| Delaware | 26-0414014 | |
| (State of Incorporation) | (I.R.S. Employer Identification Number) | |
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
2018
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| Delaware | 26-0414014 | |
| (State of Incorporation) | (I.R.S. Employer Identification Number) | |
| Title of each class | Name of each exchange on which registered | |
| Common Stock, $0.01 par value | New York Stock Exchange | |
| Large accelerated filer | x | Accelerated filer | ||||
| Non-accelerated filer | Smaller reporting company | |||||
| Emerging growth company | ☐ | |||||
29, 2018.
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| PART I. |
OUTSIDE NORTH AMERICA ON- HIGHWAY HYBRID BUS ON- HIGHWAY PARTS, OTHER 2015 NET SALES (IN MILLIONS) % OF TOTAL • #1 supplier of fully-automatic transmissions • A leading supplier of hybrid-propulsion systems • A leading independent supplier • #1 supplier of fully-automatic transmissions in China and India • Established presence in Western Europe • A leading independent supplier • #1 supplier of transmissions for the U.S. Department of Defense • Approximately 1,400 dealers and distributors worldwide • Distribution • Emergency • Refuse • Construction • Utility • School, transit, shuttle and coach buses • Motorhome • Metro tractors • Hybrid transit bus • Hybrid shuttle bus • Energy • Mining • Construction • Specialty vehicle • Distribution • Emergency • Refuse • Construction • Utility • Transit, shuttle and coach buses • Energy • Mining • Construction • Specialty vehicle • Medium- and heavy-tactical wheeled platforms • Tracked combat platforms • Parts • Support equipment • Remanufactured transmissions • Fluids 2018. customers. CLASS 4-5 TRUCKS CLASS 6-7 TRUCKS • Ford • Manual Transmissions • AMTs • Ford • Manual Transmissions • AMTs • Ford • Ford America. DOD. markets. From time to time, we also acquire certain licenses to provide us with technology to complement our portfolio of products and product initiatives.ITEM 1. BusinessOverviewAllison Transmission Holdings, Inc. and its subsidiaries (“Allison,” the “Company” or “we”) design and manufacture commercial and defense fully-automatic transmissions. The business was founded in 1915 and has been headquartered in Indianapolis, Indiana since inception. Allison was an operating unit of General Motors Corporation (“Old GM”) from 1929 until 2007, when Allison once again became a stand-alone company. In March 2012, Allison began trading on the New York Stock Exchange under the symbol “ALSN”.We have approximately 2,7002,900 employees and 1312 different transmission product lines. Although approximately 81%77% of revenues were generated in North America in 2015,2018, we have a global presence by serving customers in Europe, Asia, South America and Africa. We serve customers through an independent network of approximately 1,400 independent distributor and dealer locations worldwide.Our BusinessWe are the world’s largest manufacturer of fully-automatic transmissions for medium- and heavy-duty commercial vehicles and medium- and heavy-tactical U.S. defense vehicles. Allison transmissions are used in a wide variety of applications, including on-highway trucks (distribution, refuse, construction, fire and emergency), buses (primarily school, transit and electric hybrid-transit), motorhomes, off-highway vehicles and equipment (primarily energy, mining and construction) and defense vehicles (wheeled and tracked). We estimate that globally, in 2015,2018, we sold approximately 63%60% of all fully-automatic transmissions for medium- and heavy-duty on-highway commercial vehicle applications. We believe the Allison brand is one of the most recognized in our industry as a result of the performance, reliability and fuel efficiency of our transmissions and is associated with high quality, durability, vocational value, technological leadership and superior customer service.We introduced the world’s first fully-automatic transmission for commercial vehicles over 60 years ago. Since that time, we have driven the trend in North America and Western Europe towards increasing automaticity by targeting a diverse range of commercial vehicle vocations. Allison transmissions are optimized for the unique performance requirements of end users, which typically vary by vocation. Our products are highly engineered, requiring advanced manufacturing processes, and employ complex software algorithms for our transmission controls to maximize end user performance. We have developed over 100 different models that are used in more than 2,500 different vehicle configurations and are compatible with more than 500 combinations of engine brands, models and ratings (including diesel, gasoline, natural gas and other alternative fuels). Additionally, we have created thousands of unique Allison-developed calibrations available to be used with our transmission control modules.Our IndustryCommercial vehicles typically employ one of three transmission types: manual, automated manual transmissions (“AMT”) or fully-automatic. Manual and automated manual transmissions ("AMT") are the most prevalent transmission type used in Class 8 tractors in North America andAmerica. Manual transmissions are the most prevalent in medium- and heavy-duty commercial vehicles, generally, outside North America. Manual transmissions utilize a disconnect clutch causing power to be interrupted during each gear shift resulting in energy loss-related inefficiencies and less work being accomplished for a given amount of fuel consumed. In long-distance trucking, this power interruption is not a significant factor, as the manual transmission provides its highest degree of fuel economy during steady-state cruising. However, steady-state cruising is only one part of the duty cycle. When the duty cycle requires a high degree of “start and stop” activity or speed transients, as is common in many vocations as well as in urban environments, we believe manual transmissions result in reduced performance, lower fuel efficiency, lower average speed for a given amount of fuel consumed and inferior ride quality. Moreover, the clutches must be replaced regularly, resulting in increased maintenance expense and vehicle downtime. Manual transmissions also require a skilled driver to operate the disconnect clutch when launching the vehicle and shifting gears. AMTs are manual transmissions that feature automated operation of the disconnect clutch. Fully-automatic transmissions utilize technology that smoothly shifts gears instead of a disconnect clutch, thereby delivering uninterrupted power to the wheels during gear shifts and requiring minimal driver input. These transmissions deliver superior acceleration, higher productivity, increased fuel efficiency, reduced operating costs, less driveline shock and smoother shifting relative to both manual transmissions and AMTs in vocations with a high degree of “start and stop” activity, as well as in urban environments.Emerging technologies in commercial-duty transmissions and powertrains include dual clutch transmissions (“DCT”) and electric drive powertrains. DCTs are variants of manual transmissions and AMTs that incorporate a “dual clutch” mechanism to facilitate shifting the manual transmission gearbox. Electric drive powertrains are also emerging in certain end markets, such as transit buses, and are in part driven by efforts to reduce fuel consumption and greenhouse gas emissions. Electric drive powertrains differ from “electric hybrid” powertrains because they only propel the vehicle with an electric motor; while “electric hybrids” generally utilize both a conventional internal combustion power source and powertrain as well as the means to propel the vehicle electrically. While both emerging technologies are gaining use in niche automotive markets, they are just beginning to evolve and become proven in commercial vehicle markets.Fuel efficiency, reduction in fuel consumption and greenhouse gasreduced emissions are important considerations for commercial vehicles everywhere and they tend to go together. We believe fuel efficiency, the measure of work performed for a given amount of fuel consumed, is the best method to assess fuel consumption of commercial vehicles as compared to the more commonly-used fuel economy metric of miles-per-gallon (“MPG”). MPG is inadequate for commercial vehicles because it does not encompass two key elements of efficiency that we believe are important to vehicle owners and operators: payload and transport time. For example, if more work can be completed or more payload hauled using the same amount of fuel and/or over a shorter period of time, then we believe the vehicle is more fuel efficient. Since fuel economy and its MPG metric only accounts for distance traveled and fuel consumed, ignoring time and work performed, we believe it is therefore an inferior metric to fuel efficiency when it comes to assessing commercial vehicles. Markets, regulations, policies and technology continue to evaluateevolve with respect to these topics.Our Served MarketsWe sell our transmissions globally for use in medium- and heavy-duty on-highway commercial vehicles, off-highway vehicles and equipment and defense vehicles. In addition to the sale of transmissions, we also sell branded replacement parts, support equipment and other products necessary to service the installed base of vehicles utilizing our transmissions. The following table provides a summary of our business by end market, for the fiscal year ended December 31, 2015. NORTH AMERICA DEFENSE SERVICE END MARKET
TRANSIT OFF-
HIGHWAY OFF-
HIGHWAY
SUPPORT
EQUIPMENT
& $1,059 $73 $55 $262 $35 $113 $389 53% 4% 3% 13% 2% 6% 19% MARKET POSITION VOCATIONS OR END USE END MARKET NORTH AMERICA OUTSIDE NORTHAMERICADEFENSE SERVICE PARTS, SUPPORT EQUIPMENT& OTHERON-HIGHWAYOFF-HIGHWAYON-HIGHWAYOFF-HIGHWAY2018 NET SALES(IN MILLIONS)$1,317 $93 $383 $129 $158 $633 % OF TOTAL 49% 3% 14% 5% 6% 23% MARKET POSITION • #1 supplier of fully-automatic transmissions • A leading independent supplier • #1 supplier of fully-automatic transmissions in China • Established presence in Western Europe• A leading independent supplier • #1 supplier of transmissions for the U.S. Department of Defense • Approximately 1,400 dealers and distributors worldwide VOCATIONS OR END USE • Construction• Distribution • Electric hybrid transit and shuttle bus• Emergency • Metro Tractors • Motorhome• Refuse • School, transit, shuttle and coach buses• Utility • Construction• Energy • Mining • Specialty vehicle• Construction• Distribution • Emergency • Refuse • Transit, shuttle and coach buses • Utility • Construction• Energy • Mining • Specialty vehicle• Medium- and heavy-tactical wheeled platforms • Tracked combat platforms• Fluids• Parts• Remanufactured transmissions • Support equipmentRefer to NOTE 18, “Concentration of Risk” and NOTE 22, “Geographic Information” in Part II, Item 8, of this Annual Report on Form 10-K for additional information on our significant original equipment manufacturer (“OEM”) customers and net sales by geographical areas.North AmericaOn-Highway.We are the largest manufacturer of fully-automatic transmissions for the on-highway medium- and heavy-duty commercial vehicle market in North America. The following is a summary of our on-highway net sales by vehicle class in North America.
Our core North American on-highway market includes Class 4-5, Class 6-7 and Class 8 straight trucks, conventional transit, shuttle and coach buses, school buses and motorhomes. Class 8 trucks are subdivided into two markets: straight and tractor. Class 8 straight trucks are those with a unified body (e.g., refuse, construction, and dump trucks), while tractors have a vehicle chassis that is separable from the trailer they pull. We have been supplying transmissions for Class 8 straight trucks for decades, and it is a core end market for us. Today, we have very limited exposure to the Class 8 line-haul tractor market because lower priced manual transmissions and AMTs generally meet the needs of these vehicles which are primarily used in long distance hauling. However, we have identified a portionWe also provide electric hybrid-propulsion systems for transit buses within the North American on-highway market. The interest in conserving fuel and reducing greenhouse gas emissions is driving demand for more fuel efficient commercial vehicles. Our customers are typically city, state and federal governmental entities. We compete primarily with BAE Systems plc and manufacturers of the Class 8 tractor market that we call metro tractors that are usedelectric drive systems in urban environments the majority of the time and developed a fully-automatic transmission (the “TC10”) that meets the unique duty cycle requirements of the Class 8 metro tractorthis market. Combining the startability and continuous, uninterrupted power qualities of a fully-automatic transmission with the cruising aspects of a manual transmission, the TC10 offers an alternative to traditional manual and automated manual transmissions in tractor applications.We sell substantially all of our transmissions in the North American on-highway market to OEMs. These OEMs, in turn, install our transmissions in vehicles in which our transmission is either the exclusive transmission available or is specifically requested by end users who are choosing between a manual transmission, an AMT or a fully-automatic transmission.users. In 2015,2018, OEM customers representing over 90%95% of our North American on-highway unit volume participated in long-term supply agreements (“LTSA”) with us. Generally, these supply agreementsLTSAs offer the OEM customer defined levels of mutual commitment with respect to growing Allison’s presence in the OEMs’ products and promotional efforts, pricing and sharing of commodity cost risk. The length of our customer agreementsLTSAs is typically between three and five years. We often compete in this market against independent manufacturers of manual transmissions, AMTs, DCTs, electric drive systems, fully-automatic transmissions manufactured by Ford Motor Company (“Ford”), ZF Friedrichshafen AG (“ZF”) and Voith GmbH, (“Voith”), and against vertically integrated OEMs in certain weight classes that use their own internally manufactured transmissions in certain vehicles.The following table presents a summary of our competitive position by vehicle class in the North America on-highwayOn-Highway end market. CLASS 8 STRAIGHT
TRUCKS SCHOOL BUSES MOTORHOMES 2015 SHARE 5% 77% 61% 98% 40% PRIMARY COMPETITION Hybrid Transit Buses.The interest in conserving fuel and reducing greenhouse gas emissions is driving demand for more fuel efficient commercial vehicles. In North America, we sold approximately 60% of all units for the hybrid transit bus market in 2015. Our customers in this North American end market are typically city, state and federal governmental entities, which utilize government funds to subsidize a portion of the purchase price for the transit buses containing our hybrid-propulsion system. In this market, we compete primarily with BAE Systems plc (“BAE”). CLASS 4-5TRUCKSCLASS 6-7TRUCKSCLASS 8 STRAIGHTTRUCKSSCHOOL BUSES MOTORHOMES 2018 SHARE7% 74% 70% 88% 39% PRIMARY COMPETITION• Ford • Manual Transmissions• AMTs• Ford• Manual Transmissions• AMTs• Ford • Ford Off-Highway.We have provided products used in vehicles and equipment that serve energy, mining and construction applications in North America for over 5060 years. Off-highway energy applications include hydraulic fracturing equipment, well-stimulation equipment, pumping equipment, and well-servicing rigs, which often use a fully-automatic transmission to propel the vehicle and drive auxiliary equipment. We maintain a leadership position in this end market, with nearly all producers of well-stimulation and well-servicing equipment utilizing our heavy duty off-highway transmissions. Additionally, we sell kits that can increase the horsepower of our existing off-highway products. Competition includes Caterpillar Inc. (“Caterpillar”) and Twin Disc, Inc. (“Twin Disc”).We also provide heavy-duty transmissions used in mining trucks, specialty vehicles and construction vehicles. Mining applications include trucks used to haul various commodities and other products, including rigid dump trucks, underground trucks and long-haul tractor trailer trucks with load capacities between 40 to 110 tons. Our major competitors in this end market are Caterpillar and Komatsu Ltd. (“Komatsu”), both of which are vertically integrated and manufacture fully-automatic transmissions for their own vehicles. Specialty vehicles using our heavy-duty transmissions include airport rescue and firefighting vehicles and heavy-equipment transporters. Our major competitor in this end market is Twin Disc. Construction applications include articulated dump trucks, with Caterpillar, Volvo Group (“Volvo”) and ZF as competitors.Outside North AmericaOutside North America we serve several different markets, including: Europe, Middle East, Africa (“EMEA”(collectively, “EMEA”), Asia-Pacific and South America and India.On-Highway.We are the largest manufacturer of fully-automatic transmissions for the commercial vehicle market outside of North America. While the use of fully-automatic transmissions in the medium- and heavy-duty commercial vehicle market has been widely accepted in North America, the markets outside North America continue to be dominated by manual transmissions. In 2015,2018, fully-automatic transmission-equipped medium- and heavy-duty commercial vehicles represented less than 5% of the vehicles in markets outside North America and are concentrated in certain vocational end markets. The following is a summary of our on-highway net sales by region outside of North America.
Europe, Middle East, Africa. EMEA is composed of several different markets, each of which differs significantly from our core North American market by the degree of market maturity, sophistication and acceptance of fully-automatic transmission technology. Within Europe, we serve Western European developed markets, as well as Russian and Eastern European emerging markets, principally in the refuse, emergency, bus, coach, distribution and utility markets. Competition in Western Europe is most notably characterized by a high level of vertical powertrain integration with OEMs often utilizing their own manual transmissions and AMTs in their vehicles. The Middle East and Africa regions are generally characterized by very limited local vehicle production, with imports from the U.S., South America, Turkey, China, India and Europe accounting for the majority of vehicles.Asia-Pacific. Our key Asia-Pacific markets include China, Japan, Australia,India, and South Korea; however, we actively participate in several other important Asia-Pacific countries including Australia, Taiwan, Indonesia, Malaysia and Thailand, which are primarily importers of commercial vehicles. Within Asia-Pacific, our sales efforts are principally focused on the transit bus and vocational truck markets. Currently, manual transmissions are the predominant transmissions used in commercial vehicles in the Asia-Pacific region.South America. The South American region is characterized by a high level of OEM integration, with captive manual transmission and AMT manufacturing. Currently, manual transmissions are the predominant transmissions used in commercial vehicles in South America.India. Currently, manual transmissions are the predominant transmission used in commercial vehicles in India.Off-Highway.The following is a summary of our off-highway net sales by region outside of North America.
Europe, Middle East, Africa.Our off-highway markets in EMEA are mining and construction. Our major off-highway competitors are Caterpillar and Komatsu, both of which are vertically integrated manufacturers of off-highway mining vehicles, including the specific fully-automatic transmission used in their mining trucks. A typical construction application is the articulated dump truck, with competition from Caterpillar, Volvo and ZF transmissions.Asia-Pacific. Off-highway markets in Asia are shared by energy, mining and construction applications. Our primary competitors are Caterpillar, Danyang Winstar Auto Parts Co., Ltd. and Twin Disc in energy applications,applications; Caterpillar, Komatsu and KomatsuDanyang Winstar Auto Parts Co., Ltd. in mining applicationsapplications; and Caterpillar, Volvo and ZF in construction applications.DefenseWe have a long-standing relationship with the U.S. Department of Defense (“DOD”), dating back to 1946, when we began developing our first-generation tank transmission. Today, we sell substantially all of the transmissions for medium- and heavy-tactical wheeled vehicle platforms including the Family of Medium Tactical Vehicles, Armored Security Vehicles, Heavy Expanded Mobility Tactical Trucks, Heavy Equipment Transporters, Palletized Loading Systems, M915 Series Trucks, Medium Tactical Vehicle Replacements and the Logistic Vehicle System Replacement. Additionally, we supplied transmissions for the majority of Mine-Resistant Ambush Protected (“MRAP”) Vehicles, and the MRAP All-Terrain Vehicle and for the Joint Light Tactical Vehicles,Vehicle, which is the replacement vehicle for Humvee personnel transport. Transmissions for our wheeled vehicle platforms are typically sold to OEMs.We are also the supplier on two of the three key tracked vehicle platforms, the Abrams tank and the M113 family of vehicles, which are sold directly to the DOD. Additionally, we sell parts kits to licensees for the production of transmissions for tracked vehicles manufactured outside North America. Overall, we have seenSee Part I, Item 1A, “Risk Factors” of this Annual Report on Form 10-K for a discussion of risks associated with our contracts with the demand for U.S. defense vehicles decrease as the funding for defense vehicles declines. Additionally, the DOD budgets and supplemental spending have allowed them to recapitalize and reset many vehicle systems, which has reduced the average age of the fleet and the need to procure new vehicles.Globally, we face competition for the supply of our transmissions in tracked defense vehicles primarily from L-3 Communications Corporation,L3 Technologies, Inc., Renk AG and ZF. Additionally, we face limited competition from Caterpillar and ZF in certain defense wheeled vehicle platforms.Service Parts, Support Equipment and OtherThe aftermarket provides us with a relatively stable source of revenues as the installed base of vehicles and equipment utilizing our transmissions continues to grow. The need for replacement parts is driven by normal vehicle and equipment maintenance requirements and is not significantly impacted by economic cycles.requirements. Uninterrupted operation is generally critical for end users’ profitability. End users focus on getting the vehicle or equipment back in service, which in some cases results in the aftermarket purchase decision being less price-sensitive.The sale of Allison-branded parts and fluids, remanufactured transmissions and support equipment is fundamental to our brand promise. We have assembled a worldwide network of approximately 1,400 independent distributor and dealer locations to sell, service and support our transmissions. As part of our brand strategy, our distributors and dealers are required to sell genuine Allison-branded parts. Within the aftermarket, we offer remanufactured transmissions under our ReTran brand, which provides a cost-effective alternative for transmission repairs and replacements. We also provide support equipment to our OEMs to assist in installing new Allison transmissions into vehicles, and, therefore, sales of support equipment are dependent upon sales of new transmissions.Over the last few years, traditional aftermarket sales have been tempered by improvements in product quality and durability. While traditional aftermarket sales are expected to grow, support equipment sales fluctuate with the introduction of new transmissions. The competition for service parts and ReTran transmissions comes from a variety of smaller-scale companies sourcing non-genuine “will-fit” parts from unauthorized manufacturers. These “will-fit” parts often do not meet our product specifications, and therefore may be of lesser quality than genuine Allison parts.Our Product OfferingsAllison transmissions are sold under the Allison Transmission brand name and remanufactured transmissions are sold under the ReTran brand name. The following is a summary of our 1312 transmission product lines.
Product Development and EngineeringWe maintain product development and engineering capability dedicated to the design, development, refinement and support of our fully-automatic transmissions and electric hybrid-propulsion systems. We believe our customers expect our products to provide unparalleled performance and value defined in various ways, including delivering maximum cargo in minimum time, using the least amount of fuel possible while employing the fewest vehicles possible and experiencing maximum vehicle uptime. In response to those needs and the evolving customer focus on fuel efficiency, we provide vehicle specification guidelines, transmission control software and mechanical components to optimize fuel economy while delivering desired vehicle performance. Further, we are developing new technology to improve fuel efficiency and fuel economy by allowing engines to operate more efficiently and at lower speeds to avoid consuming fuel without compromising performance. Building on our engineering capabilities, we pioneered electric hybrid-propulsion in commercial vehicles and are developing new alternative technologies for use in our global commercial vehicle markets; however, decreased fuel costs, alternative fuels and other technologies have resulted in deteriorating market conditions for hybrid-propulsion vehicles in recent years. For the years ended December 31, 2015, 2014 and 2013, we have invested $92.5 million, $103.8 million and $97.1 million in engineering – research and development expense, respectively.initiatives, such as our engineering development agreement with Torotrak plc and our development agreement with Fallbrook Technologies, Inc. For the years ended December 31, 2015, 2014 and 2013, we have invested $0.2 million, $6.1 million and $6.0 million, respectively, in engineering – research and development expense related to technology-related licenses.We maintain test tracks on our Indianapolis, Indiana campus and at our location in Szentgotthard, Hungary for vehicle drive, testing and calibration activities in addition to being a demonstration venue for customers. We also use test track facilities in New Carlisle, Indiana and Apache Junction, Arizona.Sales and Marketing OrganizationOur sales and marketing effort is organized along geographic and customer lines and is comprised of marketing, sales and service professionals, supported by application engineers worldwide. In North America, selling efforts in the on-highway end market are organized by distributor area responsibility, OEM sales and, national accounts, for our large end users.users, national accounts. Outside North America, we manage our sales, marketing, service and application engineering professionals through regional areas of responsibility. These regional management teams distribute OEM service and application engineering resources globally. We manage our defense products sales, marketing, service and application engineering through professionals based in Indianapolis, Indiana and Detroit, Michigan.We have developed a marketing strategy to reach OEM customers as well as end users. We target our end users primarily through marketing activities by our sales staff, who directly call on end users and attend local trade shows, targeting specific vocations globally and through our plant tour programs, where end users may test our products on the Indianapolis test track and our enhanced customer experience demonstration track at our Hungary facility.While our marketing management uses the term “customer” interchangeably for OEMs and end users, the primary objective of our marketing strategy is to create demand for fully-automatic transmissions through:OEM promotion of our products and incorporation of fully-automatic transmissions in their commercial vehicle product offerings;
In addition, in conjunction with the sale of Allison (the “Acquisition Transaction”) by Old GM, we acquired
Allison trademarks.
Under
During the third quarter of 2015, the EPA determined that GM’s remedial activities were complete and that the migration of any contamination is under control, and published a public notice seeking comment on a draft final decision, the issuance of which would result in us assuming responsibility for operating, monitoring and maintaining the ongoing Corrective Action activities throughinto an anticipated agreedadministrative order of consent (“AOC”) with the EPA. As a result of the publishing of the draft final decision, we determinedEPA that appropriate liabilities for operating, monitoring and maintaining the ongoing remedial activities could be reasonably estimated and recorded approximately $14.0 million for the estimated undiscounted liabilitiesrequires us to be paid out over the next 30 years. The recorded liabilities will be adjusted periodically as remediation efforts progress or as additional technical, regulatory or legal information becomes available. We expect to fund the expenditures for these activities from operating cash flow.
On January 27, 2016, the EPA issued a final decision. With the AOC,provide financial assurance is required by the EPA to complete the operation, monitoring and maintenance activities in the event we fail to do so. This financial assurance can take a variety of forms including, but not limited to meeting certain financial metrics, providingWe currently have a letter of credit or securing a bond or an insurance policy. Thewith the EPA in the amount and method by which we will be required to provide financial assurance is expected to be determined in 2016.
of $15 million.
