UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended SeptemberJune 30, 20172018

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission FileNo. 001-35456

 

 

ALLISON TRANSMISSION HOLDINGS, INC.

(Exact Name of Registrant as Specified In Its Charter)

 

LOGO

 

Delaware 26-0414014
(State of Incorporation) 

(I.R.S. Employer

Identification Number)

One Allison Way

Indianapolis, IN

 46222
(Address of Principal Executive Offices) (Zip Code)

(317)242-5000

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” inRule 12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer 
Non-accelerated filer ☐  (Do not check if a smaller reporting company)  Smaller reporting company 
   Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).     Yes  ☐    No  ☒

As of October 17, 2017,July 16, 2018, there were 141,760,746130,467,369 shares of Common Stock outstanding.

 

 

 


INDEX

 

     

Page

 
 PART I. FINANCIAL INFORMATION  
Item 1. Financial Statements   2-183-5 
 Condensed Consolidated Balance Sheets2
Condensed Consolidated Statements of Comprehensive Income   3 
 Condensed Consolidated Statements of Cash FlowsComprehensive Income   4 
 Notes to Condensed Consolidated Financial Statements of Cash Flows   5-185 
Item 2. Notes to Condensed Consolidated Financial Statements6-20
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations   19-2921-31 
Item 3. Quantitative and Qualitative Disclosures About Market Risk30-31
Item 4.Controls and Procedures   32 
PART II. OTHER INFORMATION
Item 1.4. Legal ProceedingsControls and Procedures   33 
Item 1A. Risk FactorsPART II. OTHER INFORMATION  33
Item 2.1. Unregistered Sales of Equity Securities and Use of Proceeds33
Item 6.ExhibitsLegal Proceedings   34 
Item 1A. SignaturesRisk Factors34
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds34
Item 6.Exhibits   35 
Signatures36

1


 

PART I. FINANCIAL INFORMATION

 

 

 

ITEM 1.Financial Statements

Allison Transmission Holdings, Inc.

Condensed Consolidated Balance Sheets

(unaudited, dollars in millions, except per share data)

 

  September 30,
2017
 December 31,
2016
   June 30,
2018
 December 31,
2017
 

ASSETS

      

Current Assets

      

Cash and cash equivalents

  $210  $205   $96  $199 

Accounts receivable

   271  197 

Accounts receivable – net of allowance for doubtful accounts of $1 and $0, respectively

   328  221 

Inventories

   156  126    170  154 

Income taxes receivable

   15  33 

Other current assets

   28  20    24  25 
  

 

  

 

   

 

  

 

 

Total Current Assets

   665  548    633  632 

Property, plant and equipment, net

   456  464    442  448 

Intangible assets, net

   1,175  1,242    1,109  1,153 

Goodwill

   1,941  1,941    1,941  1,941 

Othernon-current assets

   24  24    46  31 
  

 

  

 

   

 

  

 

 

TOTAL ASSETS

  $4,261  $4,219   $4,171  $4,205 
  

 

  

 

   

 

  

 

 

LIABILITIES

      

Current Liabilities

      

Accounts payable

  $184  $128   $210  $159 

Product warranty liability

   22  25    28  22 

Current portion of long-term debt

   12  12    —    12 

Deferred revenue

   33  27    38  41 

Other current liabilities

   193  150    166  183 
  

 

  

 

   

 

  

 

 

Total Current Liabilities

   444  342    442  417 

Product warranty liability

   27  38    37  33 

Deferred revenue

   75  66    87  75 

Long-term debt

   2,536  2,147    2,520  2,534 

Deferred income taxes

   393  312    301  276 

Othernon-current liabilities

   231  233    182  181 
  

 

  

 

   

 

  

 

 

TOTAL LIABILITIES

   3,706  3,138    3,569  3,516 

Commitments and contingencies (see NOTE N)

   

Commitments and contingencies (see NOTE O)

   

STOCKHOLDERS’ EQUITY

      

Common stock, $0.01 par value, 1,880,000,000 shares authorized, 142,735,480 shares issued and outstanding and 163,795,604 shares issued and outstanding, respectively

   1  2 

Common stock, $0.01 par value, 1,880,000,000 shares authorized, 131,226,301 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

   1,750  1,728    1,764  1,758 

Accumulated deficit

   (1,144 (586   (1,136 (1,055

Accumulated other comprehensive loss, net of tax

   (52 (63   (27 (15
  

 

  

 

   

 

  

 

 

TOTAL STOCKHOLDERS’ EQUITY

   555  1,081    602  689 
  

 

  

 

   

 

  

 

 

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY

  $        4,261  $4,219   $        4,171  $4,205 
  

 

  

 

   

 

  

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

2


Allison Transmission Holdings, Inc.

Condensed Consolidated Statements of Comprehensive Income

(unaudited, dollars in millions, except per share data)

 

  Three months ended September 30, Nine months ended September 30,   Three months ended June 30, Six months ended June 30, 
      2017         2016         2017         2016           2018         2017         2018         2017     

Net sales

  $595  $434  $1,674  $1,371   $711  $580  $1,374  $1,079 

Cost of sales

   293  230   831  725    337  290   658  538 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Gross profit

   302  204   843  646    374  290   716  541 

Selling, general and administrative

   78  79   245  240    93  88   185  167 

Engineering — research and development

   26  21   74  64    33  25   61  48 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Operating income

   198  104   524  342    248  177   470  326 

Interest expense, net

   (26 (22  (78 (84   (30 (27  (60 (52

Expenses related to long-term debt refinancing

   —    (12  —    (12

Other (expense) income, net

   (2 1   (3 1 

Other income (expense), net

   4  (4  3  (1
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Income before income taxes

   170  71   443  247    222  146   413  273 

Income tax expense

   (59 (26  (154 (93   (48 (51  (88 (95
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net income

  $111  $45  $289  $154   $174  $95  $325  $178 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Basic earnings per share attributable to common stockholders

  $0.75  $0.27  $1.91  $0.91   $1.30  $0.63  $2.37  $1.16 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Diluted earnings per share attributable to common stockholders

  $0.75  $0.27  $1.90  $0.91   $1.29  $0.63  $2.37  $1.15 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Dividends declared per common share

  $0.15  $0.15  $0.45  $0.45   $0.15  $0.15  $0.30  $0.30 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Comprehensive income, net of tax

  $116  $45  $300  $156   $158  $98  $313  $184 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

3


Allison Transmission Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited, dollars in millions)

 

  Nine months ended
September 30,
   

Six months ended

June 30,

 
  2017 2016   2018 2017 

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net income

  $289  $154   $325  $178 

Adjustments to reconcile net income to net cash provided by operating activities:

      

Deferred income taxes

   72  80 

Amortization of intangible assets

   67  69    44  45 

Depreciation of property, plant and equipment

   60  63    39  39 

Unrealized (gain) loss on derivatives

   (10 10 

Deferred income taxes

   25  44 

Stock-based compensation

   8  6    6  6 

Amortization of deferred financing costs

   4  6    3  3 

Expenses related to long-term debt refinancing

   —    11 

Excess tax benefit from stock-based compensation

   —    (2

Allowance for doubtful accounts

   1   —   

Unrealized gain on derivatives

   —    (6

Other

   5  2    3  3 

Changes in assets and liabilities:

      

Accounts receivable

   (71 (5   (110 (74

Inventories

   (28 (12   (17 (19

Accounts payable

   56  8    46  43 

Other assets and liabilities

   40  26    1  15 
  

 

  

 

   

 

  

 

 

Net cash provided by operating activities

   492  416    366  277 

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Additions of long-lived assets

   (40 (36   (29 (20

Investments in technology-related initiatives

   (3 (1   —    (3
  

 

  

 

   

 

  

 

 

Net cash used for investing activities

   (43 (37   (29 (23

CASH FLOWS FROM FINANCING ACTIVITIES:

      

Repurchases of common stock

   (778 (169   (370 (539

Dividend payments

   (41 (46

Payments on long-term debt

   (28 (6

Proceeds from exercise of stock options

   5  11 

Taxes paid related to net share settlement of equity awards

   (4 (1

Debt financing fees

   (1  —   

Borrowings on revolving credit facility

   415   —      —    330 

Repayments on revolving credit facility

   (415  —      —    (125

Issuance of long-term debt

   400  1,000 

Dividend payments

   (68 (76

Proceeds from exercise of stock options

   14  9 

Payments on long-term debt

   (9 (1,212

Debt financing fees

   (5 (19

Taxes paid related to net share settlement of equity awards

   (1 (1

Excess tax benefit from stock-based compensation

   —    2 
  

 

  

 

   

 

  

 

 

Net cash used for financing activities

   (447 (466   (439 (376

Effect of exchange rate changes on cash

   3   —      (1 2 
  

 

  

 

   

 

  

 

 

Net increase (decrease) in cash and cash equivalents

   5  (87

Net decrease in cash and cash equivalents

   (103 (120

Cash and cash equivalents at beginning of period

   205  252    199  205 
  

 

  

 

   

 

  

 

 

Cash and cash equivalents at end of period

  $210  $165   $96  $85 
  

 

  

 

   

 

  

 

 

Supplemental disclosures:

      

Interest paid

  $71  $64   $57  $55 

Income taxes paid

  $65  $10   $46  $34 

The accompanying notes are an integral part of the condensed consolidated financial statements.

4


Allison Transmission Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

(UNAUDITED)

 

NOTE A.OVERVIEW

Overview

Allison Transmission Holdings, Inc. and its subsidiaries (“Allison” or the “Company”) design and manufacture commercial and defense fully-automaticfully 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 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 2,6002,700 employees and 13 different transmission product lines. Although approximately 78%79% of revenues were generated in North America in 2016,2017, 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 B.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The condensed consolidated financial statements have been prepared in accordance with accounting principles for interim financial information and with the instructions to Form10-Q and Article 10 of RegulationS-X. Accordingly, the condensed consolidated financial statements do not include all information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. The information herein reflects all normal recurring material adjustments, which are, in the opinion of management, necessary for the fair statement of the results for the periods presented. The condensed consolidated financial statements herein consist of all wholly-owned domestic and foreign subsidiaries with all significant intercompany transactions eliminated.

These condensed consolidated financial statements present the financial position, results of comprehensive income and cash flows of the Company. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Form10-K for the year ended December 31, 20162017 as filed with the Securities and Exchange Commission (“SEC”) on February 24, 2017. The presentation of certain prior year disclosures has been modified to conform to the current year presentation, as commencing in the first quarter of 2017, the Company elected to report financial data in whole millions of dollars, except as otherwise noted.15, 2018. The interim period financial results for the three and ninesix month periods presented are not necessarily indicative of results to be expected for any other interim period or for the entire year.

Use of Estimates

The 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. Estimates include, but are not limited to, sales allowances, government price adjustments, fair market values and future cash flows associated with goodwill, indefinite 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 postretirementpost-retirement 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.

5


Impairment of Assets

During the fourth quarter of every year, the Company performs additional reviews of its goodwill, other intangible assets and long-lived assets to determine whether the carrying value of an asset may not be recoverable. The Company has recorded impairments to both its Trade name and long-lived assets in prior periods with the most recent impairments recorded in 2015.

The Company performs its annual goodwill and intangible assets impairment analysis on October 31 of every year. Events or circumstances that could unfavorably impact the key assumptions in the impairment test include lower net sales, the Company’s inability to execute on marketing programs and/or delay in the introduction of new products, lower gross margins or failure to obtain forecasted cost reductions, or a higher discount rate as a result of market conditions.

The carrying value of long-lived assets is evaluated when events or circumstances indicate that there has been 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.

Recently Adopted Accounting Pronouncements

In JanuaryAugust 2017, the Financial Accounting Standards Board (“FASB”) issued authoritative accounting guidance on evaluation of goodwillaccounting for impairment. Thederivative and hedge instruments. Among other things, the guidance modifiesallows the approachinitial hedge effectiveness assessment to assessing impairment from testingbe performed by the implied fair value goodwill to testing the fair valueend of the reporting unit carryingquarter in which the goodwill, which eliminates Step 2hedge is designated, permits a qualitative assessment for certain hedges if an expectation of high effectiveness can be supported throughout the term of the current evaluation guidance. The intent of this amendmenthedge, and removes the requirement to record ineffectiveness on cash flow hedges immediately through earnings when the hedge is to reduce the cost and complexity of evaluating goodwill.highly effective. The guidance was early adopted by the Company effective JulyApril 1, 2017. The adoption of this2018 and applied upon entering into interest rate swaps designated as cash flow hedges during the period ended June 30, 2018. When adopted in an interim period, the guidance did not have an impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued authoritative accounting guidance on share-based payment awardsis required to employees. The guidance involves several aspectsbe reflected as of the accounting for share-based payment transactions, includingbeginning of the income tax consequences, classificationyear of awardsadoption. The Company has not previously designated any derivative instruments as either equity or liabilities,hedging instruments, and classification onthus, the statement of cash flows. The guidance was adopted by the Company effective January 1, 2017. Management recorded an excess tax benefit of $5 million and $16 million to income tax expense and as a component of operating cash flows for the three months and nine months ended September 30, 2017, respectively, and made the accounting policy election to account for forfeitures as they occur.

