What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2023-02-16 compared with 2022-02-17 · 359 added, 405 removed, 1155 unchanged (40% of the section changed)

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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 Company's current stock repurchase program (the "Repurchase Program") was authorized by the Board of Directors in 2016, with increases approved by the Board of Directors on each of November 8, 2017, July 30, 2018, May 9, 2019 and February 24, 2022, which in the aggregate authorized total repurchases of up to $4,000 million in shares of our common stock.

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.

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, 2022:

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October 31, 2022

1,035,298,103

November 1 –

November 30, 2022

1,035,130,253

December 1 –

December 31, 2022

1,035,130,253

(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.

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.

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”

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”

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A detailed discussion of 2020 items and year-over-year comparisons between 2021 and 2020 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.

in Part II, Item 7.

of our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 17, 2022.

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.

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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.

Global markets continue to experience supply chain, labor, energy and raw material constraints as a result of global economic volatility, the war in Ukraine and the COVID-19 pandemic, that impacted our business in 2022 and continue to impact our business performance.

As a result, during 2022 we experienced raw material and component part price inflation, increased freight and logistics costs, increased labor costs, production constraints due to labor shortages and increased foreign exchange volatility.

In addition, our net sales for 2022 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 and the inability of the commercial vehicle market to produce sufficient quantities to meet demand.

We expect that commercial vehicle build schedules will continue to be negatively impacted by the availability of components in 2023.

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.

Our net sales are driven by commercial vehicle production, which tends to be highly correlated to macroeconomic conditions.

In 2023, we expect higher net sales driven by price increases on certain products and the continued execution of growth initiatives.

Full Year 2022 and 2021 Net Sales by End Market (in millions)

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Total Net Sales

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.

North America On-Highway end market net sales were up 15% for the year ended December 31, 2022 compared to the year ended December 31, 2021, principally driven by strength in customer demand for last mile delivery, regional haul and vocational trucks.

Global Off-Highway end market net sales were up 51% for the year ended December 31, 2022 compared to the year ended December 31, 2021, principally driven by demand for hydraulic fracturing applications in the energy sector as well as higher demand in the mining and construction sectors.

Defense end market net sales were down 22% for the year ended December 31, 2022 compared to the year ended December 31, 2021, principally driven by lower usage of defense vehicles during the COVID-19 pandemic leading to lower demand for Tracked and Wheeled vehicle applications.

Outside North America On-Highway end market net sales were up 22% for the year ended December 31, 2022 compared to the year ended December 31, 2021, principally driven by the continued execution of our growth initiatives in EMEA, Asia-Pacific and South America.

Service Parts, Support Equipment and Other end market net sales were up 14% for the year ended December 31, 2022 compared to the year ended December 31, 2021, principally driven by higher demand for global service parts and support equipment and price increases on certain products.

Key Components of our Results of Operations

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Sales are recorded in accordance with the terms of the contract, net of provisions for customer allowances and other rebates.

Engineering services are recorded as net sales in accordance with the terms of the contract.

The associated costs are recorded in cost of sales.

We also have royalty agreements with third parties that provide net sales as a result of joint efforts in developing marketable products.

Cost of sales

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Net income (GAAP)

Income tax expense

Interest expense, net

Income tax expense

Depreciation of property, plant and equipment

Amortization of intangible assets

Stock-based compensation expense (a)

Unrealized gain on marketable securities (b)

Technology-related investment gain (c)

UAW Local 933 retirement incentive (d)

Unrealized loss (gain) on marketable securities (a)

Stock-based compensation expense (b)

Unrealized loss on foreign exchange (c)

Technology-related investment gain (d)

Acquisition-related earnouts (e)

Restructuring charges (f)

Expenses related to long-term debt refinancing (g)

Unrealized loss on foreign exchange (h)

Environmental remediation (i)

Loss associated with impairment of long-lived assets (j)

Pension curtailment (f)

UAW Local 933 retirement incentive (g)

Restructuring charges (h)

Expenses related to long-term debt refinancing (i)

Adjusted EBITDA (Non-GAAP)

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Additions of long-lived assets

Restructuring charges (f)

Restructuring charges (h)

Adjusted free cash flow (Non-GAAP)

(a) Represents stock-based compensation expense (recorded in Cost of sales, Selling, general and administrative, and Engineering –

(a) Represents losses (gains) (recorded in Other (expense) income, net) related to an investment in the common stock of Jing-Jin Electric Technologies Co.

(b) 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.

(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.

(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.

(c) Represents losses (recorded in Other (expense) income, net) on intercompany financing transactions related to investments in plant assets for our India facility.

(d) Represents gains (recorded in Other (expense) income, net) related to investments in co-development agreements to expand our position in propulsion solution technologies.

(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 a curtailment loss (recorded in Selling, general and administrative) for our European subsidiary's defined benefit pension plan.

(g) 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.

(h) Represents restructuring and pension plan settlement charges (recorded in Cost of sales, Selling, general and administrative, Engineering —

research and development, and Other (expense) income, net) related to voluntary and involuntary separation programs for both hourly and salaried employees in 2020.

(i) Represents expenses (recorded in Other (expense) income, net) related to the redemption of ATI’s 5.0% Senior Notes due 2024 (“5.0% Senior Notes”) in the fourth quarter of 2020.

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.