ITEM 1A. Risk FactorsThe following is a cautionary discussion of risks, uncertainties and assumptions that we believe are significant to our business. In addition to the factors discussed elsewhere in this Annual Report on Form 10-K, the following are some of the important factors that, individually or in the aggregate, we believe could make our actual results differ materially from those described in any forward-looking statements. It is impossible to predict or identify all such factors and, as a result, you should not consider the following factors to be a complete discussion of risks, uncertainties and assumptions.Risks Related to Our BusinessWe participate in markets that are competitive, and our competitors’ actions could have a material adverse effect on our business, results of operations and financial condition.Our business operates in competitive markets. We compete against other existing or new global manufacturers of transmissions for commercial vehicles on the basis of product performance, quality, price, distribution capability and service in addition to other factors. In addition, we compete with manufacturers developing alternative technologies, including electric drivetrains, that may or may not require a transmission. In addition, subsidies offered by governmental entities continue to drive the development and adoption of various alternative technologies. Actions by our competitors could lead to downward pressure on prices and/or a decline in our market share, either or both of which could adversely affect our results.In addition, some of our customers or future customers are OEMs that manufacture or could in the future manufacture transmissions or alternate technologies, including electric drive powertrains, for their own products. Despite their transmission manufacturing abilities,capabilities, our existing OEM customers have chosen to purchase certain transmissions from us due to customer demand, resulting from the quality of our transmission products and in order to reduce fixed costs, eliminate production risks and maintain company focus. However, we cannot be certain these customers will continue to purchase our products in the future. Increased levels of production insourcing by these customers could result from a number of factors, such as shifts in our customers’ business strategies, acquisition by a customer of another transmission manufacturer, the inability of third-party suppliers to meet specifications and the emergence of low-cost production opportunities in foreign countries. As a result, these OEMs may use transmissions produced internally or by another manufacturer and no longer choose to purchase transmissions from us. A significant reduction in the level of external sourcing of transmission production by our OEM customers could significantly impact our net sales and cash flows and, accordingly, have a material adverse effect on our business, results of operations and financial condition.Certain of our end users operate in highly cyclical industries, which can result in uncertainty and significantly impact the demand for our products, which could have a material adverse effect on our business, results of operations and financial condition.Some of the markets in which we operate, including energy, mining, construction, distribution and motorhomes, exhibit a high degree of cyclicality. Decisions to purchase our transmissions are largely a result of the performance of these and other industries we serve. If demand for output in these industries decreases, the demand for our products will likely decrease. Demand in these industries is impacted by numerous factors including prices of commodities, rates of infrastructure spending, housing starts, real estate equity values, interest rates, consumer spending, fuel costs, energy demands, municipal spending and commercial construction, among others. Increases or decreases in these variables globally may significantly impact the demand for our products, which could have a material adverse effect on our business, results of operations and financial condition. If we are unable to accurately predict demand, we may be unable to meet our customers’ needs, resulting in the loss of potential sales, or we may manufacture excess products, resulting in increased inventories and overcapacity in our production facilities, increasing our unit production cost and decreasing our operating margins.Continued volatilityVolatility in and disruption to the global economic environment could adversely affectand changes in the ability of customersregulatory and suppliers to obtain credit andbusiness environments in which we operate may have a material adverse effect on our business, results of operations and financial condition.The commercial vehicle industry as a whole has been more adversely affected by volatile economic conditions than many other industries, as the purchase or replacement of commercial vehicles, which are durable items, can be deferred for many reasons, including reduced spending by end users. Future changes in the regulatory and business environments in which we operate may adversely affect our ability to sell our products or source materials needed to manufacture our products. Furthermore, financial instability or bankruptcy at any of our suppliers or customers could disrupt our ability to manufacture our products and impair our ability to collect receivables, any or all of which may have a material adverse effect on our business, results of operations and financial condition. In addition, some of our customers and suppliers may experience serious cash flow problems and, thus, may find it difficult to obtain financing, if financing is available at all. As a result, our customers’ need for and ability to purchase our products or services may decrease, and our suppliers may increase their prices, reduce their output or change their terms of sale. Any inability of customers to pay us for our products and services, or any demands by suppliers for different payment terms, may materially and adversely affect our results of operations and financial condition. Furthermore, our suppliers may not be successful in generating sufficient sales or securing alternate financing arrangements, and therefore may no longer be able to supply goods and services to us. In that event, we would need to find alternate sources for these goods and services, and there is no assurance we would be able to find such alternate sources on favorable terms, if at all. Any such disruption in our supply chain could adversely affect our ability to manufacture and deliver our products on a timely basis, and thereby affect our results of operations.We may not be successful in introducing our new products and technologies and responding to customer needs.We currently have new products and technologies under development. The development of new products and technologies is difficult and the timetable for commercial release is uncertain. Not all new product launches have been successful, and we may not be successful in the future in introducing other new products and responding to customer needs. In addition, it often takes significant time, in some cases multiple fleet buy cycles, before customers gain experience with new products and technologies and those new products and technologies become widely-accepted by the market, if at all. If we do not adequately anticipate the changing needs of our customers by developing and introducing new and effective products and technologies on a timely basis, our competitive position and prospects could be harmed. If our competitors are able to respond to changing market demands and adopt new technologies more quickly than we do, demand for our products could decline, our competitive position could be harmed, our future research and development activities may be constrained due to intellectual property rights of others and we will not be able to recoup a return on our development investments. Moreover, changing customer demands as well as evolving regulatory, safety and environmental standards could require us to adapt our products and technologies to address such changes. As a result, in the future we may experience delays in the introduction of some or all of our new products or modifications or enhancements of existing products. Furthermore, there may be production delays due to unanticipated technological setbacks, which may, in turn, delay the release of new products to our end users. If we experience significant delays or increased costs in the production, launch or acceptance of our products and technologies, our net sales and results of operations may be materially adversely affected.Our sales are concentrated among our top five OEM customers and the loss or consolidation of any one of these customers or the discontinuation of particular vehicle models for which we are a significant supplier could reduce our net sales and have a material adverse effect on our results of operations and financial condition.We have in the past and may in the future derive a significant portion of our net sales from a relatively limited number of OEM customers. For the years ended December 31, 2018, 2017 and 2016, our top five OEM customers accounted for approximately 49%, 49% and 52% of our net sales, respectively. Our top two customers, Daimler AG and PACCAR Inc. accounted for approximately 18% and 10%, respectively, of our net sales during 2018. The loss of, or consolidation of, any one of these customers, or a significant decrease in business from, one or more of these customers could harm our business. In addition, the discontinuation of particular vehicle models for which we are a significant supplier could reduce our net sales and have a material adverse effect on our results of operations.Our success depends on continued research and development efforts, the outcome of which is uncertain.Our success depends on our ability to improve the efficiency and performance of our transmissions, and we invest significant resources in research and development in order to do so. Nevertheless, the research and development process is time-consuming and costly, and offers uncertain results. We may not be able through our research and development efforts to keep pace with improvements and changes in transmission-related or vehicle propulsion technology of our competitors, and licenses for technologies that would enable us to keep pace with our competitors may not be available on commercially reasonable terms if at all. Finally, our research and development efforts, and generally our ability to introduce improved or new products in the marketplace, may be constrained by the patents and other intellectual property rights of competitors and others.We may not be able to identify or consummate acquisitions or achieve expected benefits from or effectively integrate acquisitions, which could harm our growth.From time to time we evaluate selective acquisitions and strategic investments to obtain additional technologies, complementary product lines and supply channels. Acquisitions involve many risks that could have an adverse effect on our business, financial condition or results of operations, including:our ability to identify suitable acquisition candidates, prevail against competing potential acquirers and negotiate and consummate acquisitions on terms attractive to us;difficulties in integrating personnel and sales forces, operations, manufacturing, logistics, research and development, information technology, communications, purchasing, accounting, marketing, administration and other systems and processes and otherwise assimilating the operations of the acquired company;the diversion of resources, including diverting management’s attention from our current operations;risks of entering new geographic or product markets in which we have limited or no direct prior experience;the potential loss of key customers, employees or suppliers of the acquired company or adverse effects on our existing business relationships with our suppliers and customers;the potential incurrence of indebtedness to fund the acquisition;the acquired business not achieving anticipated revenues, earnings, cash flow or market share;excess capacity;failure to achieve the expected synergies or cost savings resulting from the acquisition;the need for additional investments post-acquisition that could be greater than anticipated;the impact of U.S. and foreign competition laws and regulations on our ability to make certain acquisitions;inaccurate assessment of undisclosed, contingent or other liabilities or problems and unanticipated costs associated with the acquisition;incorrect estimates made in accounting for acquisitions, incurrence of non-recurring charges and write-off of significant amounts of goodwill that could adversely affect our financial results; anddilution of earnings.We may also face liability with respect to acquired businesses for violations of environmental or other laws occurring prior to the date of our acquisition, and some or all of these liabilities may not be covered by environmental or other insurance secured to mitigate the risk or by indemnification from the sellers from which we acquired these businesses. We could also incur significant costs, including, but not limited to, remediation costs, natural resources damages, civil or criminal fines and sanctions and third-party claims, as a result of past or future violations of, or liabilities associated with, environmental or other laws.We cannot offer any assurance that we will be able to consummate any future acquisitions, strategic investments or other business combinations. If we are unable to identify suitable acquisition candidates or to consummate and successfully integrate strategic acquisitions, our business and results of operations may be adversely affected as a result.Increases in cost, disruption of supply or shortage of raw materials or components used in our products could harm our business and profitability.Our products contain various raw materials, including corrosion-resistant steel, non-ferrous metals such as aluminum and nickel, and precious metals such as platinum and palladium. We use raw materials directly in manufacturing and in transmission components that we purchase from our suppliers. We generally purchase components with significant raw material content on the open market. The prices for these raw materials fluctuate depending on market conditions. Volatility in the prices of raw materials such as steel, aluminum and nickel could increase the cost of manufacturing our products. We may not be able to pass on these costs to our customers, andthis could have a material adverse effect on our business, results of operations and financial condition. Even in the event that increased costs can be passed through to customers, our gross margin percentages would decline. Additionally, our suppliers are also subject to fluctuations in the prices of raw materials and may attempt to pass all or a portion of such increases on to us. In the event they are successful in doing so, our margins would decline.In 2018, approximately 75% of our total spending on components was sourced from approximately 35 suppliers, some of which are the single source for such components. All of the suppliers from which we purchase materials and components used in our business are fully validated suppliers, meaning the suppliers’ manufacturing processes and inputs have been validated under a production part approval process (“PPAP”). Furthermore, there are only a limited number of suppliers for certain of the materials used in our business, such as corrosion-resistant steel. As a result, our business is subject to the risk of additional price fluctuations and periodic delays in the delivery of our materials or components if supplies from a validated supplier are interrupted and a new supplier, if one is available, must be validated or materials and components must be purchased from a supplier without a completed PPAP, which could increase our risk of purchasing non-conforming components. Any such price fluctuations or delays, if significant, could harm our profitability or operations. In addition, the loss of a supplier could result in significant material cost increases or reduce our production capacity. We also cannot guarantee we will be able to maintain favorable arrangements and relationships with these suppliers. An increase in the cost or a sustained interruption in the supply or shortage of some of these raw materials or components that may be caused by a deterioration of our relationships with suppliers or by events such as natural disasters, power outages, labor strikes, or the like could negatively impact our business, results of operations and financial condition. Although we have agreements with many of our customers that we will pass such price increases through to them, such contracts may be canceled by our customers and/or we may not be able to recoup the costs of such price increases. Additionally, if we are unable to continue to purchase our required quantities of raw materials on commercially reasonable terms, or at all, if we are unable to maintain or enter into purchasing contracts for commodities, or if delivery of materials from suppliers is delayed or non-conforming, our operations could be disrupted or our profitability could be adversely impacted.We could be materially adversely affected by any failure to maintain cost controls.We rely on our cost structure and operating discipline to achieve strong operating margins. There are many factors that could affect our ability to realize expected cost savings or achieve future cost savings that we are not able to control, including the need for unexpected significant capital expenditures; unexpected changes in commodity or component pricing, including an increase in export or import tariffs, that we are unable to pass on to our suppliers or customers; labor costs, including wages, benefits and healthcare; cost inflation; and our inability to maintain efficiencies gained from our workforce optimization initiatives. Additionally, we have substantial indebtedness of approximately $2,548 million as of December 31, 2018. Our inability to maintain our cost controls could adversely impact our operating margins.Our long-term growth prospects and results of operations may be impaired if the rate of adoption of fully-automatic transmissions in commercial vehicles outside North America does not increase.Our long-term growth strategy depends in part on an increased rate of automaticity outside North America. As part of that strategy, we have established manufacturing facilities in India and Hungary. We have also dedicated significant human resources to serve markets where we anticipate increased adoption of automaticity, including China, India, Brazil and Russia. However, manual transmissions remain the market leader outside North America and there can be no assurance that adoption of automatic transmissions will increase. Factors potentially impacting adoption of automatic transmissions outside of North America may include the large existing installed base of manual transmissions, customer preferences for manual transmissions, commercial vehicle OEM vertical integration into manual transmission and AMT manufacturing, increased competition from AMTs, DCTs, electric driving systems, and other alternative transmission technologies and failure to further develop the Allison brand. If the rate of adoption of fully-automatic transmissions does not increase as we have anticipated, our long-term growth prospects and results of operations may be impaired.Our sales are concentrated among our top five OEM customers and the loss or consolidation of any one of these customers or the discontinuation of particular vehicle models for which we are a significant supplier could reduce our net sales and have a materially adverse effect on our results of operations.We have in the past and may in the future derive a significant portion of our net sales from a relatively limited number of OEM customers. For the years ended December 31, 2015, 2014 and 2013, our top five customers accounted for approximately 52%, 45% and 48% of our net sales, respectively. Our top three customers, Daimler, Navistar and Volvo, accounted for approximately 21%, 10% and 10%, respectively, of our net sales during 2015. The commercial vehicle industry, including our customers and suppliers, continues to experience volatility and uncertainty. The loss of, or consolidation of any one of these customers, or a significant decrease in business from, one or more of these customers could harm our business. In addition, the discontinuation of particular vehicle models for which we are a significant supplier could reduce our net sales and have a material adverse effect on our results of operations.Sales of our hybrid-propulsion systems have been, and are expected to continue to be, negatively impacted by external factors, including fuel price trends, regulatory requirements, alternative technologies and governmental entities electing not to subsidize the purchase of such products by end users.External factors, including diesel and natural gas fuel price trends, emissions and on-board diagnostics regulatory requirements, availability of compatible engine calibrations from engine manufacturers and alternative emerging green technologies, have, and are expected to continue to, negatively impact sales of our hybrid-propulsion systems. In addition, the sales of our hybrid-propulsion systems for use in transit buses have been, and are expected to continue to be, negatively impacted by governmental entities electing not to subsidize the purchase of such products by end users. In 2015, we derived approximately 4% of our net sales from the sale of hybrid-propulsion systems for use in transit buses to city, state and federal governmental end users. Such end users may be eligible to receive certain subsidies as a result of their purchase of vehicles using hybrid-propulsion systems. For example, the Federal Transit Authority and the DOE provide funds for end users to pursue alternative fuel propulsion systems. While we do not directly receive these subsidies, if any of the subsidizing entities elect to curtail such subsidies to end users for any reason including governmental budget reductions and related fiscal matters, failure of our hybrid technology to qualify for such subsidies or redundancy by alternative technologies created by our competitors, our sales from our hybrid-propulsion systems may be negatively impacted. For the years ended December 31, 2015, 2014 and 2013, we experienced decreases in revenue generated from hybrid-propulsion systems for use in transit buses of 22%, 11% and 9%, respectively.A majority of our sales to the defenseDefense end market are to U.S. government entities and contractors for the U.S. government,and foreign governments, and the loss of a significant number of our contracts, or budgetary declines or future reductions or changes in spending by the U.S. government wouldor foreign governments could have a material adverse effect on our results of operations and financial condition.The majority of ourOur net sales to the defenseDefense end market are derived from contracts (revenue arrangements) with agencies of, and prime system contractors for, the U.S. government.government and foreign governments. If a significant number of our DODDefense contracts and subcontracts are simultaneously delayed or cancelled for budgetary, performance or other reasons, it would have a material adverse effect on our results of operations and financial condition. Approximately 6%, or $113$158 million, of our net sales for the year ended December 31, 20152018 were from our Defense end market.Sales in our defense end market have been, and we expect will continue to be, negatively impacted by declining DOD spending on wheeled and tracked vehicles. In addition to declines in defense budgets, ourOur future financial results may be adversely affected by:declines in, or uncertainty regarding, U.S. or foreign government defense budgets;curtailment of the U.S. government’s use of technology or other services and product providers, including curtailment due to government budget reductions, future government shutdowns and related fiscal matters;
Any events that impact our brand name, including if the products we manufacture or distribute are found to be defective, could have an adverse effect on our reputation, cause us to incur significant costs and negatively impact our business, results of operations and financial condition.
We face exposure to product liability claims in the event that the use of our products has, or is alleged to have, resulted in injury, death or other adverse effects. We currently maintain product liability insurance coverage, but we cannot be assured that we will be able to obtain such insurance on acceptable terms in the future, if at all, or that any such insurance will provide adequate coverage against potential claims. Product liability claims can be expensive to defend and can divert the attention of management and other personnel for long periods of time, regardless of the ultimate outcome. An unsuccessful product liability defense could have a material adverse effect on our business, results of operation, financial condition or prospects. If one of our products is determined to be defective, we may face substantial warranty costs and may be responsible for significant costs associated with a product recall or a redesign. We have had defect and warranty issues associated with certain of our products in the past, and we cannot give assurance similar product defects will not occur in the future. See NOTE 9 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional details regarding these warranty issues.
Furthermore, our business depends on the strong brand reputation we have developed. In addition to the risk of defective products we face with our new product installations, we also face significant risks in our efforts to penetrate new markets, where we have limited brand recognition. We also rely on our reputation with end users of our transmissions to specify our transmissions when purchasing new vehicles from our OEM customers. In the event we are not able to maintain or enhance our brand in these new markets or our reputation is damaged in our existing markets as a result of product defects or recalls, we may face difficulty in maintaining our pricing positions with respect to some of our products or experience reduced demand for our products, which could negatively impact our business, results of operations and financial condition.
Our brand and reputation are dependent on the continued participation and level of service of our numerous independent distributors and dealers.
We work with a network of approximately 1,400 independent distributors and dealers that provide post-sale service and parts and support equipment. Because we depend on the pull-through demand generated by end users for our products, any actions by the independent distributors or dealers, which are not in our control, may harm our reputation and damage the brand loyalty among our customer base. In the event that we are not able to maintain our brand reputation because of the actions of our independent distributors and dealers, we may face difficulty in maintaining our pricing positions with respect to some of our products or have reduced demand for our products, which could negatively impact our business, results of operations and financial condition. In addition, if a significant number of independent dealers were to terminate their contracts, it could adversely impact our business, results of operations and financial condition.
In the event of a catastrophic loss of our key manufacturing facility, our business would be adversely affected.
While we manufacture our products in several facilities and maintain insurance covering our facilities, including business interruption insurance, a catastrophic loss of the use of all or a portion of one of our manufacturing facilities due to accident, labor issues, weather conditions, acts of war, political unrest, terrorist activity, natural disaster or otherwise, whether short- or long-term, would have a material adverse effect on our business, results of operations and financial condition. Our most significant concentration of manufacturing is around our corporate headquarters in Indianapolis, Indiana where we produce approximately 90% of our transmissions. In addition to our Indianapolis manufacturing facilities, we currently operate manufacturing facilities in both Szentgotthard, Hungary and Chennai, India. In the event of a disruption at the Indianapolis facilities, our other facilities may not be adequately equipped to operate at a level sufficient to compensate for the volume of production at the Indianapolis facility due to their size and the fact that they have not yet been tested for such significant increases in production volume.
We may not be successful in introducing our new products and responding to customer needs.
We currently have new products and technologies under development. The development of new products and technologies is difficult and the timetable for commercial release is uncertain, and we may not be successful in introducing our new products and responding to customer needs. In addition, it often takes significant time, in some cases multiple fleet buy cycles, before customers gain experience with new products and technologies and those new products and technologies become widely-accepted by the market. If we do not adequately anticipate the changing needs of our customers by developing and introducing new and effective products and technologies on a timely basis, our competitive position and prospects could be harmed. If our competitors are able to respond to changing market demands and adopt new technologies more quickly than we do, demand for our products could decline, our competitive position could be harmed, and we will not be able to recoup a return on our development investments. Moreover, changing customer demands as well as evolving safety and environmental standards could require us to adapt our products and technologies to address such changes. As a result, in the future we may experience delays in the introduction of some or all of our new products or modifications or enhancements of existing products. Furthermore, there may be production delays due to unanticipated technological setbacks, which may, in turn, delay the release of new products to our end users. If we experience significant delays in production, our net sales and results of operations may be materially adversely affected.
Our success depends on continued research and development efforts, the outcome of which is uncertain.
Our success depends on our ability to improve the efficiency and performance of our transmissions, and we invest significant resources in research and development in order to do so. Nevertheless, the research and development process is time-consuming and costly, and offers uncertain results. We may not be able through our research and development efforts to keep pace with improvements in transmission-related technology of our competitors, and licenses for technologies that would enable us to keep pace with our competitors may not be available on commercially reasonable terms if at all. Finally, our research and development efforts, and generally our ability to introduce improved products in the marketplace, may be constrained by the patents and other intellectual property rights of competitors and others.
Our international operations, in particular our emerging markets, are subject to various risks which could have a material adverse effect on our business, results of operations and financial condition.Our business is subject to certain risks associated with doing business internationally, particularly in emerging markets. Outside-North America net sales represented approximately 19%23% of our net sales for 2015.2018. Most of our operations are in the U.S., but we also have manufacturing and customization facilities in India and Hungary with a services agreement with Opel Szentgotthard Automotive Manufacturing Ltd., formerly GM-PTH, and customization capability in Brazil, The Netherlands, China and Japan. Further, we intend to continue to pursue growth opportunities for our business in a variety of business environments outside the U.S., which could exacerbate the risks set forth below. Our international operations are subject to, without limitation, the following risks:the burden of complying with multiple and possibly conflicting laws and any unexpected changes in regulatory requirements;
Labor unrest
As
In addition to our unionized work force, manysome of our direct and indirect customers and vendors have unionized work forces. Strikes, work stoppages or slowdowns experienced by these customers or vendors or their other suppliers could result in slowdowns or closings of assembly plants that use our products or supply materials for use in the production of our products. Organizations responsible for shipping our products may also be impacted by strikes. Any interruption in the delivery of our products could reducehave reduced demand for our products, andwhich could have a material adverse effect on us.
In general, we consider our labor relations with all of our employees to be good. However, in the future we may be subject to labor unrest. The inability to reach a new agreement could delay or disrupt our operations in the affected regions, including the acquisition of raw materials and components, the manufacture, sales and distribution of products and the provision of services. If strikes, work stoppages or lock-outs at our facilities or at the facilities of our vendors or customers occur or continue for a long period of time,negatively impact our business, results of operations and financial conditioncondition. In addition, if a significant number of independent dealers were to terminate their contracts, it could adversely impact our business, results of operations and financial condition.
Increases in cost, disruption of supply or shortage of raw materials or components used in
Our products contain various raw materials, including corrosion-resistant steel, non-ferrous metals such as aluminum and nickel, and precious metals such as platinum and palladium. Weinterruption insurance, a catastrophic loss of the use raw materials directly inof all or a portion of one of our manufacturing and in transmission components that we purchase from our suppliers. We generally purchase components with significant raw material content on the open market. The prices for these raw materials fluctuate depending on market conditions. Volatility in the pricesfacilities due to accident, labor issues, weather conditions, acts of raw materials such as steel, aluminum and nickel could increase the cost of manufacturing our products. We may not be able to pass on these costs to our customers, and this couldwar, political unrest, terrorist activity, natural disaster or otherwise, whether short- or long-term, would have a material adverse effect on our business, results of operations and financial condition. EvenOur most significant concentration of manufacturing is around our corporate headquarters in the event that increased costs can be passed throughIndianapolis, Indiana, where we produce approximately 90% of our transmissions. In addition to customers, our gross margin percentages would decline. Additionally, our suppliers are also subject to fluctuationsIndianapolis manufacturing facilities, we currently operate manufacturing facilities in the prices of raw materialsboth Szentgotthard, Hungary and may attempt to pass all or a portion of such increases on to us.Chennai, India. In the event they are successful in doing so, our margins would decline.
In 2015, approximately 75% of our total spending on components was sourced from approximately 40 suppliers, some of which are the single source for such components. All of the suppliers from which we purchase materials and components used in our business are fully validated suppliers, meaning the suppliers’ manufacturing processes and inputs have been validated under a production part approval process (“PPAP”). Furthermore, there are only a limited number of suppliers for certain of the materials used in our business, such as corrosion-resistant steel. As a result, our business is subject to the risk of additional price fluctuations and periodic delays in the delivery of our materials or components if supplies from a validated supplier are interrupted and a new supplier, if one is available, must be validated or materials and components must be purchased from a supplier without a completed PPAP. Any such price fluctuations or delays, if significant, could harm our profitability or operations. In addition, the loss of a supplier could result in significant material cost increases or reducedisruption at the Indianapolis facilities, our production capacity. We also cannot guarantee we will be able to maintain favorable arrangements and relationships with these suppliers. An increase in the cost or a sustained interruption in the supply or shortage of some of these raw materials or components that may be caused by a deterioration of our relationships with suppliers or by events such as natural disasters, power outages, labor strikes, or the like could negatively impact our business, results of operations and financial condition. Although we have agreements with many of our customers that we will pass such price increases through to them, such contracts may be cancelled by our customers and/or weother facilities may not be ableadequately equipped to recoupoperate at a level sufficient to compensate for the costsvolume of production at the Indianapolis facility due to their size and the fact that they have not yet been tested for such price increases. Additionally, if we are unable to continue to purchase our required quantities of raw materials on commercially reasonable terms, or at all, if we are unable to maintain or enter into purchasing contracts for commodities, or if delivery of materials from suppliers is delayed or non-conforming, our operations could be disrupted or our profitability could be adversely impacted.
We could be materially adversely affected by any failure to maintain cost controls.
We rely on our cost structure and operating discipline to achieve strong operating margins. There are many factors that could affect our ability to realize expected cost savings or achieve future cost savings that we are not able to control, including the inability to meet demand through our low-cost country sourcing initiatives; the need for unexpected significant capital expenditures; unexpected changesincreases in commodity or component pricing that we are unable to pass on to our suppliers or customers; our inability to maintain efficiencies gained from our workforce optimization initiatives; and our failure to achieve and maintain expected cost savings from our multi-tier wage and benefit structure. Additionally, we have substantial indebtedness of approximately $2,402.8 million as of December 31, 2015. Our inability to maintain our cost controls could adversely impact our operating margins.
production volume.
is limited.
$93 million.
GM performed
The result of, or expiration of the statute of limitations for, such audits could have an impact on reported net income and cash flow from operations.
GM’s actions may materially affect our business and operating results.
Although we are an independent company as a result of the Acquisition Transaction, GM’s future actions may still have a material impact on our business and results of operations. Pursuant to the Cure Agreement after GM’s emergence from bankruptcy in 2009, GM has assumed certain agreements from its predecessor, including the asset purchase agreement, intellectual property and software license agreements and a hybrid co-branding agreement. GM’s failure to comply with any portion of these agreements for any reason, including the indemnities therein, could inhibit us from operating and expanding our business in the future.
Additionally, GM has received a non-exclusive, royalty-free, worldwide license to use the “Allison Transmission” name and certain related trademarks on GM’s line of A1000 transmissions for use primarily in Class 2 and 3 pick-up trucks. If GM, or any of its subsidiaries or affiliated entities, or any third party uses the trade name “Allison Transmission” in ways that adversely affect such trade name or trademark, our reputation could suffer damage, which in turn could have a material adverse effect on our business, results of operations and financial condition.
In connection with the Acquisition Transaction, we entered into a mutual non-compete agreement with GM that restricts GM from competing with us in non-defense vehicles in North America with gross vehicle weights above 5900 kilograms (typically Class 4 and higher) with some limited exceptions for certain GM light-duty pickup truck and van platforms. It also restricts GM from competing with us in defense vehicles globally and in non-defense vehicles outside North America that exceed 4250 kilograms (generally Class 3 to Class 4 and higher) with some limited exceptions. The non-compete periods extend until August 2017 globally, except in Europe, where they expired in 2012. Similarly, we are restricted from competing with GM in weight classes below the above mentioned thresholds for similar periods of time. Upon expiration of the non-competition periods, both Allison and GM will be permitted to compete with each other but such expiration will generally not affect Allison’s rights under the Patent and Technology License Agreement to use on an exclusive basis within its respective weight classes (subject to previously mentioned exceptions) the intellectual property that is licensed to Allison on an exclusive basis.
In addition, because of our current manufacturing services agreement with Opel Szentgotthard Automotive Manufacturing Ltd., a GM subsidiary, we may be materially adversely affected by the failure of GM to perform as expected. This non-performance may consist of delays or failures caused by production issues. The risk of non-performance may also result from the insolvency or bankruptcy of GM. GM’s ability to provide personnel and technical resources to us is also subject to a number of risks, including destruction of our equipment or work stoppages. In addition, our failure to provide an adequate facility, or order sufficient quantities of inventory, may increase the cost of production or may lead to GM refusing to provide resources to us at all. Our efforts to protect against and to minimize these risks may not always be effective.
Our annual goodwill impairment test for 2015 resulted in no goodwill impairment. Although our analysis regarding the fair value of goodwill indicates that it exceeds its carrying value, materially different assumptions regarding the future performance of our business could result in goodwill impairment losses. A review of our trade name in 2015 resulted in an impairment charge of $80.0 million. The impairment charge was triggered principally by lower forecasted net sales for certain of our end markets in the fourth quarter of 2015. The effects of the impairment did not result in any other charges to goodwill, other intangible assets or long-lived assets. See NOTE 2 “Summary of Significant Accounting Policies” and NOTE 56 “Goodwill and Other Intangible Assets” of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional details.
Resources” of this Annual Report on Form 10-K.
Facility, the indenture governing the 5.0% Senior Notes and the indenture governing the 4.75% Senior Notes as well as any future agreements.
UNRESOLVED STAFF COMMENTSITEM 1B. Unresolved Staff CommentsNone.
PROPERTIES Plant Description Plant #3 Engineering, Operational Support Plant #4 Manufacturing Plant #6 Manufacturing Plant Manufacturing Plant Manufacturing Plant Manufacturing Plant Dubai Distribution Sliedrecht Customization & DistributionITEM 2. PropertiesOur world headquarters, which we own, is located at One Allison Way, Indianapolis, Indiana 46222. As of December 31, 2015,2018, we have a total of 1716 manufacturing and certain other facilities in seven countries. The following table sets forth certain information regarding these facilities.Location ApproximateSize (ft2) Owned /Leased Indianapolis 927,000 Own Indianapolis 425,900 Own Indianapolis 431,500 Own #16#12 Indianapolis 534,900 391,700 Own #12#14 Indianapolis 481,100 534,900 Own #14#16 Indianapolis 391,700 481,100 Own #15#17 Indianapolis 389,000 126,400 Own Parts Distribution Center Plant #20 Tech. Center Indianapolis 59,000 Own Engineering & Testing Plant #21 Tech. Center Indianapolis 10,000 Own Engineering & Testing Szentgotthard Hungary 149,000 Own Manufacturing & Customization Szentgotthard Hungary 3,900 Own Sales & Marketing Support Shanghai China 38,000 Lease ManufacturingPlant #17Brazil Indianapolis31,400389,000 Own PartsCustomization & Distribution CenterPlant #20 Tech. CenterIndia Indianapolis258,50059,000 Own Engineering & TestingPlant #21 Tech. CenterIndianapolis10,000OwnEngineering & TestingSzentgotthardHungary149,000OwnManufacturing & CustomizationSzentgotthardHungary3,900OwnSales & Marketing SupportShanghaiChina38,000LeaseCustomization & DistributionSanto Amaro/SorocaboBrazil31,400OwnCustomization & DistributionChennaiIndia258,500OwnManufacturingUnited Arab Emirates 16,500 Lease The Netherlands 37,000 Lease We believe all our facilities are suitable for their intended purpose, are being efficiently utilized and provide adequate capacity to meet demand for the next several years. The table above does not include sales offices located in various countries.
LEGAL PROCEEDINGSITEM 3. Legal ProceedingsWe are subject to various contingencies, including routine legal proceedings and claims arising out of the normal course of business. These proceedings primarily involve commercial claims, product liability claims, personal injury claims and workers’ compensation claims. The outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty. Nevertheless, we believe the outcome of any of these currently existing proceedings, even if determined adversely, would not have a material adverse effect on our financial condition or results of operations. See also NOTE 17, “Commitments and Contingencies” in Part II, Item 8, of this Annual Report on Form 10-K.
MINE SAFETY DISCLOSURESITEM 4. Mine Safety DisclosuresNot applicable.PART II.
Year Ended December 31, 2015: First Quarter Second Quarter Third Quarter Fourth Quarter Year Ended December 31, 2014: First Quarter Second Quarter Third Quarter Fourth Quarter does not have an expiration date. October 1 – October 31, 2015 November 1 – November 30, 2015 December 1 – December 31, 2015 Total ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket InformationOur common stock is listed on the NYSE under the symbol “ALSN.” The following table sets forth the high and low sale prices per share for our common stock on the NYSE and the dividends declared per share for each quarter for the periods indicated: High Low Dividends
Declared $ 33.85 $ 31.14 $ 0.15 $ 32.31 $ 29.21 $ 0.15 $ 29.91 $ 26.12 $ 0.15 $ 29.28 $ 24.64 $ 0.15 $ 31.27 $ 26.41 $ 0.12 $ 31.42 $ 28.56 $ 0.12 $ 32.21 $ 28.34 $ 0.12 $ 34.62 $ 26.15 $ 0.15 HoldersAs of February 5, 2016,11, 2019, there were approximately 38,70068,300 stockholders of record of our common stock, which includes the actual number of holders registered on the books of the Company and holders of shares in “street name” or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depositories.DividendsOur Board of Directors declared a quarterly dividend of (i) $0.15 per share each quarter during 2015 and for the fourth quarter of 2014 and (ii) $0.12 per share for the first, second and third quarters of 2014. We expect to continue paying cash dividends on a quarterly basis; however, future dividends are subject to approval of the Board of Directors and may be adjusted as business needs or market conditions change. In addition, our Senior Secured Credit Facility restricts the payment of dividends under certain circumstances.Unregistered Sales of Equity SecuritiesDuring the period covered by this Annual Report on Form 10-K, we did not offer or sell any equity securities that were not registered under the Securities Act of 1933, as amended (the “Securities Act”).Issuer Purchases of Equity SecuritiesOn October 30, 2014,November 14, 2016, our Board of Directors authorized us to repurchase up to $500.0$1,000 million of our common stock pursuant to a stock repurchase program (“Repurchase Program”). The Board of Directors approved increases of $500 million on each of November 8, 2017 and July 30, 2018 bringing the authorized total repurchases under the Repurchase Program to $2,000 million. The terms of the Repurchase Program provide that we may repurchase shares of our common stock, from time to time depending on market conditions and corporate needs, in the open market or through privately negotiated transactions in accordance with Rule 10b-18 of the Exchange Act. Unless earlier terminated by our Board of Directors, theThe Repurchase Program will expire on December 31, 2016.The following table sets forth information related to our repurchase of our common stock on a monthly basis in the three months ended December 31, 2015: Total Number
of Shares
Purchased(1) Average Price
Paid per Share Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs(2) Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under Plans(2) — $ — — $ 203,773,549 348,505 $ 27.30 348,505 $ 194,260,559 1,807 $ 25.89 — $ 194,260,559 350,312 $ 27.29 348,505 Total Numberof SharesPurchased Average PricePaid per Share Total Number ofShares Purchasedas Part ofPubliclyAnnouncedPrograms(1) ApproximateDollar Value ofShares that MayYet Be PurchasedUnder Programs(1)October 1 – October 31, 2018 972,033 $ 45.05 972,033 $ 553,926,433 November 1 – November 30, 2018 783,969 $ 46.33 783,969 $ 517,604,485 December 1 – December 31, 2018 1,672,871 $ 43.38 1,672,871 $ 445,031,067 Total 3,428,873 3,428,873 (1) Shares purchased include 1,807 shares withheld to cover taxes due upon the vesting of restricted stock in December 2015.(2)These values reflect repurchases made under the Repurchase Program.