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 was adopted by the Company effective January 1, 2017. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements

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 will be effective forwas adopted by the Company in fiscal yeareffective January 1, 2018 but early adoption is permitted. Management is currently evaluating theand did not have a material impact of this guidance on the Company’s consolidated financial statements.

In March 2017, the FASB issued authoritative accounting guidance on the presentation of net periodic pension costs and net periodic postretirementpost-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 early adopt, therefore the guidance will be effective for the Company in fiscal year 2018. Management is currently evaluating thehave a material impact of this guidance on the Company’s consolidated financial statements.

In October 2016, the FASB issued authoritative accounting guidance on the income tax consequences of intra-company transfers other than inventory. This guidance addresses the timing of the recognition of current and deferred income taxes. Under this guidance, the recognition of current or deferred income taxes will occur at the time of the transfer of the asset. The Company did not early adopt; therefore, the guidance will be effective for the Company in fiscal year 2018. Management is currently evaluating the impact of this guidance on the Company’s consolidated financial statements.

6


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 early adopt; therefore, the guidance will be effective for the Company in fiscal year 2018. Management is currently evaluating thehave a material impact of this guidance on the Company’s consolidated financial statements.

In February 2016, the FASB issued authoritative accounting guidance on lease accounting. The guidance requires lessees to presentright-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 new guidance also introduces new disclosure requirements for leasing arrangements. The guidance will be effective for the Company in fiscal year 2019, 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.

In January 2016, the FASB issued authoritative accounting guidance on the classification of equity securities with readily determinable fair values into different categories (e.g. trading oravailable-for-sale) and the requirement for equity securities to be measured at fair value with changes in fair value recognized in net income. The Company did not early adopt; therefore, the guidance will be effective prospectively for the Company in fiscal year 2018. Upon adoption, a cumulative-effect adjustment to retained earnings in the consolidated balance sheets will be reclassified to beginning retained earnings. Management has evaluated the impact of this guidance and expects the unrealized gains and losses for fair value measurement of the Company’savailable-for-sale securities to be recognized in net income upon adoption.

In May 2014, the FASB issued authoritative accounting guidance on a company’s accounting for revenue from contracts with customers, which guidance haswas subsequently been 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 orwas adopted by the Company effective January 1, 2018 on a modified retrospective adoption.basis. See Note C, “Revenue” for information regarding the impact of the adoption of this guidance.

Recently Issued Accounting Pronouncements

In June 2018, the FASB issued authoritative accounting guidance on accounting for nonemployee awards for goods or services received by a company. The Company did not early adopt; therefore, the guidance will be effective for the Company for the annual and interim periods beginning in fiscal year 2018.2019, but early adoption is permitted. Management is currently evaluating the impact of this guidance 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 will be effective for the Company in fiscal year 2019, but early adoption is permitted. The guidance can be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the U.S. Tax Cuts and Jobs Act is recognized. Management is currently evaluating affected balances recorded in accumulated other comprehensive loss and expects the impact of this guidance on the Company’s consolidated financial statements to be an immaterial adjustment to retained earnings.

In February 2016, the FASB issued authoritative accounting guidance on lease accounting. The guidance requires lessees to presentright-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. The guidance will implementbe effective for the Company in fiscal year 2019 using a modified retrospective approach. Management is currently evaluating the Company’s lease contracts and assessing the impact of the adoption of policy elections and practical expedients prescribed by the guidance. Management does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.

NOTE C.REVENUE

Adoption of New Revenue Guidance

New authoritative accounting guidance for revenue was adopted by the Company effective January 1, 2018 using the modified retrospective approach. Management has determined thatCurrent 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 aone-time adjustment related to sales of Extended Transmission Coverage (“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 streams that will beby $2 million andnon-current deferred revenue by $4 million as of January 1, 2018.

During the three months ended June 30, 2018, neither net sales nor deferred revenue were impacted by the guidance relate toapplication of this guidance. During the six months ended June 30, 2018, the Company increased net sales by $1 million, and decreasednon-standardnon-current transmission coverages. Certain contracts are also being reviewed individually for the potential impact. No significant changes or additionsdeferred revenue by $1 million, compared to our internal controls over financial reporting are expectedprior accounting guidance, as a result of implementinghow 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 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 our 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 andnon-current Deferred Revenue as of June 30, 2018 and December 31, 2017. See Note J, “Deferred Revenue” for more information including the amount of revenue earned during the three and six months ended June 30, 2018 that had been previously deferred. The Company does not have contract assets.

Disaggregated Revenue

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. 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):

   Three months
ended June 30,
2018
   Six months
ended June 30,
2018
 

North AmericaOn-Highway

  $343   $682 

North AmericaOff-Highway

   31    64 

Defense

   43    80 

Outside North AmericaOn-Highway

   101    192 

Outside North AmericaOff-Highway

   24    36 

Service Parts, Support Equipment and Other

   169    320 
  

 

 

   

 

 

 

Total Net Sales

  $711   $1,374 
  

 

 

   

 

 

 

Disaggregated revenue by end market is further described as follows:

North AmericaOn-Highway

Revenue from the North AmericaOn-Highway end market is driven by the sale of transmissions to original equipment manufacturers (“OEMs”), distributors and dealers that install the transmission intoClass 4-5,Class 6-7 and Class 8 straight trucks and metro tractors, conventional transit, shuttle and coach buses, school buses and motorhome applications. Revenue from the North AmericaOn-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 AmericaOff-Highway

Revenue from the North AmericaOff-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.

Defense

Revenue 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 North America 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 abill-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 AmericaOn-Highway

Revenue from the Outside North AmericaOn-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 AmericaOff-Highway

Revenue from the Outside North AmericaOff-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 Other

Revenue 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 guidance.method best depicts the progress towards satisfaction of its performance obligation. ETC contracts are sold in one to five year durations within the North AmericaOn-Highway, Outside North AmericaOn-Highway, North AmericaOff-Highway and Outside North AmericaOff-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 C.D.INVENTORIES

Inventories consisted of the following components (dollars in millions):

 

  September 30,
2017
   December 31,
2016
   June 30,
2018
   December 31,
2017
 

Purchased parts and raw materials

  $72   $57   $83   $79 

Work in progress

   8    5    10    6 

Service parts

   46    43    45    46 

Finished goods

   30    21    32    23 
  

 

   

 

   

 

   

 

 

Total inventories

  $        156   $126   $170   $154 
  

 

   

 

   

 

   

 

 

Inventory components shipped to third parties, primarily cores, parts tore-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 Other current liabilities. See NOTE J,K, “Other Current Liabilities” for more information.

 

7


NOTE D.E.GOODWILL AND OTHER INTANGIBLE ASSETS

As of SeptemberJune 30, 20172018 and December 31, 2016,2017, the carrying amount of the Company’s Goodwill was $1,941 million.

The following presents a summary of other intangible assets (dollars in millions):

 

  September 30, 2017   December 31, 2016   June 30, 2018   December 31, 2017 
  Intangible
assets, gross
   Accumulated
amortization
 Intangible
assets, net
   Intangible
assets, gross
   Accumulated
amortization
 Intangible
assets, net
   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   $790   $—    $790   $790   $—    $790 

Customer relationships — defense

   62    (37  25    62    (35 27 

Customer relationships — commercial

   832    (562  270    832    (526 306    832    (597  235    832    (573 259 

Proprietary technology

   476    (386  90    476    (358 118    476    (415  61    476    (396 80 

Customer relationships — defense

   62    (39  23    62    (38 24 

Patented technology — defense

   28    (28  —      28    (28  —   

Non-compete agreement

   17    (17  —      17    (16 1    17    (17  —      17    (17  —   

Patented technology — defense

   28    (28  —      28    (28  —   

Tooling rights

   5    (5  —      5    (5  —      5    (5  —      5    (5  —   
  

 

   

 

  

 

   

 

   

 

  

 

   

 

   

 

  

 

   

 

   

 

  

 

 

Total

  $2,210   $(1,035 $1,175   $2,210   $(968 $1,242   $2,210   $(1,101 $1,109   $2,210   $(1,057 $1,153 
  

 

   

 

  

 

   

 

   

 

  

 

   

 

   

 

  

 

   

 

   

 

  

 

 

As of SeptemberJune 30, 20172018 and December 31, 2016,2017, the net carrying value of ourthe Company’s Goodwill and otherOther intangible assets, net was $3,116$3,050 million and $3,183$3,094 million, respectively.

Amortization expense related to other intangible assets for the next five fiscal years is expected to be (dollars in millions):

 

   2018   2019   2020   2021   2022 

Amortization expense

  $87   $86   $50   $45   $43 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   2019   2020   2021   2022   2023 

Amortization expense

  $86   $50   $45   $43   $42 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NOTE E.F.FAIR VALUE OF FINANCIAL INSTRUMENTS

In accordance with the FASB’s authoritative accounting guidance on fair value measurements, fair value is the price (exit price) that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company primarily applies the market approach for recurring fair value measurements and utilizes the best available information that maximizes the use of observable inputs and minimizes the use of unobservable inputs. The Company is able to classify fair value balances based on the observability of those inputs. The accounting guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy defined by the relevant guidance are as follows:

Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, listed equities and publicly traded bonds.

Level 2 — Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes financial instruments that are valued using quoted prices in markets that are not active and those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

Level 3 — Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. At each balance sheet date, the Company performs an analysis of all instruments subject to authoritative accounting guidance and includes, in Level 3, all of those whose fair value is based on significant unobservable inputs. As of SeptemberJune 30, 20172018 and December 31, 2016,2017, the Company did not have any Level 3 financial assets or liabilities.

8


The Company’s assets and liabilities that are measured at fair value include cash equivalents,available-for-sale securities, derivative instruments, assets held in a rabbi trust and a deferred compensation obligation. The Company’s cash equivalents consist of short-term U.S. government backed securities. The Company’savailable-for-sale securities consist of ordinary shares of Torotrak plc (“Torotrak”) associated with a license and exclusivity agreement with Torotrak. Torotrak’s listed shares are traded on the London Stock Exchange under the ticker symbol “TRK.” The Company’s derivative instruments consist of interest rate swaps. The Company’s assets held in the rabbi trust consist principally of publicly available mutual funds and target date retirement funds. The Company’s deferred compensation obligation is directly related to the fair value of assets held in the rabbi trust.

The Company’s valuation techniques used to calculate the fair value of cash and cash equivalents,available-for-sale securities, assets held in the rabbi trust and the deferred compensation obligation represent a market approach in active markets for identical assets that qualify as Level 1 in the fair value hierarchy. The Company’s valuation techniques used to calculate the fair value of derivative instruments represent a market approach with observable inputs that qualify as Level 2 in the fair value hierarchy.

The Company uses valuations from the issuing financial institutioninstitutions for the fair value measurement of interest rate derivatives. The Company corroborates the valuation through the use of third-party valuation services using a standard replacement valuation model.swaps. Thefloating-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 andnon-current assets and liabilities in the Condensed 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, net in the Condensed Consolidated Statements of Comprehensive Income.

The following table summarizes the fair value of the Company’s financial assets and (liabilities) as of SeptemberJune 30, 20172018 and December 31, 20162017 (dollars in millions):

 

   Fair Value Measurements Using 
   Quoted Prices in Active
Markets for Identical
Assets (Level 1)
  Significant Other
Observable Inputs (Level 2)
  TOTAL 
   September 30,
2017
  December 31,
2016
  September 30,
2017
  December 31,
2016
  September 30,
2017
  December 31,
2016
 

Rabbi trust assets

  $8  $5  $—    $—    $8  $5 

Deferred compensation obligation

   (8  (5  —     —     (8  (5

Cash equivalents

   —     81   —     —     —     81 

Available-for-sale securities

   —     2   —     —     —     2 

Derivative liabilities, net

   —     —     (19  (29  (19  (29
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  $—    $83  $(19 $(29 $(19 $54 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

   Fair Value Measurements Using 
   Quoted Prices in Active
Markets for Identical
Assets (Level 1)
  Significant Other
Observable Inputs (Level 2)
   TOTAL 
   June 30,
2018
  December 31,
2017
  June 30,
2018
  December 31,
2017
   June 30,
2018
  December 31,
2017
 

Cash equivalents

  $2  $50  $—    $—     $2  $50 

Rabbi trust assets

   10   8   —     —      10   8 

Deferred compensation obligation

   (10  (8  —     —      (10  (8

Derivative liabilities

   —     —     (2  —      (2  —   
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Total

  $2  $50  $(2 $—     $—    $50 
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

 

9


NOTE F.G.DEBT

Long-term debt and maturities are as follows (dollars in millions):

 

  September 30,
2017
   December 31,
2016
   June 30,
2018
   December 31,
2017
 

Long-term debt:

        

Senior Secured Credit Facility TermB-3 Loan, variable, due 2022

  $1,179   $1,188   $ 1,148   $1,176 

Senior Notes, fixed 5.0%, due 2024

   1,000    1,000    1,000    1,000 

Senior Notes, fixed 4.75%, due 2027

   400    —      400    400 
  

 

   

 

   

 

   

 

 

Total long-term debt

  $2,579   $2,188   $2,548   $2,576 

Less: current maturities of long-term debt

   12    12    —      12 

deferred financing costs, net

   31    29    28    30 
  

 

   

 

   

 

   

 

 

Total long-term debt, net

  $2,536   $2,147   $        2,520   $2,534 
  

 

   

 

   

 

   

 

 

As of SeptemberJune 30, 2017,2018, the Company had $2,579$2,548 million of indebtedness associated with Allison Transmission, Inc.’s (“ATI”), the Company’s wholly-owned subsidiary, 5.0% Senior Notes due September 2024 (“5.0% Senior Notes”), ATI’s 4.75% Senior Notes due October 2027 (“4.75% Senior Notes”) and ATI’s Senior Secured Credit Facility (“Senior Secured Credit Facility”), which consists of the Senior Secured Credit Facility TermB-3 Loan due 2022 (“TermB-3 Loan”) and the Senior Secured Credit Facility revolving credit facility due 2021 (“Revolving Credit Facility”).

