Allison Transmission Holdings Inc 10-K

ITEM 5. Market for Registrant’s Common Equity, Related Stoc kholder Matters and Issuer Purchases of Equity Securities Market Information Our common stock is listed on the NYSE under the symbol “ALSN.” Holders As of February 4, 2022, there were approximately 63,474 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. 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”). Issuer Purchases of Equity Securities Our Board of Directors has authorized us to repurchase up to $3,000 million, in the aggregate, of our common stock pursuant to a stock repurchase program (the “Repurchase Program”). The terms of the Repurchase Program provide that we may repurchase shares of our common stock, from time to time depending on market conditions and corporate needs, in the open market or through privately negotiated transactions in accordance with Rule 10b-18 of the Exchange Act. The Repurchase Program does not have an expiration date. 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, 2021: Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Programs (1) Approximate Dollar Value of Shares that May Yet Be Purchased Under Programs (1) October 1 – October 31, 2021 — $ — — $ — November 1 – November 30, 2021 2,300,379 $ 36.06 2,300,379 $ 417,669,408 December 1 – December 31, 2021 2,949,113 $ 35.27 2,949,113 $ 313,647,209 Total 5,249,492 5,249,492 (1) These values reflect repurchases made under the Repurchase Program. 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. 33 Table of Contents 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 PLC. The graph assumes $100 was invested on December 31, 2016 in our common stock and each of the indices and that all dividends, if any, are reinvested. As of December 31, 2016 As of December 31, 2017 As of December 31, 2018 As of December 31, 2019 As of December 31, 2020 As of December 31, 2021 Allison Transmission Holdings, Inc. $ 100.00 $ 129.95 $ 134.29 $ 149.73 $ 136.13 $ 116.96 S&P 500 Index 100.00 121.83 116.49 153.17 181.35 233.41 Peer Group 100.00 139.25 127.51 170.02 205.11 246.93 ITEM 6. [ R ESER VED] 34 Table of Contents ITEM 7. Management’s Discussion and Analysis o f 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. This section of this Annual Report on Form 10-K generally discusses 2021 and 2020 items and year-over-year comparisons between 2021 and 2020. A detailed discussion of 2019 items and year-over-year comparisons between 2020 and 2019 that are not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on February 18, 2021. Overview We design and manufacture vehicle propulsion solutions, including commercial-duty on-highway, off-highway and defense fully automatic transmissions and electric hybrid and fully electric systems. The business was founded in 1915 and has been headquartered in Indianapolis, Indiana since inception. Allison is traded on the New York Stock Exchange under the symbol, “ALSN”. We have approximately 3,400 employees. Although approximately 76% of revenues were generated in North America in 2021, we have a global presence by serving customers in Asia, Europe, 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 Throughout 2021, the COVID-19 pandemic continued to cause supply chain, labor and raw material constraints that created volatility in our business performance and impacted global markets and supply chains. As a result, we experienced, and expect to continue to experience, raw material and component part price inflation, increased freight and logistics costs and increased overtime expense as a result of labor shortages. In addition, despite increased customer demand our net sales for 2021 were negatively impacted as a result of our customers’ inability to secure components from the broader commercial vehicle supply base which resulted in reduced commercial vehicle build schedules. We expect that commercial vehicle build schedules will continue to be negatively impacted by the availability of components in 2022. To limit the spread of COVID-19, governments continue to take various actions including the administration or mandate of vaccinations, travel bans and restrictions, quarantines, curfews, stay-at-home orders, social distancing guidelines and business shutdowns and closures. We are also continuing to take a variety of measures to promote the safety and security of our employees and to maintain operations with as minimal impact as possible to our stakeholders, and as a result, we have been able to continue our manufacturing operations and deliver our products to customers. 35 Table of Contents Full Year 2021 and 2020 Net Sales by End Market (in millions) End Market 2021 Net Sales 2020 Net Sales % Variance North America On-Highway $ 1,177 $ 1,081 9 % North America Off-Highway 58 13 346 % Defense 186 182 2 % Outside North America On-Highway 381 280 36 % Outside North America Off-Highway 83 61 36 % Service Parts, Support Equipment and Other 517 464 11 % Total Net Sales $ 2,402 $ 2,081 15 % North America On-Highway end market net sales were up 9% for the year ended December 31, 2021 compared to the year ended December 31, 2020, principally driven by the recovery in customer demand following the pandemic-related disruptions experienced in 2020 and price increases on certain products. North America Off-Highway end market net sales were up $45 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, principally driven by higher demand for hydraulic fracturing applications and price increases on certain products. Defense end market net sales were up 2% for the year ended December 31, 2021 compared to the year ended December 31, 2020, principally driven by higher demand for Tracked vehicle applications and price increases on certain products, partially offset by lower Wheeled vehicle demand. Outside North America On-Highway end market net sales were up 36% for the year ended December 31, 2021 compared to the year ended December 31, 2020, principally driven by the recovery in customer demand following the pandemic-related disruptions experienced in 2020, the execution of growth initiatives and price increases on certain products. Outside North America Off-Highway end market net sales were up 36% for the year ended December 31, 2021 compared to the year ended December 31, 2020, principally driven by higher demand in the mining, energy and construction sectors and price increases on certain products. Service Parts, Support Equipment and Other end market net sales were up 11% for the year ended December 31, 2021 compared to the year ended December 31, 2020, principally driven by higher demand for service parts and support equipment and price increases on certain products. 36 Table of Contents Key Components of our Results of Operations Net sales We generate our net sales primarily from the sale of vehicle propulsion solutions, service and component 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 in accordance with the terms of the contract, net of provisions for customer allowances and other rebates. 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 vehicle propulsion solutions and parts. For the year ended December 31, 2021, direct material costs were approximately 68%, overhead costs were approximately 24% and direct labor costs were approximately 8% 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 LTAs. 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 intangible assets. Engineering — research and development We incur costs in connection with research and development programs that are expected to contribute to future earnings. Such costs are expensed as incurred. Non-GAAP Financial Measures We use Adjusted Earnings before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) and Adjusted EBITDA as a percent of net sales to measure our operating profitability. We believe that Adjusted EBITDA and Adjusted EBITDA as a percent of net sales provide management, investors and creditors with useful measures of the operational results of our business and increase the period-to-period comparability of our operating profitability and comparability with other companies. Adjusted EBITDA as a percent of net sales is also used in the calculation of management’s incentive compensation program. The most directly comparable GAAP measure to Adjusted EBITDA and Adjusted EBITDA as a percent of net sales is Net income and Net income as a percent of net sales, respectively. Adjusted EBITDA is calculated as earnings before interest expense, net, income tax expense, amortization of intangible assets, depreciation of property, plant and equipment and other adjustments as defined by the Second Amended and Restated Credit Agreement dated as of March 29, 2019 as amended (the “Credit Agreement”) governing ATI's term loan facility due March 2026 (“Term Loan”). Adjusted EBITDA as a percent of net sales is calculated as Adjusted EBITDA divided by net sales. We use Adjusted free cash flow to evaluate the amount of cash generated by our business that, after the capital investment needed to maintain and grow our business and certain mandatory debt service requirements, can be used for repayment of debt, stockholder distributions and strategic opportunities, including investing in our business. We believe that Adjusted free cash flow enhances the understanding of the cash flows of our business for management, investors and creditors. Adjusted free cash flow is also used in the calculation of management’s incentive compensation program. The most directly comparable GAAP measure to Adjusted free cash flow is Net cash provided by operating activities. Adjusted free cash flow is calculated as Net cash provided by operating activities, excluding non-recurring restructuring charges, after additions of long-lived assets. 37 Table of Contents The following is a reconciliation of Net income and Net income as a percent of net sales to Adjusted EBITDA and Adjusted EBITDA as a percent of net sales and a reconciliation of Net cash provided by operating activities to Adjusted free cash flow: For the years ended December 31, (unaudited, in millions) 2021 2020 2019 Net income (GAAP) $ 442 $ 299 $ 604 plus: Income tax expense 130 94 164 Interest expense, net 116 137 134 Depreciation of property, plant and equipment 104 96 81 Amortization of intangible assets 46 52 86 Stock-based compensation expense (a) 14 17 13 Unrealized gain on marketable securities (b) (4 ) — — Technology-related investment gain (c) (3 ) — — UAW Local 933 retirement incentive (d) (2 ) 7 5 Acquisition-related earnouts (e) 1 1 1 Restructuring charges (f) — 14 — Expenses related to long-term debt refinancing (g) — 13 1 Unrealized loss on foreign exchange (h) — 2 — Environmental remediation (i) — — (8 ) Loss associated with impairment of long-lived assets (j) — — 2 Adjusted EBITDA (Non-GAAP) $ 844 $ 732 $ 1,083 Net sales (GAAP) $ 2,402 $ 2,081 $ 2,698 Net income as a percent of net sales (GAAP) 18.4 % 14.4 % 22.4 % Adjusted EBITDA as a percent of net sales (Non-GAAP) 35.1 % 35.2 % 40.1 % Net cash provided by operating activities (GAAP) $ 635 $ 561 $ 847 (Deductions) or additions to reconcile to Adjusted free cash flow: Additions of long-lived assets (175 ) (115 ) (172 ) Restructuring charges (f) — 12 — Adjusted free cash flow (Non-GAAP) $ 460 $ 458 $ 675 (a) Represents stock-based compensation expense (recorded in Cost of sales, Selling, general and administrative, and Engineering – research and development). (b) Represents a gain (recorded in Other income (expense), net) related to an investment in the common stock of Jing-Jin Electric Technologies Co. Ltd. (c) Represents gains (recorded in Other income (expense), net) related to investments in co-development agreements to expand our position in transmission technologies. (d) Represents (adjustments) charges (recorded in Cost of sales) related to a 2018 to 2021 retirement incentive program for certain employees represented by the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (“UAW”) pursuant to the UAW Local 933 collective bargaining agreement effective through November 2023. (e) Represents expenses (recorded in Selling, general and administrative and Engineering - research and development) for earnouts related to our acquisition of Vantage Power Limited. (f) Represents restructuring and pension plan settlement charges (recorded in Cost of sales, Selling, general and administrative, Engineering - research and development, and Other income (expense), net) related to voluntary and involuntary separation programs for both hourly and salaried employees in 2020. (g) Represents expenses (recorded in Other income (expense), net) related to the redemption of ATI’s 5.0% Senior Notes due 2024 (“5.0% Senior Notes”) in the fourth quarter of 2020, the refinancing of the prior term loan due 2022 ("Prior Term Loan") and prior revolving credit facility due 2021 ("Prior Revolving Credit Facility") in the first quarter of 2019, and the repricing of the Term Loan in the fourth quarter of 2019. (h) Represents losses (recorded in Other income (expense), net) on intercompany financing transactions related to investments in plant assets for our India facility. 38 Table of Contents (i) Represents an environmental remediation benefit (recorded in Selling, general and administrative) related to reduction of the liability for ongoing environmental remediation operating, monitoring and maintenance activities at our Indianapolis, Indiana manufacturing facilities. (j) Represents charges (recorded in Selling, general and administrative) associated with the impairment of long-lived assets related to the production of the TC10 transmission. 