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THE
POWER
OF ALLISON
TRANSMISSION
2 017 A N N UA L R E P O R T
DEAR SHAREHOLDERS,
Thanks to solid execution of our strategic imperatives and our management team’s self-disciplined
approach to creating lasting value for our Customers, I am proud to announce 2017 was a noteworthy
year for Allison Transmission.
Looking back at our achievements, we met or exceeded financial performance expectations, improved
our profitability, substantially grew our net sales and made strategic investments in our business. We
also prudently managed our capital structure with opportunistic refinancing activities, repurchased
$885 million of common stock and made payments of quarterly dividends to shareholders. I’m proud
of our team’s performance and the resourcefulness they demonstrated throughout the year
during rapidly changing market conditions.
Full year 2017 results exceeded our initial Net Sales guidance ranges across all of our end markets.
Since becoming a standalone company, we achieved record levels of Net Sales at $2,262
million, a 23 percent increase over 2016. This net sales increase translated into an Adjusted
EBITDA of $868 million, or a 35 percent increase over the previous year. Adjusted Free Cash
Flow for the year was $567 million compared to $530 million in 2016.
Allison Transmission is a well-balanced commercial, defense, and engineering-based propulsion
solution provider. Our strengths are derived from our proven ability to leverage our most
valuable assets—our people, our technology, our manufacturing capabilities and our unrelenting
focus on creating value for our Customers.
Lawrence E. Dewey, Chairman and CEO
I am also proud to report that Allison realized its second consecutive
Allison’s North America on-highway net sales increased 15 percent
year of double-digit growth in the Outside North America
while the electric hybrid propulsion systems for transit bus delivered
on-highway end market.
an impressive 16 percent year-over-year annual net sales increase.
SIGNIFICANT OPERATING HIGHLIGHTS
On the defense side of our business, the U.S. Department of
Allison serves a wide variety of end markets in various geographies,
Defense began its low-rate production ramp-up for the Joint Light
all of which produced year-over-year net sales increases during 2017.
Tactical Vehicle (JLTV). JLTVs are replacing a portion of the Humvees
Collectively, we have consistently articulated our strategic priorities
used by the U.S. Army and Marine Corps. These vehicles incorporate
of global market leadership expansion, emerging market penetration
the Allison 2500 rugged duty transmission. A total of 17,000
and product development focused on value propositions that
vehicles are currently expected to be produced over five years.
address the challenges of improved fuel economy and reduced
greenhouse gases—all while delivering solid performance.
I am also pleased to report the demand for Allison’s service parts,
support equipment and other services produced record setting
On a global basis, we saw increased demand for our new 9800
net sales in 2017. Due to the hard work and attention to detail
Oil Field Series™ transmissions during the year. These products were
of the men and women who receive, fill and ship Customer orders
developed as the result of our close and longtime relationships
from our Parts Distribution Center, we were still able to meet
with energy and mining companies. We anticipated our Customers’
overall quality and availability metrics. It was a job well done.
needs for more robust, durable, high-pressure pumping transmissions.
The strength of our new product’s early sales is an indication that
the decision to develop and launch the 9800 Oil Field Series family
of products was correct.
One aspect of our North American on-highway business that did
not meet expectations was the sales volumes for our TC10™
product for Class 8 tractors. While we continue to expand our
ALLISON TRANSMISSION / 2017 ANNUAL REPORT
Original Equipment Manufacturer (OEM) releases, secure new end
NEW PRODUCT INTRODUCTIONS FOR 2017
user Customers, and while end users are re-purchasing the TC10 in
It’s important to note that our engineers and researchers are
increasing quantities, we have not achieved the targeted volumes.
maintaining momentum with the organic growth of our product
OUR PAST PREPARES US FOR THE FUTURE
Allison’s addressable market has always been a complex application
space due to vocational vehicle fragmentation requiring a wide
range of propulsion solutions where Allison is the natural supplier.
portfolio. Last fall, we publicly announced our first 9-speed fully
automatic transmission for medium- and heavy-duty vehicles.
A few key benefits of this new transmission include further
improvements to fuel economy and drivability, engine stop-start
capabilities, and OEM greenhouse gas regulation credits. Pre-
Presently, internal combustion engines are a primary market for
production units are currently undergoing in-vehicle demonstrations
Allison’s commercial products. However, our experience and
at Allison’s research facilities and with OEMs. Allison has also
expertise is far more encompassing. The development and
hosted hands-on demonstration events for several OEMs and I’m
manufacture of the Allison H 40/50 EP™ electric hybrid propulsion
pleased with the results and pace of our development program.
systems for transit bus is nearing almost two decades—to date,
we have sold over 8,000 units. And we continue to develop our
electrification capabilities.
READY FOR THE CHALLENGES AHEAD
I realize our employees are our company’s key differentiator in an
increasingly competitive environment. As the generations who
In 2017, Volkswagen unveiled its first fully all electric e-Delivery
came before them, our employees come to work with a pride and
truck which is being developed in Brazil. The e-Delivery is an
determination to deliver the very best and I will miss my daily
urban pick-up and delivery vehicle that is expected to be licensed
interactions with them. We’ve focused on strengthening our
in the 8–10 metric ton gross vehicle weight category; it utilizes an
workforce and internal leadership through training and mentoring,
Allison 2100 transmission.
Another example of an Allison product being incorporated into a
in addition to attracting outside talent who bring us critical skills
and expertise as well as new perspectives for the future.
fully electric vehicle is the EMOSS extended range semi-truck (EVER).
With the conclusion of my final full year as Allison Transmission’s
EMOSS unveiled the Allison-equipped EVER semi, based on a DAF
CEO, I genuinely appreciate the leadership opportunity with which
chassis, in November 2017, at the eCarTec exhibition in Munich,
I was entrusted. Going forward, the board of directors and I can
Germany. The vehicle has a range of approximately 300 miles and
confidently report that CEO-elect David S. Graziosi and the Allison
uses an electric generator to recharge its 120 kilowatt-hour
team are positioned and prepared to deliver the performance that
battery pack. EMOSS is also developing Allison equipped electric
our shareholders have come to expect. I am pleased for Allison
trucks for use in construction, delivery and refuse applications.
and all of its stakeholders that Dave will succeed me as CEO.
Allison continues to conduct its own research and development
Sincerely,
on zero emissions propulsion systems, and we are working with
OEMs to explore innovative solutions that will increase operational
Lawrence E. Dewey
Chairman and Chief Executive Officer
Lawrence E. Dewey, Chairman and CEO
David S. Graziosi, President and CFO
efficiencies and lower cost.
LOOKING TOWARD THE FUTURE
Autonomous driving and smart mobility offer realistic opportunities
to further optimize the commercial trucking industry through
“truck platooning.” There are cost advantages to this innovative
system of logistics. However, the fundamentals of successful truck
platooning rely heavily on the vehicles’ communications and
controls—and that’s where Allison has excelled for many years.
Allison’s 5th Generation electronic controls and their proprietary
software have exceeded expectations and we are already working
on future evolutions of these capabilities. Allison intends to play an
important role in this exciting transportation trend. We expect to
be ready to respond with the right products at the right time.
1
ALLISON TRANSMISSION / 2017 ANNUAL REPORT
THE POWER OF ALLISON TRANSMISSION
Allison Transmission is the world’s largest manufacturer of fully
automatic transmissions for medium- and heavy-duty commercial
vehicles and we are recognized for our best-in-class products by an
increasingly demanding Customer base. By our estimates in 2017, we
continue to hold the largest portion of the fully automatic transmission
business in the end markets we serve.
The Allison team never loses sight of those who depend on us. We
know that in many cases it is our dedication to excellence that makes
the difference for both our commercial and defense Customers. We
continue to be proud of our employees, not only for their professionalism,
capabilities and skills, but also for their character and integrity.
Collectively, we are gratified our Customers continue to ask for our
products by name.
THE GROUNDWORK IS IN PLACE TO GROW OUR MARKET SHARE AND DELIVER PERFORMANCE TO ALL OF OUR STAKEHOLDERS.
OUR GOALS FOR 2018 ARE CLEAR:
• Continue to develop innovative products that Customers value
• Grow our market share outside North America
• Continue to build a corporate culture that embraces challenges
and responds quickly to evolving market needs—our Customers’
priorities will be our priorities
• Produce strong financial results
As Allison Transmission’s next Chief Executive Officer, I would like to
acknowledge Larry Dewey’s many years of dedicated service and acting
in the best long-term interests of Allison as being truly exceptional, and
I thank him for it. We all appreciate his work ethic, resilience, creativity
and integrity. Larry Dewey led us through his words and his deeds.
He established standards and performance that separate Allison from
virtually any other industrial enterprise by never accepting that we
are too successful to set another goal or imagine a better reality.
Larry Dewey’s focus will remain our focus—deliver on our commitments
because our success begins and ends with our performance.
David S. Graziosi
President and CFO
2
NORTH AMERICA
The Netherlands—Regional Headquarters
EUROPE
Indianapolis, USA—
Global Headquarters
Manufacturing, Parts Distribution
Center, and Customization Center
Customization Center and/or
Parts Distribution Center
Sales Office
MIDDLE EAST
ASIA
China—
Regional Headquarters
India—
Regional Headquarters
SOUTH AMERICA
Brazil—
Regional Headquarters
THE GROUNDWORK IS IN PLACE TO GROW OUR MARKET SHARE AND DELIVER PERFORMANCE TO ALL OF OUR STAKEHOLDERS.
2017 NET SALES BY END MARKET
49% NA On-Highway
3% Electric Hybrid Transit Bus
2% NA Off-Highway
5% Defense
15% Outside NA On-Highway
2% Outside NA Off-Highway
24% Service Parts, Support Equipment & Other
3
THE POWER OF ALLISON TRANSMISSION > COLLEAGUES PURSUING OUR VISION AND LIVING OUR VALUES.
4
ALLISON TRANSMISSION / 2017 ANNUAL REPORT
NEW PRODUCTS
It’s important to note that our engineers and researchers are
Key features and benefits of the 9-speed include three additional
maintaining their momentum to organically grow our product
transmission gears, improved fuel economy, superior drivability, engine
portfolio. In September 2017, during the North American
stop-start capabilities and OEM greenhouse gas regulation credits.
Commercial Vehicle Tradeshow in Atlanta, we unveiled the Allison
9-speed transmission, which is the first in a series of new products
targeted at addressing Customer and regulatory expectations for
improved fuel economy and reduced greenhouse gases.
Allison is the established leader in fully automatic commercial
transmissions in the markets we serve. However, we are committed
to developing and delivering new products that carry our long-
established brand attributes—products that are known for their
The Allison 9-speed transmission represents a creative, cost
innovation, reliability, durability and Customer value. The Allison
effective, and fast-to-market approach to a multi-speed automatic
9-speed transmission is an exciting product that will help us
transmission that new and established OEMs have sought.
sustain our market leadership position.
THE POWER OF ALLISON TRANSMISSION > COLLEAGUES PURSUING OUR VISION AND LIVING OUR VALUES.
EXECUTIVE LEADERSHIP TEAM
From left to right, back row then front row
David S. Graziosi
President and CFO
Randall R. Kirk
Senior Vice President, Product Engineering and Product Teams
John M. Coll
Senior Vice President, Global Marketing, Sales and Service
Michael A. Dick
Senior Vice President, Operations and Purchasing
Lawrence E. Dewey
Chairman and CEO
4
5
ALLISON TRANSMISSION / 2017 ANNUAL REPORT
PRODUCT SOLUTIONS
Allison Transmission is a company where men and women engage
observed they were running their buses on a performance
to meet challenges each and every day. By working together, our
schedule that wasn’t in step with their bus routes or how their
product teams continue to build an engineering, purchasing and
drivers operated their vehicles. Allison’s 5th Generation electronic
manufacturing culture that embraces innovation and technology.
control system allowed those fleet operators to easily adjust
Their collective efforts lower costs and improve efficiency, all while
their shift calibration and increase their fleet’s overall fuel economy
maintaining our high-quality brand standards. This allows us to
without sacrificing drivability, route times or passenger comfort.
quickly respond to our Customers’ needs and wants, and develop
solutions they value.
From school bus routes and construction sites, to mining caverns
and battlefields, we are known for how well our transmissions
We listen to our Customers and physically observe how they
perform. We focus on meeting our commitments and delivering
operate our products. We believe this approach gives us a better
product solutions that are second to none. It’s what we do best
understanding as to what our Customers value. While working
and we are proud of our achievements and heritage.
with a large Midwestern municipal transit bus authority, we
THE POWER OF ALLISON TRANSMISSION > PRODUCTS DELIVERING THE ALLISON PROMISE TO IMPROVE THE WAY THE WORLD WORKS.
EXECUTIVE LEADERSHIP TEAM
From left to right, back row then front row
Teresa van Niekerk
Vice President, Global Purchasing and Supplier Quality
Paul A. Richardson
Executive Director, Quality and Reliability
Robert M. Clark III
Vice President, Marketing and Sales for Europe,
the Middle East, Africa & Asia-Pacific
Heidi K. Schutte
Vice President, Marketing and Sales for the Americas
Thomas D. Eifert
Vice President, Program Management and Mobile
Source Emissions
6
THE POWER OF ALLISON TRANSMISSION > PRODUCTS DELIVERING THE ALLISON PROMISE TO IMPROVE THE WAY THE WORLD WORKS.
7
THE POWER OF ALLISON TRANSMISSION > INNOVATION CREATING CUSTOMER VALUE AND TECHNOLOGY TO GROW OUR BUSINESS.
8
ALLISON TRANSMISSION / 2017 ANNUAL REPORT
INNOVATIVE TECHNOLOGY
Allison was founded on the values of innovation and technology
reduces downtime and puts our Customers in a position to
and these principles remain our driving values today. There is a
succeed. In 2017, we were awarded our 1,000th U.S. patent and
spirit of innovation built into everything that we produce and the
we remain at work addressing the challenges that an ever evolving
way we conduct business. Whether it’s a fully automatic transmission
transportation industry uncovers.
that rolls off the assembly line or introducing a better way to meet
market challenges, our goal is to develop innovative and reliable
Customer-focused solutions when and where they are needed
the most.
Allison was one of the first to transition its transmissions from
hydraulics to an electronically-controlled product and many credit
Allison with advancing this important technology. Today, Allison
5th Generation electronic controls are setting a new standard
How can we make our Customers’ work more efficient, safer,
for performance, fuel economy, and drivability. Allison’s next
easier and less costly? These are the questions that lead us to
generation of controls are in development to enable increased
develop products and processes that differentiate us from others.
connectivity, cyber security and functional safety capabilities.
We answer these questions through decades of engineering and
research, science, technology and our real-world experience.
Allison Transmission has earned its reputation for innovation and
technology. We believe our proven competencies and capabilities
Allison researchers continue to develop innovative powertrain
will continue to be valued by OEMs and end users.
technology that stretches fuel budgets, eases vehicle operation,
THE POWER OF ALLISON TRANSMISSION > INNOVATION CREATING CUSTOMER VALUE AND TECHNOLOGY TO GROW OUR BUSINESS.
EXECUTIVE LEADERSHIP TEAM
From left to right, back row then front row
G. Frederick Bohley
Vice President, Finance and Treasurer
Dana J.H. Pittard
Vice President, Defense Programs
Mary Anne M. Hoffman
Vice President, Human Resources
Eric C. Scroggins
Vice President, General Counsel and Secretary
Dean E. Ranalli
Vice President, Chief Information Officer
8
9
FINANCIAL HIGHLIGHTS
(dollars in millions, except per share data)
2015
2016
2017
OPERATING RESULTS
Net sales
Gross profit
% of net sales
Operating income
% of net sales
Net income
PER SHARE DATA
Basic earnings
Diluted earnings
Dividends
FINANCIAL POSITION
Cash and cash equivalents
Total assets
Total long-term debt
Shareholders’ equity
CASH PROVIDED (USED) BY
Operating activities
Investing activities
Financing activities
$2,262
1,131
$1,840
$1,986
934
864
47.0% 47.0% 50.0%
452
429
21.6% 24.5% 28.8%
215
182
652
504
1.03
1.03
0.60
252
4,408
2,377
1,189
1.28
1.27
0.60
205
4,219
2,159
1,081
3.38
3.36
0.60
199
4,205
2,546
689
580
(60)
(529)
591
(72)
(564)
658
(94)
(574)
ADJUSTED EBITDA(1)
($ in millions)
ADJUSTED EBITDA(1)
($ in millions)
ADJUSTED EBITDA(1)
($ in millions)
TOTAL LEVERAGE RATIO(2)
TOTAL LEVERAGE RATIO(2)
TOTAL LEVERAGE RATIO(2)
NET SALES
($ in millions)
NET SALES
($ in millions)
NET SALES
($ in millions)
ADJUSTED FREE CASH FLOW(1)
ADJUSTED FREE CASH FLOW(1)
ADJUSTED FREE CASH FLOW(1)
($ in millions)
($ in millions)
($ in millions)
739.000000
739.000000
720
644
868
739.000000
720
492.666667
492.666667
492.666667
246.333333
246.333333
246.333333
644
868
644
868
720
3.5
3.0
2.5
2.0
1.5
1.0
0.5
3.5
3.0
2.99
2.5
2.0
1.5
1.0
0.5
0.000000
0.000000
0.000000
’15
’16
’17
0.0
’16
’17
’15
’15
’16
0.0
’17
’15
’16
’17
3.08
3.5
3.0
2.99
2.74
2.5
2.0
1.5
1.0
0.5
0.0
1,840
2,262
1,840
2,262
1,840
2,262
3.08
2127
3.08
1,986
2127
2127
1,986
1,986
540
530
530
540
567
530
530
567
530
567
2.99
2.74
1418
709
’15
’16
’17
0
’15
’16
’17
2.74
1418
709
0
1418
709
0
’15
’16
’17
10
405
270
135
’15
’16
’17
0
’15
’16
’17
’15
’16
’17
’15
’16
’17
’15
’16
’17
540
530
405
270
135
0
405
270
135
0
ALLISON TRANSMISSION / 2017 ANNUAL REPORT
CUSTOMER VALUE
Allison Transmission works with its Customers to provide innovative
City and transit buses are the ideal application for xFE technology.
products that exceed their operational requirements. Whether they
The intensity of start-stop routes and lower average speed duty
need improved fuel economy, increased productivity, electrified
cycles present special challenges. Allison’s xFE technology overcomes
drivetrain applications, or the ability to withstand the demanding
these issues without sacrificing drivability or performance when
24/7 operational requirements of shale gas and crude oil exploration,
using either diesel or liquid compressed natural gas engines.
we work to create solutions that meet Customer needs.
FuelSense® 2.0 with DynActive™ Shifting
Through a set of proprietary software enhancements, FuelSense
9800 Oil Field Series™ Transmissions
The Allison 9800 Oil Field Series transmissions were designed to
meet the needs of the high-pressure pumping industry. Changing
2.0 provides an infinitely variable combination of seamless shift
market dynamics in North America led oil field service companies
points that are not recognizable to the driver or passengers. This
to recognize the need for a fully automatic, high-horsepower, rugged
innovative technology doesn’t rely on fixed shift points or a
duty product that could operate around the clock for months at a
predetermined computer generated shift table. FuelSense 2.0
time. Allison engineers embraced this challenge and worked with
uses a learning algorithm to continuously find the ideal balance
leading shale gas producers to offer solutions that enhance
between fuel economy and a vehicle’s performance demands.
Customer value through innovation and technology.
xFE ™ Technology
Incorporating the latest advances in fuel economy technology,
Allison’s new series of fully automatic bus transmissions have
demonstrated fuel economy improvements up to seven percent,
in addition to the company’s FuelSense® features. Referred to as xFE,
designating extra fuel economy, the new transmissions have the
same space claim and ratings as current models, but incorporate
optimized gear ratios coupled with the FuelSense® Max package.
TOTAL LEVERAGE RATIO(2)
ADJUSTED FREE CASH FLOW UTILIZATION
NET SALES
($ in millions)
ADJUSTED FREE CASH FLOW(1)
($ in millions)
ADJUSTED EBITDA(1)
($ in millions)
644
868
720
739.000000
492.666667
246.333333
0.000000
’15
’16
’17
’15
’16
’17
2.99
3.08
2.74
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1,840
2,262
0.3%
1,986
28.5%
0.2%
44.5%
59.5%
48.3%
0.2%
63.8%
20.5%
19.0%
6.4%
2127
1418
709
0
’15
’17
540
405
270
135
Other, Net
Debt Repayment/Refinancing
Share Repurchase
Dividends
Change in Cash, Net
0
530
120
530
100
567
80
60
40
20
0
’15
’16
’17
’15 –8.8%
’16
–12.0%
’16
–27.6%
’17
–2.0%
(1) Adjusted EBITDA and Adjusted Free Cash Flow are non-GAAP financial measures we use to measure our operating profitability
and to evaluate and control our cash operating costs. Please refer to pages 33–34 for a reconciliation to Net Income and Net Cash
provided by Operating Activities.
(2) As calculated under Senior Secured Credit Facility.
11
0
20
40
60
80
100
120
CORPORATE SOCIAL RESPONSIBILITY
GIVING
BACK TO THE
COMMUNITY
At Allison Transmission, we are motivated by the enduring values of our 102-year corporate
heritage—a heritage that fosters excellence, philanthropy, volunteerism, education, diversity,
and giving back to the communities where we work and live. As a corporate citizen, Allison
invests not only in its workforce, facilities, and the next generation of technology but also in
the next generation of people who will create a better and more prosperous world.
Allison supports a variety of educational programs and initiatives through its corporate giving.
We also make contributions to colleges and universities that have nationally recognized science,
technology, and engineering and math programs. Separately, we award college scholarships
to promising high school students who rank high in their senior class.
Education is an important part of our corporate culture. As an engineering and technology
company, we are extremely interested in the quantity and quality of our nation’s technology
and business graduates. Through recruitment, these individuals become the lifeblood of our
organization.
COMMITTED TO MAKING A POSITIVE DIFFERENCE WHILE CONTINUING TO MOVE THE WORLD FORWARD.
Allison employees bring fun and enthusiasm to
Volunteering at local food banks is a must for Allison Transmission’s summer
our first “TRUCK PULL” competition.
interns. This past year, 32 interns spent the day separating, cataloging and
packaging meals for the elderly, disabled and less fortunate.
12
ALLISON TRANSMISSION / 2017 ANNUAL REPORT
In step with Allison Transmission’s corporate philanthropic initiatives is the incredible volunteerism of its workforce. Allison
employees show their support and compassion for the needy and less fortunate through their hard work, year-after-year. Allison
volunteers impact the overall health of their communities by organizing food and blood drives, through their contributions to
in-plant gate collections, by subsidizing housing programs for both veterans and others in need, and by responding with material
and financial aid to those who become victims of natural disasters.
Whether we are raising funds for non-profit organizations in Indiana, such as the Center for Leadership Development, an organi-
zation dedicated to preparing inner-city youth for college, or helping to plant a community garden near our manufacturing facility
in Chennai, India, Allison employees are making a positive difference.
COMMITTED TO MAKING A POSITIVE DIFFERENCE WHILE CONTINUING TO MOVE THE WORLD FORWARD.
In 2017, a total of 168 Allison Transmission employees, over a
Helping to renew valuable blood resources for hospitals located
two week period, constructed their fourth house for a needy
throughout the Midwest, Allison employees contributed over two
family of four. This particular one is located within a half mile
hundred pints of blood.
of the company’s Indianapolis headquarters.
12
13
ALLISON TRANSMISSION / 2016 ANNUAL REPORT
GLOBAL SUSTAINABILITY —DOING OUR FAIR SHARE
We believe protecting the environment requires a serious commitment.
Our Environmental Management Policy consists of three critical elements:
• ADHERENCE TO THE LAW—It’s paramount as to how we do business. We seek to exceed public disclosure standards and
promote transparency in all of our activities.
• POLLUTION PREVENTION—We work actively with local communities, government agencies and environmental experts to
develop cohesive anti-pollution programs for all of our facilities. The challenges under which we operate vary on a global basis.
However, our core environmental initiative is unwavering—do not pollute.
• CONTINUOUS IMPROVEMENT—Whether it relates to our products, our manufacturing practices or our environmental
practices, we seek improvement in everything we do.
9%
KILOWATT HOUR
ENERGY
REDUCTION
Through Environmental
Objectives Attained
in 2017
99%
CARBON
MONOXIDE
REDUCTION,
29% BETTER
THAN REQUIRED
ZERO
WASTE
TO LANDFILL
2,308
TONS TOTAL
RECYCLED
MATERIALS
Allison is an active participant in the Partners for Pollution Prevention
Program, which includes several environmental organizations and the
Indiana Department of Environmental Management (IDEM). IDEM
presented Allison an award for environmental excellence and strong
compliance performance throughout the company. IDEM members
are recognized by the State of Indiana as being exceptionally good
stewards of the environment.
Carbon monoxide is a colorless, odorless and tasteless gas. It is toxic
to humans and animals in concentrations above 35 parts per million.
Allison equipped a number of its transmission test cells with state of
the art technology and reduced harmful carbon monoxide levels by an
impressive 99 percent. Our work to extend this technology to other
areas is proceeding.
Allison maintains offices, warehouses, manufacturing sites, vehicle
test tracks and customization centers globally. We diligently work to
deliver novel and environmentally friendly practices to all phases of the
business. Indianapolis production facilities are Zero Waste to Landfill—
and we are working to gain this distinction at other facilities.
14
THE
POWER
OF ALLISON
TRANSMISSION
2 017 F O R M 10 - K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2017
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
OR
Commission File No. 001-35456
ALLISON TRANSMISSION HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State of Incorporation)
26-0414014
(I.R.S. Employer
Identification Number)
One Allison Way
Indianapolis, IN 46222
(Address of Principal Executive Offices and Zip Code)
(317) 242-5000
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No
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 Regulation S-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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
(Do not check if a 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 in Rule 12b-2 of the Exchange Act).
Yes No
The aggregate market value of the voting and non-voting stock held by non-affiliates was approximately $5,575 million as of
June 30, 2017.
As of February 2, 2018, there were 140,066,567 shares of Common Stock outstanding.
Documents Incorporated by Reference
Portions of the Registrant's definitive Proxy Statement for its 2018 annual meeting of stockholders will be incorporated by
reference in Part III of this Annual Report on Form 10-K.
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
INDEX
PART I.
PART II.
Page
3-13
14-25
26
26
26
26
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
27-29
Item 6.
Selected Financial Data
30
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
31-44
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
Item 15.
Exhibits, Financial Statement Schedules
Item 16.
Form 10-K Summary
PART IV.
1
45
46-84
85
85
85
86
86
86
86
86
87
90
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K 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. Although forward-looking statements reflect management’s good faith beliefs, reliance should not be
placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors,
which may cause the actual results, performance or achievements to differ materially from anticipated future results,
performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements
speak only as of the date the statements are made. We undertake no obligation to publicly update or revise any forward-
looking statement, whether as a result of new information, future events, changed circumstances or otherwise. These
forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to: 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; the failure of markets outside North America to
increase adoption of fully-automatic transmissions; the concentration of our net sales in our top five customers and the
loss of any one of these; future reductions or changes in government subsidies for hybrid vehicles and other external
factors impacting demand; U.S. and foreign defense spending; general economic and industry conditions; the discovery of
defects in our products, resulting in delays in new model launches, recall campaigns and/or increased warranty costs and
reduction in future sales or damage to our brand and reputation; our ability to prepare for, respond to and successfully
achieve our objectives relating to technological and market developments, competitive threats and changing customer
needs; risks associated with our international operations; labor strikes, work stoppages or similar labor disputes, which
could significantly disrupt our operations or those of our principal customers; risks related to our substantial indebtedness;
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 under Part I,
Item 1A, “Risk Factors” in this Annual Report on Form 10-K. All written and oral forward-looking statements attributable to
us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements as well as other
cautionary statements that are made from time to time in our other Securities and Exchange Commission filings or public
communications. You should evaluate all forward-looking statements made in this Annual Report on Form 10-K in the
context of these risks and uncertainties.
Certain Trademarks
This Annual Report on Form 10-K includes trademarks, such as Allison Transmission and ReTran, which are
protected under applicable intellectual property laws and are our property and/or the property of our subsidiaries. This
report also contains trademarks, service marks, copyrights and trade names of other companies, which are the property of
their respective owners. We do not intend our use or display of other companies’ trademarks, service marks, copyrights or
trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies. Solely for
convenience, our trademarks and trade names referred to in this report may appear without the ® or ™ symbols, but such
references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our
rights or the right of the applicable licensor to these trademarks and trade names.
2
PART I.
ITEM 1. Business
Overview
Allison Transmission Holdings, Inc. and its subsidiaries (“Allison,” the “Company” or “we”) design and manufacture
commercial and defense fully-automatic transmissions. The business was founded in 1915 and has been headquartered
in Indianapolis, Indiana since inception. Allison was an operating unit of General Motors Corporation 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 2,700 employees and 13 different transmission product lines. Although approximately 79%
of revenues were generated in North America in 2017, we have a global presence by serving customers in Europe, Asia,
South America and Africa. We serve customers through an independent network of approximately 1,400 independent
distributor and dealer locations worldwide.
Our Business
We are the world’s largest manufacturer of fully-automatic transmissions for medium- and heavy-duty commercial
vehicles and medium- and heavy-tactical U.S. defense vehicles. Allison transmissions are used in a wide variety of
applications, including on-highway trucks (distribution, refuse, construction, fire and emergency), buses (primarily school,
transit and electric hybrid-transit), motorhomes, off-highway vehicles and equipment (primarily energy, mining and
construction) and defense vehicles (wheeled and tracked). We estimate that globally, in 2017, we sold approximately 60%
of all fully-automatic transmissions for medium- and heavy-duty on-highway commercial vehicle applications. We believe
the Allison brand is one of the most recognized in our industry as a result of the performance, reliability and fuel efficiency
of our transmissions and is associated with high quality, durability, vocational value, technological leadership and superior
customer service.
We introduced the world’s first fully-automatic transmission for commercial vehicles over 60 years ago. Since that
time, we have driven the trend in North America and Western Europe towards increasing automaticity by targeting a
diverse range of commercial vehicle vocations. Allison transmissions are optimized for the unique performance
requirements of end users, which typically vary by vocation. Our products are highly engineered, requiring advanced
manufacturing processes, and employ complex software algorithms for our transmission controls to maximize end user
performance. We have developed over 100 different models that are used in more than 2,500 different vehicle
configurations and are compatible with more than 500 combinations of engine brands, models and ratings (including
diesel, gasoline, natural gas and other alternative fuels). Additionally, we have created thousands of unique Allison-
developed calibrations available to be used with our transmission control modules.
Our Industry
Commercial vehicles typically employ one of three transmission types: manual, automated manual transmissions
(“AMT”) or fully-automatic. Manual transmissions are the most prevalent transmission type used in Class 8 tractors in
North America and in medium- and heavy-duty commercial vehicles, generally, outside North America. Manual
transmissions utilize a disconnect clutch causing power to be interrupted during each gear shift resulting in energy loss-
related inefficiencies and less work being accomplished for a given amount of fuel consumed. In long-distance trucking,
this power interruption is not a significant factor, as the manual transmission provides its highest degree of fuel economy
during steady-state cruising. However, steady-state cruising is only one part of the duty cycle. When the duty cycle
requires a high degree of “start and stop” activity or speed transients, as is common in many vocations as well as in urban
environments, we believe manual transmissions result in reduced performance, lower fuel efficiency, lower average speed
for a given amount of fuel consumed and inferior ride quality. Moreover, the clutches must be replaced regularly, resulting
in increased maintenance expense and vehicle downtime. Manual transmissions also require a skilled driver to operate
the disconnect clutch when launching the vehicle and shifting gears. AMTs are manual transmissions that feature
automated operation of the disconnect clutch. Fully-automatic transmissions utilize technology that smoothly shifts gears
instead of a disconnect clutch, thereby delivering uninterrupted power to the wheels during gear shifts and requiring
minimal driver input. These transmissions deliver superior acceleration, higher productivity, increased fuel efficiency,
reduced operating costs, less driveline shock and smoother shifting relative to both manual transmissions and AMTs in
vocations with a high degree of “start and stop” activity, as well as in urban environments.