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, 2022 and 2021.

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Interest expense, net

Other income (expense), net

Other (expense) income, net

Total other expense, net

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Net sales for the year ended December 31, 2022 were $2,769 million compared to $2,402 million for the year ended December 31, 2021, 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.

The increase was principally driven by a $182 million, or 15%, increase in net sales in the North America On-Highway end market principally driven by strength in customer demand for last mile delivery, regional haul and vocational trucks, an $82 million, or 22%, increase in net sales in the Outside North America On-Highway end market principally driven by the continued execution of our growth initiatives in EMEA, Asia-Pacific and South America, a $72 million, or 51%, increase in net sales in the Global Off-Highway end market principally driven by demand for hydraulic fracturing applications in the energy sector as well as higher demand in the mining and construction sectors and a $71 million, or 14%, increase in net sales in the Service Parts, Support Equipment and Other end market principally driven by higher demand for global service parts and support equipment and price increases on certain products, partially offset by a $40 million, or 22%, decrease in net sales in the Defense end market principally driven by lower usage of defense vehicles during the COVID-19 pandemic leading to lower demand for Tracked and Wheeled vehicle applications.

Cost of sales

Cost of sales for the year ended December 31, 2022 was $1,472 million compared to $1,257 million for the year ended December 31, 2021, an increase of 17%.

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.

The increase was principally driven by increased direct material and manufacturing expense commensurate with increased net sales and higher direct material costs.

Gross profit for the year ended December 31, 2022 was $1,297 million compared to $1,145 million for the year ended December 31, 2021, an increase of 13%.

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.

The increase was principally driven by $170 million related to increased net sales and $119 million of price increases on certain products, partially offset by $96 million of higher direct material costs and $38 million of higher manufacturing expense commensurate with increased net sales.

Gross profit as a percent of net sales for the year ended December 31, 2022 decreased 90 basis points compared to the same period in 2021 principally driven by increased cost of goods sold, partially offset by price increases on certain products.

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.

Selling, general and administrative expenses for the year ended December 31, 2022 were $328 million compared to $305 million for the year ended December 31, 2021, an increase of 8%.

The increase was principally driven by higher product warranty expense and higher commercial activities spending.

Engineering —

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Engineering expenses for the year ended December 31, 2022 were $185 million compared to $171 million for the year ended December 31, 2021, an increase of 8%.

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.

The increase was principally driven by increased product initiatives spending.

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.

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.

Interest expense, net for the year ended December 31, 2022 was $118 million compared to $116 million for the year ended December 31, 2021, an increase of 2%.

The increase was principally driven by $10 million of higher interest expense on ATI's Term Loan due to higher variable interest rates, partially offset by $8 million of lower interest expense on interest rate hedges.

Other (expense) income, net

Other (expense) income, net for the year ended December 31, 2022 was ($21) million compared to $19 million for the year ended December 31, 2021.

The change was principally driven by $26 million of unfavorable change in marketable securities, $6 million of unfavorable foreign exchange on intercompany financing and $5 million of unfavorable change associated with assets held in a rabbi trust.

Income tax expense

Income tax expense for the year ended December 31, 2022 was $114 million resulting in an effective tax rate of 18%, compared to $130 million of income tax expense and an effective tax rate of 23% for the year ended December 31, 2021.

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.

The decrease in income tax expense was principally driven by enacted state tax rate legislation that resulted in a deferred tax benefit, partially offset by increased taxable income.

The decrease in the effective tax rate was principally driven by enacted state tax rate legislation that resulted in a deferred tax benefit.

Liquidity and Capital Resources

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We had total available cash and cash equivalents of $232 million and $127 million as of December 31, 2022 and 2021, 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.

Of the available cash and cash equivalents, $121 million was deposited in operating accounts and $111 million was invested in U.S.

government backed securities as of December 31, 2022, compared to December 31, 2021, when all of the $127 million was deposited in operating accounts.

As of December 31, 2022, the total of cash held by foreign subsidiaries was $57 million, the majority of which was at our subsidiaries located in China, the Netherlands, Japan and India.

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.

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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.

As of December 31, 2022, we had $625 million of indebtedness associated with ATI’s Term Loan, $400 million of indebtedness associated with ATI’s 4.75% Senior Notes due October 2027 (“4.75% Senior Notes”), $500 million of indebtedness associated with ATI’s 5.875% Senior Notes due June 2029 (“5.875% Senior Notes”) and $1,000 million of indebtedness associated with 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”).

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.

There are no required quarterly principal payments on the 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.

We made $7 million of principal payments on the Term Loan during each of the years ended December 31, 2022 and 2021.

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.

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.

The Senior Secured Credit Facility provides for a $650 million Revolving Credit Facility, net of an allowance for up to $75 million in outstanding letter of credit commitments.

Throughout the year ended December 31, 2022, we made periodic withdrawals and payments on the Revolving Credit Facility as part of our cash management plans.

The maximum amount outstanding at any time during the year ended December 31, 2022 was $75 million.

As of December 31, 2022, we had $644 million available under the Revolving Credit Facility, net of $6 million in letters of credit.

As of December 31, 2022, we had no amounts outstanding under the Revolving Credit Facility.

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.

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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.

As of December 31, 2022, we were 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”).