The fair value of the Company’s long-term debt obligations as of SeptemberJune 30, 20172018 was $2,623$2,507 million. The fair value is based on quoted Level 2 market prices of the Company’s debt as of SeptemberJune 30, 2017.2018. It is not expected that the Company would be able to repurchase a significant amountall of its debt at these levels. The difference between the fair value and carrying value of the long-term debt is driven primarily by trends in the financial markets.

Senior Secured Credit Facility

In March 2017, ATI entered into an amendment with the term loan lenders under its Senior Secured Credit Facility to lower the applicable margins on the TermB-3 Loan by 0.5%. The amendment also eliminated the minimum LIBOR floor and reduced the minimum floor applicable to the base rate from 1.75% to 1.00% on the TermB-3 Loan. The March 2017 amendment was treated as a modification to the Senior Secured Credit Facility under GAAP, and thus the Company recorded $1 million as new deferred financing fees.

In September 2017, ATI entered into a joinder agreement with the lenders under its Senior Secured Credit Facility to increase the available commitments under the Revolving Credit Facility from $450 million to $550 million. The joinder agreement was treated as a modification to the Revolving Credit Facility under GAAP.

In March 2018, ATI entered into an amendment with the term loan lenders under its Senior Secured Credit Facility to lower the applicable margins on the TermB-3 Loan by 0.25%. The March 2018 amendment was treated as a modification to the Senior Secured Credit Facility under GAAP, and thus the Company recorded $1 million as new deferred financing fees.

The Senior Secured Credit Facility is collateralized by a lien on substantially all assets of the Company including all of ATI’s capital stock and all of the capital stock or other equity interest held by the Company, ATI and each of the Company’s existing and future U.S. subsidiary guarantors (subject to certain limitations for equity interests of foreign subsidiaries and other exceptions set forth in the terms of the Senior Secured Credit Facility). Interest on the TermB-3 Loan, as of SeptemberJune 30, 2017,2018, is either (a) 2.00%1.75% over the LIBOR or (b) 1.00%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 0.5%, provided that neither is below 1.00%. As of SeptemberJune 30, 2017,2018, the Company elected to pay the lowestall-in rate of LIBOR plus the applicable margin, or 3.24%3.85%, on the TermB-3 Loan. The Senior Secured Credit Facility requires minimum quarterly principal payments on the TermB-3 Loan as well as prepayments from certain net cash proceeds ofnon-ordinary course asset sales and casualty and condemnation events and from a percentage of excess cash flow, if applicable. The minimum required quarterly principal payment on the TermB-3 Loan through its maturity date of September 2022 is $3 million.million; however, the Company made voluntary prepayments of the required quarterly principal payments of $25 million during the quarter ended June 30, 2018. As of SeptemberJune 30, 2017,2018, there had beenwere no payments required for certain net cash proceeds ofnon-ordinary course asset sales and casualty and condemnation events. The remaining principal balance is due upon maturity.

The Senior Secured Credit Facility also provides a Revolving Credit Facility, net of an allowance for up to $75 million in outstanding letters of credit commitments. Throughout the nine months ended September 30, 2017, the Company made periodic withdrawals and payments on the Revolving Credit Facility as part of its debt management plans. The maximum amount outstanding at any time during the nine months ended September 30, 2017 on the Revolving Credit Facility was $300 million. As of SeptemberJune 30, 2017,2018, the Company had $533 million available under the Revolving Credit Facility, net of $17 million in letters of credit. Revolving creditCredit Facility borrowings bear interest at a variable base rate plus an applicable margin based on the Company’s total leverage ratio. Interest on the Revolving Credit Facility is either (a) 1.75% over the LIBOR or (b) 0.75% over the greater of the prime lending rate in effect on such day and the federal funds effective rate published by the Federal Reserve Bank of New York plus 0.5%, provided that neither

10


is below 1.75%. In addition, there is an annual commitment fee, based on the Company’s total leverage ratio, on the average unused revolving credit borrowings available under the Revolving Credit Facility. Revolving creditCredit Facility borrowings are payable at the option of the Company throughout the term of the Senior Secured Credit Facility with the balance due in September 2021.

The Senior Secured Credit Facility requires the Company to maintain a specified maximum total senior secured leverage ratio of 5.50x when revolving loan commitments remain outstanding on the Revolving Credit Facility at the end of a fiscal quarter. As of SeptemberJune 30, 2017,2018, the Company had no revolving loans outstanding;amounts outstanding under the Revolving Credit Facility; however, the Company would have been in compliance with the maximum total senior secured leverage ratio, achieving a 1.19x1.03x ratio. Additionally, within the terms of the Senior Secured Credit Facility, a senior secured leverage ratio at or below 4.00x results in the elimination of excess cash flow payments on the Senior Secured Credit Facility for the applicable year. The Senior Secured Credit Facility also provides certain financial incentives based on our total leverage ratio. A total leverage ratio at or below 4.00x results in a 25 basis point reduction to the applicable margin on the Revolving Credit Facility, and a total leverage ratio at or below 3.50x results in a 12.5 basis point reduction to the Revolving Credit Facility commitment fee and an additional 25 basis point reduction to the applicable margin on the Revolving Credit Facility. These reductions would remain in effect as long as the Company achieves a total leverage ratio at or below the related threshold. As of SeptemberJune 30, 2017,2018, the Company’s total leverage ratio was 2.90x.2.40x.

In addition, the Senior Secured Credit Facility, among other things, includes customary restrictions (subject to certain exceptions) on the Company’s ability to incur certain indebtedness, grant certain liens, make certain investments, declare or pay certain dividends, or repurchase shares of the Company’s common stock. As of SeptemberJune 30, 2017,2018, the Company iswas in compliance with all covenants under the Senior Secured Credit Facility.

5.0% Senior Notes

The 5.0% Senior Notes are unsecured and are guaranteed by each of ATI’s domestic subsidiaries that is a borrower under or guarantees the Senior Secured Credit Facility and are unconditionally guaranteed, jointly and severally, by any of ATI’s future domestic subsidiaries that are borrowers under or guarantee the Senior Secured Credit Facility. None of ATI’s domestic subsidiaries currently guarantee its obligations under the Senior Secured Credit Facility, and therefore none of ATI’s domestic subsidiaries currently guarantee the 5.0% Senior Notes. The indenture governing the 5.0% Senior Notes contains negative covenants restricting or limiting the Company’s ability to, among other things: incur or guarantee additional indebtedness, incur liens, pay dividends on, redeem or repurchase the Company’s capital stock, make certain investments, permit payment or dividend restrictions on certain of the Company’s subsidiaries, sell assets, engage in certain transactions with affiliates, and consolidate or merge or sell all or substantially all of the Company’s assets. As of SeptemberJune 30, 2017,2018, the Company iswas in compliance with all covenants under the indenture governing the 5.0% Senior Notes.

4.75% Senior Notes

In September 2017, ATI completed an offering of $400 million of 4.75% Senior Notes. The 4.75% Senior Notes were offered in a private placement exempt from registration under the Securities Act of 1933, as amended. The proceeds from the offering were used for general corporate purposes and to pay related transaction fees and expenses. As a result of the offering, the Company recorded approximately $5 million as deferred financing fees in the Condensed Consolidated Balance Sheets.

The 4.75% Senior Notes are unsecured and are guaranteed by each of ATI’s domestic subsidiaries that is a borrower under or guarantees the Senior Secured Credit Facility and are unconditionally guaranteed, jointly and severally, by any of ATI’s future domestic subsidiaries that are borrowers under or guarantee the Senior Secured Credit Facility. None of ATI’s domestic subsidiaries currently guarantee its obligations under the Senior Secured Credit Facility, and therefore none of ATI’s domestic subsidiaries currently guarantee the 4.75% Senior Notes. The indenture governing the 4.75% Senior Notes contains negative covenants restricting or limiting the Company’s ability to, among other things: incur or guarantee additional indebtedness, incur liens, pay dividends on, redeem or repurchase the Company’s capital stock, make certain investments, permit payment or dividend restrictions on certain of the Company’s subsidiaries, sell assets, engage in certain transactions with affiliates, and consolidate or merge or sell all or substantially all of the Company’s assets. As of SeptemberJune 30, 2017,2018, the Company iswas in compliance with all covenants under the indenture governing the 4.75% Senior Notes.

 

11


NOTE G.H.DERIVATIVES

The Company is exposed to certain financial risk from volatility in interest rates, foreign exchange rates and commodity prices. The risk is managed through the use of financial derivative instruments including interest rate swaps, foreign currency swaps and commodity swaps, when appropriate. The Company’s current derivative instruments are used strictly as an economic hedge and not for speculative purposes. As necessary, the Company adjusts the values of the derivative instruments for counter-party or credit risk.

Interest Rate

The Company is subject to interest rate risk related to the Senior Secured Credit Facility and enters into interest rate swap contractsswaps that are based on the LIBOR to manage a portion of this exposure. The derivative instruments are not for speculative purposes and are designated as cash flow hedges.

The Company has not electedholds interest rate swaps designated as cash flow hedges that qualify for hedge accounting treatment for these derivatives, and as a result, fairunder the hypothetical derivative method. Fair value adjustments are charged directly to Interest expense, netrecorded as a component of accumulated other comprehensive loss (“AOCL”) in the Condensed Consolidated StatementsBalance Sheets. Balances in AOCL are reclassified to other comprehensive income when transactions related to the underlying risk are settled. As of Comprehensive Income.

A summaryJune 30, 2018, the Company held interest rate swaps effective from September 2019 to September 2022 with notional values totaling $250 million and a weighted average LIBOR fixed rate of 3.01% and interest rate swaps effective from September 2019 to September 2025 with notional values totaling $250 million and a weighted average LIBOR fixed rate of 3.04%. See NOTE F “Fair Value of Financial Instruments” for information regarding the fair value of the Company’s interest rate derivatives as of September 30, 2017 and December 31, 2016 follows (dollars in millions):swaps.

   September 30, 2017   December 31, 2016 
   Notional
Amount
   Fair Value   Notional
Amount
   Fair Value 

3.44% Interest Rate Swap L, Aug 2016 – Aug 2019*

  $75   $(2  $75   $(4

3.43% Interest Rate Swap M, Aug 2016 – Aug 2019*

   100    (3   100    (5

3.37% Interest Rate Swap N, Aug 2016 – Aug 2019*

   75    (2   75    (3

3.19% Interest Rate Swap O, Aug 2016 – Aug 2019*

   75    (2   75    (3

3.08% Interest Rate Swap P, Aug 2016 – Aug 2019*

   75    (2   75    (3

2.99% Interest Rate Swap Q, Aug 2016 – Aug 2019*

   50    (1   50    (2

2.98% Interest Rate Swap R, Aug 2016 – Aug 2019*

   50    (1   50    (2

2.73% Interest Rate Swap S, Aug 2016 – Aug 2019*

   50    (1   50    (1

2.74% Interest Rate Swap T, Aug 2016 – Aug 2019*

   75    (2   75    (2

2.66% Interest Rate Swap U, Aug 2016 – Aug 2019*

   50    (1   50    (1

2.60% Interest Rate Swap V, Aug 2016 – Aug 2019*

   50    (1   50    (1

2.40% Interest Rate Swap W, Aug 2016 – Aug 2019*

   25    —      25    (1

2.25% Interest Rate Swap X, Aug 2016 – Aug 2019*

   50    (1   50    (1
  

 

 

   

 

 

   

 

 

   

 

 

 

* includes LIBOR floor of 1.00%

  $800   $(19  $800   $(29
  

 

 

   

 

 

   

 

 

   

 

 

 

The following tabular disclosures further describe the Company’s interest rate derivative instrumentsderivatives qualifying and designated for hedge accounting and their impact on the financial condition of the Company (dollars in millions):

 

   September 30, 2017  December 31, 2016 
   Balance Sheet Location   Fair Value  Balance Sheet Location   Fair Value 

Derivatives not designated as hedging instruments:

       

Interest rate swaps

   
Other current
liabilities
 
 
  $(10  
Other current
liabilities
 
 
  $(11
   
Other non-current
liabilities
 
 
   (9  
Other non-current
liabilities
 
 
   (18
    

 

 

    

 

 

 

Total derivatives not designated as hedging instruments

    $(19   $(29
    

 

 

    

 

 

 
   

June 30, 2018

 
   

Balance Sheet Location

  Fair Value 

Derivatives designated as hedging instruments:

    

Interest rate swaps

  Other non-current liabilities  $(2
    

 

 

 

Total derivatives designated as hedging instruments

    $(2
    

 

 

 

The following tabular disclosure describesbalance of losses recorded in AOCL as of June 30, 2018 was $2 million. See NOTE N “Accumulated Other Comprehensive Loss” for information regarding activity recorded as a component of AOCL during the locationthree and impact onsix months ended June 30, 2018. The Company had no losses recorded in accumulated other comprehensive loss expected to be reclassified to other comprehensive income within the Company’s resultsnext twelve months as of operations related to unrealized gain (loss) on interest rate derivatives (dollars in millions):June 30, 2018.