3
Emerging technologies in commercial-duty transmissions and powertrains include dual clutch transmissions (“DCT”)
and electric drive powertrains. DCTs are variants of manual transmissions and AMTs that incorporate a “dual clutch”
mechanism to facilitate shifting the manual transmission gearbox. Electric drive powertrains are also emerging in certain
end markets, such as transit buses, and are in part driven by efforts to reduce fuel consumption and greenhouse gas
emissions. Electric drive powertrains differ from “electric hybrid” powertrains because they only propel the vehicle with an
electric motor; while “electric hybrids” generally utilize both a conventional internal combustion power source and
powertrain as well as the means to propel the vehicle electrically. While both emerging technologies are gaining use in
niche automotive markets, they are just beginning to evolve and become proven in commercial vehicle markets.
Fuel efficiency, reduction in fuel consumption and reduced emissions are important considerations for commercial
vehicles everywhere and they tend to go together. We believe fuel efficiency, the measure of work performed for a given
amount of fuel consumed, is the best method to assess fuel consumption of commercial vehicles as compared to the
more commonly-used fuel economy metric of miles-per-gallon (“MPG”). MPG is inadequate for commercial vehicles
because it does not encompass two key elements of efficiency that we believe are important to vehicle owners and
operators: payload and transport time. For example, if more work can be completed or more payload hauled using the
same amount of fuel and/or over a shorter period of time, then we believe the vehicle is more fuel efficient. Since fuel
economy only accounts for distance traveled and fuel consumed, ignoring time and work performed, we believe it is
therefore an inferior metric to fuel efficiency when it comes to assessing commercial vehicles. Markets, regulations,
policies and technology continue to evolve with respect to these topics.
Our Served Markets
We sell our transmissions globally for use in medium- and heavy-duty on-highway commercial vehicles, off-highway
vehicles and equipment and defense vehicles. In addition to the sale of transmissions, we also sell branded replacement
parts, support equipment and other products necessary to service the installed base of vehicles utilizing our
transmissions. The following table provides a summary of our business by end market, for the fiscal year ended
December 31, 2017.
NORTH AMERICA
ELECTRIC
HYBRID
TRANSIT
BUS
ON-HIGHWAY
OFF-HIGHWAY
OUTSIDE NORTH AMERICA
ON-HIGHWAY
OFF-HIGHWAY
DEFENSE
END MARKET
2017 NET SALES
(IN MILLIONS)
% OF TOTAL
MARKET POSITION
VOCATIONS OR
END USE
$1,106
49%
$71
3%
$51
2%
• #1 supplier of
fully-automatic
transmissions
• A leading
independent
supplier
• A leading
supplier of
electric
hybrid-
propulsion
systems
• Electric
hybrid
transit bus
• Electric
hybrid
shuttle bus
• Energy
• Mining
• Construction
• Specialty
vehicle
• Distribution
• Emergency
• Refuse
• Construction
• Utility
• School,
transit, shuttle
and coach
buses
• Motorhome
• Metro
tractors
$344
15%
• #1 supplier of
fully-automatic
transmissions
in China
• Established
presence in
Western
Europe
• Distribution
• Emergency
• Refuse
• Construction
• Utility
• Transit,
shuttle and
coach buses
SERVICE
PARTS,
SUPPORT
EQUIPMENT &
OTHER
$532
24%
$117
5%
$41
2%
• A leading
independent
supplier
• #1 supplier of
transmissions
for the U.S.
Department of
Defense
• Approximately
1,400 dealers
and distributors
worldwide
• Energy
• Mining
• Construction
• Specialty
vehicle
• Medium- and
heavy-tactical
wheeled
platforms
• Tracked
combat
platforms
• Parts
• Support
equipment
• Remanufactured
transmissions
• Fluids
Refer to NOTE 17, “Concentration of Risk” and NOTE 21, “Geographic Information” in Part II, Item 8, of this Annual
Report on Form 10-K for additional information on our significant original equipment manufacturer (“OEM”) customers and
net sales by geographical areas.
4
North America
On-Highway. We are the largest manufacturer of fully-automatic transmissions for the on-highway medium- and
heavy-duty commercial vehicle market in North America. The following is a summary of our on-highway net sales by
vehicle class in North America.
Our core North American on-highway market includes Class 4-5, Class 6-7 and Class 8 straight trucks, conventional
transit, shuttle and coach buses, school buses and motorhomes. Class 8 trucks are subdivided into two markets: straight
and tractor. Class 8 straight trucks are those with a unified body (e.g., refuse, construction, and dump trucks), while
tractors have a vehicle chassis that is separable from the trailer they pull. We have been supplying transmissions for
Class 8 straight trucks for decades, and it is a core end market for us. Today, we have very limited exposure to the Class
8 line-haul tractor market because lower priced manual transmissions and AMTs generally meet the needs of these
vehicles which are primarily used in long distance hauling. However, we have identified a portion of the Class 8 tractor
market that we call metro tractors that are used in urban environments the majority of the time and developed a fully-
automatic transmission (the “TC10”) that meets the unique duty cycle requirements of the Class 8 metro tractor market.
Combining the startability and continuous, uninterrupted power qualities of a fully-automatic transmission with the cruising
aspects of a manual transmission, the TC10 offers an alternative to traditional manual and automated manual
transmissions in tractor applications.
We sell substantially all of our transmissions in the North American on-highway market to OEMs. These OEMs, in
turn, install our transmissions in vehicles in which our transmission is either the exclusive transmission available or is
specifically requested by end users. In 2017, OEM customers representing over 95% of our North American on-highway
unit volume participated in long-term supply agreements (“LTSA”) with us. Generally, these LTSAs offer the OEM
customer defined levels of mutual commitment with respect to growing Allison’s presence in the OEMs’ products and
promotional efforts, pricing and sharing of commodity cost risk. The length of our LTSAs is typically between three and
five years. We often compete in this market against independent manufacturers of manual transmissions, AMTs, DCTs,
electric drive systems, fully-automatic transmissions manufactured by Ford Motor Company (“Ford”), ZF Friedrichshafen
AG (“ZF”) and Voith GmbH, and against vertically integrated OEMs in certain weight classes that use their own internally
manufactured transmissions in certain vehicles.
The following table presents a summary of our competitive position by vehicle class in the North America on-
highway end market.
2017 SHARE
PRIMARY
COMPETITION
CLASS 4-5
TRUCKS
4%
CLASS 6-7
TRUCKS
71%
CLASS 8 STRAIGHT
TRUCKS
68%
SCHOOL
BUSES
88%
MOTORHOMES
38%
Ford
Manual
Manual
Ford
Ford
Transmissions
Transmissions
AMTs
Ford
AMTs
Electric Hybrid Transit Buses. The interest in conserving fuel and reducing greenhouse gas emissions is driving
demand for more fuel efficient commercial vehicles. Our customers in this North American end market are typically city,
5
state and federal governmental entities. In this market, we compete primarily with BAE Systems plc and manufacturers of
electric drive systems.
Off-Highway. We have provided products used in vehicles and equipment that serve energy, mining and
construction applications in North America for over 60 years. Off-highway energy applications include hydraulic fracturing
equipment, well-stimulation equipment, pumping equipment, and well-servicing rigs, which often use a fully-automatic
transmission to propel the vehicle and drive auxiliary equipment. We maintain a leadership position in this end market,
with nearly all producers of well-stimulation and well-servicing equipment utilizing our heavy duty off-highway
transmissions. Competition includes Caterpillar Inc. (“Caterpillar”) and Twin Disc, Inc. (“Twin Disc”).
We also provide heavy-duty transmissions used in mining trucks, specialty vehicles and construction vehicles.
Mining applications include trucks used to haul various commodities and other products, including rigid dump trucks,
underground trucks and long-haul tractor trailer trucks with load capacities between 40 to 110 tons. Our major competitors
in this end market are Caterpillar and Komatsu Ltd. (“Komatsu”), both of which are vertically integrated and manufacture
fully-automatic transmissions for their own vehicles. Specialty vehicles using our heavy-duty transmissions include airport
rescue and firefighting vehicles and heavy-equipment transporters. Our major competitor in this end market is Twin Disc.
Construction applications include articulated dump trucks, with Caterpillar, Volvo Group (“Volvo”) and ZF as competitors.
Outside North America
Outside North America we serve several different markets, including: Europe, Middle East, Africa (“EMEA”), Asia-
Pacific, South America and India.
On-Highway. We are the largest manufacturer of fully-automatic transmissions for the commercial vehicle market
outside of North America. While the use of fully-automatic transmissions in the medium- and heavy-duty commercial
vehicle market has been widely accepted in North America, the markets outside North America continue to be dominated
by manual transmissions. In 2017, fully-automatic transmission-equipped medium- and heavy-duty commercial vehicles
represented less than 5% of the vehicles in markets outside North America and are concentrated in certain vocational end
markets. The following is a summary of our on-highway net sales by region outside of North America.
Europe, Middle East, Africa. EMEA is composed of several different markets, each of which differs from our core
North American market by the degree of market maturity, sophistication and acceptance of fully-automatic transmission
technology. Within Europe, we serve Western European developed markets, as well as Russian and Eastern European
emerging markets, principally in the refuse, emergency, bus, coach, distribution and utility markets. Competition in
Western Europe is most notably characterized by a high level of vertical powertrain integration with OEMs often utilizing
their own manual transmissions and AMTs in their vehicles. The Middle East and Africa regions are generally
characterized by very limited local vehicle production, with imports from the U.S., South America, Turkey, China, India and
Europe accounting for the majority of vehicles.
6
Asia-Pacific. Our key Asia-Pacific markets include China, Japan, India, and South Korea; however, we actively
participate in several other important Asia-Pacific countries including Australia, Taiwan, Indonesia, Malaysia and Thailand,
which are primarily importers of commercial vehicles. Within Asia-Pacific, our sales efforts are principally focused on the
transit bus and vocational truck markets. Currently, manual transmissions are the predominant transmissions used in
commercial vehicles in the Asia-Pacific region.
South America. The South American region is characterized by a high level of OEM integration, with captive
manual transmission and AMT manufacturing. Currently, manual transmissions are the predominant transmissions used
in commercial vehicles in South America.
Off-Highway. The following is a summary of our off-highway net sales by region outside of North America.
Europe, Middle East, Africa. Our off-highway markets in EMEA are mining and construction. Our major off-
highway competitors are Caterpillar and Komatsu, both of which are vertically integrated manufacturers of off-highway
mining vehicles, including the specific fully-automatic transmission used in their mining trucks. A typical construction
application is the articulated dump truck, with competition from Caterpillar, Volvo and ZF transmissions.
Asia-Pacific. Off-highway markets in Asia are shared by energy, mining and construction applications. Our primary
competitors are Caterpillar, Danyang Winstar Auto Parts Co., Ltd. and Twin Disc in energy applications, Caterpillar,
Komatsu and Danyang Winstar Auto Parts Co., Ltd. in mining applications and Caterpillar, Volvo and ZF in construction
applications.
Defense
We have a long-standing relationship with the U.S. Department of Defense (“DOD”) dating back to 1946, when we
began developing our first-generation tank transmission. Today, we sell substantially all of the transmissions for medium-
and heavy-tactical wheeled vehicle platforms including the Family of Medium Tactical Vehicles, Armored Security
Vehicles, Heavy Expanded Mobility Tactical Trucks, Heavy Equipment Transporters, Palletized Loading Systems, M915
Series Trucks, Medium Tactical Vehicle Replacements and the Logistic Vehicle System Replacement. Additionally, we
supplied transmissions for the majority of Mine-Resistant Ambush Protected (“MRAP”) Vehicles, the MRAP All-Terrain
Vehicle and the Joint Light Tactical Vehicle, which is the replacement vehicle for Humvee personnel transport.
Transmissions for our wheeled vehicle platforms are typically sold to OEMs.
We are also the supplier on two of the three key tracked vehicle platforms, the Abrams tank and the M113 family of
vehicles, which are sold directly to the DOD. Additionally, we sell parts kits to licensees for the production of transmissions
for tracked vehicles manufactured outside North America. See Part I, Item 1A, “Risk Factors” of this Annual Report on
Form 10-K for a discussion of risks associated with our contracts with the U.S. DOD.
Globally, we face competition for the supply of our transmissions in tracked defense vehicles primarily from L3
Technologies, Inc., Renk AG and ZF. Additionally, we face limited competition from Caterpillar and ZF in certain defense
wheeled vehicle platforms.
7
Service Parts, Support Equipment and Other
The aftermarket provides us with a relatively stable source of revenues as the installed base of vehicles and
equipment utilizing our transmissions continues to grow. The need for replacement parts is driven by normal vehicle and
equipment maintenance requirements. Uninterrupted operation is generally critical for end users’ profitability. End users
focus on getting the vehicle or equipment back in service, which in some cases results in the aftermarket purchase
decision being less price-sensitive.
The sale of Allison-branded parts and fluids, remanufactured transmissions and support equipment is fundamental
to our brand promise. We have assembled a worldwide network of approximately 1,400 independent distributor and
dealer locations to sell, service and support our transmissions. As part of our brand strategy, our distributors and dealers
are required to sell genuine Allison-branded parts. Within the aftermarket, we offer remanufactured transmissions under
our ReTran brand, which provides a cost-effective alternative for transmission repairs and replacements. We also provide
support equipment to our OEMs to assist in installing new Allison transmissions into vehicles, and, therefore, sales of
support equipment are dependent upon sales of new transmissions. The competition for service parts and ReTran
transmissions comes from a variety of smaller-scale companies sourcing non-genuine “will-fit” parts from unauthorized
manufacturers. These “will-fit” parts often do not meet our product specifications, and therefore may be of lesser quality
than genuine Allison parts.
8
Our Product Offerings
Allison transmissions are sold under the Allison Transmission brand name and remanufactured transmissions are
sold under the ReTran brand name. The following is a summary of our 13 transmission product lines.
On-Highway Products
Product
1000/2000
3000
4000
▪ Di s tri buti on
▪ Motorhome
▪ Servi ces
Applications
▪ Refus e
▪ School /Shuttl e Bus
▪ Wheel ed Mi l i tary
▪ Speci a l ty
▪ Cons tructi on
▪ Di s tri buti on
▪ Coa ch a nd Tra ns i t Bus
▪ Refus e
▪ Fi re a nd Emergency
▪ Speci a l ty
▪ Motorhome
▪ Servi ces
▪ Wheel ed Mi l i tary
▪ Cons tructi on
▪ Di s tri buti on
▪ Coa ch a nd Tra ns i t Bus
▪ Refus e
▪ Fi re a nd Emergency
▪ Speci a l ty
▪ Motorhome
▪ Arti cul a ted dump truck
▪ Wheel ed Mi l i tary
▪ Wel l Servi ce Ri gs
TC 10
▪ Metro Tra ctors
H 40/50 EP
▪ Hybri d Tra ns i t Bus
9
Off-Highway Products
5000
Product
6000
Applications
▪ Underground Mi ne Truck
▪ Ri gi d Dump Truck
▪ Wel l Servi ce Ri gs
8000
9000
▪ Ri gi d Dump Truck
▪ Hydra ul i c fra cturi ng equi pment
Tracked Military Products
Product
Applications
X1100
▪ Tra cked Defens e (Abra ms )
X200
▪ Tra cked Defens e (M113 Fa mi l y of Vehi cl es )
10
Product Development and Engineering
We maintain product development and engineering capability dedicated to the design, development, refinement and
support of our fully-automatic transmissions and electric hybrid-propulsion systems. We believe our customers expect our
products to provide unparalleled performance and value defined in various ways, including delivering maximum cargo in
minimum time, using the least amount of fuel possible while employing the fewest vehicles possible and experiencing
maximum vehicle uptime. In response to those needs and the evolving customer focus on fuel efficiency, we provide
vehicle specification guidelines, transmission control software and mechanical components to optimize fuel economy
while delivering desired vehicle performance. Further, we are developing new technology to improve fuel efficiency and
fuel economy by allowing engines to operate more efficiently and at lower speeds to avoid consuming fuel without
compromising performance. Building on our engineering capabilities, we pioneered electric hybrid-propulsion in
commercial vehicles and are developing new alternative technologies for use in our global commercial vehicle markets.
For the years ended December 31, 2017, 2016 and 2015, we have invested $105 million, $88 million and $93 million in
engineering – research and development, respectively. From time to time, we also acquire certain licenses to provide us
with technology to complement our portfolio of products and product initiatives.
Sales and Marketing Organization
Our sales and marketing effort is organized along geographic and customer lines and is comprised of marketing,
sales and service professionals, supported by application engineers worldwide. In North America, selling efforts in the on-
highway end market are organized by distributor area responsibility, OEM sales and, for our large end users, national
accounts. Outside North America, we manage our sales, marketing, service and application engineering professionals
through regional areas of responsibility. These regional management teams distribute OEM service and application
engineering resources globally. We manage our defense products sales, marketing, service and application engineering
through professionals based in Indianapolis, Indiana and Detroit, Michigan.
We have developed a marketing strategy to reach OEM customers as well as end users. We target our end users
primarily through marketing activities by our sales staff, who directly call on end users and attend local trade shows,
targeting specific vocations globally and through our plant tour programs, where end users may test our products on the
Indianapolis test track and our enhanced customer experience demonstration track at our Hungary facility.
While our marketing management uses the term “customer” interchangeably for OEMs and end users, the primary
objective of our marketing strategy is to create demand for fully-automatic transmissions through:
• OEM promotion of our products and incorporation of fully-automatic transmissions in their commercial vehicle
product offerings;
• Allison representative and/or Allison distributor contact with identified, major end users; and
• Our network of independent dealers who contact other end users.
The process is interactive, as Allison representatives, Allison distributors, OEMs and dealers educate customers and
respond to the specific applications, requirements and needs of numerous specialty markets.
Similarly, we work with customers, dealers and OEMs to educate, improve and simplify how they specify vehicles
and vehicle systems in order to optimize vehicle performance and fuel consumption. Our field organization also works
closely with distributors who, in turn, work with dealers to provide end users with education, parts, service and warranty
support. The defense marketing group follows a defined plan that identifies country, vehicle and specific OEMs and then
approaches the ultimate end user through a variety of channels.
Manufacturing
Our manufacturing strategy provides for distributed capability in manufacturing and assembly of our products for the
global commercial vehicle market. Our primary manufacturing facilities, located in Indianapolis, Indiana, consist of
approximately 2.3 million square feet of usable manufacturing space in six plants. We also have established
customization and parts distribution in the United States, The Netherlands, Brazil, China, Hungary, India and Japan, and
plants in Chennai, India and Szentgotthard, Hungary. Our high volume on-highway products are produced in multiple
global locations while off-highway, electric hybrid-propulsion and defense tracked and wheeled products are produced in
Indianapolis.
11
Suppliers and Raw Materials
A significant amount of the part numbers that make up our transmissions are purchased from outside suppliers, and
during 2017, we purchased approximately $735 million of direct materials and components from outside suppliers. The
largest elements of our direct spending are aluminum and steel castings and forgings that are formed by our suppliers into
our larger components and assemblies for use in our transmissions. However, our spending on aluminum and steel raw
materials directly and indirectly through our purchase of these components constituted approximately 11% of our direct
material and component costs in 2017. The balance of our direct and indirect materials and components costs are
primarily composed of value-added services and conversion costs. Our supply contracts, along with an intensive supplier
selection and performance monitoring process, have enabled us to establish and maintain close relationships with
suppliers and have contributed to our overall operating efficiency and quality.
Intellectual Property
Patents and other proprietary rights are important to the continued success of our business. We also rely upon trade
secrets, know-how, continuing technological innovation and licensing opportunities to develop and maintain our
competitive position. We protect our proprietary rights through a variety of methods, including confidentiality agreements
and proprietary information agreements with suppliers, employees, consultants and others who may have access to
proprietary information. We own over 400 issued patents worldwide, and we have licensing arrangements with respect to
more than 600 additional patents and patent applications. We have more than 400 pending patent applications throughout
the world that relate to aspects of the technology incorporated in many of our products.
We have an irrevocable, royalty-free, worldwide license of more than 250 U.S. and foreign patents and patent
applications, as well as certain unpatented technology and know-how, owned by General Motors Company (“GM”) to
manufacture, use and sell fully-automatic transmissions and certain electric hybrid-propulsion systems for use in
vocational and defense vehicles and off-highway products. Such licenses are subject to certain limitations. See Part I,
Item 1A, “Risk Factors” of this Annual Report on Form 10-K for a discussion of these risks and limitations. We also
acquired from GM an irrevocable, royalty-free, worldwide license under computer software programs that we use to run
our business, including product design. In addition, GM has a license to use certain Allison trademarks.
Seasonality
Overall, the demand for our products is relatively consistent over the year. However, in typical market conditions, the
North American truck market experiences a higher level of production in the first half of the year due to fewer holidays and
the practice of plant shutdowns in July and December. Working capital levels do not fluctuate significantly in the normal
course for our business.
Employees
As of December 31, 2017, we had approximately 2,700 employees, with approximately 89% of those employees in
the U.S. Approximately 59% of our U.S. employees are represented by the International Union, United Automobile,
Aerospace and Agricultural Implement Workers of America (“UAW”) and are subject to a collective bargaining agreement.
In December 2017, we entered into a six year collective bargaining agreement with UAW Local 933 that expires in
November 2023. As approximately 39% of our represented employees are currently retirement eligible, we anticipate a
shift toward increasing the number of multi-tier employees over the coming years. There have been no strikes or work
stoppages due to Allison-specific issues in over 30 years.
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Environmental Compliance
We are subject to a variety of federal, state, local and foreign environmental laws and regulations, including those
governing the discharge of pollutants into the air or water, the management and disposal of hazardous substances or
wastes, and the cleanup of contaminated sites. Some of our operations require environmental permits and controls to
prevent and reduce air and water pollution. These permits are subject to modification, renewal and revocation by issuing
authorities. In addition, certain of our products and our customer’s products are subject to certification requirements by a
variety of regulatory bodies. We believe we are in substantial compliance with all material environmental laws and
regulations applicable to our plants and operations. Historically, our annual costs of achieving and maintaining compliance
with environmental, health and safety requirements have not been material to our results.
Increasing global efforts to control emissions of carbon dioxide, methane, ozone, nitrogen oxide and other
greenhouse gases and pollutants, as well as the shifting focus of regulatory efforts towards total emissions output, have
the potential to impact our facilities, costs, products and customers. The U.S. Environmental Protection Agency (“EPA”)
has taken action to control greenhouse gases from certain stationary and mobile sources. In addition, several states have
taken steps, such as adoption of cap and trade programs or other regulatory systems, to address greenhouse gases.
There have also been international efforts seeking legally binding reductions in emissions of greenhouse gases. These
developments and further actions that may be taken in the U.S. and in other countries, states or provinces could affect our
operations both positively and negatively (e.g., by affecting the demand for or suitability of some of our products).
We also may be subject to liability as a potentially responsible party under the Comprehensive Environmental
Response, Compensation and Liability Act and similar state or foreign laws for contaminated properties that we currently
own, lease or operate or that we or our predecessors have previously owned, leased or operated, and sites to which we
or our predecessors sent hazardous substances. Such liability may be joint and several so that we may be liable for more
than our share of any contamination, and any such liability may be determined without regard to causation or knowledge
of contamination. We or our predecessors have been named potentially responsible parties at contaminated sites from
time to time. We do not anticipate our liabilities relating to contaminated sites will be material to our results.
In January 2016, we assumed all responsibility for operating, monitoring and maintaining the ongoing activities at
our Indianapolis, Indiana manufacturing facilities relating to historical soil and ground water contamination. We entered
into an administrative order of consent with the EPA that requires us to provide financial assurance to complete the
operation, monitoring and maintenance in the event we fail to do so. In December 2016, we issued a letter of credit to the
EPA in the amount of $15 million.
Competition
We compete on the basis of product performance, quality, price, distribution capability and service in addition to
other factors. We face competition from numerous manufacturers of various types of transmissions for commercial
vehicles. We also face competition from manufacturers in our international operations and from international
manufacturers entering our domestic market. Furthermore, we face an increasing amount of competition from vertical
integration, as some of our customers are OEMs that manufacture transmissions for their own products, and from
powertrains that do not require a transmission. Despite their transmission manufacturing capabilities, our existing OEM
customers have chosen to purchase certain transmissions from us due to the quality, reliability and strong brand of our
transmissions and in order to limit fixed costs, minimize production risks and maintain company focus on commercial
vehicle design, production and marketing.
Corporate Information
Allison Transmission Holdings, Inc. was incorporated in Delaware on June 22, 2007. Our principal executive offices
are located at One Allison Way, Indianapolis, IN 46222 and our telephone number is (317) 242-5000. Our internet
address is www.allisontransmission.com. We file annual, quarterly and current reports, proxy statements and other
documents with the United States Securities and Exchange Commission (“SEC”), under the Securities Exchange Act of
1934, as amended (“Exchange Act”). These periodic and current reports and all amendments to those reports are
available free of charge on the investor relations page of our website at http://ir.allisontransmission.com. We have
included our website address throughout this filing as textual references only. The information contained on, or accessible
through, our website is not incorporated into this Annual Report on Form 10-K. The public may read and copy any
materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The
public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC also maintains an Internet site that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC at http://www.sec.gov.
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ITEM 1A. Risk Factors
The following is a cautionary discussion of risks, uncertainties and assumptions that we believe are significant to our
business. In addition to the factors discussed elsewhere in this Annual Report on Form 10-K, the following are the
important factors that, individually or in the aggregate, we believe could make our actual results differ materially from
those described in any forward-looking statements.
Risks Related to Our Business
We participate in markets that are competitive, and our competitors’ actions could have a material adverse
effect on our business, results of operations and financial condition.
Our business operates in competitive markets. We compete against other existing or new global manufacturers of
transmissions for commercial vehicles on the basis of product performance, quality, price, distribution capability and
service in addition to other factors. In addition, we compete with manufacturers developing alternative technologies,
including electric drivetrains, that may or may not require a transmission. Actions by our competitors could lead to
downward pressure on prices and/or a decline in our market share, either or both of which could adversely affect our
results.
In addition, some of our customers or future customers are OEMs that manufacture or could in the future
manufacture transmissions for their own products. Despite their transmission manufacturing capabilities, our existing OEM
customers have chosen to purchase certain transmissions from us due to customer demand, resulting from the quality of
our transmission products and in order to reduce fixed costs, eliminate production risks and maintain company focus.
However, we cannot be certain these customers will continue to purchase our products in the future. Increased levels of
production insourcing by these customers could result from a number of factors, such as shifts in our customers’ business
strategies, acquisition by a customer of another transmission manufacturer, the inability of third-party suppliers to meet
specifications and the emergence of low-cost production opportunities in foreign countries. As a result, these OEMs may
use transmissions produced internally or by another manufacturer and no longer choose to purchase transmissions from
us. A significant reduction in the level of external sourcing of transmission production by our OEM customers could
significantly impact our net sales and cash flows and, accordingly, have a material adverse effect on our business, results
of operations and financial condition.
Certain of our end users operate in highly cyclical industries, which can result in uncertainty and significantly
impact the demand for our products, which could have a material adverse effect on our business, results of
operations and financial condition.
Some of the markets in which we operate, including energy, mining, construction, distribution and motorhomes,
exhibit a high degree of cyclicality. Decisions to purchase our transmissions are largely a result of the performance of
these and other industries we serve. If demand for output in these industries decreases, the demand for our products will
likely decrease. Demand in these industries is impacted by numerous factors including prices of commodities, rates of
infrastructure spending, housing starts, real estate equity values, interest rates, consumer spending, fuel costs, energy
demands, municipal spending and commercial construction, among others. Increases or decreases in these variables
globally may significantly impact the demand for our products, which could have a material adverse effect on our
business, results of operations and financial condition. If we are unable to accurately predict demand, we may be unable
to meet our customers’ needs, resulting in the loss of potential sales, or we may manufacture excess products, resulting in
increased inventories and overcapacity in our production facilities, increasing our unit production cost and decreasing our
operating margins.
Volatility in and disruption to the global economic environment and changes in the regulatory and business
environments in which we operate may have a material adverse effect on our business, results of operations
and financial condition.
The commercial vehicle industry as a whole has been more adversely affected by volatile economic conditions than
many other industries, as the purchase or replacement of commercial vehicles, which are durable items, can be deferred
for many reasons, including reduced spending by end users. Future changes in the regulatory and business environments
in which we operate may adversely affect our ability to sell our products or source materials needed to manufacture our
products. Furthermore, financial instability or bankruptcy at any of our suppliers or customers could disrupt our ability to
manufacture our products and impair our ability to collect receivables, any or all of which may have a material adverse
effect on our business, results of operations and financial condition. In addition, some of our customers and suppliers may
experience serious cash flow problems and, thus, may find it difficult to obtain financing, if financing is available at all. As
a result, our customers’ need for and ability to purchase our products or services may decrease, and our suppliers may
increase their prices, reduce their output or change their terms of sale. Any inability of customers to pay us for our
products and services, or any demands by suppliers for different payment terms, may materially and adversely affect our
results of operations and financial condition. Furthermore, our suppliers may not be successful in generating sufficient
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sales or securing alternate financing arrangements, and therefore may no longer be able to supply goods and services to
us. In that event, we would need to find alternate sources for these goods and services, and there is no assurance we
would be able to find such alternate sources on favorable terms, if at all. Any such disruption in our supply chain could
adversely affect our ability to manufacture and deliver our products on a timely basis, and thereby affect our results of
operations.
Our long-term growth prospects and results of operations may be impaired if the rate of adoption of fully-
automatic transmissions in commercial vehicles outside North America does not increase.
Our long-term growth strategy depends in part on an increased rate of automaticity outside North America. As part
of that strategy, we have established manufacturing facilities in India and Hungary. We have also dedicated significant
human resources to serve markets where we anticipate increased adoption of automaticity, including China, India, Brazil
and Russia. However, manual transmissions remain the market leader outside North America and there can be no
assurance that adoption of automatic transmissions will increase. Factors potentially impacting adoption of automatic
transmissions outside of North America include the large existing installed base of manual transmissions, customer
preferences for manual transmissions, commercial vehicle OEM vertical integration into manual transmission and AMT
manufacturing, increased competition from AMTs, DCTs, electric driving systems, and other alternative transmission
technologies and failure to further develop the Allison brand. If the rate of adoption of fully-automatic transmissions does
not increase as we have anticipated, our long-term growth prospects and results of operations may be impaired.
Our sales are concentrated among our top five OEM customers and the loss or consolidation of any one of
these customers or the discontinuation of particular vehicle models for which we are a significant supplier
could reduce our net sales and have a material adverse effect on our results of operations and financial
condition.