As of December 31, 2022, our credit ratings from both Moody's and Fitch are shown in the table below:

December 31, 2022

Credit Ratings

Corporate Credit

4.75% Senior Notes

5.875% Senior Notes

3.75% Senior Notes

We anticipate that our capital expenditures in 2023 will be lower than 2022 and expect increased cash income taxes as a result of lower deductions in 2023 related to our intangible assets.

Our current stock repurchase program was originally authorized by the Board of Directors in 2016.

On February 24, 2022, the Board of Directors authorized us to repurchase an additional $1,000 million of our common stock, bringing the total amount authorized under the Repurchase Program to $4,000 million.

During 2022, we repurchased approximately $278 million of our common stock under the Repurchase Program.

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We have significant liquidity, including $232 million of cash and cash equivalents and $644 million available under the Revolving Credit Facility, net of $6 million in letters of credit, as of December 31, 2022.

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.

At this time, we believe cash provided by operating activities, cash and cash equivalents and borrowing capacity under the Revolving 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, 2022 generated $657 million of cash compared to $635 million for the year ended December 31, 2021.

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.

The increase was principally driven by higher gross profit, partially offset by higher cash incentive compensation payments, higher cash income taxes and higher cash interest payments.

Cash used for investing activities

Investing activities for the year ended December 31, 2022 used $183 million of cash compared to $212 million for the year ended December 31, 2021.

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.

The decrease was principally driven by a $41 million investment in marketable securities in 2021 that did not reoccur in 2022 and an $8 million decrease in capital expenditures, partially offset by $23 million in cash paid for business acquisitions during 2022 compared to none in 2021.

Cash used for financing activities

Financing activities for the year ended December 31, 2022 used $367 million of cash compared to $604 million for the year ended December 31, 2021.

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.

Critical Accounting Policies and Significant Accounting Estimates

The decrease was principally driven by $278 million of stock repurchases in 2022 compared to $513 million of stock repurchases in 2021 under the Repurchase Program.

Critical 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.

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Assuming our current mix of sales incentives, a 10% change in sales incentives would correspondingly change our earnings by approximately $10 million.

Under terms of certain previous U.S.

Under the 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.

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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;

operating margin improvements derived from cost reduction programs and fixed cost leverage driven by higher sales volumes;

and a risk-adjusted discount rate.

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As of December 31, 2022, 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.

federal income tax deductions related to our intangible assets were approximately $200 million in 2022 and are expected to be approximately $10 million in 2023 and approximately $10 million in the aggregate through 2034.

Excluding our intangible asset deductions, our expected tax payments would have increased by approximately $40 million for the year ended December 31, 2022.

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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

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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 $644 million under our Revolving Credit Facility, net of $6 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, 2022, we held interest rate swap contracts that, in the aggregate, effectively hedge $500 million of the variable rate debt associated with the Term Loan at weighted average London Interbank Offered Rate (“LIBOR”) fixed rates of 3.04% and 2.82% through September 2025.

A one-eighth percent increase or decrease in assumed interest rates for the Senior Secured Credit Facility, if fully drawn as of December 31, 2022, would have an impact of approximately $1 million on interest expense per year.

As of December 31, 2022, 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%.

The United Kingdom's Financial Conduct Authority has announced the intent to phase out LIBOR by June 2023.

We plan to elect an alternative reference rate acceptable under reference rate reform guidance and do not expect the phase out to materially impact our financial statements, liquidity or access to capital markets.

Refer to "Note 8.

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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.

We believe our other direct 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.

As of December 31, 2022, approximately 66% of our cost of sales consisted of purchased components with significant raw material content.

A substantial portion of the purchased parts are made of aluminum and steel.

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research and development

Environmental remediation

Operating income

Interest expense, net

Other income (expense), net

Other (expense) income, net

Income before income taxes

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Other comprehensive income (loss), net of tax:

Available-for-sale securities and interest rate swaps

Interest rate swaps

Pension and OPEB liability adjustment

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Depreciation of property, plant and equipment

Deferred income taxes

Amortization of intangible assets

Unrealized loss (gain) on marketable securities

Stock-based compensation

Amortization of deferred financing costs

Unrealized gain on marketable securities

Loss on intercompany foreign exchange

Technology-related investments gain

Amortization of deferred financing costs

Deferred income taxes

Expenses related to long-term debt refinancing

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Additions of long-lived assets

Business acquisitions

Proceeds from technology-related investments

Proceeds from sale of assets

Investment in equity method investee

Investment in marketable securities

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Repayments from loans to third parties

Investments in technology-related initiatives

Business acquisitions

Net cash used for investing activities

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Repurchases of common stock

Repayments on revolving credit facility

Borrowings on revolving credit facility

Dividend payments

Payments on long-term debt

Payment of acquisition-related contingent liability

Taxes paid related to net share settlement of equity awards

Proceeds from exercise of stock options

Payment of acquisition-related contingent liability

Issuance of long-term debt

Repayments on revolving credit facility

Borrowings on revolving credit facility

Debt financing fees

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Effect of exchange rate changes on cash

Net (decrease) increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Supplemental disclosures:

Interest paid

Income taxes paid

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during period for:

Non-cash investing activities:

Capital expenditures in liabilities

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

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Stock-based compensation

Pension and OPEB liability adjustment

Foreign currency translation adjustment

Available-for-sale securities and interest rate swaps

Interest rate swaps

Issuance of common stock

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Dividends on common stock

Impact of adopting accounting standards

Balance at December 31, 2020

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Interest rate swaps

Issuance of common stock

Repurchase of common stock

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Interest rate swaps

Issuance of common stock

Repurchase of common stock

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Notes to Consolidated Financial Statements

Throughout 2021, the COVID-19 pandemic continued to cause supply chain, labor and raw material constraints that created volatility in Allison Transmission Holdings, Inc.