   Three months ended September 30,   Nine months ended September 30, 
   2017   2016   2017   2016 

Location of impact on results of operations

        

Interest expense, net

  $4   $3   $9   $(12

12


NOTE H.I.PRODUCT WARRANTY LIABILITIES

As of June 30, 2018, the current andnon-current product warranty liabilities were $28 million and $37 million, respectively. As of June 30, 2017, the current andnon-current product warranty liabilities were $21 million and $34 million, respectively.

Product warranty liability activities consist of the following (dollars in millions):

 

   Three months ended September 30,   Nine months ended September 30, 
   2017   2016   2017   2016 

Beginning balance

  $55   $70   $63   $78 

Payments

   (8   (7   (23   (26

Increase in liability (warranty issued during period)

   4    4    13    12 

Net adjustments to liability

   (2   3    (4   6 
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $49   $70   $49   $70 
  

 

 

   

 

 

   

 

 

   

 

 

 

As of September 30, 2017, the current andnon-current product warranty liabilities were $22 million and $27 million, respectively. As of September 30, 2016, the current andnon-current product warranty liabilities were $28 million and $42 million, respectively.

   Three months ended June 30,   Six months ended June 30, 
   2018   2017   2018   2017 

Beginning balance

  $62   $58   $55   $63 

Payments

   (10   (8   (19   (15

Increase in liability (warranty issued during period)

   12    5    21    9 

Net adjustments to liability

   1    —      8    (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $65   $55   $65   $55 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

NOTE I.J.DEFERRED REVENUE

As of SeptemberJune 30, 2018, current andnon-current deferred revenue was $38 million and $87 million, respectively. As of June 30, 2017, the current andnon-current deferred revenue were $33was $28 million and $75 million, respectively. As of September 30, 2016, the current andnon-current deferred revenue were $24 million and $61$68 million, respectively.

Deferred revenue activity consists of the following (dollars in millions):

 

  Three months ended September 30,   Nine months ended September 30,   Three months ended June 30,   Six months ended June 30, 
  2017   2016   2017   2016   2018   2017   2018   2017 

Beginning balance

  $96   $84   $94   $79   $112   $96   $110   $94 

Increases

   21    7    35    23    23    6    33    14 

Revenue earned

   (9   (6   (21   (17   (10   (6   (18   (12
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Ending balance

  $108   $85   $108   $85   $125   $96   $125   $96 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Deferred revenue recorded in current andnon-current liabilities related to extended transmission coverage (“ETC”)ETC contracts as of SeptemberJune 30, 2017 were2018 was $29 million and $70$71 million, respectively. Deferred revenue recorded in current andnon-current liabilities related to ETC contracts as of SeptemberJune 30, 2016 were $242017 was $27 million and $61$68 million, respectively.

13


NOTE J.K.OTHER CURRENT LIABILITIES

Other current liabilities consist of the following (dollars in millions):

 

                                            
  As of
September 30,

2017
   As of
December 31,
2016
   As of
June 30,
2018
   As of
December 31,
2017
 

Payroll and related costs

  $67   $52   $52   $73 

Sales allowances

   32    24    40    34 

Accrued interest payable

   28    17    18    19 

Vendor buyback obligation

   15    14 

Taxes payable

   19    10    14    10 

Vendor buyback obligation

   13    13 

Derivative liabilities

   11    11 

Defense price reduction reserve

   9    9    9    9 

UAW Local 933 retirement incentive

   6    —   

Non-trade payables

   3    8 

Other accruals

   14    14    9    16 
  

 

   

 

   

 

   

 

 

Total

  $193   $150   $166   $183 
  

 

   

 

   

 

   

 

 

 

NOTE K.L.EMPLOYEE BENEFIT PLANS

Components of net periodic benefit cost (credit) consist of the following (dollars in millions):

 

  Pension Plans   Post-retirement Benefits   Pension Plans   Post-retirement Benefits 
  Three months ended September 30,   Three months ended September 30,   Three months ended June 30,   Three months ended June 30, 
  2017   2016   2017   2016   2018   2017   2018   2017 

Net periodic benefit cost:

                

Service cost

  $3   $3   $—     $1   $3   $3   $1   $1 

Interest cost

   1    2    2    1    1    1    1    1 

Expected return on assets

   (1   (2   —      —      (2   (2   —      —   

Prior service cost

   —      —      (1   (1   —      —      (4   (1
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Net periodic benefit cost

  $3   $3   $1   $1 

Net periodic benefit cost (credit)

  $2   $2   $(2  $1 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  Pension Plans   Post-retirement Benefits 
  Six months ended June 30,   Six months ended June 30, 
  2018   2017   2018   2017 

Net periodic benefit cost:

        

Service cost

  $6   $6   $1   $1 

Interest cost

   3    3    2    3 

Expected return on assets

   (4   (4   —      —   

Prior service cost

   —      —      (7   (2
  

 

   

 

   

 

   

 

 

Net periodic benefit cost (credit)

  $5   $5   $(4  $2 
  

 

   

 

   

 

   

 

 

The components of net periodic benefit costs other than the service cost component are included in other income (expense), net in the Condensed Consolidated Statements of Comprehensive Income.

   Pension Plans   Post-retirement Benefits 
   Nine months ended September 30,   Nine months ended September 30, 
   2017   2016   2017   2016 

Net periodic benefit cost:

        

Service cost

  $9   $9   $1   $2 

Interest cost

   4    5    5    5 

Expected return on assets

   (5   (5   —      —   

Prior service cost

   —      —      (3   (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

  $8   $9   $3   $4 
  

 

 

   

 

 

   

 

 

   

 

 

 

14


NOTE  L.M.INCOME TAXES

For the three and ninesix months ended SeptemberJune 30, 2018, the Company recorded total tax expense of $48 million and $88 million, respectively. The effective tax rate for the three and six months ended June 30, 2018 was 22% and 21%, respectively. For the three and six months ended June 30, 2017, the Company recorded total tax expense of $59$51 million and $154$95 million, respectively. The effective tax rate for both the three and ninesix months ended SeptemberJune 30, 2017 was 35%. ForThe decrease in the three and nine months ended September 30, 2016, the Company recorded total tax expense of $26 million and $93 million, respectively. The effective tax rate for the three and nine months ended September 30, 2016 was 37% and 38%, respectively. The decrease in effective tax rate for the three and nine months ended September 30, 2017 was principally driven by increasedthe U.S. Tax Cuts and Jobs Act enacted into law in 2017.

In 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the U.S. Tax Cuts and Jobs Act. The Company recognized the income tax deductionseffects of the U.S. Tax Cuts and discrete activity relatedJobs Act for the year ended December 31, 2017, the reporting period in which the U.S. Tax Cuts and Jobs Act was signed into law, in accordance with SAB 118. As such, the Company’s financial results reflect the income tax effects of the U.S. Tax Cuts and Jobs Act and provisional amounts for those specific income tax effects of the U.S. Tax Cuts and Jobs Act that could be reasonably estimated. During both the three and six months ended June 30, 2018, there were no changes made to excess tax benefit from stock-based compensation.the provisional amounts recognized in 2017. The Company will continue to analyze the effects of the U.S. Tax Cuts and Jobs Act and any impact on its financial statements will be recorded in the period identified.

The need to establish a valuation allowance against the deferred tax assets is assessed periodically based on amore-likely-than-not realization threshold, in accordance with authoritative accounting guidance. 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 carry forward periods, 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 continues to provide for a valuation allowance on certain of its foreign deferred tax assets. The Company has determined, based on the evaluation of both objective and subjective evidence available, that this valuation allowance is necessary and that it is more likely than not that the deferred tax assets are not fully realizable.

In accordance with the FASB’s authoritative guidance on accounting for uncertainty in income taxes, the Company has recorded a liability for unrecognized tax benefits related to a 2010 Research & Development Credit as of SeptemberJune 30, 20172018 and December 31, 2016.2017. The accounting guidance prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. All of the Company’s returns will remain subject to examination by the various taxing authorities for the duration of the applicable statute of limitations (generally three years from the later of the date of filing or the due date of the return).

 

NOTE M.N.ACCUMULATED OTHER COMPREHENSIVE LOSS

The following tables reconcile changes in Accumulated other comprehensive loss (“AOCL”)AOCL by component (net of tax, dollars in millions):

 

                                                                                                                                       
  Three months ended   Three months ended 
  Available-for-
sale
securities
   Defined
benefit
pension items
   Foreign
currency
items
   Total   Available-for-
sale
securities
   Defined
benefit
pension items
   Derivatives
designated
for hedge
accounting
   Foreign
currency
items
   Total 

AOCL as of June 30, 2016

  $(6  $(21  $(30  $(57

AOCL as of March 31, 2017

  $(7  $(19  $—     $(34  $(60
  

 

   

 

   

 

   

 

   

 

 

Other comprehensive income before reclassifications

   —      —      —      4    4 

Amounts reclassified from AOCL

   —      (1   —      —      (1

Income tax

   (1   1    —      —      —   
  

 

   

 

   

 

   

 

   

 

 

Net current period other comprehensive (loss) income

  $(1  $—     $—     $4   $3 
  

 

   

 

   

 

   

 

   

 

 

AOCL as of June 30, 2017

  $(8  $(19  $—     $(30  $(57
  

 

   

 

   

 

   

 

   

 

 

AOCL as of March 31, 2018

  $—     $5   $—     $(16  $(11
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Other comprehensive loss before reclassifications

   —      —      1    1    —      —      (2   (12   (14

Amounts reclassified from AOCL

   —      (1   —      (1   —      (4   —      —      (4

Income tax

   —      —      —      —      —      2    —      —      2 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Net current period other comprehensive (loss) income

  $—     $(1  $1   $   

Net current period other comprehensive loss

  $—     $(2  $(2  $(12  $(16
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

AOCL as of September 30, 2016

  $(6  $(22  $(29  $(57

AOCL as of June 30, 2018

  $—     $3   $(2  $(28  $(27
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

AOCL as of June 30, 2017

  $(8  $(19  $(30  $(57
  

 

   

 

   

 

   

 

 

Other comprehensive (loss) income before reclassifications

   (1   —      6    5 

Amounts reclassified from AOCL

   —      (1   —      (1

Income tax

   1    —      —      1 
  

 

   

 

   

 

   

 

 

Net current period other comprehensive (loss) income

  $—     $(1  $6   $5 
  

 

   

 

   

 

   

 

 

AOCL as of September 30, 2017

  $(8  $(20  $(24  $(52
  

 

   

 

   

 

   

 

 

                                                                                                                                       
   Six months ended 
   Available-for-
sale
securities
   Defined
benefit
pension items
   Derivatives
designated
for hedge
accounting
   Foreign
currency
items
   Total 

AOCL as of December 31, 2016

  $(7  $(18  $—     $(38  $(63
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income before reclassifications

   (1   —      —      8    7 

Amounts reclassified from AOCL

   —      (2   —      —      (2

Income tax

   —      1    —      —      1 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive (loss) income

  $(1  $(1  $—     $8   $6 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AOCL as of June 30, 2017

  $(8  $(19  $—     $(30  $(57
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AOCL as of December 31, 2017

  $—     $8   $—     $(23  $(15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss before reclassifications

   —      —      (2   (5   (7

Amounts reclassified from AOCL

   —      (7   —      —      (7

Income tax

   —      2    —      —      2 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive loss

  $—     $(5  $(2  $(5  $(12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AOCL as of June 30, 2018

  $—     $3   $(2  $(28  $(27
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

15


   Nine months ended 
   Available-for-
sale
securities
   Defined
benefit
pension items
   Foreign
currency
items
   Total 

AOCL as of December 31, 2015

  $(6  $(20  $(33  $(59
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss before reclassifications

   —      —      4    4 

Amounts reclassified from AOCL

   —      (3   —      (3

Income tax

   —      1    —      1 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive (loss) income

  $—     $(2  $4   $2 
  

 

 

   

 

 

   

 

 

   

 

 

 

AOCL as of September 30, 2016

  $(6  $(22  $(29  $(57
  

 

 

   

 

 

   

 

 

   

 

 

 