| As of March 15, 2012 | As of December 31, 2012 | As of December 31, 2013 | As of December 31, 2014 | As of December 31, 2015 | ||||||||||||||||
Allison Transmission Holdings, Inc. | $ | 100.00 | $ | 88.06 | $ | 121.20 | $ | 151.30 | $ | 117.90 | ||||||||||
S&P 500 Index | 100.00 | 103.52 | 137.04 | 155.80 | 157.96 | |||||||||||||||
Peer Group(1) | 100.00 | 98.89 | 135.29 | 144.86 | 143.33 | |||||||||||||||
As of December 31, 2013 | As of December 31, 2014 | As of December 31, 2015 | As of December 31, 2016 | As of December 31, 2017 | As of December 31, 2018 | ||||||||||||||||||
| Allison Transmission Holdings, Inc. | $ | 100.00 | $ | 124.83 | $ | 97.27 | $ | 129.44 | $ | 168.21 | $ | 173.83 | |||||||||||
| S&P 500 Index | 100.00 | 113.69 | 115.26 | 129.05 | 157.22 | 150.33 | |||||||||||||||||
| Peer Group | 100.00 | 107.07 | 105.94 | 119.10 | 165.84 | 151.86 | |||||||||||||||||
Consolidated Statements of Operations: Net sales Gross profit Operating expenses: Selling, general and administrative expenses Engineering — research and development Trade name impairment Environmental remediation Loss associated with impairment of long-lived assets Total operating expenses Operating income Other income (expense), net: Interest income Interest expense Premiums and expenses on tender offer and redemption of long-term debt Other expense, net Total other expense, net Income before income taxes Income tax (expense) benefit Net income Earnings Per Share Data: Basic earnings per share Weighted-average shares outstanding Diluted earnings per share Diluted weighted-average shares outstanding Dividends declared per common share Consolidated Balance Sheet Data: Cash and cash equivalents Total assets(1) Total debt(1) Stockholders’ equityITEM 6. Selected Financial DataThe following table sets forth certain financial information for the most recent five years. The following table should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.(in millions, except per share data) Dec. 31,
2015 Dec. 31,
2014 Dec. 31,
2013 Dec. 31,
2012 Dec. 31,
2011 $ 1,985.8 $ 2,127.4 $ 1,926.8 $ 2,141.8 $ 2,162.8 933.8 975.9 841.9 954.3 954.5 317.1 344.6 334.9 419.0 409.1 92.5 103.8 97.1 115.1 116.4 80.0 — — — — 14.0 — — — — 1.3 15.4 — — — 504.9 463.8 432.0 534.1 525.5 428.9 512.1 409.9 420.2 429.0 0.7 0.9 0.8 0.9 0.9 (115.2 ) (139.3 ) (133.7 ) (152.1 ) (218.2 ) (25.3 ) — — — (56.9 ) (0.3 ) (5.6 ) (10.9 ) (52.8 ) (4.2 ) (140.1 ) (144.0 ) (143.8 ) (204.0 ) (278.4 ) 288.8 368.1 266.1 216.2 150.6 (106.5 ) (139.5 ) (100.7 ) 298.0 (47.6 ) $ 182.3 $ 228.6 $ 165.4 $ 514.2 $ 103.0 $ 1.03 $ 1.27 $ 0.90 $ 2.83 $ 0.57 175.9 179.8 184.5 182.0 181.4 $ 1.03 $ 1.25 $ 0.88 $ 2.76 $ 0.56 177.2 182.3 187.9 186.2 183.3 $ 0.60 $ 0.51 $ 0.42 $ 0.18 $ — $ 251.6 $ 263.0 $ 184.7 $ 80.2 $ 314.0 4,408.4 4,656.2 4,812.6 4,866.0 5,192.6 2,377.2 2,491.2 2,678.3 2,820.8 3,378.6 1,188.6 1,397.8 1,438.8 1,356.9 821.7 (1)Total assets and total debt as of December 31, 2015 and 2014 include reclassifications as a result of compliance with newly adopted Financial Accounting Standards Board’s (“FASB”) authoritative accounting guidance. For more information, see our consolidated financial statements and the notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K.(in millions, except per share data) December 31, 2018 December 31, 2017 December 31, 2016 December 31, 2015 December 31, 2014 Consolidated Statements of Operations: Net sales $ 2,713 $ 2,262 $ 1,840 $ 1,986 $ 2,127 Gross profit 1,422 1,131 864 934 976 Operating expenses: Selling, general and administrative 364 342 324 317 345 Engineering — research and development 131 105 88 93 104 Loss associated with impairment of long-lived assets 4 32 — 1 15 Trade name impairment — — — 80 — Environmental remediation — — — 14 — Total operating expenses 499 479 412 505 464 Operating income 923 652 452 429 512 Other income (expense), net: Interest expense, net (121 ) (103 ) (101 ) (114 ) (138 ) Expenses related to long-term debt refinancing — — (12 ) (26 ) — Other income (expense), net 3 (22 ) 2 — (6 ) Total other expense, net (118 ) (125 ) (111 ) (140 ) (144 ) Income before income taxes 805 527 341 289 368 Income tax expense (166 ) (23 ) (126 ) (107 ) (139 ) Net income $ 639 $ 504 $ 215 $ 182 $ 229 Earnings Per Share Data: Basic earnings per share $ 4.81 $ 3.38 $ 1.28 $ 1.03 $ 1.27 Weighted-average shares outstanding 133 149 168 176 180 Diluted earnings per share $ 4.78 $ 3.36 $ 1.27 $ 1.03 $ 1.25 Diluted weighted-average shares outstanding 134 150 169 177 182 Dividends declared per common share $ 0.60 $ 0.60 $ 0.60 $ 0.60 $ 0.51 Consolidated Balance Sheet Data: Cash and cash equivalents $ 231 $ 199 $ 205 $ 252 $ 263 Total assets 4,237 4,205 4,219 4,408 4,656 Total debt 2,523 2,546 2,159 2,377 2,491 Stockholders’ equity 659 689 1,081 1,189 1,398
continued execution of our growth initiatives. End Market North America On-Highway North America Hybrid-Propulsion Systems for Transit Bus North America Off-Highway Defense Outside North America On-Highway Outside North America Off-Highway Service Parts, Support Equipment and Other Total Net Sales Wheeled demand. parts and support equipment. Net income plus: Interest expense, net Cash interest expense Income tax expense Cash income taxes Amortization of intangible assets Trade name impairment (a) Environmental remediation (b) Loss associated with impairment of long-lived assets (c) Technology-related investment expense (d) Public offering expenses (e) Adjusted net income Cash interest expense Cash income taxes Depreciation of property, plant and equipment Premiums and expenses on tender offer and redemption of long-term debt (f) Dual power inverter module extended coverage (g) Unrealized loss on foreign exchange (h) Unrealized loss (gain) on commodity hedge contracts (i) Loss on repayments of long-term debt (j) Restructuring charge (k) Other (l) Adjusted EBITDA Adjusted EBITDA excluding technology-related licenses expenses (m) Net sales Adjusted EBITDA margin Adjusted EBITDA margin excluding technology-related licenses expenses (m) Net cash provided by operating activities (Deductions) or additions to reconcile to Adjusted free cash flow: Additions of long-lived assets Excess tax benefit from stock-based compensation (n) Technology-related license expenses (m) Adjusted free cash flow ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion contains forward-looking statements regarding industry trends, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in or implied by the forward looking statements as a result of various factors, including, without limitation, those set forth under Part I, Item 1A, “Risk Factors,” and other matters included elsewhere in this Annual Report on Form 10-K. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K, as well as the information presented under Part II, Item 6 of this Annual Report on Form 10-K.OverviewWe design and manufacture commercial and defense fully-automatic transmissions. The business was founded in 1915 and has been headquartered in Indianapolis, Indiana since inception. Allison was an operating unit of Old GMGeneral Motors Corporation from 1929 until 2007, when Allison once again became a stand-alone company. In March 2012, Allison began trading on the New York Stock Exchange under the symbol, “ALSN”.We have approximately 2,7002,900 employees and 1312 different transmission product lines. Although approximately 81%77% of revenues were generated in North America in 2015,2018, we have a global presence by serving customers in Europe, Asia, South America and Africa. We serve customers through an independent network of approximately 1,400 independent distributor and dealer locations worldwide.Trends Impacting Our BusinessOur net sales are driven by commercial vehicle production, which tends to be highly correlated to macroeconomic conditions. In 2016,During 2019, we expect temperinglower demand conditionsin the North America Off-Highway and Service Parts, Support Equipment and Other end markets, partially offset by increased demand in the North America On-Highway end market, no meaningful relief from the global Off-Highway end markets challengesprice increases on certain products and divergent global economic environments. Our 2016 net sales outlook also assumes previously considered reductions in demand for North America Hybrid-Propulsion Systems for Transit Bus due to engine emissions improvements and non-hybrid alternatives.Full Year 20152018 and 20142017 Net Sales by End Market (in millions) 2015
Net Sales 2014
Net Sales % Variance $ 1,059 $ 988 7 % 73 93 (22 %) 55 100 (45 %) 113 157 (28 %) 262 264 (1 %) 35 81 (57 %) 389 444 (12 %) $ 1,986 $ 2,127 (7 %) End Market 2018Net Sales 2017Net Sales % Variance North America On-Highway $ 1,317 $ 1,177 12 % North America Off-Highway 93 51 82 % Defense 158 117 35 % Outside North America On-Highway 383 344 11 % Outside North America Off-Highway 129 41 215 % Service Parts, Support Equipment and Other 633 532 19 % Total Net Sales $ 2,713 $ 2,262 20 % * North America On-Highway end market net sales are inclusive of net sales for North America Electric Hybrid-Propulsion Systems for Transit BusNorth America On-Highway end market net sales were up 7%12% for the year ended December 31, 20152018 compared to the year ended December 31, 2014,2017, principally driven by higher demand for Rugged Duty Series and Highway Series models.North America Hybrid-Propulsion Systems for Transit Bus end market net sales were down 22% for the year ended December 31, 2015 compared to the year ended December 31, 2014, 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-Highway end market net sales were down 45%up $42 million for the year ended December 31, 20152018 compared to the year ended December 31, 2014,2017, principally driven by lowerhigher demand from hydraulic fracturing applications.Defense end market net sales were down 28%up 35% for the year ended December 31, 20152018 compared to the year ended December 31, 2014,2017, principally driven by the recognition of previously deferred revenue in 2014 related to shipment of certain tracked transmissions at the request of the U.S. governmenthigher Tracked and lower U.S. defense spending.Outside North America On-Highway end market net sales were down 1%up 11% for the year ended December 31, 20152018 compared to the year ended December 31, 2014,2017, principally driven by lower demand in China partially offset by higher demand in Asia and Europe.Outside North America Off-Highway end market net sales were down 57%up $88 million for the year ended December 31, 20152018 compared to the year ended December 31, 2014,2017, principally driven by weakhigher demand in the energy, mining and miningconstruction sectors.Service parts, support equipment & otherParts, Support Equipment and Other end market net sales were down 12%up 19% for the year ended December 31, 20152018 compared to the year ended December 31, 2014,2017, principally driven by lowerhigher demand for North Americaglobal service parts.Key Components of our Results of OperationsNet salesWe generate our net sales primarily from the sale of transmissions, transmission parts, support equipment, defense kits, engineering services, royalties and Extended Transmission Coverageextended transmission coverage to a wide array of OEMs, distributors and the U.S. government. Sales are recorded net of provisions for customer allowances and other rebates. Engineering services are recorded as net sales in accordance with the terms of the contract. The associated costs are recorded in cost of sales. We also have royalty agreements with third parties that provide net sales as a result of joint efforts in developing marketable products.Cost of salesOur primary components of cost of sales are purchased parts, the overhead expense related to our manufacturing operations and direct labor associated with the manufacture and assembly of transmissions and parts. For the year ended December 31, 2015,2018, direct material costs were approximately 68%71%, overhead costs were approximately 26%23% and direct labor costs were approximately 6% of total cost of sales. We are subject to changes in our cost of sales caused by movements in underlying commodity prices. We seek to hedge against this risk by using commodity swap contracts and LTSAs.long-term supply agreements ("LTSAs"). See Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk—Commodity Price Risk” included in this Annual Report on Form 10-K.Selling, general and administrative expensesThe principal components of our selling, general and administrative expenses are salaries and benefits for our office personnel, advertising and promotional expenses, product warranty expense, expenses relating to certain information technology systems and amortization of our intangibles.Engineering — research and developmentWe incur costs in connection with research and development programs that are expected to contribute to future earnings. Such costs are expensed as incurred.Non-GAAP Financial MeasuresWe use Adjusted net income to measure our overall profitability because we believe it better reflects our cash flow generation by capturing the actual cash interest paidEarnings before Interest, Taxes, Depreciation, and cash taxes paid rather than our interest expense and tax expense as calculated under accounting principles generally accepted in the United States of AmericaAmortization (“GAAP”EBITDA”) and excludes the impact of the non-cash annual amortization of certain intangible assets and other certain non-recurring items. We use 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 to evaluate and control our cash operating costs andas a percent of net sales to measure our operating profitability. We believe the presentation of Adjusted net income,that Adjusted EBITDA and Adjusted EBITDA excluding technology-related license expenses,as a percent of net sales provide management, investors and creditors with useful measures of the operational results of our business and increase the period-to-period comparability of our operating profitability and comparability with other companies. Adjusted EBITDA margin,as a percent of net sales is also used in the calculation of management’s incentive compensation program. The most directly comparable U.S. generally accepted accounting principles (“GAAP”) measure to Adjusted EBITDA margin excluding technology-related license expenses and Adjusted EBITDA as a percent of net sales is Net income and Net income as a percent of net sales, respectively. Adjusted EBITDA is calculated as earnings before interest expense, income tax expense, amortization of intangible assets, depreciation of property, plant and equipment and other adjustments as defined by Allison Transmission, Inc.’s (“ATI”), our wholly-owned subsidiary, Term B-3 Loan due 2022 ("Term B-3 Loan"). Adjusted EBITDA as a percent of net sales is calculated as Adjusted EBITDA divided by net sales.We use Adjusted free cash flow to evaluate the amount of cash generated by our business that, after the capital investment needed to maintain and grow our business and certain mandatory debt service requirements, can be used for repayment of debt, stockholder distributions and strategic opportunities, including investing in our business. We believe that Adjusted free cash flow enhances our investors’ overallthe understanding of the financial performance and cash flowflows of our business.You should not consider Adjusted net income, Adjusted EBITDA, Adjusted EBITDA excluding technology-related license expenses, Adjusted EBITDA marginbusiness for management, investors and Adjusted EBITDA margin excluding technology-related license expenses as an alternative to net income, determined in accordance with GAAP, as an indicator of operating performance. You should not considercreditors. Adjusted free cash flow as an alternative to net cash provided by operating activities, determinedis also used in accordance with GAAP, as an indicatorthe calculation of our cash flow.A directly comparable GAAP measure to Adjusted net income, Adjusted EBITDA and Adjusted EBITDA excluding technology-related license expenses is Net income. Amanagement’s incentive compensation program. The most directly comparable GAAP measure to Adjusted free cash flow is Net cash provided by operating activities. Adjusted free cash flow is calculated as Net cash provided by operating activities after additions of long-lived assets.The following is a reconciliation of Net income and Net income as a percent of net sales to Adjusted net income, Adjusted EBITDA Adjusted EBITDA excluding technology-related license expenses, Adjusted EBITDA margin and Adjusted EBITDA margin excluding technology-related license expenses,as a percent of net sales and a reconciliation of Net cash provided by operating activities to Adjusted free cash flow: For the years ended December 31, (unaudited, in millions) 2015 2014 2013 $ 182.3 $ 228.6 $ 165.4 114.5 138.4 132.9 (97.1 ) (140.0 ) (159.2 ) 106.5 139.5 100.7 (5.2 ) (5.0 ) (3.8 ) 97.1 98.8 105.3 80.0 — — 14.0 — — 1.3 15.4 — — 2.0 5.0 — 1.4 1.6 $ 493.4 $ 479.1 $ 347.9 97.1 140.0 159.2 5.2 5.0 3.8 88.3 93.8 98.7 25.3 — — (2.1 ) 1.0 (2.4 ) 1.4 5.2 2.3 1.1 (1.0 ) 1.5 0.3 0.5 0.8 — 0.7 1.0 9.8 14.7 13.8 $ 719.8 $ 739.0 $ 626.6 $ 720.0 $ 745.1 $ 632.6 $ 1,985.8 $ 2,127.4 $ 1,926.8 36.2 % 34.7 % 32.5 % 36.3 % 35.0 % 32.8 % $ 579.9 $ 573.3 $ 463.5 (58.1 ) (64.1 ) (74.4 ) 8.4 24.6 13.7 0.2 6.1 6.0 $ 530.4 $ 539.9 $ 408.8 For the years ended December 31, (unaudited, in millions) 2018 2017 2016 Net income (GAAP) $ 639 $ 504 $ 215 plus: Income tax expense 166 23 126 Interest expense, net 121 103 101 Amortization of intangible assets 87 90 92 Depreciation of property, plant and equipment 77 80 84 UAW Local 933 retirement incentive (a) 15 — — Stock-based compensation expense (b) 13 12 9 Loss associated with impairment of long-lived assets (c) 4 32 — Technology-related investment expense (d) 3 16 1 Unrealized loss on foreign exchange (e) 3 — 1 UAW Local 933 contract signing bonus (f) — 10 — Dual power inverter module units extended coverage (g) — (2 ) 1 Expenses related to long-term debt refinancing (h) — — 12 Stockholder activism expenses (i) — — 4 Unrealized gain on commodity hedge contracts (j) — — (2 ) Adjusted EBITDA (Non-GAAP) $ 1,128 $ 868 $ 644 Net sales (GAAP) $ 2,713 $ 2,262 $ 1,840 Net income as a percent of net sales (GAAP) 23.6 % 22.3 % 11.7 % Adjusted EBITDA as a percent of net sales (Non-GAAP) 41.6 % 38.4 % 35.0 % Net cash provided by operating activities (GAAP) $ 837 $ 658 $ 591 (Deductions) or additions to reconcile to Adjusted free cash flow: Additions of long-lived assets (100 ) (91 ) (71 ) Excess tax benefit from stock-based compensation (k) — — 6 Stockholder activism expenses (i) — — 4 Adjusted free cash flow (Non-GAAP) $ 737 $ 567 $ 530 (a) Represents a charge associated with the impairment(recorded in Cost of our trade name assales) related to a result of lower forecasted net salesretirement incentive program for certain employees represented by the International Union, United Automobile, Aerospace and Agricultural Implement Workers of our end markets.America ("UAW") pursuant to the UAW Local 933 collective bargaining agreement effective through November 2023.(b) Represents environmental remediation expenses for ongoing environmental operating, monitoringemployee stock compensation expense (recorded in Cost of sales, Selling, general and maintenance activities at our Indianapolis, Indiana manufacturing facilities as a result of the EPA determining that we are responsible for future operating, monitoringadministrative, and maintenance activities,Engineering – research and that GM’s environmental remediation activities were completed in the third quarter of 2015.development).(c) Represents a charge associated with the impairment of long-lived assets related to the production of the H3000 and H4000 hybrid-propulsion systems.TC10 transmission.(d) Represents a charge (recorded in Other expense,income (expense), net) for investments in co-development agreements to expand our position in transmission technologies.(e) Represents fees and expenseslosses (recorded in Other expense,income (expense), net) on intercompany financing transactions related to investments in plant assets for our secondary offerings in September 2014, June 2014, April 2014, February 2014, December 2013, November 2013 and August 2013 and proposed secondary offering in April 2013.India facility.(f) Represents premiumsa bonus (recorded in Cost of sales, Selling, general and expenses relatedadministrative, and Engineering – research and development) to eligible employees recorded in the tender offer and redemptionfourth quarter of Allison Transmission, Inc.’s (“ATI”), our wholly owned subsidiary, 7.125% senior cash pay notes due May 2019 (“7.125% Senior Notes”).2017 as a result of UAW Local 933 represented employees ratifying a six-year collective bargaining agreement effective through November 2023.(g) Represents adjustmentsan adjustment (recorded in Selling, general and administrative expenses)administrative) associated with the Dual Power Inverter Module (“DPIM”) extended coverage program liability. The DPIM liability will continue to be reviewed for any changes in estimates as additional claims data and field information become available.(h) Represents lossesexpenses related to the refinancing of the Senior Secured Credit Facility in the third quarter of 2016.(i) Represents expenses (recorded in Selling, general and administrative) directly associated with stockholder activism activity including the notice, and subsequent withdrawal, of director nomination and governance proposals by Ashe Capital Management, LP. (j) Represents unrealized gains (recorded in Other expense, net) on the mark-to-market of our foreign currency hedge contracts and on intercompany financing transactions related to investments in plant assets for our India facility.(i)Represents losses (gains) (recorded in Other expense,income (expense), net) on the mark-to-market of our commodity hedge contracts.(j)Represents losses (recorded in Other expense, net) realized on the repayments of ATI’s long-term debt.(k) Represents a charge (recorded in Selling, general and administrative, and Engineering – research and development) related to employee headcount reductions in the second quarter of 2014 and second quarter of 2013.(l)Represents employee stock compensation expense (recorded in Cost of sales, Selling, general and administrative expenses, and Engineering – research and development).(m)Represents payments (recorded in Engineering – research and development) for licenses to expand our position in transmission technologies.(n)Represents the amount of tax benefit (recorded in Income tax expense) related to stock-based compensation expense adjusted from cash flows from operating activities to cash flows from financing activities.
| Years ended December 31, | ||||||||||||||||
| (dollars in millions) | 2015 | % of net sales | 2014 | % of net sales | ||||||||||||
Net sales | $ | 1,985.8 | 100 | % | $ | 2,127.4 | 100 | % | ||||||||
Cost of sales | 1,052.0 | 53 | 1,151.5 | 54 | ||||||||||||
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Gross profit | 933.8 | 47 | 975.9 | 46 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling, general and administrative expenses | 317.1 | 16 | 344.6 | 16 | ||||||||||||
Engineering — research and development | 92.5 | 5 | 103.8 | 5 | ||||||||||||
Trade name impairment | 80.0 | 4 | — | — | ||||||||||||
Environmental remediation | 14.0 | 1 | — | — | ||||||||||||
Loss associated with impairment of long-lived assets | 1.3 | 0 | 15.4 | 1 | ||||||||||||
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Total operating expenses | 504.9 | 26 | 463.8 | 22 | ||||||||||||
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Operating income | 428.9 | 21 | 512.1 | 24 | ||||||||||||
Other expense, net: | ||||||||||||||||
Interest expense, net | (114.5 | ) | (6 | ) | (138.4 | ) | (7 | ) | ||||||||
Premiums and expenses on tender offer and redemption of long-term debt | (25.3 | ) | (1 | ) | — | — | ||||||||||
Other expense, net | (0.3 | ) | (0 | ) | (5.6 | ) | (0 | ) | ||||||||
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Total other expense, net | (140.1 | ) | (7 | ) | (144.0 | ) | (7 | ) | ||||||||
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Income before income taxes | 288.8 | 14 | 368.1 | 17 | ||||||||||||
Income tax expense | (106.5 | ) | (5 | ) | (139.5 | ) | (7 | ) | ||||||||
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Net income | $ | 182.3 | 9 | % | $ | 228.6 | 10 | % | ||||||||
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2017
| Years ended December 31, | |||||||||||||
| (dollars in millions) | 2018 | % of net sales | 2017 | % of net sales | |||||||||
| Net sales | $ | 2,713 | 100 | % | $ | 2,262 | 100 | % | |||||
| Cost of sales | 1,291 | 48 | 1,131 | 50 | |||||||||
| Gross profit | 1,422 | 52 | 1,131 | 50 | |||||||||
| Operating expenses: | |||||||||||||
| Selling, general and administrative | 364 | 13 | 342 | 15 | |||||||||
| Engineering — research and development | 131 | 5 | 105 | 5 | |||||||||
| Loss associated with impairment of long-lived assets | 4 | — | 32 | 1 | |||||||||
| Total operating expenses | 499 | 18 | 479 | 21 | |||||||||
| Operating income | 923 | 34 | 652 | 29 | |||||||||
| Other expense, net: | |||||||||||||
| Interest expense, net | (121 | ) | (4 | ) | (103 | ) | (5 | ) | |||||
| Other income (expense), net | 3 | — | (22 | ) | (1 | ) | |||||||
| Total other expense, net | (118 | ) | (4 | ) | (125 | ) | (6 | ) | |||||
| Income before income taxes | 805 | 30 | 527 | 23 | |||||||||
| Income tax expense | (166 | ) | (6 | ) | (23 | ) | (1 | ) | |||||
| Net income | $ | 639 | 24 | % | $ | 504 | 22 | % | |||||
market.
2017 that did not recur in 2018.
activities spending.
Trade name
of long-lived assets
Environmental remediation
During10-K for additional details.
| Years ended December 31, | |||||||||||||
| (dollars in millions) | 2017 | % of net sales | 2016 | % of net sales | |||||||||
| Net sales | $ | 2,262 | 100 | % | $ | 1,840 | 100 | % | |||||
| Cost of sales | 1,131 | 50 | 976 | 53 | |||||||||
| Gross profit | 1,131 | 50 | 864 | 47 | |||||||||
| Operating expenses: | |||||||||||||
| Selling, general and administrative | 342 | 15 | 324 | 17 | |||||||||
| Engineering — research and development | 105 | 5 | 88 | 5 | |||||||||
| Loss associated with impairment of long-lived assets | 32 | 1 | — | — | |||||||||
| Total operating expenses | 479 | 21 | 412 | 22 | |||||||||
| Operating income | 652 | 29 | 452 | 25 | |||||||||
| Other expense, net: | |||||||||||||
| Interest expense, net | (103 | ) | (5 | ) | (101 | ) | (5 | ) | |||||
| Expenses related to long-term debt refinancing | — | — | (12 | ) | (1 | ) | |||||||
| Other income (expense), net | (22 | ) | (1 | ) | 2 | — | |||||||
| Total other expense, net | (125 | ) | (6 | ) | (111 | ) | (6 | ) | |||||
| Income before income taxes | 527 | 23 | 341 | 19 | |||||||||
| Income tax expense | (23 | ) | (1 | ) | (126 | ) | (7 | ) | |||||
| Net income | $ | 504 | 22 | % | $ | 215 | 12 | % | |||||
higher incentive compensation expense.
Equipment” of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional details.
Premiums and expenses on tender offer and redemption of long-term debt
refinancing
2016.
financing.
Comparison of years ended December 31, 2014 and 2013
| Years ended December 31, | ||||||||||||||||
| (dollars in millions) | 2014 | % of net sales | 2013 | % of net sales | ||||||||||||
Net sales | $ | 2,127.4 | 100 | % | $ | 1,926.8 | 100 | % | ||||||||
Cost of sales | 1,151.5 | 54 | 1,084.9 | 56 | ||||||||||||
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Gross profit | 975.9 | 46 | 841.9 | 44 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling, general and administrative expenses | 344.6 | 16 | 334.9 | 17 | ||||||||||||
Engineering — research and development | 103.8 | 5 | 97.1 | 5 | ||||||||||||
Loss associated with impairment of long-lived assets | 15.4 | 1 | — | — | ||||||||||||
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Total operating expenses | 463.8 | 22 | 432.0 | 22 | ||||||||||||
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Operating income | 512.1 | 24 | 409.9 | 22 | ||||||||||||
Other expense, net: | ||||||||||||||||
Interest expense, net | (138.4 | ) | (7 | ) | (132.9 | ) | (7 | ) | ||||||||
Other expense, net | (5.6 | ) | (0 | ) | (10.9 | ) | (1 | ) | ||||||||
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Total other expense, net | (144.0 | ) | (7 | ) | (143.8 | ) | (8 | ) | ||||||||
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Income before income taxes | 368.1 | 17 | 266.1 | 14 | ||||||||||||
Income tax expense | (139.5 | ) | (7 | ) | (100.7 | ) | (5 | ) | ||||||||
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Net income | $ | 228.6 | 10 | % | $ | 165.4 | 9 | % | ||||||||
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Net sales
Net sales for the year ended December 31, 2014 were $2,127.4 million compared to $1,926.8 million for the year ended December 31, 2013, an increase of 10%. The increase was principally driven by a $163.0 million, or 20%, increase in net sales of North American on-highway products principally driven by higher demand from Rugged Duty Series and Pupil Transport/Shuttle Series models, a $69.0 million, or 18%, increase in net sales of parts and other products principally driven by higher demand for North American service parts and support equipment commensurate with increased transmission unit volumes, and a $61.0 million, or 156%, increase in net sales of North American off-highway products principally driven by higher demand from hydraulic fracturing applications, partially offset by a $45.0 million, or 22%, decrease in net sales of defense products due to lower U.S. defense spending, a $29.0 million, or 10%, decrease in net sales of Outside North America on-highway products principally driven by weakness in Europe and Asia, a $12.0 million, or 11%, decrease in net sales of North America hybrid-propulsion systems for transit buses principally driven by lower demand due to engine emissions improvements and non-hybrid alternatives (e.g. xNG), and a $7.0 million, or 8%, decrease in net sales of Outside North America off-highway products principally driven by lower demand from the energy sector. See “Trends Impacting Our Business” above for additional information on net sales by end markets.
Cost of sales
Cost of sales for the year ended December 31, 2014 was $1,151.5 million compared to $1,084.9 million for the year ended December 31, 2013, an increase of 6%. The increase was principally driven by $45.3 million related to increased direct material costs, $17.3 million of higher overhead costs and $4.0 million of higher direct labor costs, in each case commensurate with increased sales volume and consistent with historical trends for these three cost of sales components. The increase in each of these cost of sales components was consistent with historical trends and management’s expectations given the respective change in sales volume.
Gross profit
Gross profit for the year ended December 31, 2014 was $975.9 million compared to $841.9 million for the year ended December 31, 2013, an increase of 16%. The increase was principally driven by $122.0 million related to increased net sales, $20.0 million of price increases on certain products and $3.0 million of favorable foreign exchange, partially offset by $5.8 million of higher incentive compensation expense and $5.2 million of higher manufacturing expense commensurate with increased net sales. Gross profit as a percent of net sales increased by 2%. This increase was principally driven by increased net sales and price increases on certain products.
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended December 31, 2014 were $344.6 million compared to $334.9 million for the year ended December 31, 2013, an increase of 3%. The increase was principally driven by $7.1 million of higher incentive compensation expense, increased global commercial spending activities, a $2.4 million favorable adjustment in 2013 related to the DPIM extended coverage program and a $1.0 million unfavorable adjustment in 2014 related to the DPIM extended coverage program, partially offset by $6.5 million of lower intangible asset amortization.
Engineering — research and development
Engineering expenses for the year ended December 31, 2014 were $103.8 million compared to $97.1 million for the year ended December 31, 2013, an increase of 7%. The increase was principally driven by increased spending on product initiatives and $2.7 million of higher incentive compensation expense.
Loss associated with impairment of long-lived assets
During 2014, we reviewed certain of our long-lived assets related to the production of the H3000 and H4000 hybrid-propulsion systems, resulting in a $15.4 million loss recorded for the year ended December 31, 2014. The loss included approximately $1.7 million of accrued expenses related to the impairment of the long-lived assets.
Interest expense, net
Interest expense, net for the year ended December 31, 2014 was $138.4 million compared to $132.9 million for the year ended December 31, 2013, an increase of 4%. The increase was principally driven by $30.8 million of less favorable mark-to-market adjustments for interest rate derivatives, partially offset by $12.3 million of lower interest expense as a result of the maturity of $950.0 million of interest rate derivatives, $5.2 million of lower interest expense as a result of debt repayments, $4.7 million of lower interest expense related to lower interest rates and $2.8 million of lower amortization of deferred financing fees.
Other expense, net
Other expense, net for the year ended December 31, 2014 was $5.6 million compared to $10.9 million for the year ended December 31, 2013, a decrease of 49%. The decrease in expense was principally driven by $4.5 million of lower expenses related to unrealized and realized losses on derivative contracts, $3.0 million of lower technology-related investment impairment expense, a $2.0 million gain related to the negotiation of a commercial agreement, $1.4 million of lower expenses related to foreign exchange losses, $0.3 million of lower expenses related to debt repayments, and $0.2 million of lower public offering fees and expenses, partially offset by $3.1 million of increased foreign exchange losses on intercompany financing, $2.6 million of lower grant program income and $0.4 million of lower miscellaneous income.
Income tax expense
Income tax expense for the year ended December 31, 2014 was $139.5 million compared to $100.7 million for the year ended December 31, 2013,2016, resulting in an effective tax rate of 38%4% and 37% for each of the years ended December 31, 20142017 and December 31, 2013.
2016, respectively. The decrease was a result of the U.S. Tax Cuts and Jobs Act enacted into law in 2017 and was principally driven by a $157 million decrease in net deferred tax liabilities to reflect the decrease in the corporate income tax rate from 35% to 21%, partially offset by a $5 million increase in tax liabilities related to the deemed repatriation of accumulated foreign earnings and profits as a result of the U.S. Tax Cuts and Jobs Act.
If we distribute
material.
In November 2015, we entered into an amendment with the term loan lenders under our Senior Secured Credit Facility to refinance $189.0 million of the Senior Secured Credit Facility Term B-2 Loan due 2017 replacing it with an additional $189.0 million of term loan under the Term B-3 Loan. This addition to the Term B-3 Loan increased the debt maturity from August 2017 to August 2019 and the applicable interest rate margin at our option, is either (a) 2.50% over the LIBOR (which may not be less than 1.00%) or (b) 1.50% over the greater of the prime lending rate provided by the British Banking Association or the federal funds effective rate published by the Federal Reserve Bank of New York. As of December 31, 2015, the interest rate was approximately 3.50% on the Term B-3 Loan. The November 2015 amendment was treated as a modification of debt under GAAP, and thus we expensed $0.3 million of deferred financing fees and recorded $1.3 million of new deferred financing fees in the consolidated financial statements.
As of December 31, 2015,2018, we had $2,402.8$1,148 million of indebtedness all of which was associated with ourATI’s Term B-3 Loan. Loan, $1,000 million of indebtedness associated with ATI’s 5.0% Senior Notes and $400 million of indebtedness associated with ATI’s 4.75% Senior Notes. The minimum required quarterly principal payment on ATI’s Term B-3 Loan through its maturity date of September 2022 is $3 million; however, we made voluntary prepayments of the required quarterly principal payments of $25 million in May 2018. There are no required quarterly principal payments on ATI’s 5.0% Senior Notes and 4.75% Senior Notes.
2.05x.
Facility and indentures governing the 5.0% Senior Notes and 4.75% Senior Notes.
As of December 31, 2018, we had approximately $445 million available under the Repurchase Program.
| Years ended December 31, | ||||||||||||
| Statement of Cash Flows Data | 2015 | 2014 | 2013 | |||||||||
Cash flows from operating activities | $ | 579.9 | $ | 573.3 | $ | 463.5 | ||||||
Cash flows used for investing activities | (59.7 | ) | (67.9 | ) | (81.5 | ) | ||||||
Cash flows used for financing activities | (528.7 | ) | (424.1 | ) | (277.5 | ) | ||||||
| Years ended December 31, | |||||||||||
| Statement of Cash Flows Data | 2018 | 2017 | 2016 | ||||||||
| Cash flows provided by operating activities | $ | 837 | $ | 658 | $ | 591 | |||||
| Cash flows used for investing activities | (103 | ) | (94 | ) | (72 | ) | |||||
| Cash flows used for financing activities | (700 | ) | (574 | ) | (564 | ) | |||||
As of December 31, 2015 and 2014, we had approximately $97.4 million and $253.3 million, respectively, of net operating loss carryforwards for U.S. federal income tax purposes. If we continue to generate taxable income, we expect to utilize the remaining U.S. federal net operating loss carryforwards by the end of 2016.
increased cash income taxes.
incentive compensation payments.
productivity and replacement programs.
programs and higher product initiatives spending.
debt financing fees.
issuance in connection with stock option exercises, partially offset by $603 million of increased net debt borrowings, $15 million of lower debt financing fees and $11 million of decreased dividend payments.
| Payments due by period | ||||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||
Senior Secured Credit Facility(1) | $ | 2,732.4 | $ | 108.2 | $ | 213.8 | $ | 2,410.4 | $ | — | ||||||||||
Operating leases | 14.8 | 4.7 | 5.4 | 2.7 | 2.0 | |||||||||||||||
Pension & OPEB liabilities(2) | 39.7 | 9.7 | 14.0 | 16.0 | see (2) below | |||||||||||||||
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Total(3) | $ | 2,786.9 | $ | 122.6 | $ | 233.2 | $ | 2,429.1 | $ | 2.0 | ||||||||||
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| Payments due by period | |||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
| Senior Secured Credit Facility(1) | $ | 1,330 | $ | 49 | $ | 117 | $ | 1,164 | $ | — | |||||||||
| 5.0% Senior Notes(2) | 1,287 | 50 | 100 | 100 | 1,037 | ||||||||||||||
| 4.75% Senior Notes(3) | 568 | 19 | 38 | 38 | 473 | ||||||||||||||
| Operating leases | 11 | 4 | 5 | 2 | — | ||||||||||||||
| Pension & OPEB liabilities(4) | 21 | 3 | 8 | 10 | see (4) below | ||||||||||||||
| Total(5) | $ | 3,217 | $ | 125 | $ | 268 | $ | 1,314 | $ | 1,510 | |||||||||
| (1) | Senior Secured Credit Facility includes principal payments and estimated interest |
| (2) | 5.0% Senior Notes include principal and interest payments based on a fixed interest rate of 5.00%. |
| (3) | 4.75% Senior Notes include principal and interest payments based on a fixed interest rate of 4.75%. |
| (4) | Estimated pension funding and post-retirement benefit payments are based on an increasing discount rate and effective interest rate for funding purposes between |
| (5) | Defense price reduction reserve, estimated warranty obligations and sales allowance programs, |
Beginning in 2014, all of our contracts with the U.S. government are firm fixed price contracts, which do not contain price reduction clauses and provisions.