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.

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.

or the “Company”) 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.

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The Company serves customers through an independent network of approximately 1,600 independent distributor and dealer locations worldwide.

Global markets continue to experience supply chain, labor, energy and raw material constraints as a result of global economic volatility, the war in Ukraine and the COVID-19 pandemic, that impacted the Company's business in 2022 and continue to impact its business performance.

As a result, during 2022 the Company experienced raw material and component part price inflation, increased freight and logistics costs, increased labor costs, production constraints due to labor shortages and increased foreign exchange volatility.

In addition, the Company's net sales for 2022 were negatively impacted as a result of its customers’

The Company expects that commercial vehicle build schedules will continue to be negatively impacted by the availability of components in 2023.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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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’

These reclassifications had no material impact on previously reported net income, total stockholders’

equity or cash flows.

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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.

Estimates include, but are not limited to, sales allowances, government price adjustments, fair market values and future cash flows associated with goodwill, indefinite-lived intangibles, definite-lived 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 benefit (“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.

Due to the uncertainty surrounding global economic conditions, including as a result of government actions to control inflation, the war in Ukraine and the ongoing COVID-19 pandemic, and the resulting impacts on the Company's supply chain, demand for its products, foreign exchange rates, interest rates and the cost and availability of raw materials, labor, energy and transport, 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-lived intangibles, definite-lived intangibles, long-lived asset 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.

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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.

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 (expense) income, net.

Fair Value of Financial Instruments" for more details.

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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

The Company evaluates the remaining useful life of the other intangible assets on a periodic basis to determine whether events or circumstances warrant a revision to the remaining useful life.

Assumptions and estimates about future values and remaining useful lives of the Company's intangible and other long-lived assets are complex and subjective.

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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.

Amortization of deferred financing costs is recorded as part of interest expense and totaled $ 4 million for each of the years ended December 31, 2022, 2021 and 2020 .

Financial Instruments

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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

Under the terms of previous U.S.

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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 had $ 54 million and $ 56 million recorded in the price reduction reserve account as of December 31, 2022 and 2021, respectively.

The Company engages in licensing agreements with certain third parties for the use of the Company’s intellectual property.

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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 classifies shipping and handling billed to customers in Net sales and shipping and handling costs in Cost of sales.

The Company contracts with various third parties to provide engineering services.

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Balances are translated at period-end exchange rates for assets and liabilities and monthly weighted-average exchange rates for revenues and expenses.

The translation gains and losses are stated as a component of

Accumulated Other Comprehensive Loss (“AOCL”) as disclosed in "NOTE 17.

The translation gains and losses are stated as a component of Accumulated Other Comprehensive Loss (“AOCL”) as disclosed in "Note 17.

Accumulated Other Comprehensive Loss”.

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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.

When releasing income tax effects from AOCL, 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.

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The weight given to these considerations depends upon the degree to which they can be objectively verified.

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 re alized upon ultimate settlement with the related tax authority.

Stock-Based Compensation

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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

Performance unit grants are recorded at fair value based on a Monte-Carlo pricing model, and the restrictions lapse on the date the Compensation Committee of the Board of Directors determines the number of shares that shall vest based on the related performance or market condition achievement.

Non-qualified stock option grants are recorded at fair value using a Black-Scholes option pricing model and vest upon the continued performance of services by the option holder on the third anniversary of the grant date for awards under the 2015 Plan.

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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.

Stock option incentive compensation expense recorded was $ 4 million, $ 3 million and $ 2 million for the years ended December 31, 2022, 2021 and 2020 , respectively.

Pension and Post-retirement Benefit Plans

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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 December 2022, the FASB issued authoritative accounting guidance to amend the previously issued guidance regarding highly effective cash flow hedges affected by reference rate reform that was adopted by the Company in 2021 .

The amendments in the update deferred the sunset date of the relief provided in reference rate reform from December 31, 2022 to December 31, 2024.

The Company plans to transition all reference rates prior to December 31, 2024, and the update had no effect on the Company's consolidated financial statements.

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 Company adopted this guidance effective January 1, 2023, and it will be applied prospectively to acquisitions occurring on or after the effective date.

Recently Issued Accounting Pronouncements

In June 2022, the FASB issued authoritative accounting guidance that requires investments in equity securities which are measured at fair value and are subject to contractual sale restrictions to not reflect the contractual sale restriction in its fair value measurement.

The guidance will be effective for the Company in fiscal year 2024, and the Company does not plan to early adopt.

The guidance will be applied prospectively to acquisitions occurring on or after the effective date.

Management does not expect the adoption of this guidance to have an impact on the Company's consolidated financial statements.

Revenue is recognized as each distinct performance obligation within a contract is satisfied.

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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.

The Company recorded no material adjustments based on variable consideration during either of the years ended December 31, 2022, 2021 or 2020.

