What changed in this filing

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Item 1. Financial Statements

2021-04-29 compared with 2020-10-29 · 109 added, 266 removed, 369 unchanged (50% of the section changed)

3 unchanged sentences

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

September 30,

Current Assets

33 unchanged sentences

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Cost of sales

3 unchanged sentences

Interest expense, net

Other income, net

Other income (expense), net

Income before income taxes

7 unchanged sentences

(unaudited, dollars in millions)

Nine Months Ended September 30,

Three Months Ended March 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

5 unchanged sentences

Amortization of deferred financing costs

Expenses related to long-term debt refinancing

Allowance for doubtful accounts

Changes in assets and liabilities:

5 unchanged sentences

Additions of long-lived assets

Business acquisitions

Net cash used for investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

Borrowings on revolving credit facility

Payments on revolving credit facility

Repurchases of common stock

Dividend payments

Payments on long-term debt

Payment of acquisition-related contingent liability

Taxes paid related to net share settlement of equity awards

Payments on long-term debt

Proceeds from exercise of stock options

Issuance of long-term debt

Debt financing fees

Borrowings on revolving credit facility

Payments on revolving credit facility

Net cash used for financing activities

Effect of exchange rate changes on cash

Net increase (decrease) in cash and cash equivalents

Net decrease in cash and cash equivalents

Cash and cash equivalents at beginning of period

7 unchanged sentences

(unaudited, dollars in millions)

Three months ended

Non-voting Common Stock

4 unchanged sentences

Stockholders' Equity

Balance at June 30, 2019

Balance at December 31, 2019

Stock-based compensation

5 unchanged sentences

Dividends on common stock

Balance at September 30, 2019

Balance at June 30, 2020

Stock-based compensation

Pension and OPEB liability adjustment

Foreign currency translation adjustment

Interest rate swaps

Repurchase of common stock

Dividends on common stock

Balance at September 30, 2020

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

Allison Transmission Holdings, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited, dollars in millions)

Nine months ended

Non-voting Common Stock

Preferred Stock

Paid-in Capital

Accumulated (Deficit) Income

Accumulated Other Comprehensive (Loss) Income, net of tax

Stockholders' Equity

Balance at March 31, 2020

Balance at December 31, 2020

2 unchanged sentences

Foreign currency translation adjustment

Available-for-sale securities and interest rate swaps

Issuance of common stock

Repurchase of common stock

Dividends on common stock

Impact of adopting accounting standards

Balance at September 30, 2019

Balance at December 31, 2019

Stock-based compensation

Pension and OPEB liability adjustment

Available-for-sale securities and interest rate swaps

Interest rate swaps

Issuance of common stock

1 unchanged sentence

Dividends on common stock

Balance at September 30, 2020

Balance at March 31, 2021

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

8 unchanged sentences

The Company serves customers through an independent network of approximately 1,400 independent distributor and dealer locations worldwide.

In March 2020, the World Health Organization categorized the novel coronavirus ("COVID-19") as a pandemic, and it continues to impact the United States and other major markets in which the Company operates across the world, resulting in severe disruptions to global markets and supply chains, significant uncertainty and a weaker global outlook.

The effects of the pandemic on the global economy began having a material impact on demand for the Company’s products and on the Company’s results of operations during the second quarter 2020 as our suppliers and customers reduced or halted production.

Although the Company’s suppliers and customers have restarted production, production disruptions due to more localized COVID-19 outbreaks as well as the continued uncertainty and weaker global outlook continued to have a material impact on demand for the Company’s products and on the Company’s results of operations during the third quarter 2020.

To limit the spread of COVID-19, governments have taken various actions including travel bans and restrictions, quarantines, curfews, stay-at-home orders, social distancing guidelines and business shutdowns and closures.

Despite these disruptions, the Company has continued its manufacturing operations throughout 2020 allowing the Company to deliver its products to customers without interruption.

However, the Company’s global manufacturing facilities have cut back on operating levels and shifts as a result of government orders, the Company’s inability to obtain component parts from suppliers and/or decreased customer demand and in certain locations temporarily suspended operations in the second quarter.

The Company is taking 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, including increased frequency of cleaning and disinfecting of facilities, social distancing, occupancy limits, mask wearing requirements, remote working when possible, travel restrictions and limitations on visitor access to facilities.

The Company is also working to align operations, programs and spending across our entire business with current conditions, including reduced compensation expense through restructuring initiatives of both hourly and salary employees related to voluntary and involuntary separation programs implemented during the second quarter of 2020, furloughs of a portion of our workforce, reducing overtime, and assessing the timing and cadence of various capital investments and product development initiatives.