We have in the past and may in the future derive a significant portion of our net sales from a relatively limited
number of OEM customers. For the years ended December 31, 2017, 2016 and 2015, our top five customers accounted
for approximately 49%, 52% and 52% of our net sales, respectively. Our top three customers, Daimler AG, PACCAR Inc.
and Volvo Group, accounted for approximately 20%, 9% and 8%, respectively, of our net sales during 2017. The loss of,
or consolidation of, any one of these customers, or a significant decrease in business from, one or more of these
customers could harm our business. In addition, the discontinuation of particular vehicle models for which we are a
significant supplier could reduce our net sales and have a material adverse effect on our results of operations.
We may not be successful in introducing our new products and technologies and responding to customer
needs.
We currently have new products and technologies under development. The development of new products and
technologies is difficult and the timetable for commercial release is uncertain, and we may not be successful in introducing
our new products and responding to customer needs. In addition, it often takes significant time, in some cases multiple
fleet buy cycles, before customers gain experience with new products and technologies and those new products and
technologies become widely-accepted by the market, if at all. If we do not adequately anticipate the changing needs of our
customers by developing and introducing new and effective products and technologies on a timely basis, our competitive
position and prospects could be harmed. If our competitors are able to respond to changing market demands and adopt
new technologies more quickly than we do, demand for our products could decline, our competitive position could be
harmed, and we will not be able to recoup a return on our development investments. Moreover, changing customer
demands as well as evolving safety and environmental standards could require us to adapt our products and technologies
to address such changes. As a result, in the future we may experience delays in the introduction of some or all of our new
products or modifications or enhancements of existing products. Furthermore, there may be production delays due to
unanticipated technological setbacks, which may, in turn, delay the release of new products to our end users. If we
experience significant delays in production, our net sales and results of operations may be materially adversely affected.
Our success depends on continued research and development efforts, the outcome of which is uncertain.
Our success depends on our ability to improve the efficiency and performance of our transmissions, and we invest
significant resources in research and development in order to do so. Nevertheless, the research and development
process is time-consuming and costly, and offers uncertain results. We may not be able through our research and
development efforts to keep pace with improvements in transmission-related technology of our competitors, and licenses
for technologies that would enable us to keep pace with our competitors may not be available on commercially reasonable
terms if at all. Finally, our research and development efforts, and generally our ability to introduce improved products in
the marketplace, may be constrained by the patents and other intellectual property rights of competitors and others.
Our sales to the Defense end market are to government entities and contractors for the U.S. and foreign
governments, and the loss of a significant number of our contracts, or budgetary declines or future reductions
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or changes in spending by the U.S. or foreign governments could have a material adverse effect on our results
of operations and financial condition.
Our net sales to the Defense end market are derived from contracts (revenue arrangements) with agencies of, and
prime system contractors for, the U.S. government and foreign governments. If a significant number of our DOD contracts
and subcontracts are simultaneously delayed or cancelled for budgetary, performance or other reasons, it would have a
material adverse effect on our results of operations and financial condition. Approximately 5%, or $117 million, of our net
sales for the year ended December 31, 2017 were from our Defense end market.
Our future financial results may be adversely affected by:
• declines in, or uncertainty regarding, U.S. or foreign government defense budgets;
• curtailment of the U.S. government’s use of technology or other services and product providers, including
curtailment due to government budget reductions, future government shutdowns and related fiscal matters;
• geopolitical developments that affect demand for our products and services; and
• technological developments that impact purchasing decisions or our competitive position.
Increases in cost, disruption of supply or shortage of raw materials or components used in our products could
harm our business and profitability.
Our products contain various raw materials, including corrosion-resistant steel, non-ferrous metals such as
aluminum and nickel, and precious metals such as platinum and palladium. We use raw materials directly in
manufacturing and in transmission components that we purchase from our suppliers. We generally purchase components
with significant raw material content on the open market. The prices for these raw materials fluctuate depending on
market conditions. Volatility in the prices of raw materials such as steel, aluminum and nickel could increase the cost of
manufacturing our products. We may not be able to pass on these costs to our customers, and this could have a material
adverse effect on our business, results of operations and financial condition. Even in the event that increased costs can
be passed through to customers, our gross margin percentages would decline. Additionally, our suppliers are also subject
to fluctuations in the prices of raw materials and may attempt to pass all or a portion of such increases on to us. In the
event they are successful in doing so, our margins would decline.
In 2017, approximately 75% of our total spending on components was sourced from approximately 38 suppliers,
some of which are the single source for such components. All of the suppliers from which we purchase materials and
components used in our business are fully validated suppliers, meaning the suppliers’ manufacturing processes and
inputs have been validated under a production part approval process (“PPAP”). Furthermore, there are only a limited
number of suppliers for certain of the materials used in our business, such as corrosion-resistant steel. As a result, our
business is subject to the risk of additional price fluctuations and periodic delays in the delivery of our materials or
components if supplies from a validated supplier are interrupted and a new supplier, if one is available, must be validated
or materials and components must be purchased from a supplier without a completed PPAP, which could increase our
risk of purchasing non-conforming components. Any such price fluctuations or delays, if significant, could harm our
profitability or operations. In addition, the loss of a supplier could result in significant material cost increases or reduce our
production capacity. We also cannot guarantee we will be able to maintain favorable arrangements and relationships with
these suppliers. An increase in the cost or a sustained interruption in the supply or shortage of some of these raw
materials or components that may be caused by a deterioration of our relationships with suppliers or by events such as
natural disasters, power outages, labor strikes, or the like could negatively impact our business, results of operations and
financial condition. Although we have agreements with many of our customers that we will pass such price increases
through to them, such contracts may be canceled by our customers and/or we may not be able to recoup the costs of
such price increases. Additionally, if we are unable to continue to purchase our required quantities of raw materials on
commercially reasonable terms, or at all, if we are unable to maintain or enter into purchasing contracts for commodities,
or if delivery of materials from suppliers is delayed or non-conforming, our operations could be disrupted or our profitability
could be adversely impacted.
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Our international operations, in particular our emerging markets, are subject to various risks which could have
a material adverse effect on our business, results of operations and financial condition.
Our business is subject to certain risks associated with doing business internationally, particularly in emerging
markets. Outside-North America net sales represented approximately 21% of our net sales for 2017. Most of our
operations are in the U.S., but we also have manufacturing and customization facilities in India and Hungary with a
services agreement with Opel Szentgotthard Automotive Manufacturing Ltd., formerly GM-PTH, and customization
capability in Brazil, The Netherlands, China and Japan. Further, we intend to continue to pursue growth opportunities for
our business in a variety of business environments outside the U.S., which could exacerbate the risks set forth below. Our
international operations are subject to, without limitation, the following risks:
• the burden of complying with multiple and possibly conflicting laws and any unexpected changes in regulatory
requirements;
• foreign currency exchange controls, import and export restrictions and tariffs, including restrictions promulgated
by the Office of Foreign Assets Control of the U.S. Department of the Treasury, and other trade protection
regulations and measures;
• political risks, including increased trade protectionism and risks of loss due to civil disturbances, acts of terrorism,
acts of war, guerilla activities and insurrection;
• unstable economic, financial and market conditions and increased expenses as a result of inflation or higher
interest rates;
• difficulties in enforcement of third-party contractual obligations and intellectual property rights and collecting
receivables through foreign legal systems;
• difficulty in staffing and managing international operations and the application of foreign labor regulations;
• differing local product preferences and product requirements;
• fluctuations in currency exchange rates to the extent that our assets or liabilities are denominated in a currency
other than the functional currency of the country where we operate;
• potentially adverse tax consequences from changes in tax laws, requirements relating to withholding taxes on
remittances and other payments by subsidiaries and restrictions on our ability to repatriate dividends from our
subsidiaries; and
• exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt
Practices Act (“FCPA”) and similar laws and regulations in other jurisdictions.
Any one of these factors could materially adversely affect our sales of products or services to international
customers or harm our reputation, which could have a material adverse effect on our business, results of operations and
financial condition.
Our international operations require us to comply with anti-corruption laws and regulations of the U.S.
government and various international jurisdictions.
Doing business on a worldwide basis requires us and our subsidiaries to comply with the laws and regulations of the
U.S. government and various international jurisdictions, and our failure to comply with these rules and regulations may
expose us to liabilities. These laws and regulations may apply to companies, individual directors, officers, employees and
agents, and may restrict our operations, trade practices investment decisions and partnering activities. In particular, our
international operations are subject to U.S. and foreign anti-corruption laws and regulations, such as the FCPA. The
FCPA prohibits U.S. companies and their officers, directors, employees and agents acting on their behalf from corruptly
offering, promising, authorizing or providing anything of value to foreign officials for the purposes of influencing official
decisions or obtaining or retaining business or otherwise obtaining favorable treatment. The FCPA also requires
companies to make and keep books, records and accounts that accurately and fairly reflect transactions and dispositions
of assets and to maintain a system of adequate internal accounting controls. As part of our business, we deal with state-
owned business enterprises, the employees and representatives of which may be considered foreign officials for purposes
of the FCPA. In addition, some of the international locations in which we operate lack a developed legal system and have
elevated levels of corruption. As a result of the above activities, we are exposed to the risk of violating anti-corruption
laws. Violations of these legal requirements are punishable by criminal fines and imprisonment, civil penalties,
disgorgement of profits, injunctions, debarment from government contracts as well as other remedial measures. We have
established policies and procedures designed to assist us and our personnel in complying with applicable U.S. and
international laws and regulations. However, our employees, subcontractors and agents could take actions that violate
these legal requirements, which could adversely affect our reputation, business, financial condition and results of
operations.
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Sales of our electric hybrid-propulsion systems have been, and are expected to continue to be, negatively
impacted by external factors, including fuel price trends, regulatory requirements, alternative technologies
and governmental entities electing not to subsidize the purchase of such products by end users.
External factors, including diesel and natural gas fuel price trends, emissions and on-board diagnostics regulatory
requirements, availability of compatible engine calibrations from engine manufacturers and alternative emerging green
technologies, have negatively impacted, and are expected to continue to negatively impact, sales of our electric hybrid-
propulsion systems. In addition, the sales of our electric hybrid-propulsion systems for use in transit buses have been, and
are expected to continue to be, negatively impacted by governmental entities electing not to subsidize the purchase of
such products by end users. In 2017, we derived approximately 3% of our net sales from the sale of electric hybrid-
propulsion systems for use in transit buses to city, state and federal governmental end users. Such end users may be
eligible to receive certain subsidies as a result of their purchase of vehicles using electric hybrid-propulsion systems.
While we do not directly receive these subsidies, if any of the subsidizing entities elect to curtail such subsidies to end
users for any reason including governmental budget reductions and related fiscal matters, failure of our electric hybrid
technology to qualify for such subsidies or redundancy by alternative technologies created by our competitors, our sales
from our electric hybrid-propulsion systems may be negatively impacted. For the year ended December 31, 2017, we
experienced an increase in revenue generated from electric hybrid propulsion systems for use in transit buses of 16%. For
the years ended December 31, 2016 and 2015, we experienced decreases in revenue generated from electric hybrid-
propulsion systems for use in transit buses of 16% and 22%, respectively.
Any events that impact our brand name, including if the products we manufacture or distribute are found to be
defective, could have an adverse effect on our reputation, cause us to incur significant costs and negatively
impact our business, results of operations and financial condition.
We face exposure to product liability claims in the event that the use of our products has, or is alleged to have,
resulted in injury, death or other adverse effects. We currently maintain product liability insurance coverage, but we
cannot be assured that we will be able to obtain such insurance on acceptable terms in the future, if at all, or that any
such insurance will provide adequate coverage against potential claims. Product liability claims can be expensive to
defend and can divert the attention of management and other personnel for long periods of time, regardless of the
ultimate outcome. An unsuccessful product liability defense could have a material adverse effect on our business, results
of operation, financial condition or prospects. If one of our products is determined to be defective, we may face substantial
warranty costs and may be responsible for significant costs associated with a product recall or a redesign. We have had
defect and warranty issues associated with certain of our products in the past, and we cannot give assurance similar
product defects will not occur in the future. See NOTE 9 “Product Warranty Liabilities” of Notes to Consolidated Financial
Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional details regarding these warranty
issues.
Furthermore, our business depends on the strong brand reputation we have developed. In addition to the risk of
defective products, we also face significant risks in our efforts to penetrate new markets, where we have limited brand
recognition. We also rely on our reputation with end users of our transmissions to specify our transmissions when
purchasing new vehicles from our OEM customers. In the event we are not able to maintain or enhance our brand in
these new markets or our reputation is damaged in our existing markets as a result of product defects or recalls, we may
face difficulty in maintaining our pricing positions with respect to some of our products or experience reduced demand for
our products, which could negatively impact our business, results of operations and financial condition.
Additionally, we license the “Allison Transmission” name and certain related trademarks to third parties. If any third
party uses the trade name “Allison Transmission” in ways that adversely affect such trade name or trademark, our
reputation could suffer damage, which in turn could have a material adverse effect on our business, results of operations
and financial condition.
Our brand and reputation are dependent on the continued participation and level of service of our numerous
independent distributors and dealers.
We work with a network of approximately 1,400 independent distributors and dealers that provide post-sale service
and parts and support equipment. Because we depend on the pull-through demand generated by end users for our
products, any actions by the independent distributors or dealers, which are not in our control, may harm our reputation
and damage the brand loyalty among our customer base. In the event that we are not able to maintain our brand
reputation because of the actions of our independent distributors and dealers, we may face difficulty in maintaining our
pricing positions with respect to some of our products or have reduced demand for our products, which could negatively
impact our business, results of operations and financial condition. In addition, if a significant number of independent
dealers were to terminate their contracts, it could adversely impact our business, results of operations and financial
condition.
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We are subject to cybersecurity risks to operational systems, security systems, or infrastructure owned by
Allison or third-party vendors or suppliers.
We are at risk for interruptions, outages, and breaches of: (i) operational systems, including business, financial,
accounting, product development, data processing, or manufacturing processes, owned by us or our third-party vendors
or suppliers; (ii) facility security systems, owned by us or our third-party vendors or suppliers; and/or (iii) transmission
control modules or other in-product technology, owned by us or our third-party vendors or suppliers. Such cyber incidents
could materially disrupt operational systems; result in loss of intellectual property, trade secrets or other proprietary or
competitively sensitive information; compromise personally identifiable information of employees, customers, suppliers, or
others; jeopardize the security of our facilities; and/or affect the performance of transmission control modules or other in-
product technology. A cyber incident could be caused by malicious third parties using sophisticated, targeted methods to
circumvent firewalls, encryption, and other security defenses, including hacking, fraud, trickery, or other forms of
deception. The techniques used by third parties change frequently and may be difficult to detect for long periods of time. A
significant cyber incident could impact production capability, harm our reputation and/or subject us to regulatory actions or
litigation, any of which could materially affect our business, results of operations and financial condition.
Labor unrest could have a material adverse effect on our business, results of operations and financial
condition.
As of December 31, 2017, approximately 59% of our U.S. employees, representing over 50% of our total
employees, were represented by the UAW and are subject to a collective bargaining agreement. In December 2017, we
reached an agreement on a new six-year collective bargaining agreement with UAW Local 933, which is effective through
November 2023.
In addition to our unionized work force, many of our direct and indirect customers and vendors have unionized work
forces. Strikes, work stoppages or slowdowns experienced by these customers or vendors or their other suppliers could
result in slowdowns or closings of assembly plants that use our products or supply materials for use in the production of
our products. Organizations responsible for shipping our products may also be impacted by strikes. Any interruption in the
delivery of our products could reduce demand for our products and could have a material adverse effect on us.
In general, we consider our labor relations with all of our employees to be good. However, in the future we may be
subject to labor unrest. If strikes, work stoppages or lock-outs at our facilities or at the facilities of our vendors or
customers occur or continue for a long period of time, our business, results of operations and financial condition may be
materially adversely affected.
In the event of a catastrophic loss of our key manufacturing facility, our business would be adversely affected.
While we manufacture our products in several facilities and maintain insurance covering our facilities, including
business interruption insurance, a catastrophic loss of the use of all or a portion of one of our manufacturing facilities due
to accident, labor issues, weather conditions, acts of war, political unrest, terrorist activity, natural disaster or otherwise,
whether short- or long-term, would have a material adverse effect on our business, results of operations and financial
condition. Our most significant concentration of manufacturing is around our corporate headquarters in Indianapolis,
Indiana, where we produce approximately 90% of our transmissions. In addition to our Indianapolis manufacturing
facilities, we currently operate manufacturing facilities in both Szentgotthard, Hungary and Chennai, India. In the event of
a disruption at the Indianapolis facilities, our other facilities may not be adequately equipped to operate at a level sufficient
to compensate for the volume of production at the Indianapolis facility due to their size and the fact that they have not yet
been tested for such significant increases in production volume.
We could be materially adversely affected by any failure to maintain cost controls.
We rely on our cost structure and operating discipline to achieve strong operating margins. There are many factors
that could affect our ability to realize expected cost savings or achieve future cost savings that we are not able to control,
including the need for unexpected significant capital expenditures; unexpected changes in commodity or component
pricing, including an increase in export or import tariffs, that we are unable to pass on to our suppliers or customers and
our inability to maintain efficiencies gained from our workforce optimization initiatives. Additionally, we have substantial
indebtedness of approximately $2,576 million as of December 31, 2017. Our inability to maintain our cost controls could
adversely impact our operating margins.
19
Many of the key patents and unpatented technology we use in our business are licensed to us, not owned by
us, and our ability to use and enforce such patents and technology is restricted by the terms of the license.
Protecting our intellectual property rights is critical to our ability to compete and succeed as a company. GM has
granted us an irrevocable, perpetual, royalty-free, worldwide license under a large number of U.S. and foreign patents and
patent applications, as well as certain unpatented technology and know-how, to design, develop, manufacture, use and
sell fully-automatic transmissions and H 40/50 EP electric hybrid-propulsion transit bus systems for use in certain
vocational vehicles, defense vehicles and off-road products. With respect to the bulk of the intellectual property licensed to
us, our license is exclusive with respect to the design, development, manufacture, use and sale of fully-automatic
transmissions and H 40/50 EP electric hybrid-propulsion transit bus systems in vocational vehicles above certain weight
rating thresholds, certain defense vehicles and certain off-road products. It is non-exclusive with respect to certain other
products that are within the scope of the licensed patents or to which the licensed technology can be applied. We consider
the patents and technology licensed under such license agreement, as a whole, to be critical to preserving our competitive
position in the market. However, GM continues to own such patents and technology, and GM has the right, in the first
instance, to control the maintenance, enforcement and defense of such patents and the prosecution of the licensed patent
applications. In addition, our ability to sublicense our rights is limited.
We rely on unpatented technology, which exposes us to certain risks.
We currently do, and may continue in the future to, rely on unpatented proprietary technology. In such regard, we
cannot be assured that any of our applications for protection of our intellectual property rights will be approved or that
others will not infringe or challenge our intellectual property rights. It is possible our competitors will independently develop
the same or similar technology or otherwise obtain access to our unpatented technology.
Although we believe the loss or expiration of any single patent would not have a material effect on our business,
results of operations or financial position, there can be no assurance that any one, or more, of the patents licensed from
GM, or any other intellectual property owned by or licensed to us, will not be challenged, invalidated or circumvented by
third parties. In fact, a number of the patents licensed to us by GM are set to expire in the next few years. When a patent
expires, the inventions it discloses can be used freely by others. Thus, the competitive advantage that we gain from the
patents licensed to us from GM will decrease over time, and a greater burden will be placed on our own research and
development and licensing efforts to develop and otherwise acquire technologies to keep pace with improvements of
transmission-related technology in the marketplace. We enter into confidentiality and invention assignment agreements
with employees, and into non-disclosure agreements with suppliers and appropriate customers so as to limit access to
and disclosure of our proprietary information. We cannot be assured that these measures will provide meaningful
protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use,
misappropriation or disclosure. If we are unable to maintain the proprietary nature of our technologies, our ability to
sustain margins on some or all of our products may be affected, which could reduce our sales and profitability. Moreover,
the protection provided for our intellectual property by the laws and courts of foreign nations may not be as advantageous
to us as the protection available under U.S. law.
Our pension and other post-retirement benefits funding obligations could increase significantly due to a
reduction in funded status as a result of a variety of factors.
Our earnings may be positively or negatively impacted by the amount of income or expense recorded for our defined
benefit pension plans and other post-retirement benefits (“OPEB”). Accounting principles generally accepted in the United
States of America (“GAAP”) require that income or expense for defined benefit pension plans be calculated at the annual
measurement date using actuarial assumptions and calculations. These calculations reflect certain assumptions, the most
significant of which relate to the capital markets, interest rates, health care inflation rates and other economic conditions.
Changes in key economic indicators can change these assumptions. These assumptions, along with the actual value of
assets at the measurement date, will impact the calculation of pension expense for the year. Although GAAP pension
expense and pension contributions are not directly related, the key economic indicators that affect GAAP pension
expense also affect the amount of cash that we would contribute to our defined benefit pension plans. Because the values
of these defined benefit pension plans’ assets have fluctuated and will fluctuate in response to changing market
conditions, the amount of gains or losses that will be recognized in subsequent periods, the impact on the funded status of
the defined benefit pension plans and the future minimum required contributions, if any, could have a material adverse
effect on our business, results of operations and financial condition. The magnitude of such impact cannot be determined
with certainty at this time. However, the effect of a one percentage point decrease in the assumed discount rate would
result in an increase in the December 31, 2017 defined benefit pension plans obligation of approximately $22 million.
Likewise, a one percentage point decrease in the effective interest rate for determining defined benefit pension plans
contributions would result in an increase in the minimum required contributions for 2018 of approximately $4 million.
Similarly, a one percentage point decrease in the assumed discount rate would result in an increase in the December 31,
2017 OPEB obligation of approximately $15 million. As of December 31, 2017, the funded status of our defined benefit
pension plans was $7 million and the unfunded status of our OPEB plan was $102 million.
20
Environmental, health and safety laws and regulations may impose significant compliance costs and liabilities
on us.
We are subject to many environmental, health and safety laws and regulations governing emissions to air,
discharges to water, the generation, handling and disposal of waste and the cleanup of contaminated properties.
Compliance with these laws and regulations is costly. We have incurred and expect to continue to incur significant costs
to maintain or achieve compliance with applicable environmental, health and safety laws and regulations. Moreover, if
these environmental, health and safety laws and regulations become more stringent or expand to include a larger portion
of our products or our customer’s products in the future, we could incur additional costs in order to ensure that our
business and products comply with such regulations. In addition, we may not be successful in complying with, or the
vehicle or customer OEMs to which we sell our products may choose not to comply with, such laws and regulations, which
could impact our ability to sell our products in certain locations. Furthermore, if our products that are already placed in
service are found to be non-compliant with certain laws, regulations and certifications, we may incur additional costs and
fines. We cannot assure we are in full compliance with all environmental, health and safety laws and regulations. Our
failure to comply with applicable environmental, health and safety laws and regulations and permit requirements could
result in civil or criminal fines, penalties or enforcement actions, third-party claims for property damage and personal
injury, requirements to clean up property or to pay for the costs of cleanup or regulatory or judicial orders enjoining or
curtailing operations or requiring corrective measures, including the installation of pollution control equipment or remedial
actions. Our failure to comply could also result in our failure to secure adequate insurance for our business, resulting in
significant exposure, diminished ability to hedge our risks and material modifications of our business operations.
We may be subject to liability as a potentially responsible party under the Comprehensive Environmental Response,
Compensation and Liability Act and similar state or foreign laws for contaminated properties that we currently own, lease
or operate or that we or our predecessors have previously owned, leased or operated, and sites to which we or our
predecessors sent hazardous substances. Such liability may be joint and several so that we may be liable for more than
our share of any contamination, and any such liability may be determined without regard to causation or knowledge of
contamination. We or our predecessors have been named potentially responsible parties at contaminated sites from time
to time.
We manage the remediation of historical soil and groundwater contamination at our Indianapolis, Indiana facilities
under an Agreed Order of Consent with the EPA. We recorded approximately $14 million for the estimated undiscounted
environmental liabilities to be paid out over 30 years, which will be adjusted periodically as remediation efforts progress or
as additional technical, regulatory or legal information becomes available. In the fourth quarter of 2016, we satisfied the
financial assurance requirement under the AOC by securing a letter of credit in the amount of $15 million. See Part I, Item
1, “Business — Environmental Compliance” and Part II, Item 8, NOTE 16, “Commitments and Contingencies” of this
Annual Report on Form 10-K. There can be no assurances that future environmental remediation obligations will not have
a material adverse effect on our results of operations and financial condition. In addition, we occasionally evaluate
alternatives with respect to our facilities, including possible dispositions or closings. Investigations undertaken in
connection with these activities may lead to discoveries of contamination that must be remediated, and closings of
facilities may trigger remediation requirements that are not applicable to operating facilities. We may also face lawsuits
brought by third parties that either allege property damage or personal injury as a result of, or seek reimbursement for
costs associated with, such contamination.
Our business and financial results may be adversely affected by government contracting risks.
We are subject to various laws and regulations applicable to parties doing business with the U.S. government,
including laws and regulations governing performance of U.S. government contracts, the use and treatment of U.S.
government furnished property and the nature of materials used in our products. We may be unilaterally suspended or
barred from conducting business with the U.S. government, or become subject to fines or other sanctions if we are found
to have violated such laws or regulations. As a result of the need to comply with these laws and regulations, we are
subject to increased risks of governmental investigations, civil fraud actions, criminal prosecutions, whistleblower law suits
and other enforcement actions. The laws and regulations to which we are subject include, but are not limited to, Export
Administration Regulations, the Federal Acquisition Regulation, International Traffic in Arms Regulations and regulations
from the Bureau of Alcohol, Tobacco and Firearms and the FCPA.
U.S. government contracts are subject to modification, curtailment or termination by the U.S. government without
prior written notice, either for convenience or for default as a result of our failure to perform under the applicable contract.
If terminated by the U.S. government as a result of our default, we could be liable for additional costs the U.S. government
incurs in acquiring undelivered goods or services from another source and any other damages it suffers. Additionally, we
cannot assign prime U.S. government contracts without the prior consent of the U.S. government contracting officer, and
we are required to register with the Central Contractor Registration Database. Furthermore, the U.S. government
periodically audits our governmental contract costs, which could result in fines, penalties or adjustment of costs and prices
under the contracts. The result of, or expiration of the statute of limitations for, such audits could have an impact on
reported net income and cash flow from operations.
21
Exchange rate fluctuations could adversely affect our results of operations and financial position.
As a result of the expansion of our international operations, currency exchange rate fluctuations could affect our
results of operations and financial position. We expect to generate an increasing portion of our net sales and expenses in
such foreign currencies as the Japanese Yen, Euro, Indian Rupee, Brazilian Real, Chinese Yuan Renminbi, Canadian
Dollar and Hungarian Forint. Although we may enter into foreign exchange agreements with financial institutions in order
to reduce our exposure to fluctuations in the value of these and other foreign currencies, these transactions, if entered
into, will not eliminate that risk entirely. To the extent that we are unable to match net sales received in foreign currencies
with expenses paid in the same currency, exchange rate fluctuations could have a negative impact on our results of
operations and financial condition. Additionally, because our consolidated financial results are reported in U.S. Dollars, if
we generate net sales or earnings in other currencies, the conversion of such amounts into U.S. Dollars can result in an
increase or decrease in the amount of our net sales or earnings. Furthermore, we sell certain of our products in our non-
North American markets denominated in the U.S. Dollar. To the extent that certain of the local currencies in our non-North
American markets are relatively weaker than the U.S. Dollar, whether as a result of foreign governments’ influence or
otherwise, we could become less price competitive, which could have a material adverse effect on the results of our
operations.
An impairment in the carrying value of goodwill, other intangible assets or long-lived assets could negatively
affect our consolidated results of operations and net worth.
Pursuant to GAAP, we are required to assess our goodwill and indefinite-lived intangible assets to determine if they
are impaired on an annual basis, or more often if events or changes in circumstances indicate that impairment may have
occurred. Intangible assets with finite lives are amortized over the useful life and are reviewed for impairment on triggering
events such as events or changes in circumstances indicating that an impairment may have occurred. If the testing
performed indicates that impairment has occurred, we are required to record a non-cash impairment charge for the
difference between the carrying value of the goodwill and the implied fair value of the goodwill or the carrying value of the
intangible assets and the fair value of the intangible assets in the period the determination is made. Disruptions to our
business, end market conditions, protracted economic weakness and unexpected significant declines in operating results
may result in charges for goodwill and other asset impairments.
Our annual goodwill and trade name impairment tests for the year ended December 31, 2017 resulted in no
impairment. Although our analysis regarding the fair value of goodwill and trade name indicated that they exceeded their
respective carrying values, materially different assumptions regarding the future performance of our business could result
in goodwill impairment losses. See NOTE 2 “Summary of Significant Accounting Policies” and NOTE 5 “Goodwill and
Other Intangible Assets” of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on
Form 10-K for additional details.
The carrying value of long-lived assets is evaluated whenever events or circumstances indicate that the carrying
value of a long-lived asset may not be recoverable. Events or circumstances that would result in an impairment review
primarily include a significant change in the use of an asset, a significant change in the projected future cash flows
generated by 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 and could have a material adverse effect on the results of our operations.
As a result of events and circumstances in the fourth quarter of 2017, we reviewed certain of our long-lived assets
related to the production of the TC10 product, resulting in a $32 million loss for the year ended December 31, 2017. See
NOTE 2 “Summary of Significant Accounting Policies” and NOTE 4 “Property, Plant and Equipment” of Notes to
Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional details.
22
Provisions of our amended and restated certificate of incorporation and amended and restated bylaws and
Delaware law might discourage, delay or prevent a change of control of our company or changes in our
management and, as a result, depress the trading price of our common stock.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that
could discourage, delay or prevent a change in control of our company or changes in our management that the
stockholders of our company may deem advantageous. These provisions:
• authorize the issuance of blank check preferred stock that our Board of Directors could issue to increase the
number of outstanding shares and to discourage a takeover attempt;
• limit the ability of stockholders to remove directors only “for cause”;
• prohibit our stockholders from calling a special meeting of stockholders;
• prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of
our stockholders;
• provide that the Board of Directors is expressly authorized to adopt, or to alter or repeal our bylaws;
• establish advance notice requirements for nominations for election to our Board of Directors or for
proposing matters that can be acted upon by stockholders at stockholder meetings; and
• require the approval of holders of at least two-thirds of the outstanding shares of common stock to amend the
bylaws and certain provisions of the certificate of incorporation.
These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our
company that our stockholders may believe to be in their best interests. These provisions could also discourage proxy
contests and make it more difficult for our stockholders to elect directors of their choosing and cause us to take corporate
actions other than those they desire.
23
Risks Related to Our Indebtedness
Our substantial indebtedness could adversely affect our financial health, restrict our activities and affect our
ability to meet our obligations.
We have a significant amount of indebtedness. As of December 31, 2017, we had total indebtedness of $2,576
million and we would have been able to borrow an additional $533 million, net of $17 million of outstanding letters of
credit, under the revolving portion of Allison Transmission Inc.’s (“ATI”), the Company’s wholly-owned subsidiary, Senior
Secured Credit Facility due 2021 (“Revolving Credit Facility”), less $17 million of letters of credit. As of December 31,
2017, we had no outstanding borrowings against the Revolving Credit Facility. At December 31, 2017, $1,176 million of
our total indebtedness was associated with ATI’s, Senior Secured Credit Facility Term B-3 Loan due 2022 (“Term B-3
Loan”, and together with the Revolving Credit Facility, the “Senior Secured Credit Facility”), $1,000 million of our total
indebtedness was associated with ATI’s 5.0% Senior Notes due September 2024 (“5.0% Senior Notes”) and $400 million
of our total indebtedness was associated with ATI’s 4.75% Senior Notes due October 2027 (“4.75% Senior Notes”). For a
complete description of the terms of the Senior Secured Credit Facility, the 5.0% Senior Notes and the 4.75% Senior
Notes, please see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Liquidity and Capital Resources.”