AOCL as of December 31, 2016

  $(7  $(18  $(38  $(63
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income before reclassifications

   (2   —      14    12 

Amounts reclassified from AOCL

   —      (3   —      (3

Income tax

   1    1    —      2 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive (loss) income

  $(1  $(2  $14   $11 
  

 

 

   

 

 

   

 

 

   

 

 

 

AOCL as of September 30, 2017

  $(8  $(20  $(24  $(52
  

 

 

   

 

 

   

 

 

   

 

 

 

  Amounts reclassified from AOCL 

Affected line item in the Condensed Consolidated
Statements of Comprehensive Income

  Amounts reclassified from AOCL   Affected line item in the Condensed
Consolidated Statements of Comprehensive
Income
AOCL Components  Three months
ended
September 30,
2017
 Three months
ended
September 30,
2016
   Three months
ended
June 30, 2018
   Three months
ended
June 30, 2017
   

Amortization of defined benefit pension items:

    

Amortization of benefit items:

      

Prior service cost

  $1  $1  Cost of sales  $3   $1   Cost of sales
   1    —     Selling, general and administrative
  

 

  

 

    

 

   

 

   

Total reclassifications, before tax

  $1  $1  Income before income taxes  $4   $1   Income before income taxes

Income tax

   —     —    Income tax expense   (2   (1  Income tax expense
  

 

  

 

    

 

   

 

   

Total reclassifications

  $1  $1  Net of tax

Total reclassifications, net of tax

  $2   $—     
  

 

  

 

    

 

   

 

   
  Amounts reclassified from AOCL   Amounts reclassified from AOCL   Affected line item in the Condensed
Consolidated Statements of Comprehensive
Income
AOCL Components  Nine months
ended
September 30,
2017
 Nine months
ended
September 30,
2016
 

Affected line item in the Condensed Consolidated
Statements of Comprehensive Income

  Six months
ended
June 30, 2018
   Six months
ended
June 30, 2017
   

Amortization of defined benefit pension items:

          

Prior service cost

  $3  $3  Cost of sales  $6   $2   Cost of sales
  

 

  

 

     1    —     Selling, general and administrative
  

 

   

 

   

Total reclassifications, before tax

  $3  $3  Income before income taxes  $7   $2   Income before income taxes

Income tax

   (1 (1 Income tax expense   (2   (1  Income tax expense
  

 

  

 

    

 

   

 

   

Total reclassifications

  $2  $2  Net of tax

Total reclassifications, net of tax

  $5   $1   
  

 

  

 

    

 

   

 

   

Prior service cost is included in the computation of the Company’s net periodic benefit cost. Please seeSee NOTE KL, “Employee Benefit Plans” for additional details.

16


NOTE N.O.COMMITMENTS AND CONTINGENCIES

Environmental Matters

The Company has an agreement with the Environmental Protection Agency to perform remedial activities at the Company’s Indianapolis, Indiana manufacturing facilities related to historical soil and groundwater contamination. As of SeptemberJune 30, 2017,2018, the Company had a liability recorded in the amount of $13 million.

Claims, Disputes, and Litigation

The 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 condensed 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 O.P.EARNINGS PER SHARE

The Company presents both basic and diluted earnings per share (“EPS”) amounts. Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the reporting period. Diluted EPS is calculated by dividing net income by the weighted average number of common shares and common equivalent shares outstanding during the reporting period that are calculated using the treasury stock method for stock-based awards. The treasury stock method assumes that the Company uses the proceeds from the exercise of awards to repurchase common stock at the average market price during the period. The assumed proceeds under the treasury stock method include the purchase price that the grantee will pay in the future and compensation cost for future service that the Company has not yet recognized and any tax benefits generated when the award generates a tax deduction. If there would be a shortfall, such an amount would be a reduction of the proceeds to the extent of the gains. The diluted weighted-average common shares outstanding exclude the anti-dilutive effect of certain stock options since such options had an exercise price in excess of the monthly average market value of our common stock.recognized. For each of the three months and ninesix months ended Septemberboth June 30, 2018 and June 30, 2017, 0.2 millionthere were no outstanding stock options were not included in the diluted EPS calculation because they were anti-dilutive. For each of the three months and nine months ended September 30, 2016, 0.6 million outstanding stock options were not included inexcluded from the diluted EPS calculation because they were anti-dilutive.

The following table reconciles the numerators and denominators used to calculate basic EPS and diluted EPS (in millions, except per share data):

 

  Three months ended September 30,   Nine months ended September 30,   Three months ended June 30,   Six months ended June 30, 
  2017   2016   2017   2016   2018   2017   2018   2017 

Net income

  $111   $45   $289   $154   $174   $95   $325   $178 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Weighted average shares of common stock outstanding

   146    167    152    169    134    151    137    154 

Dilutive effect stock-based awards

   1    1    1    1 

Dilutive effect of stock-based awards

   1    1        1 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Diluted weighted average shares of common stock outstanding

   147    168    153    170    135    152    137    155 
  

 

   

 

   

 

   

 

   

 

   

 

   

��

 

   

 

 

Basic earnings per share attributable to common stockholders

  $0.75   $0.27   $1.91   $0.91   $1.30   $0.63   $2.37   $1.16 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Diluted earnings per share attributable to common stockholders

  $0.75   $0.27   $1.90   $0.91   $1.29   $0.63   $2.37   $1.15 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

NOTE P.Q.COMMON STOCK

The Company’s current stock repurchase program was announced on November 14, 2016. The2016 when the Board of Directors authorized the Company to repurchase up to $1,000 million of its common stock on the open market or through privately negotiated transactions through December 31, 2019. On November 8, 2017, the Board of Directors authorized the Company to repurchase an additional $500 million of its common stock, bringing the total amount authorized under the current stock repurchase program to $1,500 million through December 31, 2019. The timing and amount of stock purchases are subject to market conditions and corporate needs. This stock repurchase program may be extended, modified, suspended or discontinued at any time at the Company’s discretion. During the three and ninesix months ended SeptemberJune 30, 2017,2018, the Company repurchased approximately $239$244 million and $778$370 million, respectively, of its common stock under the repurchase program.program, leaving $184 million of authorized repurchases remaining under the current stock repurchase program as of June 30, 2018.

17


NOTE Q.R.CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Repurchase of Common Stock held by ValueAct Capital Master Fund

On February 3, 2017, the Company entered into a stock repurchase agreement with ValueAct Capital Master Fund, L.P., a related party, to repurchase 10,525,204 shares of the Company’s common stock for approximately $363 million. The shares were repurchased under the stock repurchase program approved by the Board of Directors in November 2016. The purchase closed on February 8, 2017 and was funded with cash on hand and borrowings under the Revolving Credit Facility. The shares were subsequently retired.

 

NOTE S.SUBSEQUENT EVENTS

18On July 30, 2018, the Company announced that its Board of Directors had approved a new authorization under the Company’s current stock repurchase program for the repurchase of up to an additional $500 million of the Company’s outstanding common stock and had removed the termination date of the program. The new authorization brings the total amount authorized under the program to $2,000 million.


 

 

ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, liquidity and capital resources. You should read this discussion in conjunction with our condensed consolidated interim financial statements and the related notes contained elsewhere in this Quarterly Report on Form10-Q.

The statements in this discussion regarding industry trends, our expectations regarding our future performance, liquidity and capital resources and othernon-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Cautionary Note Regarding Forward-Looking Statements” and Part II, Item 1A “Risk Factors” below. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

Overview

Allison Transmission Holdings, Inc. and its subsidiaries (“Allison,” the “Company”Allison”, “our” or “we”) design and manufacture commercial and defense fully-automaticfully 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 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 2,6002,700 employees and 13 different transmission product lines. Although approximately 78%79% of revenues were generated in North America in 2016,2017, we have a global presence by serving customers in Europe, Asia, South America and Africa. We serve customers through a network of approximately 1,400 independent distributor and dealer locations worldwide.

Recent Developments

On July 30, 2018, we announced that our Board of Directors had approved a new authorization under our current stock repurchase program for the repurchase of up to an additional $500 million of our common stock and had removed the termination date of the program. The new authorization brings the total amount authorized under the program to $2,000 million.

Trends Impacting Our Business

Our net sales are driven by commercial vehicle production, which tends to be highly correlated to macroeconomic conditions. Our 2017 net sales reflect strongerIn 2018, we expect increased demand for North AmericaOff-Highway service parts, globalOn-Highwayon-highway products and globalOff-Highwayoff-highway products and price increases on certain products.

ThirdSecond Quarter Net Sales by End Market (in millions)

 

End Market

  Q3 2017
Net Sales
   Q3 2016
Net Sales
   % Variance   Q2 2018
Net Sales
   Q2 2017
Net Sales
   % Variance 

North AmericaOn-Highway

  $282   $224    26

North America Electric Hybrid-Propulsion Systems for Transit Bus

   19    8    138

North AmericaOn-Highway*

  $343   $314    9

North AmericaOff-Highway

   17    1    1,600   31    5    520

Defense

   35    25    40   43    30    43

Outside North AmericaOn-Highway

   89    78    14   101    85    19

Outside North AmericaOff-Highway

   14    2    600   24    10    140

Service Parts, Support Equipment and Other

   139    96    45   169    136    24
  

 

   

 

     

 

   

 

   

Total Net Sales

  $595   $434    37  $711   $580    23
  

 

   

 

     

 

   

 

   

*North AmericaOn-Highway end market net sales are inclusive of net sales for North America Electric Hybrid-Propulsion Systems for Transit Bus

North AmericaOn-Highway end market net sales were up 26%9% for the thirdsecond quarter 20172018 compared to the thirdsecond quarter 2016,2017, principally driven by higher demand for Rugged Duty Series and Highway Series models.

North America Electric Hybrid-Propulsion Systems for Transit Bus end market net sales were up $11 million for the third quarter 2017 compared to the third quarter 2016, principally driven by the timing of certain transit property orders.

North AmericaOff-Highway end market net sales were up $16$26 million for the thirdsecond quarter 20172018 compared to the thirdsecond quarter 2016,2017, principally driven by higher demand from hydraulic fracturing applications.

19


Defense end market net sales were up $10$13 million for the thirdsecond quarter 20172018 compared to the thirdsecond quarter 2016,2017, principally driven by higher Tracked and Wheeled demand.

Outside North AmericaOn-Highway end market net sales were up 14%19% for the thirdsecond quarter 20172018 compared to the thirdsecond quarter 2016,2017, principally driven by higher demand in Asia and Europe.

Outside North AmericaOff-Highway end market net sales were up $12$14 million for the thirdsecond quarter 20172018 compared to the thirdsecond quarter 2016,2017, principally driven by improved demand in the energy, mining and energyconstruction sectors.

Service Parts, Support Equipment and Other end market net sales were up 45%24% for the thirdsecond quarter 20172018 compared to the thirdsecond quarter 2016,2017, principally driven by higher demand for North AmericaOff-Highwayglobal service parts globalOn-Highway service parts and global support equipment.

Key Components of our Results of Operations

Net sales

We generate our net sales primarily from the sale of transmissions, transmission parts, support equipment, defense kits, engineering services, royalties and extended transmission coverage to a wide array of original equipment manufacturers, distributors and the U.S. government.and foreign governments. 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 sales

Our 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 ninesix months ended SeptemberJune 30, 2017,2018, direct material costs were approximately 70%71%, overhead costs were approximately 24%22%, and direct labor costs were approximately 6%7% 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 long-term supply agreements (“LTSAs”)., as appropriate. See Part I, Item 3 “Quantitative and Qualitative Disclosures about Market Risk—Commodity Price Risk” included below.

Selling, general and administrative

The 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 intangible assets.

Engineering — research and development

We incur costs in connection with research and development programs that are expected to contribute to future earnings. Such costs are expensed as incurred.