In March 2020, the World Health Organization categorized the novel coronavirus ("COVID-19") as a pandemic.

In the first quarter of 2021, the COVID-19 pandemic continued to create volatility in the Company’s business performance and impact global markets and supply chains.

To limit the spread of COVID-19, governments continue to take various actions including the administration of vaccinations, travel bans and restrictions, quarantines, curfews, stay-at-home orders, social distancing guidelines and business shutdowns and closures.

The Company is also continuing to take a variety of measures to promote the safety and security of its employees and to maintain operations with as minimal impact as possible to its stakeholders, including increased frequency of cleaning and disinfecting of facilities, social distancing, occupancy limits, mask wearing requirements, onsite testing, remote working, travel restrictions, limitations on visitor access to facilities and, most recently, administration of vaccinations at the Company’s corporate headquarters.

As a result, the Company has been able to continue its manufacturing operations and deliver its products to customers with minimal disruptions.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

4 unchanged sentences

The condensed consolidated financial statements herein consist of all wholly-owned domestic and foreign subsidiaries with all significant intercompany transactions eliminated.

These condensed consolidated financial statements present the financial position, results of comprehensive income, cash flows and statements of stockholders’ equity of the Company.

The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange Commission on February 27, 2020.

These condensed consolidated financial statements present the financial position, results of compreh ensive income, cash flows and statements of stockholders’ equity of the Company.

Certain immaterial reclassifications have been made in the condensed consolidated financial statements of prior periods to conform to the current period presentation.

These reclassifications had no impact on previously reported net income, total stockholders’ equity or cash flows.

The interim period financial results for the three and nine month periods presented are not necessarily indicative of results to be expected for any other interim period or for the entire year.

The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2020 as filed with the Secur ities and Exchange Commission on February 18 , 20 2 1 .

The interim period financial results for the three - month period s presented are not necessarily indicative of results to be expected for any other interim period or for the entire year.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses.

Estimates include, but are not limited to, sales allowances, government price adjustments, fair market values and future cash flows associated with goodwill, indefinite life intangibles, definite life intangibles, long-lived asset impairment tests, useful lives for depreciation and amortization, warranty liabilities, environmental liabilities, determination of discount and other assumptions for pension and other post-retirement benefit 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 life intangibles, definite life intangibles, long-lived asset impairment tests, useful lives for depreciation and amortization, warranty liabilities, environmental liabilities, determination of discount rate and other assumptions for pension and other post-retirement benefit 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 the 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 and other assumptions for pension and other post-retirement benefit expense and income taxes.

Due to the continued uncertainty related to the ongoing COVID-19 pandemic, actual results could differ materially from the 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 other post-retirement benefit 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.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued authoritative accounting guidance on the presentation of financial assets at the net amount expected to be collected, which guidance has subsequently been amended.

The guidance also requires the disclosure of financing receivables disaggregated by the year of origination.

The Company adopted this guidance using a modified retrospective approach effective January 1, 2020 .

The adoption of this guidance did not have a material impact on the Company's condensed consolidated financial statements.

In August 2018, the FASB issued authoritative accounting guidance amending disclosure requirements for certain assets subject to fair value measurement.

The guidance allows the Company to reduce the amount of disclosure on transfers between Level 1 and Level 2 assets.

The Company adopted this guidance effective January 1, 2020 .

The adoption of this guidance did not have a material impact on the Company's condensed consolidated financial statements.

In August 2018, the FASB issued authoritative accounting guidance on accounting for implementation costs in hosting arrangements to align these costs with existing guidance for internally developed software.

The stage of implementation must be assessed to determine if costs should be capitalized or expensed, and capitalized costs should be expensed during the noncancellable term of the agreement.

The Company adopted this guidance on a prospective basis effective January 1, 2020 .

The adoption of this guidance did not have a material impact on the Company's condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

In August 2018, the FASB issued authoritative accounting guidance amending disclosure requirements for the Company's defined benefit pension plans and other postretirement benefit plan.

The guidance will be effective for the Company in 2021, and the Company does not plan to early adopt.

Management is currently identifying and evaluating the impact of this guidance on the Company's disclosures and condensed consolidated financial statements.

In March 2020, the Financial Accounting Standards Board (“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 condensed 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 guidance will be effective for the Company in 2021, and the Company does not plan to early adopt.

Management is currently evaluating the impact of this guidance on the Company's condensed consolidated financial statements.

In March 2020, the FASB issued authoritative accounting guidance regarding highly effective cash flow hedges affected by reference rate reform.