Our substantial indebtedness could have important consequences. For example, it could:
• make it more difficult for us to satisfy our obligations under our indebtedness;
• require us to further dedicate a substantial portion of our cash flow from operations to payments of principal and
interest on our indebtedness, thereby reducing the availability of our cash flow to fund acquisitions, working
capital, capital expenditures, research and development efforts and other general corporate purposes;
• increase our vulnerability to and limit our flexibility in planning for, or reacting to, downturns or changes in our
business and the industry in which we operate;
• restrict us from making strategic acquisitions or cause us to make non-strategic divestitures;
• expose us to the risk of increased interest rates as borrowings under the Senior Secured Credit Facility are
subject to variable rates of interest;
• place us at a competitive disadvantage compared to our competitors that have less debt; and
• limit our ability to borrow additional funds.
In addition, the Revolving Credit Facility contains a maximum total senior secured leverage ratio. The Senior
Secured Credit Facility, the indenture governing the 5.0% Senior Notes and the indenture governing the 4.75% Senior
Notes also contain other negative and affirmative covenants that will limit our ability to engage in activities that may be in
our long-term best interests. Our failure to comply with any of the covenants could result in an event of default which, if
not cured or waived, could result in the acceleration of all of our indebtedness.
Our ability to pay regular dividends on our common stock is subject to the discretion of our Board of Directors
and may be limited by our structure and statutory restrictions and restrictions imposed by the Senior Secured
Credit Facility, the indenture governing the 5.0% Senior Notes and the indenture governing the 4.75% Senior
Notes as well as any future agreements.
Our Board of Directors declared a quarterly dividend of $0.06 per share of common stock beginning in the second
quarter of 2012, increased the quarterly dividend to $0.12 per share of common stock beginning in the second quarter of
2013 and increased the quarterly dividend again to $0.15 per share of common stock beginning in the fourth quarter of
2014. However, the payment of future dividends will be at the discretion of our Board of Directors and will depend on,
among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and
contractual restrictions applying to the payment of dividends and other considerations that our Board of Directors deems
relevant. The Senior Secured Credit Facility, the indenture governing the 5.0% Senior Notes and the indenture governing
the 4.75% Senior Notes also effectively limit our ability to pay dividends. As a consequence of these limitations and
restrictions, we may not be able to make, or may have to reduce or eliminate, the payment of dividends on our common
stock. Accordingly, you may have to sell some or all of your common stock after price appreciation in order to generate
cash flow from your investment. You may not receive a gain on your investment when you sell your common stock and
you may lose the entire amount of the investment. Additionally, any change in the level of our dividends or the suspension
of the payment thereof could adversely affect the market price of our common stock.
24
To service our indebtedness, we will require a significant amount of cash, and our ability to generate cash
depends on many factors beyond our control.
Our ability to make cash payments on our indebtedness and to fund planned capital expenditures will depend on our
ability to generate significant operating cash flow in the future. This, to a significant extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are beyond our control.
We cannot ensure that our business will generate sufficient cash flow from operations or that future borrowings will
be available to us under the Senior Secured Credit Facility in an amount sufficient to enable us to pay our indebtedness or
to fund our other liquidity needs. In such circumstances, we may need to refinance all or a portion of our indebtedness on
or before maturity. We cannot ensure that we will be able to refinance any of our indebtedness on commercially
reasonable terms or at all. If we cannot service our indebtedness, we may have to take actions such as selling assets,
seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances.
We cannot ensure that any such actions, if necessary, could be effected on commercially reasonable terms or at all.
If we fail to pay principal, premium, if any, and interest on our indebtedness or to otherwise comply with the
covenants in the instruments governing our indebtedness, we may be forced into bankruptcy or liquidation by
our lenders.
If we are unable to generate sufficient cash flow or are otherwise unable to obtain funds necessary to meet required
payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various
covenants in the instruments governing our indebtedness, we could be in default under the terms of the agreements
governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the
funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under the
Senior Secured Credit Facility could elect to terminate their commitments thereunder, cease making further loans and
institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating
performance declines, we may in the future need to obtain waivers from the required lenders under the Senior Secured
Credit Facility to avoid being in default. If we or any of our subsidiaries breach the covenants under the Senior Secured
Credit Facility and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we
would be in default under the Senior Secured Credit Facility, the lenders could exercise their rights, as described above,
and we could be forced into bankruptcy or liquidation.
Despite current indebtedness levels, we and our subsidiaries may still be able to incur additional
indebtedness, which could further exacerbate the risks associated with our substantial financial leverage.
We and our subsidiaries may be able to incur additional indebtedness in the future because the terms of our
indebtedness do not fully prohibit us or our subsidiaries from doing so. Subject to covenant compliance and certain
conditions, our indebtedness permits additional borrowing, including total borrowing up to $533 million under the
Revolving Credit Facility. If new debt is added to our current debt levels and our subsidiaries’ current debt levels, the
related risks that we and they now face could intensify.
25
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
Our world headquarters, which we own, is located at One Allison Way, Indianapolis, Indiana 46222. As of
December 31, 2017, we have a total of 17 manufacturing and certain other facilities in seven countries. The following
table sets forth certain information regarding these facilities.
Location
Plant
Plant #3 ..................................... Indianapolis
Plant #4 ..................................... Indianapolis
Plant #6 ..................................... Indianapolis
Plant #12 ................................... Indianapolis
Plant #14 ................................... Indianapolis
Plant #15 ................................... Indianapolis
Plant #16 ................................... Indianapolis
Plant #17 ................................... Indianapolis
Plant #20 Tech. Center ............. Indianapolis
Plant #21 Tech. Center ............. Indianapolis
Szentgotthard ............................ Hungary
Szentgotthard ............................ Hungary
Shanghai ................................... China
Santo Amaro/Sorocabo ............. Brazil
Chennai ..................................... India
Dubai ......................................... United Arab Emirates
Sliedrecht .................................. The Netherlands
Approximate
Size (ft2)
927,000
425,900
431,500
534,900
481,100
126,400
391,700
389,000
59,000
10,000
149,000
3,900
38,000
31,400
258,500
16,500
37,000
Owned /
Leased
Own
Own
Own
Own
Own
Lease
Own
Own
Own
Own
Own
Own
Lease
Own
Own
Lease
Lease
Description
Engineering, Operational Support
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Parts Distribution Center
Engineering & Testing
Engineering & Testing
Manufacturing & Customization
Sales & Marketing Support
Customization & Distribution
Customization & Distribution
Manufacturing
Distribution
Customization & Distribution
We believe all our facilities are suitable for their intended purpose, are being efficiently utilized and provide adequate
capacity to meet demand for the next several years. The table above does not include sales offices located in various
countries.
ITEM 3. Legal Proceedings
We are subject to various contingencies, including routine legal proceedings and claims arising out of the normal
course of business. These proceedings primarily involve commercial claims, product liability claims, personal injury claims
and workers’ compensation claims. The outcome of these lawsuits, legal proceedings and claims cannot be predicted with
certainty. Nevertheless, we believe the outcome of any of these currently existing proceedings, even if determined
adversely, would not have a material adverse effect on our financial condition or results of operations. See also NOTE 16,
“Commitments and Contingencies” in Part II, Item 8, of this Annual Report on Form 10-K.
ITEM 4. Mine Safety Disclosures
Not applicable.
26
PART II.
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information
Our common stock is listed on the NYSE under the symbol “ALSN.” The following table sets forth the high and low
sale prices per share for our common stock on the NYSE and the dividends declared per share for each quarter for the
periods indicated:
Year Ended December 31, 2017:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2016:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders
High
Low
Dividends
Declared
$38.17
$40.02
$40.25
$45.69
$27.13
$29.96
$30.52
$35.76
$32.80
$34.11
$32.93
$36.06
$20.56
$25.88
$26.74
$27.03
$0.15
$0.15
$0.15
$0.15
$0.15
$0.15
$0.15
$0.15
As of February 2, 2018, there were approximately 46,950 stockholders of record of our common stock, which
includes the actual number of holders registered on the books of the Company and holders of shares in “street name” or
persons, partnerships, associations, corporations or other entities identified in security position listings maintained by
depositories.
Dividends
Our Board of Directors declared a quarterly dividend of $0.15 per share each quarter during 2017 and 2016. We
expect to continue paying cash dividends on a quarterly basis; however, future dividends are subject to approval of the
Board of Directors and may be adjusted as business needs or market conditions change. In addition, our Senior Secured
Credit Facility, the indenture governing the 5.0% Senior Notes and the indenture governing the 4.75% Senior Notes
restrict the payment of dividends under certain circumstances.
Unregistered Sales of Equity Securities
During the period covered by this Annual Report on Form 10-K, we did not offer or sell any equity securities that
were not registered under the Securities Act of 1933, as amended (the “Securities Act”).
27
Issuer Purchases of Equity Securities
On November 14, 2016, our Board of Directors authorized us to repurchase up to $1,000 million of our common
stock pursuant to a stock repurchase program (“2016 Repurchase Program”). On November 8, 2017, our Board of
Directors increased the authorization by $500 million, bringing the total amount authorized under the 2016 Repurchase
Program to $1,500 million. The terms of the 2016 Repurchase Program provide that we may repurchase shares of our
common stock, from time to time depending on market conditions and corporate needs, in the open market or through
privately negotiated transactions in accordance with Rule 10b-18 of the Exchange Act. Unless earlier terminated by our
Board of Directors, the 2016 Repurchase Program will expire on December 31, 2019.
The following table sets forth information related to our repurchase of our common stock on a monthly basis in the
three months ended December 31, 2017:
Total Number
of Shares
Purchased
October 1 – October 31, 2017 ......................... 1,789,132
November 1 – November 30, 2017 .................
846,522
December 1 – December 31, 2017 .................
108,865
Total............................................................. 2,744,519
Average Price
Paid per Share
$
$
$
38.18
39.54
40.71
(1) These values reflect repurchases made under the 2016 Repurchase Program.
Total Number of
Shares Purchased
as Part of
Publicly
Announced
Programs(1)
1,789,132
846,522
108,865
2,744,519
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under Programs(1)
$ 91,701,335
$ 558,226,571
$ 553,794,867
Issuances Under Equity Compensation Plans
For information regarding the securities authorized for issuance under our equity compensation plans, see Part III,
Item 12 of this Annual Report on Form 10-K.
28
Comparative Stock Performance Graph
The information included under the heading “Comparative Stock Performance Graph” in this Item 5 of Part II of this
Annual Report on Form 10-K shall not be deemed to be “soliciting material” or subject to Regulation 14A or 14C, shall not
be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, nor
shall it be deemed incorporated by reference in any filing under the Securities Act or the Exchange Act.
Set forth below is a graph comparing the total cumulative returns of ALSN, the S&P 500 Index and an index of peer
companies selected by us. Our peer group includes Donaldson Company, Inc., Graco Inc., Roper Technologies, Inc.,
Gentex Corporation, Rockwell Automation, Inc. and Sensata Technologies Holding N.V. The graph assumes $100 was
invested on December 31, 2012 in our common stock and each of the indices and that all dividends, if any, are
reinvested.
As of December 31,
2012
As of December 31,
2013
As of December 31,
2014
As of December 31,
2015
As of December 31,
2016
As of December 31,
2017
Allison Transmission
Holdings, Inc ........................ $
S&P 500 Index .....................
Peer Group ...........................
100.00 $
100.00
100.00
$
137.63
132.39
136.81
$
171.81
150.51
146.48
$
133.88
152.59
144.94
$
178.15
170.84
162.93
231.52
208.14
226.88
29
ITEM 6. Selected Financial Data
The following table sets forth certain financial information for the most recent five years. The following table should
be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
(in millions, except per share data)
Consolidated Statements of Operations:
Net sales ..................................................... $
Gross profit ..................................................
Operating expenses:
Selling, general and administrative ........
Engineering — research and
development .......................................
Loss associated with impairment of
long-lived assets .................................
Trade name impairment…………………
Environmental remediation……………..
Total operating expenses ...................
Operating income ........................................
Other income (expense), net:
Interest income .......................................
Interest expense .....................................
Expenses related to long-term debt
refinancing ..........................................
Other (expense) income, net ..................
Total other expense, net .....................
Income before income taxes .......................
Income tax expense ....................................
Net income .................................................. $
Earnings Per Share Data:
Basic earnings per share ............................ $
Weighted-average shares outstanding .......
Diluted earnings per share .......................... $
Diluted weighted-average shares
outstanding ..................................................
Dividends declared per common share ...... $
Consolidated Balance Sheet Data:
Cash and cash equivalents ......................... $
Total assets .................................................
Total debt ....................................................
Stockholders’ equity ....................................
Dec. 31,
2017
Dec. 31,
2016
Dec. 31,
2015
Dec. 31,
2014
Dec. 31,
2013
2,262 $
1,131
1,840 $
864
1,986 $
934
2,127 $
976
1,927
842
342
105
32
—
—
479
652
324
88
—
—
—
412
452
—
(103)
1
(102)
(12)
2
(111)
341
(126)
215 $
1.28 $
168
1.27 $
169
0.60 $
317
93
1
80
14
505
429
1
(115)
(26)
—
(140)
289
(107)
182 $
1.03 $
176
1.03 $
177
0.60 $
345
104
15
—
—
464
512
1
(139)
—
(6)
(144)
368
(139)
229 $
1.27 $
180
1.25 $
182
0.51 $
335
97
—
—
—
432
410
1
(134)
—
(11)
(144)
266
(101)
165
0.90
185
0.88
188
0.42
205 $
252 $
4,219
2,159
1,081
4,408
2,377
1,189
263 $
4,656
2,491
1,398
185
4,813
2,642
1,439
—
(22)
(125)
527
(23)
504 $
3.38 $
149
3.36 $
150
0.60 $
199 $
4,205
2,546
689
30
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains forward-looking statements regarding industry trends, our expectations regarding
our future performance, liquidity and capital resources and other non-historical statements that involve risks and
uncertainties. Our actual results may differ materially from those discussed in or implied by the forward looking statements
as a result of various factors, including, without limitation, those set forth under Part I, Item 1A, “Risk Factors,” and other
matters included elsewhere in this Annual Report on Form 10-K. The following discussion and analysis of our financial
condition and results of operations should be read in conjunction with our consolidated financial statements and the notes
thereto included elsewhere in this Annual Report on Form 10-K, as well as the information presented under Part II, Item 6
of this Annual Report on Form 10-K.
Overview
We design and manufacture commercial and defense fully-automatic transmissions. The business was founded in
1915 and has been headquartered in Indianapolis, Indiana since inception. Allison was an operating unit of General
Motors Corporation 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 2,700 employees and 13 different transmission product lines. Although approximately 79%
of revenues were generated in North America in 2017, we have a global presence by serving customers in Europe, Asia,
South America and Africa. We serve customers through an independent network of approximately 1,400 independent
distributor and dealer locations worldwide.
Trends Impacting Our Business
Our net sales are driven by commercial vehicle production, which tends to be highly correlated to macroeconomic
conditions. During 2018, we expect continued strength in our North American On-Highway end market. We expect
demand in the Defense, Outside North America On-Highway and North America Off-Highway end markets to increase,
and we expect that demand in the Service Parts, Support Equipment and Other end market will decrease.
Full Year 2017 and 2016 Net Sales by End Market (in millions)
2017
Net Sales
2016
Net Sales
% Variance
End Market
North America On-Highway ...............................................................
North America Electric Hybrid-Propulsion Systems for
$
1,106 $
Transit Bus ....................................................................................
North America Off-Highway ...............................................................
Defense .............................................................................................
Outside North America On-Highway .................................................
Outside North America Off-Highway .................................................
Service Parts, Support Equipment and Other ...................................
71
51
117
344
41
532
Total Net Sales ..................................................................................
$
2,262 $
962
15%
61
7
115
305
12
378
1,840
16%
629%
2%
13%
242%
41%
23%
North America On-Highway end market net sales were up 15% for the year ended December 31, 2017 compared to
the year ended December 31, 2016, principally driven by higher demand for Rugged Duty Series models.
North America Electric Hybrid-Propulsion Systems for Transit Bus end market net sales were up 16% for the year
ended December 31, 2017 compared to the year ended December 31, 2016, principally driven by the timing of certain
transit property orders.
North America Off-Highway end market net sales were up 629% for the year ended December 31, 2017 compared
to the year ended December 31, 2016, principally driven by higher demand from hydraulic fracturing applications.
Defense end market net sales were up 2% for the year ended December 31, 2017 compared to the year ended
December 31, 2016, principally driven by higher demand.
Outside North America On-Highway end market net sales were up 13% for the year ended December 31, 2017
compared to the year ended December 31, 2016, principally driven by higher demand in Asia, Europe and South America.
Outside North America Off-Highway end market net sales were up 242% for the year ended December 31, 2017
compared to the year ended December 31, 2016, principally driven by improved demand in the mining and energy sector.
31
Service Parts, Support Equipment and Other end market net sales were up 41% for the year ended December 31,
2017 compared to the year ended December 31, 2016, principally driven by higher demand for North America 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 OEMs, distributors and the
U.S. government. Sales are recorded net of provisions for customer allowances and other rebates. Engineering services
are recorded as net sales in accordance with the terms of the contract. The associated costs are recorded in cost of sales.
We also have royalty agreements with third parties that provide net sales as a result of joint efforts in developing
marketable products.
Cost of 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 year ended
December 31, 2017, direct material costs were approximately 69%, overhead costs were approximately 25% and direct
labor costs were approximately 6% of total cost of sales. We are subject to changes in our cost of sales caused by
movements in underlying commodity prices. We seek to hedge against this risk by using commodity swap contracts and
LTSAs. See Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk—Commodity Price Risk”
included in this Annual Report on Form 10-K.
Selling, general and administrative
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 intangibles.
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.
32
Non-GAAP Financial Measures
We use Adjusted Earnings before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) and Adjusted EBITDA
margin to measure our operating profitability. We believe that Adjusted EBITDA and Adjusted EBITDA margin provide
management, investors and creditors with useful measures of the operational results of our business and increase the
period-to-period comparability of our operating profitability and comparability with other companies. Adjusted EBITDA
margin is also used in the calculation of management’s incentive compensation program. The most directly comparable
GAAP measure to Adjusted EBITDA is Net income. 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 our Senior Secured Credit Facility. Adjusted EBITDA margin 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. 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.
The following is a reconciliation of Net income to Adjusted EBITDA and Adjusted EBITDA margin and a
reconciliation of Net cash provided by operating activities to Adjusted free cash flow:
(unaudited, in millions)
Net income (GAAP) .............................................................................
plus:
Interest expense, net ........................................................................
Amortization of intangible assets .....................................................
Depreciation of property, plant and equipment ................................
Loss associated with impairment of long-lived assets (a) ................
Income tax expense .........................................................................
Technology-related investment expense (b) ....................................
Stock-based compensation expense (c) ..........................................
UAW Local 933 contract signing bonus (d) ......................................
Dual power inverter module units extended coverage (e) ...............
Expenses related to long-term debt refinancing (f) ..........................
Stockholder activism expenses (g) ..................................................
Unrealized (gain) loss on commodity hedge contracts (h) ...............
Unrealized loss on foreign exchange (i) ...........................................
Trade name impairment (j) ..............................................................
Environmental remediation (k) ........................................................
Loss on repayments of long-term debt (l) ........................................
Adjusted EBITDA (Non-GAAP) ..........................................................
For the years ended December 31,
2017
$ 504
2016
$ 215
2015
$ 182
103
90
80
32
23
16
12
10
(2)
—
—
—
—
—
—
—
$ 868
101
92
84
—
126
1
9
—
1
12
4
(2)
1
—
—
—
$ 644
114
97
88
1
107
—
10
—
(2)
26
—
1
1
80
14
1
$ 720
Net sales (GAAP) ................................................................................
Adjusted EBITDA margin (Non-GAAP) .............................................
$ 2,262
$ 1,840
$ 1,986
38.4%
35.0%
36.2%
Net cash provided by operating activities (GAAP) .........................
(Deductions) or additions to reconcile to Adjusted free cash flow:
Additions of long-lived assets ...............................................................
Excess tax benefit from stock-based compensation (m) ......................
Stockholder activism expenses (g) .......................................................
Adjusted free cash flow (Non-GAAP) ...............................................
$
658
$
591
$ 580
(91)
—
—
$ 567
(71)
6
4
$ 530
(58)
8
—
$ 530
(a) Represents a charge associated with the impairment of long-lived assets related to the production of the TC10
transmission and H3000 and H4000 electric hybrid-propulsion systems.
(b) Represents a charge (recorded in Other (expense) income, net) for investments in co-development
agreements to expand our position in transmission technologies.
(c) Represents stock-based compensation expense (recorded in Cost of sales, Selling, general and
administrative, and Engineering – research and development).
33
(d) Represents a bonus (recorded in Cost of sales, Selling, general and administrative, and Engineering –
research and development) to eligible employees recorded in the fourth quarter of 2017 as a result of UAW
Local 933 represented employees ratifying a six-year collective bargaining agreement effective through
November 2023.
(e) 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.
(f)
Represents expenses related to the refinancing of the Senior Secured Credit Facility in the third quarter of
2016 and ATI’s tender offer and redemption of its 7.125% senior notes due May 2019 (“7.125% Senior Notes”)
in the second quarter of 2015.
(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 unrealized (gains) losses (recorded in Other (expense) income, net) on the mark-to-market of our
commodity hedge contracts.
(i)
Represents losses (recorded in Other (expense) income, net) on intercompany financing transactions related
to investments in plant assets for our India facility.
(j)
Represents a charge associated with the impairment of our trade name as a result of lower forecasted net
sales for certain of our end markets.
(k) Represents environmental remediation expenses for ongoing operating, monitoring and maintenance activities
at our Indianapolis, Indiana manufacturing facilities.
(l)
Represents losses (recorded in Other income (expense), net) realized on the repayments of ATI's long-term
debt.
(m) Represents the amount of tax benefit (recorded in Income tax expense) related to stock-based compensation
expense adjusted from cash flows from operating activities to cash flows from financing activities.
34
Results of Operations
The following tables set forth certain financial information for the years ended December 31, 2017 and 2016 and for
the years ended December 31, 2016 and 2015. The following tables and discussion should be read in conjunction with the
information contained in our consolidated financial statements and the notes thereto included in Part II, Item 8 of this
Annual Report on Form 10-K.
Comparison of years ended December 31, 2017 and 2016
Years ended December 31,
%
of net sales
100%
53
47
%
of net sales
100%
50
50
$
(dollars in millions)
Net sales ........................................................................... $
Cost of sales .....................................................................
Gross profit ................................................................................................................................................................................
Operating expenses:
2016
1,840
976
864
2017
2,262
1,131
1,131
Selling, general and administrative .......................................................................................................................................
Engineering — research and development ...........................................................................................................................
Loss associated with impairment of long-lived assets ..........................................................................................................
Total operating expenses ..................................................................................................................................................
Operating income ......................................................................................................................................................................
Other expense, net:
324
88
—
412
452
342
105
32
479
652
15
5
1
21
29
17
5
—
22
25
Interest expense, net .............................................................................................................................................................
Expenses related to long-term debt refinancing ...................................................................................................................
Other income (expense), net .................................................................................................................................................
Total other expense, net ...................................................................................................................................................
Income before income taxes......................................................................................................................................................
Income tax expense ...................................................................................................................................................................
Net income .................................................................................................................................................................................
(101)
(12)
2
(111)
341
(126)
215
(103)
—
(22)
(125)
527
(23)
504
(5)
—
(1)
(6)
23
(1)
22%
(5)
(1)
—
(6)
19
(7)
12%
$
$
Net sales
Net sales for the year ended December 31, 2017 were $2,262 million compared to $1,840 million for the year ended
December 31, 2016, an increase of 23%. The increase was principally driven by a $154 million, or 41%, 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 $144 million, or 15%, increase in net sales in the North America
On-Highway end market principally driven by higher demand for Rugged Duty Series models, a $44 million increase in net
sales in the North America Off-Highway end market principally driven by higher demand from hydraulic fracturing
applications, a $39 million, or 13%, increase in net sales in the Outside North America On-Highway end market principally
driven by higher demand in Asia, Europe and South America, a $29 million increase in net sales in the Outside North
America Off-Highway end market principally driven by improved demand in the mining and energy sectors, a $10 million,
or 16%, increase in net sales in the North America Electric Hybrid-Propulsion Systems for Transit Bus end market
principally driven by the timing of certain transit property orders and a $2 million, or 2%, increase in net sales in the
Defense end market principally driven by higher demand. See “Trends Impacting Our Business” above for additional
information on net sales by end market.
Cost of sales
Cost of sales for the year ended December 31, 2017 were $1,131 million compared to $976 million for the year
ended December 31, 2016, an increase of 16%. The increase was principally driven by increased material cost and
manufacturing expenses commensurate with increased net sales, $9 million associated with the ratification of a new
collective bargaining agreement with UAW Local 933 and $6 million of higher incentive compensation expense.
35
Gross profit
Gross profit for the year ended December 31, 2017 was $1,131 million compared to $864 million for the year ended
December 31, 2016, an increase of 31%. The increase was principally driven by $260 million related to increased net
sales and $38 million of price increases on certain products, partially offset by $9 million of expenses associated with the
ratification of a new collective bargaining agreement with UAW Local 933, $9 million of higher manufacturing expense
commensurate with increased net sales, $6 million of higher incentive compensation expense and $7 million of
unfavorable material cost. Gross profit as a percent of net sales for the year ended December 31, 2017 increased 3%
compared to the same period in 2016 principally driven by favorable sales volume and price increases on certain
products, partially offset by expense associated with the ratification of a new collective bargaining agreement, higher
incentive compensation expense and unfavorable material cost.
Selling, general and administrative
Selling, general and administrative expenses for the year ended December 31, 2017 were $342 million compared to
$324 million for the year ended December 31, 2016, an increase of 6%. The increase was principally driven by increased
commercial activities spending, $6 million of higher incentive compensation expense, $5 million of unfavorable product
warranty adjustments and $2 million of higher stock-based compensation expense, partially offset by $4 million of
stockholder activism expenses in 2016 that did not recur in 2017 and $4 million of favorable DPIM adjustments.
Engineering — research and development
Engineering expenses for the year ended December 31, 2017 were $105 million compared to $88 million for the
year ended December 31, 2016, an increase of 19%. The increase was principally driven by increased product initiatives
spending and $3 million of higher incentive compensation expense.
Loss associated with impairment of long-lived assets
During the fourth quarter of 2017, we recorded approximately $32 million of losses associated with impairment of
certain of our long-lived assets related to the production of the TC10 transmission. See NOTE 4 “Property, Plant and
Equipment” of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K
for additional details.
Interest expense, net
Interest expense, net for the year ended December 31, 2017 was $103 million compared to $101 million for the year
ended December 31, 2016, an increase of 2%. The increase was principally driven by $36 million of higher interest
expense on ATI’s 5.0% Senior Notes issued in September 2016, $8 million of higher interest expense for our interest rate
derivatives that became effective in August 2016, $5 million of interest expense on ATI’s 4.75% Senior Notes issued in
September 2017 and $4 million of interest expense on revolving loan balances in 2017, partially offset by $35 million
lower interest expense on ATI’s Term B-3 Loan principally due to repayment of $1,200 million of principal in the third
quarter of 2016 and $16 million of favorable mark-to-market adjustments for our interest rate derivatives.
Expenses related to long-term debt refinancing
In September 2016, we refinanced our Senior Secured Credit Facility, resulting in expenses of $12 million for the
year ended December 31, 2016.
Other (expense) income, net
Other expense, net for the year ended December 31, 2017 was $22 million compared to other income, net of $2
million for the year ended December 31, 2016. The change was principally driven by a $15 million increase in technology-
related investments expense, $5 million of unfavorable vendor settlements in 2017 and $4 million of higher foreign
exchange losses on intercompany financing.
Income tax expense
Income tax expense for the year ended December 31, 2017 was $23 million compared to $126 million for the year
ended December 31, 2016, resulting in an effective tax rate of 4% and 37% for years ended December 31, 2017 and
December 31, 2016, respectively. The decrease was a result of the U.S. Tax Cuts and Jobs Act enacted into law in 2017
and was principally driven by a $157 million decrease in net deferred tax liabilities to reflect the decrease in the corporate
income tax rate from 35% to 21%, partially offset by a $5 million increase in tax liabilities related to the deemed
repatriation of accumulated foreign earnings and profits.
36
Comparison of years ended December 31, 2016 and 2015
Years ended December 31,
%
of net sales
100%
53
47
%
of net sales
100%
53
47
$
(dollars in millions)
Net sales ........................................................................... $
Cost of sales .....................................................................
Gross profit ................................................................................................................................................................................
Operating expenses:
2016
1,840
976
864
1,986
1,052
2015
934
Selling, general and administrative .......................................................................................................................................
Engineering — research and development ...........................................................................................................................
Trade name impairment ........................................................................................................................................................
Environmental remediation ....................................................................................................................................................
Loss associated with impairment of long-lived assets ..........................................................................................................
Total operating expenses ..................................................................................................................................................
Operating income ......................................................................................................................................................................
Other expense, net:
324
88
—
—
—
412
452
317
93
80
14
1
505
429
17
5
—
—
—
22
25
16
5
4
1
0
26
21
Interest expense, net .............................................................................................................................................................
Expenses related to long-term debt refinancing ...................................................................................................................
Other income (expense), net .................................................................................................................................................
Total other expense, net ...................................................................................................................................................
Income before income taxes......................................................................................................................................................
Income tax expense ...................................................................................................................................................................
Net income .................................................................................................................................................................................
(114)
(26)
—
(140)
289
(107)
182
(101)
(12)
2
(111)
341
(126)
215
(5)
(1)
0
(6)
19
(7)
12%
(6)
(1)
(0)
(7)
14
(5)
9%
$
$
Net sales
Net sales for the year ended December 31, 2016 were $1,840 million compared to $1,986 million for the year ended
December 31, 2015, a decrease of 7%. The decrease was principally driven by a $97 million, or 9%, decrease in net sales
in the North America On-Highway end market driven by lower demand from Rugged Duty Series and Highway Series
models partially offset by higher demand for Pupil Transport/Shuttle models, a $48 million, or 87%, decrease in net sales
in the North American Off-Highway end market driven by the previously contemplated impact of low energy prices, a $23
million, or 66%, decrease in net sales in the Outside North America Off-Highway end market driven by lower demand in
the mining and energy sectors, a $12 million, or 16%, decrease in net sales in the North America Hybrid-Propulsion
Systems for Transit Bus end market driven by lower demand due to engine emissions improvements and other alternative
technologies, and an $11 million, or 3%, decrease in net sales in the Service Parts, Support Equipment and Other end
market driven by lower demand for North America Off-Highway service parts, partially offset by a $43 million, or 16%,
increase in net sales in the Outside North America On-Highway end market driven by higher demand in Europe and
Japan partially offset by lower demand in China and a $2 million, or 2%, increase in net sales in the Defense end market
principally driven by higher demand for Wheeled Defense partially offset by lower demand for Tracked Defense.