20


Non-GAAP Financial Measures

We use Adjusted Earnings before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) and Adjusted EBITDA marginas a percent of net sales to measure our operating profitability. We believe that Adjusted EBITDA and Adjusted EBITDA marginas a percent of net sales provide management, investors and creditors with useful measures of the operational results of our business and increase theperiod-to-period comparability of our operating profitability and comparability with other companies. Adjusted EBITDA marginas 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 and Adjusted EBITDA as a percent of net sales is Net income.income and Net income as a percent of net sales, respectively. Adjusted EBITDA is calculated as the 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, TermB-3 Loan due 2022 (“TermB-3 Loan”, and together with the revolving portion of ATI’s senior secured credit facility (“Revolving Credit Facility”), defined as the “Senior Secured Credit Facility”). Adjusted EBITDA marginas 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 and strengthening our balance sheet.business. We believe that Adjusted free cash flow enhances the understanding of the cash flows of our business for management, investors and creditors. Adjusted free cash flow is also used in the calculation of management’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 EBITDA and Adjusted EBITDA marginas a percent of net sales and a reconciliation of Net cash provided by operating activities to Adjusted free cash flow:

 

  Three months ended September 30, Nine months ended September 30,   Three months ended June 30, Six months ended June 30, 
(unaudited, dollars in millions)  2017 2016 2017 2016   2018 2017 2018 2017 

Net income (GAAP)

  $111  $45  $289  $154   $174  $95  $325  $178 

plus:

          

Income tax expense

   59  26   154  93    48  51   88  95 

Interest expense, net

   26  22   78  84    30  27   60  52 

Amortization of intangible assets

   22  23   67  69    22  23   44  45 

Depreciation of property, plant and equipment

   21  21   60  63    19  20   39  39 

Stock-based compensation expense (a)

   2  2   8  6 

Dual power inverter module units extended coverage (b)

   (2  —     (2 1 

UAW Local 933 retirement incentive (a)

   —     —     7   —   

Stock-based compensation expense (b)

   3  4   6  6 

Unrealized loss (gain) on foreign exchange (c)

   2  (1  1  1    1  1   3  (1

Technology-related investment expense (d)

   —    1   3  1    —    3   —    3 

Expenses related to long-term debt refinancing (e)

   —    12   —    12 

Unrealized gain on commodity hedge contracts (f)

   —     —     —    (2

Stockholder activism expenses (g)

   —     —     —    4 

Unrealized loss on commodity hedge contracts (e)

   —    1   —     —   
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Adjusted EBITDA(Non-GAAP)

  $241  $151  $658  $486   $297  $225  $572  $417 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net sales (GAAP)

  $595  $434  $1,674  $1,371   $711  $580  $  1,374  $  1,079 

Adjusted EBITDA margin(Non-GAAP)

   40.5 34.7  39.3 35.4

Net income as a percent of net sales (GAAP)

   24.5   16.4  23.7 16.5

Adjusted EBITDA as a percent of net sales(Non-GAAP)

     41.8 38.8  41.6 38.6

Net cash provided by operating activities (GAAP)

  $215  $128  $492  $416   $213  $166  $366  $277 

(Deductions) or additions to reconcile to Adjusted free cash flow:

     

Deductions to reconcile to Adjusted free cash flow:

     

Additions of long-lived assets

   (20 (14  (40 (36   (19 (12  (29 (20

Stockholder activism expenses (g)

   —     —     —    4 

Excess tax benefit from stock-based compensation (h)

   —    1   —    1 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Adjusted free cash flow(Non-GAAP)

  $195  $115  $452  $385   $194  $154  $337  $257 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

 

(a)Represents employee stocka charge (recorded in Cost of sales) related to a retirement incentive program for certain employees represented by the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (“UAW”) pursuant to the UAW Local 933 collective bargaining agreement effective through November 2023.
(b)Represents stock-based compensation expense (recorded in Cost of sales, Selling, general and administrative, and Engineering – research and development).
(b)Represents an adjustment (recorded in Selling, general and 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.
(c)Represents losses (gains) (recorded in Other income (expense) income,, net) on intercompany financing transactions related to investments in plant assets for our India facility.

(d)Represents a charge (recorded in Other income (expense) income,, net) for investments inco-development agreements to expand our position in transmission technologies.

21


(e)Represents expenses related to the refinancing of ATI’s, our wholly-owned subsidiary, Senior Secured Credit Facility in the third quarter of 2016.
(f)Represents unrealized gainslosses (recorded in Other income (expense) income,, net) on themark-to-market of our commodity hedge contracts.
(g)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.
(h)Represents the amount of tax benefit (recorded in Income tax expense) related to stock-based compensation adjusted from cash flows from operating activities to cash flows from financing activities.

22


Results of Operations

Comparison of three months ended SeptemberJune 30, 20172018 and 20162017

The following table sets forth certain financial information for the three months ended SeptemberJune 30, 20172018 and 2016.2017. The following table and discussion should be read in conjunction with the information contained in our condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form10-Q.

 

                                                                                
  Three months ended September 30,   Three months ended June 30, 
(unaudited, dollars in millions)  2017   %
of net sales
 2016   %
of net sales
   2018   %
of net sales
 2017   %
of net sales
 

Net sales

  $595    100 $434    100  $711    100 $580    100

Cost of sales

   293    49  230    53    337    47   290    50 
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Gross profit

   302    51  204    47    374    53   290    50 

Operating expenses:

              

Selling, general and administrative expenses

   78    13  79    18 

Selling, general and administrative

   93    13   88    15 

Engineering — research and development

   26    5  21    5    33    5   25    4 
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total operating expenses

   104    18  100    23    126    18   113    19 
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Operating income

   198    33  104    24    248    35   177    31 

Interest expense, net

   (26   (4 (22   (5   (30   (4  (27   (5

Expenses related to long-term debt refinancing

   —      —    (12   (3

Other (expense) income, net

   (2   —    1    —   

Other income (expense), net

   4    1   (4   (1
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Income before income taxes

   170    29  71    16    222    32   146    25 

Income tax expense

   (59   (10 (26   (6   (48   (7  (51   (9
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Net income

  $111    19 $45    10  $174    25 $95    16
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Net sales

Net sales for the quarter ended SeptemberJune 30, 20172018 were $595$711 million compared to $434$580 million for the quarter ended SeptemberJune 30, 2016,2017, an increase of 37%23%. The increase was principally driven by a $58$33 million, or 26%24%, increase in net sales in the Service Parts, Support Equipment and Other end market principally driven by higher demand for global service parts and support equipment, a $29 million, or 9%, increase in net sales in the North AmericaOn-Highway end market principally driven by higher demand for Rugged Duty Series and Highway Series models, a $43 million, or 45%, increase in net sales in the Service Parts, Support Equipment and Other end market principally driven by higher demand for North AmericaOff-Highway service parts, globalOn-Highway service parts and global support equipment, a $16$26 million increase in net sales in the North AmericaOff-Highway end market principally driven by higher demand from hydraulic fracturing applications, a $12 million increase in net sales in the Outside North AmericaOff-Highway end market principally driven by improved demand in the mining and energy sectors, an $11$16 million, or 14%19%, increase in net sales in the Outside North AmericaOn-Highway end market principally driven by higher demand in Asia and Europe, an $11a $14 million increase in net sales in the Outside North America Electric Hybrid-Propulsion Systems for Transit BusOff-Highway end market principally driven by higher demand in the timing of certain transit property orders,energy, mining and construction sectors and a $10$13 million, or 40%43%, increase in net sales in the Defense end market principally driven by higher Tracked and Wheeled demand.

Cost of sales

Cost of sales for the quarter ended SeptemberJune 30, 20172018 was $293$337 million compared to $230$290 million for the quarter ended SeptemberJune 30, 2016,2017, an increase of 27%16%. The increase was principally driven by increased direct material costs and manufacturing expenses commensurate with increased net sales and $2 million of higher incentive compensation expense.unfavorable material costs.

Gross profit

Gross profit for the quarter ended SeptemberJune 30, 20172018 was $302$374 million compared to $204$290 million for the quarter ended SeptemberJune 30, 2016,2017, an increase of 48%29%. The increase was principally driven by $101$85 million related to increased net sales and $7$5 million of price increases on certain products, partially offset by $4 million of unfavorable material costs, $4 million of increasedhigher manufacturing expenseexpenses commensurate with increased net sales, and $2$3 million of higher incentive compensation expense.unfavorable material costs. Gross profit as a percent of net sales for the quarter was higher than forthree months ended June 30, 2018 increased 260 basis points compared to the same period in 20162017 principally driven by favorableincreased net sales volume and price increases on certain products, partially offset by unfavorable material costs and higher incentive compensation expense.costs.

23


Selling, general and administrative

Selling, general and administrative expenses for the quarter ended SeptemberJune 30, 20172018 were $78$93 million compared to $79$88 million for the quarter ended SeptemberJune 30, 2016, a decrease2017, an increase of 1%6%. The decreaseincrease was principally driven by $3$8 million of favorablehigher product warranty adjustments and $3 million of favorable DPIM adjustments,expense commensurate with increased net sales, partially offset by increased commercial activities spending and $2 million of higherlower incentive compensation expense.

Engineering — research and development

Engineering expenses for the quarter ended SeptemberJune 30, 20172018 were $26$33 million compared to $21$25 million for the quarter ended SeptemberJune 30, 2016,2017, an increase of 24%32%. The increase was principally driven by increased product initiatives spending and $2 million of higher incentive compensation expense.spending.

Interest expense, net

Interest expense, net for the quarter ended SeptemberJune 30, 20172018 was $26$30 million compared to $22$27 million for the quarter ended SeptemberJune 30, 2016,2017, an increase of 18%11%. The increase was principally driven by $12$5 million of higher interest expense for ATI’s 5.0%4.75% Senior Notes due September 2024October 2027 (“5.0%4.75% Senior Notes”) that were issued in September 2016, $12017, partially offset by $2 million of 2017 interest expense related to revolving loans outstanding on our Revolving Credit Facility and $1 million of higher interest expensethat did not recur in 2018 for our interest rate derivatives that became effectivewere terminated in August 2016, partially offset by $10 million of lower interest expense as a result of debt repayments related to ATI’s TermB-3 Loan, $1 million of favorablemark-to-market adjustments for our interest rate derivatives and $1 million of lower amortization of deferred financing fees.

Expenses related to long-term debt refinancing

In September 2016, we refinanced our Senior Secured Credit Facility, resulting in aone-time expense of $12 million for the three months ended September 30, 2016.December 2017.

Other income (expense) income,, net

Other income (expense) income,, net for the quarter ended SeptemberJune 30, 20172018 was ($2)$4 million compared to $1($4) million for the quarter ended SeptemberJune 30, 2016.2017. The change in Other (expense) income, net was principally driven by $2$4 million of 2017 losses on intercompany financing, $1net periodic benefit credits related to post-retirement benefit plan amendments, $3 million of 2016 gains on intercompany financing and $1 million of higher foreign exchange losses, partially offset by $1 million of 20162017 technology-related investment expense for investments inco-development agreements to expand our position in transmission technologies.technologies that did not recur in 2018 and $1 million of lower losses on foreign exchange on intercompany financing.

Income tax expense

Income tax expense for the quarterthree months ended SeptemberJune 30, 20172018 was $59$48 million, resulting in an effective tax rate of 35% versus22%, compared to $51 million of income tax expense and an effective tax rate of 37%35% for the quarterthree months ended SeptemberJune 30, 2016.2017. The decrease in the effective tax rate was principally driven by increasedthe U.S. income tax deductionsTax Cuts and discrete activity related to excess tax benefit from stock-based compensation.Jobs Act enacted into law in December 2017.

24


Comparison of ninesix months ended SeptemberJune 30, 20172018 and 20162017

The following table sets forth certain financial information for the ninesix months ended SeptemberJune 30, 20172018 and 2016.2017. The following table and discussion should be read in conjunction with the information contained in our condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form10-Q.

 

                                                                                
  Nine months ended September 30,   Six months ended June 30, 
(unaudited, dollars in millions)  2017   %
of net sales
 2016   %
of net sales
   2018   %
of net sales
 2017   %
of net sales
 

Net sales

  $1,674    100 $1,371    100  $1,374    100 $1,079    100

Cost of sales

   831    50  725    53    658    48   538    50 
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Gross profit

   843    50  646    47    716    52   541    50 

Operating expenses:

              

Selling, general and administrative expenses

   245    15  240    17 

Selling, general and administrative

   185    14   167    16 

Engineering — research and development

   74    4  64    5    61    4   48    4 
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total operating expenses

   319    19  304    22    246    18   215    20 
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Operating income

   524    31  342    25    470    34   326    30 

Interest expense, net

   (78   (5 (84   (6   (60   (4  (52   (5

Expenses related to long-term debt refinancing

   —      —    (12   (1

Other (expense) income, net

   (3   —    1    —   

Other income (expense), net

   3    —     (1   —   
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Income before income taxes

   443    26  247    18    413    30   273    25 

Income tax expense

   (154   (9 (93   (7   (88   (6  (95   (9
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Net income

  $289    17 $154    11  $325    24 $178    16
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Net sales

Net sales for the ninesix months ended SeptemberJune 30, 20172018 were $1,674$1,374 million compared to $1,371$1,079 million for the ninesix months ended SeptemberJune 30, 2016,2017, an increase of 22%27%. The increase was principally driven by a $123$93 million, or 46%, increase in net sales in the Service Parts, Support Equipment and Other end market principally driven by higher demand for North America service parts and global support equipment, a $91 million, or 12%16%, increase in net sales in the North AmericaOn-Highway end market principally driven by higher demand for Rugged Duty Series and Highway Series models, a $24$66 million, or 11%26%, increase in net sales in the Outside North AmericaOn-HighwayService Parts, Support Equipment and Other end market principally driven by higher demand in Asiafor global service parts and Europe,support equipment, a $22 million increase in net sales in the Outside North AmericaOff-Highway end market principally driven by higher demand in the mining and energy sectors, a $16$58 million increase in net sales in the North AmericaOff-Highway end market principally driven by higher demand from hydraulic fracturing applications, a $14$35 million, or 18%22%, increase in net sales in the Outside North AmericaOn-Highway end market principally driven by higher demand in Europe and Asia, a $23 million, or 40%, increase in net sales in the Defense end market principally driven by higherTracked and Wheeled demand, and a $13$20 million or 32%, increase in net sales in the Outside North America Electric Hybrid-Propulsion Systems for Transit BusOff-Highway end market principally driven by higher demand in the timing of certain transit property orders.energy, mining and construction sectors.