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 guidance may be adopted in any interim period between March 2020 and December 2020, with the amendments applied prospectively.

Upon adoption, 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 Company’s existing contracts with no impact on the Company’s condensed consolidated financial statements.

The Company adopted this guidance effective January 1, 2021 .

The adoption of this guidance did not have a material impact on the Company's condensed consolidated financial statements.

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

9 unchanged sentences

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 adjustments based on variable consideration during the three and nine months ended September 30, 2020 and 2019.

The Company recorded no material adjustments based on variable consideration during the three months ended March 31, 2021 and 2020.

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

For certain goods or services, the Company receives consideration prior to satisfying the related performance obligation.

Such consideration is recorded as a contract liability in current and non-current Deferred revenue as of September 30, 2020 and December 31, 2019.

See Note J, “Deferred Revenue” for more information including the amount of revenue earned during the three and nine months ended September 30, 2020 and 2019 that had been previously deferred.

The Company had no contract assets as of September 30, 2020 and December 31, 2019.

Such consideration is recorded as a contract liability in current and non-current Deferred revenue as of March 31, 2021 and December 31, 2020.

See Note J, “Deferred Revenue” for more information, including the amount of revenue earned during the three months ended March 31, 2021 and 2020 that had been previously deferred.

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

The Company has one operating segment and reportable segment.

The Company is in one line of business, which is the manufacture and distribution of vehicle propulsion solutions.

The following presents disaggregated revenue by categories that best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors (dollars in millions):

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

North America On-Highway

5 unchanged sentences

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

September 30,

Purchased parts and raw materials

6 unchanged sentences

GOODWILL AND OTHER INTANGIBLE ASSETS

As of September 30, 2020 and December 31, 2019, the carrying amount of the Company’s Goodwill was $ 2,063 million and $ 2,041 million, respectively.

As of March 31, 2021 and December 31, 2020, the carrying value of the Company’s Goodwill was $ 2,064 million.

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

September 30, 2020

March 31, 2021

December 31, 2020

6 unchanged sentences

Customer relationships — defense

As of September 30, 2020 and December 31, 2019, the carrying value of the Company’s Goodwill and Intangible assets, net was $ 3,038 million and $ 3,083 million, respectively.

As of March 31, 2021 and December 31, 2020, the carrying value of the Company’s Goodwill and Intangible assets, net was $ 3,015 million and $ 3,027 million, respectively.

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

Amortization expense

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

Balance at December 31, 2018

Net current period impact to goodwill

Balance at September 30, 2019

Balance at December 31, 2019

Measurement period adjustments

Walker Die Casting net working capital settlement

Net current period impact to goodwill

Balance at September 30, 2020

See NOTE T, "Acquisitions" for more information on certain changes in the Company's goodwill and other intangible assets.

FAIR VALUE OF FINANCIAL INSTRUMENTS

17 unchanged sentences

At each balance sheet date, the Company performs an analysis of all instruments subject to authoritative accounting guidance and includes, in Level 3, all of those whose fair value is based on significant unobservable inputs.

As of September 30, 2020 and December 31, 2019, the Company did no t have any Level 3 financial assets or liabilities.

As of March 31, 2021 and December 31, 2020, the Company did no t have any Level 3 financial assets or liabilities.

The Company’s assets and liabilities that are measured at fair value include cash equivalents, derivative instruments, assets held in a rabbi trust and a deferred compensation obligation.

7 unchanged sentences

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 LIBOR, which is observable at commonly quoted intervals.

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

The following table summarizes the fair value of the Company’s financial assets and (liabilities) as of September 30, 2020 and December 31, 2019 (dollars in millions):

The following table summarizes the fair value of the Company’s financial assets and (liabilities) as of March 31, 2021 and December 31, 2020 (dollars in millions):

Fair Value Measurements Using

4 unchanged sentences

Observable Inputs

September 30,

Cash equivalents

1 unchanged sentence

Deferred compensation obligation

Derivative liabilities

Derivative liabilities, net

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

September 30,

Long-term debt:

Senior Notes, fixed 5.0 %, due 2024

Senior Secured Credit Facility Term Loan, variable, due 2026

1 unchanged sentence

Senior Notes, fixed 5.875 %, due 2029

Senior Notes, fixed 3.75 %, due 2031

Total long-term debt

2 unchanged sentences

Total long-term debt, net

As of September 30, 2020, the Company had $ 2,540 million of indebtedness associated with Allison Transmission, Inc.’s (“ATI”), the Company’s wholly-owned subsidiary, 5.0 % Senior Notes due September 2024 (“5.0% Senior Notes”), ATI’s 4.75 % Senior Notes due October 2027 (“4.75% Senior Notes”), ATI’s 5.875 % Senior Notes due June 2029 (“5.875% Senior Notes,” and, together with the 5.0% Senior Notes and 4.75% Senior Notes, the “Senior Notes”) and the Second Amended and Restated Credit Agreement dated as of March 29, 2019 (the “Credit Agreement”), governing ATI’s new term loan facility in the amount of $ 640 million due March 2026 (“New Term Loan”) and ATI’s new revolving credit facility with commitments in the amount of $ 600 million due September 2024 (“New Revolving Credit Facility” and, together with the New Term Loan, the “New Senior Secured Credit Facility”).

The fair value of the Company’s long-term debt obligations as of September 30, 2020 was $ 2,599 million.

The fair value is based on quoted Level 2 market prices of the Company’s debt as of September 30, 2020.

As of March 31, 2021, the Company had $ 2,536 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 new term loan facility in the amount of $ 636 million due March 2026 (“New Term Loan”) and ATI’s new revolving credit facility with commitments in the amount of $ 650 million due September 2025 (“New Revolving Credit Facility” and, together with the New Term Loan, the “New Senior Secured Credit Facility”).

The fair value of the Company’s long-term debt obligations as of March 31, 2021 was $ 2,580 million.

The fair value is based on quoted Level 2 market prices of the Company’s debt as of March 31, 2021.

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

1 unchanged sentence

New 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 New 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 New 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 Condensed Consolidated Statement of Comprehensive Income for the nine months ended September 30, 2019 and recorded $ 5 million as new deferred financing fees in the Condensed Consolidated Balance Sheet in the first quarter of 2019.

In October 2019, ATI entered into an amendment to the Credit Agreement with the lenders under its New Senior Secured Credit Facility to lower the applicable margins on the New Term Loan by 0.25 %.

The October 2019 amendment was treated as a modification to the New 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 New Revolving Credit Facility by $ 50 million to $ 650 million.

The amendment also extended the New Revolving Credit Facility termination date from September 2024 to September 2025 .

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

subsidiary guarantors, with certain exceptions set forth in the Credit Agreement, and ATI’s capital stock and all of the capital stock or other equity interests held by the Company, ATI and each of ATI’s existing and future U.S.

subsidiary guarantors (subject to certain limitations for equity interest of foreign subsidiaries and other exceptions set forth in the Credit Agreement).

Interest on the New Term Loan, as of September 30, 2020, is either (a) 1.75 % over a LIBOR rate on deposits in U.S.

dollars for one-, two-, three- or six-month periods (or twelve-month or shorter periods if, at the time of the borrowing, available from all relevant lenders) (the "LIBOR Rate"), or (b) 0.75 % over the greater of the prime lending rate as quoted by the administrative agent, the LIBOR Rate for an interest period of one month plus 1.00 % and the federal funds effective rate published by the Federal Reserve Bank of New York plus 0.50 %, subject to a 1.00 % floor (the "Base Rate").

As of September 30, 2020, the Company elected to pay the lowest all-in rate of LIBOR plus the applicable margin, or 1.90 %, on the New Term Loan.

subsidiary guarantors (subject to certain limitations for

equity interest of foreign subsidiaries and other exceptions set forth in the Credit Agreement).

Interest on the New Term Loan, as of March 31, 2021 , is either (a) 1.75 % over a LIBOR rate on deposits in U.S.

dollars for one-, two-, three- or six-month periods (or twelve-month or shorter periods if, at the time of the borrowing, available from all relevant lenders) (the "LIBOR Rate"), or (b) 0.75 % over the greater of the prime lending rate as quoted by the administrative agent, the LIBOR R ate for an interest period of one month plus 1.00 % and the federal funds effective rate published by the Federal Reserve Bank of New York plus 0.50 %, subject to a 1.00 % floor (the "Base Rate").

As of March 31, 2021 , the Company elected to pay the lowest all-in rate of LIBOR plus the applicable margin, or 1.86 % , on the New Term Loan.

The Credit Agreement requires minimum quarterly principal payments on the New 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 New Term Loan through its maturity date of March 2026 is $ 2 million.

As of September 30, 2020, there had been no payments required for certain net cash proceeds of non-ordinary course asset sales and casualty and condemnation events.

As of March 31, 2021 , there had been no payments required for certain net cash proceeds of non-ordinary course asset sales and casualty and condemnation events.

The remaining principal balance is due upon maturity.