39 Table of Contents Results of Operations Throughout 2021, the COVID-19 pandemic continued to cause supply chain, labor, freight and raw material constraints that created volatility in our business performance and impacted global markets. As a result, we experienced, and expect to continue to experience, raw material and component part price inflation, increased freight and logistics costs and increased overtime expense as a result of labor shortages. See “Trends Impacting our Business” above for additional information on the impact of the COVID-19 pandemic on our results of operations. The following table sets forth certain financial information for the years ended December 31, 2021 and 2020. The following table 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, 2021 and 2020 Years ended December 31, (dollars in millions) 2021 % of net sales 2020 % of net sales Net sales $ 2,402 100 % $ 2,081 100 % Cost of sales 1,257 52 1,083 52 Gross profit 1,145 48 998 48 Operating expenses: Selling, general and administrative 305 13 317 15 Engineering — research and development 171 7 147 7 Total operating expenses 476 20 464 22 Operating income 669 28 534 26 Other expense, net: Interest expense, net (116 ) (5 ) (137 ) (7 ) Other income (expense), net 19 1 (4 ) — Total other expense, net (97 ) (4 ) (141 ) (7 ) Income before income taxes 572 24 393 19 Income tax expense (130 ) (6 ) (94 ) (5 ) Net income $ 442 18 % $ 299 14 % Net sales Net sales for the year ended December 31, 2021 were $2,402 million compared to $2,081 million for the year ended December 31, 2020, an increase of 15%. The increase was principally driven by a $101 million, or 36%, increase in net sales in the Outside North America On-Highway end market principally driven by the recovery in customer demand following the pandemic-related disruptions experienced in 2020, the execution of growth initiatives and price increases on certain products, a $96 million, or 9%, increase in net sales in the North America On-Highway end market principally driven by the recovery in customer demand following the pandemic-related disruptions experienced in 2020 and price increases on certain products, a $53 million, or 11%, increase in net sales in the Service Parts, Support Equipment and Other end market principally driven by higher demand for service parts and support equipment and price increases on certain products, a $45 million, or 346%, increase in net sales in the North America Off-Highway end market principally driven by higher demand for hydraulic fracturing applications and price increases on certain products, a $22 million, or 36%, increase in net sales in the Outside North America Off-Highway end market principally driven by higher demand in the mining, energy and construction sectors and price increases on certain products and a $4 million, or 2%, increase in net sales in the Defense end market principally driven by higher demand for Tracked vehicle applications and price increases on certain products, partially offset by lower Wheeled vehicle demand. 40 Table of Contents Cost of sales Cost of sales for the year ended December 31, 2021 was $1,257 million compared to $1,083 million for the year ended December 31, 2020, an increase of 16%. The increase was principally driven by increased direct material and manufacturing expense commensurate with increased net sales, unfavorable material costs and increased incentive compensation expense, partially offset by UAW retirement incentive program expense in 2020 that did not reoccur in 2021 and restructuring charges in 2020 that did not reoccur in 2021. Gross profit Gross profit for the year ended December 31, 2021 was $1,145 million compared to $998 million for the year ended December 31, 2020, an increase of 15%. The increase was principally driven by $211 million related to increased net sales, $35 million of price increases on certain products, $7 million related to UAW retirement incentive program expense in 2020 that did not reoccur in 2021 and $5 million of restructuring charges in 2020 that did not reoccur in 2021, partially offset by $52 million of unfavorable material costs, $43 million of higher manufacturing expense commensurate with increased net sales and $18 million of higher incentive compensation expense. Gross profit as a percent of net sales for the year ended December 31, 2021 decreased 30 basis points compared to the same period in 2020 principally driven by unfavorable material costs and higher incentive compensation expense, partially offset by increased net sales, price increases on certain products, UAW retirement incentive program expenses in 2020 that did not reoccur in 2021 and restructuring charges in the second quarter of 2020 that did not reoccur in 2021. Selling, general and administrative Selling, general and administrative expenses for the year ended December 31, 2021 were $305 million compared to $317 million for the year ended December 31, 2020, a decrease of 4%. The decrease was principally driven by unfavorable product warranty adjustments in 2020 that did not reoccur in 2021, $6 million of lower intangible amortization expense and $4 million of lower stock-based compensation expense, partially offset by higher incentive compensation expense and higher commercial activities spending. Engineering — research and development Engineering expenses for the year ended December 31, 2021 were $171 million compared to $147 million for the year ended December 31, 2020, an increase of 16%. The increase was principally driven by increased product initiatives spending and higher incentive compensation expense, partially offset by $4 million of restructuring charges in 2020 that did not reoccur in 2021. Interest expense, net Interest expense, net for the year ended December 31, 2021 was $116 million compared to $137 million for the year ended December 31, 2020, a decrease of 15%. The decrease was principally driven by $11 million of decreased interest expense due to lower interest rates as a result of our long-term debt refinancing in the fourth quarter of 2020 that extended maturities at lower fixed interest rates, $6 million of deferred financing costs written off related to the long-term debt refinancing in the fourth quarter of 2020 that did not reoccur in 2021, $3 million of lower interest expense on ATI’s Term Loan due to lower variable interest rates and $2 million of decreased interest expense on ATI’s Revolving Credit Facility, partially offset by $4 million of increased interest expense on interest rate hedges. 41 Table of Contents Other income (expense), net Other income (expense), net for the year ended December 31, 2021 was $19 million compared to ($4) million for the year ended December 31, 2020. The change was principally driven by $13 million of expenses related to the redemption of ATI's 5.0% Senior Notes in the fourth quarter of 2020 that did not reoccur in 2021, a $4 million unrealized gain on marketable securities, a $4 million gain related to technology-related investments, $3 million of favorable foreign exchange on intercompany financing and a $2 million settlement charge related to the settlement of pension obligations as a result of our voluntary and involuntary separation programs recognized in 2020 that did not reoccur in 2021, partially offset by $3 million of reduced post-retirement benefit plan credits. Income tax expense Income tax expense for the year ended December 31, 2021 was $130 million resulting in an effective tax rate of 23%, compared to $94 million of income tax expense and an effective tax rate of 24% for the year ended December 31, 2020. The increase in income tax expense was principally driven by increased taxable income. The decrease in the effective tax rate was principally driven by increased estimated U.S. federal income tax deductions. 42 Table of Contents 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, working capital needs, debt service, dividends on common stock, stock repurchases, and strategic growth initiatives, including investments, acquisitions and collaborations. Our ability to generate cash in the future and our future uses of cash are subject to general economic, financial, competitive, legislative, regulatory and other factors that may be beyond our control. We had total available cash and cash equivalents of $127 million and $310 million as of December 31, 2021 and 2020, respectively. Of the available cash and cash equivalents, all of the $127 million was deposited in operating accounts as of December 31, 2021, compared to $150 million deposited in operating accounts and $160 million invested in U.S. government backed securities as of December 31, 2020 . As of December 31, 2021, the total of cash and cash equivalents held by foreign subsidiaries was $84 million, the majority of which was located in China and Europe. We manage our worldwide cash requirements considering available funds among the subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. As a result, we do not currently anticipate that local liquidity restrictions will preclude us from funding our targeted expectations or operating needs with local resources. We have not recognized any deferred tax liabilities associated with earnings in foreign subsidiaries, except for our subsidiary located in China, as they are intended to be permanently reinvested and used to support foreign operations or have no associated tax requirements. We have recorded a deferred tax liability of $3 million for the tax liability associated with the remittance of previously taxed income and unremitted earnings for our subsidiary located in China. The remaining deferred tax liabilities, if recorded, related to unremitted earnings that are indefinitely reinvested are not material. Our liquidity requirements are significant, primarily due to our debt service requirements. As of December 31, 2021, we had $631 million of indebtedness associated with ATI’s Term Loan, $400 million of indebtedness associated with ATI’s 4.75% Senior Notes, $500 million of indebtedness associated with ATI’s 5.875% Senior Notes and $1,000 million of indebtedness associated with ATI’s 3.75% Senior Notes. Short-term and long-term debt service liquidity requirements consist of $2 million of minimum required quarterly principal payments on ATI’s Term Loan through its maturity date of March 2026 and periodic interest payments on ATI’s Term Loan and the Senior Notes. There are no required quarterly principal payments on ATI’s Senior Notes. Long-term debt service liquidity requirements also consist of the payment in full of any remaining principal balance of ATI’s Term Loan and the Senior Notes upon their respective maturity dates. We made $7 million and $6 million of principal payments on the Term Loan during the years ended December 31, 2021 and 2020, respectively. Our ability to make payments on and refinance our indebtedness and to fund planned capital expenditures and growth initiatives will depend on our ability to generate cash in the future. 43 Table of Contents In November 2020, the Company and ATI entered into an amendment to the Credit Agreement to increase the commitments under the revolving credit facility due September 2025 ("Revolving Credit Facility" and, together with the Term Loan, the “Senior Secured Credit Facility”) by $50 million. The amendment also extended the Revolving Credit Facility termination date from September 2024 to September 2025. The Senior Secured Credit Facility, as amended, provides for a $650 million Revolving Credit Facility, net of an allowance for up to $75 million in outstanding letters of credit commitments. As of December 31, 2021, we had $645 million available under the Revolving Credit Facility, net of $5 million in letters of credit. If we have 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 first lien net leverage ratio of 5.50x. Additionally, within the terms of the Senior Secured Credit Facility, a first lien net 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, 2021, our first lien net leverage ratio was 0.60x. The Senior Secured Credit Facility also provides certain financial incentives based on our first lien net leverage ratio. A first lien net leverage ratio at or below 4.00x and above 3.50x results in a 25 basis point reduction to the applicable margin on the Revolving Credit Facility. A first lien net leverage ratio at or below 3.50x results in an additional 25 basis point reduction to the applicable margin on the Revolving Credit Facility. These reductions remain in effect as long as we achieve a first lien net leverage ratio at or below the related threshold. In addition, the Credit Agreement includes, among other things, customary restrictions (subject to certain exceptions) on our ability to incur certain indebtedness, grant certain liens, make certain investments, engage in acquisitions, consolidations and mergers, declare or pay certain dividends, and repurchase shares of our common stock. The indentures governing the 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, 2021, we are in compliance with all covenants under the Senior Secured Credit Facility and indentures governing the Senior Notes. Our credit ratings are reviewed by Moody’s Investors Service (“Moody’s”) and Fitch Ratings (“Fitch”), and in 2021, we received credit ratings upgrades from Moody's and Fitch. Moody’s rates our corporate credit at ‘Ba1’, the Term Loan at ‘Baa2’, the 4.75% Senior Notes at ‘Ba2’, the 5.875% Senior Notes at 'Ba2', and the 3.75% Senior Notes at ‘Ba2’. Fitch rates our corporate credit at ‘BB’, the Term Loan at ‘BBB-’, the 4.75% Senior Notes at ‘BB’, the 5.875% Senior Notes at 'BB' and the 3.75% Senior Notes at ‘BB’. We anticipate that our capital expenditures in 2022 will be in line with 2021 and expect increased cash income taxes as a result of lower deductions in 2022 related to our intangible assets. During 2021, we repurchased approximately $513 million of our common stock under the Repurchase Program. All of the repurchase transactions during 2021 were settled in cash during the same period. As of December 31, 2021, we had approximately $314 million available under the Repurchase Program. 44 Table of Contents The following table shows our sources and uses of funds for the years ended December 31, 2021, 2020 and 2019 (in millions): Years ended December 31, Statement of Cash Flows Data 2021 2020 2019 Cash flows provided by operating activities $ 635 $ 561 $ 847 Cash flows used for investing activities (212 ) (111 ) (405 ) Cash flows used for financing activities (604 ) (335 ) (480 ) Generally, cash provided by operating activities has been adequate to fund our operations. We have significant liquidity, including $127 million of cash and cash equivalents and $645 million available under the Revolving Credit Facility, net of $5 million in letters of credit, as of December 31, 2021. At this time, we believe cash provided by operating activities, cash and cash equivalents and borrowing capacity under the Senior Secured Credit Facility will be sufficient to meet our known and anticipated cash requirements for the next twelve months and thereafter. Cash provided by operating activities Operating activities for the year ended December 31, 2021 generated $635 million of cash compared to $561 million for the year ended December 31, 2020. The increase was principally driven by hi gher gross profit, lower cash incentive compensation payments and lower cash interest payments, partially offset by higher operating working capital requirements, higher cash income taxes and increased product initiatives spending. Cash used for investing activities Investing activities for the year ended December 31, 2021 used $212 million of cash compared to $111 million for the year ended December 31, 2020. The increase was principally driven by a $60 million increase in capital expenditures, a $41 million investment in marketable securities and a $4 million net working capital settlement related to the acquisition of Walker Die Casting in 2020 that did not reoccur in 2021, partially offset by $4 million of proceeds from technology-related investments in 2021. Cash used for financing activities Financing activities for the year ended December 31, 2021 used $604 million of cash compared to $335 million for the year ended December 31, 2020. The increase was principally driven by $288 million of increased stock repurchases under the Repurchase Program and $3 million of increased dividend payments, partially offset by payments related to long-term debt refinancing in 2020 that did not reoccur in 2021. 