Cost of sales

Cost of sales for the ninesix months ended SeptemberJune 30, 20172018 was $831$658 million compared to $725$538 million for the ninesix months ended SeptemberJune 30, 2016,2017, an increase of 15%22%. The increase was principally driven by increased direct material costs and manufacturing expenses commensurate with increased net sales, expenses of $7 million related to a retirement incentive program for certain UAW Local 933 employees and $9 million of higher incentive compensation expense.unfavorable material costs.

Gross profit

Gross profit for the ninesix months ended SeptemberJune 30, 20172018 was $843$716 million compared to $646$541 million for the ninesix months ended SeptemberJune 30, 2016,2017, an increase of 30%32%. The increase was principally driven by $184$188 million related to increased net sales and $29$11 million of price increases on certain products, partially offset by $9$12 million of higher manufacturing expenses commensurate with increased net sales, expenses of $7 million due to a retirement incentive compensation expense, $5program for certain UAW Local 933 employees, and $6 million of unfavorable material costs, and $2 million of higher manufacturing expense commensurate with increased net sales.costs. Gross profit as a percent of net sales for the ninesix months ended SeptemberJune 30, 2017 was higher than for2018 increased 200 basis points compared to the same period in 20162017 principally driven by increased net sales volume and price increases on certain products, partially offset by higherexpenses for the retirement incentive compensation expenseprogram and unfavorable material costs.

25


Selling, general and administrative

Selling, general and administrative expenses for the ninesix months ended SeptemberJune 30, 20172018 were $245$185 million compared to $240$167 million for the ninesix months ended SeptemberJune 30, 2016,2017, an increase of 2%11%. The increase was principally driven by $13 million of higher incentive compensationproduct warranty expense commensurate with increased net sales, $8 million of unfavorable product warranty adjustments and $2 million of higher stock-based compensation expense and increased commercial activities spending, partially offset by $7 million of favorable 2017 product warranty adjustments $4 million of stockholder activism expenses in 2016 that did not recur in 2017 and2018, partially offset by $4 million of favorable DPIM adjustments.lower incentive compensation expense and decreased commercial activities spending.

Engineering — research and development

Engineering expenses for the ninesix months ended SeptemberJune 30, 20172018 were $74$61 million compared to $64$48 million for the ninesix months ended SeptemberJune 30, 2016,2017, an increase of 16%27%. The increase was principally driven by $5 million of higher incentive compensation expense and increased product initiatives spending.

Interest expense, net

Interest expense, net for the ninesix months ended SeptemberJune 30, 20172018 was $78$60 million compared to $84$52 million for the ninesix months ended SeptemberJune 30, 2016, a decrease2017, an increase of 7%15%. The decreaseincrease was principally driven by $35 million of lower interest expense as a result of debt repayments related to ATI’s TermB-3 Loan, $21 million of favorablemark-to-market adjustments for our interest rate derivatives and $2 million of lower deferred financing fees, partially offset by $37$10 million of interest expense for ATI’s 5.0%4.75% Senior Notes that were issued in September 2016, $92017, partially offset by $2 million of higher2017 interest expense that did not recur in 2018 for our interest rate derivatives that became effectivewere terminated in August 2016 and $4 million of interest expense related to revolving loans outstanding on our Revolving Credit Facility.

Expenses related to long-term debt refinancing

In September 2016, we refinanced our Senior Secured Credit Facility, resulting in aone-time expense of $12 million for the nine months ended September 30, 2016.December 2017.

Other income (expense) income,, net

Other income (expense) income,, net for the ninesix months ended SeptemberJune 30, 20172018 was ($3)$3 million compared to $1 million($1) for the ninesix months ended SeptemberJune 30, 2016.2017. The change in Other income (expense) income,, net was principally driven by $2$6 million of highernet periodic benefit credits related to post-retirement benefit plan amendments and $3 million of 2017 technology-related investment expense for investments inco-development agreements to expand our position in transmission technologies $1that did not recur in 2018, partially offset by $3 million of higherunfavorable foreign exchange losseson intercompany financing and $1 million of higher losseslower gains on intercompany financing.commodity hedging.

Income tax expense

Income tax expense for the ninesix months ended SeptemberJune 30, 20172018 was $154$88 million resulting in an effective tax rate of 35% versus21%, compared to $95 million of income tax expense and an effective tax rate of 38%35% for the ninesix months ended SeptemberJune 30, 2016.2017. The decrease in the effective tax rate was principally driven by increasedthe U.S. income tax deductionsTax Cuts and discrete activity related to excess tax benefit from stock-based compensation.Jobs Act enacted into law in December 2017.

26


Liquidity and Capital Resources

We generate cash primarily from our operating activities to fund our operating, investing and financing activities. Our principal uses of cash are operating expenses, capital expenditures, debt service, stock repurchases, dividends on common stock and working capital needs. We had total available cash and cash equivalents of $210$96 million and $205$199 million as of SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively. Of the available cash and cash equivalents, approximately $210$94 million and $124$149 million were deposited in operating accounts as of September 30, 2017while $2 million and December 31, 2016, respectively, while approximately $81$50 million were invested in U.S. government backed securities as of June 30, 2018 and December 31, 2016.2017, respectively.

As of SeptemberJune 30, 2017,2018, the total of cash and cash equivalents held by foreign subsidiaries was $71$55 million, the majority of which was located in Europe and China. The geographic location of our cash aligns with our business growth strategy. We manage our worldwide cash requirements considering available funds among the subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. As a result, we do not currently anticipate any local liquidity restrictions towill preclude us from funding our targeted expectations or operating needs with local resources.

If we distribute our foreign cash balancebalances to the U.S. or to other foreign subsidiaries, we could be required to accrue and pay U.S. taxes. For example, we would be required to accrue and pay additional U.S. taxes if we repatriate earnings from certain foreign subsidiaries whose earnings we have asserted are permanently reinvested outsideAs a result of the U.S. ForeignTax Cuts and Jobs Act, we recorded a charge of $5 million in 2017 for theone-time repatriation tax to be paid to the U.S. Government. We also recorded a deferred tax liability of $2 million in 2017 for the tax liability associated with the remittance of previously taxed income and unremitted earnings for which we assert permanent reinvestment outside the U.S. consist primarily ofour subsidiaries located in China. The deferred tax liabilities related to unremitted earnings of our Europe and China subsidiaries. We currently dothat are indefinitely reinvested are not foresee a need to repatriate any earnings from these subsidiaries for which we have asserted permanent reinvestment.material.

Our liquidity requirements are significant, primarily due to our debt service requirements. As of SeptemberJune 30, 2017,2018, we had $1,179$1,148 million of indebtedness associated with ATI’s TermB-3 Loan, $1,000 million of indebtedness associated with ATI’s 5.0% Senior Notes due 2024 (“5.0% Senior Notes”) and $400 million of indebtedness associated with ATI’s 4.75% Senior Notes due October 2027 (“4.75% Senior Notes”).Notes. The minimum required quarterly principal payment on ATI’s TermB-3 Loan through its maturity date of September 2022 is $3 million.million; however, we made voluntary prepayments of the required quarterly principal payments of $25 million during the quarter ended June 30, 2018. There are no required quarterly principal payments on ATI’s 5.0% Senior Notes and 4.75% Senior Notes.

Our ability to make payments on and to refinance our indebtedness, and to fund planned capital expenditures and growth initiatives will depend on our ability to generate cash in the future. This is subject to general economic, financial, competitive, legislative, regulatory and other factors that may be beyond our control. We made principal payments of $293$25 million and $424$28 million on the Senior Secured Credit Facility during the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively. We made principal payments of $1,200$73 million and $1,212$131 million on the Senior Secured Credit Facility during the three months and ninesix months ended SeptemberJune 30, 2016,2017, respectively.

The Senior Secured Credit Facility provides for a $550 million Revolving Credit Facility, net of an allowance for up to $75 million in outstanding letters of credit commitments. Throughout the nine months ended September 30, 2017, we made periodic withdrawals and payments on the Revolving Credit Facility as part of our debt management plans. The maximum amount outstanding at any time during the nine months ended September 30, 2017 on the Revolving Credit Facility was $300 million. As of SeptemberJune 30, 2017,2018, we had $533 million available under the Revolving Credit Facility, net of $17 million in letters of credit. As of SeptemberJune 30, 2017,2018, we had no amounts outstanding revolving loans outstanding.under the Revolving Credit Facility. If we have revolving loan commitments outstanding on the Revolving Credit Facility at the end of a fiscal quarter, the Senior Secured Credit Facility requires us to maintain a specified maximum total senior secured leverage ratio of 5.50x. Additionally, within the terms of the Senior Secured Credit Facility, a senior secured leverage ratio at or below 4.00x results in the elimination of excess cash flow payments on the Senior Secured Credit Facility for the applicable year. As of SeptemberJune 30, 2017,2018, our senior secured leverage ratio was 1.19x.1.03x. The Senior Secured Credit Facility also provides certain financial incentives based on our total leverage ratio. A total leverage ratio at or below 4.00x results in a 25 basis point reduction to the applicable margin on our Revolving Credit Facility, and a total leverage ratio at or below 3.50x results in a 12.5 basis point reduction to the Revolving Credit Facility commitment fee and an additional 25 basis point reduction to the applicable margin on our Revolving Credit Facility. These reductions would remain in effect as long as we achieve a total leverage ratio at or below the related threshold. As of SeptemberJune 30, 2017,2018, our total leverage ratio was 2.90x.2.40x.

27


In addition, the Senior Secured Credit Facility includes, among other things, customary restrictions (subject to certain exceptions) on our ability to incur certain indebtedness, grant certain liens, make certain investments, declare or pay certain dividends, orand repurchase shares of our common stock. The indentures governing the 5.0% Senior Notes and 4.75% Senior Notes contain negative covenants restricting or limiting our ability to, among other things, incur or guarantee additional indebtedness, incur liens, pay dividends on, redeem or repurchase our capital stock, make certain investments, permit payment or dividend restrictions on certain of our subsidiaries, sell assets, engage in certain transactions with affiliates, and consolidate or merge or sell all or substantially all of our assets. As of SeptemberJune 30, 2017,2018, we are in compliance with all covenants under the Senior Secured Credit Facility and indentures governing the 5.0% Senior Notes and 4.75% Senior Notes.

Our credit ratings are reviewed by Moody’s Investors Service (“Moody’s”) and Fitch Ratings (“Fitch”). In September 2017, our credit ratings were reviewed by Moody’s and Fitch. Moody’s held our corporate rating at ‘Ba2’ and our 5.0% Senior Notes rating at ‘Ba3’, upgraded our TermB-3 Loan rating to ‘Baa3’, and assigned ‘Ba3’ to the 4.75% Senior Notes. Fitch held our corporate rating at ‘BB’, our TermB-3 Loan rating at ‘BB+’, and our 5.0% Senior Notes rating at ‘BB’ and assigned ‘BB’ to the 4.75% Senior Notes.

On November 14, 2016, our Board of Directors authorized us to purchase up to $1,000 million of our common stock under a stock repurchase program. DuringOn November 8, 2017 our Board of Directors increased the authorization by $500 million, bringing the total amount authorized to $1,500 million. For the three and ninesix months ended SeptemberJune 30, 2017,2018, we repurchased approximately $239$244 million and $778$370 million, respectively, of our common stock under the repurchase program. As of June 30, 2018 we had $184 million available under the repurchase program.

The following table shows our sources and uses of funds for the ninesix months ended SeptemberJune 30, 20172018 and 20162017 (in millions):

 

  Nine months ended September 30,   Six months ended June 30, 
Statements of Cash Flows Data  2017   2016   2018   2017 

Cash flows provided by operating activities

  $492   $416   $366   $277 

Cash flows used for investing activities

  $(43  $(37   (29  $(23

Cash flows used for financing activities

  $(447  $(466   (439  $(376

Generally, cash provided by operating activities has been adequate to fund our operations. Due to fluctuations in our cash flows and the growth in our operations, it may be necessary from time to time in the future to borrow under the Senior Secured Credit Facility to meet cash demands. We anticipate cash provided by operating activities, cash and cash equivalents and borrowing capacity under the Senior Secured Credit Facility will be sufficient to meet our cash requirements for the next twelve months.

Cash provided by operating activities

Operating activities for the ninesix months ended SeptemberJune 30, 20172018 generated $492$366 million of cash compared to $416$277 million for the ninesix months ended SeptemberJune 30, 2016.2017. The increase was principally driven by increased gross profit and higher accounts payable, and higher deferred revenue, partially offset by increased defined benefit pension plans funding payments, increased product initiatives spending, higher accounts receivable, increased cash income taxes, higher inventories, increased cash interest expense and increased incentive compensation payments.