10-K.
Our
Our
Further information is provided in NOTE 2 “Summary of Significant Accounting Policies” and NOTE 56 “Goodwill and Other Intangible Assets” of Notes to the consolidated financial statementsConsolidated Financial Statements included in ourPart II, Item 8, of this Annual Report on Form 10-K for the year ended December 31, 2015.
10-K.
2016.
2018.
As of December 31, 2015, we early adopted the FASB’s authoritative accounting guidance on a retrospective basis to classify all deferred tax assets and liabilities, along with any related valuation allowance, as noncurrent on the balance sheet.
10-K.
Revolving Credit Facility.
| Counterparty | Effective Date | Notional Amount (in millions) | LIBOR Fixed Rate | |||||||||
Interest Rate Swap L | Barclays | Aug 2016-Aug 2019 | $ | 75.0 | 3.44 | %* | ||||||
Interest Rate Swap M | JP Morgan | Aug 2016-Aug 2019 | $ | 100.0 | 3.43 | %* | ||||||
Interest Rate Swap N | Bank of America | Aug 2016-Aug 2019 | $ | 75.0 | 3.37 | %* | ||||||
Interest Rate Swap O | Deutsche Bank | Aug 2016-Aug 2019 | $ | 75.0 | 3.19 | %* | ||||||
Interest Rate Swap P | Barclays | Aug 2016-Aug 2019 | $ | 75.0 | 3.08 | %* | ||||||
Interest Rate Swap Q | Barclays | Aug 2016-Aug 2019 | $ | 50.0 | 2.99 | %* | ||||||
Interest Rate Swap R | Deutsche Bank | Aug 2016-Aug 2019 | $ | 50.0 | 2.98 | %* | ||||||
Interest Rate Swap S | Deutsche Bank | Aug 2016-Aug 2019 | $ | 50.0 | 2.73 | %* | ||||||
Interest Rate Swap T | Bank of America | Aug 2016-Aug 2019 | $ | 75.0 | 2.74 | %* | ||||||
Interest Rate Swap U | Fifth Third Bank | Aug 2016-Aug 2019 | $ | 50.0 | 2.66 | %* | ||||||
Interest Rate Swap V | Fifth Third Bank | Aug 2016-Aug 2019 | $ | 50.0 | 2.60 | %* | ||||||
Interest Rate Swap W | Fifth Third Bank | Aug 2016-Aug 2019 | $ | 25.0 | 2.40 | %* | ||||||
Interest Rate Swap X | Huntington Bank | Aug 2016-Aug 2019 | $ | 50.0 | 2.25 | %* | ||||||
* includes LIBOR floor of 1.00% | ||||||||||||
We are exposed to increased2017, we terminated interest expense if a counterparty defaults. rate swap contracts with notional values totaling $800 million. The transaction resulted in $13 million of interest expense.
Allison Transmission Holdings, Inc. Limitations of Internal Control over Financial Reporting 26, 2019 ASSETS Current Assets Cash and cash equivalents Accounts receivable — net of allowance for doubtful accounts of $0.4 and $0.3, respectively Inventories Other current assets Total Current Assets Property, plant and equipment, net Intangible assets, net Goodwill Deferred income taxes, net Other non-current assets TOTAL ASSETS LIABILITIES Current Liabilities Accounts payable Product warranty liability Current portion of long-term debt Deferred revenue Other current liabilities Total Current Liabilities Product warranty liability Deferred revenue Long-term debt Deferred income taxes Other non-current liabilities TOTAL LIABILITIES Commitments and contingencies (see NOTE 17) STOCKHOLDERS’ EQUITY Common stock, $0.01 par value, 1,880,000,000 shares authorized, 171,157,004 shares issued and outstanding and 179,488,247 shares issued and outstanding, respectively Non-voting common stock, $0.01 par value, 20,000,000 shares authorized, none issued and outstanding Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding Paid in capital Accumulated deficit Accumulated other comprehensive loss, net of tax TOTAL STOCKHOLDERS’ EQUITY TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY Net sales Cost of sales Gross profit Selling, general and administrative expenses Engineering — research and development Trade name impairment (see NOTE 5) Environmental remediation Loss associated with impairment of long-lived assets Operating income Interest income Interest expense Premiums and expenses on tender offer and redemption of long-term debt Other expense, net Income before income taxes Income tax expense Net income Basic earnings per share attributable to common stockholders Diluted earnings per share attributable to common stockholders Dividends declared per common share Other comprehensive (loss) income, net of tax: Foreign currency translation Pension and OPEB liability adjustment Available-for-sale securities Total other comprehensive (loss) income, net of tax Comprehensive income CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operating activities: Amortization of intangible assets Depreciation of property, plant and equipment Deferred income taxes Trade name impairment Premiums and expenses on tender offer and redemption of long-term debt Unrealized loss (gain) on derivatives Stock-based compensation Excess tax benefit from stock-based compensation Amortization of deferred financing costs Loss associated with impairment of long-lived assets Loss on repayments of long-term debt Impairment loss on investments in technology-related initiatives Other Changes in assets and liabilities: Accounts receivable Inventories Accounts payable Other assets and liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Additions of long-lived assets Investments in technology-related initiatives Proceeds from disposal of assets Collateral for interest rate derivatives Net cash used for investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Repurchases and redemption of long-term debt Issuance of long-term debt Repurchase of common stock Payments on long-term debt Dividend payments Proceeds from exercise of stock options Debt financing costs Excess tax benefit from stock-based compensation Taxes paid related to net share settlement of equity awards Net cash used for financing activities Effect of exchange rate changes on cash Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental disclosures: Interest paid Income taxes paid Balance at December 31, 2012 Stock-based compensation Pension and OPEB liability adjustment Foreign currency translation adjustment Available-for-sale securities Issuance of common stock Repurchase of common stock Retirement of treasury stock Dividends on common stock Excess tax benefit from stock-based compensation Net income Balance at December 31, 2013 Stock-based compensation Pension and OPEB liability adjustment Foreign currency translation adjustment Available-for-sale securities Issuance of common stock Repurchase of common stock Dividends on common stock Excess tax benefit from stock-based compensation Net income Balance at December 31, 2014 Stock-based compensation Pension and OPEB liability adjustment Foreign currency translation adjustment Available-for-sale securities Issuance of common stock Repurchase of common stock Dividends on common stock Excess tax benefit from stock-based compensation Net income Balance at December 31, 2015 ITEM 8. Financial Statements and Supplementary DataINDEX TO CONSOLIDATED FINANCIAL STATEMENTSPage Report of Independent Registered Public Accounting FirmTo theBoard of Directors and Stockholders ofIn our opinion,Opinions on the Financial Statements and Internal Control over Financial ReportingWe have audited the accompanying consolidated balance sheets of Allison Transmission Holdings, Inc. and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of comprehensive income, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Allison Transmission Holdings, Inc. and its subsidiaries at December 31, 2015 and December 31, 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20152018, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015,2018, based on criteria established inInternal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). COSO.Basis for OpinionsThe Company’sCompany's management is responsible for these consolidated financial statements, and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’sManagement's Report on Internal Control Overover Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these the Company’s consolidatedfinancial statements on the financial statement schedule, and on the Company’sCompany's internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidatedfinancial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidatedfinancial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.As discussed in NOTE 2 to the consolidated financial statements, the Company changed the manner in which it classifies deferred taxesDefinition and deferred financing costs in 2015.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate./s/ \s\PricewaterhouseCoopers LLPIndianapolis, IndianaFebruary 19, 2016We have served as the Company’s auditor since 2008.Allison Transmission Holdings, Inc.Consolidated Balance Sheets(dollars in millions, except share data) December 31,
2015 December 31,
2014 $ 251.6 $ 263.0 195.0 207.4 141.4 143.5 28.8 24.4 616.8 638.3 479.7 514.6 1,334.8 1,512.0 1,941.0 1,941.0 1.9 2.3 34.2 48.0 $ 4,408.4 $ 4,656.2 $ 126.2 $ 151.7 24.9 24.0 24.5 17.9 22.9 20.6 106.1 131.7 304.6 345.9 53.4 59.6 56.4 48.7 2,352.7 2,473.3 204.6 119.5 248.1 211.4 3,219.8 3,258.4 1.7 1.8 — — — — 1,690.2 1,651.0 (444.5 ) (215.5 ) (58.8 ) (39.5 ) 1,188.6 1,397.8 $ 4,408.4 $ 4,656.2 December 31, 2018 December 31, 2017 ASSETS Current Assets Cash and cash equivalents $ 231 $ 199 Accounts receivable - net of allowance for doubtful accounts of $1 and $0, respectively 279 221 Inventories 170 154 Income taxes receivable 16 33 Other current assets 29 25 Total Current Assets 725 632 Property, plant and equipment, net 466 448 Intangible assets, net 1,066 1,153 Goodwill 1,941 1,941 Other non-current assets 39 31 TOTAL ASSETS $ 4,237 $ 4,205 LIABILITIES Current Liabilities Accounts payable $ 169 $ 159 Product warranty liability 26 22 Current portion of long-term debt — 12 Deferred revenue 34 41 Other current liabilities 197 183 Total Current Liabilities 426 417 Product warranty liability 40 33 Deferred revenue 88 75 Long-term debt 2,523 2,534 Deferred income taxes 329 276 Other non-current liabilities 172 181 TOTAL LIABILITIES 3,578 3,516 Commitments and Contingencies (see NOTE 17) STOCKHOLDERS’ EQUITY Common stock, $0.01 par value, 1,880,000,000 shares authorized, 126,251,266 shares issued and outstanding and 139,990,865 shares issued and outstanding, respectively 1 1 Non-voting common stock, $0.01 par value, 20,000,000 shares authorized, none issued and outstanding — — Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding — — Paid in capital 1,788 1,758 Accumulated deficit (1,100 ) (1,055 ) Accumulated other comprehensive loss, net of tax (30 ) (15 ) TOTAL STOCKHOLDERS’ EQUITY 659 689 TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY $ 4,237 $ 4,205 The accompanying notes are an integral part of the consolidated financial statements.Allison Transmission Holdings, Inc.Consolidated Statements of Comprehensive Income(dollars in millions, except per share data) Years ended December 31, 2015 2014 2013 $ 1,985.8 $ 2,127.4 $ 1,926.8 1,052.0 1,151.5 1,084.9 933.8 975.9 841.9 317.1 344.6 334.9 92.5 103.8 97.1 80.0 — — 14.0 — — 1.3 15.4 — 428.9 512.1 409.9 0.7 0.9 0.8 (115.2 ) (139.3 ) (133.7 ) (25.3 ) — — (0.3 ) (5.6 ) (10.9 ) 288.8 368.1 266.1 (106.5 ) (139.5 ) (100.7 ) $ 182.3 $ 228.6 $ 165.4 $ 1.03 $ 1.27 $ 0.90 $ 1.03 $ 1.25 $ 0.88 $ 0.60 $ 0.51 $ 0.42 (11.5 ) (7.4 ) (5.0 ) (3.0 ) (9.1 ) 29.0 (4.8 ) (2.0 ) (1.1 ) (19.3 ) (18.5 ) 22.9 $ 163.0 $ 210.1 $ 188.3 Years ended December 31, 2018 2017 2016 Net sales $ 2,713 $ 2,262 $ 1,840 Cost of sales 1,291 1,131 976 Gross profit 1,422 1,131 864 Selling, general and administrative 364 342 324 Engineering — research and development 131 105 88 Loss associated with impairment of long-lived assets 4 32 — Operating income 923 652 452 Interest expense, net (121 ) (103 ) (101 ) Expenses related to long-term debt refinancing — — (12 ) Other income (expense), net 3 (22 ) 2 Income before income taxes 805 527 341 Income tax expense (166 ) (23 ) (126 ) Net income $ 639 $ 504 $ 215 Basic earnings per share attributable to common stockholders $ 4.81 $ 3.38 $ 1.28 Diluted earnings per share attributable to common stockholders $ 4.78 $ 3.36 $ 1.27 Dividends declared per common share $ 0.60 $ 0.60 $ 0.60 Other comprehensive (loss) income, net of tax: Foreign currency translation (9 ) 15 (6 ) Pension and OPEB liability adjustment 1 26 3 Available-for-sale securities and interest rate swaps (7 ) 7 (1 ) Total other comprehensive (loss) income, net of tax (15 ) 48 (4 ) Comprehensive income $ 624 $ 552 $ 211 The accompanying notes are an integral part of the consolidated financial statements.Allison Transmission Holdings, Inc.Consolidated Statements of Cash Flows(dollars in millions) Years ended December 31, 2015 2014 2013 $ 182.3 $ 228.6 $ 165.4 97.1 98.8 105.3 88.3 93.8 98.7 96.0 131.8 98.0 80.0 — — 25.3 — — 14.7 (4.7 ) (32.8 ) 9.8 14.7 13.7 (8.4 ) (24.6 ) (13.7 ) 8.0 8.1 10.9 1.3 15.4 — 0.3 0.5 0.8 — 2.0 5.0 2.0 5.2 2.1 9.0 (35.8 ) (9.9 ) (2.2 ) 12.7 (4.4 ) (25.1 ) 2.1 17.6 1.5 24.7 6.8 579.9 573.3 463.5 (58.1 ) (64.1 ) (74.4 ) (1.9 ) (5.8 ) (8.8 ) 0.3 0.3 0.5 — 1.7 1.2 (59.7 ) (67.9 ) (81.5 ) (491.2 ) — — 470.0 — — (305.8 ) (249.8 ) (99.5 ) (116.5 ) (157.6 ) (142.4 ) (105.6 ) (91.6 ) (77.1 ) 22.9 59.6 46.3 (9.0 ) (0.9 ) (14.9 ) 8.4 24.6 13.7 (1.9 ) (8.4 ) (3.6 ) (528.7 ) (424.1 ) (277.5 ) (2.9 ) (3.0 ) (0.0 ) (11.4 ) 78.3 104.5 263.0 184.7 80.2 $ 251.6 $ 263.0 $ 184.7 $ 97.1 $ 140.0 $ 159.2 $ 5.2 $ 5.0 $ 3.8 Years ended December 31, 2018 2017 2016 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 639 $ 504 $ 215 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of intangible assets 87 90 92 Depreciation of property, plant and equipment 77 80 84 Deferred income taxes 52 (50 ) 114 Stock-based compensation 13 12 9 Amortization of deferred financing costs 6 6 7 Loss associated with impairment of long-lived assets 4 32 — Impairment loss on investments in technology-related initiatives 3 16 1 Unrealized gain on derivatives — (29 ) (1 ) Expenses related to long-term debt refinancing — — 11 Excess tax benefit from stock-based compensation — — (6 ) Other 4 — 1 Changes in assets and liabilities: Accounts receivable (61 ) (19 ) (3 ) Inventories (18 ) (25 ) 15 Accounts payable 9 30 2 Other assets and liabilities 22 11 50 Net cash provided by operating activities 837 658 591 CASH FLOWS FROM INVESTING ACTIVITIES: Additions of long-lived assets (100 ) (91 ) (71 ) Investments in technology-related initiatives (3 ) (3 ) (1 ) Net cash used for investing activities (103 ) (94 ) (72 ) CASH FLOWS FROM FINANCING ACTIVITIES: Repurchases of common stock (609 ) (885 ) (256 ) Dividend payments (80 ) (89 ) (100 ) Payments on long-term debt (28 ) (12 ) (1,215 ) Proceeds from exercise of stock options 22 19 24 Taxes paid related to net share settlement of equity awards (4 ) (1 ) (2 ) Debt financing fees (1 ) (6 ) (21 ) Borrowings on revolving credit facility — 415 — Repayments on revolving credit facility — (415 ) — Issuance of long-term debt — 400 1,000 Excess tax benefit from stock-based compensation — — 6 Net cash used for financing activities (700 ) (574 ) (564 ) Effect of exchange rate changes on cash (2 ) 4 (2 ) Net increase (decrease) in cash and cash equivalents 32 (6 ) (47 ) Cash and cash equivalents at beginning of period 199 205 252 Cash and cash equivalents at end of period $ 231 $ 199 $ 205 Supplemental disclosures: Interest paid $ 115 $ 124 $ 78 Income taxes paid $ 101 $ 96 $ 13 The accompanying notes are an integral part of the consolidated financial statements.Allison Transmission Holdings, Inc.Consolidated Statements of Stockholders’ Equity(dollars in millions) Common
Stock Non-
voting
Common
Stock Preferred
Stock Treasury
Stock Paid-in
Capital Accumulated
Deficit Accumulated
Other
Comprehensive
Income (Loss),
net of tax Stockholders’
Equity $ 1.8 $ 0.0 $ — $ (0.2 ) $ 1,601.5 $ (202.3 ) $ (43.9 ) $ 1,356.9 — — — — 13.7 — — 13.7 — — — — — — 29.0 29.0 — — — — — — (5.0 ) (5.0 ) — — — — — — (1.1 ) (1.1 ) 0.0 — — — 42.6 — — 42.6 (0.0 ) — — — (39.7 ) (59.8 ) — (99.5 ) — — — 0.2 — — — 0.2 — — — — — (77.1 ) — (77.1 ) — — — — 13.7 — — 13.7 — — — — — 165.4 — 165.4 $ 1.8 $ 0.0 $ — $ — $ 1,631.8 $ (173.8 ) $ (21.0 ) $ 1,438.8 — — — — 14.7 — — 14.7 — — — — — — (9.1 ) (9.1 ) — — — — — — (7.4 ) (7.4 ) — — — — — — (2.0 ) (2.0 ) 0.0 — — — 51.0 — — 51.0 (0.0 ) (0.0 ) — — (71.1 ) (178.7 ) — (249.8 ) — — — — — (91.6 ) — (91.6 ) — — — — 24.6 — — 24.6 — — — — — 228.6 — 228.6 $ 1.8 $ — $ — $ — $ 1,651.0 $ (215.5 ) $ (39.5 ) $ 1,397.8 — — — — 9.8 — — 9.8 — — — — — — (3.0 ) (3.0 ) — — — — — — (11.5 ) (11.5 ) — — — — — — (4.8 ) (4.8 ) 0.0 — — — 21.0 — — 21.0 (0.1 ) — — — — (305.7 ) — (305.8 ) — — — — — (105.6 ) — (105.6 ) — — — — 8.4 — — 8.4 — — — — — 182.3 — 182.3 $ 1.7 $ — $ — $ — $ 1,690.2 $ (444.5 ) $ (58.8 ) $ 1,188.6 CommonStock Non-votingCommonStock PreferredStock Paid-inCapital AccumulatedDeficit AccumulatedOtherComprehensiveLoss, net of tax Stockholders’EquityBalance at December 31, 2015 $ 2 $ — $ — $ 1,690 $ (445 ) $ (59 ) $ 1,188 Stock-based compensation — — — 9 — — 9 Pension and OPEB liability adjustment — — — — — 3 3 Foreign currency translation adjustment — — — — — (6 ) (6 ) Available-for-sale securities — — — — — (1 ) (1 ) Issuance of common stock — — — 23 — — 23 Repurchase of common stock — — — — (256 ) — (256 ) Dividends on common stock — — — — (100 ) — (100 ) Excess tax benefit from stock-based compensation — — — 6 — — 6 Net income — — — — 215 — 215 Balance at December 31, 2016 $ 2 $ — $ — $ 1,728 $ (586 ) $ (63 ) $ 1,081 Stock-based compensation — — — 12 — — 12 Pension and OPEB liability adjustment — — — — — 26 26 Foreign currency translation adjustment — — — — — 15 15 Available-for-sale securities — — — — — 7 7 Issuance of common stock — — — 18 — — 18 Repurchase of common stock (1 ) — — — (884 ) — (885 ) Dividends on common stock — — — — (89 ) — (89 ) Net income — — — — 504 — 504 Balance at December 31, 2017 $ 1 $ — $ — $ 1,758 $ (1,055 ) $ (15 ) $ 689 Stock-based compensation — — — 13 — — 13 Pension and OPEB liability adjustment — — — — — 1 1 Foreign currency translation adjustment — — — — — (9 ) (9 ) Available-for-sale securities and interest rate swaps — — — — — (7 ) (7 ) Issuance of common stock — — — 17 — — 17 Repurchase of common stock — — — — (609 ) — (609 ) Dividends on common stock — — — — (80 ) — (80 ) Impact of adopting accounting standards — — — — 5 — 5 Net income — — — — 639 — 639 Balance at December 31, 2018 $ 1 $ — $ — $ 1,788 $ (1,100 ) $ (30 ) $ 659 The accompanying notes are an integral part of the consolidated financial statements.Allison Transmission Holdings, Inc.Notes to Consolidated Financial StatementsNOTE 1.OVERVIEWNOTE 1. OVERVIEWOverviewAllison Transmission Holdings, Inc. and its subsidiaries (“Allison,”Allison” or the “Company” or “we”) design and manufacture commercial and defense fully-automatic transmissions. The business was founded in 1915 and has been headquartered in Indianapolis, Indiana since inception. Allison was an operating unit of General Motors Corporation (“Old GM”) from 1929 until 2007, when Allison once again became a stand-alone company. In March 2012, Allison began trading on the New York Stock Exchange under the symbol, “ALSN”.The Company has approximately 2,7002,900 employees and 1312 different transmission product lines. Although approximately 81%77% of revenues were generated in North America in 2015,2018, the Company has a global presence by serving customers in Europe, Asia, South America and Africa. The Company serves customers through an independent network of approximately 1,400 independent distributor and dealer locations worldwide.NOTE 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Land improvements Buildings and building improvements Machinery and equipment Software Special tools 2016. Refer to NOTE 6, “Goodwill and Other Intangible Assets” for further information. NOTE information. 8, “Debt”. license period as it is earned. Contingencies”. 16, “Accumulated Other Comprehensive Loss”. Purchased parts and raw materials Work in progress Service parts Finished goods Total inventories NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of Presentation and Principles of ConsolidationThe consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The information herein reflects all normal recurring material adjustments, which are, in the opinion of management, necessary for thea fair statementsstatement of the results for the periods presented. The consolidated financial statements herein consist of all wholly-owned domestic and foreign subsidiaries with all significant intercompany transactions eliminated.These consolidated financial statements present the financial position, results of comprehensive income, cash flows and statements of equity. Certain reclassifications have been made in the consolidated financial statements of prior periods to conform to the current period presentation. The Company revised its consolidated statements of cash flows for prior periods due to changes in how foreign currency exchange rate movements on cash were calculated. The revisions resulted in a decrease to the “Effect of exchange rate changes on cash” with a corresponding increase to “Net cash provided by operating activities.” Management believes the revisions are immaterial to the consolidated financial statements.The Company made reclassifications to the balance sheets for deferred financing costs and deferred taxes as a result of newly adopted accounting guidance. All reclassifications and revisions had no impact on previously reported net income, total stockholders’ equity or cash. See “Recently Issued Accounting Pronouncements” below for more details.Use of EstimatesThe preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Significant estimatesEstimates include, but are not limited to, allowance for doubtful accounts, sales allowances, government price adjustments, fair market values and future cash flows associated with goodwill, indefinite-lifeindefinite life intangibles, long-lived asset impairment tests, useful lives for depreciation and amortization, warranty liabilities, environmental liabilities, determination of discount and other assumptions for pension and other postretirement benefit expense, income taxes and deferred tax valuation allowances, derivative valuation, and contingencies. The Company’s accounting policies involve the application of judgments and assumptions made by management that include inherent risks and uncertainties. Actual results could differ materially from these estimates. Changes in estimates are recorded in results of operations in the period that the events or circumstances giving rise to such changes occur.Segment ReportingIn accordance with the Financial Accounting Standards Board’s (“FASB”) authoritative accounting guidance on segment reporting, the Company has one operating segment and reportable segment. The Company is in one line of business, which is the manufacture and distribution of fully-automatic transmissions.Cash and Cash EquivalentsCash equivalents are defined as short-term, highly-liquid investments with original maturities of 90 days or less. Under the Company’s cash management system, checks issued but not presented to banks may result in book overdraft balances for accounting purposes and are classified within Accounts payable in the Consolidated Balance Sheets. The change in book overdrafts is reported as a component of operating cash flows for Accounts payable.Marketable SecuritiesThe Company determines the appropriate classification of all marketable securities as “held-to-maturity,” “available-for-sale” or “trading” at the time of purchase, and re-evaluates such classifications as of each balance sheet date. As of December 31, 2015,2018, and 2017, the Company’s marketable securities arewere classified as either available-for-sale or trading.Available-for-sale securities are carried at fair value with the unrealized gain or loss reported in Accumulated other comprehensive loss (“AOCL”). Unrealized gains or losses considered to be “other-than-temporary” are recognized in income. Trading securities are carried at fair value with the unrealized gain or loss recognized in Other expense,income (expense), net. The fair value of the Company’s investment securities is determined by currently available market prices. See NOTE 67 “Fair Value of Financial Instruments” for more details.Allowance for Doubtful AccountsThe allowance for doubtful trade accounts receivable reflects estimated losses to be incurred in the collection of the receivables. Estimated losses are based on historical collection experience as well as a review by management of the current status of all receivables. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.InventoriesInventories are stated at the lower of cost or market.and net realizable value. The Company determines cost using the first-in, first-out method. The Company analyzes inventory on a quarterly basis to determine whether it is excess or obsolete inventory. Any decline in carrying value of estimated excess or obsolete inventory is recorded as a reduction of inventory and as an expense included in Cost of sales in the period it is identified.Property, Plant and EquipmentProperty, plant and equipment are recorded at cost less accumulated depreciation. Depreciation expense is recorded using the straight-line method over the following estimated lives: Range in Years 5 – 30 10 – 40 2 – 20 2 – 5 2 – 10 Software represents the costs of software developed or obtained for internal use. Software costs are amortized on a straight-line basis over their estimated useful lives. Software assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. Upgrades and enhancements are capitalized if they result in added functionality, which enables the software to perform tasks it was previously incapable of performing. Software maintenance, training, data conversion and business process reengineering costs are expensed in the period in which they are incurred.Special tooling represents the costs to design and develop tools, dies, jigs and other items owned by the Company and used in the manufacture of components by suppliers under long-term supply agreements. Special tooling is depreciated over the tool’s expected life. Special tooling used in the development of new technology is expensed as incurred. Engineering, testing and other costs incurred in the design and development of production parts are expensed as incurred.Impairment of Long-Lived AssetsThe carrying value of long-lived assets is evaluated whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. Events or circumstances that would result in an impairment review primarily include a significant change in the use of an asset or the planned sale or disposal of an asset. The asset would be considered impaired when there is no future use planned for the asset or the future net undiscounted cash flows generated by the asset or asset group are less than its carrying value. An impairment loss would be recognized based on the amount by which the carrying value exceeds fair value.Assumptions and estimates used to determine cash flows in the evaluation of impairment and the fair values used to determine the impairment are subject to a degree of judgment and complexity. Any changes to the assumptions and estimates resulting from changes in actual results or market conditions from those anticipated may affect the carrying value of long-lived assets and could result in an impairment charge.As a result of events and circumstances related to weak demand conditions for the TC10 product in the fourth quarter of 2014,2017 and the decision to cease production of the TC10 product in the fourth quarter of 2018, the Company reviewed certain of its long-lived assets related torecorded a $4 million and $32 million impairment loss associated with the production of TC10 for the H3000years ended December 31, 2018 and H4000 hybrid-propulsion systems, resulting in a $15.4 million loss recorded2017, respectively.There were no impairment charges for the year ended December 31, 2014. The loss, determined by using future net discounted cash flows, included approximately $1.7 million of accrued expenses related to the impairment of the long-lived assets. The Company also recorded $1.3 million impairment loss during the first quarter of 2015. Deteriorating market conditions for hybrid-propulsion vehicles, principally as a result of decreased fuel costs, alternative fuels and other technologies, significantly contributed to the future cash flows of the related assets being less than the carrying value of those assets.Goodwill and Other Intangible AssetsGoodwill represents the excess of purchase price paid over the fair value of net assets acquired. In accordance with the FASB’s authoritative accounting guidance on goodwill, the Company does not amortize goodwill but rather evaluates it for impairment on an annual basis, or more often if events or circumstances change that could cause goodwill to become impaired. Goodwill is tested for impairment at the reporting unit level, which is the same as the Company’s one operating and reportable segment. The Company does not aggregate any components into its reporting unit. The Company has elected to perform its annual goodwill impairment test on October 31 of every year. Ayear using a multi-step impairment test is performed on goodwill.test. In Step 0, the Company has the option to evaluate various qualitative factors to determine the likelihood of impairment. If determined that the fair value is more likely than not less than the carrying value, then the Company is required to perform Step 1. If the Company does not elect to perform Step 0, it can voluntarily proceed directly to Step 1. In Step 1, the Company performs a quantitative analysis to compare the fair value of its reporting unit to its carrying value including goodwill. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not considered impaired, and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform Step 2 of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied faircarrying value of net assets, then the Company would record an impairment loss equal to the difference.Goodwill impairment testing for 20152018 was performed by assessingusing the Step 0 analysis of certain qualitative trends and factors. The Company’s qualitative assessment included an assessment of business changes, economic outlook, financial trends and forecasts, growth rates, credit ratings, equity ratings, discount rates, industry data and other relevant qualitative factors. Events or circumstances that could unfavorably impact the key assumptions include lower net sales driven by market conditions, our inability to execute on marketing programs and/or delay in the introduction of new products,growth initiatives, lower gross margins as a result of market conditions or failure to obtain forecasted cost reductions, or a higher discount rate as a result of market conditions. While unpredictable and inherently uncertain, the Company believes itsthe forecast estimates arewere reasonable and incorporate assumptions that similar market participants would use in their estimates of fair value. These trends and factors were compared to, and based on, the assumptions used in prior years. After reviewing various qualitative factors, the Company’s 20152018 annual goodwill impairment test indicated that the fair value of the reporting unit more likely than not exceeded its carrying value, indicating no impairment.Other intangible assets have both indefinite and finite useful lives. Intangible assets with indefinite useful lives, such as the Company’s trade name, are not amortized but are tested annually for impairment. The Company has elected to perform ourits annual trade name impairment test on October 31 of every year and follow a similar multi-step impairment test to that is performed on goodwill. Events or circumstances that could unfavorably impact the key assumptions include lower net sales driven by market conditions, ourthe Company's inability to execute on marketing programs and/or delay in introduction of new products, and higher discount rate as a result of market conditions. While unpredictable and inherently uncertain, the Company believes the forecast estimates are reasonable and incorporate those assumptions that similar market participants would use in their estimates of fair value. After reviewing various qualitative factors, the Company’s annual 20152018 trade name impairment test as of October 31, 2015, indicated that the fair value of the trade name more likely than not exceeded its carrying value, indicating no impairment. However, late in the fourth quarter of 2015, the Company obtained updated market data showing a further decline in forecasted net sales for certain of the Company’s end markets. As a result of the new market data and revised near term and long term forecasts, the Company completed a Step 1 analysis for the trade name to assess the impact of these changes on its fair value. The Company performed a quantitative analysis to compare the fair value of trade name to the carrying value of the trade name primarily using the relief-from-royalty method under the income valuation approach consistent with prior years. Significant assumptions used to determine fair value under the relief-from-royalty method include forecasted net sales, royalty rates and a discount rate to be applied to the forecasted net sales. The estimated fair value of the trade name, as of December 31, 2015, was approximately $790.0 million versus a carrying amount of $870.0 million, resulting in a trade name impairment of $80.0 million as of December 31, 2015. The trade name impairment did not result in any other charges to goodwill, other intangible assets or long-lived assets. Refer to NOTE 56, “Goodwill and Other Intangible Assets” for further information.Intangible assets with finite lives are amortized over their estimated useful lives and reviewed for impairment when circumstances change that would create a triggering event. Customer relationships are amortized over the life in which expected benefits are to be consumed. The other remaining finite useful life intangibles are amortized on a straight-line basis over their useful lives. The Company evaluates the remaining useful life of the other intangible assets on a periodic basis to determine whether events or circumstances warrant a revision to the remaining useful life. Assumptions and estimates about future values and remaining useful lives of the Company’s intangible and other long-lived assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors, such as changes in the Company’s business strategy and internal forecasts. Although management believes the historical assumptions and estimates are reasonable and appropriate, different assumptions and estimates could materially impact the Company’s reported financial results.56 “Goodwill and Other Intangible Assets” provides further information on Goodwill and Other intangible assets.Deferred Financing CostsThe Company early adopted the FASB’s authoritative accounting guidance, as of December 31, 2015, to present the deferred financing costs on the balance sheet as a direct deduction from the carrying amount of the debt rather than at cost as a component of other non-current assets. The debt issuance costs related to line-of-credit arrangements is presented as a component of other non-current assetsassets. The debt issuance costs related to other types of debt instruments such as permitted by the new guidance.notes and loans are presented as a component of long-term debt. Deferred financing costs continue to be amortized over the life of the related debt using the effective interest method. Amortization of deferred financing costs is recorded as part of interest expense and totaled $8.0$6 million, $8.1$6 million and $10.9$7 million for the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively.Financial InstrumentsThe Company’s cash equivalents are invested in U.S. Governmentgovernment backed securities and recorded at fair value in the Consolidated Balance Sheets. The carrying values of accounts receivable and accounts payable approximate fair value due to their short-term nature. The Company’s financial derivative instruments, including interest rate swaps, and foreign currency and commodity forward contracts are carried at fair value on the Consolidated Balance Sheets. Refer to NOTE 67, “Fair Value of Financial Instruments” for more detail. The Company’s long-term debt obligations are carried at historical amounts with the Company providing fair value disclosure in NOTE 7.Insurable LiabilitiesThe Company records liabilities for its medical, workers’ compensation, long-term disability, product, general and auto liabilities. The determination of these liabilities and related expenses is dependent on claims experience. For most of these liabilities, claims incurred but not yet reported are estimated based upon historical claims experience.Revenue RecognitionThe Company records sales when title has transferred to the customer, thereas each distinct performance obligation within a contract is evidence of an agreement, the sales price is fixed or determinable, delivery has occurred or services have been rendered, and collectability is reasonably assured.satisfied. The Company sells Extended Transmission Coverageextended transmission coverage (“ETC”) for which sales are deferred. ETC sales are recognized ratably over the period of the ETC,coverage, which typically ranges from two to five years after initial sale. Costs associated with ETC programs are recorded as incurred during the extended period. Distributor and customer sales incentives, consisting