45 Table of Contents 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 correspondingly change our earnings by approximately $9 million. 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. Given our current price reduction reserve for government contracts, a 10% adjustment in our price reduction reserve would correspondingly change our earnings by approximately $6 million. Since 2014, Allison contracts with the U.S. Government have generally been firm, fixed price contracts and therefore have not required re-calculation of pricing based on cost principles. 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 We have elected to perform our annual impairment tests for goodwill and indefinite lived intangible assets on October 31 of every year using a multi-step impairment test. 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 to our carrying value. If the fair value exceeds the carrying value, no impairment is recorded, and we are not required to perform further testing. If the carrying value exceeds fair value, 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 financial forecasts; net sales growth derived from market information, industry reports, marketing programs and future new product introductions; operating margin improvements derived 46 Table of Contents from cost reduction programs and fixed cost leverage driven by higher sales volumes; and a risk-adjusted discount rate. Goodwill represents the excess of purchase price paid over the fair value of net assets acquired. In accordance with the Financial Accounting Standards Board’s (“FASB”) authoritative accounting guidance on goodwill, we do not amortize goodwill but rather evaluate 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 our one operating and reportable segment. We do not aggregate any components into our reporting unit. Goodwill impairment testing for 2021 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 2021 annual goodwill impairment test indicated that the fair value for 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, or more often if events or circumstances change that could cause intangible assets with indefinite useful lives to become impaired. After reviewing the various qualitative factors mentioned above, our annual 2021 indefinite lived intangible assets impairment tests, as of October 31, 2021, indicated that the fair value of our indefinite lived intangible assets more likely than not exceeded their respective carrying values, 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. 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. We evaluate 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 our intangible and other long-lived assets are complex and subjective. Such assumptions and estimates 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 6. 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. 47 Table of Contents 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 expense 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 10. 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 2021, 2020 and 2019, including adjustments to pre-existing warranties. 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, 2021. The effect of a one percentage point decrease in the assumed discount rate would result in an increase in the December 31, 2021 defined benefit pension plans obligation of approximately $27 million. Similarly, a one percentage point decrease in the assumed discount rate would result in an increase in the December 31, 2021 OPEB obligation of approximately $15 million. Further information is provided in "NOTE 15. 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. When releasing income tax effects from accumulated other comprehensive loss, we utilize the portfolio securities approach. As of December 31, 2021, our U.S. federal income tax deductions related to our intangible assets were approximately $330 million in 2021 and are expected to be approximately $197 million in 2022 and approximately $10 million annually through 2034. Excluding our intangible asset deductions, our expected tax payments would have increased by approximately $77 million for the year ended December 31, 2021. 48 Table of Contents The need to establish a valuation allowance against the deferred tax assets is assessed at least quarterly based on a more-likely-than-not realization threshold, in accordance with the 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 16. Income Taxes” of Notes to Consolidated Financial Statements included in Part II, Item 8., of this Annual Report on Form 10-K. Business Combinations We use the acquisition method to account for business combinations. The assets acquired and liabilities assumed are recorded at their respective estimated fair value at the date of acquisition. Any excess purchase price over the fair values of the acquired net assets is recorded as goodwill. Determining the fair values of assets acquired and liabilities assumed requires management's judgment and includes the use of estimates with respect to timing and amount of future cash flows, market rate assumptions, actuarial assumptions, appropriate discount rates and other relevant factors. 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. 49 Table of Contents ITEM 7A. Quantitative and Qualita tive 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 $650 million including $645 million under our Revolving Credit Facility, net of $5 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, 2021, would have an impact of approximately $1 million on interest expense. As of December 31, 2021, we had no outstanding borrowings against the Revolving Credit Facility. From time to time, we enter into interest rate swap agreements to hedge the risk associated with our variable interest rate debt. As of December 31, 2021, we held interest rate swaps effective from (i) September 2019 to September 2022 with notional values totaling $250 million and a weighted average London Interbank Offered Rate (“LIBOR”) fixed rate of 3.01%, (ii) September 2019 to September 2025 with notional values totaling $250 million and a weighted average LIBOR fixed rate of 3.04% and (iii) September 2022 to September 2025 with notional values totaling $250 million and a weighted average LIBOR fixed rate of 2.82%. Refer to "NOTE 8. Debt” and "NOTE 9. 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 Brazilian Real, British Pound, Canadian Dollar, Chinese Yuan Renminbi, Euro, Hungarian Forint, Indian Rupee and Japanese Yen. 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 Chinese Yuan Renminbi, Euro, Indian Rupee, and Japanese Yen would correspondingly change our earnings, net of tax, by an estimated $4 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. As of December 31, 2021, approximately 68% 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 includes 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 LTAs. We historically have not entered into long-term purchase contracts related to the purchase of aluminum and steel. 50 Table of Contents Assuming current levels of commodity purchases, a 10% variation in the price of aluminum and steel would correspondingly change our earnings by approximately $6 million and $11 million per year, respectively. Many of our LTAs 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. 51 Table of Contents ITEM 8. Financial Statemen ts and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB: ID 238 ) 53 Consolidated Balance Sheets 55 Consolidated Statements of Comprehensive Income 56 Consolidated Statements of Cash Flows 57 Consolidated Statements of Stockholders' Equity 58 Notes to Consolidated Financial Statements 59 52 Table of Contents 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 (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 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, 2021, 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. 53 Table of Contents 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 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. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Product Warranty Liabilities As described in Notes 2 and 10 to the consolidated financial statements, the Company’s consolidated product warranty liability balance was $53 million as of December 31, 2021. Management makes provisions for the estimated product warranty liabilities at the time the products are sold. 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. The principal considerations for our determination that performing procedures relating to the product warranty liabilities is a critical audit matter are (i) the significant judgment by management when determining the product warranty liability estimate; (ii) the high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to the significant assumptions related to the frequency and average cost of warranty claims; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s process for developing the estimate, significant assumptions, and inputs used to estimate product warranty liabilities. These procedures also included, among others, (i) testing the completeness and accuracy of historical warranty claims data used in the estimate and (ii) professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of the frequency and average cost of warranty claims assumptions. /s/ PricewaterhouseCoopers LLP Indianapolis, Indiana February 17, 2022 We have served as the Company’s auditor since 2008. 54 Table of Contents Allison Transmission Holdings, Inc. Consolidated B alance Sheets (dollars in millions, except share data) December 31, 2021 December 31, 2020 ASSETS Current Assets Cash and cash equivalents $ 127 $ 310 Accounts receivable - net of allowance for doubtful accounts of $ 3 and $ 1 , respectively 301 228 Inventories 204 181 Other current assets 39 37 Total Current Assets 671 756 Property, plant and equipment, net 706 638 Intangible assets, net 917 963 Goodwill 2,064 2,064 Marketable securities 46 — Other non-current assets 53 56 TOTAL ASSETS $ 4,457 $ 4,477 LIABILITIES Current Liabilities Accounts payable $ 179 $ 157 Product warranty liability 33 36 Current portion of long-term debt 6 6 Deferred revenue 37 34 Other current liabilities 204 140 Total Current Liabilities 459 373 Product warranty liability 20 30 Deferred revenue 99 109 Long-term debt 2,504 2,507 Deferred income taxes 514 442 Other non-current liabilities 227 260 TOTAL LIABILITIES 3,823 3,721 Commitments and Contingencies (see NOTE 18) STOCKHOLDERS’ EQUITY Common stock, $ 0.01 par value, 1,880,000,000 shares authorized, 99,262,951 shares issued and outstanding and 112,033,477 shares issued and outstanding, respectively 1 1 Non-voting common stock, $ 0.01 par value, 20,000,000 shares authorized, none issued and outstanding — — Preferred stock, $ 0.01 par value, 100,000,000 shares authorized, none issued and outstanding — — Paid in capital 1,832 1,818 Accumulated deficit ( 1,126 ) ( 974 ) Accumulated other comprehensive loss, net of tax ( 73 ) ( 89 ) TOTAL STOCKHOLDERS’ EQUITY 634 756 TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY $ 4,457 $ 4,477 The accompanying notes are an integral part of the consolidated financial statements. 55 Table of Contents Allison Transmission Holdings, Inc. Consolidated Statements of Comprehensive Income (dollars in millions, except per share data) Years ended December 31, 2021 2020 2019 Net sales $ 2,402 $ 2,081 $ 2,698 Cost of sales 1,257 1,083 1,304 Gross profit 1,145 998 1,394 Selling, general and administrative 305 317 356 Engineering — research and development 171 147 154 Environmental remediation — — ( 8 ) Operating income 669 534 892 Interest expense, net ( 116 ) ( 137 ) ( 134 ) Other income (expense), net 19 ( 4 ) 10 Income before income taxes 572 393 768 Income tax expense ( 130 ) ( 94 ) ( 164 ) Net income $ 442 $ 299 $ 604 Basic earnings per share attributable to common stockholders $ 4.13 $ 2.62 $ 4.95 Diluted earnings per share attributable to common stockholders $ 4.13 $ 2.62 $ 4.91 Other comprehensive income (loss), net of tax: Available-for-sale securities and interest rate swaps 22 ( 20 ) ( 19 ) Pension and OPEB liability adjustment 2 ( 27 ) — Foreign currency translation ( 8 ) 10 ( 3 ) Total other comprehensive income (loss), net of tax 16 ( 37 ) ( 22 ) Comprehensive income, net of tax $ 458 $ 262 $ 582 The accompanying notes are an integral part of the consolidated financial statements. 56 Table of Contents Allison Transmission Holdings, Inc. Consolidated Statem ents of Cash Flows (dollars in millions) Years ended December 31, 2021 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 442 $ 299 $ 604 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property, plant and equipment 104 96 81 Deferred income taxes 64 69 65 Amortization of intangible assets 46 52 86 Stock-based compensation 14 17 13 Amortization of deferred financing costs 4 4 5 Unrealized gain on marketable securities ( 4 ) — — Technology-related investments gain ( 3 ) — — Expenses related to long-term debt refinancing — 19 5 Other — 3 3 Changes in assets and liabilities: Accounts receivable ( 78 ) 28 37 Inventories ( 26 ) 21 ( 11 ) Accounts payable 24 ( 4 ) ( 25 ) Other assets and liabilities 48 ( 43 ) ( 16 ) Net cash provided by operating activities 635 561 847 CASH FLOWS FROM INVESTING ACTIVITIES: Additions of long-lived assets ( 175 ) ( 115 ) ( 172 ) Investment in marketable securities ( 41 ) — — Loans to third parties ( 12 ) — — Repayments from loans to third parties 12 — — Investments in technology-related initiatives 4 — ( 1 ) Business acquisitions — 4 ( 232 ) Net cash used for investing activities ( 212 ) ( 111 ) ( 405 ) CASH FLOWS FROM FINANCING ACTIVITIES: Repurchases of common stock ( 513 ) ( 225 ) ( 393 ) Dividend payments ( 81 ) ( 78 ) ( 73 ) Payments on long-term debt ( 7 ) ( 1,019 ) ( 1,151 ) Payment of acquisition-related contingent liability ( 3 ) ( 3 ) — Taxes paid related to net share settlement of equity awards ( 3 ) ( 2 ) ( 4 ) Proceeds from exercise of stock options 3 2 5 Issuance of long-term debt — 1,000 1,148 Repayments on revolving credit facility — ( 800 ) ( 90 ) Borrowings on revolving credit facility — 800 90 Debt financing fees — ( 10 ) ( 12 ) Net cash used for financing activities ( 604 ) ( 335 ) ( 480 ) Effect of exchange rate changes on cash ( 2 ) 3 ( 1 ) Net (decrease) increase in cash and cash equivalents ( 183 ) 118 ( 39 ) Cash and cash equivalents at beginning of period 310 192 231 Cash and cash equivalents at end of period $ 127 $ 310 $ 192 Supplemental disclosures: Interest paid $ 103 $ 136 $ 125 Income taxes paid $ 60 $ 26 $ 89 The accompanying notes are an integral part of the consolidated financial statements. 