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

Throughout the nine months ended September 30, 2020, the Company made periodic withdrawals and payments on the New Revolving Credit Facility as part of the Company's debt and cash management plans.

The maximum amount outstanding under the New Revolving Credit Facility at any time during the nine months ended September 30, 2020 was $ 500 million.

As of September 30, 2020, the Company had $ 595 million available under the New Revolving Credit Facility, net of $ 5 million in letters of credit.

As of March 31, 2021, the Company had $ 645 million available under the New Revolving Credit Facility, net of $ 5 million in letters of credit.

Borrowings under the New Revolving Credit Facility bear interest at a variable base rate plus an applicable margin based on the Company’s first lien net leverage ratio.

2 unchanged sentences

and when the Company’s first lien net leverage ratio is equal to or below 3.50 x, interest on the New Revolving Credit Facility is (y) 0.25 % over the Base Rate or (z) 1.25 % over the LIBOR Rate.

As of September 30, 2020, the applicable margin for the New Revolving Credit Facility was 1.25 % on the New Revolving Credit Facility.

As of March 31, 2021, the applicable margin for the New Revolving Credit Facility was 1.25 %.

In addition, there is an annual commitment fee, based on the Company’s first lien net leverage ratio, on the average unused revolving credit borrowings available under the New Revolving Credit Facility.

As of September 30, 2020, the commitment fee is 0.25 %.

As of March 31, 2021, the commitment fee is 0.25 %.

Borrowings under the New Revolving Credit Facility are payable at the option of the Company throughout the term of the New Senior Secured Credit Facility with the balance due in September 2025.

The New 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 New Revolving Credit Facility at the end of a fiscal quarter.

As of September 30, 2020, the Company had no amounts outstanding under the New Revolving Credit Facility;

As of March 31, 2021, the Company had no amounts outstanding under the New Revolving Credit Facility;

however, the Company would have been in compliance with the maximum first lien net leverage ratio, achieving a 0.49 x ratio.

1 unchanged sentence

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 September 30, 2020, the Company was in compliance with all covenants under the Credit Agreement.

As of March 31, 2021, the Company was in compliance with all covenants under the Credit Agreement.

4 .75% Senior Notes

3 unchanged sentences

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 September 30, 2020, the Company was in compliance with all covenants under the indenture governing the 5.0% Senior Notes.

As of March 31, 2021, the Company was in compliance with all covenants under the indenture governing the 4.75 % Senior Notes.

5.875% Senior Notes

3 unchanged sentences

As of September 30, 2020, the Company was in compliance with all covenants under the indenture governing the 4.75% Senior Notes.

As of March 31, 2021, the Company was in compliance with all covenants under the indenture governing the 5.875 % Senior Notes.

3.75% Senior Notes

In March 2019, ATI completed an offering of $ 500 million of the 5.875 % 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 borrowings under the New 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 Condensed Consolidated Balance Sheet in the first quarter of 2019.

The net proceeds from the offering, together with cash on hand, were used to redeem all of ATI’s outstanding 5.0% Senior Notes due 2024 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.

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 New 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 New Senior Secured Credit Facility.

2 unchanged sentences

As of September 30, 2020 , the Company was in compliance with all covenants under the indenture governing the 5.875% Senior Notes.

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

The Company is subject to interest rate risk related to the New Senior Secured Credit Facility and enters into interest rate swaps that are based on LIBOR to manage a portion of this exposure.

2 unchanged sentences

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 September 30, 2020, the Company held interest rate swaps effective from September 2019 to September 2025 with notional values totaling $ 250 million and a weighted average LIBOR fixed rate of 3.04 %, interest rate swaps effective from September 2019 to September 2022 with notional values totaling $ 250 million and a weighted average LIBOR fixed rate of 3.01 % and interest rate swaps effective from September 2022 to September 2025 with notional values totaling $ 250 million and a weighted average LIBOR fixed rate of 2.82 %.

As of March 31, 2021, the Company held interest rate swaps effective from September 2019 to September 2025 with notional values totaling $ 250 million and a weighted average LIBOR fixed rate of 3.04 %, interest rate swaps effective from September 2019 to September 2022 with notional values totaling $ 250 million and a weighted average LIBOR fixed rate of 3.01 % and interest rate swaps effective from September 2022 to September 2025 with notional values totaling $ 250 million and a weighted average LIBOR fixed rate of 2.82 %.

See NOTE F, “Fair Value of Financial Instruments” for information regarding the fair value of the Company’s interest rate swaps.