of allowances and other rebates, are estimated at the time of sale based upon the Company’s history and experience and are recorded as a reduction to Net sales.sales when it is determined that the adjustment is not likely to reverse, historically on a quarterly basis. Incentive programs are generally product specific or region specific. Some factors used in estimating the cost of incentives includewhen an adjustment is not likely to reverse are the number of transmissions that will be affected by the incentive program and rate of acceptance of any incentive program. If the actual number of affected transmissions differs from this estimate, or if a different mix of incentives is actually paid, the impact on Net sales would be recorded in the period that the change was identified. Consideration given to commercial customers recorded as a reduction of Net sales in the Consolidated Statements of Comprehensive Income included $46.7$80 million, $66.9$66 million, and $65.2$58 million for the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively.Sales under U.S. government production contracts are recordedrecognized at the point in time when control passes to the product is accepted, title has transferred tocustomer, or when the U.S. government accepts the sales pricetransmission and is fixed or determinable, and delivery has occurred.able to direct its use in certain bill-and-hold arrangements. Deferred revenue arises from cash received in advance of the culmination of the earnings process and is recognized as revenue in future periods when the applicable revenue recognition criteria have been met. Under the terms of someprevious U.S. government contracts, there arewere certain price reduction clauses and provisions for potential price reductions which arewere estimated at the time of sale based upon the Company’s history and experience and arewere recorded as a reduction to Net sales. Potential reductions may be attributed to a change in projected sales volumes or plant efficiencies which impact overall costs. As of each of December 31, 20152018 and 2014,2017, the Company had $55.1 million and $63.1$56 million recorded in the price reduction reserve account, respectively.Due to requestsaccount.The Company engages in licensing agreements with certain third parties for the use of the Company’s intellectual property. Deferred revenue arises from cash received in advance of the U.S. government,period of use of the Company billed, but did not ship certain tracked transmissions during 2013. Based onintellectual property. Revenue is recognized over the lack of a fixed delivery date from the U.S. government, the Company deferred approximately $8.8 million of Net sales for these transmissions until they were shipped in 2014. See NOTE 10 for additional details.The Company classifies shipping and handling billed to customers in Net sales and shipping and handling costs in Cost of sales, in accordance with authoritative accounting guidance.The Company contracts with various third parties to provide engineering services. These services are recorded as Net sales in accordance with the terms of the contract. The saleable engineering recorded was $4.2$3 million $7.4 million and $12.4 million for each of the years ended December 31, 2015, 20142018, 2017 and 2013, respectively.2016. The associated costs are recorded in Cost of sales.WarrantyProvisions for estimated expenses related to product warranties are made at the time products are sold. Warranty claims arise when a transmission fails while in service during the relevant warranty period. The warranty reserve is adjusted in Selling, general and administrative expenses based on the Company’s current and historical warranty claims paid and associated repair costs. These estimates are established using historical information including the nature, frequency, and average cost of warranty claims and are adjusted as actual information becomes available. From time to time, the Company may initiate a specific field action program. As a result of the uncertainty surrounding the nature and frequency of specific field action programs, the liability for such programs is recorded when the Company commits to an action. The Company reviews and assesses the liability for these programs on a quarterly basis. The Company also assesses its ability to recover certain costs from its suppliers and records a receivable from the supplier when it believes a recovery is probable. Warranty costs may differ from those estimated if actual claim rates are higher or lower than ourthe Company's historical rates.Research and DevelopmentThe Company incurs costs in connection with research and development programs that are expected to contribute to future earnings. Such costs are charged to Engineering — research and development as incurred.EnvironmentalThe Company accrues costs related to environmental matters when it is probable that the Company has incurred a liability related to a contaminated site and the costs can be reasonably estimated. For additional information, see NOTE 17, Commitments“Commitments and Contingencies.Foreign Currency TranslationMost of the subsidiaries outside the United States prepare financial statements in currencies other than the U.S. dollar.Dollar. The functional currency for all of these subsidiaries is the local currency, except for the Company’s Hong Kong and Middle East subsidiaries which currently use the U.S. dollarDollar as their functional currency. Balances are translated at period-end exchange rates for assets and liabilities and monthly weighted-average exchange rates for revenues and expenses. The translation gains (losses)and losses are stated as a component of AOCLAccumulated Other Comprehensive Loss (“AOCL”) as disclosed in NOTE 16.Derivative InstrumentsIn the normal course of business, the Company is exposed to fluctuations in interest rates, foreign currency exchange rates, and commodity prices. The risk is managed through the use of financial derivative instruments, including interest rate swapswhen appropriate. The Company has qualified for and commodity and foreign currency forward contracts. Despite the fact that the Company either has not elected or does not qualify for hedge accounting treatment on all of its derivative instruments, the contracts are used strictly as an economic hedge and not for speculative purposes.interest rate swap contracts. As necessary, the Company adjusts the values of the derivative instruments for counter-party or credit risk. NOTE 89, “Derivatives” provides further information on the accounting treatment of the Company’s derivative instruments.Income TaxesIncome taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The future tax benefits associated with operating loss and tax credit carryforwards are recognized as deferred tax assets. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.The need to establish a valuation allowance against the deferred tax assets is assessed periodically based on a more-likely-than-not realization threshold, in accordance with the FASB’s authoritative accounting guidance on income taxes. Appropriate consideration is given to all positive and negative evidence related to that realization. This assessment considers, among other matters, the nature, frequency and severity of recent losses, forecasts of future profitability, the duration of statutory carryforward periods, and experience with tax attributes expiring unused and tax planning alternatives. The weight given to these considerations depends upon the degree to which they can be objectively verified.The Company earlyStock-Based CompensationIn March 2015, the Company’s Board of Directors adopted and, in May 2015, the FASB’s authoritative accounting guidanceCompany’s stockholders approved the Allison Transmission Holdings, Inc. 2015 Equity Incentive Award Plan (“2015 Plan”), which became effective on a retrospective basis, as of December 31,May 14, 2015. Under the 2015 to classify all deferred tax assets and liabilities, along with any related valuation allowance, as noncurrent on the balance sheet.Stock-Based CompensationThe Company maintains a stock-based compensation plan which allowsPlan, certain employees (including executive officers), consultants and directors are eligible to receive equity-based compensation, including non-qualified stock options, incentive stock options, restricted stock, dividend equivalents, stock payments, restricted stock units (“RSUs”), performance awards, stock appreciation rights and other equity-based awards, or any combination thereof. The 2015 Plan limits the aggregate number of shares of common stock available for issue to 15.3 million and will expire on, and no option or other equity awards. award may be granted pursuant to the 2015 Plan after, the tenth anniversary of the date the 2015 Plan was approved by the Board of Directors.Prior to the adoption of the 2015 Plan, the Company’s equity-based awards were granted under the Allison Transmission Holdings, Inc. 2011 Equity Incentive Award Plan (“2011 Plan”) and the Equity Incentive Plan of Allison Transmission Holdings, Inc. (“Equity Plan” and, together with the 2011 Plan, the “Prior Plans”). As of the effective date of the 2015 Plan, no new awards will be granted under the Prior Plans, but the Prior Plans will continue to govern the equity awards issued under the Prior Plans.RSU grants are recorded at fair market value at the date of grant and vest upon continued performance of services by the RSU holders over one to three years. Performance unit grants are recorded at fair value based on a Monte-Carlo pricing model and the restrictions lapse on the date the Compensation Committee of the Board of Directors determines the number of shares that shall vest based on the related performance or market condition achievement. Non-qualified stock option grants are recorded at fair value using a Black-Scholes option pricing model and vest upon the continued performance of services by the option holder on the third anniversary of the grant date for awards under the 2015 Plan.The Company follows the FASB’s authoritativehas made a policy election under applicable accounting guidance on share-based payments and recognizes the fair value of the awards as compensation expense over the vesting period. The accounting guidance also requires thatto account for forfeitures be estimated over the vesting period of an award instead of being recognized as a reduction of stock-based compensation expense when the forfeiture actually occurs.RSUs were granted to certain employees and directors at fair market value on the date of grant. The restrictions lapse upon continued performance by the RSU holder on the vest date which generally occurs over one, two or three years. RSU incentive compensation expense recorded was $5 million, $7 million and $2 million for the years ended December 31, 2018, 2017 and 2016, respectively.Performance-based awards, including performance units, were granted to certain employees at fair value at the date of grant. The Company records the fair value of each performance-based award based on a Monte-Carlo pricing model. Performance-based award incentive compensation expense recorded was $6 million, $3 million and $1 million for the years ended December 31, 2018, 2017 and 2016, respectively.Stock options were granted to certain employees at fair value on the date of grant using a Black-Scholes option pricing model. Stock option incentive compensation expense recorded was $2 million, $2 million and $3 million for the years ended December 31, 2018, 2017 and 2016, respectively.Pension and Post-retirement Benefit PlansFor pension and other post-retirement benefits (“OPEB”) plans in which employees participate, costs are determined within the FASB’s authoritative accounting guidance set forth in employers’ defined benefit pensions including accounting for settlements and curtailments of defined benefit pension plans, termination of benefits and accounting for post-retirement benefits other than pensions. In accordance with the authoritative accounting guidance, the Company recognizes the funded status of its defined benefit pension plans and OPEB plan in its Consolidated Balance Sheets with a corresponding adjustment to AOCL, net of tax.Post-retirement benefit costs consist of service cost and interest cost on accrued obligations and the expected return on assets (calculated using a smoothed market value of assets). Any difference between actual and expected returns on assets during a year and actuarialobligations. Actuarial gains and losses on liabilities, together with any prior service costs, are charged (or credited) to income over the average remaining service lives of employees.The benefit cost components shown in the Consolidated Statements of Comprehensive Income are based upon various actuarial assumptions and methodologies as prescribed by authoritative accounting guidance. These assumptions include discount rates, expected return on plan assets, health care cost trend rates, inflation, rate of compensation increases, population demographics, mortality rates and other factors. The Company reviews all actuarial assumptions on an annual basis. Changes in key economic indicators can change these assumptions. These assumptions, along with the actual value of assets at the measurement date, will impact the calculation of pension expenses for the year. For instance, the effect of a one percentage point decrease in the assumed discount rate would result in an increase in the December 31, 2015 defined benefit pension plans obligation of approximately $21.1 million. Similarly, a one percentage point decrease in the assumed discount rate would result in an increase in the December 31, 2015 OPEB obligation of approximately $28.0 million.Recently IssuedAdopted Accounting PronouncementsIn November 2015, the FASB issued authoritative accounting guidance to simplify the balance sheet classification of deferred taxes. The guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. The guidance will be effective prospectively or retrospectively for public entities for interim and annual reporting periods beginning after December 15, 2016, but can be early-adopted. Management has elected to early adopt the guidance on a retrospective basis as of December 31, 2015. As of December 31, 2014, the Company reclassified $1.0 million and ($118.7) million to non-current deferred income tax assets, net and non-current deferred income tax liabilities, net, respectively, to conform to the current period presentation.In July 2015, the FASB issued authoritative accounting guidance to simplify the measurement of inventory. The guidance requires that inventory be measured at the lower of cost and net realizable value. When evidence exists that the net realizable value of inventory is lower than its cost, the difference shall be recognized as a loss in earnings in the period in which it occurs. Inventory measured using last-in, first-out and the retail inventory method are not impacted by the new guidance. The guidance is effective for public entities for interim and annual reporting periods beginning after December 15, 2016, but can be early-adopted. Management is assessing the potential impact of the adoption of this guidance on the Company’s consolidated financial statements.In April 2015, the FASB issued authoritative accounting guidance to simplify the presentation of the debt issuance costs. The guidance requires that the debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The debt issuance costs related to line-of-credit arrangements can still be deferred and presented as an asset and subsequently amortized ratably over the term of the line-of-credit arrangement. The recognition and measurement guidance for debt issuance costs are not affected. The guidance is effective for public entities for interim and annual reporting periods beginning after December 15, 2015, but can be early-adopted. The guidance should also be applied on a retrospective basis. As of December 31, 2015, management has decided to early adopt this guidance. As of December 31, 2015 and 2014, approximately $25.6 million and $29.3 million of debt issuance costs, net of accumulated amortization, were presented in the consolidated balance sheet as direct deductions from the carrying amounts of the debt.In August 2014, the FASB issued authoritative accounting guidance on the disclosure of uncertainties about an entity’s ability to continue as a going concern. The guidance requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that financial statements are available to be issued when applicable) and to provide related footnote disclosures. The guidance is effective prospectively for fiscal years beginning after December 15, 2016, but can be early-adopted. While the adoption of this guidance is not expected to have an effect on the Company’s consolidated financial statements, it could affect the disclosure applied under these circumstances in the future.In May 2014, the FASB issued authoritative accounting guidance on a company’s accounting for revenue from contracts with customers.customers, which guidance was subsequently amended. The guidance applies to all companies that enter into contracts with customers to transfer goods, services or nonfinancial assets. The guidance requires these companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, timing, amount and uncertainty of revenue that is recognized. The guidance allows either full or modified retrospective adoption. The new guidance would have becomewas adopted by the Company effective for annual and interim periods beginning January 1, 2017. In July 2015, the FASB approved a one year delay of the effective date of the standard to January 1, 2018 to provide adequate timeon a modified retrospective basis. See NOTE 3, “Revenue” for implementation. Management is in the early stage of assessinginformation regarding the impact of both methodsthe adoption of this guidance.In February 2016, the FASB issued authoritative accounting guidance on lease accounting, which guidance was subsequently amended. The guidance requires lessees to present right-of-use assets and lease liabilities on the balance sheet for all leases not considered short-term leases. Short-term leases are leases with a lease term of 12 months or less as long as the leases do not include options to purchase the underlying assets that the lessee is reasonably certain to exercise. The guidance also introduces new disclosure requirements for leasing arrangements. In July 2018, the FASB issued additional authoritative guidance on this topic giving lessees an optional adoption approach under which the impact of the adoption of the guidance would be shown as of the date of adoption. Management has elected to adopt the guidance using this modified retrospective approach. The guidance was adopted by the Company effective January 1, 2019. The Company will record a non-monetary right-of-use asset and current and non-current lease liabilities of less than $15 million on its Consolidated Balance Sheets as of January 1, 2019. The adoption of this guidance did not have a material impact on the Company's Consolidated Statements of Comprehensive Income.In August 2016, the FASB issued authoritative accounting guidance on the presentation and classification of certain cash receipts and cash payments on the statement of cash flows. The guidance specifically addresses cash flow issues with the objective of reducing the diversity in practice. The guidance was adopted by the Company effective January 1, 2018 and did not have a material impact on the Company’s consolidated financial statements.NOTE 3.INVENTORIESIn March 2017, the FASB issued authoritative accounting guidance on the presentation of net periodic pension costs and net periodic post-retirement benefit costs. The guidance clarifies the presentation of component costs within an employer’s financial statements and restricts component costs eligible for capitalization to the service cost component. The guidance was adopted by the Company effective January 1, 2018 and did not have a material impact on the Company’s consolidated financial statements.In May 2017, the FASB issued authoritative accounting guidance on accounting for modifications to the terms of employee stock compensation. The guidance clarifies which changes to terms or conditions of share-based payment awards require the entity to apply modification accounting. The guidance was adopted by the Company effective January 1, 2018 and did not have a material impact on the Company’s consolidated financial statements.In August 2017, the FASB issued authoritative accounting guidance on accounting for derivative and hedge instruments. Among other things, the guidance allows the initial hedge effectiveness assessment to be performed by the end of the quarter in which the hedge is designated, permits a qualitative assessment for certain hedges if an expectation of high effectiveness can be supported throughout the term of the hedge, and removes the requirement to record ineffectiveness on cash flow hedges immediately through earnings when the hedge is highly effective. The guidance was early adopted by the Company effective April 1, 2018 and applied upon entering into interest rate swaps designated as cash flow hedges during the second quarter of 2018. When adopted in an interim period, the guidance is required to be reflected as of the beginning of the year of adoption. The Company has not previously designated any derivative instruments as hedging instruments, and thus, the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.In February 2018, the FASB issued authoritative accounting guidance on transfers of stranded balances in accumulated other comprehensive loss to retained earnings. The passage of the U.S. Tax Cuts and Jobs Act by the U.S. federal government in December 2017 and existing GAAP requirements to adjust deferred tax assets and liabilities for changes in tax laws or rates created stranded balances in accumulated other comprehensive loss on deferred tax assets and liabilities previously recorded as a component to accumulated other comprehensive loss. The guidance applies to companies affected by these stranded balances and allows a reclassification of these balances to retained earnings. The guidance was adopted by the Company effective January 1, 2019. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.In June 2018, the FASB issued authoritative accounting guidance on accounting for nonemployee awards for goods or services received by a company. The guidance was adopted by the Company effective January 1, 2019. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.Recently Issued Accounting PronouncementsIn June 2016, the FASB issued authoritative accounting guidance on the presentation of financial assets at the net amount expected to be collected. The guidance also requires the disclosure of financing receivables disaggregated by the year of origination. The guidance will be effective for the Company in fiscal year 2020, and the Company does not plan to early adopt. Management is evaluating the impact of this guidance on the Company's consolidated financial statements.In August 2018, the FASB issued authoritative accounting guidance amending disclosure requirements for certain assets subject to fair value measurement. The guidance allows the Company to reduce the amount of disclosure on transfers between Level 1 and Level 2 assets. The guidance will be effective for the Company in fiscal year 2020, and the Company does not plan to early adopt. Management does not expect the adoption of this guidance to have a material impact on the Company's consolidated financial statements.In August 2018, the FASB issued authoritative accounting guidance amending disclosure requirements for the Company's defined benefit pension plans and other post-retirement benefit plan. The guidance will be effective for the Company in fiscal year 2021, but early adoption is permitted. Management is currently evaluating the impact of this guidance on the Company's consolidated financial statements.In August 2018, the FASB issued authoritative accounting guidance on accounting for implementation costs in hosting arrangements to align these costs with existing guidance for internally developed software. The stage of implementation must be assessed to determine if costs should be capitalized or expensed, and capitalized costs should be expensed during the noncancellable term of the agreement. The guidance will be effective for the Company in fiscal year 2020, and the Company does not plan to early adopt. Management is currently evaluating the impact of this guidance on the Company's consolidated financial statements.NOTE 3. REVENUEAdoption of New Revenue GuidanceNew authoritative accounting guidance for revenue was adopted by the Company effective January 1, 2018 using the modified retrospective approach. Current period results are presented in conformity with the new authoritative accounting guidance, while prior period results are presented in conformity with prior accounting guidance.In accordance with the modified retrospective approach, the Company recorded a one-time adjustment related to sales of ETC contracts open as of the date of adoption, which increased opening retained earnings by $5 million, net of tax, and decreased current deferred revenue by $2 million and non-current deferred revenue by $4 million as of January 1, 2018.During the year ended December 31, 2018, the Company increased net sales by $2 million, and decreased non-current deferred revenue by $2 million, compared to prior accounting guidance, as a result of how the Company allocates revenue to the ETC performance obligation in certain contracts under the new authoritative accounting guidance for revenue.Under the new authoritative accounting guidance, revenue is recognized as each distinct performance obligation within a contract with a customer is satisfied. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. The Company enters into long-term supply agreements (“LTSAs”) and distributor agreements with certain customers. The LTSAs and distributor agreements do not include committed volumes until underlying purchase orders are issued; therefore, the Company determined that purchase orders are the contract with a customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when the performance obligation is satisfied, as there is no right of return.Many of the Company’s contracts have a single performance obligation, as the promise to transfer the individual good or service is not separately identifiable from other promises in the contracts and is, therefore, not distinct. Some of the Company's contracts have multiple performance obligations, most commonly the sale of both a transmission and ETC. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using a ratable allocation based on the standalone selling price of each distinct good or service in the contract.The Company may also use volume based discounts and rebates as marketing incentives in the sales of both transmissions and service parts, which are accounted for as variable consideration. The Company records the impact of the incentives as a reduction to revenue when it is determined that the adjustment is not likely to reverse, historically on a quarterly basis. Due to the typically short duration of purchase orders and minimal number of open contracts with variable consideration at any point in time, the impact of variable consideration is immaterial. If it were to become material, the Company would explain the methods, assumptions and estimates used to determine the consideration allocated to each performance obligation. The Company estimates the impact of all other incentives based on the related sales and market conditions in the end market vocation.Net sales are made on credit terms, generally 30 days, based on an assessment of the customer’s creditworthiness. For certain goods or services, the Company receives consideration prior to satisfying the related performance obligation. Such consideration is recorded as a contract liability in current and non-current deferred revenue as of December 31, 2018 and December 31, 2017. See NOTE 11, “Deferred Revenue” for more information including the amount of revenue earned during the year ended December 31, 2018 that had been previously deferred. The Company does not have contract assets.Disaggregated RevenueThe Company has one operating segment and reportable segment. The Company is in one line of business, which is the manufacture and distribution of fully automatic transmissions. The following presents disaggregated revenue by categories that best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors (dollars in millions): Year ended December 31, 2018 North America On-Highway $ 1,317 North America Off-Highway 93 Defense 158 Outside North America On-Highway 383 Outside North America Off-Highway 129 Service Parts, Support Equipment and Other 633 Total Net Sales $ 2,713 Disaggregated revenue by end market is further described as follows:North America On-HighwayRevenue from the North America On-Highway end market is driven by the sale of transmissions to original equipment manufacturers (“OEMs”), distributors and dealers that install the transmission into Class 4-5, Class 6-7 and Class 8 straight trucks, conventional transit, shuttle and coach buses, school buses and motorhome applications. Revenue from the North America On-Highway end market also includes the sale of electric hybrid-propulsion systems for transit bus. Revenue is recognized at the point in time when control passes to the customer, which is based on shipping terms when the order is fulfilled by the Company.North America Off-HighwayRevenue from the North America Off-Highway end market is driven by sales of transmissions to OEMs and distributors that serve end users who operate vehicles and auxiliary equipment in energy, mining and construction applications. Revenue is recognized at the point in time when control passes to the customer, which is based on shipping terms when the order is fulfilled by the Company.DefenseRevenue from the Defense end market is driven by sales of transmissions to the U.S. Government or its contractors and sales to certain government contractors outside of the U.S. for use in both wheeled and tracked defense vehicle applications. Revenue is recognized at the point in time when control passes to the customer, which is based on shipping terms when the order is fulfilled by the Company.Periodically, the Company and the U.S. Government will enter into a bill-and-hold arrangement where a completed transmission physically remains at the Company’s facility at the request of the U.S. Government. Revenue is recognized at the point in time when it is determined that the U.S. Government accepts the transmission and is able to direct its use.Outside North America On-HighwayRevenue from the Outside North America On-Highway end market is driven by the sale of transmissions to OEMs and distributors that produce vehicles for commercial users in medium and heavy duty applications. Revenue is recognized at the point in time when control passes to the customer, which is based on shipping terms when the order is fulfilled by the Company.Outside North America Off-HighwayRevenue from the Outside North America Off-Highway end market is driven by sales of transmissions to OEMs and distributors serving end users who operate vehicles and auxiliary equipment in energy, mining and construction applications. Revenue is recognized at the point in time when control passes to the customer, which is based on shipping terms when the order is fulfilled by the Company.Service Parts, Support Equipment and OtherRevenue from the Service Parts, Support Equipment and Other end market is primarily derived from the sale of transmission parts and fluid purchased for the normal maintenance and repair needs of products in service and the sale of ETC contracts which extend the warranty coverages of transmissions beyond the standard warranty period.Revenue is recognized on sales of service parts and support equipment at the point in time when control passes to the customer, which is based on shipping terms when the order is fulfilled by the Company.Revenue from the sale of ETC contracts is recognized ratably over the time period that corresponds with the period of coverage, as the Company has determined this method best depicts the progress towards satisfaction of its performance obligation. ETC contracts are sold in one to five year durations within the North America On-Highway, Outside North America On-Highway, North America Off-Highway and Outside North America Off-Highway end markets. The ETC contract period begins when the standard warranty coverage period ends. All consideration allocated to an ETC performance obligation is initially deferred until the coverage period begins.NOTE 4. INVENTORIESInventories consisted of the following components (dollars in millions): December 31,
2015 December 31,
2014 $ 69.5 $ 72.3 5.1 6.1 45.8 46.5 21.0 18.6 $ 141.4 $ 143.5 December 31, 2018 December 31, 2017 Purchased parts and raw materials $ 82 $ 79 Work in progress 8 6 Service parts 48 46 Finished goods 32 23 Total inventories $ 170 $ 154 Inventory components shipped to third parties, primarily cores, parts to re-manufacturers, and parts to contract manufacturers, which the Company has an obligation to buy back, are included in purchased parts and raw materials, with an offsetting liability in Otherother current liabilities. See NOTE 12,13, “Other Current Liabilities” for more information.NOTE 4.PROPERTY, PLANT AND EQUIPMENT
| December 31, 2015 | December 31, 2014 | |||||||
Land and land improvements | $ | 25.0 | $ | 23.6 | ||||
Buildings and building improvements | 293.8 | 281.6 | ||||||
Machinery and equipment | 585.7 | 576.2 | ||||||
Software | 121.3 | 117.0 | ||||||
Special tools | 160.0 | 143.6 | ||||||
Construction in progress | 28.8 | 39.9 | ||||||
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Total property, plant and equipment | 1,214.6 | 1,181.9 | ||||||
Accumulated depreciation | (734.9 | ) | (667.3 | ) | ||||
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Property, plant and equipment, net | $ | 479.7 | $ | 514.6 | ||||
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| December 31, 2018 | December 31, 2017 | ||||||
| Land and land improvements | $ | 24 | $ | 24 | |||
| Buildings and building improvements | 336 | 322 | |||||
| Machinery and equipment | 643 | 601 | |||||
| Software | 143 | 136 | |||||
| Special tools | 201 | 169 | |||||
| Construction in progress | 52 | 46 | |||||
| Total property, plant and equipment | 1,399 | 1,298 | |||||
| Accumulated depreciation | (933 | ) | (850 | ) | |||
| Property, plant and equipment, net | $ | 466 | $ | 448 | |||
During 2015
| December 31, 2015 | December 31, 2014 | |||||||||||||||||||||||
| Intangible assets, gross | Accumulated amortization | Intangible assets, net | Intangible assets, gross | Accumulated amortization | Intangible assets, net | |||||||||||||||||||
Other intangible assets: | ||||||||||||||||||||||||
Trade name | $ | 790.0 | $ | — | $ | 790.0 | $ | 870.0 | $ | — | $ | 870.0 | ||||||||||||
Customer relationships - defense | 62.3 | (31.3 | ) | 31.0 | 62.3 | (27.9 | ) | 34.4 | ||||||||||||||||
Customer relationships – commercial | 831.8 | (477.3 | ) | 354.5 | 831.8 | (426.9 | ) | 404.9 | ||||||||||||||||
Proprietary technology | 476.3 | (320.1 | ) | 156.2 | 476.3 | (282.0 | ) | 194.3 | ||||||||||||||||
Non-compete agreement | 17.3 | (14.6 | ) | 2.7 | 17.3 | (12.8 | ) | 4.5 | ||||||||||||||||
Patented technology - defense | 28.2 | (27.9 | ) | 0.3 | 28.2 | (24.5 | ) | 3.7 | ||||||||||||||||
Tooling rights | 4.5 | (4.4 | ) | 0.1 | 4.5 | (4.3 | ) | 0.2 | ||||||||||||||||
Patented technology - commercial | 260.6 | (260.6 | ) | — | 260.6 | (260.6 | ) | — | ||||||||||||||||
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Total | $ | 2,471.0 | $ | (1,136.2 | ) | $ | 1,334.8 | $ | 2,551.0 | $ | (1,039.0 | ) | $ | 1,512.0 | ||||||||||
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| December 31, 2018 | December 31, 2017 | ||||||||||||||||||||||
Intangible assets, gross | Accumulated amortization | Intangible assets, net | Intangible assets, gross | Accumulated amortization | Intangible assets, net | ||||||||||||||||||
| Other intangible assets: | |||||||||||||||||||||||
| Trade name | $ | 790 | $ | — | $ | 790 | $ | 790 | $ | — | $ | 790 | |||||||||||
| Customer relationships – commercial | 832 | (619 | ) | 213 | 832 | (573 | ) | 259 | |||||||||||||||
| Proprietary technology | 476 | (434 | ) | 42 | 476 | (396 | ) | 80 | |||||||||||||||
| Customer relationships – defense | 62 | (41 | ) | 21 | 62 | (38 | ) | 24 | |||||||||||||||
| Patented technology – defense | 28 | (28 | ) | — | 28 | (28 | ) | — | |||||||||||||||
| Non-compete agreement | 17 | (17 | ) | — | 17 | (17 | ) | — | |||||||||||||||
| Tooling rights | 5 | (5 | ) | — | 5 | (5 | ) | — | |||||||||||||||
| Total | $ | 2,210 | $ | (1,144 | ) | $ | 1,066 | $ | 2,210 | $ | (1,057 | ) | $ | 1,153 | |||||||||
The trade name impairment did not result in any other charges to goodwill, other intangible assets or long-lived assets.
As of December 31, 2015,2017, the net carrying value of the Company’s Goodwill and Other intangible assets, net was $3,275.8 million.