Cost of sales
Cost of sales for the year ended December 31, 2016 were $976 million compared to $1,052 million for the year
ended December 31, 2015, a decrease of 7%. The decrease was principally driven by $51 million of decreased direct
material costs and $22 million of lower manufacturing expense, in each case consistent with historical trends and
management’s expectations given the respective change in sales volume, and $10 million of favorable direct material
costs, partially offset by $7 million of higher incentive compensation expense.
Gross profit
Gross profit for the year ended December 31, 2016 was $864 million compared to $934 million for the year ended
December 31, 2015, a decrease of 7%. The decrease was principally driven by $98 million related to decreased net sales
and $7 million of higher incentive compensation expense, partially offset by $22 million of lower manufacturing expense
commensurate with decreased net sales, $10 million of favorable direct material costs and $3 million resulting from price
increases on certain products. Gross profit as a percent of net sales was flat for the year compared to 2015 principally
driven by favorable direct material costs and price increases on certain products, offset by unfavorable sales volume and
higher incentive compensation expense.
37
Selling, general and administrative
Selling, general and administrative for the year ended December 31, 2016 were $324 million compared to $317
million for the year ended December 31, 2015, an increase of 2%. The increase was principally driven by $15 million of
higher incentive compensation expense, $4 million of stockholder activism expenses and $3 million of unfavorable
adjustments related to the DPIM extended coverage program, partially offset by $5 million of lower product warranty
expense, $5 million of lower intangible asset amortization, $2 million of unfavorable 2015 product warranty adjustments
and reduced global commercial spending activities.
Engineering — research and development
Engineering expenses for the year ended December 31, 2016 were $88 million compared to $93 million for the year
ended December 31, 2015, a decrease of 4%. The decrease was principally driven by the cadence of certain product
initiatives, partially offset by $3 million of higher incentive compensation expense.
Trade name impairment
During the fourth quarter of 2015, we recorded a trade name impairment charge of $80 million as a result of lower
forecasted net sales for certain of our end markets. Refer to NOTE 5, “Goodwill and Other Intangible Assets” in Part II,
Item 8, of this Annual Report on Form 10-K. No trade name impairment charges were recorded in 2016.
Environmental remediation
During the third quarter of 2015, we recorded approximately $14 million for environmental remediation expenses as
a result of the EPA determining that GM’s environmental remediation activities at our Indianapolis, Indiana manufacturing
facilities were complete, and our assumption of responsibility for future operating, monitoring and maintenance activities.
Refer to NOTE 16 “Commitments and Contingencies” in Part II, Item 8, of this Annual Report on Form 10-K.
Loss associated with impairment of long-lived assets
During the first quarter of 2015, we recorded approximately $1 million of losses associated with impairment of
certain of our long-lived assets related to the production of the H3000 and H4000 hybrid-propulsion systems.
Interest expense, net
Interest expense, net for the year ended December 31, 2016 was $101 million compared to $114 million for the year
ended December 31, 2015, a decrease of 12%. The decrease was principally driven by $14 million of favorable mark-to-
market adjustments for our interest rate derivatives, $9 million of lower interest expense as a result of the repurchase and
redemption of ATI’s 7.125% Senior Notes in the second quarter of 2015, $8 million of lower interest expense on ATI’s
Term B-3 Loan due primarily to the repayment of $1,200 million of principal in the third quarter of 2016, and $1 million of
lower amortization of deferred financing fees, partially offset by $14 million of interest expense on ATI’s 5.0% Senior
Notes issued in September 2016 and $7 million of interest expense for our interest rate derivatives that became effective
in August 2016.
Expenses related to long-term debt refinancing
In September 2016, we refinanced our Senior Secured Credit Facility, resulting in expenses of $12 million for the
year ended December 31, 2016. In April 2015, we completed a cash tender offer to purchase any and all of the
outstanding 7.125% Senior Notes. The tender offer resulted in the repurchase of $421 million of the 7.125% Senior Notes
in April 2015. In May 2015, we redeemed the remaining $50 million of the outstanding 7.125% Senior Notes, resulting in
premiums and expenses totaling $26 million for the year ended December 31, 2015.
Other income (expense), net
Other income (expense), net for the year ended December 31, 2016 was income of $2 million compared to zero for
the year ended December 31, 2015. The change was principally driven by $3 million of net gains on derivative contracts
and $1 million of lower foreign exchange losses on intercompany financing, partially offset by $1 million of technology-
related investment expense and $1 million of miscellaneous expense, net.
Income tax expense
Income tax expense for the year ended December 31, 2016 was $126 million compared to $107 million for the year
ended December 31, 2015, resulting in an effective tax rate of 37% for each of the years ended December 31, 2016 and
2015.
38
Liquidity and Capital Resources
We generate cash primarily from operations 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 $199 million and $205 million as of
December 31, 2017 and 2016, respectively. Of the available cash and cash equivalents, approximately $149 million and
$124 million were deposited in operating accounts while approximately $50 million and $81 million were invested in U.S.
government backed securities as of December 31, 2017 and 2016, respectively.
As of December 31, 2017, the total of cash and cash equivalents held by foreign subsidiaries was $75 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
anticipate that local liquidity restrictions will preclude us from funding our targeted expectations or operating needs with
local resources.
As of December 31, 2017, the Company had approximately $62 million of undistributed earnings in foreign
subsidiaries which were subject to the one-time repatriation tax on foreign earnings required by the Tax Cuts and Jobs Act
(“Tax Act”). As a result, we recorded a charge of $5 million for the one-time repatriation tax, to be paid to the U.S.
Government over the next eight years. We have not recognized any deferred tax liabilities associated with earnings in
foreign subsidiaries, except for our subsidiaries located in China and Hong Kong, as they are intended to be permanently
reinvested and used to support foreign operations. We have recorded a deferred tax liability of $2 million for the tax
liability associated with the remittance of previously taxed income and unremitted earnings for our subsidiaries located in
China and Hong Kong.
Our liquidity requirements are significant, primarily due to our debt service requirements. As of December 31, 2017,
we had $1,176 million of indebtedness associated with ATI’s Term B-3 Loan, $1,000 million of indebtedness associated
with ATI’s 5.0% Senior Notes and $400 million of indebtedness associated with ATI’s 4.75% Senior Notes. The minimum
required quarterly principal payment on ATI’s Term B-3 Loan through its maturity date of September 2022 is $3 million.
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 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 net principal payments of $427 million, $215
million and $117 million on our Senior Secured Credit Facility during the years ended December 31, 2017, 2016 and
2015, 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 year ended December 31, 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 year ended December 31, 2017 on the Revolving Credit Facility was $300
million. The Revolving Credit Facility was not utilized during the years ended December 31, 2016 and 2015. As of
December 31, 2017, we had $533 million available under the Revolving Credit Facility, net of $17 million in letters of
credit. As of December 31, 2017, we had no revolving loans outstanding. 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 December 31, 2017, the senior secured
leverage ratio was 1.13x. 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 December 31, 2017, our total leverage ratio was 2.74x.
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, or 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 December 31, 2017, 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.
39
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 Term B-3 Loan rating to ‘Baa3’, and assigned ‘Ba3’ to the 4.75% Senior Notes.
Fitch held our corporate rating at ‘BB’, our Term B-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 repurchase up to $1,000 million of our common
stock pursuant to the 2016 Repurchase Program. On November 8, 2017, our Board of Directors increased the
authorization by $500 million, bringing the total amount authorized under the 2016 Repurchase Program to $1,500 million.
During 2017, we repurchased approximately $885 million of our common stock under the 2016 Repurchase Program. All
of the repurchase transactions during 2017 were settled in cash during the same period. As of December 31, 2017, we
had approximately $554 million available under the 2016 Repurchase Program.
The following table shows our sources and uses of funds for the years ended December 31, 2017, 2016 and 2015
(in millions):
Statement of Cash Flows Data
Cash flows provided by operating activities ......................................................
Cash flows used for investing activities .............................................................
Cash flows used for financing activities ............................................................
$
Years ended December 31,
2016
2015
2017
$
658
(94)
(574)
$
591
(72)
(564)
580
(60)
(529)
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 year ended December 31, 2017 generated $658 million of cash compared to $591 million
for the year ended December 31, 2016. The increase was principally driven by increased gross profit, higher sales
allowances and higher deferred revenue, partially offset by increased cash income taxes, higher inventories, increased
cash interest expense, increased pension funding payments and increased incentive compensation payments.
Operating activities for the year ended December 31, 2016 generated $591 million of cash compared to $580 million
for the year ended December 31, 2015. The increase was principally driven by higher accounts payable, lower
inventories, lower incentive compensation payments, decreased excess tax benefit from stock-based compensation,
lower interest paid as a result of debt repayments and refinancing, lower manufacturing expense, favorable direct material
costs and higher other liabilities, net, partially offset by decreased net sales and higher accounts receivable.
Cash used for investing activities
Investing activities for the year ended December 31, 2017 used $94 million of cash compared to $72 million for the
year ended December 31, 2016. The increase was principally driven by an increase of $20 million in capital expenditures
and an increase of $2 million in technology-related initiatives. The increase in capital expenditures was principally driven
by spending related to investments in productivity and replacement programs and higher product initiatives spending.
Investing activities for the year ended December 31, 2016 used $72 million of cash compared to $60 million for the
year ended December 31, 2015. The increase was principally driven by an increase of $13 million in capital expenditures.
The increase in capital expenditures was principally driven by spending related to investments in productivity and
replacement programs and higher product initiatives spending.
40
Cash used for financing activities
Financing activities for the year ended December 31, 2017 used $574 million of cash compared to $564 million for
the year ended December 31, 2016. The increase was principally driven by $629 million of increased repurchases of
common stock, $6 million of 2016 excess tax benefit from stock-based compensation and $5 million of decreased
proceeds from common stock issuance in connection with stock option exercises, partially offset by $603 million of
increased net debt borrowings, $15 million of lower debt financing fees and $11 million of decreased dividend payments.
Financing activities for the year ended December 31, 2016 used $564 million of cash compared to $529 million for
the year ended December 31, 2015. The increase was principally driven by $78 million of increased payments, net on
long-term debt, $12 million of increased debt financing fees associated with the issuance of the 5.0% Senior Notes and
the amendments to the Senior Secured Credit Facility in the third quarter of 2016, and $2 million of decreased excess tax
benefit from stock-based compensation, partially offset by $50 million of lower stock repurchases, $5 million of decreased
dividend payments, and $1 million of increased proceeds from the exercise of stock options.
Contractual Obligations, Contingent Liabilities and Commitments
The following table summarizes our contractual obligations as of December 31, 2017 (dollars in millions):
Payments due by period
Total
Less than
1 year
1-3
years
Senior Secured Credit Facility(1) ........................................
5.0% Senior Notes(2) .........................................................
$
1,370
1,338
4.75% Senior Notes(3) .......................................................
Operating leases .................................................................
Pension & OPEB liabilities(4) .............................................
587
11
27
$
54
50
19
4
3
$
106
100
38
4
9
3-5
years
1,210
100
$
$
More than
5 years
—
1,088
38
2
15
492
1
see (4) below
Total(5) ................................................................................
$
3,333
$
130
$
257
$
1,365
$
1,581
(1) Senior Secured Credit Facility includes principal payments and estimated interest payments. Interest on the Term B-3
Loan is equal to the London Interbank Offered Rate (“LIBOR”) plus 2.00%. For the purposes of this table the rate has
been calculated using LIBOR as of December 31, 2017, resulting in an applied rate of 3.57%. Actual payments will
vary.
(2) 5.0% Senior Notes include principal and interest payments based on a fixed interest rate of 5.00%.
(3) 4.75% Senior Notes include principal and interest payments based on a fixed interest rate of 4.75%.
(4) Estimated pension funding and post-retirement benefit payments are based on an increasing discount rate and
effective interest rate for funding purposes between 3.8% - 4.6%. Pension funding and post-retirement benefit
payments are excluded from the table beyond year 5, though we expect funding and payments to continue beyond
year 5. See NOTE 13 “Employee Benefit Plans” of Notes to Consolidated Financial Statements included in Part II,
Item 8, of this Annual Report on Form 10-K for the funding status of our pension plans and other post-retirement
benefit plan as of December 31, 2017.
(5) Defense price reduction reserve, estimated warranty obligations and sales allowance programs, which total $56
million, $55 million and $34 million, respectively, as of December 31, 2017 have been excluded from this table as
timing of any payments are uncertain.
41
Critical Accounting Policies and Significant Accounting Estimates
The preparation of the 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 net sales and expenses during the applicable reporting period. Differences between actual amounts
and estimates are recorded in the period identified. Estimates can require a significant amount of judgment, and a
different set of judgments could result in changes to our reported results. A summary of our critical accounting estimates
is included below.
Revenue Recognition
Revenue recognition contains uncertainties because it requires management to make assumptions and to apply
judgment to estimate the amount of sales incentives and provision for government price reductions. Distributor and
customer sales incentives, consisting of allowances and other rebates, are estimated at the time of sale based upon
history and experience and are recorded as a reduction to net sales. Incentive programs are generally product specific or
region specific. Some factors used in estimating the cost of incentives include the number of transmissions that will be
affected by the incentive program and the rate of acceptance of any incentive program. If the actual number of affected
transmissions differs from this estimate, or if a different mix of incentives is actually paid, the impact on net sales would be
recorded in the period that the change was identified. Assuming our current mix of sales incentives, a 10% change in
sales incentives would have affected our earnings by approximately $5 million to $7 million per year for each of the prior
three fiscal years.
Under terms of certain previous U.S. government contracts, there were price reduction clauses and provisions for
potential price reductions which are estimated at the time of sale based upon history and experience, and finalized after
completion of U.S. government audits. Potential reductions may be attributed to a change in projected sales volumes or
plant efficiencies which impact overall costs. Given our current price reduction reserve for government contracts, a 10%
adjustment in our price reduction reserve would have affected our earnings by approximately $6 million per year for each
of the prior three fiscal years. Beginning in 2014, all of our contracts with the U.S. government are firm fixed price
contracts, which do not contain price reduction clauses and provisions.
Further information is provided in NOTE 2 “Summary of Significant Accounting Policies” of Notes to Consolidated
Financial Statements included in Part II, Item 8, of this Annual Report on Form 10-K.
Goodwill and Other Intangible Assets
Goodwill is tested for impairment at the reporting unit level, which is the same as our one operating and reportable
segment. We do not aggregate any components into our reporting unit. We have elected to perform our annual
impairment test on October 31 of every year. A multi-step impairment test is performed on goodwill. In Step 0, we have
the option to evaluate various qualitative factors to determine the likelihood of impairment. If we determine that the fair
value is more likely than not less than the carrying value, then we are required to perform Step 1. If we do not elect to
perform Step 0, we can voluntarily proceed directly to Step 1. In Step 1, we perform a quantitative analysis to compare the
fair value of our reporting unit to our carrying value including goodwill. If the fair value of the reporting unit exceeds the
carrying value of the net assets assigned to that unit, goodwill is not considered impaired, and we are not required to
perform further testing. If the carrying value of a reporting unit’s goodwill exceeds its carrying value of net assets, then we
would record an impairment loss equal to the difference.
A qualitative assessment contains uncertainties because it requires management to make assumptions and to apply
judgment to assess business changes, economic outlook, financial trends and forecasts, growth rates, credit ratings,
equity ratings, discount rates, industry data and other relevant qualitative factors.
A quantitative analysis contains uncertainties because it is performed utilizing a discounted cash flow model which
includes key assumptions, such as net sales growth derived from market information, industry reports, marketing
programs and future new product introductions; operating margin improvements derived from cost reduction programs
and fixed cost leverage driven by higher sales volumes; and a risk-adjusted discount rate.
Events or circumstances that could unfavorably impact the key assumptions include lower net sales driven by
market conditions, our inability to execute on marketing programs and/or a delay in the introduction of new products, lower
gross margins as a result of market conditions or failure to obtain forecasted cost reductions, or a higher discount rate as
a result of market conditions.
42
Goodwill impairment testing for 2017 was performed using the Step 0 analysis by assessing certain qualitative
trends and factors. These trends and factors were compared to, and based on, the assumptions used in prior years. After
reviewing the various qualitative factors mentioned above, our 2017 annual goodwill impairment test indicated that the fair
value of the reporting unit more likely than not exceeded its carrying value, indicating no impairment.
Other intangible assets have both indefinite and finite useful lives. Intangible assets with indefinite useful lives are
not amortized but are tested annually for impairment. We have elected to perform our annual trade name impairment test
on October 31 of every year and follow a similar multi-step impairment test that is performed on goodwill. While
unpredictable and inherently uncertain, we believe the forecast estimates are reasonable and incorporate those
assumptions that similar market participants would use in their estimates of fair value. After reviewing the various
qualitative factors mentioned above, our annual 2017 trade name impairment test, as of October 31, 2017, indicated that
the fair value of our trade name more likely than not exceeded the respective carrying value, indicating no impairment.
Intangible assets with finite lives are amortized over their estimated useful lives and reviewed for impairment when
circumstances change that would create a triggering event. Assumptions and estimates about future values and
remaining useful lives of our intangible and other long-lived assets are complex and subjective. They can be affected by a
variety of factors, including external factors such as industry and economic trends, and internal factors, such as changes
in our business strategy and internal forecasts. Although management believes the historical assumptions and estimates
are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial
results. Further information is provided in NOTE 2 “Summary of Significant Accounting Policies” and NOTE 5 “Goodwill
and Other Intangible Assets” of Notes to Consolidated Financial Statements included in Part II, Item 8, of this Annual
Report on Form 10-K.
Impairment of Long-Lived Assets
The carrying value of long-lived assets is evaluated whenever events or circumstances indicate that the carrying
value of a long-lived asset may not be recoverable. Events or circumstances that would result in an impairment review
primarily include a significant change in the use of an asset, or the planned sale or disposal of an asset. The asset would
be considered impaired when there is no future use planned for the asset or the future net undiscounted cash flows
generated by the asset or asset group are less than its carrying value. An impairment loss would be recognized based on
the amount by which the carrying value exceeds fair value.
Assumptions and estimates used to determine cash flows in the evaluation of impairment and the fair values used to
determine the impairment are subject to a degree of judgment and complexity. Any changes to the assumptions and
estimates resulting from changes in actual results or market conditions from those anticipated may affect the carrying
value of long-lived assets and could result in an impairment charge. As a result of events and circumstances in the fourth
quarter of 2017, we reviewed certain of our long-lived assets related to the production of the TC10 product. We completed
a test for recoverability using the undiscounted cash flows of the TC10 product line. Due to continued weak demand
conditions for the TC10 product, the future undiscounted cash flows of the related assets were less than the carrying
value of those assets. We used a market approach to determine the fair value of the assets, resulting in a $32 million loss
for the year ended December 31, 2017. There were no impairment charges for the year ended December 31, 2016.
As a result of events and circumstances in the first quarter of 2015, we reviewed certain of our long-lived assets
related to the production of the H3000 and H4000 electric hybrid-propulsion systems, resulting in a $1 million loss
recorded for the year ended December 31, 2015. Deteriorating market conditions for hybrid-propulsion vehicles,
principally as a result of decreased fuel costs, alternative fuels and other technologies, significantly contributed to the
future cash flows of the related assets being less than the carrying value of those assets.
Warranty
Provisions for estimated expenses related to product warranties are made at the time products are sold. Warranty
claims arise when a transmission fails while in service during the relevant warranty period. The warranty reserve is
adjusted in Selling, general and administrative based on our current and historical warranty claims paid and associated
repair costs. These estimates are established using historical information including the nature, frequency, and average
cost of warranty claims and are adjusted as actual information becomes available. From time to time, we may initiate a
specific field action program. As a result of the uncertainty surrounding the nature and frequency of specific field action
programs, the liability for such programs is recorded when we commit to an action. We review and assess the liability for
these programs on a quarterly basis. We also assess our ability to recover certain costs from our suppliers and record a
receivable from the supplier when we believe a recovery is probable. Warranty costs may differ from those estimated if
actual claim rates are higher or lower than our historical rates. Further information is provided in NOTE 9 “Product
Warranty Liabilities” of Notes to Consolidated Financial Statements included in Part II, Item 8, of this Annual Report on
Form 10-K which contains a summary of the activity in our warranty liability account for 2017, 2016 and 2015 including
adjustments to pre-existing warranties.
43
Pension and Post-retirement Benefit Plans
Pension and OPEB costs are based upon various actuarial assumptions and methodologies as prescribed by
authoritative accounting guidance. These assumptions include discount rates, expected return on plan assets, health care
cost trend rates, inflation, rate of compensation increases, population demographics, mortality rates and other factors. We
review all actuarial assumptions on an annual basis.
A change in the discount rate can have a significant impact on determining our benefit obligations. Our current
discount rate is determined by matching the plans’ projected cash flows to a yield curve based on long-term, fixed income
debt instruments available as of the measurement date of December 31, 2017. The effect of a one percentage point
decrease in the assumed discount rate would result in an increase in the December 31, 2017 defined benefit pension
plans obligation of approximately $22 million. Similarly, a one percentage point decrease in the assumed discount rate
would result in an increase in the December 31, 2017 OPEB obligation of approximately $15 million.
Further information is provided in NOTE 13 “Employee Benefit Plans” of Notes to Consolidated Financial Statements
included in Part II, Item 8, of this Annual Report on Form 10-K, which contains our review on various actuarial
assumptions.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are
recognized for the expected future tax consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. The future tax benefits
associated with operating loss and tax credit carryforwards are recognized as deferred tax assets. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
On December 22, 2017, the Tax Act was enacted into law. The Tax Act makes broad and complex changes to the
U.S. tax code that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35% to 21%
for tax years beginning after December 31, 2017. The Tax Act also makes other changes including, but not limited to, the
acceleration of depreciation for certain assets placed into service after September 27, 2017 as well as a one-time deemed
repatriation tax on undistributed foreign earnings and profits. Beginning in 2018, the Tax Act makes other changes
impacting us such as additional limitations on executive compensation, the repeal of the domestic manufacturing
deduction and qualifications around certain research and development expenditures.
As of December 31, 2017, our U.S. federal income tax deductions related to our intangible assets were
approximately $315 million annually through 2021 and approximately $185 million in 2022. Excluding our intangible asset
deductions, our expected tax payments would have increased by approximately $110 million for the year ended
December 31, 2017.
The need to establish a valuation allowance against the deferred tax assets is assessed periodically based on a
more-likely-than-not realization threshold, in accordance with the Financial Accounting Standard Board’s (“FASB”)
authoritative accounting guidance on income taxes. Appropriate consideration is given to all positive and negative
evidence related to that realization. This assessment considers, among other matters, the nature, frequency and severity
of recent losses, forecasts of future profitability, the duration of statutory carryforward periods, and experience with tax
attributes expiring unused and tax planning alternatives. The weight given to these considerations depends upon the
degree to which they can be objectively verified.
Further information on income taxes is provided in NOTE 14 “Income Taxes” of Notes to Consolidated Financial
Statements included in Part II, Item 8, of this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements.
Recently Adopted Accounting Pronouncements
Refer to NOTE 2, “Summary of Significant Accounting Policies” in Part II, Item 8, of this Annual Report on Form 10-
K.
44
ITEM 7A. 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 $1,709 million including $533 million under our Revolving Credit Facility, net
of $17 million of letters of credit. A one-eighth percent increase or decrease in assumed interest rates for the Senior
Secured Credit Facility, if fully drawn as of December 31, 2017, would have an impact of approximately $2 million on
interest expense. As of December 31, 2017, we had no outstanding borrowings against the Revolving Credit Facility.
During December 2017, we terminated interest rate swap contracts with notional values totaling $800 million. The
transaction resulted in $13 million of interest expense. As of December 31, 2017, we are not party to any interest rate
swaps.
Refer to NOTE 7 “Debt” and NOTE 8 “Derivatives” of Notes to Consolidated Financial Statements included in Part II,
Item 8, of this Annual Report on Form 10-K.
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 $5 million per year. We believe other exposure to foreign currencies is immaterial.
Commodity Price Risk
We are subject to changes in our cost of sales caused by movements in underlying commodity prices.
Approximately two-thirds 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 includes 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. Assuming
current levels of commodity purchases, a 10% increase or decrease in the price of aluminum and steel would
correspondingly change our earnings by approximately $2 million and $5 million per year, respectively.
Many of our LTSAs have incorporated a cost-sharing arrangement related to potential future commodity price
fluctuations. For purposes of the sensitivity analysis above, the impact of these cost sharing arrangements has not been
included.
45
ITEM 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Allison Transmission Holdings, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Allison Transmission Holdings, Inc. and its
subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of comprehensive income,
stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, including the
related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as
the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as
of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our
responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal
control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was
maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such
other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
46
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
\s\PricewaterhouseCoopers LLP
Indianapolis, Indiana
February 15, 2018
We have served as the Company’s auditor since 2008.
47
Allison Transmission Holdings, Inc.
Consolidated Balance Sheets
(dollars in millions, except share data)
December 31,
2017
December 31,
2016
ASSETS
Current Assets
205
Cash and cash equivalents ...................................................................................................................................................
Accounts receivable ..............................................................................................................................................................
197
Inventories ............................................................................................................................................................................
126
Income taxes receivable .......................................................................................................................................................
3
Other current assets .............................................................................................................................................................
17
548
Total Current Assets .................................................................................................................................................................
Property, plant and equipment, net ...........................................................................................................................................
464
Intangible assets, net ................................................................................................................................................................
1,242
Goodwill .....................................................................................................................................................................................
1,941
24
Other non-current assets ..........................................................................................................................................................
4,219
TOTAL ASSETS .......................................................................................................................................................................
199 $
221
154
33
25
632
448
1,153
1,941
31
4,205 $
$
$
LIABILITIES
Current Liabilities
$
Accounts payable..................................................................................................................................................................
128
Product warranty liability .......................................................................................................................................................
25
Current portion of long-term debt ..........................................................................................................................................
12
27
Deferred revenue ..................................................................................................................................................................
Other current liabilities ..........................................................................................................................................................
150
Total Current Liabilities .............................................................................................................................................................
342
Product warranty liability ...........................................................................................................................................................
38
66
Deferred revenue ......................................................................................................................................................................
Long-term debt ..........................................................................................................................................................................
2,147
Deferred income taxes ..............................................................................................................................................................
312
Other non-current liabilities .......................................................................................................................................................
233
3,138
TOTAL LIABILITIES ..................................................................................................................................................................
Commitments and Contingencies (see NOTE 16)
159 $
22
12
41
183
417
33
75
2,534
276
181
3,516
STOCKHOLDERS’ EQUITY
Common stock, $0.01 par value, 1,880,000,000 shares authorized, 139,990,865 shares
issued and outstanding and 163,795,604 shares issued and outstanding,
2
respectively .......................................................................................................................................................................
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 ........................................................................................................................................................................
1,728
Accumulated deficit ...............................................................................................................................................................
(586)
(63)
Accumulated other comprehensive loss, net of tax ..............................................................................................................
TOTAL STOCKHOLDERS’ EQUITY.........................................................................................................................................
1,081
4,219
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY ................................................................................................................
—
1,758
(1,055)
(15)
689
4,205 $
$
The accompanying notes are an integral part of the consolidated financial statements.
48
Allison Transmission Holdings, Inc.
Consolidated Statements of Comprehensive Income
(dollars in millions, except per share data)
Net sales ............................................................................................................... $
Cost of sales ..........................................................................................................
Gross profit ..........................................................................................................
Selling, general and administrative .......................................................................
Engineering — research and development ...........................................................
Loss associated with impairment of long-lived assets ..........................................
Trade name impairment ........................................................................................
Environmental remediation ...................................................................................
Operating income ................................................................................................
Interest expense, net .............................................................................................
Expenses related to long-term debt refinancing ...................................................
Other (expense) income, net .................................................................................
Income before income taxes ..............................................................................
Income tax expense ..............................................................................................
Net income ........................................................................................................... $
Basic earnings per share attributable to common stockholders ................... $
Diluted earnings per share attributable to common stockholders ................ $
Dividends declared per common share ............................................................ $
Other comprehensive income (loss), net of tax:
Foreign currency translation .............................................................................
Pension and OPEB liability adjustment ............................................................
Available-for-sale securities ..............................................................................
Total other comprehensive income (loss), net of tax ......................................
Comprehensive income ...................................................................................... $
$
$
Years ended December 31,
2016
1,840
976
864
324
88
—
—
—
452
(101)
(12)
2
341
(126)
215
1.28
1.27
0.60
$
$
$
$
$
$
$
$
2017
2,262
1,131
1,131
342
105
32
—
—
652
(103)
—
(22)
527
(23)
504
3.38
3.36
0.60
15
26
7
48
552
(6)
3
(1)
(4)
211
$
$
2015
1,986
1,052
934
317
93
1
80
14
429
(114)
(26)
—
289
(107)
182
1.03
1.03
0.60
(11)
(3)
(5)
(19)
163
The accompanying notes are an integral part of the consolidated financial statements.
49
Allison Transmission Holdings, Inc.
Consolidated Statements of Cash Flows
(dollars in millions)
Years ended December 31,
2016
2015
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................................................................................. $
Adjustments to reconcile net income to net cash provided by operating activities:
504
$
215
$
182
Amortization of intangible assets ...........................................................................
Depreciation of property, plant and equipment ......................................................
Deferred income taxes ...........................................................................................
Loss associated with impairment of long-lived assets ...........................................
Unrealized (gain) loss on derivatives .....................................................................
Impairment loss on investments in technology-related initiatives ..........................
Stock-based compensation ....................................................................................
Amortization of deferred financing costs ................................................................
Expenses related to long-term debt refinancing.....................................................
Excess tax benefit from stock-based compensation ..............................................
Trade name impairment .........................................................................................
Other .......................................................................................................................
Changes in assets and liabilities:
Accounts receivable ...............................................................................................
Inventories ..............................................................................................................
Accounts payable ...................................................................................................
Other assets and liabilities .....................................................................................
Net cash provided by operating activities ..........................................................
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of long-lived assets .................................................................................
Investments in technology-related initiatives ..........................................................
Net cash used for investing activities .................................................................
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of common stock ..............................................................................
Borrowings on revolving credit facility ....................................................................
Repayments on revolving credit facility ..................................................................
Issuance of long-term debt .....................................................................................
Dividend payments .................................................................................................
Proceeds from exercise of stock options ...............................................................
Payments on long-term debt ..................................................................................
Debt financing fees .................................................................................................
Taxes paid related to net share settlement of equity awards .................................
Excess tax benefit from stock-based compensation ..............................................
Repurchases and redemption of long-term debt ....................................................
Net cash used for financing activities .................................................................
Effect of exchange rate changes on cash ..................................................................
Net decrease in cash and cash equivalents ......................................................
Cash and cash equivalents at beginning of period .....................................................
Cash and cash equivalents at end of period .............................................................. $
Supplemental disclosures:
Interest paid........................................................................................................ $
Income taxes paid .............................................................................................. $
90
80
(50)
32
(29)
16
12
6
—
—
—
—
(19)
(25)
30
11
658
(91)
(3)
(94)
(885)
415
(415)
400
(89)
19
(12)
(6)
(1)
—
—
(574)
4
(6)
205
199
124
96
92
84
114
—
(1)
1
9
7
11
(6)
—
1
(3)
15
2
50
591
(71)
(1)
(72)
(256)
—
—
1,000
(100)
24
(1,215)
(21)
(2)
6
—
(564)
(2)
(47)
252
205
78
13
$
$
$
$
$
$
97
88
96
1
15
—
10
8
26
(8)
80
1
9
(2)
(25)
2
580
(58)
(2)
(60)
(306)
—
—
470
(106)
23
(117)
(9)
(2)
8
(490)
(529)
(2)
(11)
263
252
97
5
The accompanying notes are an integral part of the consolidated financial statements.
