusted Free Cash Flow, a non-GAAP financial measure, for the quarter was $184 million compared to $115 million for the same period in 2017.
David S. Graziosi, President and Chief Executive Officer of Allison Transmission commented, "I am pleased to report that 2018 was a record year for Allison Transmission. Full year results exceeded our initial Net Sales guidance ranges across all of our end markets. Furthermore, Allison achieved record levels of Net Sales, Net Income, Adjusted EBITDA, Net Cash Provided by Operating Activities and Adjusted Free Cash Flow. Full year net sales growth of 20 percent was surpassed, by even stronger growth in Net Income, up 27 percent, Diluted EPS, up 42 percent and Adjusted EBITDA, up 30 percent. And notably, double digit growth was realized in the Outside North America On-Highway end market for the third consecutive year." Graziosi continued, "Throughout the year, we continued our well-defined approach to capital structure and allocation. During the fourth quarter, we paid a dividend of $0.15 per share and settled $153 million of share repurchases, resulting in $609 million of total share repurchases in 2018 or approximately 10% of our outstanding shares."
Fourth Quarter Highlights
North America On-Highway end market net sales were up 6 percent from the same period in 2017 principally driven by higher demand for Rugged Duty Series and Highway Series models and down 9 percent on a sequential basis principally driven by lower demand for Rugged Duty Series and Pupil Transport/Shuttle Series models.
North America Off-Highway end market net sales were down $11 million from the same period in 2017 and up $5 million sequentially, in both cases principally driven by fluctuations in demand from hydraulic fracturing applications.
Defense end market net sales were up $11 million from the same period in 2017 principally driven by higher Tracked demand and down $6 million on a sequential basis principally driven by lower Wheeled and Tracked demand.
Outside North America On-Highway end market net sales were down 3 percent from the same period in 2017 principally driven by lower demand in South America and Asia and down 1 percent sequentially.
Outside North America Off-Highway end market net sales were up $36 million from the same period in 2017 principally driven by improved demand in the energy, mining and construction sectors and up $1 million on a sequential basis.
Service Parts, Support Equipment & Other end market net sales were up 7 percent from the same period in 2017 principally driven by higher demand for North America On-Highway service parts and global support equipment and down 9 percent sequentially principally driven by lower demand for North America service parts.
Gross profit for the quarter was $338 million, an increase of 17 percent from $288 million for the same period in 2017. Gross margin for the quarter was 52.2 percent, an increase of 320 basis points from a gross margin of 49.0 percent for the same period in 2017. The increase in gross profit from the same period in 2017 was principally driven by increased net sales, price increases on certain products and favorable material costs.
Selling, general and administrative expenses for the quarter were $90 million, a decrease of $7 million from $97 million for the same period in 2017. The decrease was principally driven by unfavorable product warranty adjustments in 2017 that did not recur in 2018.
Engineering - research and development expenses for the quarter were $37 million, an increase of $6 million from $31 million for the same period in 2017. The increase was principally driven by increased product initiatives spending.
As a result of continued weak demand conditions for the TC10 transmission we ceased production and recorded a corresponding $4 million impairment loss compared to a $32 million impairment loss for the same period in 2017.
Income tax expense for the quarter was $27 million compared to a $131 million benefit for the same period in 2017. The change was principally driven by a one-time income tax benefit resulting from a decrease in deferred tax liabilities in 2017 as a result of the U.S. Tax Cuts and Jobs Act enacted into law in December 2017 and increased taxable income partially offset by a decrease in effective tax rate as a result of the U.S. Tax Cuts and Jobs Act.
Net income for the quarter was $147 million compared to $215 million for the same period in 2017. The decrease was principally driven by the enactment of the U.S. Tax Cuts and Jobs Act in December 2017, increased product initiatives spending and increased interest expense partially offset by increased gross profit, decreased loss associated with the impairment of long-lived assets, decreased technology-related investment expense and decreased selling, general and administrative expenses.
Net cash provided by operating activities was $232 million compared to $166 million for the same period in 2017. The increase was principally driven by increased gross profit, decreased cash income taxes and decreased cash interest expense partially offset by increased product initiatives spending.
Fourth Quarter Non-GAAP Financial Measures
Adjusted EBITDA for the quarter was $261 million compared to $210 million for the same period in 2017, an increase of $51 million. The increase in Adjusted EBITDA was principally driven by increased gross profit and decreased selling, general and administrative expenses partially offset by increased product initiatives spending.
Adjusted Free Cash Flow for the quarter was $184 million compared to $115 million for the same period in 2017, an increase of $69 million. The increase was driven by increased cash provided by operating activities and decreased capital expenditures.
Full Year 2019 Guidance
Allison expects 2019 net sales to be in the range of $2,580 to $2,680 million, Net Income in the range of $535 to $585 million, Adjusted EBITDA in the range of $1,000 to $1,060 million, Net Cash Provided by Operating Activities in the range of $710 to $750 million, Adjusted Free Cash Flow in the range of $550 to $600 million and cash income taxes in the range of $100 to $110 million.
Our 2019 net sales guidance reflects lower demand in the North America Off-Highway and Service Parts, Support Equipment & Other end markets principally driven by hydraulic fracturing applications partially offset by increased demand in the North America On-Highway end market, price increases on certain products and continued execution of our growth initiatives.
Although we are not providing specific first quarter 2019 guidance, Allison does expect first quarter net sales to be flat from the same period in 2018 principally driven by increased demand expected in the North America On-Highway end market offset by decreased demand expected in the North America Off-Highway and Service Parts, Support Equipment & Other end markets.
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