$3,007 million and $3,094 million, respectively. The Company’s 2018 annual goodwill impairment test indicated that the fair value of the reporting unit more likely than not exceeded its carrying value, indicating no impairment. The Company's 2018 annual trade name impairment test indicated that the fair value of the trade name more likely than not exceeded its carrying value, indicating no impairment.
| 2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | |||||||||||||||||||
Amortization expense | $ | 92.4 | $ | 89.7 | $ | 87.2 | $ | 85.7 | $ | 49.9 | $ | 140.6 | ||||||||||||
| 2019 | 2020 | 2021 | 2022 | 2023 | |||||||||||||||
| Amortization expense | $ | 86 | $ | 50 | $ | 45 | $ | 43 | $ | 42 | |||||||||
For the fair value measurement of foreign currency derivatives, the Company uses forward foreign exchange rates receivedvaluations from the issuing financial institution. These rates are periodically corroborated by comparing to third-party broker quotes. The foreign currency swaps are accountedinstitutions for within the authoritative accounting guidance set forth on accounting for derivative instruments and hedging activities and have been recorded at fair value based upon quoted market rates. The fair values are included in Other current and non-current assets and liabilities in the Consolidated Balance Sheets. The Company generally does not elect to apply hedge accounting for these foreign currency swaps, and as a result, unrealized fair value adjustments and realized gains and losses are recorded in Other expense, net in the Consolidated Statements of Comprehensive Income during the period of change.
For the fair value measurement of commodity derivatives, the Company uses forward prices received from the issuing financial institution. These rates are periodically corroborated by comparing to third-party broker quotes. The commodity derivatives are accounted for within the authoritative accounting guidance set forth on accounting for derivative instruments and hedging activities and have been recorded at fair value based upon quoted market rates. The fair values are included in Other current and non-current assets and liabilities in the Consolidated Balance Sheets. The Company has either not qualified for or not elected hedge accounting treatment for these commodity swaps, and as a result, unrealized fair value adjustments and realized gains and losses are recorded in Other expense, net in the Consolidated Statements of Comprehensive Income.
For the fair value measurement of interest rate derivatives, the Company uses valuations from the issuing financial institution. The Company corroborates the valuation through the use of third-party valuation services using a standard replacement valuation model.swaps. The floating-to-fixed interest rate swaps are based on the London Interbank Offered Rate (“LIBOR”) which is observable at commonly quoted intervals. The fair values are included in other current and non-current assets and liabilities in the Consolidated Balance Sheets. The Company has not qualified for hedge accounting treatment for the interest rate swaps and, as a result, fair value adjustments are charged directly to Interest expense in the Consolidated Statements of Comprehensive Income.
| Fair Value Measurements Using | ||||||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | TOTAL | ||||||||||||||||||||||
| 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||
Cash equivalents | $ | 100.0 | $ | 55.0 | $ | — | $ | — | $ | 100.0 | $ | 55.0 | ||||||||||||
Available-for-sale securities | 2.9 | 8.6 | — | — | 2.9 | 8.6 | ||||||||||||||||||
Rabbi trust assets | 4.8 | 2.9 | — | — | 4.8 | 2.9 | ||||||||||||||||||
Deferred compensation obligation | (4.8 | ) | (2.9 | ) | — | — | (4.8 | ) | (2.9 | ) | ||||||||||||||
Derivative assets | — | — | 0.0 | 0.0 | 0.0 | 0.0 | ||||||||||||||||||
Derivative liabilities | — | — | (30.1 | ) | (15.4 | ) | (30.1 | ) | (15.4 | ) | ||||||||||||||
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Total | $ | 102.9 | $ | 63.6 | $ | (30.1 | ) | $ | (15.4 | ) | $ | 72.8 | $ | 48.2 | ||||||||||
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Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | TOTAL | |||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
| Cash equivalents | $ | 111 | $ | 50 | $ | — | $ | — | $ | 111 | $ | 50 | |||||||||||
| Rabbi trust assets | 9 | 8 | — | — | 9 | 8 | |||||||||||||||||
| Deferred compensation obligation | (9 | ) | (8 | ) | — | — | (9 | ) | (8 | ) | |||||||||||||
| Derivative liabilities, net | — | — | (9 | ) | — | (9 | ) | — | |||||||||||||||
| Total | $ | 111 | $ | 50 | $ | (9 | ) | $ | — | $ | 102 | $ | 50 | ||||||||||
| December 31, 2015 | December 31, 2014 | |||||||
Long-term debt: | ||||||||
Senior Secured Credit Facility Term B-2 Loan, variable, due 2017 | $ | — | $ | 283.6 | ||||
Senior Secured Credit Facility Term B-3 Loan, variable, due 2019 | 2,402.8 | 1,765.6 | ||||||
Senior Notes, fixed 7.125%, due 2019 | — | 471.3 | ||||||
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Total long-term debt | $ | 2,402.8 | $ | 2,520.5 | ||||
Less: current maturities of long-term debt | 24.5 | 17.9 | ||||||
deferred financing costs, net (see NOTE 2) | 25.6 | 29.3 | ||||||
|
|
|
| |||||
Total long-term debt, net | $ | 2,352.7 | $ | 2,473.3 | ||||
|
|
|
| |||||
| December 31, 2018 | December 31, 2017 | ||||||
| Long-term debt: | |||||||
| Senior Secured Credit Facility Term B-3 Loan, variable, due 2022 | $ | 1,148 | $ | 1,176 | |||
| Senior Notes, fixed 5.0%, due 2024 | 1,000 | 1,000 | |||||
| Senior Notes, fixed 4.75%, due 2027 | 400 | 400 | |||||
| Total long-term debt | $ | 2,548 | $ | 2,576 | |||
| Less: current maturities of long-term debt | — | 12 | |||||
| deferred financing costs, net (see NOTE 2) | 25 | 30 | |||||
| Total long-term debt, net | $ | 2,523 | $ | 2,534 | |||
| Required Principal Payments | ||||||||||||||||||||
| (dollars in millions) | 2016 | 2017 | 2018 | 2019 | 2020 | |||||||||||||||
Payment | $ | 24.5 | $ | 24.5 | $ | 24.5 | $ | 2,329.3 | $ | — | ||||||||||
| (dollars in millions) | 2019 | 2020 | 2021 | 2022 | 2023 | ||||||||||||||
| Payments | $ | — | $ | 8 | $ | 12 | $ | 1,128 | $ | — | |||||||||
In March 2015, ATI commenced a cash tender offer to purchase its outstanding 7.125% senior cash pay notes due May 2019 (“7.125% Senior Notes”). In connection with the cash tender offer, ATI solicited consents to enter into a supplemental indenture to eliminate substantially all of the restrictive covenants, certain events of default and related provisions contained in the indenture dated as of May 6, 2011 (the “Indenture”) governing the 7.125% Senior Notes. On March 31, 2015, ATI received valid consents from holders with an aggregate principal amount of $420.9 million of the 7.125% Senior Notes. Accordingly, ATI entered into a first supplemental indenture to the Indenture contingent on the execution of an amendment with the term loan lenders under its
Facility
Revolving Credit Facility under GAAP.
In November 2015,March 2018, ATI entered into an amendment with the term loan lenders under its Senior Secured Credit Facility to refinance $189.0 million of Senior Secured Credit Facility Term B-2 Loan due 2017 (“Term B-2 Loan”) replacing it with an additional $189.0 million of term loans underlower the Term B-3 Loan. The addition toapplicable margins on the Term B-3 Loan increased the Company’s debt maturity from August 2017 to August 2019 and the applicable interest rate margin at the Company’s option, is either (a) 2.50% over the LIBOR (which may not be less than 1.00%) or (b) 1.50% over the greater of the prime lending rate provided by the British Banking Association or the federal funds effective rate published by the Federal Reserve Bank of New York. As of December 31, 2015, the rate was approximately 3.50% on the Term B-3 Loan.0.25%. The November 2015March 2018 amendment was treated as a modification of debtto the Senior Secured Credit Facility under GAAP, and thus the Company expensed $0.3recorded $1 million of deferred financing fees and recorded $1.3 million ofas new deferred financing fees in the consolidated financial statements.
The Senior Secured Credit Facility requires minimum quarterly principal payments on the Term B-3 Loan as well as prepayments from certain net cash proceeds of non-ordinary course asset sales and casualty and condemnation events and from a percentage of excess cash flow, if applicable. During 2015, the Company made principal payments of $94.5 million on the Term B-2 Loan, resulting in a loss of $0.3 million associated with the write off of related deferred debt issuance costs. The minimum required quarterly principal payment on the Term B-3 Loan is $6.1 million and remains through its maturity date of 2019. As of December 31, 2015, there had been no payments required from certain net cash proceeds of non-ordinary course asset sales and casualty and condemnation events. The remaining principal balance is due upon maturity.
fees.
In accordance with Interest on the Term B-3 Loan, as of December 31, 2018, is either (a) 1.75% over the LIBOR or (b) 0.75% over the greater of the prime lending rate as quoted by the administrative agent and the federal funds effective rate published by the Federal Reserve Bank of New York plus 0.50%, provided that neither is below 1.00%. As of December 31, 2018, the Company elected to pay the lowest all-in rate of LIBOR plus the applicable margin, or 4.26%, on the Term B-3 Loan. The Senior Secured Credit Facility requires minimum quarterly principal payments on the Term B-3 Loan as well as prepayments from certain net cash proceeds of non-ordinary course asset sales and casualty and condemnation events will only beand from a percentage of excess cash flow, if applicable. The minimum required to prepayquarterly principal payment on the term loan ifTerm B-3 Loan through its maturity date of September 2022 is $3 million; however, the Company does not reinvest or commit to reinvest suchmade voluntary prepayments of the required quarterly principal payments of $25 million in May 2018. As of December 31, 2018, there had been no payments required for certain net cash proceeds in assets to be used in its business or to make certain other permitted investments within 15 months of the related transaction or event, subject to certain limitations.non-ordinary course asset sales and casualty and condemnation events. The Company must apply 50% of its annual excess cash flow (as defined in the Senior Secured Credit Facility) to the prepayment of the Senior Secured Credit Facility, however this percentage reduces to certain levels and eventually to zeroremaining principal balance is due upon achievement of certain total senior secured leverage ratios. For the years ended December 31, 2015 and 2014, the Company was not required to make an excess cash flow payment.
maturity.
September 2021.
2.05x.
Interest Rate
otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Prior to October 1, 2020, ATI may redeem up to 40% of the 4.75% Senior Notes by paying a price equal to 104.75% of the principal amount being redeemed. Prior to October 1, 2022, ATI may redeem some or all of the 4.75% Senior Notes by paying a price equal to 100.00% of the principal amount being redeemed, plus a “make-whole” premium. At any time on or after October 1, 2022, ATI may redeem some or all of the 4.75% Senior Notes at specified redemption prices in the governing indenture.
| December 31, 2015 | December 31, 2014 | |||||||||||||||
| Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||
3.44% Interest Rate Swap L, Aug 2016 – Aug 2019* | $ | 75.0 | (3.6 | ) | 75.0 | (2.3 | ) | |||||||||
3.43% Interest Rate Swap M, Aug 2016 – Aug 2019* | 100.0 | (4.8 | ) | 100.0 | (3.0 | ) | ||||||||||
3.37% Interest Rate Swap N, Aug 2016 – Aug 2019* | 75.0 | (3.5 | ) | 75.0 | (2.1 | ) | ||||||||||
3.19% Interest Rate Swap O, Aug 2016 – Aug 2019* | 75.0 | (3.1 | ) | 75.0 | (1.7 | ) | ||||||||||
3.08% Interest Rate Swap P, Aug 2016 – Aug 2019* | 75.0 | (2.8 | ) | 75.0 | (1.5 | ) | ||||||||||
2.99% Interest Rate Swap Q, Aug 2016 – Aug 2019* | 50.0 | (1.7 | ) | 50.0 | (0.9 | ) | ||||||||||
2.98% Interest Rate Swap R, Aug 2016 – Aug 2019* | 50.0 | (1.7 | ) | 50.0 | (0.9 | ) | ||||||||||
2.73% Interest Rate Swap S, Aug 2016 – Aug 2019* | 50.0 | (1.4 | ) | 50.0 | (0.5 | ) | ||||||||||
2.74% Interest Rate Swap T, Aug 2016 – Aug 2019* | 75.0 | (2.1 | ) | 75.0 | (0.8 | ) | ||||||||||
2.66% Interest Rate Swap U, Aug 2016 – Aug 2019* | 50.0 | (1.2 | ) | 50.0 | (0.4 | ) | ||||||||||
2.60% Interest Rate Swap V, Aug 2016 – Aug 2019* | 50.0 | (1.2 | ) | 50.0 | (0.3 | ) | ||||||||||
2.40% Interest Rate Swap W, Aug 2016 – Aug 2019* | 25.0 | (0.5 | ) | 25.0 | 0.0 | |||||||||||
2.25% Interest Rate Swap X, Aug 2016 – Aug 2019* | 50.0 | (0.8 | ) | — | — | |||||||||||
|
|
|
|
|
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| |||||||||
* includes LIBOR floor of 1.00% | $ | 800.0 | $ | (28.4 | ) | $ | 750.0 | $ | (14.4 | ) | ||||||
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Currency Exchange
The Company’s business is subject to foreign exchange rate risk. As a result, the Company enters into various forward rate contracts that qualify as derivatives under the authoritative accounting guidance to manage certain of these exposures. Forward contracts are used to hedge forecasted transactions and known exposure of payables denominated in a foreign currency. The Company has not elected to apply hedge accounting under the authoritative accounting guidance and recorded the unrealized fair value adjustments and realized gains and losses associated with these contracts in Other expense, net in the Consolidated Statements of Comprehensive Income during the period of change.
The following table summarizes the outstanding foreign currency swaps as of December 31, 2015 and 2014 (amounts in millions):
| December 31, 2015 | December 31, 2014 | |||||||||||||||
| Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||
Japanese Yen (JPY) | ¥ | — | $ | — | ¥ | 300.0 | $ | (0.3 | ) | |||||||
|
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|
| |||||||||||||
| $ | — | $ | (0.3 | ) | ||||||||||||
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Commodity
The Company’s business is subject to commodity price risk, primarily with component suppliers. As a result, the Company enters into various commodity swap contracts that qualify as derivatives under the authoritative accounting guidance to manage certain of these exposures. Swap contracts are used to hedge forecasted transactions either of the commodity or of components containing the commodity. The Company has not qualified for hedge accounting treatment for these commodity swaps, and as a result, unrealized fair value adjustments and realized gains and losses associated with these contracts were charged directly to Other expense, net in the Consolidated Statements of Comprehensive Income during the period of change.
The following table summarizes the outstanding commodity swaps as of December 31, 2015 and December 31, 2014 (dollars in millions):
| December 31, 2015 | December 31, 2014 | |||||||||||||||||||
| Notional Amount | Quantity | Fair Value | Notional Amount | Quantity | Fair Value | |||||||||||||||
Aluminum | $ | 13.7 | 8,150 metric tons | $ | (1.7 | ) | $ | 11.3 | 6,200 metric tons | $ | (0.7 | ) | ||||||||
Natural Gas | $ | 0.2 | 70,000 MMBtu | 0.0 | $ | 0.2 | 60,000 MMBtu | 0.0 | ||||||||||||
|
|
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| |||||||||||||||||
| $ | (1.7 | ) | $ | (0.7 | ) | |||||||||||||||
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| |||||||||||||||||
swaps.
| December 31, 2015 | December 31, 2014 | |||||||||||
| Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | |||||||||
Derivatives not designated as hedging instruments | ||||||||||||
Foreign currency swaps | Other current assets | $ | — | Other current liabilities | $ | (0.3 | ) | |||||
Commodity swaps | ||||||||||||
| Other current and non-current liabilities | (1.7 | ) | Other current and non-current liabilities | (0.7 | ) | |||||||
Interest rate swaps | ||||||||||||
| Other current and non-current liabilities | (28.4 | ) | Other non- current liabilities | (14.4 | ) | |||||||
|
|
|
| |||||||||
Total derivatives not designated as hedging instruments | $ | (30.1 | ) | $ | (15.4 | ) | ||||||
|
|
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| |||||||||
| December 31, 2018 | December 31, 2017 | ||||||||||
| Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||||
| Derivatives designated as hedging instruments: | |||||||||||
| Interest rate swaps | Other current liabilities | $ | (1 | ) | Other current liabilities | $ | — | ||||
| Other non-current liabilities | (8 | ) | Other non-current liabilities | — | |||||||
| Total derivatives designated as hedging instruments | $ | (9 | ) | $ | — | ||||||
Asbe reclassified to earnings within the next twelve months as of December 31, 2014, the amount recorded to Other current liabilities for foreign currency swaps was ($0.3) million. The amounts recorded to Other current and non-current liabilities for commodity swaps were ($0.6) million and ($0.1) million, respectively. The amount recorded to Other non-current liabilities for interest rate swaps was ($14.4) million, respectively.
The impact on the Company’s Consolidated Statements of Comprehensive Income related to foreign currency and commodity swaps can be found in NOTE 11, and the following tabular disclosure describes the location and impact on the Company’s results of operations related to unrealized (loss) gain on interest rate derivatives (dollars in millions):
| December 31, 2015 | December 31, 2014 | December 31, 2013 | ||||||||||
Location of impact on results of operations | ||||||||||||
Interest expense | $ | (14.0 | ) | $ | 3.5 | $ | 34.3 | |||||
2018.
| Year ended December 31, 2015 | Year ended December 31, 2014 | Year ended December 31, 2013 | ||||||||||
Beginning balance | $ | 83.6 | $ | 90.5 | $ | 109.7 | ||||||
Payments | (32.5 | ) | (35.0 | ) | (38.7 | ) | ||||||
Increase in liability (warranty issued during period) | 21.2 | 26.8 | 28.4 | |||||||||
Net adjustments to liability | 5.5 | 0.7 | (9.6 | ) | ||||||||
Accretion (for predecessor liabilities) | 0.5 | 0.6 | 0.7 | |||||||||
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| |||||||
Ending balance | $ | 78.3 | $ | 83.6 | $ | 90.5 | ||||||
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| |||||||
During 2015, the Company recorded approximately $9.2 million of adjustments to the product warranty liabilities as a result of specific field action programs. As a result of the uncertainty surrounding the nature and frequency of specific field action programs, these liabilities will change as additional field information becomes available.
| Year ended December 31, 2018 | Year ended December 31, 2017 | Year ended December 31, 2016 | |||||||||
| Beginning balance | $ | 55 | $ | 63 | $ | 79 | |||||
| Payments | (32 | ) | (30 | ) | (35 | ) | |||||
| Increase in liability (warranty issued during period) | 38 | 18 | 16 | ||||||||
| Net adjustments to liability | 5 | 4 | 3 | ||||||||
| Ending balance | $ | 66 | $ | 55 | $ | 63 | |||||
During 2015, the Company completed an analysis of its DPIM extended coverage program and determined, based on current claims, that the product warranty liability should be increased by $1.8 million. This resulted in a $2.1 million increase in the GM DPIM receivable and a $0.3 million favorable adjustment to the Consolidated Statements of Comprehensive Income. During 2015, the Company also received a $1.8 million favorable settlement related to the specific DPIM field action programs. As of December 31, 2015,2018 and 2017, the Company’s remaining DPIM liability was $50.3$1 million with an associatedand $4 million, respectively, and the related receivable fromowed by GM of $30.7 million. Through December 31, 2015,to the Company had paid approximately $39.6was $1 million in DPIM claims and received approximately $23.6$3 million, in reimbursement from GM. The Company will continue to review the total DPIM liability and GM receivable for any changes in estimates as additional data becomes available.
During 2014, the Company completed an analysis of its DPIM extended coverage program and determined, based on current claims, that the product warranty liability should be increased by $3.9 million. This resulted in a $2.9 million increase in the GM DPIM receivable and a $1.0 million unfavorable adjustment to the Consolidated Statements of Comprehensive Income. As of December 31, 2014, the DPIM liability was $48.5 million with an associated receivable from GM of $28.7 million. Through December 31, 2014, the Company had paid approximately $32.8 million in DPIM claims and received approximately $14.9 million in reimbursement from GM. The Company will continue to review the total DPIM liability and GM receivable for any changes in estimates as additional data becomes available.
During 2013, the Company completed an analysis of its DPIM extended coverage program and determined, based on current claims, that the product warranty liability should be reduced by $8.2 million. This resulted in a $5.8 million reduction in the GM DPIM receivable and a $2.4 million favorable adjustment to the Consolidated Statements of Comprehensive Income. As of December 31, 2013, the DPIM liability was $44.6 million with an associated receivable from GM of $25.8 million. Through December 31, 2013, the Company had paid approximately $25.5 million in DPIM claims and received approximately $9.1 million in reimbursement from GM.
respectively.
| Year ended December 31, 2015 | Year ended December 31, 2014 | Year ended December 31, 2013 | ||||||||||
Beginning balance | $ | 69.0 | $ | 63.6 | $ | 63.5 | ||||||
Increases | 31.9 | 26.2 | 21.1 | |||||||||
Revenue earned | (21.6 | ) | (20.8 | ) | (21.0 | ) | ||||||
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| |||||||
Ending balance | $ | 79.3 | $ | 69.0 | $ | 63.6 | ||||||
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| Year ended December 31, 2018 | Year ended December 31, 2017 | Year ended December 31, 2016 | |||||||||
| Beginning balance | $ | 110 | $ | 93 | $ | 79 | |||||
| Increases | 52 | 52 | 37 | ||||||||
| Revenue earned | (40 | ) | (29 | ) | (23 | ) | |||||
| Ending balance | $ | 122 | $ | 116 | $ | 93 | |||||
Due Deferred revenue recorded in current and non-current liabilities related to requests from the U.S. government, the Company billed, but did not ship certain tracked transmissions during 2013. Based on the lackETC as of a fixed delivery date from the U.S. government, the Company deferred approximately $8.8December 31, 2017 were $30 million of net sales for these transmissions until they were shipped in 2014.
and $72 million, respectively.
| Years ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
Vendor settlement | $ | 2.9 | $ | — | $ | — | ||||||
Loss on intercompany foreign exchange | (1.7 | ) | (5.4 | ) | (2.3 | ) | ||||||
Gain (loss) on foreign exchange | 1.4 | (1.0 | ) | (2.4 | ) | |||||||
Realized loss on derivative contracts (see NOTE 8) | (1.3 | ) | (1.0 | ) | (2.8 | ) | ||||||
Unrealized (loss) gain on derivative contracts (see NOTE 8) | (0.8 | ) | 1.2 | (1.5 | ) | |||||||
Loss on repayments and repurchases of long-term debt (see NOTE 7) | (0.3 | ) | (0.5 | ) | (0.8 | ) | ||||||
Grant program income | — | 2.6 | 5.2 | |||||||||
Impairment loss on investments in technology-related initiatives | — | (2.0 | ) | (5.0 | ) | |||||||
Gain on negotiation of commercial agreement | — | 2.0 | — | |||||||||
Public offering fees and expenses | — | (1.4 | ) | (1.6 | ) | |||||||
Other | (0.5 | ) | (0.1 | ) | 0.3 | |||||||
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| |||||||
Total | $ | (0.3 | ) | $ | (5.6 | ) | $ | (10.9 | ) | |||
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| Years ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| Post-retirement benefit plan amendment credits | $ | 12 | $ | — | $ | — | |||||
| Vendor settlements | (4 | ) | (5 | ) | 1 | ||||||
| Technology-related investment expense | (3 | ) | (16 | ) | (1 | ) | |||||
| Other | (2 | ) | (1 | ) | 2 | ||||||
| Total | $ | 3 | $ | (22 | ) | $ | 2 | ||||
| As of December 31, 2015 | As of December 31, 2014 | |||||||
Payroll and related costs | $ | 31.5 | $ | 50.9 | ||||
Sales allowances | 24.3 | 25.5 | ||||||
Vendor buyback obligation | 12.1 | 13.2 | ||||||
Taxes payable | 12.6 | 8.5 | ||||||
Defense price reduction reserve | 8.7 | 16.2 | ||||||
Derivative liabilities | 5.0 | 0.8 | ||||||
Accrued interest payable | 0.6 | 5.2 | ||||||
Environmental liabilities | 0.5 | — | ||||||
Other accruals | 10.8 | 11.4 | ||||||
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| |||||
Total | $ | 106.1 | $ | 131.7 | ||||
|
|
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| |||||
| As of December 31, 2018 | As of December 31, 2017 | ||||||
| Payroll and related costs | $ | 81 | $ | 73 | |||
| Sales allowances | 39 | 34 | |||||
| Accrued interest payable | 19 | 19 | |||||
| Vendor buyback obligation | 15 | 14 | |||||
| Taxes payable | 10 | 10 | |||||
| Defense price reduction reserve | 9 | 9 | |||||
| Non-trade payables | 3 | 8 | |||||
| Derivative liabilities | 1 | — | |||||
| Other accruals | 20 | 16 | |||||
| Total | $ | 197 | $ | 183 | |||
2016.
2016.
| Pension Plans | Post-retirement Benefits | |||||||||||||||||||||||
| Year ended December 31, 2015 | Year ended December 31, 2014 | Year ended December 31, 2013 | Year ended December 31, 2015 | Year ended December 31, 2014 | Year ended December 31, 2013 | |||||||||||||||||||
Net Periodic Benefit Cost: | ||||||||||||||||||||||||
Service cost | $ | 14.4 | $ | 13.2 | $ | 16.3 | $ | 2.2 | $ | 2.2 | $ | 3.3 | ||||||||||||
Interest cost | 5.2 | 5.0 | 4.0 | 5.4 | 5.9 | 5.8 | ||||||||||||||||||
Expected return on assets | (8.5 | ) | (7.7 | ) | (6.7 | ) | — | — | — | |||||||||||||||
Prior service cost | 0.1 | 0.1 | 0.1 | (3.6 | ) | (3.6 | ) | (3.6 | ) | |||||||||||||||
(Gain) loss | (0.1 | ) | — | 0.7 | — | (0.7 | ) | — | ||||||||||||||||
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| |||||||||||||
Net Periodic Benefit Cost | $ | 11.1 | $ | 10.6 | $ | 14.4 | $ | 4.0 | $ | 3.8 | $ | 5.5 | ||||||||||||
Other changes recognized in other comprehensive income: | ||||||||||||||||||||||||
Prior service credit | $ | 0.2 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Net (gain) loss | (4.4 | ) | 2.1 | (18.4 | ) | 4.4 | 7.8 | (30.7 | ) | |||||||||||||||
Amortizations | (0.0 | ) | (0.1 | ) | (0.8 | ) | 3.6 | 4.3 | 3.6 | |||||||||||||||
|
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| |||||||||||||
Total recognized – other comprehensive income | $ | (4.2 | ) | $ | 2.0 | $ | (19.2 | ) | $ | 8.0 | $ | 12.1 | $ | (27.1 | ) | |||||||||
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| Pension Plans | Post-retirement Benefits | ||||||||||||||||||||||
| Year ended December 31, 2018 | Year ended December 31, 2017 | Year ended December 31, 2016 | Year ended December 31, 2018 | Year ended December 31, 2017 | Year ended December 31, 2016 | ||||||||||||||||||
| Net Periodic Benefit Cost (Credit): | |||||||||||||||||||||||
| Service cost | $ | 12 | $ | 12 | $ | 13 | $ | 1 | $ | 2 | $ | 2 | |||||||||||
| Interest cost | 6 | 6 | 6 | 4 | 6 | 7 | |||||||||||||||||
| Expected return on assets | (8 | ) | (7 | ) | (7 | ) | — | — | — | ||||||||||||||
| Prior service credit | — | — | — | (13 | ) | (4 | ) | (4 | ) | ||||||||||||||
| Net Periodic Benefit Cost (Credit) | $ | 10 | $ | 11 | $ | 12 | $ | (8 | ) | $ | 4 | $ | 5 | ||||||||||
| Other changes recognized in other comprehensive income: | |||||||||||||||||||||||
| Prior service cost (credit) | $ | — | $ | 1 | $ | (5 | ) | $ | — | $ | (73 | ) | $ | — | |||||||||
| Net (gain) loss | (2 | ) | 8 | 8 | (12 | ) | 24 | (11 | ) | ||||||||||||||
| Amortizations | — | — | — | 13 | 4 | 4 | |||||||||||||||||
| Total recognized – other comprehensive income | $ | (2 | ) | $ | 9 | $ | 3 | $ | 1 | $ | (45 | ) | $ | (7 | ) | ||||||||
| Pension Plans | Post-retirement Benefits | |||||||||||||||||||||||
| Year ended December 31, 2015 | Year ended December 31, 2014 | Year ended December 31, 2013 | Year ended December 31, 2015 | Year ended December 31, 2014 | Year ended December 31, 2013 | |||||||||||||||||||
Discount rate | 3.90 | % | 4.80 | % | 3.90 | % | 4.00 | % | 4.90 | % | 4.10 | % | ||||||||||||
Rate of compensation increase (salaried) | 3.00 | % | 3.00 | % | 3.00 | % | N/A | N/A | N/A | |||||||||||||||
Expected return on assets | 6.25 | % | 6.80 | % | 7.00 | % | N/A | N/A | N/A | |||||||||||||||
cost (credit).
| Pension Plans | Post-retirement Benefits | ||||||||||||||||
| Year ended December 31, 2018 | Year ended December 31, 2017 | Year ended December 31, 2016 | Year ended December 31, 2018 | Year ended December 31, 2017 | Year ended December 31, 2016 | ||||||||||||
| Discount rate | 3.50 | % | 4.10 | % | 4.40 | % | 3.60 | % | 4.30 | % | 4.60 | % | |||||
| Rate of compensation increase (salaried) | 3.00 | % | 3.00 | % | 3.00 | % | N/A | N/A | N/A | ||||||||
| Expected return on assets | 4.50 | % | 4.70 | % | 4.70 | % | N/A | N/A | N/A | ||||||||
| Pension Plans | Post-retirement Benefits | |||||||||||||||
| As of December 31, | ||||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
Discount rate | 4.40 | % | 3.90 | % | 4.60 | % | 4.00 | % | ||||||||
Rate of compensation increase (salaried) | 3.00 | % | 3.00 | % | N/A | N/A | ||||||||||
| Pension Plans | Post-retirement Benefits | ||||||||||
| As of December 31, | |||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||
| Discount rate | 4.20 | % | 3.50 | % | 4.20 | % | 3.60 | % | |||
| Rate of compensation increase (salaried) | 3.00 | % | 3.00 | % | N/A | N/A | |||||
2018.