50
Allison Transmission Holdings, Inc.
Consolidated Statements of Stockholders’ Equity
(dollars in millions)
Non-
voting
Common
Stock
Common
Stock
Preferred
Stock
Treasury
Stock
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss, net of tax
Balance at December 31, 2014 $
Stock-based compensation
Pension and OPEB liability
2 $ — $ —
—
— —
$ — $
—
1,651 $
10
(215) $
—
adjustment
— —
—
—
— —
— —
— —
— —
— —
—
—
—
—
—
—
—
—
—
—
— —
— —
—
—
—
—
8
—
—
182
2 $ — $ —
—
— —
$ — $
—
1,690 $
9
(445) $
—
Foreign currency translation
adjustment
Available-for-sale securities
Issuance of common stock
Repurchase of common stock
Dividends on common stock
Excess tax benefit from stock-
based compensation
Net income
Balance at December 31, 2015 $
Stock-based compensation
Pension and OPEB liability
Foreign currency translation
adjustment
Available-for-sale securities
Issuance of common stock
Repurchase of common stock
Dividends on common stock
Excess tax benefit from stock-
based compensation
Net income
Balance at December 31, 2016 $
Stock-based compensation
Pension and OPEB liability
adjustment
— —
—
—
— —
— —
— —
— —
— —
—
—
—
—
—
—
—
—
—
—
— —
— —
—
—
—
—
—
—
—
21
—
—
—
—
—
—
(306)
(106)
—
—
—
23
—
—
6
—
—
—
—
—
(256)
(100)
—
215
2 $ — $ —
—
— —
$ — $
—
1,728 $
12
(586) $
—
adjustment
— —
—
—
Foreign currency translation
adjustment
Available-for-sale securities
Issuance of common stock
Repurchase of common stock
Dividends on common stock
Excess tax benefit from stock-
based compensation
Net income
— —
— —
— —
(1) —
— —
—
—
—
—
—
—
—
—
—
—
— —
— —
—
—
—
—
—
—
—
18
—
—
—
—
—
—
—
—
(884)
(89)
—
504
(40)
—
(3)
(11)
(5)
—
—
—
—
—
(59)
—
3
(6)
(1)
—
—
—
—
—
(63)
—
26
15
7
—
—
—
—
—
Stockholders’
Equity
$
1,398
10
$
$
(3)
(11)
(5)
21
(306)
(106)
8
182
1,188
9
3
(6)
(1)
23
(256)
(100)
6
215
1,081
12
26
15
7
18
(885)
(89)
—
504
689
Balance at December 31, 2017 $
1 $ — $ —
$ — $
1,758 $
(1,055) $
(15)
$
The accompanying notes are an integral part of the consolidated financial statements.
51
Allison Transmission Holdings, Inc.
Notes to Consolidated Financial Statements
NOTE 1. OVERVIEW
Overview
Allison Transmission Holdings, Inc. and its subsidiaries (“Allison” or the “Company”) design and manufacture
commercial and defense fully-automatic transmissions. The business was founded in 1915 and has been headquartered
in Indianapolis, Indiana since inception. Allison was an operating unit of General Motors Corporation (“Old GM”) from
1929 until 2007, when Allison once again became a stand-alone company. In March 2012, Allison began trading on the
New York Stock Exchange under the symbol, “ALSN”.
The Company has approximately 2,700 employees and 13 different transmission product lines. Although
approximately 79% of revenues were generated in North America in 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 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”). The information herein reflects all normal recurring material
adjustments, which are, in the opinion of management, necessary for a fair statement of the results for the periods
presented. The consolidated financial statements herein consist of all wholly-owned domestic and foreign subsidiaries
with all significant intercompany transactions eliminated.
These consolidated financial statements present the financial position, results of comprehensive income, cash flows
and statements of equity. 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.
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 postretirement benefit expense, income taxes and
deferred tax valuation allowances, derivative valuation, and contingencies. The Company’s accounting policies involve the
application of judgments and assumptions made by management that include inherent risks and uncertainties. Actual
results could differ materially from these estimates. Changes in estimates are recorded in results of operations in the
period that the events or circumstances giving rise to such changes occur.
Segment Reporting
In accordance with the Financial Accounting Standards Board’s (“FASB”) authoritative accounting guidance on
segment reporting, the Company has one operating segment and reportable segment. The Company is in one line of
business, which is the manufacture and distribution of fully-automatic transmissions.
Cash and Cash Equivalents
Cash equivalents are defined as short-term, highly-liquid investments with original maturities of 90 days or less.
Under the Company’s cash management system, checks issued but not presented to banks may result in book overdraft
balances for accounting purposes and are classified within Accounts payable in the Consolidated Balance Sheets. The
change in book overdrafts is reported as a component of operating cash flows for Accounts payable.
52
Marketable Securities
The Company determines the appropriate classification of all marketable securities as “held-to-maturity,” “available-
for-sale” or “trading” at the time of purchase, and re-evaluates such classifications as of each balance sheet date. As of
December 31, 2017, the Company’s marketable securities are classified as trading.
Trading securities are carried at fair value with the unrealized gain or loss recognized in Other (expense) income,
net. The fair value of the Company’s investment securities is determined by currently available market prices. See NOTE
6 “Fair Value of Financial Instruments” for more details.
Inventories
Inventories are stated at the lower of cost and net realizable value. The Company determines cost using the first-in,
first-out method. The Company analyzes inventory on a quarterly basis to determine whether it is excess or obsolete
inventory. Any decline in carrying value of estimated excess or obsolete inventory is recorded as a reduction of inventory
and as an expense included in Cost of sales in the period it is identified.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost less accumulated depreciation. Depreciation expense is
recorded using the straight-line method over the following estimated lives:
Land improvements......................................................................................................................
Buildings and building improvements ..........................................................................................
Machinery and equipment ............................................................................................................
Software .......................................................................................................................................
Special tools .................................................................................................................................
5 – 30
10 – 40
2 – 20
2 – 5
2 – 10
Range in Years
Software represents the costs of software developed or obtained for internal use. Software costs are amortized on a
straight-line basis over their estimated useful lives. Software assets are reviewed for impairment when events or
circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. Upgrades
and enhancements are capitalized if they result in added functionality, which enables the software to perform tasks it was
previously incapable of performing. Software maintenance, training, data conversion and business process reengineering
costs are expensed in the period in which they are incurred.
Special tooling represents the costs to design and develop tools, dies, jigs and other items owned by the Company
and used in the manufacture of components by suppliers under long-term supply agreements. Special tooling is
depreciated over the tool’s expected life. Special tooling used in the development of new technology is expensed as
incurred. Engineering, testing and other costs incurred in the design and development of production parts are expensed
as incurred.
Impairment of Long-Lived Assets
The carrying value of long-lived assets is evaluated whenever events or circumstances indicate that the carrying
value of an asset may not be recoverable. Events or circumstances that would result in an impairment review primarily
include a significant change in the use of an asset or the planned sale or disposal of an asset. The asset would be
considered impaired when there is no future use planned for the asset or the future net undiscounted cash flows
generated by the asset or asset group are less than its carrying value. An impairment loss would be recognized based on
the amount by which the carrying value exceeds fair value.
Assumptions and estimates used to determine cash flows in the evaluation of impairment and the fair values used to
determine the impairment are subject to a degree of judgment and complexity. Any changes to the assumptions and
estimates resulting from changes in actual results or market conditions from those anticipated may affect the carrying
value of long-lived assets and could result in an impairment charge.
As a result of events and circumstances in the fourth quarter of 2017, the Company reviewed certain of its long-lived
assets related to the production of the TC10 product, resulting in a $32 million impairment loss recorded for the year
ended December 31, 2017. Continued weak demand conditions for the TC10 product contributed to the future cash flows
of the related assets being less than the carrying value of those assets.
There were no impairment charges for the year ended December 31, 2016.
53
The Company recorded a $1 million impairment loss during 2015 on certain of its long-lived assets related to the
production of the H3000 and H4000 electric hybrid-propulsion systems. Deteriorating market conditions for hybrid-
propulsion vehicles, principally as a result of decreased fuel costs, alternative fuels and other technologies, significantly
contributed to the future cash flows of the related assets being less than the carrying value of those assets.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price paid over the fair value of net assets acquired. In accordance with
the FASB’s authoritative accounting guidance on goodwill, the Company does not amortize goodwill but rather evaluates it
for impairment on an annual basis, or more often if events or circumstances change that could cause goodwill to become
impaired. Goodwill is tested for impairment at the reporting unit level, which is the same as the Company’s one operating
and reportable segment. The Company does not aggregate any components into its reporting unit. The Company has
elected to perform its annual goodwill impairment test on October 31 of every year using a multi-step impairment test. In
Step 0, the Company has the option to evaluate various qualitative factors to determine the likelihood of impairment. If
determined that the fair value is more likely than not less than the carrying value, then the Company is required to perform
Step 1. If the Company does not elect to perform Step 0, it can voluntarily proceed directly to Step 1. In Step 1, the
Company performs a quantitative analysis to compare the fair value of its reporting unit to its carrying value including
goodwill. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is
not considered impaired, and the Company is not required to perform further testing. If the carrying value of a reporting
unit’s goodwill exceeds its carrying value of net assets, then the Company would record an impairment loss equal to the
difference.
Goodwill impairment testing for 2017 was performed using the Step 0 analysis of certain trends and factors. The
Company’s qualitative assessment included an assessment of business changes, economic outlook, financial trends and
forecasts, growth rates, credit ratings, equity ratings, discount rates, industry data and other relevant qualitative factors.
Events or circumstances that could unfavorably impact the key assumptions include lower net sales driven by market
conditions, our inability to execute on marketing programs and/or growth initiatives, lower gross margins as a result of
market conditions or failure to obtain forecasted cost reductions, or a higher discount rate as a result of market conditions.
While unpredictable and inherently uncertain, the Company believes the forecast estimates were reasonable and
incorporate assumptions that similar market participants would use in their estimates of fair value. These trends and
factors were compared to, and based on, the assumptions used in prior years. After reviewing various qualitative factors,
the Company’s 2017 annual goodwill impairment test indicated that the fair value of the reporting unit more likely than not
exceeded its carrying value, indicating no impairment. Refer to NOTE 5 “Goodwill and Other Intangible Assets” for further
information.
Other intangible assets have both indefinite and finite useful lives. Intangible assets with indefinite useful lives, such
as the Company’s trade name, are not amortized but are tested annually for impairment. The Company has elected to
perform our annual trade name impairment test on October 31 of every year and follow a similar multi-step impairment
test to that performed on goodwill. Events or circumstances that could unfavorably impact the key assumptions include
lower net sales driven by market conditions, our inability to execute on marketing programs and/or delay in introduction of
new products, and higher discount rate as a result of market conditions. While unpredictable and inherently uncertain, the
Company believes the forecast estimates are reasonable and incorporate those assumptions that similar market
participants would use in their estimates of fair value. After reviewing various qualitative factors, the Company’s annual
2017 trade name impairment test, as of October 31, 2017, indicated that the fair value of the trade name more likely than
not exceeded its carrying value, indicating no impairment. Refer to NOTE 5 “Goodwill and Other Intangible Assets” for
further information.
Intangible assets with finite lives are amortized over their estimated useful lives and reviewed for impairment when
circumstances change that would create a triggering event. Customer relationships are amortized over the life in which
expected benefits are to be consumed. The other remaining finite life intangibles are amortized on a straight-line basis
over their useful lives. The Company evaluates the remaining useful life of the other intangible assets on a periodic basis
to determine whether events or circumstances warrant a revision to the remaining useful life. Assumptions and estimates
about future values and remaining useful lives of the Company’s intangible and other long-lived assets are complex and
subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends,
and internal factors, such as changes in the Company’s business strategy and internal forecasts. Although management
believes the historical assumptions and estimates are reasonable and appropriate, different assumptions and estimates
could materially impact the Company’s reported financial results. NOTE 5 “Goodwill and Other Intangible Assets” provides
further information.
54
Deferred Financing Costs
The debt issuance costs related to line-of-credit arrangements is presented as a component of other non-current
assets. The debt issuance costs related to other types of debt instruments such as notes and loans are presented as a
component of long-term debt. Deferred financing costs continue to be amortized over the life of the related debt using the
effective interest method. Amortization of deferred financing costs is recorded as part of interest expense and totaled $6
million, $7 million and $8 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Financial Instruments
The Company’s cash equivalents are invested in U.S. government backed securities and recorded at fair value in
the Consolidated Balance Sheets. The carrying values of accounts receivable and accounts payable approximate fair
value due to their short-term nature. The Company’s financial derivative instruments, including interest rate swaps and
foreign currency and commodity forward contracts are carried at fair value on the Consolidated Balance Sheets. Refer to
NOTE 6 “Fair Value of Financial Instruments” for more detail. The Company’s long-term debt obligations are carried at
historical amounts with the Company providing fair value disclosure in NOTE 7 “Debt”.
Insurable Liabilities
The Company records liabilities for its medical, workers’ compensation, long-term disability, product, general and
auto liabilities. The determination of these liabilities and related expenses is dependent on claims experience. For most of
these liabilities, claims incurred but not yet reported are estimated based upon historical claims experience.
Revenue Recognition
The Company records sales when title has transferred to the customer, there is evidence of an agreement, the sales
price is fixed or determinable, delivery has occurred or services have been rendered, and collectability is reasonably
assured. The Company sells extended transmission coverage (“ETC”) for which sales are deferred. ETC sales are
recognized ratably over the period of the ETC, which typically ranges from two to five years after initial sale. Costs
associated with ETC programs are recorded as incurred during the extended period. Distributor and customer sales
incentives, consisting of allowances and other rebates, are estimated at the time of sale based upon the Company’s
history and experience and are recorded as a reduction to Net sales. Incentive programs are generally product specific or
region specific. Some factors used in estimating the cost of incentives include the number of transmissions that will be
affected by the incentive program and rate of acceptance of any incentive program. If the actual number of affected
transmissions differs from this estimate, or if a different mix of incentives is actually paid, the impact on Net sales would
be recorded in the period that the change was identified. Consideration given to commercial customers recorded as a
reduction of Net sales in the Consolidated Statements of Comprehensive Income included $66 million, $58 million, and
$47 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Sales under U.S. government production contracts are recorded when the product is accepted, title has transferred
to the U.S. government, the sales price is fixed or determinable, delivery has occurred, and any other terms of the
contract have been met. Deferred revenue arises from cash received in advance of the culmination of the earnings
process and is recognized as revenue in future periods when the applicable revenue recognition criteria have been met.
Under the terms of previous U.S. government contracts, there were certain price reduction clauses and provisions for
potential price reductions which were estimated at the time of sale based upon the Company’s history and experience and
were recorded as a reduction to Net sales. Potential reductions may be attributed to a change in projected sales volumes
or plant efficiencies which impact overall costs. As of each of December 31, 2017 and 2016, the Company had $56 million
recorded in the price reduction reserve account.
The Company engages in licensing agreements with certain third parties for the use of the Company’s intellectual
property. Deferred revenue arises from cash received in advance of the period of use of the intellectual property. Revenue
is recognized over the license period as it is earned.
The Company classifies shipping and handling billed to customers in Net sales and shipping and handling costs in
Cost of sales, in accordance with authoritative accounting guidance.
The Company contracts with various third parties to provide engineering services. These services are recorded as
Net sales in accordance with the terms of the contract. The saleable engineering recorded was $3 million, $3 million and
$4 million for the years ended December 31, 2017, 2016 and 2015, respectively. The associated costs are recorded in
Cost of sales.
55
Warranty
Provisions for estimated expenses related to product warranties are made at the time products are sold. Warranty
claims arise when a transmission fails while in service during the relevant warranty period. The warranty reserve is
adjusted in Selling, general and administrative based on the Company’s current and historical warranty claims paid and
associated repair costs. These estimates are established using historical information including the nature, frequency, and
average cost of warranty claims and are adjusted as actual information becomes available. From time to time, the
Company may initiate a specific field action program. As a result of the uncertainty surrounding the nature and frequency
of specific field action programs, the liability for such programs is recorded when the Company commits to an action. The
Company reviews and assesses the liability for these programs on a quarterly basis. The Company also assesses its
ability to recover certain costs from its suppliers and records a receivable from the supplier when it believes a recovery is
probable. Warranty costs may differ from those estimated if actual claim rates are higher or lower than our historical rates.
Research and Development
The Company incurs costs in connection with research and development programs that are expected to contribute
to future earnings. Such costs are charged to Engineering — research and development as incurred.
Environmental
The Company accrues costs related to environmental matters when it is probable that the Company has incurred a
liability related to a contaminated site and the costs can be reasonably estimated. For additional information, see NOTE
16 “Commitments and Contingencies”.
Foreign Currency Translation
Most of the subsidiaries outside the United States prepare financial statements in currencies other than the
U.S. Dollar. The functional currency for all of these subsidiaries is the local currency, except for the Company’s Hong
Kong and Middle East subsidiaries which currently use the U.S. Dollar as their functional currency. Balances are
translated at period-end exchange rates for assets and liabilities and monthly weighted-average exchange rates for
revenues and expenses. The translation gains and losses are stated as a component of Accumulated Other
Comprehensive Loss (“AOCL”) as disclosed in NOTE 15 “Accumulated Other Comprehensive Loss”.
Derivative Instruments
In the normal course of business, the Company is exposed to fluctuations in interest rates, foreign currency
exchange rates, and commodity prices. The risk is managed through the use of financial derivative instruments including
interest rate swaps and commodity and foreign currency forward contracts, when appropriate. Despite the fact that the
Company either has not elected or does not qualify for hedge accounting treatment on all of its derivative instruments, the
contracts are used strictly as an economic hedge and not for speculative purposes. As necessary, the Company adjusts
the values of the derivative instruments for counter-party or credit risk. NOTE 8 “Derivatives” provides further information
on the accounting treatment of the Company’s derivative instruments.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are
recognized for the expected future tax consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. The future tax benefits
associated with operating loss and tax credit carryforwards are recognized as deferred tax assets. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The need to establish a valuation allowance against the deferred tax assets is assessed periodically based on a
more-likely-than-not realization threshold, in accordance with the FASB’s authoritative accounting guidance on income
taxes. Appropriate consideration is given to all positive and negative evidence related to that realization. This assessment
considers, among other matters, the nature, frequency and severity of recent losses, forecasts of future profitability, the
duration of statutory carryforward periods, and experience with tax attributes expiring unused and tax planning
alternatives. The weight given to these considerations depends upon the degree to which they can be objectively verified.
56
Stock-Based Compensation
In March 2015, the Company’s Board of Directors adopted and, in May 2015, the Company’s stockholders approved
the Allison Transmission Holdings, Inc. 2015 Equity Incentive Award Plan (“2015 Plan”), which became effective on May
14, 2015. Under the 2015 Plan, certain employees (including executive officers), consultants and directors are eligible to
receive equity-based compensation, including non-qualified stock options, incentive stock options, restricted stock,
dividend equivalents, stock payments, restricted stock units (“RSU”s), performance awards, stock appreciation rights and
other equity-based awards, or any combination thereof. The 2015 Plan limits the aggregate number of shares of common
stock available for issue to 15.3 million and will expire on, and no option or other equity award may be granted pursuant to
the 2015 Plan after, the tenth anniversary of the date the 2015 Plan was approved by the Board of Directors.
Prior to the adoption of the 2015 Plan, the Company’s equity-based awards were granted under the Allison
Transmission Holdings, Inc. 2011 Equity Incentive Award Plan (“2011 Plan”) and the Equity Incentive Plan of Allison
Transmission Holdings, Inc. (“Equity Plan” and, together with the 2011 Plan, the “Prior Plans”). As of the effective date of
the 2015 Plan, no new awards will be granted under the Prior Plans, but the Prior Plans will continue to govern the equity
awards issued under the Prior Plans.
RSUs are recorded at fair market value at the date of grant and vest upon continued performance of services by the
RSU holders over one to three years. Restricted stock awards are recorded at fair market value at the date of grant and
the restrictions lapse upon continued performance by the restricted stock holders on the vest date which generally occurs
over one, two or three years. Performance awards are recorded at fair value based on a Monte-Carlo pricing model and
the restrictions lapse on the date the Compensation Committee of the Board of Directors determines the number of
shares that shall vest based on the total stockholder return of the Company relative to the specified peer group. Non-
qualified stock options are recorded at fair value using a Black-Scholes option pricing model and vest upon the continued
performance of services by the option holder on the third anniversary of the grant date for awards under the 2015 Plan.
The Company has made a policy election under applicable accounting guidance to account for forfeitures as a
reduction of stock-based compensation expense when the forfeiture actually occurs.
Restricted stock and RSUs were granted to certain employees and directors at fair market value on the date of
grant. The restrictions lapse upon continued performance by the restricted stock or RSU holders on the vest date which
generally occurs over one, two or three years. Restricted stock and RSU incentive compensation expense recorded was
$7 million, $2 million and $2 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Performance awards were granted to certain employees at fair value at the date of grant. The Company records the
fair value of each performance award based on a Monte-Carlo pricing model. Performance award incentive compensation
expense recorded was $3 million, $1 million and $1 million for the years ended December 31, 2017, 2016 and 2015,
respectively.
Stock options were granted to certain employees at fair value on the date of grant using a Black-Scholes option
pricing model. Stock option incentive compensation expense recorded was $2 million, $3 million and $4 million for the
years ended December 31, 2017, 2016 and 2015, respectively.
Pension and Post-retirement Benefit Plans
For pension and other post-retirement benefits (“OPEB”) plans in which employees participate, costs are determined
within the FASB’s authoritative accounting guidance set forth in employers’ defined benefit pensions including accounting
for settlements and curtailments of defined benefit pension plans, termination of benefits and accounting for post-
retirement benefits other than pensions. In accordance with the authoritative accounting guidance, the Company
recognizes the funded status of its defined benefit pension plans and OPEB plan in its Consolidated Balance Sheets with
a corresponding adjustment to AOCL, net of tax.
Post-retirement benefit costs consist of service cost and interest cost on accrued obligations. Actuarial gains and
losses on liabilities together with any prior service costs are charged (or credited) to income over the average remaining
service lives of employees.
The benefit cost components shown in the Consolidated Statements of Comprehensive Income are based upon
various actuarial assumptions and methodologies as prescribed by authoritative accounting guidance. These assumptions
include discount rates, expected return on plan assets, health care cost trend rates, inflation, rate of compensation
increases, population demographics, mortality rates and other factors. The Company reviews all actuarial assumptions on
an annual basis. Changes in key economic indicators can change these assumptions. These assumptions, along with the
actual value of assets at the measurement date, will impact the calculation of pension expenses for the year.
57
Recently Adopted 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 was adopted by the Company effective January
1, 2018. The adoption of this guidance is not expected to have a material impact 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 postretirement 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.
In January 2017, the FASB issued authoritative accounting guidance on evaluation of goodwill for impairment. The
guidance modifies the approach to assessing impairment from testing the implied fair value goodwill to testing the fair
value of the reporting unit carrying the goodwill, which eliminates Step 2 of the prior evaluation guidance. The intent of this
amendment is to reduce the cost and complexity of evaluating goodwill. The guidance was early adopted by the Company
effective July 1, 2017. The adoption of this guidance did not have an impact 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 guidance was adopted by the Company effective January 1, 2018. The adoption of this
guidance is not expected to have a material impact on the Company’s consolidated financial statements.
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. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial
statements.
In March 2016, the FASB issued authoritative accounting guidance on share-based payment awards to employees.
The guidance involves several aspects of the accounting for share-based payment transactions, including the income tax
consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The
guidance was adopted by the Company effective January 1, 2017. Management recorded an excess tax benefit of $18
million to income tax expense and as a component of operating cash flows for the year ended December 31, 2017, and
made the accounting policy election to account for forfeitures in stock-based compensation as they occur.
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 or available-for-sale) and the requirement for equity
securities to be measured at fair value with changes in fair value recognized in net income. The guidance was adopted by
the Company effective January 1, 2018. The adoption of this guidance is not expected to have a material impact on the
Company’s consolidated financial statements.
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.
In May 2014, the FASB issued authoritative accounting guidance on a company’s accounting for revenue from
contracts with customers, which guidance has 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 or modified retrospective adoption. The guidance was adopted by the Company effective
January 1, 2018 using the modified retrospective approach. Management expects that the revenue streams that will be
impacted by the guidance, although immaterially, relate to non-standard transmission coverages. Certain contracts have
also been reviewed individually for the potential impact. No significant changes or additions to the Company’s internal
controls over financial reporting are expected as a result of implementing this guidance. The adoption of this guidance is
not expected to have a material impact on the Company’s consolidated financial statements.
58
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued authoritative accounting guidance on lease accounting. The guidance requires
lessees to present right-of-use assets and lease liabilities on the balance sheet for all leases not considered short-term
leases. Short-term leases are leases with a lease term of 12 months or less as long as the leases do not include options
to purchase the underlying assets that the lessee is reasonably certain to exercise. The 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.
NOTE 3. INVENTORIES
Inventories consisted of the following components (dollars in millions):
Purchased parts and raw materials ................................................................ $
Work in progress ............................................................................................
Service parts ...................................................................................................
Finished goods ...............................................................................................
Total inventories ......................................................................................... $
79
6
46
23
154
$
$
57
5
43
21
126
December 31,
2017
December 31,
2016
Inventory components shipped to third parties, primarily cores, parts to re-manufacturers, and parts to contract
manufacturers, which the Company has an obligation to buy back, are included in purchased parts and raw materials, with
an offsetting liability in Other current liabilities. See NOTE 12, “Other Current Liabilities” for more information.
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
The cost and accumulated depreciation of property, plant and equipment are as follows (dollars in millions):
Land and land improvements ......................................................................... $
Buildings and building improvements ............................................................
Machinery and equipment ..............................................................................
Software .........................................................................................................
Special tools ...................................................................................................
Construction in progress ................................................................................
Total property, plant and equipment ..........................................................
Accumulated depreciation ..............................................................................
Property, plant and equipment, net ........................................................... $
December 31,
2017
December 31,
2016
24
322
601
136
169
46
1,298
(850)
448
$
$
25
303
590
128
157
46
1,249
(785)
464
Depreciation of property, plant and equipment was $80 million, $84 million and $88 million for the years ended
December 31, 2017, 2016 and 2015, respectively.
As a result of events and circumstances in the fourth quarter of 2017, the Company reviewed certain machinery and
equipment and special tools related to the production of the TC10 product. The Company completed a test for
recoverability using the undiscounted cash flows of the TC10 product line. Due to continued weak demand conditions for
the TC10 product, the future undiscounted cash flows of the related assets were less than the carrying value of those
assets. The Company used a market approach to determine the fair value of the assets, resulting in a $32 million loss for
the year ended December 31, 2017. During 2015, the Company recorded an impairment of certain machinery and
equipment and special tools associated with the production of the H3000 and H4000 electric hybrid-propulsion systems.
See NOTE 2 “Summary of Significant Accounting Policies”, Impairment of Long-Lived Assets for more information.
59
NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS
As of December 31, 2017 and 2016, the carrying amount of the Company’s Goodwill was $1,941 million.
The following presents a summary of other intangible assets (dollars in millions):
December 31, 2017
December 31, 2016
Intangible
assets, gross
Accumulated
amortization
Intangible
assets, net
Intangible
assets, gross
Accumulated
amortization
Intangible
assets, net
Other intangible assets:
Trade name .........................................................................................................................................................................................
Customer relationships –
790 $
790 $
790
790
—
—
$
$
$
$
commercial .....................................................................................................................................................................................
(573)
Proprietary technology ........................................................................................................................................................................
(396)
Customer relationships – defense ......................................................................................................................................................
(38)
Non-compete agreement ....................................................................................................................................................................
(17)
Patented technology – defense ..........................................................................................................................................................
(28)
Tooling rights ......................................................................................................................................................................................
(5)
Total ...............................................................................................................................................................................................
832
476
62
17
28
5
2,210 $
80
24
—
—
—
1,153 $
306
118
27
1
—
—
1,242
832
476
62
17
28
5
2,210
(526)
(358)
(35)
(16)
(28)
(5)
(968)
$ (1,057) $
259
$
$
Amortization of intangible assets was $90 million, $92 million and $97 million for the years ended December 31,
2017, 2016 and 2015, respectively.
As of December 31, 2017 and 2016, the net carrying value of the Company’s Goodwill and Other intangible assets,
net was $3,094 million and $3,183 million, respectively. The Company’s 2017 annual goodwill impairment test indicated
that the fair value of the reporting unit exceeded its carrying value, indicating no impairment.
As of December 31, 2015, the Company recorded a trade name impairment charge of $80 million. The impairment
charge was a result of a decline in forecasted net sales for certain of the Company’s end markets. The trade name
impairment did not result in any other charges to goodwill, other intangible assets or long-lived assets.
Amortization expense related to other intangible assets for the next five years is expected to be (dollars in millions):
Amortization expense .......................... $
87
$
86
$
50
$
45 $
43
2018
2019
2020
2021
2022
60
NOTE 6. 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
December 31, 2017 and 2016, the Company did not have any Level 3 financial assets or liabilities.
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’s available-for-sale securities
consisted of ordinary shares of Torotrak plc (“Torotrak”) associated with a license and exclusivity agreement with
Torotrak. Torotrak’s listed shares were traded on the London Stock Exchange under the symbol “TRK” until trading was
suspended in December 2017, at which time the fair value was zero, and the Company realized a loss of $13 million for
the year ended December 31, 2017. The Company’s derivative instruments consisted 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 institution 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. The floating-to-fixed interest rate swaps are based on the London Interbank Offered Rate
(“LIBOR”) which is observable at commonly quoted intervals. The fair values are included in other current and non-current
assets and liabilities in the Consolidated Balance Sheets. The Company did not elect hedge accounting treatment for the
interest rate swaps and, as a result, fair value adjustments were charged directly to Interest expense, net in the
Consolidated Statements of Comprehensive Income.
61
The following table summarizes the fair value of the Company’s financial assets and (liabilities) as of December 31
(dollars in millions):
Fair Value Measurements Using
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
2017
2016
Significant Other
Observable Inputs (Level 2)
2016
2017
TOTAL
2017
2016
Cash equivalents ........................................... $
Rabbi trust assets ........................................
Deferred compensation obligation ...............
Available-for-sale securities .........................
Derivative liabilities, net ................................
Total ......................................................... $
50 $
8
(8)
—
—
50 $
81 $
5
(5)
2
—
83 $
— $
—
—
—
—
— $
— $
—
—
—
(29)
(29) $
50 $
8
(8)
—
—
50 $
81
5
(5)
2
(29)
54
NOTE 7. DEBT
Long-term debt and maturities are as follows (dollars in millions):
December 31,
2017
December 31,
2016
Long-term debt:
Senior Secured Credit Facility Term B-3 Loan, variable, due 2022 ..................................
Senior Notes, fixed 5.0%, due 2024 ..................................................................................
Senior Notes, fixed 4.75%, due 2027 ................................................................................
Total long-term debt ......................................................................................................
Less: current maturities of long-term debt .........................................................................
deferred financing costs, net (see NOTE 2) .............................................................
Total long-term debt, net ..............................................................................................