57 Table of Contents Allison Transmission Holdings, Inc. Consolidated Statements of Stockholders’ Equity (dollars in millions) Common Stock Non- voting Common Stock Preferred Stock Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss, net of tax Stockholders’ Equity Balance at December 31, 2018 $ 1 $ — $ — $ 1,788 $ ( 1,100 ) $ ( 30 ) $ 659 Stock-based compensation — — — 13 — — 13 Foreign currency translation adjustment — — — — — ( 3 ) ( 3 ) Available-for-sale securities and interest rate swaps — — — — — ( 19 ) ( 19 ) Issuance of common stock — — — 1 — — 1 Repurchase of common stock — — — — ( 393 ) — ( 393 ) Dividends on common stock — — — — ( 73 ) — ( 73 ) Impact of adopting accounting standards — — — — ( 8 ) — ( 8 ) Net income — — — — 604 — 604 Balance at December 31, 2019 $ 1 $ — $ — $ 1,802 $ ( 970 ) $ ( 52 ) $ 781 Stock-based compensation — — — 17 — — 17 Pension and OPEB liability adjustment — — — — — ( 27 ) ( 27 ) Foreign currency translation adjustment — — — — — 10 10 Interest rate swaps — — — — — ( 20 ) ( 20 ) Issuance of common stock — — — ( 1 ) — — ( 1 ) Repurchase of common stock — — — — ( 225 ) — ( 225 ) Dividends on common stock — — — — ( 78 ) — ( 78 ) Net income — — — — 299 — 299 Balance at December 31, 2020 $ 1 $ — $ — $ 1,818 $ ( 974 ) $ ( 89 ) $ 756 Stock-based compensation — — — 14 — — 14 Pension and OPEB liability adjustment — — — — — 2 2 Foreign currency translation adjustment — — — — — ( 8 ) ( 8 ) Interest rate swaps — — — — — 22 22 Repurchase of common stock — — — — ( 513 ) — ( 513 ) Dividends on common stock — — — — ( 81 ) — ( 81 ) Net income — — — — 442 — 442 Balance at December 31, 2021 $ 1 $ — $ — $ 1,832 $ ( 1,126 ) $ ( 73 ) $ 634 The accompanying notes are an integral part of the consolidated financial statements. 58 Table of Contents Allison Transmission Holdings, Inc. Notes to Consolidated Financial Statements NOTE 1. OVERVIEW Overview Throughout 2021, the COVID-19 pandemic continued to cause supply chain, labor and raw material constraints that created volatility in Allison Transmission Holdings, Inc. and its subsidiaries' (“Allison,” or the “Company”) business performance and impacted global markets and supply chains. As a result, the Company experienced, and expect to continue to experience, raw material and component part price inflation, increased freight and logistics costs and increased overtime expense as a result of labor shortages. In addition, despite increased customer demand the Company's net sales for 2021 were negatively impacted as a result of its customers’ inability to secure components from the broader commercial vehicle supply base which resulted in reduced commercial vehicle build schedules. To limit the spread of COVID-19, governments continue to take various actions including the administration or mandate of vaccinations, travel bans and restrictions, quarantines, curfews, stay-at-home orders, social distancing guidelines and business shutdowns and closures. The Company is also continuing to take a variety of measures to promote the safety and security of its employees and to maintain operations with as minimal impact as possible to its stakeholders, and as a result, the Company has been able to continue its manufacturing operations and deliver its products to customers The Company designs and manufactures vehicle propulsion solutions, including commercial-duty on-highway, off-highway and defense fully automatic transmissions and electric hybrid and fully electric systems. The business was founded in 1915 and has been headquartered in Indianapolis, Indiana since inception. Allison trades on the New York Stock Exchange under the symbol, “ALSN”. The Company has approximately 3,400 employees. Although approximately 76 % of revenues were generated in North America in 2021, the Company has a global presence by serving customers in Asia, Europe, 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 stockholders’ equity. Certain immaterial reclassifications have been made in the consolidated financial statements of prior periods to conform to the current period presentation. These reclassifications had no impact on previously reported net income, total stockholders’ equity or cash flows. 59 Table of Contents 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, definite life intangibles, long-lived asset impairment tests, useful lives for depreciation and amortization, warranty liabilities, core deposit liabilities, environmental liabilities, determination of discount rate and other assumptions for pension and other post-retirement benefits (“OPEB”) expense, determination of discount rate and period for leases, income taxes and deferred tax valuation allowances, derivative valuation, assumptions for business combinations and contingencies. The Company’s accounting policies involve the application of judgments and assumptions made by management that include inherent risks and uncertainties. Due to the continued uncertainty related to the ongoing COVID-19 pandemic, actual results could differ materially from these estimates and assumptions used in preparation of the financial statements including, but not limited to, future cash flows associated with goodwill, indefinite life intangibles, definite life intangibles, long-lived impairment tests, determination of discount rate and other assumptions for pension and OPEB expense and income taxes. 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 vehicle propulsion solutions. Business Combinations The Company uses the acquisition method to account for business combinations. The assets acquired and liabilities assumed are recorded at their respective estimated fair value at the date of acquisition. Any excess purchase price over the fair values of the acquired net assets is recorded as goodwill. Determining the fair values of assets acquired and liabilities assumed requires management's judgment and includes the use of estimates with respect to timing and amount of future cash flows, market rate assumptions, actuarial assumptions, appropriate discount rates and other relevant factors. 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. 60 Table of Contents Investments Investments in equity securities with a readily determinable fair value, not accounted for under the equity method, are recorded at that value with unrealized gains and losses included in earnings. For equity securities without a readily determinable fair value, the investment is recorded at cost, less any impairment, plus or minus adjustments related to observable transactions for the same or similar securities, with unrealized gains and losses included in earnings. The Company's investments in equity securities had a readily determinable fair value and were recorded at fair value with unrealized gains and losses included in Other income (expense), net. See "NOTE 7. Fair Value of Financial Instruments" for more details. Inventories Inventories are stated at the lower of cost or 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: Range in Years Land improvements 5 – 30 Buildings and building improvements 10 – 40 Machinery and equipment 2 – 20 Software 2 – 5 Special tooling 2 – 10 Software represents the costs of software developed or obtained for internal use. Software costs are amortized on a straight-line basis over their estimated useful lives. Software assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. Upgrades and enhancements are capitalized if they result in added functionality, which enables the software to perform tasks it was previously incapable of performing. Software maintenance, training, data conversion and business process reengineering costs are expensed in the period in which they are incurred. Special tooling represents the costs to design and develop tools, dies, jigs and other items owned by the Company and used in the manufacture of components by suppliers under long-term supply agreements. Special tooling is depreciated over the tool’s expected life. Special tooling used in the development of new technology is expensed as incurred. Engineering, testing and other costs incurred in the design and development of production parts are expensed as incurred. Impairment of Long-Lived 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. 61 Table of Contents 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. Goodwill and Other Intangible Assets The Company has elected to perform its annual impairment tests for goodwill and indefinite lived intangible assets 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 the Company determines that the fair value is more likely than not less than the carrying value, then it 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 to its carrying value. If the fair value exceeds the carrying value, no impairment is recorded, and the Company is not required to perform further testing. If the carrying value exceeds fair value, the Company 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 financial forecasts; 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. 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. Goodwill impairment testing for 2021 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, the Company's 2021 annual goodwill impairment test indicated that the fair value for 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, or more often if events or circumstances change that could cause intangible assets with indefinite useful lives to become impaired. After reviewing the various qualitative factors mentioned above, the Company's annual 2021 indefinite lived intangible assets impairment tests, as of October 31, 2021, indicated that the fair value of its indefinite lived intangible assets more likely than not exceeded their 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. 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 62 Table of Contents 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. Such assumptions and estimates 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. Further information is provided in "NOTE 6. Goodwill and Other Intangible Assets.” 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 $ 4 million, $ 4 million and $ 5 million for the years ended December 31, 2021, 2020 and 2019 , 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 Company's marketable securities are carried at fair value on the Consolidated Balance Sheets. The Company’s financial derivative instruments, including interest rate swaps, are carried at fair value on the Consolidated Balance Sheets. Refer to "NOTE 7. 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 8. Debt”. The carrying values of accounts receivable and accounts payable approximate fair value due to their short-term nature. 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 as each distinct performance obligation within a contract is satisfied. The Company sells extended transmission coverage (“ETC”) for which sales are deferred. ETC sales are recognized ratably over the period of coverage, which typically ranges from one to five years after the standard warranty coverage ends. 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 recorded as a reduction to Net sales when it is determined that the adjustment is not likely to reverse, historically on a quarterly basis. Incentive programs are generally product specific or region specific. Some factors used in estimating when an adjustment is not likely to reverse are the number of transmissions that will be affected by the incentive program and rate of acceptance of any incentive program. Sales under U.S. government production contracts are recognized at the point in time when control passes to the customer, or when the U.S. government accepts the transmission and is able to direct its use in certain bill-and-hold arrangements. Deferred revenue arises from cash received in advance of the culmination of the earnings process and is recognized as revenue in future periods when the applicable revenue recognition criteria have been 63 Table of Contents 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. The Company had $ 56 million recorded in the price reduction reserve account as of each of December 31, 2021 and 2020. 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 $ 21 million, $ 16 million and $ 11 million for the years ended December 31, 2021, 2020 and 2019, respectively. The associated costs are recorded in Cost of sales. Warranty Provisions for estimated expenses related to product warranties are made at the time products are sold. Warranty claims arise when a transmission or propulsion solution manufactured by us fails while in service during the relevant warranty period. The warranty reserve is adjusted in Selling, general and administrative expense 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 the Company's 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 18. Commitments and Contingencies”. Foreign Currency Translation Most of the Company’s 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 64 Table of Contents Accumulated Other Comprehensive Loss (“AOCL”) as disclosed in "NOTE 17. 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, when appropriate. The Company has qualified for and elected hedge accounting treatment on interest rate swap contracts. As necessary, the Company adjusts the values of the derivative instruments for counter-party or credit risk. "NOTE 9. 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. When releasing income tax effects from accumulated other comprehensive loss the Company utilizes the portfolio securities approach. 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. 