Net sales are made on credit terms, generally 30 days , based on an assessment of the customer’s creditworthiness.

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for more information including the amount of revenue earned during the year ended December 31, 2022 that had been previously deferred.

The Company had no material contract assets as of either December 31, 2021 and 2020.

The Company had no material contract assets as of either December 31, 2022 or 2021.

The Company has one operating segment and reportable segment.

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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.

ETC contracts are typically 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.

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December 31, 2021

Land and land improvements

Buildings and building improvements

Machinery and equipment

Buildings and building improvements

Special tooling

Construction in progress

Land and land improvements

Total property, plant and equipment

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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.

As of December 31, 2022 and 2021, the carrying amount of the Company’s Goodwill was $ 2,075 million and $ 2,064 million, respectively.

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

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Other intangible assets:

In process research and

In process research and development

Customer relationships –

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Customer relationships –

Non-compete agreement

Amortization of intangible assets was $ 46 million, $ 46 million and $ 52 million for the years ended December 31, 2022, 2021 and 2020, respectively.

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Amortization expense

The following presents a summary of the changes in the goodwill of the Company's single operating and reporting segment (dollars in millions):

Allison Transmission, Inc.

Balance at December 31, 2021

Foreign currency translation

Net current period impact to goodwill

Balance at December 31, 2022

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.

Fair value is the price (exit price) that would be received to sell an asset or paid to transfer a liability in an orderly tran saction 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.

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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.

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.

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 in which all significant value-drivers are observable in active markets 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.

Certain inputs are unobservable or have little or no market data available.

These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

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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 cash equivalents, marketable securities, assets held in the rabbi trust and the deferred compensation obligation represent a market approach in active markets for identical assets that qualify as Level 1 in the fair value hierarchy.

The Company’s valuation techniques used to calculate the fair value of derivative instruments represent a market approach with observable inputs that qualify as Level 2 in the fair value hierarchy.

The Company uses valuations from the issuing financial 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

The floating-to-fixed interest rate swaps are based on the London Interbank Offered Rate (“LIBOR”), which is observable at commonly quoted intervals.

The fair values are included in other current and non-current assets and liabilities in the Consolidated Balance Sheets.

See “Note 9.

Derivatives”

for more information regarding the Company’s interest rate swaps.

The following table summarizes the fair value of the Company’s financial assets and (liabilities) as of December 31, 2022 and 2021 (dollars in millions):

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Marketable securities

Derivative liabilities, net

Derivative assets (liabilities), net

Rabbi trust assets

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Total long-term debt, net

Principal payments required on long-term debt during the nex t five years are as follows:

(dollars in millions)

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”

Principal payments required on long-term debt during the nex t five years are as follows (dollars in millions):

As of December 31, 2022, the Company had $ 2,525 million of indebtedness associated with Allison Transmission, Inc.’s (“ATI”), the Company’s wholly-owned subsidiary, 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 amount of $ 625 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”).

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The fair value is based on quoted Level 2 market prices of the Company’s debt as of December 31, 2022.

It is not expected that the Company would be able to repurchase a significant amount of its debt at these levels.

The difference between the fair value and carrying value of the long-term debt is driven primarily by trends in the financial markets.

Senior Secured Credit Facility

In March 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).

The borrowings under the Senior Secured Credit Facility are collateralized by a lien on substantially all assets of the Company, ATI and certain existing and future U.S.

subsidiary guarantors, as provided in the Credit Agreement.

Interest on the Term Loan, as of December 31, 2022 , 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").

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 rat e 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, 2022, the Company elected to pay the lowest all-in rate of LIBOR plus the applicable margin, or 6.14 % , 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 Credit Agreement requires minimum quarterly principal payments on the Term Loan, 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.

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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.

The Senior Secured Credit Facility also provides a Revolving C redit Facility, net of an allowance for up to $ 75 million in outstanding letters of credit commitments.

Throughout the year ended December 31, 2022, the Company made periodic withdrawals and payments on the Revolving Credit Facility as part of the Company's cash management plans.

The maximum amount outstanding at any time during the year ended December 31, 2022 was $ 75 million.

As of December 31, 2022, the Company had $ 644 million available under the Revolving Credit Facility, net of $ 6 million in letters of cred it.

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.

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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

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 LIBOR Rate.

As of December 31, 2022, the applicable margin for the Revolving Credit Facility was 1.25 %.

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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;

As of December 31, 2022, the Compa ny had no amounts ou tstanding under the Revolving Credit Facility;

however, the Company would have been in compliance with the maximum first lien net leverage ratio, achieving a 0.41 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.

Additionally, within the terms of the Senior Secured Credit Facility, a first lien net leverage ratio at or below 4.00 x resu lts 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, 2022, 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.

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.

The indenture governing the 5.875% Senior Notes contains negative covenants restricting or limiting the Company’s ability to, among other things:

Each series of the Senior Notes is unsecured and is 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.

The indentures governing the Senior Notes contain negative covenants restricting or limiting the Company’s ability to, among other things:

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.

As of December 31, 2022, the Company was in compliance with all covenants under the indentures governing the Senior Notes.

In November 2020, ATI redeemed all of its outstanding 5.0 % Senior Notes due 2024 (the "5.0% Senior Notes"), resulting in a loss of $ 19 million, which included the premium between the purchase price of the 5.0 % Senior Notes and the face value of such notes and the deferred financing fees written off.