2036.
| 1% Increase | 1% Decrease | |||||||
Effect on total of service and interest cost | $ | 1.8 | $ | (1.3 | ) | |||
Effect on post-retirement benefit obligation | $ | 31.2 | $ | (24.3 | ) | |||
| 1% Increase | 1% Decrease | ||||||
| Effect on total of service and interest cost | $ | 1 | $ | (1 | ) | ||
| Effect on post-retirement benefit obligation | $ | 13 | $ | (11 | ) | ||
| Pension Plans | Post-retirement Benefits | |||||||||||||||||||||||
| Year ended December 31, 2015 | Year ended December 31, 2014 | Year ended December 31, 2013 | Year ended December 31, 2015 | Year ended December 31, 2014 | Year ended December 31, 2013 | |||||||||||||||||||
Benefit Obligations: | ||||||||||||||||||||||||
Net benefit obligation at beginning of year | $ | 133.5 | $ | 105.9 | $ | 103.3 | $ | 136.0 | $ | 120.7 | $ | 142.6 | ||||||||||||
Service cost | 14.4 | 13.2 | 16.3 | 2.2 | 2.2 | 3.3 | ||||||||||||||||||
Interest cost | 5.2 | 5.0 | 4.0 | 5.4 | 5.9 | 5.8 | ||||||||||||||||||
Plan Amendments | 0.2 | — | — | — | — | — | ||||||||||||||||||
Benefits paid | (2.0 | ) | (1.5 | ) | (0.8 | ) | (0.7 | ) | (0.6 | ) | (0.3 | ) | ||||||||||||
Actuarial (gain) loss | (10.9 | ) | 10.9 | (16.9 | ) | 4.4 | 7.8 | (30.7 | ) | |||||||||||||||
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Net benefit obligation at end of year | $ | 140.4 | $ | 133.5 | $ | 105.9 | $ | 147.3 | $ | 136.0 | $ | 120.7 | ||||||||||||
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Fair Value of Plan Assets: | ||||||||||||||||||||||||
Fair value of plan assets at beginning of year | $ | 135.3 | $ | 108.6 | $ | 89.4 | $ | — | $ | — | $ | — | ||||||||||||
Actual return on plan assets | 2.0 | 16.4 | 8.2 | — | — | — | ||||||||||||||||||
Employer contributions | 4.8 | 11.8 | 11.8 | 0.7 | 0.6 | 0.3 | ||||||||||||||||||
Benefits paid | (2.0 | ) | (1.5 | ) | (0.8 | ) | (0.7 | ) | (0.6 | ) | (0.3 | ) | ||||||||||||
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Fair value of plan assets at end of year | $ | 140.1 | $ | 135.3 | $ | 108.6 | $ | — | $ | — | $ | — | ||||||||||||
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Net Funded Status | $ | (0.3 | ) | $ | 1.8 | $ | 2.7 | $ | (147.3 | ) | $ | (136.0 | ) | $ | (120.7 | ) | ||||||||
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| Pension Plans | Post-retirement Benefits | ||||||||||||||||||||||
| Year ended December 31, 2018 | Year ended December 31, 2017 | Year ended December 31, 2016 | Year ended December 31, 2018 | Year ended December 31, 2017 | Year ended December 31, 2016 | ||||||||||||||||||
| Benefit Obligations: | |||||||||||||||||||||||
| Net benefit obligation at beginning of year | $ | 181 | $ | 155 | $ | 140 | $ | 102 | $ | 144 | $ | 147 | |||||||||||
| Service cost | 12 | 12 | 13 | 1 | 2 | 2 | |||||||||||||||||
| Interest cost | 6 | 6 | 6 | 4 | 6 | 7 | |||||||||||||||||
| Plan Amendments | — | 1 | (5 | ) | — | (73 | ) | — | |||||||||||||||
| Benefits paid | (6 | ) | (7 | ) | (7 | ) | (2 | ) | (2 | ) | (1 | ) | |||||||||||
| Actuarial (gain) loss | (16 | ) | 14 | 8 | (12 | ) | 25 | (11 | ) | ||||||||||||||
| Net benefit obligation at end of year | $ | 177 | $ | 181 | $ | 155 | $ | 93 | $ | 102 | $ | 144 | |||||||||||
| Fair Value of Plan Assets: | |||||||||||||||||||||||
| Fair value of plan assets at beginning of year | $ | 188 | $ | 150 | $ | 140 | $ | — | $ | — | $ | — | |||||||||||
| Actual return on plan assets | (6 | ) | 14 | 6 | — | — | — | ||||||||||||||||
| Employer contributions | 20 | 31 | 11 | 2 | 2 | 1 | |||||||||||||||||
| Benefits paid | (6 | ) | (7 | ) | (7 | ) | (2 | ) | (2 | ) | (1 | ) | |||||||||||
| Fair value of plan assets at end of year | $ | 196 | $ | 188 | $ | 150 | $ | — | $ | — | $ | — | |||||||||||
| Net Funded Status | $ | 19 | $ | 7 | $ | (5 | ) | $ | (93 | ) | $ | (102 | ) | $ | (144 | ) | |||||||
| Fair Value Measurements Using | ||||||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | TOTAL | ||||||||||||||||||||||
| 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||
Cash equivalents | $ | 3.0 | $ | 8.6 | $ | — | $ | — | $ | 3.0 | $ | 8.6 | ||||||||||||
Diversified equity securities | 21.1 | 57.8 | — | — | 21.1 | 57.8 | ||||||||||||||||||
Diversified debt securities | 21.9 | 68.9 | 94.1 | — | 116.0 | 68.9 | ||||||||||||||||||
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Total | $ | 46.0 | $ | 135.3 | $ | 94.1 | $ | — | $ | 140.1 | $ | 135.3 | ||||||||||||
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Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | TOTAL | |||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
| Diversified debt securities | $ | 9 | $ | 26 | $ | 156 | $ | 128 | $ | 165 | $ | 154 | |||||||||||
| Diversified equity securities | 20 | 20 | 8 | 8 | 28 | 28 | |||||||||||||||||
| Cash equivalents | 3 | 6 | — | — | 3 | 6 | |||||||||||||||||
| Total | $ | 32 | $ | 52 | $ | 164 | $ | 136 | $ | 196 | $ | 188 | |||||||||||
| Target | ||||||
| Asset Category | Hourly | Salary | ||||
| Cash equivalents | 2 | % | 2 | % | ||
| Diversified equity securities | 15 | 15 | ||||
| Diversified debt securities | 83 | 83 | ||||
| Total | 100 | % | 100 | % | ||
| Pension Plans | Post-retirement Benefits | |||||||||||||||
| As of December 31, | ||||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
Amounts Recognized in Balance Sheet: | ||||||||||||||||
Noncurrent assets | $ | 6.6 | $ | 7.9 | $ | — | $ | — | ||||||||
Current liabilities | — | — | (1.6 | ) | (1.2 | ) | ||||||||||
Noncurrent liabilities | (6.9 | ) | (6.1 | ) | (145.7 | ) | (134.8 | ) | ||||||||
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Total (liability) asset | $ | (0.3 | ) | $ | 1.8 | $ | (147.3 | ) | $ | (136.0 | ) | |||||
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Accumulated Other Comprehensive Loss: | ||||||||||||||||
Prior service (cost) credit | $ | (0.3 | ) | $ | (0.1 | ) | $ | 18.1 | $ | 21.7 | ||||||
Actuarial gain | 5.0 | 0.6 | 4.2 | 8.6 | ||||||||||||
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Total | $ | 4.7 | $ | 0.5 | $ | 22.3 | $ | 30.3 | ||||||||
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| Pension Plans | Post-retirement Benefits | ||||||||||||||
| As of December 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||||||
| Amounts Recognized in Balance Sheet: | |||||||||||||||
| Noncurrent assets | $ | 19 | $ | 7 | $ | — | $ | — | |||||||
| Current liabilities | — | — | (3 | ) | (3 | ) | |||||||||
| Noncurrent liabilities | — | — | (90 | ) | (99 | ) | |||||||||
| Total asset (liability) | $ | 19 | $ | 7 | $ | (93 | ) | $ | (102 | ) | |||||
| Accumulated Other Comprehensive Loss: | |||||||||||||||
| Prior service credit | $ | 3 | $ | 4 | $ | 71 | $ | 84 | |||||||
| Actuarial (loss) gain | (8 | ) | (11 | ) | 2 | (10 | ) | ||||||||
| Total | $ | (5 | ) | $ | (7 | ) | $ | 73 | $ | 74 | |||||
| 2016 | ||||||||
| Pension Plans | Post-retirement Benefits | |||||||
Prior service (cost) credit | $ | (0.2 | ) | $ | 3.6 | |||
Actuarial gain | 0.3 | — | ||||||
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Total | $ | 0.1 | $ | 3.6 | ||||
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| 2019 | |||||||
Pension Plans | Post-retirement Benefits | ||||||
| Prior service credit | $ | 1 | $ | 13 | |||
| Actuarial loss | (1 | ) | — | ||||
| Total | $ | — | $ | 13 | |||
| Hourly Plan | Salary Plan | |||||||||||||||
| As of December 31, | ||||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
Plans with projected benefit obligation in excess of plan assets: | ||||||||||||||||
Projected benefit obligation | N/A | 1 | N/A | 1 | $ | 74.6 | $ | 71.4 | ||||||||
Fair value of plan assets | N/A | 1 | N/A | 1 | $ | 67.7 | $ | 65.3 | ||||||||
Plans with accumulated benefit obligation in excess of plan assets: | ||||||||||||||||
Accumulated benefit obligation | N/A | 1 | N/A | 1 | $ | 70.8 | $ | 67.6 | ||||||||
Fair value of plan assets | N/A | 1 | N/A | 1 | $ | 67.7 | $ | 65.3 | ||||||||
obligation.
| Pension Plans | Post-retirement Benefits | |||||||
Employer Contributions: | ||||||||
2016 expected contributions | $ | 8.0 | $ | 1.7 | ||||
Expected Benefit Payments: | ||||||||
2016 | 3.3 | 1.7 | ||||||
2017 | 4.1 | 2.3 | ||||||
2018 | 4.8 | 3.0 | ||||||
2019 | 5.6 | 3.7 | ||||||
2020 | 6.4 | 4.5 | ||||||
2021-2025 | 45.6 | 30.8 | ||||||
Pension Plans | Post-retirement Benefits | ||||||
| Employer Contributions: | |||||||
| 2019 expected contributions | $ | — | $ | 3 | |||
| Expected Benefit Payments: | |||||||
| 2019 | 8 | 3 | |||||
| 2020 | 10 | 4 | |||||
| 2021 | 11 | 4 | |||||
| 2022 | 12 | 5 | |||||
| 2023 | 13 | 5 | |||||
| 2024-2028 | 67 | 26 | |||||
In March 2015, the Company’s Board of Directors adopted and in May 2015, the Company’s stockholders approved the Allison Transmission Holdings, Inc. 2015 Equity Incentive Award Plan (“2015 Plan”), which became effective on May 14, 2015. Under the 2015 Plan, certain employees (including executive officers), consultants and directors are eligible to receive equity-based compensation, including non-qualified stock options, incentive stock options, restricted stock, dividend equivalents, stock payments, restricted stock units (“RSU”), performance awards, stock appreciation rights and other equity-based awards, or any combination thereof. The 2015 Plan limits the aggregate number of shares of common stock available for issue to 15.3 million and will expire on, and no option or other equity award may be granted pursuant to the 2015 Plan after, the tenth anniversary of the date the 2015 Plan was approved by the Board of Directors.
Prior to the adoption of the 2015 Plan, the Company’s equity-based awards were granted under Allison Transmission Holdings, Inc. 2011 Equity Incentive Award Plan (“2011 Plan”) and the Equity Incentive Plan of Allison Transmission Holdings, Inc. (“Equity Plan” and, together with the 2011 Plan, the “Prior Plans”). As of the effective date of the 2015 Plan, no new awards will be granted under the Prior Plans, but the Prior Plans will continue to govern the equity awards issued under the Prior Plans.
Restricted Stock Units
RSUs were issued to certain employees in 2015, 2014 and 2013 under the 2011 Plan, and certain directors in 2015 and 2014 under the 2015 Plan and 2011 Plan, at fair market value at the date of grant. These awards entitle the holder to receive one common share for each RSU upon vesting, which generally occurs over one to three years upon continued performance of services by the RSU holders. A summary of RSU activity as of December 31, 2015, 2014 and 2013, and changes during the period then ended is presented below:
Non-vested RSUs: | RSUs (in millions) | Weighted-Average Grant-Date Fair Value | ||||||
Non-vested as of December 31, 2012 | 1.0 | $ | 20.20 | |||||
Granted | 0.2 | 23.31 | ||||||
Vested | (0.4 | ) | 20.23 | |||||
Non-vested as of December 31, 2013 | 0.8 | $ | 20.90 | |||||
Granted | 0.0 | 29.85 | ||||||
Vested | (0.6 | ) | 20.32 | |||||
Non-vested as of December 31, 2014 | 0.2 | $ | 26.57 | |||||
Granted | 0.1 | 31.96 | ||||||
Vested | (0.1 | ) | 23.95 | |||||
Non-vested as of December 31, 2015 | 0.2 | $ | 30.61 | |||||
As of December 31, 2015 and 2014, there were $2.8 million and $3.0 million, respectively, of unrecognized compensation cost related to non-vested RSU compensation arrangements granted under the 2015 Plan and 2011 Plan. This cost is expected to be recognized, on a straight line basis, over a period of approximately two years. RSU incentive compensation expense recorded was $3.0 million, $9.8 million and $12.0 million for the years ended December 31, 2015, 2014 and 2013, respectively. The total intrinsic value of RSUs vested during the years ended December 31, 2015, 2014 and 2013 was $0.2 million, $7.4 million and $1.1 million, respectively. The total fair value of RSUs vested during the years ended December 31, 2015, 2014 and 2013 was approximately $3.8 million, $20.2 million and $9.0 million, respectively.
Pursuant to the share withholding provisions of the 2011 Plan and the related RSU award agreement, certain employees, in lieu of paying withholding taxes on the vesting of RSUs, authorized the withholding of an aggregate of approximately 0.1 million, 0.3 million and 0.1 million shares, respectively of the Company’s common stock to satisfy their minimum statutory tax withholding requirements related to such vesting events during 2015, 2014 and 2013. The withheld shares were recorded as a reduction to equity on the applicable vesting dates of approximately $1.4 million, $8.4 million and $3.6 million during 2015, 2014 and 2013, respectively.
Restricted Stock Awards
Restricted stock was granted to certain employees in 2015 and 2014 under the 2011 Plan at fair market value on the date of grant. The restrictions lapse upon continued performance by the restricted stock holders on the vest date which generally occurs over one, two or three years. A summary of restricted stock activity as of December 31, 2015 and 2014, and changes during the period ended December 31, 2015 and 2014 is presented below:
Non-vested Shares: | Restricted Stock (in millions) | Weighted-Average Grant-Date Fair Value | ||||||
Non-vested as of December 31, 2013 | — | $ | — | |||||
Granted | 0.2 | 29.47 | ||||||
Vested | — | — | ||||||
Non-vested as of December 31, 2014 | 0.2 | $ | 29.47 | |||||
Granted | 0.0 | 32.05 | ||||||
Vested | 0.0 | 29.08 | ||||||
Non-vested as of December 31, 2015 | 0.2 | $ | 30.27 | |||||
As of December 31, 2015 and 2014, there was $2.8 million and $3.4 million, respectively, of unrecognized compensation cost related to non-vested restricted stock compensation arrangements granted under the 2011 Plan. This cost is expected to be recognized, on a straight line basis, over a period of approximately two years. Restricted stock incentive compensation expense recorded was $2.2 million and $1.6 million for the years ended December 31, 2015 and 2014, respectively. The total intrinsic value of restricted stock vested during the year ended December 31, 2015 was $0.1 million.
Pursuant to the share withholding provisions of the 2011 Plan and the related restricted stock award agreement, certain employees, in lieu of paying withholding taxes on the vesting of restricted stock, authorized the withholding of the Company’s common stock to satisfy their minimum statutory tax withholding requirements related to such vesting events during 2015. The withheld shares were recorded as a reduction to equity on the applicable vesting dates of approximately $0.5 million during 2015.
Performance Awards
Performance awards were granted to certain employees in 2015 under the 2011 Plan. In accordance with the FASB’s authoritative accounting guidance on stock compensation, each performance award granted is to be recorded at fair value. The Company records the fair value of each performance award based on a Monte-Carlo pricing model using the assumptions noted in the following table:
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The restrictions lapse on the date the Compensation Committee of the Board of Directors determines the number of shares that shall vest based on the total stockholders return of the Company and the specified peer group, which date should be no later than February 28, 2018. A summary of performance award activity as of December 31, 2015, and changes during the period ended December 31, 2015 is presented below:
Non-vested Shares: | Performance award (in millions) | Weighted-Average Grant-Date Fair Value | ||||||
Non-vested as of December 31, 2014 | — | $ | — | |||||
Granted | 0.1 | $ | 36.53 | |||||
Vested | — | — | ||||||
Non-vested as of December 31, 2015 | 0.1 | $ | 36.53 | |||||
As of December 31, 2015, there was $1.7 million of unrecognized compensation cost related to non-vested performance awards granted under the 2011 Plan. This cost is expected to be recognized, on a straight line basis, over a period of approximately three years. Performance award incentive compensation expense recorded was $0.7 million for the year ended December 31, 2015.
Stock Options
Stock options granted under the Equity Plan after the completion of the Acquisition Transaction and through March 2012, have a per share exercise price based on the fair market value of the Company at the date of grant. Stock options granted under the 2015 Plan and 2011 Plan have a per share exercise price based on the closing price of a share of the Company’s common stock as reported by the NYSE on the date of grant. All stock options expire 10 years after the grant date. The options vest upon the continued performance of services by the option holder over time, with either 20% or 33% of the award vesting on each anniversary of the grant date over three to five years for awards under the Equity Plan and 100% of the award vesting in December of the year that is two years after the year of grant or the third anniversary of the grant date under the 2011 Plan. Upon termination of employment for reasons other than cause, retirement before the age of 65 with less than 90 points (calculated as age plus years of service), death or disability, the options shall cease to be exercisable ninety days following the date of the optionees’ termination of service. Upon termination of employment for cause, the options shall not be exercisable on the date of such termination. Upon termination of employment for retirement at or after the age of 65, the options shall cease to be exercisable three years following such date. Upon termination of employment for retirement before the age of 65 with 90 or more points, the options shall cease to be exercisable two years following such date. Upon termination of employment for death or disability, the options shall cease to be exercisable twelve months following such date.
In accordance with the FASB’s authoritative accounting guidance on stock compensation, each option grant is to be recorded at fair value. When options are granted, the Company uses a Black-Scholes option pricing model to calculate the fair value of each option award using the assumptions noted in the following table:
| 2015 | 2014 | 2013 | ||||||||||
Expected volatility | 31 | % | 38 | % | 51 | % | ||||||
Expected dividend yield | 1.9 | % | 1.6 | % | 1.2 | % | ||||||
Expected term (in years) | 6.0 | 5.5 | 5.4 | |||||||||
Risk-free rate | 1.5 | % | 1.7 | % | 1.6 | % | ||||||
Expected volatility is based on “the average volatilities of otherwise similar public entities” as defined by authoritative accounting guidance. The Company currently pays a $0.15 dividend per quarter. The expected term is derived from the average of the weighted vesting life and the contractual term. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
A summary of option activity as of December 31, 2015, 2014 and 2013, and changes during the period then ended is presented below:
| Options (in millions) | Weighted- Average Exercise Price | Weighted-Average Remaining Contractual Term | ||||||||||
Outstanding as of December 31, 2012 | 11.9 | $ | 14.01 | 4.93 years | ||||||||
Exercisable as of December 31, 2012 | 11.8 | $ | 14.02 | 4.91 years | ||||||||
Granted | 0.6 | $ | 23.39 | |||||||||
Exercised | (3.8 | ) | — | |||||||||
Outstanding as of December 31, 2013 | 8.7 | $ | 15.33 | 4.30 years | ||||||||
Exercisable as of December 31, 2013 | 8.1 | $ | 14.79 | 3.94 years | ||||||||
Granted | 0.4 | $ | 30.23 | |||||||||
Exercised | (4.2 | ) | — | |||||||||
Outstanding as of December 31, 2014 | 4.9 | $ | 17.49 | 4.19 years | ||||||||
Exercisable as of December 31, 2014 | 3.9 | $ | 15.32 | 3.08 years | ||||||||
Granted | 0.2 | $ | 32.13 | |||||||||
Exercised | (1.5 | ) | — | |||||||||
Outstanding as of December 31, 2015 | 3.6 | $ | 19.47 | 4.12 years | ||||||||
Exercisable as of December 31, 2015 | 3.0 | $ | 16.87 | 3.12 years | �� | |||||||
The weighted-average grant-date fair value of options granted during the years ended December 31, 2015, 2014 and 2013 was $8.39, $9.51 and $9.76, respectively. The total fair value of stock options vested during the years ended December 31, 2015, 2014 and 2013 was $5.9 million, $0.0 million and $0.7 million, respectively. The total intrinsic value of stock options exercised during the years ended December 31, 2015, 2014 and 2013 was $25.8 million, $82.3 million and $58.0 million, respectively. The aggregate intrinsic value of stock options outstanding and exercisable was $23.1 million and $27.1 million as of December 31, 2015, and $80.4 million and $72.5 million as of December 31, 2014, respectively.
A summary of the status of the Company’s non-vested stock options as of December 31, 2015, 2014 and 2013, and changes during the period ended December 31, 2015, 2014 and 2013 is presented below:
Non-vested Stock Options: | Options (in millions) | Weighted-Average Grant-Date Fair Value | ||||||
Non-vested at December 31, 2012 | 0.2 | $ | 4.34 | |||||
Granted | 0.6 | 9.76 | ||||||
Vested | (0.2 | ) | 3.59 | |||||
Non-vested at December 31, 2013 | 0.6 | $ | 9.06 | |||||
Granted | 0.4 | 9.51 | ||||||
Vested | — | — | ||||||
Non-vested at December 31, 2014 | 1.0 | $ | 9.44 | |||||
Granted | 0.2 | 8.39 | ||||||
Vested | (0.6 | ) | 9.76 | |||||
Non-vested at December 31, 2015 | 0.6 | $ | 9.12 | |||||
As of December 31, 2015, 2014 and 2013, there was $2.9 million, $4.8 million and $4.2 million, respectively, of unrecognized compensation cost related to non-vested stock option compensation arrangements granted under the Prior Plans. This cost is expected to be recognized, on a straight line basis, over a period of approximately two to three years. Stock option incentive compensation expense recorded was $3.9 million, $3.3 million and $1.7 million for the years ended December 31, 2015, 2014 and 2013, respectively.
| Years ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
U.S. income | $ | 260.5 | $ | 355.1 | $ | 259.0 | ||||||
Foreign income | 28.3 | 13.0 | 7.1 | |||||||||
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Total | $ | 288.8 | $ | 368.1 | $ | 266.1 | ||||||
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| Years ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| U.S. income | $ | 755 | $ | 491 | $ | 309 | |||||
| Foreign income | 50 | 36 | 32 | ||||||||
| Total | $ | 805 | $ | 527 | $ | 341 | |||||
| Years ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
Estimated current income taxes: | ||||||||||||
U.S. federal | $ | 3.0 | $ | 1.6 | $ | 0.2 | ||||||
Foreign | 5.4 | 6.3 | 1.9 | |||||||||
U.S. state and local | 2.1 | (0.2 | ) | 0.6 | ||||||||
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Total Current | 10.5 | 7.7 | 2.7 | |||||||||
Deferred income tax expense (credit), net: | ||||||||||||
U.S. federal | 89.7 | 125.6 | 87.6 | |||||||||
Foreign | (0.1 | ) | (0.3 | ) | 0.1 | |||||||
U.S. state and local | 6.4 | 6.5 | 10.3 | |||||||||
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Total Deferred | 96.0 | 131.8 | 98.0 | |||||||||
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Total income tax expense | $ | 106.5 | $ | 139.5 | $ | 100.7 | ||||||
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Cash paid
| Years ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| Estimated current income taxes: | |||||||||||
| U.S. federal | $ | 94 | $ | 61 | $ | 2 | |||||
| Foreign | 9 | 7 | 8 | ||||||||
| U.S. state and local | 11 | 5 | 2 | ||||||||
| Total Current | 114 | 73 | 12 | ||||||||
| Deferred income tax expense (credit), net: | |||||||||||
| U.S. federal | 45 | (44 | ) | 107 | |||||||
| Foreign | — | 1 | — | ||||||||
| U.S. state and local | 7 | (7 | ) | 7 | |||||||
| Total Deferred | 52 | (50 | ) | 114 | |||||||
| Total income tax expense | $ | 166 | $ | 23 | $ | 126 | |||||
is incorporated into the Company’s income tax expense for the year ended December 31, 2018. The Company concluded that no material adjustments were required from the previous reasonable estimate related to the U.S. Tax Cuts and Jobs Act.
| Years ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
Tax at U.S. statutory income tax rate | $ | 101.1 | $ | 128.9 | $ | 93.1 | ||||||
Foreign rate differential | (3.0 | ) | (2.3 | ) | (0.7 | ) | ||||||
Non-deductible expenses | 3.9 | 3.9 | 0.8 | |||||||||
Valuation allowance | (0.8 | ) | 2.6 | 1.0 | ||||||||
State tax expense | 5.4 | 4.0 | 7.3 | |||||||||
Adjustment to deferred tax expense | 1.2 | 2.4 | (0.3 | ) | ||||||||
Other adjustments | (1.3 | ) | (0.0 | ) | (0.5 | ) | ||||||
|
|
|
|
|
| |||||||
Total income tax expense | $ | 106.5 | $ | 139.5 | $ | 100.7 | ||||||
|
|
|
|
|
| |||||||
| Years ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| Tax at U.S. statutory income tax rate | $ | 169 | $ | 185 | $ | 120 | |||||
| State tax expense | 15 | 10 | 6 | ||||||||
| Non-deductible expenses | (9 | ) | 7 | 5 | |||||||
| Foreign rate differential | (4 | ) | (5 | ) | (5 | ) | |||||
| Effect of tax rate changes | (4 | ) | — | — | |||||||
| Tax credits | (3 | ) | (21 | ) | — | ||||||
| Valuation allowance | 2 | 3 | 1 | ||||||||
| Impact related to U.S. Tax Cuts and Jobs Act | — | (155 | ) | — | |||||||
| Other adjustments | — | (1 | ) | (1 | ) | ||||||
| Total income tax expense | $ | 166 | $ | 23 | $ | 126 | |||||
| As of December 31, 2015 | As of December 31, 2014 | |||||||
Deferred tax assets: | ||||||||
Inventories | $ | 5.4 | $ | 5.1 | ||||
Warranty accrual | 26.3 | 26.2 | ||||||
Sales allowances and rebates | 6.8 | 6.7 | ||||||
Deferred revenue | 29.4 | 25.7 | ||||||
Post-retirement | 11.2 | 5.0 | ||||||
Intangibles | 71.8 | 77.3 | ||||||
Other accrued liabilities | 24.1 | 32.8 | ||||||
Unrealized loss on interest rate derivatives | 13.4 | 6.6 | ||||||
Operating loss carryforwards | 48.6 | 107.8 | ||||||
Tax credits | 6.2 | 3.1 | ||||||
Environmental remediation | 5.2 | — | ||||||
Stock based compensation | 7.4 | 6.9 | ||||||
Technology-related investments | 10.2 | 7.5 | ||||||
Other | 13.8 | 10.8 | ||||||
|
|
|
| |||||
Total Deferred tax assets | 279.8 | 321.5 | ||||||
|
|
|
| |||||
Valuation allowances | (4.2 | ) | (5.2 | ) | ||||
|
|
|
| |||||
Deferred tax liabilities: | ||||||||
Property, plant and equipment | (19.0 | ) | (19.6 | ) | ||||
Goodwill | (365.0 | ) | (320.8 | ) | ||||
Trade name | (91.3 | ) | (90.3 | ) | ||||
Other | (3.0 | ) | (2.8 | ) | ||||
|
|
|
| |||||
Total Deferred tax liabilities | (478.3 | ) | (433.5 | ) | ||||
|
|
|
| |||||
Net Deferred tax liability | $ | (202.7 | ) | $ | (117.2 | ) | ||
|
|
|
| |||||
As of December 31, 2015, the Company early adopted the FASB’s authoritative accounting guidance on a retrospective basis to classify all deferred tax assets and liabilities, along with any related valuation allowance, as noncurrent on the balance sheet. Refer to NOTE 2 for more details.
Of the
| As of December 31, 2018 | As of December 31, 2017 | ||||||
| Deferred tax assets: | |||||||
| Intangibles | $ | 29 | $ | 35 | |||
| Deferred revenue | 24 | 25 | |||||
| Other accrued liabilities | 20 | 18 | |||||
| Warranty accrual | 14 | 11 | |||||
| Operating loss carryforwards | 10 | 12 | |||||
| Sales allowances and rebates | 8 | 6 | |||||
| Stock-based compensation | 5 | 6 | |||||
| Technology-related investments | 5 | 4 | |||||
| Inventories | 4 | 5 | |||||
| Capital loss carryforwards | 3 | 3 | |||||
| Environmental remediation | 3 | 3 | |||||
| Unrealized loss on interest rate derivatives | 1 | 1 | |||||
| Tax credits | 1 | — | |||||
| Other | 2 | 4 | |||||
| Total Deferred tax assets | 129 | 133 | |||||
| Valuation allowances | (10 | ) | (9 | ) | |||
| Deferred tax liabilities: | |||||||
| Goodwill | (311 | ) | (287 | ) | |||
| Trade name | (114 | ) | (96 | ) | |||
| Property, plant and equipment | (10 | ) | (7 | ) | |||
| Post-retirement | (9 | ) | (4 | ) | |||
| Other | (2 | ) | (3 | ) | |||
| Total Deferred tax liabilities | (446 | ) | (397 | ) | |||
| Net Deferred tax liability | $ | (327 | ) | $ | (273 | ) | |
2028-2031.
The Company has not recognized any deferred tax liabilities associated with investments and earnings in foreign subsidiaries as they are intended to be permanent in duration. Such amounts may become taxable upon an actual or deemed repatriation in the future; however, at this time, management believes any related unrecognized deferred tax liability is immaterial.
| December 31, 2016 | $ | 2 | |
| Increases in unrecognized tax benefits as a result of current year activity | — | ||
| December 31, 2017 | $ | 2 | |
| Increases in unrecognized tax benefits as a result of current year activity | — | ||
| December 31, 2018 | $ | 2 | |
December 31, 2013 | $ | 2.3 | ||
December 31, 2014 | $ | 2.5 | ||
Increases in unrecognized tax benefits as a result of current year activity | — | |||
|
| |||
December 31, 2015 | $ | 2.5 | ||
|
| |||
For the years ended December 31, 2015, 2014 and 2013, the Company recognized no interest and penalties in the Consolidated Statements of Comprehensive Income. The Company follows a policy of recording any tax related interest or penalties in Income tax expense.