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 (“RSUs”), performance awards, stock appreciation rights and other equity-based awards, or any combination thereof. The 2015 Plan limits the aggregate number of shares of common stock available for issue to 15 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 (“Prior Plan”). As of the effective date of the 2015 Plan, no new awards will be granted under the Prior Plan, but the Prior Plan will continue to govern the equity awards issued under the Prior Plan. RSU grants are recorded at fair market value at the date of grant and vest upon continued performance of services by the RSU holders over one to three years . Performance unit grants are recorded at fair value based on a Monte-Carlo pricing model and the restrictions lapse on the date the Compensation Committee of the Board of Directors determines the number of shares that shall vest based on the related performance or market condition 65 Table of Contents achievement. Non-qualified stock option grants are recorded at fair value using a Black-Scholes option pricing model and vest upon the continued performance of services by the option holder on the third anniversary of the grant date for awards under the 2015 Plan. The Company 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. RSUs were granted to certain employees and directors at fair market value on the date of grant. The restrictions lapse upon continued performance by the RSU holder on the vest date which generally occurs over one , two or three years . RSU incentive compensation expense recorded was $ 6 million, $ 6 million and $ 5 million for the years ended December 31, 2021, 2020 and 2019, respectively. Performance-based awards, including performance units, were granted to certain employees at fair value at the date of grant. The Company records the fair value of each performance-based award based on a Monte-Carlo pricing model. Performance-based award incentive compensation expense recorded was $ 5 million, $ 9 million and $ 6 million for the years ended December 31, 2021, 2020 and 2019, 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 $ 3 million for the year ended December 31, 2021 and $ 2 million for each of the years ended December 31, 2020 and 2019. Pension and Post-retirement Benefit Plans For pension and 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 following year. 66 Table of Contents Recently Adopted Accounting Pronouncements In March 2020, the FASB issued authoritative accounting guidance regarding highly effective cash flow hedges affected by reference rate reform, which guidance was subsequently amended. The guidance allows the Company to continue to classify its interest rate hedges as highly effective subsequent to reference rate reform under certain circumstances. The Company adopted this guidance effective January 1, 2021 and will apply the guidance prospectively on all applicable transactions through December 31, 2022. Management expects to be able to elect the optional expedient within this guidance upon the Company’s transition from the London Interbank Offered Rate ("LIBOR") to an alternative reference rate. The election of the optional expedient is expected to allow for the continuation of the existing contract with no impact on the Company’s consolidated financial statements. In December 2019, the FASB issued authoritative accounting guidance to simplify the accounting for income taxes. The guidance identifies specific exceptions to be removed from the calculation and reporting of income taxes. The Company adopted this guidance effective January 1, 2021 . The adoption of this guidance did no t have a material impact on the Company's consolidated financial statements. Recently Issued Accounting Pronouncements In October 2021, the FASB issued authoritative accounting guidance that requires contract assets and contract liabilities acquired in a business combination to be recognized as if the acquirer originated the contracts. The guidance will be effective for the Company in fiscal year 2023, and the Company does not plan to early adopt. The guidance will be applied prospectively to acquisitions occurring on or after the effective date. NOTE 3. REVENUE Revenue is recognized as each distinct performance obligation within a contract is satisfied. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. The Company enters into long-term agreements (“LTAs”) and distributor agreements with certain customers. The LTAs and distributor agreements do not include committed volumes until underlying purchase orders are issued; therefore, the Company determined that purchase orders are the contract with a customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when the performance obligation is satisfied, as there is no right of return. Some of the Company's contracts include multiple performance obligations, most commonly the sale of both a transmission and ETC. The Company allocates the contract’s transaction price to each performance obligation based on the standalone selling price of each distinct good or service in the contract. The Company may also use volume-based discounts and rebates as marketing incentives in the sales of both vehicle propulsion solutions and service parts, which are accounted for as variable consideration. The Company records the impact of the incentives as a reduction to revenue when it is determined that the adjustment is not likely to reverse, historically on a quarterly basis. The Company estimates the impact of all other incentives based on the related sales and market conditions in the end market vocation. The Company recorded no material adjustments based on variable consideration during either of the years ended December 31, 2021 and 2020. Net sales are made on credit terms, generally 30 days , based on an assessment of the customer’s creditworthiness. For certain goods or services, the Company receives consideration prior to satisfying the related performance obligation. Such consideration is recorded as a contract liability in current and non-current deferred revenue as of December 31, 2021 and December 31, 2020. See "NOTE 11. Deferred Revenue” for more information including the amount of revenue earned during the year ended December 31, 2021 that had been previously deferred. The Company had no material contract assets as of either December 31, 2021 and 2020. 67 Table of Contents The Company has one operating segment and reportable segment. The Company is in one line of business, which is the manufacture and distribution of vehicle propulsion solutions. The following presents disaggregated revenue by categories that best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors (dollars in millions): Year ended December 31, 2021 Year ended December 31, 2020 North America On-Highway $ 1,177 $ 1,081 North America Off-Highway 58 13 Defense 186 182 Outside North America On-Highway 381 280 Outside North America Off-Highway 83 61 Service Parts, Support Equipment and Other 517 464 Total Net Sales $ 2,402 $ 2,081 Disaggregated revenue by end market is further described as follows: North America On-Highway Revenue from the North America On-Highway end market is driven by the sale of propulsion solutions to original equipment manufacturers (“OEMs”), distributors and dealers that install the product into Class 4-5, Class 6-7 and Class 8 straight trucks, Class 8 day cab tractors, conventional transit, shuttle and coach buses, school buses and motorhome applications. Revenue is recognized at the point in time when control passes to the customer, which is based on shipping terms when the order is fulfilled by the Company. North America Off-Highway Revenue from the North America Off-Highway end market is driven by sales of transmissions to OEMs and distributors that serve end users who operate vehicles and auxiliary equipment in energy, mining and construction applications. Revenue is recognized at the point in time when control passes to the customer, which is based on shipping terms when the order is fulfilled by the Company. Defense Revenue from the Defense end market is driven by sales of propulsion solutions to the U.S. Government or its contractors and sales to certain government contractors outside of the U.S. for use in both wheeled and tracked defense vehicle applications. Revenue is recognized at the point in time when control passes to the customer, which is based on shipping terms when the order is fulfilled by the Company. Periodically, the Company and the U.S. Government will enter into a bill-and-hold arrangement where a completed transmission physically remains at the Company’s facility at the request of the U.S. Government. Revenue is recognized at the point in time when it is determined that the U.S. Government accepts the transmission and is able to direct its use. Outside North America On-Highway Revenue from the Outside North America On-Highway end market is driven by the sale of propulsion solutions to OEMs and distributors that produce vehicles for commercial users in medium- and heavy-duty applications. Revenue is recognized at the point in time when control passes to the customer, which is based on shipping terms when the order is fulfilled by the Company. 68 Table of Contents Outside North America Off-Highway Revenue from the Outside North America Off-Highway end market is driven by sales of transmissions to OEMs and distributors serving end users who operate vehicles and auxiliary equipment in energy, mining and construction applications. Revenue is recognized at the point in time when control passes to the customer, which is based on shipping terms when the order is fulfilled by the Company. Service Parts, Support Equipment and Other Revenue from the Service Parts, Support Equipment and Other end market is primarily derived from the sale of transmission parts and fluid purchased for the normal maintenance and repair needs of products in service, the sale of aluminum die cast components purchased as original parts and the sale of ETC contracts which extend the warranty coverages of propulsion solutions beyond the standard warranty period. Revenue is recognized on sales of service parts, support equipment and aluminum die cast components at the point in time when control passes to the customer, which is based on shipping terms when the order is fulfilled by the Company. Revenue from the sale of ETC contracts is recognized ratably over the time period that corresponds with the period of coverage, as the Company has determined this method best depicts the progress towards satisfaction of its performance obligation. ETC contracts are sold in one- to five-year durations within the North America On-Highway, Outside North America On-Highway, North America Off-Highway and Outside North America Off-Highway end markets. The ETC contract period begins when the standard warranty coverage period ends. All consideration allocated to an ETC performance obligation is initially deferred until the coverage period begins. NOTE 4. INVENTORIES Inventories consisted of the following components (dollars in millions): December 31, 2021 December 31, 2020 Purchased parts and raw materials $ 101 $ 88 Work in progress 8 15 Service parts 44 43 Finished goods 51 35 Total inventories $ 204 $ 181 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 14. Other Current Liabilities” for more information. 69 Table of Contents NOTE 5. PROPERTY, PLANT AND EQUIPMENT The cost and accumulated depreciation of property, plant and equipment are as follows (dollars in millions): December 31, 2021 December 31, 2020 Land and land improvements $ 27 $ 26 Buildings and building improvements 492 423 Machinery and equipment 795 783 Software 188 175 Special tooling 243 223 Construction in progress 83 54 Total property, plant and equipment 1,828 1,684 Accumulated depreciation ( 1,122 ) ( 1,046 ) Property, plant and equipment, net $ 706 $ 638 Depreciation of property, plant and equipment was $ 104 million, $ 96 million and $ 81 million for the years ended December 31, 2021, 2020 and 2019 , respectively. NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS As of each of December 31, 2021 and 2020, the carrying amount of the Company’s Goodwill was $ 2,064 million. The following presents a summary of other intangible assets (dollars in millions): December 31, 2021 December 31, 2020 Intangible assets, gross Accumulated amortization Intangible assets, net Intangible assets, gross Accumulated amortization Intangible assets, net Other intangible assets: Trade name $ 791 $ — $ 791 $ 791 $ — $ 791 In process research and development 25 — 25 25 — 25 Customer relationships – commercial 839 ( 751 ) 88 839 ( 708 ) 131 Proprietary technology 478 ( 477 ) 1 478 ( 477 ) 1 Customer relationships – defense 62 ( 50 ) 12 62 ( 47 ) 15 Total $ 2,195 $ ( 1,278 ) $ 917 $ 2,195 $ ( 1,232 ) $ 963 Amortization of intangible assets was $ 46 million, $ 52 million and $ 86 million for the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021 and 2020, the net carrying value of the Company’s Goodwill and Other intangible assets, net was $ 2,981 million and $ 3,027 million, respectively. The Company’s 2021 annual goodwill impairment test indicated that the fair value of the reporting unit more likely than not exceeded its carrying value, indicating no impairment. The Company's 2021 annual indefinite lived intangible assets impairment test indicated that the fair value of the Company’s indefinite lived intangible assets more likely than not exceeded their carrying value, indicating no impairment. Amortization expense re lated to other intangible assets for the next five years is expected to be (dollars in millions): 2022 2023 2024 2025 2026 Amortization expense $ 45 $ 43 $ 8 $ 4 $ 1 70 Table of Contents NOTE 7. 