ATI may from time to time seek to retire its Senior Notes through cash purchases, exchanges for equity securities, 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 and will be in accordance with the respective indenture governing such notes.

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.

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.

The indenture governing the 3.75% Senior Notes contains negative covenants restricting or limiting the Company’s ability to, among other things:

As of December 31, 2021 , the Company was in compliance with all covenants under the indenture governing the 3.75% Senior Notes.

Some or all of the 4.75 % Senior Notes may be redeemed at any time at redemption prices specified in the indenture governing such notes.

Some or all of the 5.875 % Senior Notes may be redeemed prior to June 1, 2024 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 redemption prices specified in the indenture governing such notes.

ATI may redeem up to 40 % of the 3.75 % Senior Notes prior to January 30, 2024 by paying a price equal to 103.750 % of the principal amount being redeemed.

On or after January 30, 2024 and 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 redemption prices specified in the indenture governing such notes.

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.

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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 %.

Fair Value of Financial Instruments”

for information regarding the fair value of the Company’s interest rate swaps.

As of December 31, 2022, the Company held interest rate swaps as follows (dollars in millions):

Effective Dates

Notional Amount

Weighted Average LIBOR Fixed Rate

September 2019 - September 2025

September 2022 - September 2025

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

Derivatives designated as hedging instruments:

Derivative Assets:

Interest rate swaps

Other current

Other non-current

Total derivatives designated as hedging instruments

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.

Other current assets

Other non-current assets

Total derivative assets

Derivative Liabilities:

Interest rate swaps

Other current liabilities

Other non-current liabilities

Total derivative liabilities

The balance of derivative gains and (losses) recorded in AOCL as of December 31, 2022 and 2021 was $ 18 million and ($ 31 ) million, respectively.

The Company had $ 9 million of derivative gains recorded in AOCL expected to be reclassified to earnings within the next twelve months as of December 31, 2022.

See "Note 17.

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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.

As of December 31, 2022, the Company was not a party to any fin ance 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.

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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.

Certain lease contracts may contain an option to extend or terminate the lease.

The Company considers the economic impact of extension and termination options by contract.

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 determines its discount rates 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.

Lease liabilities are 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, 2022 and 2021 was 4.43 % and 4.25 %, 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.

As of both December 31, 2022 and December 31, 2021, the Compa ny recorded current and non-current operating lease liabilities of $ 4 million and $ 13 m illion, respectively.

The following table reconciles future undiscounted cash flows for operating leases as of December 31, 2022 to total operating lease liabilities:

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The below table depicts the ROU assets held by the Company based on the underlying asset:

Total right-of-use assets

Total ROU assets

The weighted average remaining lease term as of December 31, 2022 and December 31, 2021 was 6.3 years and 6.8 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.

Operating lease expense was $ 5 milli on and $ 6 million for the years ended December 31, 2022 and 2021, respectively, 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 either of the years ended December 31, 2022 or 2021.

The calculation of the Company's ROU assets and lease liabilities did not include cash consideration as of either December 31, 2022 or 2021.

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.

OTHER INCOME (EXPENSE), NET

Other income (expense), net consists of the following (dollars in millions):

During the years ended December 31, 2022 and 2021, the Company recorded $ 4 million and $ 2 million, respectively, of new ROU assets obtained in exchange for lease obligations.

OTHER (EXPENSE) INCOME, NET

Other (expense) income, net consists of the following (dollars in millions):

Years ended December 31,

Unrealized (loss) gain on marketable securities

Loss on foreign exchange

Post-retirement benefit plan amendment credits

Unrealized gain on marketable securities

Technology-related investments gain

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Sales allowances

Taxes payable

Accrued interest payable

Vendor buyback obligation

Taxes payable

Derivative liabilities

Lease liability

Non-trade payables

Construction liability

Derivative liabilities

Other accruals

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.

The Company provides defined benefit pension plans, defined contribution plans and/or other postretirement benefit plans to certain employees globally.

However, contributions to the Company’s various international benefit plans are not material for the periods presented.

The Company’s defined benefit pension plans generally provide benefits of negotiated, stated amounts for each year of service as well as significant supplemental benefits for eligible employees.

The Company sponsors defined contribution retirement savings plans for eligible employees, based on employee location and status.

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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.

Obligations, Funded Status and Recognition in the Consolidated Balance Sheets

The following table provides a reconciliation of the changes in the benefit obligations, funded status and amounts recognized in the Consolidated Balance Sheets for the years ended December 31, 2022 and 2021 (dollars in millions):

Pension Plans

Post-retirement Benefits

Benefit Obligations:

Benefit obligation at beginning of year

Interest cost

Benefits paid

Actuarial gain

Benefit obligation at end of year

Fair Value of Plan Assets:

Fair value of plan assets at beginning of year

Actual return on plan assets

Employer contributions

Benefits paid

Fair value of plan assets at end of year

Net Funded Status

Amounts Recognized in Balance Sheet:

Noncurrent assets

Current liabilities

Noncurrent liabilities

Total liabilities

Accumulated Other Comprehensive Loss:

Prior service credit

Actuarial (gain) loss

The accumulated benefit obligation for the Company's pension plans as of December 31, 2022 and 2021 was $ 159 million and $ 216 million, respectively.