$
$
$
1,176
1,000
400
2,576
12
30
2,534
$
$
$
1,188
1,000
—
2,188
12
29
2,147
Principal payments required on long-term debt during the next five years are as follows:
(dollars in millions)
2018
2019
2020
2021
2022
Payments ................... $ 12
$ 12
$ 12
$ 12
$ 1,128
As of December 31, 2017, the Company had $2,576 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 Term B-3 Loan due 2022 (“Term B-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 December 31, 2017 was $2,622 million. The fair
value is based on quoted Level 2 market prices of the Company’s debt as of December 31, 2017. It is not expected that
the Company would be able to repurchase a significant amount 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 Term B-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 Term B-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.
62
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 Term B-3
Loan, as of December 31, 2017, is either (a) 2.00% over the LIBOR or (b) 1.00% 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 December 31, 2017, the Company elected to pay the
lowest all-in rate of LIBOR plus the applicable margin, or 3.57%, on the Term B-3 Loan. The Senior Secured Credit
Facility requires minimum quarterly principal payments on the Term B-3 Loan as well as prepayments from certain net
cash proceeds of non-ordinary course asset sales and casualty and condemnation events and from a percentage of
excess cash flow, if applicable. The minimum required quarterly principal payment on the Term B-3 Loan through its
maturity date of September 2022 is $3 million. As of December 31, 2017, there had been no payments required for certain
net cash proceeds of non-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 year ended December 31, 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 year ended December 31, 2017 on the Revolving Credit Facility was $300
million. As of December 31, 2017, the Company had $533 million available under the Revolving Credit Facility, net of $17
million in letters of credit. Revolving credit 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 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 credit 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 December 31, 2017, the Company had no revolving loans outstanding; however the Company
would have been in compliance with the maximum total senior secured leverage ratio, achieving a 1.13x 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
December 31, 2017, the Company’s total leverage ratio was 2.74x.
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 December 31, 2017, the
Company is in compliance with all covenants under the Senior Secured Credit Facility.
5.0% Senior Notes
In September 2016, ATI completed an offering of $1,000 million of the 5.0% Senior Notes. The 5.0% Senior Notes
were offered in a private placement exempt from registration under the Securities Act of 1933, as amended. The proceeds
from the offering, together with cash on hand, were used to repay $1,200 million of the Term B-3 Loan plus accrued and
unpaid interest and related transaction expenses. As a result of the offering, the Company recorded approximately $13
million as deferred financing fees in the Consolidated Balance Sheets in September 2016.
ATI may from time to time seek to retire the 5.0% Senior Notes through cash purchases and/or exchanges for equity
securities, in open market purchases, privately negotiated transactions, contractual redemptions or otherwise. Such
repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual
restrictions and other factors. The amounts involved may be material. Prior to October 1, 2019, ATI may redeem up to
40% of the 5.0% Senior Notes by paying a price equal to 100% of the principal amount being redeemed plus the
applicable “make-whole” premium. At any time on or after October 1, 2019, ATI may redeem some or all of the 5.0%
Senior Notes at specified redemption prices in the governing indenture.
63
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
December 31, 2017, the Company was 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 Consolidated Balance
Sheets.
ATI may from time to time seek to retire the 4.75% Senior Notes through cash purchases and/or exchanges for
equity securities, in open market purchases, privately negotiated transactions, contractual redemptions or otherwise. Such
repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual
restrictions and other factors. The amounts involved may be material. Prior to October 1, 2020, ATI may redeem up to
40% of the 4.75% Senior Notes by paying a price equal to 104.75% of the principal amount being redeemed. Prior to
October 1, 2022, ATI may redeem some or all of the 4.75% Senior Notes by paying a price equal to 100.00% of the
principal amount being redeemed, plus a “make-whole” premium. At any time on or after October 1, 2022, ATI may
redeem some or all of the 4.75% Senior Notes at specified redemption prices in the governing indenture.
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 December 31, 2017, the Company was in compliance with all covenants under the indenture governing the
4.75% Senior Notes.
64
NOTE 8. 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. Currently, the Company does not have any derivative
instruments. The Company’s derivative instruments outstanding during 2017 were 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 entered into interest
rate swap contracts that were based on the LIBOR to manage a portion of this exposure. The Company did not elect
hedge accounting treatment for these derivatives, and as a result, fair value adjustments were charged directly to Interest
expense, net in the Consolidated Statements of Comprehensive Income. During December 2017, the Company
terminated the interest rate swap contracts.
A summary of the Company’s interest rate derivatives as of December 31, 2017 and 2016 follows (dollars in
millions):
December 31, 2017
December 31, 2016
$
Fair Value
3.44% Interest Rate Swap L, Aug 2016 – Aug 2019* ...............................................................................................................
(4)
3.43% Interest Rate Swap M, Aug 2016 – Aug 2019* ..............................................................................................................
(5)
(3)
3.37% Interest Rate Swap N, Aug 2016 – Aug 2019* ..............................................................................................................
3.19% Interest Rate Swap O, Aug 2016 – Aug 2019* ..............................................................................................................
(3)
3.08% Interest Rate Swap P, Aug 2016 – Aug 2019* ..............................................................................................................
(3)
2.99% Interest Rate Swap Q, Aug 2016 – Aug 2019* ..............................................................................................................
(2)
2.98% Interest Rate Swap R, Aug 2016 – Aug 2019* ..............................................................................................................
(2)
2.73% Interest Rate Swap S, Aug 2016 – Aug 2019* ..............................................................................................................
(1)
2.74% Interest Rate Swap T, Aug 2016 – Aug 2019* ...............................................................................................................
(2)
2.66% Interest Rate Swap U, Aug 2016 – Aug 2019* ..............................................................................................................
(1)
2.60% Interest Rate Swap V, Aug 2016 – Aug 2019* ..............................................................................................................
(1)
(1)
2.40% Interest Rate Swap W, Aug 2016 – Aug 2019* .............................................................................................................
2.25% Interest Rate Swap X, Aug 2016 – Aug 2019* ..............................................................................................................
(1)
(29)
Fair Value
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Notional
Amount
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
Notional
Amount
75
100
75
75
75
50
50
50
75
50
50
25
50
800
* includes LIBOR floor of 1.00%
$
$
$
$
The following tabular disclosures further describe the Company’s interest rate derivative instruments and their impact on
the financial condition of the Company (dollars in millions):
Derivatives not designated as hedging instruments
Interest rate swaps ............................................
Total derivatives not designated as hedging
instruments ...................................................
December 31, 2017
December 31, 2016
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
Other current
liabilities
Other non-current
liabilities
Other current
liabilities
Other non-current
liabilities
$
$
—
—
—
$
(11)
(18)
$
(29)
The following tabular disclosure describes the location and impact on the Company’s results of operations related to
gain (loss) on interest rate derivatives (dollars in millions):
December 31,
2017
December 31,
2016
December 31,
2015
Location of impact on results of operations
Interest income (expense),net ..............................................................................................................................................
(14)
16
—
$
$
$
65
NOTE 9. PRODUCT WARRANTY LIABILITIES
As of December 31, 2017, the current and non-current product warranty liabilities were $22 million and $33 million,
respectively. As of December 31, 2016, the current and non-current product warranty liabilities were $25 million and $38
million, respectively. Product warranty liability activities consist of the following (dollars in millions):
Year ended
December 31,
2017
Year ended
December 31,
2016
Year ended
December 31,
2015
Beginning balance .....................................................................................................................................................................
Payments...................................................................................................................................................................................
Increase in liability (warranty issued during period) ..................................................................................................................
Net adjustments to liability .........................................................................................................................................................
Accretion (for predecessor liabilities) ........................................................................................................................................
Ending balance ..........................................................................................................................................................................
79
(35)
16
3
—
63
84
(33)
21
6
1
79
63
(30)
18
4
—
55
$
$
$
$
$
$
During 2017, 2016 and 2015, the Company recorded approximately $1 million, $1 million and $9 million,
respectively, of adjustments to the product warranty liabilities as a result of specific field action programs. As a result of
the uncertainty surrounding the nature and frequency of specific field action programs, these liabilities will change as
additional field information becomes available.
The remaining adjustments to the total liability in 2017, 2016 and 2015, excluding the Dual Power Inverter Module
(“DPIM”) as discussed below, were the result of general changes in estimates for various products as additional claims
data and field information became available.
Dual Power Inverter Module
During June 2007, Old GM recognized the estimated cost of replacing the DPIM used on H 40/50 EP electric hybrid
systems. Certain units were falling short of their expected service life and the Company’s predecessor, Allison
Transmission, an operating unit of Old GM, decided to cover repair or replacement for an extended period. The Company
is responsible for the first $12 million of qualified cost while General Motors Company (“GM”) is responsible for the next
$34 million of costs, with any amount over $46 million being shared one-third by the Company and two-thirds by GM for
shipments through June 30, 2009. As of December 31, 2017 and 2016, the Company’s remaining DPIM liability was $4
million and $6 million, respectively, and the related receivable owed by GM to the Company was $3 million and $3 million,
respectively.
NOTE 10. DEFERRED REVENUE
As of December 31, 2017, the current and non-current deferred revenue were $41 million and $75 million,
respectively. As of December 31, 2016, the current and non-current deferred revenue were $27 million and $66 million,
respectively. Deferred revenue activity consists of the following (dollars in millions):
Year ended
December 31,
2017
Year ended
December 31,
2016
Year ended
December 31,
2015
Beginning balance ..................................................... $
Increases ...................................................................
Revenue earned ........................................................
Ending balance .......................................................... $
93
52
(29)
116
$
$
79
37
(23)
93
$
$
69
32
(22)
79
Deferred revenue recorded in current and non-current liabilities related to ETC as of December 31, 2017 were $30
million and $72 million, respectively. Deferred revenue recorded in current and non-current liabilities related to ETC as of
December 31, 2016 were $26 million and $66 million, respectively.
66
NOTE 11. OTHER (EXPENSE) INCOME, NET
Other (expense) income, net consists of the following (dollars in millions):
Years ended December 31,
2016
2017
2015
Technology-related investment expense ........................................................ $
Vendor settlements .........................................................................................
Other ...............................................................................................................
Total ................................................................................................................ $
(16) $
(5)
(1)
(22) $
(1)
1
2
2
$ —
3
(3)
$ —
NOTE 12. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (dollars in millions):
Payroll and related costs ............................................................................. $
Sales allowances .........................................................................................
Accrued interest payable .............................................................................
Vendor buyback obligation ..........................................................................
Taxes payable .............................................................................................
Defense price reduction reserve .................................................................
Non-trade payables .....................................................................................
Derivative liabilities ......................................................................................
Other accruals .............................................................................................
As of
December 31,
2017
As of
December 31,
2016
$
73
34
19
14
10
9
8
—
16
52
24
17
13
10
9
4
11
10
Total ........................................................................................................ $
183
$
150
NOTE 13. EMPLOYEE BENEFIT PLANS
The Company’s hourly defined benefit pension plan generally provides benefits of negotiated, stated amounts for
each year of service as well as significant supplemental benefits for employees who retire with 30 years of service before
normal retirement age. Any difference between actual and expected returns on assets during a year and actuarial gains
and losses on liabilities together with any prior service costs are charged (or credited) to income over the average
remaining service lives of employees. The benefit cost components shown in the Consolidated Statements of
Comprehensive Income are based upon certain data specific to the Company, actuarial assumptions that were used for
accounting disclosures, and certain allocation methodologies such as population demographics.
For all hourly employees hired after May 18, 2008, the defined benefit pension plan was replaced with a defined
contribution pension plan, and the company-sponsored retiree healthcare was also eliminated for those hired after
May 18, 2008. The charge to expense for the hourly defined contribution pension plan was $2 million for each of the years
ended December 31, 2017, 2016 and 2015.
The Company’s salaried defined benefit plan covering salaried employees with a service date prior to January 1,
2001 is generally based on years of service and compensation history. Any difference between actual and expected
returns on assets during a year and actuarial gains and losses on liabilities together with any prior service costs are
charged (or credited) to income over the average remaining service lives of employees. The benefit cost components
shown in the Consolidated Statements of Comprehensive Income are based upon certain data specific to the Company,
actuarial assumptions that were used for accounting disclosures, and certain allocation methodologies such as population
demographics.
The Company’s salaried defined contribution retirement savings plan requires the Company to match employee
contributions up to certain predefined limits based upon eligible base salary. In addition to the matching contribution, the
Company is required to make a contribution equal to 1% of eligible base salary for salaried employees with a service date
on or after January 1, 1993 to cover certain benefits in retirement that are different from salaried employees with a service
date prior to January 1, 1993. In addition, for salaried employees with a service date on or after January 1, 2001, the
Company is required to contribute to its defined contribution retirement savings plan an amount equal to 4% of eligible
base salary under the program. The charge to expense for the salaried defined contribution retirement savings plan was
$6 million for each of the years ended December 31, 2017, 2016 and 2015.
67
The Company is also responsible for OPEB costs (medical, dental, vision, and life insurance) for hourly employees
hired prior to May 19, 2008. Post-retirement benefit costs consist of service cost and interest cost on accrued obligations.
Actuarial gains and losses on liabilities and any prior service costs are charged (or credited) to income over the average
remaining service lives of employees. The benefit cost components shown in the Consolidated Statements of
Comprehensive Income are based upon certain data specific to the Company, actuarial assumptions that were used for
OPEB accounting disclosures, and certain allocation methodologies such as population demographics. The plan is
unfunded and any future payments will be funded by the Company’s operating cash flows. As of December 31, 2017 and
2016, the Company had an estimated OPEB liability for hourly employees hired prior to May 19, 2008, excluding those
employees eligible to retire at the time of the sale of the Company, of $102 million and $144 million, respectively.
As part of the Affordable Care Act enacted in 2010, the Company has evaluated the impact on “High-cost Health
Plans” in which employers offering health plan coverage exceeding certain thresholds must pay an excise tax equal to
40% of the value of the plan that exceeds the threshold amount. As a result of the excise tax, the Company has recorded
$2 million in its OPEB liability as of both December 31, 2017 and 2016 with a corresponding adjustment to AOCL, net of
tax.
The Company provides contributions to certain international benefit plans; however, these contributions are not
material for the periods presented.
For all pension and OPEB plans in which employees participate, costs are determined within the FASB’s
authoritative accounting guidance set forth on employers’ defined benefit pensions including accounting for settlements
and curtailments of defined benefit pension plans, termination of benefits and accounting for post-retirement benefits other
than pensions. In accordance with the authoritative accounting guidance, the Company recognizes the funded status of its
defined benefit pension plans and OPEB plan in its Consolidated Balance Sheets with a corresponding adjustment to
AOCL, net of tax.
Information about the net periodic benefit cost and other changes recognized in AOCL for the pension and post-
retirement benefit plans is as follows (dollars in millions):
Year ended
December 31,
2017
Pension Plans
Year ended
December 31,
2016
Year ended
December 31,
2015
Year ended
December 31,
2017
Post-retirement Benefits
Year ended
December 31,
2016
Year ended
December 31,
2015
Net Periodic Benefit Cost:
Service cost .............................
Interest cost .............................
Expected return on assets ......
Prior service credit ..................
Net Periodic Benefit Cost ........
Other changes recognized in
$
$
other comprehensive income:
$
Prior service cost (credit) ........
Net loss (gain) .........................
Amortizations ..........................
Total recognized – other
12 $
13 $
14 $
6
(7)
—
6
(7)
—
5
(8)
—
$
2
6
—
(4)
$
2
7
—
(4)
11 $
12 $
11 $
4 $
5 $
1 $
8
—
(5) $
8
—
— $
(4)
—
(73) $
24
4
$
—
(11)
4
comprehensive income .......
$
9 $
3 $
(4) $
(45) $
(7) $
2
5
—
(3)
4
—
4
4
8
The table below provides the weighted-average actuarial assumptions used to determine the net periodic benefit
cost.
Year ended
December 31,
2017
Discount rate ...........................
Rate of compensation
increase (salaried) ..............
Expected return on assets ......
4.10%
3.00%
4.70%
Pension Plans
Year ended
December 31,
2016
4.40%
3.00%
4.70%
Year ended
December 31,
2015
Year ended
December 31,
2017
Post-retirement Benefits
Year ended
December 31,
2016
Year ended
December 31,
2015
3.90%
3.00%
6.25%
4.30%
4.60%
4.00%
N/A
N/A
N/A
N/A
N/A
N/A
68
The table below provides the weighted-average actuarial assumptions used to determine the benefit obligations of
the Company’s plans.
Pension Plans
Post-retirement Benefits
As of December 31,
2017
Discount rate ........................................................................................... 3.50%
Rate of compensation increase (salaried) .............................................. 3.00%
2016
4.10%
3.00%
2017
3.60%
N/A
2016
4.30%
N/A
The Company’s pension and OPEB costs are calculated using various actuarial assumptions and methodologies as
prescribed by authoritative accounting guidance. These assumptions include discount rates, expected return on plan
assets, health care cost trend rates, inflation, rate of compensation increases, mortality rates and other factors. The
Company reviews all actuarial assumptions on an annual basis.
The discount rate is used to determine the present value of the Company’s benefit obligations. The Company’s
discount rate is determined by matching the plans’ projected cash flows to a yield curve based on long-term, fixed income
debt instruments available as of the measurement date of December 31, 2017.
The overall expected rate of return on plan assets is based upon historical and expected future returns consistent
with the expected benefit duration of the plan for each asset group adjusted for investment and administrative fees.
Health care cost trends are used to project future post-retirement benefits payable from the Company’s plans. For
the Company’s December 31, 2017 obligations, future post-retirement medical care costs and prescription drug costs
were forecasted assuming an initial annual increase of 5.20%, decreasing to 4.50% by the year 2036.
As health care costs trends have a significant effect on the amounts reported, an increase and decrease of one-
percentage-point would have the following effects in the year ended December 31, 2017 (dollars in millions):
Effect on total of service and interest cost ........................................................ $
Effect on post-retirement benefit obligation ....................................................... $
1% Increase
2
15
1% Decrease
(1)
(12)
$
$
The following table provides a reconciliation of the changes in the net benefit obligations and fair value of plan
assets for the years ended December 31, 2017, 2016 and 2015 (dollars in millions):
Year ended
December 31,
2017
Pension Plans
Year ended
December 31,
2016
Year ended
December 31,
2015
Year ended
December 31,
2017
Post-retirement Benefits
Year ended
December 31,
2016
Year ended
December 31,
2015
Benefit Obligations:
Net benefit obligation at
beginning of year .................. $
Service cost ...............................
Interest cost ...............................
Plan Amendments .....................
Benefits paid..............................
Actuarial loss (gain) ...................
Net benefit obligation at end of
year ....................................... $
Fair Value of Plan Assets:
Fair value of plan assets at
155 $
12
6
1
(7)
14
140 $
13
6
(5)
(7)
8
134 $
14
5
—
(2)
(11)
144 $
2
6
(73)
(2)
25
147 $
2
7
—
(1)
(11)
136
2
5
—
(1)
5
181 $
155 $
140 $
102 $
144 $
147
beginning of year .................. $
150 $
140 $
135 $
— $
— $
Actual return on plan
assets ....................................
Employer contributions ..............
Benefits paid..............................
Fair value of plan assets at end
of year ................................... $
Net Funded Status .................... $
14
31
(7)
6
11
(7)
2
5
(2)
—
2
(2)
—
1
(1)
188 $
7 $
150 $
(5) $
140 $
— $
— $
(102) $
— $
(144) $
—
(147)
69
—
—
1
(1)
The Company’s OPEB plan was amended to reflect certain limitations on participants’ annual benefits that were
included in the new collective bargaining agreement ratified by International Union, United Automobile, Aerospace and
Agricultural Implement Workers of America (“UAW”) Local 933 in December 2017.
The Company’s pension plan assets mostly consist of diversified equity securities and diversified debt securities.
The fair values of plan assets for the Company’s pension plans as of December 31, 2017 and 2016 are as follows (dollars
in millions):
Fair Value Measurements Using
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
2017
2016
Significant Other
Observable Inputs (Level 2)
2016
2017
TOTAL
2017
2016
Diversified debt securities ............................ $
Diversified equity securities ..........................
Cash equivalents ...........................................
Total ......................................................... $
26 $
20
6
52 $
12 $
22
4
38 $
128 $
8
—
136 $
112 $
—
—
112 $
154 $
28
6
188 $
124
22
4
150
The Company’s investment strategy with respect to pension plan assets is to invest the assets in accordance with
laws and regulations. The long-term primary objectives for the Company’s pension assets are to provide results that meet
or exceed the plans’ actuarially assumed long-term rate of return without subjecting the funds to undue risk. To achieve
these objectives the Company has established the following targets:
Asset Category
2%
Cash equivalents ....................................................................................................................................
15
Diversified equity securities ....................................................................................................................
Diversified debt securities ......................................................................................................................
83
100%
Total ...................................................................................................................................................
Hourly
Salary
2%
15
83
100%
Target
Through 2017, the Company’s investment committee has continued to evaluate the investments and take steps
toward the established targets.
The following table discloses the amounts recognized in the balance sheet and in AOCL at December 31, 2017 and
2016, on a pre-tax basis (dollars in millions):
Pension Plans
Post-retirement Benefits
2017
As of December 31,
2017
2016
2016
Amounts Recognized in Balance Sheet:
Noncurrent assets ....................................................................................
7
Current liabilities.......................................................................................
—
Noncurrent liabilities .................................................................................
—
Total asset (liability) .................................................................................
7
Accumulated Other Comprehensive Loss:
Prior service credit ...................................................................................
4
Actuarial (loss) gain .................................................................................
(11)
Total .....................................................................................................
(7) $
$
$
$
$
$
$ — $
—
(5)
(5) $
$
$
—
(3)
(99)
(102) $
5 $
(3)
2 $
84
(10)
74
$
$
—
(2)
(142)
(144)
15
15
30
The amounts in AOCL expected to be amortized and recognized as a component of net periodic benefit cost in 2018
are as follows (dollars in millions):
Prior service credit ................................................................................................ $
Actuarial loss ........................................................................................................
Total ................................................................................................................. $
2018
Pension
Plans
1
(1)
—
$
$
Post-retirement
Benefits
13
—
13
70
The accumulated benefit obligation for the Company’s pension plans as of December 31, 2017 and 2016 was $177
million and $151 million, respectively.
As of December 31, 2017 and 2016, the projected benefit obligation, the accumulated benefit obligation, and the fair
value of plan assets for pension plans with a projected benefit obligation in excess of plan assets and for pension plans
with an accumulated benefit obligation in excess of plan assets were as follows (dollars in millions):
Hourly Plan
Salary Plan
As of December 31,
2017
2016
2017
2016
Plans with projected benefit obligation in excess of plan assets:
Projected benefit obligation ......................................................................
Fair value of plan assets ..........................................................................
Plans with accumulated benefit obligation in excess of plan
assets:
N/A2
Accumulated benefit obligation ................................................................
N/A2
Fair value of plan assets ..........................................................................
1
As of December 31, 2017, the hourly defined benefit pension plan had plan assets greater than the projected benefit obligation and the accumulated
benefit obligation. As of December 31, 2017, the salary defined benefit pension plan had plan assets greater than the projected benefit obligation and
accumulated benefit obligation.
2
As of December 31, 2016, the salary defined benefit pension plan had plan assets greater than the accumulated benefit obligation.
N/A1
N/A1
N/A1
N/A1
N/A1
N/A1
N/A1
N/A1
78
75
76
75
76
75
$
$
$
$
$
$
Information about expected cash flows for the Company’s pension and post-retirement benefit plans is as follows
(dollars in millions):
Pension
Plans
Post-retirement
Benefits
Employer Contributions:
2018 expected contributions ............................................................................... $
Expected Benefit Payments:
2018 .....................................................................................................................
2019 .....................................................................................................................
2020 .....................................................................................................................
2021 .....................................................................................................................
2022 .....................................................................................................................
2023-2027 ...........................................................................................................
—
$
9
10
11
12
13
68
3
3
3
4
5
5
27
Expected benefit payments for pension and post-retirement benefits will be paid from plan trusts or corporate assets.
The Company’s funding policy is to contribute amounts annually that are at least equal to the amounts required by
applicable laws and regulations or to directly fund payments to plan participants. Additional discretionary contributions will
be made when deemed appropriate to meet the Company’s long-term obligation to the plans.
In June 2012, the Company established a non-qualified deferred compensation plan (“Deferred Compensation
Plan”) for a select group of management. Under the terms of the plan, the Company has utilized a rabbi trust to
accumulate assets to fund its promise to pay benefits under the Deferred Compensation Plan. The rabbi trust is an
irrevocable trust, which restricts any use of funds (operational or otherwise) by the Company other than to pay benefits
under the Deferred Compensation Plan, and prevents immediate taxation of contributed amounts. Funds are accumulated
through both employee deferrals and a company match. Funds can be invested by the employee into a diversified group
of investment options, which have been selected by the Company’s investment committee, that are all categorized as
Level 1 in the fair value hierarchy. The company match resulted in a charge of zero to the Consolidated Statements of
Comprehensive Income for each of the years ended December 31, 2017, 2016 and 2015, and the fair value of the rabbi
trust plan assets and deferred compensation obligation was $8 million and $5 million as of December 31, 2017 and 2016,
respectively.
71
NOTE 14. INCOME TAXES
Income before income taxes included the following (dollars in millions):
U.S. income ..............................................................................................
Foreign income .........................................................................................
Total .....................................................................................................
$
$
2017
Years ended December 31,
2016
309
32
341
491 $
36
527 $
2015
261
28
289
$
$
The provision for income tax expense was estimated as follows (dollars in millions):
Years ended December 31,
2016
2015
2017
Estimated current income taxes:
U.S. federal ................................................................................................... $
Foreign ..........................................................................................................
U.S. state and local .......................................................................................
Total Current .............................................................................................
Deferred income tax (credit) expense, net:
U.S. federal ...................................................................................................
Foreign ..........................................................................................................
U.S. state and local .......................................................................................
Total Deferred ...........................................................................................
Total income tax expense ................................................................................. $
61
7
5
73
(44)
1
(7)
(50)
23
$
$
2 $
8
2
12
107
—
7
114
126
$
3
6
2
11
90
—
6
96
107
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was enacted into law. The Tax Act makes broad and
complex changes to the U.S. tax code that impact the Company, most notably a reduction of the U.S. corporate income
tax rate from 35% to 21% for tax years beginning after December 31, 2017. The Tax Act also makes other changes
including, but not limited to, the acceleration of depreciation for certain assets placed into service after September 27,
2017 as well as a one-time deemed repatriation tax on undistributed foreign earnings and profits. Beginning in 2018, the
Tax Act makes other changes impacting the Company such as additional limitations on executive compensation, the
repeal of the domestic manufacturing deduction and qualifications around certain research and development
expenditures.
On December 22, 2017, the United States Securities and Exchange Commission (“SEC”) issued Staff Accounting
Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. The Company
recognized the income tax effects of the Tax Act for the year ended December 31, 2017, the reporting period in which the
Tax Act was signed into law, in accordance with SAB 118. As such, the Company’s financial results reflect the income tax
effects of the Tax Act and provisional amounts for those specific income tax effects of the Tax Act that could be
reasonably estimated.
In accordance with SAB 118, the Company recorded a $157 million deferred tax benefit related to the re-
measurement of certain deferred tax assets and liabilities and $5 million of tax expense recorded in connection with the
transition tax on the mandatory deemed repatriation of foreign earnings and profits for the year ended December 31,
2017.
72
A reconciliation of the provision for income tax expense compared with the amounts at the U.S. federal statutory rate
is as follows (dollars in millions):
Tax at U.S. statutory income tax rate ......................................................... $
Impact related to Tax Act ...........................................................................
Tax credits ..................................................................................................
Foreign rate differential ..............................................................................
Non-deductible expenses ...........................................................................
Valuation allowance ...................................................................................
State tax expense .......................................................................................
Adjustment to deferred tax expense ..........................................................
Other adjustments ......................................................................................
Total income tax expense ...................................................................... $
$
$
Years ended December 31,
2016
120
—
—
(5)
5
1
6
—
(1)
126
2017
185
(155)
(21)
(5)
7
3
10
—
(1)
23
2015
101
—
—
(3)
4
(1)
5
1
—
107
$
$
The effective tax rate for the year ended December 31, 2017 was 4%, as compared with 37% in 2017. The lower
rate is principally due to $155 million of tax benefit recorded in connection with the Tax Act, largely due to the $157 million
decrease in net deferred tax liabilities to reflect the decrease in the corporate income tax rate from 35% to 21%.
Deferred income tax assets and liabilities as of December 31, 2017 and 2016 reflect the effect of temporary
differences between amounts of assets, liabilities and equity for financial reporting purposes and the bases of such
assets, liabilities and equity as measured by tax laws, as well as tax loss and tax credit carry forwards. Net deferred tax
assets and liabilities are classified as non-current in the consolidated statements of financial position. As described above,
the deferred tax assets and liabilities are measured based on the enacted tax rates that will apply in the years in which the
temporary differences are expected to be recovered or paid. As such, the Company re-measured its deferred tax assets
and liabilities as a direct result of the enactment of the Tax Act. The primary impact of the re-measurement was a
reduction in deferred tax assets and liabilities in connection with the reduction of the U.S. corporate income tax rate from
35% to 21%.
As of December 31, 2017, the Company had approximately $62 million of undistributed earnings in foreign
subsidiaries which were subject to the one-time repatriation tax on foreign earnings required by the Tax Act. As a result,
the Company recorded a charge of $5 million for the one-time repatriation tax, to be paid to the U.S. Government over the
next eight years. The Company has not recognized any deferred tax liabilities associated with earnings in foreign
subsidiaries, except for its subsidiaries located in China and Hong Kong, as they are intended to be permanently
reinvested and used to support foreign operations. The deferred tax liabilities, if recorded, related to unremitted earnings
that are indefinitely reinvested are not material. The Company has recorded a deferred tax liability of $2 million for the tax
liability associated with the remittance of previously taxed income and unremitted earnings for its subsidiaries located in
China and Hong Kong, which in previous periods had been considered indefinitely reinvested.
73
Temporary differences and carryforwards that gave rise to deferred tax assets and liabilities included the following
(dollars in millions):
Deferred tax assets:
Intangibles ............................................................................................... $
Deferred revenue ....................................................................................
Other accrued liabilities ...........................................................................
Operating loss carryforwards ..................................................................
Warranty accrual .....................................................................................
Stock-based compensation.....................................................................
Sales allowances and rebates ................................................................
Inventories ..............................................................................................
Technology-related investments .............................................................
Capital loss carryforwards.......................................................................
Environmental remediation .................................... ………………………
Unrealized loss on interest rate derivatives ............................................
Post-retirement .......................................................................................
Tax credits ..............................................................................................
Other .......................................................................................................
Total Deferred tax assets ............................................................................
Valuation allowances ...................................................................................
Deferred tax liabilities:
Goodwill ..................................................................................................
Trade name .............................................................................................
Property, plant and equipment ................................................................
Post-retirement .......................................................................................
Other .......................................................................................................
Total Deferred tax liabilities .........................................................................
Net Deferred tax liability .............................................................................. $
As of
December 31,
2017
As of
December 31,
2016
35
25
18
12
11
6
6
5
4
3
3
1
—
—
4
133
(9)
(287)
(96)
(7)
(4)
(3)
(397)
(273)
$
$
64
35
34
14
22
8
7
6
9
—
5
11
12
8
8
243
(5)
(409)
(122)
(15)
—
(2)
(548)
(310)
The estimated net operating loss carryforwards as of December 31, 2017 relate solely to U.S. state net operating
loss carryforwards. Substantially all state operating loss carryforwards will not expire until 2027-2032.