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 reporting 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, 2021 and 2020, the Company did no t have any Level 3 financial assets or liabilities. The Company’s assets and liabilities that are measured at fair value include cash equivalents, marketable 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 marketable securities consist of publicly traded stock of Jing-Jin Electric Technologies Co. Ltd., which has a readily determinable fair value. The Company’s derivative instruments consist of interest rate swaps. The Company’s assets held in the rabbi trust consist principally of publicly available mutual funds and target date retirement funds. The Company’s deferred compensation obligation is directly related to the fair value of assets held in the rabbi trust. The Company’s valuation techniques used to calculate the fair value of cash and cash equivalents, 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 institutions for the fair value measurement of interest rate swaps. The floating-to-fixed interest rate swaps are based on LIBOR which is observable at commonly quoted 71 Table of Contents intervals. The fair values are included in other current and non-current assets and liabilities in the Consolidated Balance Sheets. The following table summarizes the fair value of the Company’s financial assets and (liabilities) as of December 31, 2021 and 2020 (dollars in millions): Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) TOTAL 2021 2020 2021 2020 2021 2020 Cash equivalents $ — $ 160 $ — $ — $ — $ 160 Marketable securities 46 — — — 46 — Derivative liabilities, net — — ( 31 ) ( 60 ) ( 31 ) ( 60 ) Rabbi trust assets 19 17 — — 19 17 Deferred compensation obligation ( 19 ) ( 17 ) — — ( 19 ) ( 17 ) Total $ 46 $ 160 $ ( 31 ) $ ( 60 ) $ 15 $ 100 NOTE 8. DEBT Long-term debt and maturities are as follows (dollars in millions): December 31, 2021 December 31, 2020 Long-term debt: Senior Secured Credit Facility Term Loan, variable, due 2026 $ 631 $ 638 Senior Notes, fixed 4.75 %, due 2027 400 400 Senior Notes, fixed 5.875 %, due 2029 500 500 Senior Notes, fixed 3.75 %, due 2031 1,000 1,000 Total long-term debt $ 2,531 $ 2,538 Less: current maturities of long-term debt 6 6 deferred financing costs, net (see NOTE 2) 21 25 Total long-term debt, net $ 2,504 $ 2,507 Principal payments required on long-term debt during the nex t five years are as follows: (dollars in millions) 2022 2023 2024 2025 2026 Payments $ 6 $ 6 $ 6 $ 6 $ 607 As of December 31, 2021, the Company had $ 2,531 million of ind ebtedness associated with Allison Transmission, Inc.’s (“ATI”), the Company’s wholly-owned subsidiary, ATI’s 4.75 % Senior Notes due October 2027 (“4.75% Senior Notes”), ATI’s 5.875 % Senior Notes due June 2029 (“5.875% Senior Notes”), ATI’s 3.75 % Senior Notes due January 2031 (“3.75% Senior Notes” and, together with the 4.75% Senior Notes and 5.875% Senior Notes, the “Senior Notes”) and the Second Amended and Restated Credit Agreement dated as of March 29, 2019, as amended (the “Credit Agreement”), governing ATI’s term loan facility in the amou nt of $ 631 million due March 2026 (“Term Loan”) and ATI’s revolving credit facility with commitments in the amount of $ 650 million due September 2025 (“Revolving Credit Facility” and, together with the Term Loan, the “Senior Secured Credit Facility”). The fair value of the Company’s long-term debt obligations as of December 31, 2021 was $ 2,568 million. The fair value is based on quoted Level 2 market prices of the Company’s debt as of December 31, 2021. 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. 72 Table of Contents Senior Secured Credit Facility In March 2019, the Company and ATI entered into the Credit Agreement to reduce the commitments under the prior term loan due 2022 (“Prior Term Loan”) by $ 500 million and increase the commitments under the prior $ 550 million revolving credit facility due 2021 (“Prior Revolving Credit Facility” and, together with the Prior Term Loan, the “Prior Senior Secured Credit Facility”) by $ 50 million. The Senior Secured Credit Facility also extended the maturity of the Prior Term Loan from 2022 to 2026 and extended the Prior Revolving Credit Facility termination date from 2021 to 2024 . The Senior Secured Credit Facility replaced the Prior Senior Secured Credit Facility, including the Prior Term Loan and Prior Revolving Credit Facility, on March 29, 2019. The Credit Agreement was treated as a modification to the Prior Senior Secured Credit Facility under GAAP, and thus the Company expensed $ 5 million of prior deferred financing fees and $ 1 million of related third party fees in the Consolidated Statement of Comprehensive Income for the year ended December 31, 2019 and recorded $ 5 million as new deferred financing fees in the Consolidated Balance Sheet in the first quarter of 2019. In October 2019, the Company and ATI entered into an amendment to the Credit Agreement with the Term Loan lenders under its Senior Secured Credit Facility to lower the applicable margins on the Term Loan by 0.25 %. The October 2019 amendment was treated as a modification to the Senior Secured Credit Facility under GAAP. In November 2020, the Company and ATI entered into an amendment to the Credit Agreement to increase the commitments under the Revolving Credit Facility by $ 50 million to $ 650 million. The amendment also extended the Revolving Credit Facility termination date from September 2024 to September 2025 . The borrowings under the Senior Secured Credit Facility are collateralized by a lien on substantially all assets of the Company, ATI and each of the existing and future U.S. subsidiary guarantors, with certain exceptions set forth in the Credit Agreement, and ATI’s capital stock and all of the capital stock or other equity interests held by the Company, ATI and each of ATI’s existing and future U.S. subsidiary guarantors (subject to certain limitations for equity interest of foreign subsidiaries and other exceptions set forth in the Credit Agreement). Interest on the Term Loan, as of December 31, 2021 , is either (a) 1.75 % over a LIBOR rate on deposits in U.S. dollars for one-, two-, three- or six-month periods (or twelve-month or shorter periods if, at the time of the borrowing, available from all relevant lenders) (the "LIBOR Rate"), or (b) 0.75 % over the greater of the prime lending rate as quoted by the administrative agent, the LIBOR Rate for an interest period of one month plus 1.00 % and the federal funds effective rate published by the Federal Reserve Bank of New York plus 0.50 %, subject to a 1.00 % floor (the "Base Rate"). As of December 31, 2021, the Company elected to pay the lowest all-in rate of LIBOR plus the applicable margin, or 1.85 %, on the Term Loan. The Credit Agreement requires minimum quarterly principal payments on the Term Loan starting with the fiscal quarter which ended September 30, 2019, as well as prepayments from certain net cash proceeds of non-ordinary course asset sales and casualty and condemnation events, the incurrence of certain debt and from a percentage of excess cash flow, if applicable. The minimum required quarterly principal payment on the Term Loan through its maturity date of March 2026 is $ 2 million. As of December 31, 2021, 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. As of December 31, 2021, the Company had $ 645 million available under the Revolving Credit Facility, net of $ 5 million in letters of credit. Borrowings under the Revolving Credit Facility bear interest at a variable base rate plus an applicable margin based on the Company’s first lien net leverage ratio. When the Company’s first lien net leverage ratio is above 4.00 x, interest on the Revolving Credit Facility is (a) 0.75 % over the Base Rate or (b) 1.75 % over the LIBOR Rate; when the Company’s first lien net leverage ratio is equal to or less than 4.00 x and above 3.50 x, interest on the Revolving Credit Facility is (i) 0.50 % over the Base Rate or (ii) 1.50 % over the LIBOR Rate; and when the Company’s first lien net leverage ratio is equal to or below 3.50 x, interest on the Revolving Credit Facility is (y) 0.25 % over the Base Rate or (z) 1.25 % over the 73 Table of Contents LIBOR Rate. As of December 31, 2021, the applicable margin for the Revolving Credit Facility was 1.25 %. In addition, there is an annual commitment fee, based on the Company’s first lien net leverage ratio, on the average unused revolving credit borrowings available under the Revolving Credit Facility. As of December 31, 2021, the commitment fee is 0.25 %. Borrowings under the Revolving Credit Facility are payable at the option of the Company throughout the term of the Senior Secured Credit Facility with the balance due in September 2025. The Senior Secured Credit Facility requires the Company to maintain a specified maximum first lien net leverage ratio of 5.50 x when revolving loan commitments remain outstanding on the Revolving Credit Facility at the end of a fiscal quarter. As of December 31, 2021 , the Company had no amounts outstanding under the Revolving Credit Facility; however, the Company would have been in compliance with the maximum first lien net leverage ratio, achieving a 0.60 x ratio. Additionally, within the terms of the Senior Secured Credit Facility, a first lien net leverage ratio at or below 4.00 x results in the elimination of excess cash flow payments on the Senior Secured Credit Facility for the applicable year. In addition, the Credit Agreement, 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, engage in acquisitions, consolidations and mergers, declare or pay certain dividends or repurchase shares of the Company’s common stock. As of December 31, 2021, the Company was in compliance with all covenants under the Credit Agreement. 5.0% Senior Notes In November 2020, ATI redeemed all of its outstanding 5.0 % Senior Notes due 2024 (“5.0% Senior Notes”), at the redemption price equal to 101.25 % of the principal amount plus any accrued and unpaid interest, using the proceeds from the issuance of the 3.75% Senior Notes and cash on hand, resulting in a loss (the premium between the purchase price of the 5.0% Senior Notes and the face value of such notes) of $ 19 million including the deferred financing fees written off. 4.75% Senior Notes 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, 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 an “applicable 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, 2021, the Company was in compliance with all covenants under the indenture governing the 4.75% Senior Notes. 74 Table of Contents 5.875% Senior Notes In March 2019, ATI completed an offering of $ 500 million of the 5.875 % Senior Notes. The 5.875% Senior Notes were offered in a private placement exempt from registration under the Securities Act of 1933, as amended. The net proceeds from the offering, together with borrowings under the Senior Secured Credit Facility and cash on hand, were used to repay all of the outstanding borrowings under the Prior Term Loan plus accrued and unpaid interest and related transaction expenses. As a result of the offering, the Company recorded $ 6 million as deferred financing fees in the Consolidated Balance Sheet in the first quarter of 2019. ATI may from time to time seek to retire the 5.875 % Senior Notes through cash purchase 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 June 1, 2022 , ATI may redeem up to 40 % of the 5.875 % Senior Notes by paying a price equal to 105.875 % of the principal amount being redeemed. Prior to June 1, 2024 , ATI may redeem some or all of the 5.875 % Senior Notes by paying a price equal to 100.00 % of the principal amount being redeemed, plus an “applicable premium”. At any time on or after June 1, 2024 , ATI may redeem some or all of the 5.875 % Senior Notes at specified redemption prices in the governing indenture. The 5.875% 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 5.875% Senior Notes. The indenture governing the 5.875% 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, 2021, the Company was in compliance with all covenants under the indenture governing the 5.875% Senior Notes. 3.75% Senior Notes In November 2020, ATI completed an offering of $ 1,000 million of the 3.75 % Senior Notes. The 3.75% Senior Notes were offered in a private placement exempt from registration under the Securities Act of 1933, as amended. The net proceeds from the offering, together with cash on hand, were used to redeem all of the outstanding 5.0% Senior Notes plus accrued and unpaid interest and related transaction expenses. As a result of the offering, the Company recorded $ 10 million as deferred financing fees in the Consolidated Balance Sheet as of December 31, 2020. ATI may from time to time seek to retire the 3.75 % Senior Notes through cash purchase 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 January 30, 2024 , ATI may redeem up to 40 % of the 3.75 % Senior Notes by paying a price equal to 103.750 % of the principal amount being redeemed. Prior to January 30, 2026 , ATI may redeem some or all of the 3.75 % Senior Notes by paying a price equal to 100.00 % of the principal amount being redeemed, plus an “applicable premium”. At any time on or after January 30, 2026 , ATI may redeem some or all of the 3.75 % Senior Notes at specified redemption prices in the governing indenture. 