1 unchanged sentence

Balance Sheet Location

September 30,

Derivatives designated as hedging instruments:

3 unchanged sentences

Total derivatives designated as hedging instruments

The balance of derivative losses recorded in AOCL as of September 30, 2020 was $ 64 million.

See NOTE O “Accumulated Other Comprehensive Loss” for information regarding activity recorded as a component of AOCL during the three and nine months ended September 30, 2020.

As of September 30, 2020, the Company had $ 14 million of derivative losses recorded in AOCL expected to be reclassified to earnings within the next twelve months.

The balance of derivative losses recorded in AOCL as of March 31, 2021 was $ 46 million.

See NOTE O, “Accumulated Other Comprehensive Loss” for information regarding activity recorded as a component of AOCL during the three months ended March 31, 2021 and 2020.

As of March 31, 2021, the Company had $ 14 million of derivative losses recorded in AOCL expected to be reclassified to earnings within the next twelve months.

PRODUCT WARRANTY LIABILITIES

As of September 30, 2020, current and non-current product warranty liabilities were $ 34 million and $ 31 million, respectively.

As of September 30, 2019, current and non-current product warranty liabilities were $ 25 million and $ 29 million, respectively.

As of March 31, 2021, current and non-current product warranty liabilities were $ 32 million and $ 30 million, respectively.

As of March 31, 2020, current and non-current product warranty liabilities were $ 25 million and $ 26 million, respectively.

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

Beginning balance

2 unchanged sentences

Ending balance

During the third quarter of 2020, the Company recorded a $ 23 million product warranty adjustment to address a transmission performance issue associated with shift quality in a defined population of products.

As a result of this performance issue, the Company created a field action program in 2019 dedicated to the defined population of products and reviewed, assessed and made adjustments to the liability on a quarterly basis.

The product warranty adjustment during the third quarter 2020 was the result of additional claims data and field information becoming available.

DEFERRED REVENUE

As of September 30, 2020, current and non-current deferred revenue was $ 33 million and $ 107 million, respectively.

As of September 30, 2019, current and non-current deferred revenue was $ 35 million and $ 103 million, respectively.

As of March 31, 2021, current and non-current deferred revenue was $ 35 million and $ 107 million, respectively.

As of March 31, 2020, current and non-current deferred revenue was $ 34 million and $ 106 million, respectively.

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

Beginning balance

1 unchanged sentence

Ending balance

Deferred revenue recorded in current and non-current liabilities related to ETC as of September 30, 2020 was $ 28 million and $ 89 million, respectively.

Deferred revenue recorded in current and non-current liabilities related to ETC as of September 30, 2019 was $ 28 million and $ 82 million, respectively.

Deferred revenue recorded in current and non-current liabilities related to ETC as of March 31, 2021 was $ 29 million and $ 88 million, respectively.

Deferred revenue recorded in current and non-current liabilities related to ETC as of March 31, 2020 was $ 27 million and $ 87 million, respectively.

Contracts are assessed by the Company to determine if the contract conveys the right to control an identified asset in exchange for consideration during a period of time.

The Company classifies all identified leases as operating or finance leases.

As of September 30, 2020, the Company was not a party to any finance leases.

The Company classifies all identified leases as either operating or finance leases.

As of March 31, 2021, the Company was not a party to any finance leases.

Contracts that contain leases are assessed to determine if the consideration in the contract is related to a lease component, non-lease component or other components not related to the lease.

3 unchanged sentences

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.

1 unchanged sentence

The Company believes this rate effectively represents a borrowing rate the Company could obtain on a debt instrument possessing similar terms as the lease.

The lease liability is classified between current and non-current liabilities based on the terms of the underlying leases.

The weighted average discount rate on operating leases as of September 30, 2020 and December 31, 2019 was 4.37 % and 4.36 %, respectively.

As of September 30, 2020, the Company recorded current and non-current operating lease liabilities of $ 4 million and $ 17 million, respectively.

Any lease liability is classified between current and non-current liabilities based on the terms of the underlying leases.

The weighted average discount rate on operating leases as of both March 31, 2021 and December 31, 2020 was 4.37 %.

As of March 31, 2021, the Company recorded current and non-current operating lease liabilities of $ 4 million and $ 16 million, respectively.

As of December 31, 2020, the Company recorded current and non-current operating lease liabilities of $ 4 million and $ 17 million, respectively.

The following table reconciles total operating lease liabilities as of September 30, 2020 to future undiscounted cash flows for operating leases:

September 30,

The following table reconciles total operating lease liabilities as of March 31, 2021 to future undiscounted cash flows for operating leases:

Total lease payments

2 unchanged sentences

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

September 30,

Total right-of-use assets

The weighted average remaining lease term as of September 30, 2020 and September 30, 2019 was 7.59 years and 6.89 years, respectively.