| Before Tax | Tax (Expense) Benefit | After Tax | ||||||||||
Balance at December 31, 2012 | $ | (9.2 | ) | $ | (34.7 | ) | $ | (43.9 | ) | |||
Foreign currency translation | (5.0 | ) | — | (5.0 | ) | |||||||
Pension and OPEB liability adjustment | 46.4 | (17.4 | ) | 29.0 | ||||||||
Available-for-sale securities | (1.9 | ) | 0.8 | (1.1 | ) | |||||||
|
|
|
|
|
| |||||||
Net current period other comprehensive income | $ | 39.5 | $ | (16.6 | ) | $ | 22.9 | |||||
|
|
|
|
|
| |||||||
Balance at December 31, 2013 | $ | 30.3 | $ | (51.3 | ) | $ | (21.0 | ) | ||||
Foreign currency translation | (7.4 | ) | — | (7.4 | ) | |||||||
Pension and OPEB liability adjustment | (14.6 | ) | 5.5 | (9.1 | ) | |||||||
Available-for-sale securities | (3.2 | ) | 1.2 | (2.0 | ) | |||||||
|
|
|
|
|
| |||||||
Net current period other comprehensive loss | $ | (25.2 | ) | $ | 6.7 | $ | (18.5 | ) | ||||
|
|
|
|
|
| |||||||
Balance at December 31, 2014 | $ | 5.1 | $ | (44.6 | ) | $ | (39.5 | ) | ||||
Foreign currency translation | (11.5 | ) | — | (11.5 | ) | |||||||
Pension and OPEB liability adjustment | (3.4 | ) | 0.4 | (3.0 | ) | |||||||
Available-for-sale securities | (7.6 | ) | 2.8 | (4.8 | ) | |||||||
|
|
|
|
|
| |||||||
Net current period other comprehensive loss | $ | (22.5 | ) | $ | 3.2 | $ | (19.3 | ) | ||||
| Balance at December 31, 2015 | $ | (17.4 | ) | $ | (41.4 | ) | $ | (58.8 | ) | |||
| Before Tax | Tax (Expense) Benefit | After Tax | |||||||||
| Balance at December 31, 2015 | $ | (17 | ) | $ | (42 | ) | $ | (59 | ) | ||
| Foreign currency translation | (6 | ) | — | (6 | ) | ||||||
| Pension and OPEB liability adjustment | 4 | (2 | ) | 2 | |||||||
| Available-for-sale securities | (1 | ) | 1 | — | |||||||
| Net current period other comprehensive loss | $ | (3 | ) | $ | (1 | ) | $ | (4 | ) | ||
| Balance at December 31, 2016 | $ | (20 | ) | $ | (43 | ) | $ | (63 | ) | ||
| Foreign currency translation | 15 | — | 15 | ||||||||
| Pension and OPEB liability adjustment | 34 | (8 | ) | 26 | |||||||
| Available-for-sale securities | 11 | (4 | ) | 7 | |||||||
| Net current period other comprehensive income | $ | 60 | $ | (12 | ) | $ | 48 | ||||
| Balance at December 31, 2017 | $ | 40 | $ | (55 | ) | $ | (15 | ) | |||
| Foreign currency translation | (9 | ) | — | (9 | ) | ||||||
| Pension and OPEB liability adjustment | 1 | — | 1 | ||||||||
| Available-for-sale securities and interest rate swaps | (9 | ) | 2 | (7 | ) | ||||||
| Net current period other comprehensive loss | $ | (17 | ) | $ | 2 | $ | (15 | ) | |||
| Balance at December 31, 2018 | $ | 23 | $ | (53 | ) | $ | (30 | ) | |||
| For the year ended December 31, 2015 | ||||||
| AOCL Components | Amount reclassified from AOCL | Affected line item in the consolidated statements of comprehensive income | ||||
Amortization of defined benefit pension items: | ||||||
Prior service cost | $ | 3.2 | Cost of sales | |||
| 0.2 | Selling, general and administrative | |||||
| 0.1 | Engineering – research and development | |||||
Actuarial loss | 0.1 | Cost of sales | ||||
| 0.0 | Selling, general and administrative | |||||
| 0.0 | Engineering – research and development | |||||
|
| |||||
Total reclassifications, before tax | 3.6 | Income before income taxes | ||||
Income tax expense | (1.3 | ) | Tax expense | |||
|
| |||||
Total reclassifications | $ | 2.3 | Net of tax | |||
|
| |||||
| For the year ended December 31, 2016 | |||||
| AOCL Components | Amount reclassified from AOCL | Affected line item in the consolidated statements of comprehensive income | |||
| Amortization of OPEB items: | |||||
| Prior service credit | $ | 3 | Cost of sales | ||
| Actuarial gain | 1 | Cost of sales | |||
| Total reclassifications, before tax | 4 | Income before income taxes | |||
| Income tax expense | (2 | ) | Income tax expense | ||
| Total reclassifications | $ | 2 | Net of tax | ||
| For the year ended December 31, 2017 | |||||
| AOCL Components | Amount reclassified from AOCL | Affected line item in the consolidated statements of comprehensive income | |||
| Amortization of OPEB items: | |||||
| Prior service credit | $ | 3 | Cost of sales | ||
| 1 | Selling, general and administrative | ||||
| Total reclassifications, before tax | 4 | Income before income taxes | |||
| Income tax expense | (1 | ) | Income tax expense | ||
| Total reclassifications | $ | 3 | Net of tax | ||
| For the year ended December 31, 2018 | |||||
| AOCL Components | Amount reclassified from AOCL | Affected line item in the consolidated statements of comprehensive income | |||
| Amortization of OPEB items: | |||||
| Prior service credit | $ | 13 | Other income (expense), net | ||
| Total reclassifications, before tax | 13 | Income before income taxes | |||
| Income tax expense | (3 | ) | Income tax expense | ||
| Total reclassifications | $ | 10 | Net of tax | ||
2016 2017 2018 2019 2020 Thereafter Total $12 million.NOTE 17. COMMITMENTS AND CONTINGENCIESOperating LeasesThe Company leases certain facilities and equipment under various operating leases. Rent expense under the non-cancelable operating leases was $5.1$5 million $5.4 million, and $5.7 million for each of the years ended December 31, 2015, 20142018, 2017 and 2013, respectively.2016. Certain leases contain renewal options.As of December 31, 2015,2018, future payments under non-cancelable operating leases are as follows over each of the next five years and thereafter (dollars in millions): $ 4.7 3.3 2.1 1.4 1.3 2.0 $ 14.8 2019 $ 4 2020 3 2021 2 2022 1 2023 1 Thereafter — Total $ 11 Environmental MattersUnder the asset purchaseThe Company has an agreement with Old GM, Old GM agreed to indemnify the Company against certain environmental liabilities, including pre-acquisition offsite waste disposal from the Company’s facilities, former facilities associated with the business and any properties or facilities relating to the business that Old GM retained. While the Company is responsible for environmental liabilities that arise due to post-acquisition activities, GM, as successor to Old GM’s obligations, has continuedEnvironmental Protection Agency to perform remedial activities at the Company’s Indianapolis, Indiana manufacturing facilities relatingrelated to historical soil and groundwater contamination at the facilities. GM’s activities are referred to as the “Corrective Action” plan, pursuant to the asset purchase agreement, whereby it retained responsibility for completing all obligations covered by a voluntary Corrective Action Agreement that Old GM entered with the U.S. Environmental Protection Agency (“EPA”). By operationcontamination. As of the asset purchase agreement, once the EPA issues a final decision on GM’s activities under the Corrective Action Plan,December 31, 2018, the Company assumes all responsibility for operating, monitoring and maintaining the ongoing corrective action and GM’s indemnification obligations cease.During the third quarter of 2015, the EPA determined that GM’s remedial activities were complete and that the migration of any contamination is under control, and publishedhad a public notice seeking comment on a draft final decision, the issuance of which would resultliability recorded in the Company assuming responsibility for operating, monitoring and maintaining the ongoing Corrective Action activities through an agreed orderamount of consent (“AOC”) with the EPA.As a result of the publishing of the draft final decision, the Company has determined that appropriate liabilities for the operating, monitoring and maintaining the ongoing remedial activities can be reasonably estimated. As of September 30, 2015, the Company recorded approximately $14.0 million for the estimated undiscounted liabilities to be paid out over the next 30 years, including approximately $0.5 million recorded to Other current liabilities and approximately $13.5 million to Other non-current liabilities. The recorded liabilities will be adjusted periodically as remediation efforts progress or as additional technical, regulatory or legal information becomes available. The Company expects to fund the expenditures for these activities from operating cash flow.On January 27, 2016, the EPA issued a final decision. With the AOC, financial assurance is required by the EPA to complete the operation, monitoring and maintenance activities in the event the Company fails to do so. This financial assurance can take a variety of forms including, but not limited to meeting certain financial metrics, providing a letter of credit, or securing a bond or an insurance policy. The amount and method by which the Company will be required to provide financial assurance is expected to be determined in 2016.Claims, Disputes, and LitigationThe Company is party to various legal actions and administrative proceedings and subject to various claims arising in the ordinary course of business. These proceedings primarily involve commercial claims, product liability claims, personal injury claims and workers’ compensation claims. The Company believes that the ultimate liability, if any, in excess of amounts already provided for in the consolidated financial statements or covered by insurance on the disposition of these matters will not have a material adverse effect on the financial position, results of operations or cash flows of the Company.NOTE 18.CONCENTRATION OF RISK
Three2023.
| Years ended December 31, | ||||||||||||
| % of net sales | 2015 | 2014 | 2013 | |||||||||
Daimler AG | 21 | % | 17 | % | 17 | % | ||||||
Navistar, Inc. | 10 | % | 10 | % | 10 | % | ||||||
Volvo Group | 10 | % | 8 | % | 6 | % | ||||||
| Years ended December 31, | ||||||||
| % of net sales | 2018 | 2017 | 2016 | |||||
| Daimler AG | 18 | % | 20 | % | 21 | % | ||
| PACCAR Inc. | 10 | % | 9 | % | 9 | % | ||
Two2016.
| % of accounts receivable | As of December 31, 2015 | As of December 31, 2014 | ||||||
Daimler AG | 24 | % | 15 | % | ||||
Navistar, Inc. | 8 | % | 12 | % | ||||
| % of accounts receivable | As of December 31, 2018 | As of December 31, 2017 | |||
| Daimler AG | 18 | % | 7 | % | |
| Volvo Group | 11 | % | 11 | % | |
| Kirby Corporation | 9 | % | 15 | % | |
One2017.
| Years ended December 31, | ||||||||||||
| % of material purchased | 2015 | 2014 | 2013 | |||||||||
Linamar Corporation Inc. | 8 | % | 10 | % | 13 | % | ||||||
No other supplier accounted for more than 10% of materials purchased during the years ended December 31, 2015, 20142018, 2017 or 2013.
2016.
Senior Notes Held by Executive Officers
In May 2015, the Company redeemed $100,000 and $450,000 of ATI’s 7.125% Senior Notes held by Lawrence E. Dewey, Chairman and Chief Executive Officer, and David S. Graziosi, President, Chief Financial Officer and Treasurer, respectively, at the specified redemption price in the governing indenture equal to 103.563% of the principal amount plus any accrued and unpaid interest. Refer to
19. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
During 2014,ValueAct Capital Master Fund
retired.
four quarters’ EPS may not equal full-year EPS.
| Years ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
Net income | $ | 182.3 | $ | 228.6 | $ | 165.4 | ||||||
|
|
|
|
|
| |||||||
Weighted average shares of common stock outstanding | 175.9 | 179.8 | 184.5 | |||||||||
Dilutive effect stock-based awards | 1.3 | 2.5 | 3.4 | |||||||||
|
|
|
|
|
| |||||||
Diluted weighted average shares of common stock outstanding | 177.2 | 182.3 | 187.9 | |||||||||
|
|
|
|
|
| |||||||
Basic earnings per share attributable to common stockholders | $ | 1.03 | $ | 1.27 | $ | 0.90 | ||||||
|
|
|
|
|
| |||||||
Diluted earnings per share attributable to common stockholders | $ | 1.03 | $ | 1.25 | $ | 0.88 | ||||||
|
|
|
|
|
| |||||||
| Years ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| Net income | $ | 639 | $ | 504 | $ | 215 | |||||
| Weighted average shares of common stock outstanding | 133 | 149 | 168 | ||||||||
| Dilutive effect stock-based awards | 1 | 1 | 1 | ||||||||
| Diluted weighted average shares of common stock outstanding | 134 | 150 | 169 | ||||||||
| Basic earnings per share attributable to common stockholders | $ | 4.81 | $ | 3.38 | $ | 1.28 | |||||
| Diluted earnings per share attributable to common stockholders | $ | 4.78 | $ | 3.36 | $ | 1.27 | |||||
| Years ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
United States | $ | 1,459.8 | $ | 1,578.0 | $ | 1,354.3 | ||||||
Canada | 95.5 | 85.1 | 88.6 | |||||||||
China | 63.9 | 128.7 | 141.0 | |||||||||
Japan | 48.7 | 45.8 | 37.0 | |||||||||
United Kingdom | 44.0 | 36.8 | 42.5 | |||||||||
Germany | 39.6 | 38.1 | 53.9 | |||||||||
Other | 234.3 | 214.9 | 209.5 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 1,985.8 | $ | 2,127.4 | $ | 1,926.8 | ||||||
|
|
|
|
|
| |||||||
| Years ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| United States | $ | 1,922 | $ | 1,614 | $ | 1,277 | |||||
| China | 127 | 62 | 50 | ||||||||
| Canada | 104 | 125 | 115 | ||||||||
| Japan | 101 | 75 | 70 | ||||||||
| Mexico | 57 | 39 | 41 | ||||||||
| Germany | 55 | 45 | 53 | ||||||||
| United Kingdom | 55 | 36 | 28 | ||||||||
| France | 40 | 21 | 16 | ||||||||
| Sweden | 30 | 13 | 8 | ||||||||
| Netherlands | 25 | 30 | 27 | ||||||||
| Other | 197 | 202 | 155 | ||||||||
| Total | $ | 2,713 | $ | 2,262 | $ | 1,840 | |||||
| Years ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
United States | $ | 419.2 | $ | 442.6 | $ | 478.7 | ||||||
India | 43.2 | 51.5 | 59.9 | |||||||||
Hungary | 12.5 | 15.1 | 18.1 | |||||||||
Others | 4.8 | 5.4 | 6.7 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 479.7 | $ | 514.6 | $ | 563.4 | ||||||
|
|
|
|
|
| |||||||
| Years ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| United States | $ | 427 | $ | 400 | $ | 412 | |||||
| India | 24 | 32 | 36 | ||||||||
| Hungary | 11 | 12 | 11 | ||||||||
| Other | 4 | 4 | 5 | ||||||||
| Total | $ | 466 | $ | 448 | $ | 464 | |||||
| Quarters ended, | ||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | |||||||||||||
2015 | ||||||||||||||||
Net sales | $ | 503.6 | $ | 511.0 | $ | 493.0 | $ | 478.2 | ||||||||
Gross profit | 239.2 | 236.3 | 236.1 | 222.2 | ||||||||||||
Operating income | 142.3 | 137.5 | 111.9 | 37.2 | ||||||||||||
Income before income taxes | 108.2 | 87.1 | 73.8 | 19.7 | ||||||||||||
Net income | 68.4 | 54.4 | 46.5 | 13.0 | ||||||||||||
Basic earnings per share | $ | 0.38 | $ | 0.30 | $ | 0.27 | $ | 0.08 | ||||||||
Diluted earnings per share | $ | 0.38 | $ | 0.30 | $ | 0.27 | $ | 0.08 | ||||||||
2014 | ||||||||||||||||
Net sales | $ | 493.6 | $ | 536.1 | $ | 553.3 | $ | 544.4 | ||||||||
Gross profit | 222.5 | 238.5 | 259.3 | 255.6 | ||||||||||||
Operating income | 114.8 | 132.2 | 147.3 | 117.8 | ||||||||||||
Income before income taxes | 79.3 | 94.7 | 116.3 | 77.8 | ||||||||||||
Net income | 52.1 | 57.2 | 68.8 | 50.5 | ||||||||||||
Basic earnings per share | $ | 0.29 | $ | 0.32 | $ | 0.38 | $ | 0.28 | ||||||||
Diluted earnings per share | $ | 0.28 | $ | 0.31 | $ | 0.38 | $ | 0.28 | ||||||||
The Company’s 2015 quarterly results were affected by certain items. For the quarter ended December 31, 2015, the Company recorded $80.0 million of trade name impairment charge as a result of lower forecasted net sales for certain of the Company’s end markets.
| Quarters ended, | |||||||||||||||
| March 31 | June 30 | September 30 | December 31 | ||||||||||||
| 2018 | |||||||||||||||
| Net sales | $ | 663 | $ | 711 | $ | 692 | $ | 647 | |||||||
| Gross profit | 342 | 374 | 368 | 338 | |||||||||||
| Operating income | 222 | 248 | 246 | 207 | |||||||||||
| Income before income taxes | 191 | 222 | 218 | 174 | |||||||||||
| Net income | 151 | 174 | 167 | 147 | |||||||||||
| Basic earnings per share | $ | 1.09 | $ | 1.30 | $ | 1.28 | $ | 1.15 | |||||||
| Diluted earnings per share | $ | 1.08 | $ | 1.29 | $ | 1.27 | $ | 1.14 | |||||||
| 2017 | |||||||||||||||
| Net sales | $ | 499 | $ | 580 | $ | 595 | $ | 588 | |||||||
| Gross profit | 251 | 290 | 302 | 288 | |||||||||||
| Operating income | 149 | 177 | 198 | 128 | |||||||||||
| Income before income taxes | 127 | 146 | 170 | 84 | |||||||||||
| Net income | 83 | 95 | 111 | 215 | |||||||||||
| Basic earnings per share | $ | 0.53 | $ | 0.63 | $ | 0.75 | $ | 1.52 | |||||||
| Diluted earnings per share | $ | 0.52 | $ | 0.63 | $ | 0.75 | $ | 1.51 | |||||||
| December 31, 2015 | December 31, 2014 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash | $ | — | $ | — | ||||
|
|
|
| |||||
Total Current Assets | — | — | ||||||
Investments in and advances to subsidiaries | 1,188.6 | 1,397.8 | ||||||
|
|
|
| |||||
TOTAL ASSETS | $ | 1,188.6 | $ | 1,397.8 | ||||
|
|
|
| |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | — | $ | — | ||||
|
|
|
| |||||
Total Current Liabilities | — | — | ||||||
Capital stock | 1.7 | 1.8 | ||||||
Additional paid-in-capital | 1,690.2 | 1,651.0 | ||||||
Treasury stock | — | — | ||||||
Accumulated deficit | (444.5 | ) | (215.5 | ) | ||||
Accumulated other comprehensive loss, net of tax | (58.8 | ) | (39.5 | ) | ||||
|
|
|
| |||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 1,188.6 | $ | 1,397.8 | ||||
|
| �� |
| |||||
| December 31, 2018 | December 31, 2017 | ||||||
| ASSETS | |||||||
| Current Assets: | |||||||
| Cash | $ | — | $ | — | |||
| Total Current Assets | — | — | |||||
| Investments in and advances to subsidiaries | 659 | 689 | |||||
| TOTAL ASSETS | $ | 659 | $ | 689 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
| Current Liabilities: | |||||||
| Accounts payable | $ | — | $ | — | |||
| Total Current Liabilities | — | — | |||||
| Capital stock | 1 | 1 | |||||
| Paid in capital | 1,788 | 1,758 | |||||
| Treasury stock | — | — | |||||
| Accumulated deficit | (1,100 | ) | (1,055 | ) | |||
| Accumulated other comprehensive loss, net of tax | (30 | ) | (15 | ) | |||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 659 | $ | 689 | |||
| Years ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
Net sales | $ | — | $ | — | $ | — | ||||||
General and administrative fees | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total operating income | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Other income: | ||||||||||||
Equity earnings of consolidated subsidiary | 182.3 | 228.6 | 165.4 | |||||||||
|
|
|
|
|
| |||||||
Income before income taxes | 182.3 | 228.6 | 165.4 | |||||||||
Income tax expense | — | — | — | |||||||||
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Net income | $ | 182.3 | $ | 228.6 | $ | 165.4 | ||||||
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Comprehensive income | $ | 182.3 | $ | 228.6 | $ | 165.4 | ||||||
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| Years ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| Net sales | $ | — | $ | — | $ | — | |||||
| General and administrative fees | — | — | — | ||||||||
| Total operating income | — | — | — | ||||||||
| Other income: | |||||||||||
| Equity earnings of consolidated subsidiary | 639 | 504 | 215 | ||||||||
| Income before income taxes | 639 | 504 | 215 | ||||||||
| Income tax expense | — | — | — | ||||||||
| Net income | $ | 639 | $ | 504 | $ | 215 | |||||
| Comprehensive income | $ | 624 | $ | 552 | $ | 211 | |||||
| Years ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net income | $ | 182.3 | $ | 228.6 | $ | 165.4 | ||||||
Deduct items included in net income not providing cash: | ||||||||||||
Equity in earnings in consolidated subsidiary | (182.3 | ) | (228.6 | ) | (165.4 | ) | ||||||
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Net cash provided by operating activities | — | — | — | |||||||||
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CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Investments in subsidiaries | (22.9 | ) | (59.6 | ) | (46.3 | ) | ||||||
Dividends | 105.6 | 91.6 | 77.1 | |||||||||
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Net cash provided by investing activities | 82.7 | 32.0 | 30.8 | |||||||||
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CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Capital contributions | 22.9 | 59.6 | 46.3 | |||||||||
Dividends | (105.6 | ) | (91.6 | ) | (77.1 | ) | ||||||
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Net cash used in financing activities | (82.7 | ) | (32.0 | ) | (30.8 | ) | ||||||
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Net increase (decrease) during period | — | — | — | |||||||||
Cash and cash equivalents at beginning of period | — | — | — | |||||||||
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Cash and cash equivalents at end of period | $ | — | $ | — | $ | — | ||||||
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| Years ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net income | $ | 639 | $ | 504 | $ | 215 | |||||
| Deduct items included in net income not providing cash: | |||||||||||
| Equity in earnings in consolidated subsidiary | (639 | ) | (504 | ) | (215 | ) | |||||
| Net cash provided by operating activities | — | — | — | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Investments in subsidiaries | (22 | ) | (19 | ) | (24 | ) | |||||
| Dividends | 80 | 89 | 100 | ||||||||
| Net cash provided by investing activities | 58 | 70 | 76 | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Capital contributions | 22 | 19 | 24 | ||||||||
| Dividends | (80 | ) | (89 | ) | (100 | ) | |||||
| Net cash used in financing activities | (58 | ) | (70 | ) | (76 | ) | |||||
| Net increase (decrease) during period | — | — | — | ||||||||
| Cash and cash equivalents at beginning of period | — | — | — | ||||||||
| Cash and cash equivalents at end of period | $ | — | $ | — | $ | — | |||||
ITEM 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresOur management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of December 31, 2015.2018. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.Based on the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 2015,2018, the end of the period covered by this Annual Report on Form 10-K, were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange CommissionSEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.Management’s Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2015.2018. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission inInternal Control—Integrated Framework (2013). Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2015.2018. PricewaterhouseCoopers LLP, our independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2015.2018. Their report is included in Part II, Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.Changes in Internal Control over Financial ReportingThere were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 20152018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. Other InformationNone.PART III.
ITEM 10. Directors, Executive Officers and Corporate GovernanceThe information required by this Item concerning our executive officers, directors and nominees for director, Audit Committee members and financial expert(s) and disclosure of delinquent filers under Section 16(a) of the Exchange Act is incorporated herein by reference from our definitive Proxy Statement for our 20162019 annual meeting of stockholders which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year.Code of Business ConductWe have adopted the Allison Code of Business Conduct that applies to all of our directors and officers and other employees, including our principal executive officer, principal financial officer and principal accounting officer. This code is publicly available through the Investor Relations section of our website at www.allisontransmission.com. We will post on the Investor Relations section of our website any amendment to the codeAllison Code of business conduct,Business Conduct, or any grant of a waiver from a provision of the codeAllison Code of business conduct.Business Conduct.
ITEM 11. Executive CompensationThe information required by this Item concerning remuneration of our executive officers and directors, material transactions involving such executive officers and directors and Compensation Committee interlocks, as well as the Compensation Committee Report and pay ratio disclosure, are incorporated herein by reference to our definitive Proxy Statement for our 20162019 annual meeting of stockholders which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this Item concerning the stock ownership of management, five percent beneficial owners and securities authorized for issuance under equity compensation plans is incorporated herein by reference to our definitive Proxy Statement for our 20162019 annual meeting of stockholders which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year.
ITEM 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required by this Item concerning certain relationships and related person transactions, and director independence is incorporated herein by reference to our definitive Proxy Statement for our 20162019 annual meeting of stockholders which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year.
ITEM 14. Principal Accounting Fees and ServicesThe information required by this Item concerning the fees and services of our independent registered public accounting firm and our Audit Committee actions with respect thereto is incorporated herein by reference to our definitive Proxy Statement for our 20162019 annual meeting of stockholders which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year.PART IV.
/s/ CAPACITY Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) C. Everitt Director Director Director Director DirectorITEM 15. Exhibits, Financial Statement Schedules(a)(1) Financial Statements.The response to this item is included in Part II, Item 8 of this Annual Report on Form 10-K.(a)(2) Financial Statement Schedules.Schedule I is– Parent Company only Balance Sheets as of the years ended December 31, 2018 and 2017, Schedule I – Parent Company only Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016, Schedule I – Parent Company only Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016 and Schedule I – Parent Company only Footnote are included in Part II, Item 8 of this Annual Report on Form 10-K. All other schedules have been omitted because they are not required or because the information required is included in the consolidated financial statements and notes thereto.(a)(3) ExhibitsSee the response to Item 15(b) below.(b) ExhibitsThe following exhibits are filed as part of, or are incorporated by reference into, this Annual Report on Form 10-K:ExhibitNo. ExhibitNo.DESCRIPTION OF EXHIBIT 3.1 2012 (File No. 001-35456)) 3.2 Third3.3 May 18, 2016) 4.1 17, 2011 (File No. 333-172932)) 4.2 Indenture governing the 7.125% Senior Notes due 2019, among Allison Transmission, Inc. as Issuer, the Guarantors named therein, and Wells Fargo Bank, National Association, as trustee, dated May 6, 2011 (incorporated by reference to Exhibit 4.6 to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 filed May 16, 2011) 4.3Form of 7.125% Senior Note due 2019 (included in Exhibit 4.2) 4.4First Supplemental September 23, 2016) 4.3 10.1 September 23, 2016) 10.2 First Amendment to the Credit 10.3Guarantee And Collateral Agreement made by Allison Transmission Holdings, Inc. Allison Transmission, Inc. as Borrower, and the Subsidiary Guarantors party heretothereto in favor of Citicorp North America, Inc., as Administrative Agent, dated as of August 7, 2007 (incorporated by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1 filed March 18, 2011)2011 (File No. 333-172932)) 10.410.3 2011 (File No. 333-172932)) 10.510.4 2011 (File No. 333-172932)) 10.6*10.5 Form of Allison Transmission Holdings, Inc. Indemnification Agreement (incorporated by reference to Exhibit 10.9 to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 filed May 16, 2011) 10.7*Allison Transmission Holdings, Inc. 2011 Equity Incentive Award Plan (incorporated by reference to Exhibit 10.10 to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 filed June 16, 2011) 10.8*Form of 2011 Equity Incentive Award Plan Restricted Stock Agreement (incorporated by reference to Exhibit 10.11 to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 filed June 16, 2011) 10.9*Form of 2011 Equity Incentive Award Plan Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.12 to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 filed June 16, 2011) 10.10*Form of 2011 Equity Incentive Award Plan Stock Option Agreement (incorporated by reference to Exhibit 10.13 to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 filed June 16, 2011) 10.11*Equity Incentive Plan of Allison Transmission Holdings, Inc. (incorporated by reference to Exhibit 10.14 to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 filed May 16, 2011) 10.12*Form of Employee Stock Option Agreement under Equity Incentive Plan of Allison Transmission Holdings, Inc. (incorporated by reference to Exhibit 10.15 to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 filed May 16, 2011) 10.13*Form of Independent Director Stock Option Agreement under Equity Incentive Plan of Allison Transmission Holdings, Inc. (incorporated by reference to Exhibit 10.16 to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 filed May 16, 2011) 10.14Second Amendment to the Credit Agreement among Allison Transmission Holdings, Inc., Allison Transmission, Inc., as Borrower, the several banks and other financial institutions or entities from time to time parties thereto as Lenders, Citicorp North America, Inc., as Administrative Agent and Collateral Agent, Lehman Brothers Commercial Bank and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Syndication Agents, Sumitomo Mitsui Banking Corporation, as Documentation Agent and Co-Arranger, and Citigroup Global Markets Inc., Lehman Brothers Inc., and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Joint Lead Arrangers and Joint Bookrunners, dated as of May 13, 2011 (incorporated by reference to Exhibit 10.17 to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 filed June 16, 2011) 10.15Third Amendment to the Credit Agreement among Allison Transmission Holdings, Inc., Allison Transmission, Inc., as Borrower, the several banks and other financial institutions or entities from time to time parties thereto as Lenders, Citicorp North America, Inc., as Administrative Agent and Collateral Agent and the other agents and arrangers party thereto, dated as of March 9, 2012 (incorporated by reference to Exhibit 10.19 to Amendment No. 8 to the Registrant’s Registration Statement on Form S-1 filed March 12, 2012) 10.16*Incentive Plan of Allison Transmission Holdings, Inc. (incorporated by reference to Exhibit 10.20 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 filed on July 31, 2012) 10.17*Deferred Compensation Plan of Allison Transmission Inc. (incorporated by reference to Exhibit 10.21 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 filed on July 31, 2012) 10.18Amendment No. 4 to the Credit Agreement, dated as of August 23, 2012, among Allison Transmission Holdings, Inc., Allison Transmission, Inc., as Borrower, the several banks and other financial institutions or entities from time to time parties thereto as Lenders, Citicorp North America, Inc., as Administrative Agent and the other agents and arrangers party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed August 23, 2012) 10.19Amendment No. 5 to the Credit Agreement, dated as of October 4, 2012, among Allison Transmission Holdings, Inc., Allison Transmission, Inc., as Borrower, the several banks and other financial institutions or entities from time to time parties thereto as Lenders, Citicorp North America, Inc., as Administrative Agent and the other agents and arrangers party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed October 4, 2012) 10.20*Non-Employee Director Deferred Compensation Plan of Allison Transmission Holdings, Inc. (incorporated by reference to Exhibit 10.23 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 filed on February 28, 2013) 10.21*Form Amendment to Stock Option Agreement under Equity Incentive Plan of Allison Transmission Holdings, Inc. (incorporated by reference to Exhibit 10.24 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 filed on February 28, 2013) 10.22Amendment No. 6 to the Credit Agreement, dated as of February 6, 2013, among Allison Transmission Holdings, Inc., Allison Transmission, Inc., as Borrower, the several banks and other financial institutions or entities from time to time parties thereto as Lenders, Citicorp North America, Inc., as Administrative Agent and the other agents and arrangers party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed February 6, 2013) 10.23Amendment No. 7 to the Credit Agreement, dated as of February 6, 2013 among Allison Transmission Holdings, Inc., Allison Transmission, Inc., as Borrower, the several banks and other financial institutions or entities from time to time parties thereto as Lenders, Citicorp North America, Inc., as Administrative Agent and the other agents and arrangers party thereto (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed February 6, 2013) 10.24*Form Amendment to Stock Option Agreement under the Allison Transmission Holdings, Inc. 2011 Equity Incentive Award Plan and Equity Incentive Plan of Allison Transmission Holdings, Inc.(incorporated by reference to Exhibit 10.27 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 filed on July 30, 2013) 10.25*Form of 2011 Equity Incentive Award Plan Stock Option Agreement (incorporated by reference to Exhibit 10.29 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 filed on October 29, 2013) 10.26Amendment No. 8 to the Credit Agreement, dated as of August 26, 2013, among Allison Transmission Holdings, Inc., Allison Transmission, Inc., as Borrower, the several banks and other financial institutions or entities from time to time parties thereto as Lenders, Citicorp North America, Inc., as Administrative Agent and the other agents and arrangers party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed August 26, 2013) 10.27Amendment No. 9 to the Credit Agreement, dated as of December 31, 2013, among Allison Transmission Holdings, Inc., Allison Transmission, Inc., as Borrower, the several banks and other financial institutions or entities from time to time parties thereto as Lenders, Citicorp North America, Inc., as Administrative Agent and the other agents and arrangers party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed December 31, 2013) 10.28*Form of Change in Control Severance Agreement (incorporated by reference to Exhibit 10.34 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013 filed on February 24, 2014) 10.29 10.30 10.6 March 24, 2017) 10.31*10.7 Employment 10.32*Employment Agreement, between Allison Transmission, Inc.Amended and David S. Graziosi, dated as of April 15, 2014 (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed April 15, 2014) 10.33*Form of 2011 Equity Incentive Award Plan Restricted Stock Unit Agreement for Non-Employee Directors for 2014 Compensation (incorporated by reference to Exhibit 10.40 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed July 25, 2014) 10.34Amendment No. 11 to theRestated Credit Agreement, dated as of April 7, 2015,September 23, 2016, among Allison Transmission Holdings, Inc., Allison Transmission, Inc., as Borrower, the several banks and other financial institutions or entities from time to time parties thereto as Lenders,lenders and Citicorp North America, Inc., as Administrative Agent and the other agents and arrangers parties thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 7, 2015)September 26, 2017)10.8 10.9* 10.10* 10.11* 10.12* 10.13* 10.14* 10.15* 10.16* 10.17* 10.35* 10.18* 10.19* 10.20* 10.21* 10.22* 10.23* 10.24* 10.25* 10.36*10.26* Separation10.27* 10.28* December 21, 2016) 10.3710.29* Amendment No. 12 to the CreditMarch 23, 2018) 10.38* Separation Agreement between the Company and Michael G. Headly, dated December 17, 2015 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on December 18, 2015) 10.39*Allison Transmission Holdings, Inc. 2015 Equity Incentive Award Plan (incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed April 2, 2015) 10.40*Allison Transmission Holdings, Inc. 2016 Incentive Plan (incorporated by reference to Appendix B to the Registrant’s Definitive Proxy Statement on Schedule 14A filed April 2, 2015) 10.41*Form of 2015 Equity Incentive Award Plan Restricted Stock Agreement (filed herewith) 10.42*Form of 2015 Equity Incentive Award Plan Restricted Stock Unit Agreement (filed herewith) 10.43*Form of 2015 Equity Incentive Award Plan Stock Option Agreement (filed herewith) 10.44*Second Amended and Restated Non-Employee Directors Compensation Policy (filed herewith)14.1 (filed herewith) 21.1 23.1 31.1 31.2 32.1 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document * Indicates a management contract or compensatory plan or arrangement ITEM 16. Form 10-K SummaryIntentionally left blank.SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Allison Transmission Holdings, Inc. (Registrant) Date: February 19, 201626, 2019 By: Lawrence E. Dewey Lawrence E. DeweyDavid S. Graziosi Chairman of the BoardPresident and Chief Executive Officer (Principal Executive Officer)Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.SIGNATURES CAPACITYSIGNATURES DATE /s/ Lawrence E. DeweyLawrence E. Dewey Chairman of the Board/s/ David S. GraziosiDavid S. GraziosiDirector, President and Chief Executive Officer (Principal Executive Officer) February 26, 2019 February 19, 2016/s/ David S. GraziosiDavid S. GraziosiG. Frederick Bohley February 26, 2019 February 19, 2016/s/ Lawrence E. DeweyLawrence E. DeweyChairman of the Board February 26, 2019 /s/ Judy AltmaierJudy AltmaierDirector February 26, 2019 /s/ Stan A. AskrenStan A. AskrenDirector February 26, 2019 /s/ David DenisonDavid DenisonC. Everitt February 26, 2019 February 19, 2016/s/ David EverittDavid EverittDirectorFebruary 19, 2016/s/ Alvaro Garcia-TunonAlvaro Garcia-Tunon February 26, 2019 February 19, 2016/s/ Gregory S. LedfordGregory S. LedfordWilliam R. Harker February 26, 2019 February 19, 2016/s/ Carolann I. HaznedarCarolann I. HaznedarDirector February 26, 2019 /s/ Richard P. LavinRichard P. LavinDirector February 26, 2019 /s/ Thomas W. RabautThomas W. Rabaut February 26, 2019 February 19, 2016/s/ Francis RabornFrancis RabornDirectorFebruary 19, 2016/s/ Richard V. ReynoldsRichard V. Reynolds February 19, 2016/s/ Gregory P. SpivyGregory P. SpivyDirectorFebruary 19, 201626, 201994105