75 Table of Contents The 3.75% 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 3.75% Senior Notes. The indenture governing the 3.75% 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, 2021 , the Company was in compliance with all covenants under the indenture governing the 3.75% Senior Notes. NOTE 9. DERIVATIVES The Company is subject to interest rate risk related to the Senior Secured Credit Facility and enters into interest rate swaps that are based on LIBOR to manage a portion of this exposure. The interest rate swaps are designated as cash flow hedges that qualify for hedge accounting under the hypothetical derivative method. Fair value adjustments are recorded as a component of AOCL in the Consolidated Balance Sheets. Balances in AOCL are reclassified to earnings when transactions related to the underlying risk are settled. During the first quarter of 2019, the Company entered into $ 250 million of interest rate swaps and designated them as cash flow hedges under the hypothetical derivative method. As of December 31, 2021 , the Company held interest rate swaps effective from (i) September 2019 to September 2022 with notional values totaling $ 250 million and a weighted average LIBOR fixed rate of 3.01 %, (ii) from September 2019 to September 2025 with notional values totaling $ 250 million and a weighted average LIBOR fixed rate of 3.04 % and (iii) September 2022 to September 2025 with notional values totaling $ 250 million and a weighted average LIBOR fixed rate of 2.82 %. See "NOTE 7. Fair Value of Financial Instruments” for information regarding the fair value of the Company’s interest rate swaps. The following tabular disclosures further describe the Company’s interest rate derivatives qualifying and designated for hedge accounting and their impact on the financial condition of the Company (dollars in millions): December 31, 2021 December 31, 2020 Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives designated as hedging instruments: Interest rate swaps Other current liabilities $ 10 Other current liabilities $ 14 Other non-current liabilities 21 Other non-current liabilities 46 Total derivatives designated as hedging instruments $ 31 $ 60 76 Table of Contents The balance of derivative losses recorded in AOCL as of December 31, 2021 and 2020 was $ 31 million and $ 60 million, respectively. During the year ended December 31, 2021, the Company reclassified $ 15 million from AOCL to earnings, which was recorded as Interest expense, net on the Consolidated Statements of Comprehensive Income. The Company had $ 13 million of derivative losses recorded in AOCL expected to be reclassified to earnings within the next twelve months as of December 31, 2021. See "NOTE 17. Accumulated Other Comprehensive Loss” for information regarding activity recorded as a component of AOCL during the year ended December 31, 2021 . NOTE 10. PRODUCT WARRANTY LIABILITIES As of December 31, 2021, the current and non-current product warranty liabilities were $ 33 million and $ 20 million, respectively. As of December 31, 2020, the current and non-current product warranty liabilities were $ 36 million and $ 30 million, respectively. Product warranty liability activities consist of the following (dollars in millions): Year ended December 31, 2021 Year ended December 31, 2020 Year ended December 31, 2019 Beginning balance $ 66 $ 52 $ 66 Payments ( 30 ) ( 32 ) ( 26 ) Increase in liability (warranty issued during period) 16 15 21 Net adjustments to liability 1 31 ( 9 ) Ending balance $ 53 $ 66 $ 52 The adjustments to the total liability in 2021, 2020 and 2019 were the result of general changes in estimates for various products and specific field action programs as additional claims data and field information became available. In 2020, the Company recorded a $ 23 million product warranty adjustment to address a transmission performance issue associated with shift quality in a defined population of products. As a result of this performance issue, the Company created a field action program in 2019 dedicated to the defined population of products and reviewed, assessed and made adjustments to the liability on a quarterly basis. The product warranty adjustment in 2020 was the result of additional claims data and field information becoming available. NOTE 11. DEFERRED REVENUE As of December 31, 2021, the current and non-current deferred revenue were $ 37 million and $ 99 million, respectively. As of December 31, 2020, the current and non-current deferred revenue were $ 34 million and $ 109 million, respectively. Deferred revenue activity consists of the following (dollars in millions): Year ended December 31, 2021 Year ended December 31, 2020 Year ended December 31, 2019 Beginning balance $ 143 $ 139 $ 122 Increases 29 40 55 Revenue earned ( 36 ) ( 36 ) ( 38 ) Ending balance $ 136 $ 143 $ 139 Deferred revenue recorded in current and non-current liabilities related to ETC as of December 31, 2021 were $ 30 million and $ 84 million, respectively. Deferred revenue recorded in current and non-current liabilities related to ETC as of December 31, 2020 were $ 28 million and $ 88 million, respectively. 77 Table of Contents NOTE 12. LEASES Lessee Accounting Contracts are assessed by the Company to determine if the contract conveys the right to control an identified asset in exchange for consideration during a period of time. The Company classifies all identified leases as either operating or finance leases. As of December 31, 2021, the Company was not a party to any finance leases. Contracts that contain leases are assessed to determine if the consideration in the contract is related to a lease component, non-lease component or other components not related to the lease. Lease components are recorded as right-of-use (“ROU”) assets and lease liabilities while any non-lease component is expensed as incurred. The consideration in the contract related to other components not related to the lease is allocated among the lease component and the non-lease component, as applicable, based on the stand-alone selling price of the lease and non-lease components . Certain lease agreements may contain an option to extend or terminate the lease. The Company considers the economic impact of extension and termination options for each lease agreement. If the Company concludes it is reasonably certain an option will be exercised, that option is included in the lease term and impacts the amount recorded as an ROU asset and lease liability upon inception of the contract. The Company's lease liability is determined by discounting the future cash flows over the lease period. The Company determines its discount rates by utilizing current secured financing rates based on the length of the lease period plus the Company's margin over LIBOR on the Term Loan. The Company believes this rate effectively represents a borrowing rate the Company could obtain on a debt instrument possessing similar terms as the lease. Any lease liability is classified between current and non-current liabilities based on the terms of the underlying leases. The weighted average discount rate on operating leases as of December 31, 2021 and 2020 was 4.25 % and 4.37 %, respectively. As of December 31, 2021, the Compa ny recorded current and non-current operating lease liabilities of $ 4 million and $ 13 million, respectively. As of December 31, 2020, the Company recorded current and non-current operating lease liabilities of $ 4 million and $ 17 million, respectively. The following table reconciles future undiscounted cash flows for operating leases as of December 31, 2021 to total operating lease liabilities: December 31, 2021 2022 $ 5 2023 3 2024 2 2025 2 2026 2 Thereafter 6 Total lease payments $ 20 Less: Interest 3 Present value of lease liabilities $ 17 78 Table of Contents ROU assets are calculated as the related lease liability adjusted for lease incentives, prepayments and the effect of escalating lease payments on period expense. The below table depicts the ROU assets held by the Company based on the underlying asset: December 31, 2021 Buildings $ 16 Land 1 Vehicles 1 Total right-of-use assets $ 18 The weighted average remaining lease term as of December 31, 2021 and December 31, 2020 was 6.8 years and 7.6 years, respectively. Operating lease expense was $ 6 million for each of the years ended December 31, 2021 and 2020, and was recorded within Selling, general and administrative expense and Engineering - research and development on the Company's Consolidated Statements of Comprehensive Income. There was no material short-term operating lease expense for any of the years ended December 31, 2021 and 2020. The calculation of the Company's ROU assets and lease liabilities did not include cash consideration as of either December 31, 2021 or 2020. During each of the years ended December 31, 2021 and 2020, the Company recorded $ 2 million of new ROU assets obtained in exchange for lease obligations. NOTE 13. OTHER INCOME (EXPENSE), NET Other income (expense), net consists of the following (dollars in millions): Years ended December 31, 2021 2020 2019 Post-retirement benefit plan amendment credits $ 10 $ 13 $ 11 Unrealized gain on marketable securities 4 — — Technology-related investments gain 4 — — Expenses related to long-term debt refinancing — ( 13 ) ( 1 ) Other 1 ( 4 ) — Total $ 19 $ ( 4 ) $ 10 NOTE 14. OTHER CURRENT LIABILITIES Other current liabilities consist of the following (dollars in millions): As of December 31, 2021 As of December 31, 2020 Payroll and related costs $ 80 $ 47 Sales allowances 39 20 Accrued interest payable 24 12 Vendor buyback obligation 16 16 Taxes payable 14 11 Derivative liabilities 10 14 Lease liability 4 4 Non-trade payables 2 2 Construction liability 2 1 Other accruals 13 13 Total $ 204 $ 140 79 Table of Contents NOTE 15. 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 were hired on or before May 18, 2008 and 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. 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 sponsors defined contribution retirement savings plans for eligible employees, based on employee location and status. The Company’s salaried defined contribution retirement savings plans provide for a Company match of employee contributions up to certain limits based upon eligible base salary. The charge to expense for the Company’s defined contribution retirement savings plans was $ 14 million, $ 12 million and $ 11 million for the years ended December 31, 2021, 2020 and 2019, respectively. The Company is also responsible for OPEB costs (medical, dental, vision, and life insurance) for hourly employees hired prior to May 19, 2008, excluding those employees eligible to retire at the time of the sale of the Company. 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, 2021 and 2020, 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 $ 107 million, respectively. 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. 80 Table of Contents Information about the net periodic benefit cost (credit) and other changes recognized in AOCL for the pension and post-retirement benefit plans is as follows (dollars in millions): Pension Plans Post-retirement Benefits Year ended December 31, 2021 Year ended December 31, 2020 Year ended December 31, 2019 Year ended December 31, 2021 Year ended December 31, 2020 Year ended December 31, 2019 Net Periodic Benefit Cost (Credit): Service cost $ 9 $ 10 $ 10 $ 1 $ 1 $ 1 Interest cost 5 6 7 3 3 4 Expected return on assets ( 8 ) ( 9 ) ( 9 ) — — — Settlement loss — 2 — — — — Prior service credit — — — ( 10 ) ( 14 ) ( 13 ) Recognized actuarial loss 1 — — — — — Net Periodic Benefit Cost (Credit) $ 7 $ 9 $ 8 $ ( 6 ) $ ( 10 ) $ ( 8 ) Other changes recognized in other comprehensive income: Net (gain) loss $ ( 6 ) $ 12 $ ( 2 ) $ ( 5 ) $ 12 $ ( 1 ) Amortizations ( 1 ) ( 2 ) — 10 13 13 Total recognized – other comprehensive (income) loss $ ( 7 ) $ 10 $ ( 2 ) $ 5 $ 25 $ 12 The components of net periodic benefit costs other than the service cost component are included in Other income (expense), net in the Consolidated Statements of Comprehensive Income. The voluntary and involuntary separation programs in the second quarter of 2020 resulted in a one-time, non-cash settlement charge of $ 2 million recorded in Other income (expense), net in the Consolidated Statements of Comprehensive Income. The table below provides the weighted-average actuarial assumptions used to determine the net periodic benefit cost (credit). Pension Plans Post-retirement Benefits Year ended December 31, 2021 Year ended December 31, 2020 Year ended December 31, 2019 Year ended December 31, 2021 Year ended December 31, 2020 Year ended December 31, 2019 Discount rate 2.30 % 3.20 % 4.20 % 2.40 % 3.20 % 4.20 % Rate of compensation increase (salaried) 3.00 % 3.00 % 3.00 % N/A N/A N/A Expected return on assets 3.70 % 4.00 % 4.50 % N/A N/A N/A 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, 2021 2020 2021 2020 Discount rate 2.70 % 2.30 % 2.80 % 2.40 % Rate of compensation increase (salaried) 3.00 % 3.00 % N/A N/A 81 Table of Contents 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 and in the case of remeasurement. 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, 2021. 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, 2021 obligations, future post-retirement health care costs were forecasted assuming an initial annual increase of up to 6.70 %, decreasing to an annual increase of up to 4.00 % by the year 2044 . 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, 2021, 2020 and 2019 (dollars in millions): Pension Plans Post-retirement Benefits Year ended December 31, 2021 Year ended December 31, 2020 Year ended December 31, 2019 Year ended December 31, 2021 Year ended December 31, 2020 Year ended December 31, 2019 Benefit Obligations: Net benefit obligation at beginning of year $ 235 $ 204 $ 177 $ 107 $ 94 $ 93 Service cost 9 10 10 1 1 1 Interest cost 5 6 7 3 3 4 Settlements — ( 12 ) — — — — Benefits paid ( 14 ) ( 6 ) ( 9 ) ( 4 ) ( 3 ) ( 2 ) Actuarial (gain) loss ( 15 ) 33 19 ( 5 ) 12 ( 2 ) Net benefit obligation at end of year $ 220 $ 235 $ 204 $ 102 $ 107 $ 94 Fair Value of Plan Assets: Fair value of plan assets at beginning of year $ 228 $ 217 $ 196 $ — $ — $ — Actual return on plan assets ( 1 ) 29 30 — — — Employer contributions — — — 3 3 2 Settlements — ( 12 ) — — — — Benefits paid ( 14 ) ( 6 ) ( 9 ) ( 3 ) ( 3 ) ( 2 ) Fair value of plan assets at end of year $ 213 $ 228 $ 217 $ — $ — $ — Net Funded Status $ ( 7 ) $ ( 7 ) $ 13 $ ( 102 ) $ ( 107 ) $ ( 94 ) 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, 2021 and 2020 are as follows (dollars in millions): 82 Table of Contents Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) TOTAL 2021 2020 2021 2020 2021 2020 Diversified debt securities $ 14 $ 14 $ 160 $ 172 $ 174 $ 186 Diversified equity securities 24 28 9 10 33 38 Cash equivalents 6 4 — — 6 4 Total $ 44 $ 46 $ 169 $ 182 $ 213 $ 228 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: Target Asset Category Hourly Salary Cash equivalents 2 % 2 % Diversified equity securities 15 15 Diversified debt securities 83 83 Total 100 % 100 % Through 2021, 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, 2021 and 2020, on a pre-tax basis (dollars in millions): Pension Plans Post-retirement Benefits As of December 31, 2021 2020 2021 2020 Amounts Recognized in Balance Sheet: Noncurrent assets $ 1 $ — $ — $ — Current liabilities — — ( 4 ) ( 3 ) Noncurrent liabilities ( 8 ) ( 7 ) ( 98 ) ( 104 ) Total (liability) asset $ ( 7 ) $ ( 7 ) $ ( 102 ) $ ( 107 ) Accumulated Other Comprehensive Loss: Prior service credit $ 2 $ 2 $ 34 $ 44 Actuarial loss ( 8 ) ( 16 ) ( 3 ) ( 8 ) Total $ ( 6 ) $ ( 14 ) $ 31 $ 36 The accumulated benefit obligation for the Company’s pension plans as of December 31, 2021 and 2020 was $ 216 million and $ 230 million, respectively. As of December 31, 2021 and 2020, 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): 83 Table of Contents Hourly Plan Salary Plan As of December 31, 2021 2020 2021 2020 Plans with projected benefit obligation in excess of plan assets: Projected benefit obligation N/A 1 N/A 1 $ 110 $ 119 Fair value of plan assets N/A 1 N/A 1 $ 101 $ 112 Plans with accumulated benefit obligation in excess of plan assets: Accumulated benefit obligation N/A 1 N/A 1 $ 105 $ 114 Fair value of plan assets N/A 1 N/A 1 $ 101 $ 112 (1) As of December 31, 2021 and 2020, the hourly defined pension plan had plan assets greater than the projected benefit obligation and the accumulated benefit obligation. 