Management has determined, based on an evaluation of available objective and subjective evidence, that it is more
likely than not that certain foreign deferred tax assets and an anticipated capital loss carryforward will not be realized;
therefore these deferred tax assets are offset with a valuation allowance of $9 million and $5 million as of December 31,
2017 and 2016, respectively.
In accordance with the FASB’s authoritative accounting guidance on accounting for income taxes, the Company
records uncertain tax positions on the basis of a two-step process whereby (1) it is determined whether it is more likely
than not that the tax position will be sustained based on the technical merits of the position and (2) for those tax positions
that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is greater
than 50% likely to be realized upon ultimate settlement with the related tax authority. Based upon this process, the
Company has recognized a liability for uncertain tax benefits as of December 31, 2017 and 2016. Management does not
anticipate any material changes in the balance within the coming year. The change in the liability for unrecognized tax
benefits are as follows (dollars in millions):
December 31, 2015................................................................................................
Increases in unrecognized tax benefits as a result of current year activity ...........
December 31, 2016................................................................................................
Increases in unrecognized tax benefits as a result of current year activity ...........
December 31, 2017................................................................................................
$
$
$
2
—
2
—
2
74
For the years ended December 31, 2017, 2016 and 2015, the Company recognized no interest and penalties in the
Consolidated Statements of Comprehensive Income because either no uncertain tax positions were identified or the
penalties and interest anticipated were not material in all the periods presented. The Company follows a policy of
recording any interest or penalties in Income tax expense.
Management does not anticipate any significant changes in unrecognized tax benefits within the coming year. There
was $2 million as of both December 31, 2017 and 2016 of unrecognized tax benefits that, if recognized, would affect the
annual effective tax rate. All of the Company's returns, once filed, will remain subject to examination by the various taxing
authorities for the duration of the applicable statute of limitations (generally three years from the earlier of the date of filing
or the due date of the return).
NOTE 15. ACCUMULATED OTHER COMPREHENSIVE LOSS
The changes in components of AOCL consisted of the following (dollars in millions):
Before Tax
Tax (Expense)
Benefit
After Tax
Balance at December 31, 2014.......................................................................... $
5
$
(45)
$
(40)
Foreign currency translation ..........................................................................
Pension and OPEB liability adjustment .........................................................
Available-for-sale securities ...........................................................................
(11)
(3)
(8)
—
—
3
Net current period other comprehensive loss .................................................... $
(22) $
3
$
(11)
(3)
(5)
(19)
Balance at December 31, 2015.......................................................................... $
(17) $
(42)
$
(59)
Foreign currency translation ..........................................................................
Pension and OPEB liability adjustment .........................................................
Available-for-sale securities ...........................................................................
(6)
4
(1)
—
(2)
1
(6)
2
—
Net current period other comprehensive loss .................................................... $
(3) $
(1) $ (4)
Balance at December 31, 2016.......................................................................... $
(20) $
(43) $
(63)
Foreign currency translation ..........................................................................
Pension and OPEB liability adjustment .........................................................
Available-for-sale securities ...........................................................................
Net current period other comprehensive loss .................................................... $
15
34
11
60
—
(8)
(4)
$
(12) $
15
26
7
48
Balance at December 31, 2017.......................................................................... $
40
$
(55) $
(15)
75
The following table shows the location in the Consolidated Statements of Comprehensive Income affected by
reclassifications from AOCL (dollars in millions):
AOCL Components
For the year ended December 31, 2015
Amount
reclassified from
AOCL
Affected line item in the consolidated
statements of comprehensive income
Amortization of defined benefit pension items:
Prior service credit ....................................... $
Actuarial gain ...............................................
Total reclassifications, before tax .....................
Income tax expense .........................................
Total reclassifications ....................................... $
3 Cost of sales
— Selling, general and administrative
— Engineering – research and development
— Cost of sales
3
(1) Tax expense
2 Net of tax
Income before income taxes
AOCL Components
For the year ended December 31, 2016
Amount
reclassified from
AOCL
Affected line item in the consolidated
statements of comprehensive income
Amortization of defined benefit pension items:
Prior service credit ....................................... $
Actuarial gain ...............................................
Total reclassifications, before tax .....................
Income tax expense .........................................
Total reclassifications ....................................... $
3 Cost of sales
— Selling, general and administrative
— Engineering – research and development
1 Cost of sales
— Selling, general and administrative
— Engineering – research and development
4
(2) Tax expense
2 Net of tax
Income before income taxes
AOCL Components
For the year ended December 31, 2017
Amount
reclassified from
AOCL
Affected line item in the consolidated
statements of comprehensive income
Amortization of defined benefit pension items:
Prior service credit ....................................... $
Actuarial gain ...............................................
Total reclassifications, before tax .....................
Income tax expense .........................................
Total reclassifications ....................................... $
3 Cost of sales
1 Selling, general and administrative
— Engineering – research and development
— Cost of sales
4
(1) Tax expense
3 Net of tax
Income before income taxes
Prior service cost and actuarial loss are included in the computation of the Company’s net periodic benefit cost.
Please see NOTE 13 “Employee Benefit Plans” for additional details.
76
NOTE 16. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain facilities under various operating leases. Rent expense under the non-cancelable
operating leases was $5 million for each of the years ended December 31, 2017, 2016 and 2015. Certain leases contain
renewal options.
As of December 31, 2017, future payments under non-cancelable operating leases are as follows over each of the
next five years and thereafter (dollars in millions):
2018 ....................................................................................................... $
2019 .......................................................................................................
2020 .......................................................................................................
2021 .......................................................................................................
2022 .......................................................................................................
Thereafter ..............................................................................................
Total ................................................................................................... $
4
2
2
1
1
1
11
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
December 31, 2017, 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 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 17. CONCENTRATION OF RISK
As of December 31, 2017 and 2016, the Company employed approximately 2,700 employees with 89% of those
employees in the U.S. Approximately 59% and 58% of the Company’s U.S. employees were represented by unions and
subject to a collective bargaining agreement as of December 31, 2017 and 2016, respectively. In addition, many of the
hourly employees outside the U.S. are represented by various unions. The Company is currently operating under a
collective bargaining agreement with UAW Local 933 that expires in November 2023.
Three customers accounted for greater than 10% of net sales within the last three years presented.
% of net sales
Daimler AG ..........................................................................................................
Navistar, Inc. .......................................................................................................
Volvo Group ........................................................................................................
2017
Years ended December 31,
2016
21%
9%
8%
20%
8%
8%
2015
21%
10%
10%
No other customers accounted for more than 10% of net sales of the Company during the years ended
December 31, 2017, 2016 or 2015.
77
Three customers accounted for greater than 10% of outstanding accounts receivable within the last two years
presented.
% of accounts receivable
Kirby Corporation1 ............................................................................................
4%
6%
Volvo Group .....................................................................................................
Daimler AG .......................................................................................................
19%
1As of December 31, 2017, Kirby Corporation (“Kirby”) was the parent company of customers United Engines LLC and Stewart & Stevenson
LLC. As of December 31, 2016, Kirby was the parent company of United Engines LLC.
15%
11%
7%
As of
December 31,
2017
As of
December 31,
2016
No other customers accounted for more than 10% of the outstanding accounts receivable as of December 31, 2017
or December 31, 2016.
No supplier accounted for greater than 10% of materials purchased during the years ended December 31, 2017,
2016 or 2015.
NOTE 18. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Senior Notes Held by Executive Officers
In May 2015, the Company redeemed $100,000 and $450,000 of ATI’s 7.125% Senior Notes held by Lawrence E.
Dewey, Chairman and Chief Executive Officer, and David S. Graziosi, President and Chief Financial Officer, respectively,
at the specified redemption price in the governing indenture equal to 103.563% of the principal amount plus any accrued
and unpaid interest.
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.
Sales to Customer Indirectly Owned by Director
During 2017, the Company had net sales of less than $30 million to Gillig LLC (“Gillig”) and less than $6 million to
General Dynamics Corporation (“GD”). James A. Star, a member of the Company’s Board of Directors, has an indirect
material interest in Gillig as a result of trusts for the benefit of his wife and children collectively owning an approximately
5% interest in the entities that directly and indirectly own Gillig LLC. In addition, all of the remaining direct and indirect
interests in Gillig LLC are owned by trusts for the benefit of members of Mr. Star’s wife’s immediate and extended family.
Mr. Star also has an indirect material interest in GD as a result of trusts for the benefit of his wife, children and members
of his wife’s family collectively owning approximately 10% of the outstanding shares of common stock of GD.
NOTE 19. COMMON STOCK
On November 14, 2016, the Company’s Board of Directors authorized the Company to repurchase up to $1,000
million of its common stock pursuant to a stock repurchase program (“2016 Repurchase Program”). On November 8,
2017, the Company’s Board of Directors increased the authorization by $500 million bringing the total amount authorized
under the 2016 Repurchase Program to $1,500 million. The terms of the 2016 Repurchase Program provide that the
Company may repurchase shares of our common stock, from time to time depending on market conditions and corporate
needs, in the open market or through privately negotiated transactions in accordance with Rule 10b-18 of the Exchange
Act. Unless earlier terminated by our Board of Directors, the 2016 Repurchase Program will expire on December 31,
2019.
During 2017, the Company purchased approximately $885 million of its common stock under the 2016 Repurchase
Program. All transactions during 2017 were settled in cash during the same period.
78
NOTE 20. 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. As of December 31, 2017, 2016, and 2015, the Company had 0.2 million, 0.2 million,
and 0.7 million outstanding stock options that were not included in the diluted EPS calculation because they were anti-
dilutive. Basic and diluted EPS for the full-year is calculated using the weighted average shares of common stock
outstanding during the year while quarterly basic and diluted EPS is calculated using the weighted average shares of
common stock outstanding during the quarter; therefore, the sum of the four quarters’ EPS may not equal full-year EPS.
The following table reconciles the numerators and denominators used to calculate basic EPS and diluted EPS (in
millions, except per share data):
Net income ................................................................................................. $
Weighted average shares of common stock outstanding ..........................
Dilutive effect stock-based awards .............................................................
Diluted weighted average shares of common stock outstanding ..........
Years ended December 31,
2016
215
168
1
169
Basic earnings per share attributable to common stockholders ................ $ 3.38 $ 1.28
Diluted earnings per share attributable to common stockholders ......... $ 3.36 $ 1.27
2017
504 $
149
1
150
2015
182
176
1
177
$ 1.03
$ 1.03
$
NOTE 21. GEOGRAPHIC INFORMATION
The Company had the following net sales by country (dollars in millions):
United States .............................................................................................................................................................................
Canada ......................................................................................................................................................................................
Japan .........................................................................................................................................................................................
China .........................................................................................................................................................................................
Germany ....................................................................................................................................................................................
Mexico .......................................................................................................................................................................................
United Kingdom .........................................................................................................................................................................
Netherlands ...............................................................................................................................................................................
Turkey .......................................................................................................................................................................................
Other .........................................................................................................................................................................................
Total ......................................................................................................................................................................................
Years ended December 31,
2016
1,277 $
115
70
50
53
41
28
27
26
153
1,840
2017
1,614 $
125
75
62
45
39
36
30
28
208
2,262
2015
1,460
96
49
64
40
36
44
19
30
148
1,986
$
$
$
$
The Company had the following net long-lived assets by country (dollars in millions):
Years ended December 31,
2016
2017
2015
United States .............................................................................................................................................................................
India ...........................................................................................................................................................................................
Hungary .....................................................................................................................................................................................
Others ........................................................................................................................................................................................
Total ......................................................................................................................................................................................
412 $
36
11
5
464 $
400 $
32
12
4
448 $
419
43
13
5
480
$
$
79
NOTE 22. QUARTERLY FINANCIAL INFORMATION
The following is a summary of the unaudited quarterly results of operations. The Company believes that all
adjustments considered necessary for a fair presentation in accordance with GAAP have been included (unaudited, in
millions, except per share data).
March 31
June 30
September 30
December 31
Quarters ended,
2017
Net sales ....................................................................................................................................................................................
Gross profit ................................................................................................................................................................................
Operating income.......................................................................................................................................................................
Income before income taxes ......................................................................................................................................................
Net income .................................................................................................................................................................................
Basic earnings per share ...........................................................................................................................................................
Diluted earnings per share .........................................................................................................................................................
595 $
302
198
170
111
0.75 $
0.75 $
588
288
128
84
215
1.52
1.51
580
290
177
146
95
0.63
0.63
499
251
149
127
83
0.53
0.52
$
$
$
$
$
$
$
$
$
2016
Net sales ....................................................................................................................................................................................
Gross profit ................................................................................................................................................................................
Operating income.......................................................................................................................................................................
Income before income taxes ......................................................................................................................................................
Net income .................................................................................................................................................................................
Basic earnings per share ...........................................................................................................................................................
Diluted earnings per share .........................................................................................................................................................
434 $
204
104
71
45
0.27 $
0.27 $
469
218
110
94
61
0.37
0.36
462
215
111
77
48
0.28
0.28
475
227
127
99
61
0.36
0.36
$
$
$
$
$
$
$
$
$
80
Allison Transmission Holdings, Inc.
Schedule I—Parent Company only Balance Sheets
(dollars in millions)
ASSETS
Current Assets:
Cash ............................................................................................................................................ $
Total Current Assets .......................................................................................................................
Investments in and advances to subsidiaries .................................................................................
TOTAL ASSETS ............................................................................................................................. $
— $
—
689
689 $
—
—
1,081
1,081
December 31,
2017
December 31,
2016
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable ....................................................................................................................... $
Total Current Liabilities ...................................................................................................................
Capital stock ...............................................................................................................................
Paid in capital .............................................................................................................................
Treasury stock ............................................................................................................................
Accumulated deficit .....................................................................................................................
Accumulated other comprehensive loss, net of tax ....................................................................
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY ................................................................. $
— $
—
1
1,758
—
(1,055)
(15)
689 $
—
—
2
1,728
—
(586)
(63)
1,081
The accompanying note is an integral part of the Parent Company only financial statements.
81
Allison Transmission Holdings, Inc.
Schedule I—Parent Company only Statements of Comprehensive Income
(dollars in millions)
Years ended December 31,
2016
2015
2017
Net sales .........................................................................................................................................
General and administrative fees .....................................................................................................
Total operating income ...............................................................................................................
$
— $
—
—
Other income:
Equity earnings of consolidated subsidiary ................................................................................
Income before income taxes ...........................................................................................................
Income tax expense ........................................................................................................................
504
504
Net income ......................................................................................................................................
Comprehensive income ..................................................................................................................
—
504 $
552 $
$
$
— $
—
—
215
215
—
215 $
211 $
—
—
—
182
182
—
182
163
The accompanying note is an integral part of the Parent Company only financial statements.
82
Allison Transmission Holdings, Inc.
Schedule I—Parent Company only Statements of Cash Flows
(dollars in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................................................................................................
Deduct items included in net income not providing cash:
$
504 $
215 $
182
Equity in earnings in consolidated subsidiary .............................................................................
Net cash provided by operating activities ...............................................................................
(504 )
—
(215 )
—
(182 )
—
CASH FLOWS FROM INVESTING ACTIVITIES:
Years ended December 31,
2016
2017
2015
Investments in subsidiaries ........................................................................................................
Dividends ....................................................................................................................................
Net cash provided by investing activities ...............................................................................
(19 )
89
70
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions ...................................................................................................................
Dividends ....................................................................................................................................
Net cash used in financing activities ......................................................................................
Net increase (decrease) during period ...........................................................................................
Cash and cash equivalents at beginning of period .........................................................................
Cash and cash equivalents at end of period ...................................................................................
$
19
(89 )
(70 )
—
—
(24 )
100
76
24
(100 )
(76 )
—
—
(23 )
106
83
23
(106 )
(83 )
—
—
— $ — $ —
The accompanying note is an integral part of the Parent Company only financial statements.
83
Allison Transmission Holdings, Inc.
Schedule I—Parent Company only Footnote
NOTE 1—BASIS OF PRESENTATION
Allison Transmission Holdings, Inc. (the “Parent Company”) is a holding company that conducts all of its business
operations through its subsidiaries. There are restrictions on the Parent Company’s ability to obtain funds from its
subsidiaries through dividends (refer to NOTE 7 “Debt” of the Consolidated Financial Statements). The entire amount of
our consolidated net assets was subject to restrictions on payment of dividends at the end of December 31, 2017, 2016
and 2015. Accordingly, these financial statements have been presented on a “parent-only” basis. Under a parent-only
presentation, the Parent Company’s investments in its consolidated subsidiaries are presented under the equity method of
accounting. These parent-only financial statements should be read in conjunction with Allison Transmission Holdings,
Inc.’s audited Consolidated Financial Statements included elsewhere herein.
84
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. 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 Rules 13a-15(e) and 15d-15(e) under the Exchange
Act), as of December 31, 2017. In designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must
reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the
benefits of possible controls and procedures relative to their costs.
Based on the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures as of December 31, 2017, the end of the period covered by this Annual Report on Form 10-K,
were effective to provide reasonable assurance that information we are required to disclose in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange 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.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of
December 31, 2017. In making this assessment, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013). Based on this
assessment, management concluded that our internal control over financial reporting was effective as of December 31,
2017. PricewaterhouseCoopers LLP, our independent registered public accounting firm, has audited the effectiveness of
our internal control over financial reporting as of December 31, 2017. Their report is included in Part II, Item 8, “Financial
Statements and Supplementary Data” in this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the quarter ended December 31, 2017 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
ITEM 9B. Other Information
None.
85
PART III.
ITEM 10. Directors, Executive Officers and Corporate Governance
The information required by this Item concerning our executive officers, directors and nominees for director, Audit
Committee members and financial expert(s) and disclosure of delinquent filers under Section 16(a) of the Exchange Act is
incorporated herein by reference from our definitive Proxy Statement for our 2018 annual meeting of stockholders which
will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year.
Code of Business Conduct
We have adopted the Allison Code of Business Conduct that applies to all of our directors and officers and other
employees, including our principal executive officer, principal financial officer and principal accounting officer. This code is
publicly available through the Investor Relations section of our website at www.allisontransmission.com. We will post on
the Investor Relations section of our website any amendment to the Allison Code of Business Conduct, or any grant of a
waiver from a provision of the Allison Code of Business Conduct.
ITEM 11. Executive Compensation
The information required by this Item concerning remuneration of our executive officers and directors, material
transactions involving such executive officers and directors and Compensation Committee interlocks, as well as the
Compensation Committee Report, are incorporated herein by reference to our definitive Proxy Statement for our 2018
annual meeting of stockholders which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end
of our last fiscal year.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item concerning the stock ownership of management, five percent beneficial owners
and securities authorized for issuance under equity compensation plans is incorporated herein by reference to our
definitive Proxy Statement for our 2018 annual meeting of stockholders which will be filed with the SEC pursuant to
Regulation 14A within 120 days after the end of our last fiscal year.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item concerning certain relationships and related person transactions, and director
independence is incorporated herein by reference to our definitive Proxy Statement for our 2018 annual meeting of
stockholders which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal
year.
ITEM 14. Principal Accounting Fees and Services
The information required by this Item concerning the fees and services of our independent registered public
accounting firm and our Audit Committee actions with respect thereto is incorporated herein by reference to our definitive
Proxy Statement for our 2018 annual meeting of stockholders which will be filed with the SEC pursuant to Regulation 14A
within 120 days after the end of our last fiscal year.
86
PART IV.
ITEM 15. Exhibits, Financial Statement Schedules
(a)(1) Financial Statements.
The response to this item is included in Part II, Item 8 of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules.
Schedule I – Parent Company only Balance Sheets as of the years ended December 31, 2017 and 2016, Schedule I
– Parent Company only Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015,
and Schedule I – Parent Company only Statements of Cash Flows for the years ended December 31, 2017, 2016 and
2015 and Schedule I – Parent Company only Footnote are included in Part II, Item 8 of this Annual Report on Form 10-K.
All other schedules have been omitted because they are not required or because the information required is included in
the consolidated financial statements and notes thereto.
(a)(3) Exhibits
See the response to Item 15(b) below.
(b) Exhibits
The following exhibits are filed as part of, or are incorporated by reference into, this Annual Report on Form 10-K:
Exhibit
No.
3.1
3.2
3.3
4.1
4.2
4.3
10.1
10.2
DESCRIPTION OF EXHIBIT
Second Amended and Restated Certificate of Incorporation of Allison Transmission
Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2012 filed April 26, 2012)
Amendment to Second Amended and Restated Certificate of Incorporation of Allison
Transmission Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s
Current Report on Form 8-K filed May 18, 2016)
Fifth Amended and Restated Bylaws of Allison Transmission Holdings, Inc. (incorporated
by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed May 18,
2016)
Form of Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 3 to
the Registrant’s Registration Statement on Form S-1 filed June 17, 2011 (File No. 333-
172932))
Indenture, dated as of September 23, 2016, between the Issuer and Wilmington Trust,
National Association, as Trustee (including the form of 5.0% Senior Notes due 2024)
(incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K
filed September 23, 2016)
Indenture, dated as of September 26, 2017, between the Issuer and Wilmington Trust,
National Association, as Trustee (including form of 4.75% Senior Notes due 2027)
(incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K
filed September 26, 2017)
Amended and Restated Credit Agreement among Allison Transmission Holdings, Inc.,
Allison Transmission, Inc., as Borrower, the several lenders from time to time parties
thereto, and Citicorp North America, Inc., as Administrative Agent, dated as of September
23, 2016 (incorporated by reference to Exhibit B of Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed September 23, 2016)
Guarantee And Collateral Agreement made by Allison Transmission Holdings, Inc. Allison
Transmission, Inc., as Borrower, and the Subsidiary Guarantors party thereto in favor of
Citicorp North America, Inc., as Administrative Agent, dated as of August 7, 2007
(incorporated by reference to Exhibit 10.3 to the Registrant’s Registration Statement on
Form S-1 filed March 18, 2011 (File No. 333-172932))
10.3
Trademark Security Agreement made by Allison Transmission, Inc. in favor of Citicorp
North America, Inc., as Administrative Agent, dated as of August 7, 2007 (incorporated by
reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1 filed
March 18, 2011 (File No. 333-172932))
10.4
Copyright Security Agreement made by Allison Transmission, Inc. in favor of Citicorp
87
10.5
North America, Inc., as Administrative Agent, dated as of August 7, 2007 (incorporated by
reference to Exhibit 10.5 to Amendment No. 2 to the Registrant’s Registration Statement
on Form S-1 filed May 16, 2011 (File No. 333-172932))
Consent Agreement to the Credit Agreement, dated as of March 12, 2014, among Allison
Transmission Holdings, Inc., Allison Transmission, Inc., as Borrower, the several banks
and other financial institutions or entities from time to time parties thereto as Lenders,
Citicorp North America, Inc., as Administrative Agent, and the other agents and arrangers
party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report
on Form 8-K filed March 14, 2014)
10.6
Amendment No. 1, dated March 24, 2017, to the Amended and Restated Credit
10.7
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, Citicorp North America, Inc., as
Administrative Agent and the other agents and arrangers party thereto (incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed March 24,
2017)
Incremental 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 Form 8-K filed September
26, 2017)
10.8*
Allison Transmission Holdings, Inc. 2015 Equity Incentive Award Plan (incorporated by
reference to Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A
filed April 2, 2015)
10.9*
Allison Transmission Holdings, Inc. 2016 Incentive Plan (incorporated by reference to
10.10*
10.11*
Appendix B to the Registrant’s Definitive Proxy Statement on Schedule 14A filed April 2,
2015)
Form of 2015 Equity Incentive Award Plan Restricted Stock Agreement (incorporated by
reference to Exhibit 10.41 to the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2015 filed February 19, 2016)
Form of 2015 Equity Incentive Award Plan Restricted Stock Unit Agreement (incorporated
by reference to Exhibit 10.42 to the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2015 filed February 19, 2016)
10.12*
Form of 2015 Equity Incentive Award Plan Stock Option Agreement (incorporated by
reference to Exhibit 10.43 to the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2015 filed February 19, 2016)
10.13*
Form of 2015 Equity Incentive Award Plan Performance Stock Unit Agreement
(incorporated by reference to Exhibit 10.25 to the Registrant’s Annual Report on Form 10-
K for the year ended December 31, 2016 filed February 24, 2017)
10.14*
Allison Transmission Holdings, Inc. 2011 Equity Incentive Award Plan (incorporated by
reference to Exhibit 10.10 to Amendment No. 3 to the Registrant’s Registration Statement
on Form S-1 filed June 17, 2011 (File No. 333-172932))
10.15*
Form of 2011 Equity Incentive Award Plan Restricted Stock Agreement (incorporated by
reference to Exhibit 10.11 to Amendment No. 3 to the Registrant’s Registration Statement
on Form S-1 filed June 17, 2011 (File No. 333-172932))
10.16*
Form of 2011 Equity Incentive Award Plan Restricted Stock Unit Agreement (incorporated
by reference to Exhibit 10.12 to Amendment No. 3 to the Registrant’s Registration
Statement on Form S-1 filed June 17, 2011 (File No. 333-172932))
10.17*
Form of 2011 Equity Incentive Award Plan Stock Option Agreement (incorporated by
10.18*
10.19*
reference to Exhibit 10.13 to Amendment No. 3 to the Registrant’s Registration Statement
on Form S-1 filed June 17, 2011 (File No. 333-172932))
Form Amendment to Stock Option Agreement under the Allison Transmission Holdings,
Inc. 2011 Equity Incentive Award Plan and Equity Incentive Plan of Allison Transmission
Holdings, Inc. (incorporated by reference to Exhibit 10.27 to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2013 filed July 30, 2013)
Form of 2011 Equity Incentive Award Plan Stock Option Agreement (incorporated by
reference to Exhibit 10.29 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2013 filed October 29, 2013)
10.20*
Equity Incentive Plan of Allison Transmission Holdings, Inc. (incorporated by reference to
Exhibit 10.14 to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1
filed May 16, 2011 (File No. 333-172932))
88
10.21*
Form of Employee Stock Option Agreement under Equity Incentive Plan of Allison
Transmission Holdings, Inc. (incorporated by reference to Exhibit 10.15 to Amendment
No. 2 to the Registrant’s Registration Statement on Form S-1 filed May 16, 2011 (File No.
333-172932))
10.22*
Form Amendment to Stock Option Agreement under Equity Incentive Plan of Allison
10.23*
10.24*
Transmission Holdings, Inc. (incorporated by reference to Exhibit 10.24 to the Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2012 filed on February 28,
2013)
Form of Independent Director Stock Option Agreement under Equity Incentive Plan of
Allison Transmission Holdings, Inc. (incorporated by reference to Exhibit 10.16 to
Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 filed May 16,
2011 (File No. 333-172932))
Deferred Compensation Plan of Allison Transmission Inc. (incorporated by reference to
Exhibit 10.21 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2012 filed July 31, 2012)
10.25*
Third Amended and Restated Non-Employee Director Compensation Policy (filed
herewith)
10.26*
Amended and Restated Non-Employee Director Deferred Compensation Plan of Allison
10.27*
10.28*
Transmission Holdings, Inc. (incorporated by reference to Exhibit 10.38 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 filed April 28, 2015)
Form of Allison Transmission Holdings, Inc. Indemnification Agreement (incorporated by
reference to Exhibit 10.9 to Amendment No. 2 to the Registrant’s Registration Statement
on Form S-1 filed May 16, 2011 (File No. 333-172932))
Form of Change in Control Severance Agreement (incorporated by reference to Exhibit
10.34 to the Registrant’s Annual Report on Form 10-K for the year ended December 31,
2013 filed February 24, 2014)
10.29*
Employment Agreement, between Allison Transmission, Inc. and Lawrence E. Dewey,
dated as of December 21, 2016 (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed December 21, 2016)
10.30*
Employment Agreement, between Allison Transmission, Inc. and David S. Graziosi, dated
as of December 21, 2016 (incorporated by reference to Exhibit 10.2 to the Registrant’s
Current Report on Form 8-K filed December 21, 2016)
14.1
Code of Business Conduct, adopted by the Board of Directors on October 30, 2014
21.1
23.1
31.1
31.2
(incorporated by reference to Exhibit 14.1 to the Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2014 filed February 20, 2015)
List of Subsidiaries of Allison Transmission Holdings, Inc. (filed herewith)
Consent of PricewaterhouseCoopers LLP (filed herewith)
Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
of the Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (filed herewith)
Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
of the Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (filed herewith)
32.1
Certification 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
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
*Indicates a management contract or compensatory plan or arrangement
89
ITEM 16. Form 10-K Summary
Intentionally left blank.
90
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 15, 2018
Allison Transmission Holdings, Inc.
(Registrant)
By: /s/ Lawrence E. Dewey
Lawrence E. Dewey
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURES
CAPACITY
DATE
/s/ Lawrence E. Dewey
Lawrence E. Dewey
/s/ David S. Graziosi
David S. Graziosi
/s/ Stan A. Askren
Stan A. Askren
/s/ David C. Everitt
David C. Everitt
/s/ Alvaro Garcia-Tunon
Alvaro Garcia-Tunon
/s/ William R. Harker
William R. Harker
/s/ Richard P. Lavin
Richard P. Lavin
/s/ Thomas W. Rabaut
Thomas W. Rabaut
/s/ Francis Raborn
Francis Raborn
/s/ Richard V. Reynolds
Richard V. Reynolds
/s/ James A. Star
James A. Star
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
February 15, 2018
President and Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
Director
Director
Director
Director
Director
Director
Director
Director
Director
91
ALLISON TRANSMISSION / 2017 ANNUAL REPORT
CORPORATE INFORMATION
Board of Directors
Lawrence E. Dewey
Chairman and CEO
Allison Transmission Holdings, Inc.
Stan A. Askren
Chairman, President and CEO
HNI Corporation
David C. Everitt
Retired, President
Deere & Company
Alvaro Garcia-Tunon
Retired, CFO
Wabtec Corporation
William R. Harker
President and Co-founder
Ashe Capital Management, LP
Richard P. Lavin
Retired, President and CEO
Commercial Vehicle Group, Inc.
Thomas W. Rabaut
Operating Executive
The Carlyle Group
Francis “Buzz” Raborn
Retired, VP and CFO
United Defense Industries, Inc.
Richard V. Reynolds
Retired, Lieutenant General
Founder and Owner
The VanFleet Group, LLC
James A. Star
President and CEO
Longview Asset Management LLC
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Common Stock
The common stock of Allison Transmission
Holdings, Inc. trades on the New York Stock
Exchange under the symbol ALSN.
Annual Meeting
Our annual stockholder’s meeting will be held
on Wednesday, May 9, at 11:00 a.m. EDT, at
Andaz Wall Street
75 Wall Street
New York, New York, 10005
Form 10-K
Copies of Allison’s Form 10-K as filed with
the Securities and Exchange Commission are
available free of charge by visiting the website
(www.allisontransmission.com) or by contacting:
Investor Relations, Allison Transmission Holdings,
Inc., One Allison Way, Indianapolis, Indiana 46222,
(317) 242-3078
Transfer Agent & Register
American Stock Transfer
& Trust Company, LLC
6201 15th Avenue
Brooklyn, New York 11219
Investor Relations Department
(800) 937-5449
Independent Auditors
PricewaterhouseCoopers, LLP
101 W. Washington St., Suite 1300
Indianapolis, Indiana 46204
Pictured left to right: James A. Star, Alvaro Garcia-Tunon,
David C. Everitt, Lawrence E. Dewey, Richard P. Lavin,
Thomas W. Rabaut, Stan A. Askren, Richard V. Reynolds,
William R. Harker, Francis “Buzz” Raborn
One Allison Way
Indianapolis, IN 46222-5200
317.242.5000
allisontransmission.com