Operating lease expense was $ 1 million in each of the three months ended September 30, 2020 and 2019 and $ 4 million in each of the nine months ended September 30, 2020 and 2019, recorded within Selling, general and administrative expense and Engineering - research and development on the Company's Condensed Consolidated Statements of Comprehensive Income.

There was no short-term operating lease expense for the three and nine months ended September 30, 2020 and 2019.

The calculation of the Company's ROU assets and lease liabilities did not include cash consideration as of September 30, 2020 and December 31, 2019.

During the nine months ended September 30, 2020 and 2019, the Company recorded $ 2 million and $ 10 million, respectively, of new ROU assets obtained in exchange for lease obligations.

The weighted average remaining lease term as of March 31, 2021 and March 31, 2020 was 7.4 years and 7.7 years, respectively.

Operating lease expense was $ 1 million in each of the three months ended March 31, 2021 and 2020, recorded within Selling, general and administrative expense and Engineering - research and development on the Company's Condensed Consolidated Statements of Comprehensive Income.

There was no short-term operating lease expense for the three months ended March 31, 2021 and 2020.

The calculation of the Company's ROU assets and lease liabilities did not include cash consideration as of March 31, 2021 and December 31, 2020.

During the three months ended March 31, 2021 and 2020, the Company recorded zero and $ 1 million, respectively, of new ROU assets obtained in exchange for lease obligations.

OTHER CURRENT LIABILITIES

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

September 30,

Accrued interest payable

Payroll and related costs

Accrued interest payable

Taxes payable

3 unchanged sentences

Lease liability

Construction liability

Vendor liability

Non-trade payables

5 unchanged sentences

For the Three Months

Ended September 30,

Ended March 31,

For the Three Months

Ended September 30,

Net periodic benefit cost (credit):

Interest cost

Expected return on assets

Prior service credit

Net periodic benefit cost (credit)

Pension Plans

Post-retirement Benefits

For the Nine Months

Ended September 30,

For the Nine Months

Ended September 30,

Ended March 31,

Net periodic benefit cost (credit):

3 unchanged sentences

Net periodic benefit cost (credit)

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

For the three and nine months ended September 30, 2020, the Company recorded total tax expense of $ 21 million and $ 70 million, respectively.

The effective tax rate for the three and nine months ended September 30, 2020 was 21 % and 23 %, respectively.

For the three and nine months ended September 30, 2019, the Company recorded total tax expense of $ 45 million and $ 137 million, respectively.

The effective tax rate for the three and nine months ended September 30, 2019 was 23 % and 22 %, respectively.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law making several changes to the U.S.

The changes include, but are not limited to, increasing the threshold on the amount of deductible interest expense, allowing companies to carryback certain net operating losses, increasing the amount of net operating loss carryforwards that corporations can use to offset taxable income, and making technical changes related to the accounting of qualified improvement property.

Some of the tax law changes included in the CARES Act are retroactive.

While the Company has reviewed the elections set forth in the CARES Act, its provision for income taxes for the three and nine months ended September 30, 2020 does not reflect the effect of any of these elections.

The effects, both individually and in the aggregate, are not expected to be material at this time.

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

For the three months ended March 31, 2021, the Company recorded total income tax expense of $ 34 million.

The effective tax rate for the three months ended March 31, 2021 was 22 %.

For the three months ended March 31, 2020, the Company recorded total income tax expense of $ 42 million.

The effective tax rate for the three months ended March 31, 2020 was 23 %.

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 authoritative accounting guidance.

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The Company has determined, based on the evaluation of both objective and subjective evidence available, that this valuation allowance is necessary and that it is more likely than not that the deferred tax assets are not fully realizable.

In accordance with the FASB’s authoritative guidance on accounting for income taxes, the Company has recorded a liability for unrecognized tax benefits related to a 2010 Research and Development Credit as of September 30, 2020 and December 31, 2019.