Cash used for investing activities

Investing activities for the ninesix months ended SeptemberJune 30, 20172018 used $43$29 million of cash compared to $37$23 million for the ninesix months ended SeptemberJune 30, 2016.2017. The increase was principally driven by an increase of $4$9 million in capital expenditures, and an increasepartially offset by $3 million of $2 million in technology-related initiatives.decreased spending on technology related investments. The increase in capital expenditures was principally driven by intra-year movement in the timing of spending related to investments in productivity and replacement programs and higher product initiatives spending.programs.

Cash used for financing activities

Financing activities for the ninesix months ended SeptemberJune 30, 20172018 used $447$439 million of cash compared to $466$376 million for the ninesix months ended SeptemberJune 30, 2016.2017. The decreaseincrease was principally driven by $603$205 million of decreased net borrowings under our revolving credit facility, $22 million of increased netpayments on long-term debt borrowings, $14and $6 million of lower debt financing fees, $8decreased proceeds from stock issued upon the exercise of stock options, partially offset by $169 million of lower dividend paymentsdecreased stock repurchases and $5 million of increased proceeds from common stock issuance, partially offset by $609 million of increased repurchases of common stock.decreased dividend payments.

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Contingencies

We are a party to various legal actions and administrative proceedings and subject to various claims arising in the ordinary course of business, including those relating to commercial transactions, product liability, personal injury and workers’ compensation, safety, health, taxes, environmental and other matters. For more information, see NOTE N,O, “Commitments and Contingencies” of our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form10-Q.

Critical Accounting Policies and Significant Accounting Estimates

A discussion of our critical accounting policies and significant accounting estimates are describedis included in Part II, Item 7 “Management’s Discussion and Analysis” section in our Annual Report on Form10-K for the year ended December 31, 20162017 as filed with the Securities and Exchange Commission on February 24, 2017.15, 2018. The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of some assets and liabilities and, in some instances, the reported amounts of revenues and expenses during the applicable reporting period. 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. Within the context of these critical accounting estimates, we are not currently aware of any reasonably likely events or circumstances that would result in different policies or estimates being reported for the ninesix months ended SeptemberJune 30, 2017.2018.

Off-Balance Sheet Arrangements

We are not a party to anyoff-balance sheet arrangements.

Recently Issued Accounting Pronouncements

Refer toSee NOTE B, “Summary of Significant Accounting Policies” in Part I, Item 1, of this Quarterly Report on Form10-Q.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form10-Q contains forward-looking statements. The words “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Althoughforward-looking statements reflect management’s good faith beliefs, reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by suchforward-looking statements. Forward-looking statements speak only as of the date the statements are made. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to: risks related to our substantial indebtedness; uncertainty in the global regulatory and business environments in which we operate; our participation in markets that are competitive; the highly cyclical industries in which certain of our end users operate; uncertainty in the global regulatory and business environments in which we operate; the failure of markets outside North America to increase adoption of fully-automatic transmissions; the concentration of our net sales in our top five customers and the loss of any one of these; future reductions or changes in government subsidiesour ability to prepare for, hybrid vehiclesrespond to and other external factors impacting demand;successfully achieve our objectives relating to technological and market developments, competitive threats and changing customer needs; U.S. and foreign defense spending; general economic and industry conditions; increases in cost, disruption of supply or shortage of raw materials or components used in our products; the discovery of defects in our products, resulting in delays in new model launches, recall campaigns and/or increased warranty costs and reduction in future sales or damage to our brand and reputation; our ability to prepare for, respond to and successfully achieve our objectives relating to technological and market developments, competitive threats and changing customer needs; risks associated with our international operations;operations, including increased trade protectionism; future reductions or changes in government subsidies for hybrid vehicles and other external factors impacting demand; labor strikes, work stoppages or similar labor disputes, which could significantly disrupt our operations or those of our principal customers; and our intention to pay dividends and repurchase shares of our common stock.

Important factors that could cause actual results to differ materially from our expectations are disclosed in Part I, Item 1A of our Annual Report on Form10-K for the year ended December 31, 20162017 as filed with the Securities and Exchange Commission on February 24, 2017.15, 2018. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by thethese cautionary statements as well as other cautionary statements that are made from time to time in our public communications. You should evaluate all forward-looking statements made in this Quarterly Report on Form10-Q in the context of these risks and uncertainties.

29


 

 

ITEM 3.Quantitative and Qualitative Disclosures About Market Risk

 

 

Our exposure to market risk consists of changes in interest rates, foreign currency rate fluctuations and movements in commodity prices.

Interest Rate Risk

We are subject to interest rate market risk in connection with a portion of our long-term debt. Our principal interest rate exposure relates to outstanding amounts under our Senior Secured Credit Facility. Our Senior Secured Credit Facility provides for variable rate borrowings of up to $1,712$1,681 million including $533 million under our Revolving Credit Facility, net of $17 million of letters of credit. Aone-eighth percent increase or decrease in assumed interest rates for the Senior Secured Credit Facility, if fully drawn, as of SeptemberJune 30, 20172018 would have an impact of approximately $1$2 million on interest expense. As of SeptemberJune 30, 2017,2018, we had no outstanding borrowings under our Revolving Credit Facility.

From time to time, we enter into interest rate swap agreements to hedge our variable interest rate debt. Below is a listAs of ourJune 30, 2018, we held interest rate swaps aseffective from September 2019 to September 2022 with notional values totaling $250 million and a weighted average LIBOR fixed rate of 3.01% and interest rate swaps effective from September 30, 2017:

   Counterparty  Effective Date  Notional
Amount

(in millions)
   LIBOR Fixed
Rate
 

Interest Rate Swap L*

  Barclays  Aug 2016-Aug 2019  $75    3.44

Interest Rate Swap M*

  JP Morgan  Aug 2016-Aug 2019  $100    3.43

Interest Rate Swap N*

  Bank of America  Aug 2016-Aug 2019  $75    3.37

Interest Rate Swap O*

  Deutsche Bank  Aug 2016-Aug 2019  $75    3.19

Interest Rate Swap P*

  Barclays  Aug 2016-Aug 2019  $75    3.08

Interest Rate Swap Q*

  Barclays  Aug 2016-Aug 2019  $50    2.99

Interest Rate Swap R*

  Deutsche Bank  Aug 2016-Aug 2019  $50    2.98

Interest Rate Swap S*

  Deutsche Bank  Aug 2016-Aug 2019  $50    2.73

Interest Rate Swap T*

  Bank of America  Aug 2016-Aug 2019  $75    2.74

Interest Rate Swap U*

  Fifth Third Bank  Aug 2016-Aug 2019  $50    2.66

Interest Rate Swap V*

  Fifth Third Bank  Aug 2016-Aug 2019  $50    2.60

Interest Rate Swap W*

  Fifth Third Bank  Aug 2016-Aug 2019  $25    2.40

Interest Rate Swap X*

  Huntington Bank  Aug 2016-Aug 2019  $50    2.25

*  includes LIBOR floor of 1.00%

  

We are exposed2019 to increased interest expense ifSeptember 2025 with notional values totaling $250 million and a counterparty defaults. Refer to NOTE F, “Debt” and NOTE G, “Derivatives”weighted average LIBOR fixed rate of the notes to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form10-Q.3.04%.

Exchange Rate Risk

While our net sales and costs are denominated primarily in U.S. Dollars, net sales, costs, assets and liabilities are generated in other currencies including Japanese Yen, Euro, Indian Rupee, Brazilian Real, Chinese Yuan Renminbi, Canadian Dollar and Hungarian Forint. The expansion of our business outside North America may further increase the risk that cash flows resulting from these activities may be adversely affected by changes in currency exchange rates.

Assuming current levels of foreign currency transactions, a 10% aggregate increase or decrease in the Japanese Yen, Euro, Indian Rupee and Chinese Yuan Renminbi would correspondingly change our earnings, net of tax, by an estimated $3$7 million per year. AllWe believe other exposure to foreign currencies is considered immaterial.

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Commodity Price Risk

We are subject to changes in our cost of sales caused by movements in underlying commodity prices. Approximatelytwo-thirds 70% of our cost of sales consists of purchased components with significant raw material content. A substantial portion of the purchased parts are made of aluminum and steel. The cost of aluminum parts includeincludes an adjustment factor on future purchases for fluctuations in aluminum prices based on accepted industry indices. In addition, a substantial amount of steel-based contracts also include an index-based component. As our costs change, we are able to pass through a portion of the changes in commodity prices to certain of our customers according to our LTSAs. We historically have not entered into long-term purchase contracts related to the purchase of aluminum and steel. We currently hold commodity swaps that are intended to hedge forecasted aluminum purchases. Based on our forecasted demand for 2017 and 2018, as of September 30, 2017, the hedge contracts cover approximately 21% and 0% of our aluminum requirements, respectively. We do not hold financial instruments for trading or speculative purposes.

Assuming current levels of commodity purchases, a 10% increase or decreasevariation in the price of aluminum and steel would correspondingly change our earnings net of tax, by approximately $2$4 million and $5$7 million per year, respectively. This includes the partial offset of our hedging contracts described above.

Many of our LTSAs have incorporated a cost-sharing arrangement related to potential future commodity price fluctuations. Our hedging policy is that we hedge our exposure and do not hedge any portion of the customers’ exposure. For purposes of the sensitivity analysis above, the impact of these cost sharing arrangements has not been included.

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ITEM 4.Controls and Procedures

 

 

Evaluation of Disclosure Controls and Procedures

Our 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 Rules13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. 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 the end of the period covered by this Quarterly Report on Form10-Q 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 Commission 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.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules13a-15(f) and15d-15(f) under the Exchange Act) during the period covered by this Quarterly Report on Form10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

 

 

Item 1. Legal Proceedings

From time to time, we are a party to various legal actions in the normal course of our business, including those related to commercial transactions, product liability, personal injury and workers’ compensation, safety, health, taxes, environmental and other matters. See NOTE N,O, “Commitments and Contingencies” in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form10-Q.

Item 1A. Risk Factors

There have been no material changes from our risk factors as previously reported in Part I, Item 1A of our Annual Report on Form10-K for the year ended December 31, 20162017 as filed with the Securities and Exchange Commission on February 24, 2017.15, 2018.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information related to our repurchases of our common stock on a monthly basis forin the three months ended SeptemberJune 30, 2017:2018:

 

   Total Number
of Shares
Purchased
   Average Price
Paid per
Share
   Total Number of
Shares
Purchased
as Part of
Publicly
Announced Plans
or Programs(1)
   Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under Plans(1)
 

July 1 – July 31, 2017

   1,995,937   $37.80    1,995,937   $323,609,815 

August 1 – August 31, 2017

   1,868,672   $35.26    1,868,672   $257,716,837 

September 1 – September 30, 2017

   2,795,216   $34.96    2,795,216   $160,005,528 
  

 

 

     

 

 

   

Total

   6,659,825   $35.89    6,659,825   
  

 

 

     

 

 

   
   Total Number
of Shares
Purchased
   Average Price
Paid per
Share
   Total Number of
Shares
Purchased
as Part of
Publicly
Announced Plans
or Programs(1)
   Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under Plans(1)
 

April 1– April 30, 2018

   1,834,031   $39.69    1,834,031   $355,703,596 

May 1 – May 31, 2018

   2,045,794   $41.91    2,045,794   $269,959,884 

June 1 – June 30, 2018

   2,074,917   $41.33    2,074,917   $184,196,011 
  

 

 

     

 

 

   

Total

   5,954,742   $41.03    5,954,742   
  

 

 

     

 

 

   

 

(1) These values reflect repurchases made under the stock repurchase program approved by the Board of Directors on November 14, 2016 and the update approved by the Board of Directors on November 8, 2017 authorizing $1,000total repurchases of $1,500 million of repurchases through December 31, 2019.

 

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Item 6. Exhibits

Item 6.Exhibits

(a) Exhibits

 

Exhibit
Number

  

Description

  4.1Indenture, dated as of September  26, 2017, between Allison Transmission, Inc. and Wilmington Trust, National Association, as Trustee (including form of Note) (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form8-K filed September 26, 2017)
  10.1Incremental Facility Joinder Agreement, dated as of September  26, 2017, supplementing the Amended and Restated Credit Agreement, dated as of 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 and Citicorp North America, Inc., as Administrative Agent (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form8-K filed September 26, 2017)
31.1  Certification of Chief Executive Officer pursuant to Rule13a-14(a)/15d-14(a) as adopted pursuant to Section  302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2  Certification of Chief Financial Officer pursuant to Rule13a-14(a)/15d-14(a) as adopted pursuant to Section  302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1  Certification of Periodic Report by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
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

34


SIGNATURES

Pursuant to the requirements 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.
Date: OctoberJuly 31, 2017By:

/s/ Lawrence E. Dewey

Name:Lawrence E. Dewey
Title:

Chairman of the Board and Chief Executive Officer

(Principal Executive Officer)

Date: October 31, 20172018  By: 

/s/ David S. Graziosi

   Name: David S. Graziosi
   Title: 

President and Chief FinancialExecutive Officer

(Principal Executive Officer)

Date: July 31, 2018By:

/s/ G. Frederick Bohley

Name:G. Frederick Bohley
Title:Vice President, Chief Financial Officer and

Treasurer (Principal Financial Officer and Principal Accounting Officer)

 

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