The Company's Pension and OPEB benefit obligations decreased for the year ended December 31, 2022 compared to the year ended December 31, 2021 principally driven by the increase in weighted-average discount rates used to value each respective benefit obligation.

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,

Discount rate

Rate of compensation increase (salaried)

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, 2022.

The Company reviews all actuarial assumptions on an annual basis and in the case of remeasurement.

As of December 31, 2022 and 2021, 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):

As of December 31,

Plans with projected benefit obligation in excess of plan assets:

Projected benefit obligation

Fair value of plan assets

Plans with accumulated benefit obligation in excess of plan assets:

Accumulated benefit obligation

Fair value of plan assets

(1) As of December 31, 2022 and 2021, the hourly defined pension plan had plan assets greater than the p rojected benefit obligation and the accumulated benefit obligation.

Net Periodic Benefit Cost

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):

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comprehensive (income) loss

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 components of net periodic benefit costs other than the service cost component are included in Other (expense) income, 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 (expense) income, 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).

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Expected return on assets

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,

Discount rate

Rate of compensation increase (salaried)

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

Benefit Obligations:

Net benefit obligation at beginning of

Interest cost

Benefits paid

Actuarial (gain) loss

Net benefit obligation at end of year

Fair Value of Plan Assets:

Fair value of plan assets at beginning

Actual return on plan assets

Employer contributions

Benefits paid

Fair value of plan assets at end of

Net Funded Status

As of December 31, 2022, future post-retirement health care costs were forecasted assuming an initial annual increase of up to 7.80 %, decreasing to an annual increase of up to 4.00 % by the year 2046 .

The Company reviews all actuarial assumptions on an annual basis and in the case of remeasurement.

Pension Plan Assets

The Company’s pension plan assets mostly consist of diversified equity securities and diversified debt securities.

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Diversified debt securities

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,

Amounts Recognized in Balance Sheet:

Noncurrent assets

Current liabilities

Noncurrent liabilities

Total (liability) asset

Accumulated Other Comprehensive Loss:

Prior service credit

Actuarial loss

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):

As of December 31,

Plans with projected benefit obligation in excess of plan assets:

Projected benefit obligation

Fair value of plan assets

Plans with accumulated benefit obligation in excess of plan assets:

Accumulated benefit obligation

Fair value of plan assets

(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.

Throughout 2022, the Company’s investment committee has continued to evaluate the investments and take steps toward the established targets.

Expected Contributions and Benefit Payments

Information about expected cash flows for the Company’s pension and post-retirement benefit plans is as follows (dollars in millions):

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Additional discretionary contributions will be made when deemed appropriate to meet the Company’s long-term obligation to the plans.

Non-qualified Deferred Compensation Plan

The Company maintains a non-qualified deferred compensation plan (“Deferred Compensation Plan”) for a select group of management.

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statutory income tax rate

State tax expense

Effect of tax rate changes

Foreign rate differential

State tax expense

Valuation allowance

Foreign rate differential

Uncertain tax position

Non-deductible expenses

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The effective tax rate for the years ended December 31, 2022 and 2021 was 18 % and 23 %, respectively.

The change in the effective tax rate in 2022 was due to enacted state tax rate legislation that resulted in a deferred tax benefit.

Deferred income tax assets and liabilities as of December 31, 2022 and 2021 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.

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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.

The Co mpany 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, 2022, 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.

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Deferred revenue

Capitalized research

Warranty accrual

Stock-based compensation

Unrealized loss on Interest rate hedges

Sales allowances and rebates

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Technology-related investments

Unrealized loss on Interest rate hedges

Total deferred tax assets

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Property, plant and equipment

Post-retirement

Total deferred tax liabilities

Net deferred tax liability

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.

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 will not be realized;

therefore, these deferred tax assets are offset with a valuation allowance of $ 7 million as of D ecember 31, 2022 and $ 11 million as of December 31, 2021.

The 2017 U.S.

Tax Cuts and Jobs Act requires taxpayers to capitalize and amortize specified research and development expenditures over a period of five years for domestic or 15 years for foreign research, beginning with the tax years after December 31, 2021.

As a result, the Company recognized a deferred tax asset of $ 29 million as of December 31, 2022.

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).

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The changes in components of AOCL consisted of the following (dollars in millions):

Tax (Expense)

Reclassification of stranded tax effects

Balance at December 31, 2018

Foreign currency translation

Pension and OPEB liability adjustment

Available-for-sale securities

Net current period other comprehensive (loss) income

Balance at December 31, 2019

Foreign currency translation

Pension and OPEB liability adjustment

Interest rate swaps

AOCL as of December 31, 2019

Other comprehensive (loss) income before reclassifications

Amounts reclassified from AOCL

Income tax benefit

Net current period other comprehensive (loss) income

Balance at December 31, 2020

Foreign currency translation

Pension and OPEB liability adjustment

Interest rate swaps

AOCL as of December 31, 2020

Other comprehensive income (loss) before reclassifications

Amounts reclassified from AOCL

Income tax expense

Net current period other comprehensive income (loss)

AOCL as of December 31, 2021

Other comprehensive income (loss) before reclassifications

Amounts reclassified from AOCL

Income tax expense

Net current period other comprehensive income (loss)