The accounting guidance prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

2 unchanged sentences

The following tables reconcile changes in AOCL by component (net of tax, dollars in millions):

Three months ended

AOCL as of June 30, 2019

AOCL as of December 31, 2019

Other comprehensive loss before reclassifications

Amounts reclassified from AOCL

Income tax benefit

Net current period other comprehensive loss

AOCL as of September 30, 2019

AOCL as of June 30, 2020

AOCL as of March 31, 2020

AOCL as of December 31, 2020

Other comprehensive income before reclassifications

Amounts reclassified from AOCL

Income tax benefit

Net current period other comprehensive (loss) income

AOCL as of September 30, 2020

Nine months ended

AOCL as of December 31, 2018

Other comprehensive loss before reclassifications

Amounts reclassified from AOCL

Reclassification of stranded tax effects

Net current period other comprehensive income (loss)

AOCL as of September 30, 2019

AOCL as of December 31, 2019

Other comprehensive loss before reclassifications

Amounts reclassified from AOCL

Net current period other comprehensive loss

AOCL as of September 30, 2020

The Company reclassified $ 7 million, as of January 1, 2019, from AOCL to retained earnings for the stranded tax effects resulting from the U.S.

Tax Cuts and Jobs Act.

This reclassification had zero net effect on total stockholders' equity.

The Company utilizes the portfolio securities approach when releasing income tax effects from AOCL for its investment securities.

AOCL as of March 31, 2021

Amounts reclassified from AOCL

1 unchanged sentence

Three months ended

September 30, 2020

March 31, 2021

Three months ended

September 30, 2019

March 31, 2020

Affected line item in the Condensed

3 unchanged sentences

Prior service cost

Other income, net

Other income (expense), net

Total reclassifications, before tax

3 unchanged sentences

Total reclassifications, net of tax

Amounts reclassified from AOCL

AOCL Components

Nine months ended

September 30, 2020

Nine months ended

September 30, 2019

Affected line item in the Condensed

Consolidated Statements of

Comprehensive Income

Amortization of benefit items:

Prior service cost

Other income, net

Total reclassifications, before tax

Income before income taxes

Income tax expense

Total reclassifications

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

3 unchanged sentences

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.

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 March 31, 2021, the Company had a liability recorded in the amount of $ 3 million.

Claims, Disputes, and Litigation

8 unchanged sentences

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.

For each of the three and nine months ended September 30, 2020, there were 1 million outstanding stock options excluded from the diluted EPS calculation because they were anti-dilutive.

For each of the three and nine months ended September 30, 2019, there were no outstanding stock options excluded from the diluted EPS calculation because they were anti-dilutive.

For the three months ended March 31, 2021, there were 1 million outstanding stock options excluded from the diluted EPS calculation because they were anti-dilutive.

For the three months ended March 31, 2020, there were no outstanding stock options excluded from the diluted EPS calculation because they were anti-dilutive.

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

Weighted average shares of common stock outstanding

8 unchanged sentences

The Repurchase Program may be modified, suspended or discontinued at any time at the Company’s discretion.

During the three and nine months ended September 30, 2020, the Company repurchased $ 16 million and $ 196 million, respectively, of its common stock under the Repurchase Program, leaving $ 856 million of authorized repurchases remaining under the Repurchase Program as of September 30, 2020.

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

On May 7, 2019, the Company entered into a stock repurchase agreement with Ashe Capital Management, LP to repurchase 4,977,043 shares of the Company's common stock for approximately $ 232 million.

William Harker, a member of the Company's Board of Directors until May 9, 2019, is the President and Co-Founder of Ashe Capital Management, LP.

The shares were repurchased under the Repurchase Program.

The purchase was funded with cash on hand and borrowings under the New Revolving Credit Facility.

The shares were subsequently retired.

AxleTech Electric Vehicle Systems Division Acquisition

In the second quarter of 2020, the Company finalized its purchase price allocation related to the acquisition of the AxleTech electric vehicle systems division by recording a measurement period adjustment which resulted in a $ 25 million increase to goodwill and a corresponding decrease to in-process research and development as of June 30, 2020.

The measurement period adjustment reflects facts and circumstances that existed as of the date of acquisition.

The measurement period has ended for this acquisition, and the purchase price allocation is complete.

Walker Die Casting Acquisition

On September 9, 2019, the Company acquired the assets of Walker Die Casting, Inc.

(“Walker Die Casting”), an aluminum castings company, and C&R Tool and Engineering, Inc., a supplier of metal-working tools, for $ 103 million in cash, resulting in a net purchase price of $ 99 million after the effective settlement of $ 4 million of pre-existing accounts payable.

In the second quarter of 2020, the Company received a $ 4 million net working capital settlement from Walker Die Casting, reducing the purchase price to $ 95 million.

The measurement period has ended for this acquisition, and the purchase price allocation is complete.

During the three months ended March 31, 2021, the Company repurchased $ 96 million of its common stock under the Repurchase Program, leaving $ 731 million of authorized repurchases remaining under the Repurchase Program as of March 31, 2021.

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-Q

Item 1. Financial Statements