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: 2022 expected contributions $ — $ 4 Expected Benefit Payments: 2022 11 4 2023 11 4 2024 12 4 2025 13 4 2026 13 4 2027-2031 68 24 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. The Company maintains 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 no charge to the Consolidated Statements of Comprehensive Income for any of the years ended December 31, 2021, 2020 and 2019, and the fair value of the rabbi trust plan assets and deferred compensation obligation was $ 19 million and $ 17 million as of December 31, 2021 and 2020 , respectively. 84 Table of Contents NOTE 16. INCOME TAXES Income before income taxes included the following (dollars in millions): Years ended December 31, 2021 2020 2019 U.S. income $ 513 $ 364 $ 712 Foreign income 59 29 56 Total $ 572 $ 393 $ 768 The provision for income tax expense was estimated as follows (dollars in millions): Years ended December 31, 2021 2020 2019 Estimated current income taxes: U.S. federal $ 48 $ 18 $ 75 Foreign 10 6 13 U.S. state and local 8 1 11 Total Current 66 25 99 Deferred income tax expense, net: U.S. federal 56 61 58 Foreign — 1 — U.S. state and local 8 7 7 Total Deferred 64 69 65 Total income tax expense $ 130 $ 94 $ 164 A reconciliation of the provision for income tax expense compared with the amounts at the U.S. federal statutory rate is as follow s (dollars in millions): Years ended December 31, 2021 2020 2019 Tax at U.S. statutory income tax rate $ 120 $ 82 $ 161 State tax expense 12 10 14 Tax credits ( 4 ) ( 5 ) ( 4 ) Effect of tax rate changes 2 5 ( 2 ) Foreign rate differential ( 2 ) ( 2 ) ( 1 ) Valuation allowance ( 1 ) 2 1 Non-deductible expenses — 3 ( 7 ) Other adjustments 3 ( 1 ) 2 Total income tax expense $ 130 $ 94 $ 164 The effective tax rate for the years ended December 31, 2021 and 2020 was 23 % and 24 %, respectively. Deferred income tax assets and liabilities as of December 31, 2021 and 2020 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 Balance Sheets. 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. The Company has not recognized any deferred tax liabilities associated with earnings in foreign subsidiaries, except for its subsidiary located in China, as they are intended to be permanently reinvested and used to support foreign operations or have no associated tax requirements. As of December 31, 2021, the Company has recorded a deferred tax liability of $ 3 million for the tax liability associated with the remittance of previously taxed income and unremitted earnings for its subsidiary located in China. 85 Table of Contents Temporary differences and carryforwards that gave rise to deferred tax assets and liabilities included the following (dollars in millions): As of December 31, 2021 As of December 31, 2020 Deferred tax assets: Other accrued liabilities $ 35 $ 26 Deferred revenue 31 33 Warranty accrual 11 14 Stock-based compensation 10 9 Unrealized loss on Interest rate hedges 7 14 Inventories 7 7 Sales allowances and rebates 7 3 Tax credits 5 4 Operating loss carryforwards 4 6 Technology-related investments 3 4 Intangibles — 9 Other 13 13 Total deferred tax assets 133 142 Valuation allowances ( 11 ) ( 12 ) Deferred tax liabilities: Goodwill ( 405 ) ( 373 ) Trade name ( 173 ) ( 153 ) Property, plant and equipment ( 46 ) ( 40 ) Intangibles ( 7 ) — Other ( 3 ) ( 2 ) Total deferred tax liabilities ( 634 ) ( 568 ) Net deferred tax liability $ ( 512 ) $ ( 438 ) The estimated net operating loss carryforwards as of December 31, 2021 relate solely to U.S. state net operating loss carryforwards. Substantially all state operating loss carryforwards will not expire until 2028-2031. 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 $ 11 million a s of December 31, 2021 and $ 12 million as of December 31, 2020. 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, the Company recognizes 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 $ 3 million liability for uncertain tax benefits as of each of December 31, 2021 and 2020. Management does not anticipate any mate rial changes in the balance in 2022. For the years ended December 31, 2021, 2020 and 2019, 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. All of the Company's tax 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). 86 Table of Contents NOTE 17. ACCUMULATED OTHER COMPREHENSIVE LOSS The changes in components of AOCL consisted of the following (dollars in millions): Before Tax Tax (Expense) Benefit Reclassification of stranded tax effects After Tax Balance at December 31, 2018 $ 23 $ ( 53 ) $ — $ ( 30 ) Foreign currency translation ( 3 ) — — ( 3 ) Pension and OPEB liability adjustment ( 11 ) 2 9 — Available-for-sale securities ( 24 ) 6 ( 1 ) ( 19 ) Net current period other comprehensive (loss) income $ ( 38 ) $ 8 $ 8 $ ( 22 ) Balance at December 31, 2019 $ ( 15 ) $ ( 45 ) $ 8 $ ( 52 ) Foreign currency translation 10 — — 10 Pension and OPEB liability adjustment ( 36 ) 9 — ( 27 ) Interest rate swaps ( 26 ) 6 — ( 20 ) Net current period other comprehensive (loss) income $ ( 52 ) $ 15 $ — $ ( 37 ) Balance at December 31, 2020 $ ( 67 ) $ ( 30 ) $ 8 $ ( 89 ) Foreign currency translation ( 8 ) — — ( 8 ) Pension and OPEB liability adjustment 3 ( 1 ) — 2 Interest rate swaps 29 ( 7 ) — 22 Net current period other comprehensive income (loss) $ 24 $ ( 8 ) $ — $ 16 Balance at December 31, 2021 $ ( 43 ) $ ( 38 ) $ 8 $ ( 73 ) The following table shows the location in the Consolidated Statements of Comprehensive Income affected by reclassifications from AOCL (dollars in millions): For the year ended December 31, 2019 AOCL Components Amount reclassified from AOCL Affected line item in the consolidated statements of comprehensive income Interest rate swaps $ 1 Interest expense, net Prior service credit 13 Other income (expense), net Total reclassifications, before tax 14 Income before income taxes Income tax expense ( 3 ) Income tax expense Total reclassifications $ 11 For the year ended December 31, 2020 AOCL Components Amount reclassified from AOCL Affected line item in the consolidated statements of comprehensive income Interest rate swaps $ 11 Interest expense, net Prior service credit 14 Other income (expense), net Total reclassifications, before tax 25 Income before income taxes Income tax expense ( 6 ) Income tax expense Total reclassifications $ 19 87 Table of Contents For the year ended December 31, 2021 AOCL Components Amount reclassified from AOCL Affected line item in the consolidated statements of comprehensive income Interest rate swaps $ 15 Interest expense, net Prior service credit 10 Other income (expense), net Recognized actuarial loss ( 1 ) Other income (expense), net Total reclassifications, before tax 24 Income before income taxes Income tax expense ( 6 ) Income tax expense Total reclassifications $ 18 Prior service cost and actuarial loss are included in the computation of the Company’s net periodic benefit cost. Please see "NOTE 15. Employee Benefit Plans” for additional details. NOTE 18. COMMITMENTS AND CONTINGENCIES Environmental Matters The Company has an agreement with the Environmental Protection Agency ("EPA") to perform remedial activities at the Company’s Indianapolis, Indiana manufacturing facilities related to historical soil and groundwater contamination. In the fourth quarter of 2019, the EPA accepted a proposal to reduce the Company’s ongoing responsibilities for operating, monitoring and maintaining the ongoing activities resulting in the Company reducing its associated undiscounted liability to $ 3 million to complete the future operating, monitoring and maintenance activities over the next 30 years. As of December 31, 2021, the Company had a liability recorded in the amount of $ 3 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. 88 Table of Contents NOTE 19. CONCENTRATION OF RISK As of December 31, 2021 and 2020, the Company employed approximately 3,400 and 3,300 employees, respectively, with 90 % and 89 %, respectively, of those employees in the U.S. Approximately 46 % and 47 % of the Company’s U.S. employees were represented by unions and subject to a collective bargaining agreement as of December 31, 2021 and 2020, respectively. The Company is currently operating under a collective bargaining agreement with UAW Local 933 that expires in November 2023. Three customers acc ounted for 10% or more of net sales within the last three years presented. Years ended December 31, % of net sales 2021 2020 2019 Daimler AG 20 % 20 % 20 % PACCAR Inc. 10 % 11 % 12 % Traton SE 1 10 % 11 % 11 % (1) Traton SE acquired Navistar International Corporation in July 2021. Percentages for 2021 include net sales to Traton SE and Navistar International Corporation. Percentages for 2020 and 2019 include net sales to Navistar International Corporation only . No other customers accounted for 10% or more of net sales of the Company during the years ended December 31, 2021, 2020 or 2019. Two customers accounted for 10% or more of outstanding accounts receivable within the last two years presented. % of accounts receivable As of December 31, 2021 As of December 31, 2020 Daimler AG 17 % 21 % Traton SE 1 11 % 14 % (1) Traton SE acquired Navistar International Corporation in July 2021. Percentages for 2021 include net sales to Traton SE and Navistar International Corporation. Percentages for 2020 and 2019 include net sales to Navistar International Corporation only . No other customers accounted for 10% or more of the outstanding accounts receivable as of December 31, 2021 or December 31, 2020. No supplier accounted for 10% or more of materials purchased during the years ended December 31, 2021, 2020 or 2019 . NOTE 20. COMMON STOCK The Company's Board of Directors has authorized it to repurchase up to $ 3,000 million, in the aggregate, of its common stock pursuant to a stock repurchase program (the “Repurchase Program”). During 2021, the Company repurchased approximately $ 513 million of its common stock under the Repurchase Program, leaving $ 314 million of authorized repurchases remaining under the Repurchase Program as of December 31, 2021. The Repurchase Program has no termination date, and the timing and amount of stock purchases are subject to market conditions and corporate needs. The Repurchase Program may be modified, suspended or discontinued at any time at the Company’s discretion. NOTE 21. 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 89 Table of Contents 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. During each of the years ended December 31, 2021 and 2020, 1 million outstanding stock options were excluded from the diluted EPS calculation because they were anti-dilutive, and during the year ended December 31, 2019, there were no outstanding stock options excluded from 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): Years ended December 31, 2021 2020 2019 Net income $ 442 $ 299 $ 604 Weighted average shares of common stock outstanding 107 114 122 Dilutive effect stock-based awards — — 1 Diluted weighted average shares of common stock outstanding 107 114 123 Basic earnings per share attributable to common stockholders $ 4.13 $ 2.62 $ 4.95 Diluted earnings per share attributable to common stockholders $ 4.13 $ 2.62 $ 4.91 NOTE 22. GEOGRAPHIC INFORMATION The Company had the following net sales by country, based on the location of the customer (dollars in millions): Years ended December 31, 2021 2020 2019 United States $ 1,706 $ 1,521 $ 1,915 China 122 87 136 Japan 109 66 79 Canada 62 70 104 Mexico 50 61 71 Germany 34 36 59 South Korea 28 22 24 Sweden 27 19 23 France 27 21 37 United Kingdom 26 25 35 Netherlands 24 21 26 Other 187 132 189 Total $ 2,402 $ 2,081 $ 2,698 T he Company had the following net long-lived assets by country (dollars in millions): Years ended December 31, 2021 2020 2019 United States $ 680 $ 611 $ 583 India 11 12 17 Hungary 11 11 11 Other 4 4 5 Total $ 706 $ 638 $ 616 90 Table of Contents Allison Transmission Holdings, Inc. Schedule I—Parent Compa ny only Balance Sheets (dollars in millions) December 31, 2021 December 31, 2020 ASSETS Current Assets: Cash $ — $ — Total Current Assets — — Investments in and advances to subsidiaries 634 756 TOTAL ASSETS $ 634 $ 756 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable $ — $ — Total Current Liabilities — — Capital stock 1 1 Paid in capital 1,832 1,818 Treasury stock — — Accumulated deficit ( 1,126 ) ( 974 ) Accumulated other comprehensive loss, net of tax ( 73 ) ( 89 ) TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 634 $ 756 The accompanying note is an integral part of the Parent Company only financial statements. 91 Table of Contents Allison Transmission Holdings, Inc. Schedule I—Parent Company only St atements of Comprehensive Income (dollars in millions) Years ended December 31, 2021 2020 2019 Net sales $ — $ — $ — General and administrative fees — — — Total operating income — — — Other income: Equity earnings of consolidated subsidiary 442 299 604 Income before income taxes 442 299 604 Income tax expense — — — Net income $ 442 $ 299 $ 604 Comprehensive income $ 458 $ 262 $ 582 The accompanying note is an integral part of the Parent Company only financial statements. 92 Table of Contents Allison Transmission Holdings, Inc. Schedule I—Parent Company on ly Statements of Cash Flows (dollars in millions) Years ended December 31, 2021 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 442 $ 299 $ 604 Deduct items included in net income not providing cash: Equity in earnings in consolidated subsidiary ( 442 ) ( 299 ) ( 604 ) Net cash provided by operating activities — — — CASH FLOWS FROM INVESTING ACTIVITIES: Investments in subsidiaries ( 3 ) ( 2 ) ( 5 ) Dividends 81 78 73 Net cash provided by investing activities 78 76 68 CASH FLOWS FROM FINANCING ACTIVITIES: Capital contributions 3 2 5 Dividends ( 81 ) ( 78 ) ( 73 ) Net cash used in financing activities ( 78 ) ( 76 ) ( 68 ) Net increase (decrease) during period — — — Cash and cash equivalents at beginning of period — — — Cash and cash equivalents at end of period $ — $ — $ — The accompanying note is an integral part of the Parent Company only financial statements. 93 Table of Contents Allison Transmission Holdings, Inc. Schedule I—Parent Co mpany only Footnote NOTE 1—BASIS O F 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 8. Debt” of Notes to Consolidated Financial Statements). The entire amount of the Parent Company’s consolidated net assets was subject to restrictions on payment of dividends as of December 31, 2021, 2020 and 2019 . 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. 94 Table of Contents ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.