Balance at December 31, 2022

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AOCL Components

reclassified from

Affected line item

in the consolidated

statements of

comprehensive

Amounts reclassified

Affected line item in the

consolidated statements of comprehensive income

Interest rate swaps

1 unchanged sentence

Prior service credit

Other income (expense), net

Other (expense) income, net

Total reclassifications, before tax

5 unchanged sentences

AOCL Components

reclassified from

Affected line item

in the consolidated

statements of

comprehensive

Amounts reclassified

Affected line item in the

consolidated statements of comprehensive income

Interest rate swaps

1 unchanged sentence

Prior service credit

Other income (expense), net

Other (expense) income, net

Recognized actuarial loss

Other (expense) income, net

Total reclassifications, before tax

Income before income taxes

Income tax expense

Income tax benefit

Income tax expense

2 unchanged sentences

AOCL Components

reclassified from

Affected line item

in the consolidated

statements of

comprehensive

Amounts reclassified

Affected line item in the

consolidated statements of

comprehensive income

Interest rate swaps

1 unchanged sentence

Prior service credit

Other income (expense), net

Other (expense) income, net

Recognized actuarial loss

Other income (expense), net

Other (expense) income, net

Total reclassifications, before tax

3 unchanged sentences

Total reclassifications

The Company revised its disclosure of amounts reclassified from AOCL related to its interest rate swaps and the income tax benefit (expense) attributed to those reclassifications for the periods ended December 31, 2021 and 2020, which resulted in a decrease to the previously disclosed total reclassifications from AOCL.

The Company believes these revisions to the disclosures are immaterial to the consolidated financial statements.

Prior service cost and actuarial loss are included in the computation of the Company’s net periodic benefit cost.

4 unchanged sentences

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.

The Company has an agreement with the Environmental Protection Agency to perform remedial activities at the Company’s Indianapolis, Indiana manufacturing facilities related to historical soil and groundwater contamination.

As of December 31, 2022 , the Company had a liability recorded in the am ount of $ 3 million.

Claims, Disputes, and Litigation

5 unchanged sentences

As of December 31, 2022 and 2021, the Company employed approximately 3,500 and 3,400 employees, respectively, with 89 % and 90 %, 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.

Approximately 46 % of the Company’s U.S.

employees were represented by unions and subject to a collective bargaining agreement as of December 31, 2022 and 2021.

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.

Three cu stomers accounted for 10% or more of net sales within the last three years presented.

Years ended December 31,

1 unchanged sentence

(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.

Percentages for 2022 and 2021 include net sales to Traton SE and Navistar International Corporation.

Percentages for 2020 include net sales to Navistar International Corporation only .

Two cust omers accounted for 10% or more of outstanding accounts receivable within the last two years presented.

% of accounts receivable

1 unchanged sentence

As of December 31,

(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, 2022, 2021 or 2020 .

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”).

The Company's current stock repurchase program (the "Repurchase Program") was authorized by the Board of Directors in 2016.

On February 24, 2022, the Board of Directors authorized the Company to repurchase an additional $ 1,000 million of its common stock, bringing the total amount authorized under the Repurchase Program to $ 4,000 million.

During 2022, the Company repurchased approximately $ 278 million of its common stock under the Repurchase Program, leaving $ 1,035 million of authorized repurchases remaining under the Repurchase Program as of December 31, 2022.

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 h as 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.

EARNINGS PER SHARE

The Company presents both basic and diluted earnings per share (“EPS”) amounts.

Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the reporting period.

Diluted EPS is calculated by dividing net income by the weighted average number of common shares and common equivalent shares outstanding during the reporting period that are calculated using the treasury stock method for stock-based awards.

The treasury stock method assumes that the Company uses the proceeds from the exercise of awards to repurchase common stock at the average market price during the period.

The assumed proceeds under

the treasury stock method include the purchase price that the grantee will pay in the future and compensation cost for future service that the Company has not yet recognized.

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):

5 unchanged sentences

Diluted earnings per share attributable to common

The dilutive impact of stock-based compensation is calculated using the treasury stock method.

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.

During the years ended December 31, 2022, 2021 and 2020, 2 millio n, 1 million and 1 million of outstanding stock options were excluded from the diluted EPS calculation because they were anti-dilutive.

therefore, the sum of the four quarters’

EPS may not equal full-year EPS.

GEOGRAPHIC INFORMATION

2 unchanged sentences

United States

United Kingdom

T he Company had the following net long-lived assets by country (dollars in millions):

1 unchanged sentence

United States

On March 31, 2 022 , the Company acquired transmission portfolio assets of India-based AVTEC Ltd.'s off-highway business and AVTEC's Madras Export Procession Zone off-highway component machining business, for $ 23 m illion in cash.

The Company accounted for this transaction under the acquisition method in accordance with authoritative guidance on business combinations.

Control was obtained as of the purchase date through the purchase agreement.

The acquired business was integrated into the Company's single operating segment.

The purchase price allocation for this transaction resulted in the recognition of goodwill, intangible assets and property, plant and equipment of $ 13 million, $ 8 million a nd $ 2 million, respectively.

The Company has completed its i nitial accounting for the fair value of the acquired assets and liabilities, and any adjustments identified in the measurement period, which will not exceed one year from the acquisition date, will be accounted for prospectively.

Allison Transmission Holdings, Inc.

60 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity