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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File No. 001-35456
ALLISON TRANSMISSION HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
https://cdn.kscope.io/0118189c38440c9a217fff1b2a64694b-logo2a04.jpg 
Delaware
26-0414014
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer
Identification Number)
One Allison Way
 

Indianapolis,
IN
46222
(Address of Principal Executive Offices)
(Zip Code)

(317) 242-5000
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol(s)
 
Name of Each Exchange
on which Registered
Common stock, $0.01 par value
 
ALSN
 
New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Table of Contents

Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No   x
As of July 15, 2019, there were 120,507,491 shares of Common Stock outstanding.


Table of Contents

INDEX
 
 
 
Page
 
 
 
 
 
Item 1.
4-6
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7-23
 
 
 
Item 2.
24-35
 
 
 
Item 3.
36
 
 
 
Item 4.
37
 
 
 
 
 
 
 
 
Item 1.
38
 
 
 
Item 1A.
38
 
 
 
Item 2.
38
 
 
 
Item 6.
39
 
 
 
 
40
 



3

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements
Allison Transmission Holdings, Inc.
Condensed Consolidated Balance Sheets
(unaudited, dollars in millions, except share and per share data)
 
June 30, 2019
 
December 31, 2018
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
153

 
$
231

Accounts receivable – net of allowance for doubtful accounts of $2 and $1, respectively
322

 
279

Inventories
188

 
170

Other current assets
42

 
45

Total Current Assets
705

 
725

Property, plant and equipment, net
490

 
466

Intangible assets, net
1,079

 
1,066

Goodwill
2,019

 
1,941

Other non-current assets
62

 
39

TOTAL ASSETS
$
4,355

 
$
4,237

LIABILITIES
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
208

 
$
169

Product warranty liability
27

 
26

Current portion of long-term debt
6

 

Deferred revenue
34

 
34

Other current liabilities
193

 
197

Total Current Liabilities
468

 
426

Product warranty liability
32

 
40

Deferred revenue
99

 
88

Long-term debt
2,514

 
2,523

Deferred income taxes
355

 
329

Other non-current liabilities
219

 
172

TOTAL LIABILITIES
3,687

 
3,578

Commitments and contingencies (see NOTE P)

 

STOCKHOLDERS’ EQUITY
 
 
 
Common stock, $0.01 par value, 1,880,000,000 shares authorized, 120,503,416 shares issued and outstanding and 126,251,266 shares issued and outstanding, respectively
1

 
1

Non-voting common stock, $0.01 par value, 20,000,000 shares authorized, none issued and outstanding

 

Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding

 

Paid in capital
1,796

 
1,788

Accumulated deficit
(1,082
)
 
(1,100
)
Accumulated other comprehensive loss, net of tax
(47
)
 
(30
)
TOTAL STOCKHOLDERS’ EQUITY
668

 
659

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY
$
4,355


$
4,237


The accompanying notes are an integral part of the condensed consolidated financial statements.
4

Table of Contents

Allison Transmission Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Income
(unaudited, dollars in millions, except per share data)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Net sales
$
737

 
$
711

 
$
1,412

 
$
1,374

Cost of sales
348

 
337

 
664

 
658

Gross profit
389


374


748


716

Selling, general and administrative
93

 
93

 
177

 
185

Engineering — research and development
37

 
33

 
68

 
61

Operating income
259


248


503


470

Interest expense, net
(33
)
 
(30
)
 
(69
)
 
(60
)
Other income, net
3

 
4

 
6

 
3

Income before income taxes
229


222


440


413

Income tax expense
(48
)
 
(48
)
 
(92
)
 
(88
)
Net income
$
181

 
$
174

 
$
348

 
$
325

Basic earnings per share attributable to common stockholders
$
1.47

 
$
1.30

 
$
2.81

 
$
2.37

Diluted earnings per share attributable to common stockholders
$
1.46

 
$
1.29

 
$
2.78

 
$
2.37

Comprehensive income, net of tax
$
167

 
$
158

 
$
331

 
$
313



The accompanying notes are an integral part of the condensed consolidated financial statements.
5

Table of Contents

Allison Transmission Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited, dollars in millions)

 
Six months ended June 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
348

 
$
325

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of intangible assets
43

 
44

Depreciation of property, plant and equipment
37

 
39

Deferred income taxes
33

 
25

Stock-based compensation
8

 
6

Expenses related to long-term debt refinancing
5

 

Amortization of deferred financing costs
2

 
3

Allowance for doubtful accounts
2

 
1

Other

 
3

Changes in assets and liabilities:
 
 
 
Accounts receivable
(44
)
 
(110
)
Inventories
(16
)
 
(17
)
Accounts payable
23

 
46

Other assets and liabilities
(8
)
 
1

Net cash provided by operating activities
433

 
366

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Business acquisitions
(133
)
 

Additions of long-lived assets
(44
)
 
(29
)
Net cash used for investing activities
(177
)
 
(29
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Payments on long-term debt
(1,148
)
 
(28
)
Issuance of long-term debt
1,148

 

Repurchases of common stock
(285
)
 
(370
)
Payments on revolving credit facility
(90
)
 

Borrowings on revolving credit facility
90

 

Dividend payments
(37
)
 
(41
)
Debt financing fees
(12
)
 
(1
)
Taxes paid related to net share settlement of equity awards
(4
)
 
(4
)
Proceeds from exercise of stock options
4

 
5

Net cash used for financing activities
(334
)
 
(439
)
Effect of exchange rate changes on cash

 
(1
)
Net decrease in cash and cash equivalents
(78
)
 
(103
)
Cash and cash equivalents at beginning of period
231

 
199

Cash and cash equivalents at end of period
$
153

 
$
96

Supplemental disclosures:
 
 
 
Interest paid
$
53

 
$
57

Income taxes paid
$
55

 
$
46


The accompanying notes are an integral part of the condensed consolidated financial statements.
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Allison Transmission Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(UNAUDITED)


NOTE A. OVERVIEW
Overview
Allison Transmission Holdings, Inc. and its subsidiaries (“Allison” or the “Company”) design and manufacture commercial and defense fully-automatic transmissions. The business was founded in 1915 and has been headquartered in Indianapolis, Indiana since inception. Allison was an operating unit of General Motors Corporation from 1929 until 2007, when Allison once again became a stand-alone company. In March 2012, Allison began trading on the New York Stock Exchange under the symbol, “ALSN”.
The Company has approximately 2,900 employees and 12 different product lines. Although approximately 77% of revenues were generated in North America in 2018, the Company has a global presence by serving customers in Europe, Asia, South America and Africa. The Company serves customers through an independent network of approximately 1,400 independent distributor and dealer locations worldwide.

NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The condensed consolidated financial statements have been prepared in accordance with accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the condensed consolidated financial statements do not include all information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. The information herein reflects all normal recurring material adjustments, which are, in the opinion of management, necessary for the fair statement of the results for the periods presented. The condensed consolidated financial statements herein consist of all wholly-owned domestic and foreign subsidiaries with all significant intercompany transactions eliminated.
These condensed consolidated financial statements present the financial position, results of comprehensive income and cash flows of the Company. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2018 as filed with the Securities and Exchange Commission (“SEC”) on February 26, 2019. The interim period financial results for the three and six month periods presented are not necessarily indicative of results to be expected for any other interim period or for the entire year.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Estimates include, but are not limited to, sales allowances, government price adjustments, fair market values and future cash flows associated with goodwill, indefinite life intangibles, 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 and contingencies. The Company’s accounting policies involve the application of judgments and assumptions made by management that include inherent risks and uncertainties. Actual results could differ materially from these estimates. Changes in estimates are recorded in results of operations in the period that the events or circumstances giving rise to such changes occur.
Business Combinations
The Company uses the acquisition method to account for business combinations. The assets acquired and liabilities assumed are recorded at their respective estimated fair value at the date of acquisition. Any excess purchase price over the fair values of the acquired net assets is recorded as goodwill. Determining the fair values of assets acquired and liabilities assumed requires management's judgment and includes the use of estimates with respect to timing and amount of future cash flows, market rate assumptions, actuarial assumptions, appropriate discount rates and other relevant factors.

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Recently Adopted Accounting Pronouncements
In June 2018, the Financial Accounting Standards Board ("FASB") issued authoritative accounting guidance on accounting for nonemployee awards for goods or services received by a company. The Company adopted this guidance effective January 1, 2019. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
In February 2018, the FASB issued authoritative accounting guidance on transfers of stranded balances in accumulated other comprehensive loss ("AOCL") to retained earnings. The passage of the U.S. Tax Cuts and Jobs Act by the U.S. federal government in December 2017 and existing GAAP requirements to adjust deferred tax assets and liabilities for changes in tax laws or rates created stranded balances in AOCL on deferred tax assets and liabilities previously recorded as a component to AOCL. The guidance applies to companies affected by these stranded balances and allows a reclassification of these balances to retained earnings. The Company adopted this guidance effective January 1, 2019. As a result of the adoption of this guidance, the Company recorded an adjustment that reclassified $7 million of AOCL to retained earnings as of January 1, 2019.
In February 2016, the FASB issued authoritative accounting guidance on lease accounting, which guidance was subsequently amended. The guidance requires lessees to present right-of-use assets and lease liabilities on the balance sheet for all leases not considered short-term leases. Short-term leases are leases with a lease term of 12 months or less as long as the leases do not include options to purchase the underlying assets that the lessee is reasonably certain to exercise. The guidance also introduces new disclosure requirements for leasing arrangements. In July 2018, the FASB issued additional authoritative guidance on this topic giving lessees an optional adoption approach under which the impact of the adoption of the guidance would be shown as of the date of adoption. Management elected to adopt the guidance using this optional alternative method. The Company adopted this guidance effective January 1, 2019. The Company recorded non-financial right-of-use ("ROU") assets of $14 million, including $1 million of assets transferred from the balance recorded as prepaid lease expense under the prior guidance, and current and non-current lease liabilities of $4 million and $9 million, respectively. The adoption of this guidance did not have a material impact on the Company's opening retained earnings. See Note K, "Leases" for further details.
Recently Issued Accounting Pronouncements
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 guidance will be effective for the Company in fiscal year 2020, and the Company does not plan to early adopt. Management does not expect the adoption of this guidance to have a material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued authoritative accounting guidance amending disclosure requirements for the Company's defined benefit pension plans and other post-retirement benefit plan. The guidance will be effective for the Company in fiscal year 2021, and the Company does not plan to early adopt. Management is currently evaluating the impact of this guidance on the Company's consolidated financial statements.
In 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 guidance will be effective for the Company in fiscal year 2020, and the Company does not plan to early adopt. Management does not expect the adoption of this guidance to have a material impact on the Company's consolidated financial statements.
In June 2016, the FASB issued authoritative accounting guidance on the presentation of financial assets at the net amount expected to be collected, which guidance was subsequently amended. The guidance also requires the disclosure of financing receivables disaggregated by the year of origination. The guidance will be effective for the Company in fiscal year 2020. Management is currently evaluating the impact of this guidance on the Company's consolidated financial statements by identifying and reviewing financial assets which could be subject to credit losses.

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NOTE C. REVENUE
Revenue is recognized as each distinct performance obligation within a contract is satisfied. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. The Company enters into long-term supply agreements (“LTSAs”) and distributor agreements with certain customers. The LTSAs and distributor agreements do not include committed volumes until underlying purchase orders are issued; therefore, the Company determined that purchase orders are the contract with a customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when the performance obligation is satisfied, as there is no right of return.
Some of the Company's contracts include multiple performance obligations, most commonly the sale of both a transmission and Extended Transmission Coverage ("ETC"). The Company allocates the contract’s transaction price to each performance obligation based on the standalone selling price of each distinct good or service in the contract.
The Company may also use volume based discounts and rebates as marketing incentives in the sales of both transmissions and service parts, which are accounted for as variable consideration. The Company records the impact of the incentives as a reduction to revenue when it is determined that the adjustment is not likely to reverse, historically on a quarterly basis. 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 six months ended June 30, 2019 and 2018.
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 June 30, 2019 and December 31, 2018. See Note J, “Deferred Revenue” for more information including the amount of revenue earned during the three and six months ended June 30, 2019 that had been previously deferred. The Company had no contract assets as of June 30, 2019 and December 31, 2018.
The following presents disaggregated revenue by categories that best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors (dollars in millions):
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
North America On-Highway
$
398

 
$
343

 
$
775

 
$
682

North America Off-Highway
9

 
31

 
23

 
64

Defense
37

 
43

 
69

 
80

Outside North America On-Highway
106

 
101

 
200

 
192

Outside North America Off-Highway
40

 
24

 
67

 
36

Service Parts, Support Equipment and Other
147

 
169

 
278

 
320

Total Net Sales
$
737


$
711

 
$
1,412

 
$
1,374





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NOTE D. INVENTORIES
Inventories consisted of the following components (dollars in millions):
 
June 30, 2019
 
December 31, 2018
Purchased parts and raw materials
$
95

 
$
82

Work in progress
9

 
8

Service parts
53

 
48

Finished goods
31

 
32

Total inventories
$
188


$
170


Inventory components shipped to third parties, primarily cores, parts to re-manufacturers, and parts to contract manufacturers, which the Company has an obligation to buy back, are included in purchased parts and raw materials, with an offsetting liability in Other current liabilities. See NOTE L, “Other Current Liabilities” for more information.

NOTE E. GOODWILL AND OTHER INTANGIBLE ASSETS
As of June 30, 2019 and December 31, 2018, the carrying amount of the Company’s Goodwill was $2,019 million and $1,941 million, respectively.
The following presents a summary of other intangible assets (dollars in millions):
 
June 30, 2019
 
December 31, 2018
 
Intangible
assets, gross
 
Accumulated
amortization
 
Intangible
assets, net
 
Intangible
assets, gross
 
Accumulated
amortization
 
Intangible
assets, net
Other intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Trade name
$
790

 
$

 
$
790

 
$
790

 
$

 
$
790

In process research and development
50

 

 
50

 

 

 

Customer relationships — commercial
835

 
(641
)
 
194

 
832

 
(619
)
 
213

Proprietary technology
479

 
(454
)
 
25

 
476

 
(434
)
 
42

Customer relationships — defense
62

 
(42
)
 
20

 
62

 
(41
)
 
21

Total
$
2,216


$
(1,137
)

$
1,079


$
2,160


$
(1,094
)

$
1,066


As of June 30, 2019 and December 31, 2018, the net carrying value of the Company’s Goodwill and other intangible assets, net was $3,098 million and $3,007 million, respectively. See NOTE T, "Acquisitions" for details on the increase in the Company's Goodwill and other intangible assets.
Amortization expense related to other intangible assets for the next five fiscal years is expected to be (dollars in millions):
 
2020
 
2021
 
2022
 
2023
 
2024
Amortization expense
$
51

 
$
45

 
$
44

 
$
43

 
$
7




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Table of Contents

NOTE F. FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with the FASB’s authoritative accounting guidance on fair value measurements, fair value is the price (exit price) that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company primarily applies the market approach for recurring fair value measurements and utilizes the best available information that maximizes the use of observable inputs and minimizes the use of unobservable inputs. The Company is able to classify fair value balances based on the observability of those inputs. The accounting guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy defined by the relevant guidance are as follows:
Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, listed equities and publicly traded bonds.
Level 2 — Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes financial instruments that are valued using quoted prices in markets that are not active and those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.
Level 3 — Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. At each balance sheet date, the Company performs an analysis of all instruments subject to authoritative accounting guidance and includes, in Level 3, all of those whose fair value is based on significant unobservable inputs. As of June 30, 2019 and December 31, 2018, the Company did not have any Level 3 financial assets or liabilities.
The Company’s assets and liabilities that are measured at fair value include cash equivalents, derivative instruments, assets held in a rabbi trust and a deferred compensation obligation. The Company’s cash equivalents consist of short-term U.S. government backed securities. The Company’s derivative instruments consist of interest rate swaps. The Company’s assets held in the rabbi trust consist principally of publicly available mutual funds and target date retirement funds. The Company’s deferred compensation obligation is directly related to the fair value of assets held in the rabbi trust.
The Company’s valuation techniques used to calculate the fair value of cash and cash equivalents, assets held in the rabbi trust and the deferred compensation obligation represent a market approach in active markets for identical assets that qualify as Level 1 in the fair value hierarchy. The Company’s valuation techniques used to calculate the fair value of derivative instruments represent a market approach with observable inputs that qualify as Level 2 in the fair value hierarchy.
The Company uses valuations from the issuing financial institutions for the fair value measurement of interest rate swaps. The floating-to-fixed interest rate swaps are based on 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 Condensed Consolidated Balance Sheets.

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The following table summarizes the fair value of the Company’s financial assets and (liabilities) as of June 30, 2019 and December 31, 2018 (dollars in millions):
 
Fair Value Measurements Using
 
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
TOTAL
 
June 30,
2019
 
December 31, 2018
 
June 30,
2019
 
December 31, 2018
 
June 30,
2019
 
December 31, 2018
Cash equivalents
$
20

 
$
111

 
$

 
$

 
$
20

 
$
111

Rabbi trust assets
12

 
9

 

 

 
12

 
9

Deferred compensation obligation
(12
)
 
(9
)
 

 

 
(12
)
 
(9
)
Derivative liabilities

 

 
(34
)
 
(9
)
 
(34
)
 
(9
)
Total
$
20


$
111


$
(34
)

$
(9
)

$
(14
)

$
102



NOTE G. DEBT
Long-term debt and maturities are as follows (dollars in millions):
 
June 30,
2019
 
December 31, 2018
Long-term debt:
 
 
 
Senior Secured Credit Facility Term Loan, variable, due 2022
$

 
$
1,148

Senior Notes, fixed 5.0%, due 2024
1,000

 
1,000

Senior Secured Credit Facility Term Loan, variable, due 2026
648

 

Senior Notes, fixed 4.75%, due 2027
400

 
400

Senior Notes, fixed 5.875%, due 2029
500

 

Total long-term debt
$
2,548

 
$
2,548

Less: current maturities of long-term debt
6

 

deferred financing costs, net
28

 
25

Total long-term debt, net
$
2,514

 
$
2,523


As of June 30, 2019, the Company had $2,548 million of indebtedness associated with Allison Transmission, Inc.’s (“ATI”), the Company’s wholly-owned subsidiary, 5.0% Senior Notes due September 2024 (“5.0% Senior Notes”), ATI’s 4.75% Senior Notes due October 2027 (“4.75% Senior Notes”), 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 $648 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 June 30, 2019 was $2,593 million. The fair value is based on quoted Level 2 market prices of the Company’s debt as of June 30, 2019. 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.

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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 six months ended June 30, 2019 and recorded $5 million as new deferred financing fees in the Condensed Consolidated Balance Sheet in the first quarter of 2019.
In March 2018, ATI entered into an amendment with the term loan lenders under the Prior Senior Secured Credit Facility to lower the applicable margins on the Prior Term Loan by 0.25%. The March 2018 amendment was treated as a modification to the Prior Senior Secured Credit Facility under GAAP, and thus the Company recorded $1 million as new deferred financing fees in the first quarter of 2018.
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 June 30, 2019, is either (a) 2.00% 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) 1.00% 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 June 30, 2019, the Company elected to pay the lowest all-in rate of LIBOR plus the applicable margin, or 4.48%, on the New Term Loan. The Credit Agreement requires minimum quarterly principal payments on the New Term Loan starting with the fiscal quarter ending September 30, 2019, as well as prepayments from certain net cash proceeds of non-ordinary course asset sales and casualty and condemnation events, the incurrence of certain debt and from a percentage of excess cash flow, if applicable. The minimum required quarterly principal payment on the New Term Loan through its maturity date of March 2026 is $2 million. As of June 30, 2019, 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 six months ended June 30, 2019, the Company made periodic withdrawals and payments on the New Revolving Credit Facility as part of the Company's debt management plans. The maximum amount outstanding at any time during the six months ended June 30, 2019 was $90 million. As of June 30, 2019, the Company had $578 million available under the New Revolving Credit Facility, net of $22 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. When the Company’s first lien net leverage ratio is above 4.00x, interest on the New Revolving Credit Facility is (a) 0.75% over the Base Rate or (b) 1.75% over the LIBOR Rate; when the Company’s first lien net leverage ratio is equal to or less than 4.00x and above 3.50x, interest on the New 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 3.50x, 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 June 30, 2019, 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 June 30, 2019, 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 2024.
The New Senior Secured Credit Facility requires the Company to maintain a specified maximum first lien net leverage ratio of 5.50x when revolving loan commitments remain outstanding on the New Revolving Credit Facility at the end of a fiscal quarter. As of June 30, 2019, 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

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leverage ratio, achieving a 0.43x ratio. Additionally, within the terms of the New Senior Secured Credit Facility, a first lien net leverage ratio at or below 4.00x results in the elimination of excess cash flow payments on the New 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 June 30, 2019, the Company was in compliance with all covenants under the Credit Agreement.
5.0% Senior Notes
The 5.0% Senior Notes are unsecured and are guaranteed by each of ATI’s domestic subsidiaries that is a borrower under or guarantees the 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. None of ATI’s domestic subsidiaries currently guarantee its obligations under the New Senior Secured Credit Facility, and therefore none of ATI’s domestic subsidiaries currently guarantee the 5.0% Senior Notes. The indenture governing the 5.0% Senior Notes contains negative covenants restricting or limiting the Company’s ability to, among other things: incur or guarantee additional indebtedness, incur liens, pay dividends on, redeem or repurchase the Company’s capital stock, make certain investments, permit payment or dividend restrictions on certain of the Company’s subsidiaries, sell assets, engage in certain transactions with affiliates, and consolidate or merge or sell all or substantially all of the Company’s assets. As of June 30, 2019, the Company was in compliance with all covenants under the indenture governing the 5.0% Senior Notes.
4.75% Senior Notes
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 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. None of ATI’s domestic subsidiaries currently guarantee its obligations under the New 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 June 30, 2019, 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 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 5.875% 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. None of ATI’s domestic subsidiaries currently guarantee its obligations under the New Senior Secured Credit Facility, and therefore none of ATI’s domestic subsidiaries currently guarantee the 5.875% Senior Notes. The indenture governing the 5.875% Senior Notes contains negative covenants restricting or limiting the Company’s ability to, among other things: incur or guarantee additional indebtedness, incur liens, pay dividends on, redeem or repurchase the Company’s capital stock, make certain investments, permit payment or dividend restrictions on certain of the Company’s subsidiaries, sell assets, engage in certain transactions with affiliates, and consolidate or merge or sell all or substantially all of the Company’s assets. As of June 30, 2019, the Company was in compliance with all covenants under the indenture governing the 5.875% Senior Notes.



14

Table of Contents

NOTE H. DERIVATIVES
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. The interest rate swaps are designated as cash flow hedges that qualify for hedge accounting under the hypothetical derivative method. Fair value adjustments are recorded as a component of AOCL in the Condensed Consolidated Balance Sheets. Balances in AOCL are reclassified to earnings when transactions related to the underlying risk are settled. During the first quarter of 2019, the Company entered into $250 million of interest rate swaps and designated them as cash flow hedges under the hypothetical derivative method. As of June 30, 2019, 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.
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):
 
 
 
Fair Value
 
Balance Sheet Location
 
June 30, 2019
 
December 31, 2018
Derivatives designated as hedging instruments:
 
 
 
 
 
Interest rate swaps
Other current liabilities
 
$
5

 
$
1

 
Other non-current liabilities
 
29

 
8

Total derivatives designated as hedging instruments
 
 
$
34

 
$
9


The balance of derivative losses recorded in AOCL as of June 30, 2019 was $34 million. See NOTE O “Accumulated Other Comprehensive Loss” for information regarding activity recorded as a component of AOCL during the three and six months ended June 30, 2019. The Company had $3 million derivative losses recorded in AOCL expected to be reclassified to earnings within the next twelve months as of June 30, 2019.

NOTE I. PRODUCT WARRANTY LIABILITIES
As of June 30, 2019, current and non-current product warranty liabilities were $27 million and $32 million, respectively. As of June 30, 2018, current and non-current product warranty liabilities were $28 million and $37 million, respectively.
Product warranty liability activities consist of the following (dollars in millions):
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Beginning balance
$
64

 
$
62

 
$
66

 
$
55

Payments
(6
)
 
(10
)
 
(12
)
 
(19
)
Increase in liability (warranty issued during period)
6

 
12

 
11

 
21

Net adjustments to liability
(5
)
 
1

 
(6
)
 
8

Ending balance
$
59

 
$
65

 
$
59

 
$
65




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Table of Contents

NOTE J. DEFERRED REVENUE
As of June 30, 2019, current and non-current deferred revenue was $34 million and $99 million, respectively. As of June 30, 2018, current and non-current deferred revenue was $38 million and $87 million, respectively.
Deferred revenue activity consists of the following (dollars in millions):
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Beginning balance
$
131

 
$
112

 
$
122

 
$
110

Increases
11

 
23

 
29

 
33

Revenue earned
(9
)
 
(10
)
 
(18
)
 
(18
)
Ending balance
$
133

 
$
125

 
$
133

 
$
125


Deferred revenue recorded in current and non-current liabilities related to ETC as of June 30, 2019 was $29 million and $77 million, respectively. Deferred revenue recorded in current and non-current liabilities related to ETC as of June 30, 2018 was $29 million and $71 million, respectively.

NOTE K. LEASES
Adoption of New Lease Guidance
New authoritative guidance for leases was adopted by the Company effective January 1, 2019 using the optional transition method. Balances as of June 30, 2019 and results for the three and six months ended June 30, 2019 are presented in conformity with the new authoritative accounting guidance, while prior period balances and results are presented in conformity with prior accounting guidance for leases.
The Company recognized right-of-use ("ROU") assets for operating leases of $14 million and current and non-current operating lease liabilities of $4 million and $9 million, respectively, as of January 1, 2019. At the time of adoption, the Company was not party to any finance leases.
The Company elected practical expedients allowed by this guidance which included not reassessing existing or expired contracts for leases, not reassessing existing or expired leases for classification, not reassessing indirect costs for any existing leases and using hindsight when determining lease terms.
Lessee Accounting
Contracts are assessed by the Company to determine if the contract conveys the right to control an identified asset in exchange for consideration during a period of time. The Company classifies all identified leases as operating or finance leases. As of June 30, 2019, the Company was not a party to any finance leases. Contracts that contain leases are assessed to determine if the consideration in the contract is related to a lease component, non-lease component or other components not related to the lease. Lease components are recorded as ROU assets and lease liabilities while any non-lease component is expensed as incurred. The consideration in the contract related to other components not related to the lease is allocated among the lease component and the non-lease component, as applicable, based on the stand-alone selling price of the lease and non-lease components.
Certain lease 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 utilizing current secured financing rates based on the length of the lease period plus the Company's margin over LIBOR on the New 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. 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 June 30, 2019 was 4.33%.


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Table of Contents

As of December 31, 2018, future undiscounted payments under operating leases (as defined by prior guidance) are expected to be as follows for the next five annual periods and thereafter following December 31, 2018:
 
December 31, 2018
2019
$
4

2020
3

2021
2

2022
1

2023
1

Thereafter

Total
$
11


As of June 30, 2019, 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 June 30, 2019 to future undiscounted cash flows for operating leases:
 
June 30, 2019
2019
$
3

2020
5

2021
3

2022
2

2023
2

Thereafter
9

Total lease payments
$
24

Less: Interest
3

Present value of lease liabilities
$
21


ROU assets are calculated as the related lease liability adjusted for lease incentives, prepayments and the effect of escalating lease payments on period expense. The below table depicts the ROU assets held by the Company based on the underlying asset:
 
June 30, 2019
Buildings
$
19

Land
1

Vehicles
1

Equipment
1

Total right-of-use assets
$
22


The weighted average remaining lease term as of June 30, 2019 was 7.08 years.
Operating lease expense was $2 million and $3 million for the three and six months ended June 30, 2019, respectively, and 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 six months ended June 30, 2019.
The calculation of the the Company's ROU assets and lease liabilities did not include cash consideration as of June 30, 2019. During the three and six months ended June 30, 2019, the Company added $8 million of new ROU assets obtained through non-cash transactions.


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Table of Contents

NOTE L. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (dollars in millions):
 
As of June 30,
2019
 
As of December 31, 2018
Payroll and related costs
$
62

 
$
81

Sales allowances
28

 
39

Accrued interest payable
28

 
19

Vendor buyback obligation
15

 
15

Taxes payable
10

 
10

Vendor liability
10

 
5

Defense price reduction reserve
9

 
9

Derivative liabilities
5

 
1

Non-trade payables
4

 
3

Lease liability
4

 

Other accruals
18

 
15

Total
$
193

 
$
197



NOTE M. EMPLOYEE BENEFIT PLANS
Components of net periodic benefit cost (credit) consist of the following (dollars in millions):
 
Pension Plans
 
Post-retirement Benefits
 
Three months ended June 30,
 
Three months ended June 30,
 
2019
 
2018
 
2019
 
2018
Net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
3

 
$
3

 
$
1

 
$
1

Interest cost
2

 
1

 
1

 
1

Expected return on assets
(3
)
 
(2
)
 

 

Prior service credit

 

 
(4
)
 
(4
)
Net periodic benefit cost (credit)
$
2


$
2


$
(2
)

$
(2
)
 
Pension Plans
 
Post-retirement Benefits
 
Six months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
5

 
$
6

 
$
1

 
$
1

Interest cost
4

 
3

 
2

 
2

Expected return on assets
(5
)
 
(4
)
 

 

Prior service credit

 

 
(7
)
 
(7
)
Net periodic benefit cost (credit)
$
4

 
$
5

 
$
(4
)
 
$
(4
)

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.

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Table of Contents



NOTE N. INCOME TAXES
For the three and six months ended June 30, 2019, the Company recorded total tax expense of $48 million and $92 million, respectively. The effective tax rate for both the three and six months ended June 30, 2019 was 21%. For the three and six months ended June 30, 2018, the Company recorded total tax expense of $48 million and $88 million, respectively. The effective tax rate for three and six months ended June 30, 2018 was 22% and 21%, respectively.
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. Appropriate consideration is given to all positive and negative evidence related to that realization. This assessment considers, among other matters, the nature, frequency and severity of recent losses, forecasts of future profitability, the duration of statutory carry-forward periods, experience with tax attributes expiring unused, and tax planning alternatives. The weight given to these considerations depends upon the degree to which they can be objectively verified.
The Company continues to provide for a valuation allowance on certain of its foreign deferred tax assets and an anticipated capital loss carryforward. 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 June 30, 2019 and December 31, 2018. 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. The Company's returns will remain subject to examination by the various taxing authorities for the duration of the applicable statute of limitations (generally three years from the later of the date of filing or the due date of the return).


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Table of Contents

NOTE O. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables reconcile changes in AOCL by component (net of tax, dollars in millions):
 
Three months ended
 
Pension and OPEB liability adjustment
 
Available-for-sale securities and interest rate swaps
 
Foreign
currency
items
 
Total
AOCL as of March 31, 2018
$
5

 
$

 
$
(16
)
 
$
(11
)
Other comprehensive loss before reclassifications

 
(2
)
 
(12
)
 
(14
)
Amounts reclassified from AOCL
(4
)
 

 

 
(4
)
Income tax
2

 

 

 
2

Net current period other comprehensive loss
$
(2
)
 
$
(2
)
 
$
(12
)
 
$
(16
)
AOCL as of June 30, 2018
$
3

 
$
(2
)
 
$
(28
)
 
$
(27
)
AOCL as of March 31, 2019
$
15

 
$
(16
)
 
$
(32
)
 
$
(33
)
Other comprehensive (loss) income before reclassifications

 
(15
)
 
1

 
(14
)
Amounts reclassified from AOCL
(4
)
 

 

 
(4
)
Income tax
1

 
3

 

 
4

Net current period other comprehensive (loss) income
$
(3
)
 
$
(12
)
 
$
1

 
$
(14
)
AOCL as of June 30, 2019
$
12

 
$
(28
)
 
$
(31
)
 
$
(47
)

 
Six months ended
 
Pension and OPEB liability adjustment
 
Available-for-sale securities and interest rate swaps
 
Foreign
currency
items
 
Total
AOCL as of December 31, 2017
$
8

 
$

 
$
(23
)
 
$
(15
)
Other comprehensive loss before reclassifications

 
(2
)
 
(5
)
 
(7
)
Amounts reclassified from AOCL
(7
)
 

 

 
(7
)
Income tax
2

 

 

 
2

Net current period other comprehensive loss
$
(5
)
 
$
(2
)
 
$
(5
)
 
$
(12
)
AOCL as of June 30, 2018
$
3

 
$
(2
)
 
$
(28
)
 
$
(27
)
AOCL as of December 31, 2018
$
9

 
$
(7
)
 
$
(32
)
 
$
(30
)
Other comprehensive (loss) income before reclassifications

 
(25
)
 
1

 
(24
)
Amounts reclassified from AOCL
(7
)
 

 

 
(7
)
Income tax
2

 
5

 

 
7

Reclassification of stranded tax effects
8

 
(1
)
 

 
7

Net current period other comprehensive income (loss)
$
3

 
$
(21
)
 
$
1

 
$
(17
)
AOCL as of June 30, 2019
$
12

 
$
(28
)
 
$
(31
)
 
$
(47
)

In accordance with the FASB's new authoritative guidance regarding the reclassification of certain tax effects from accumulated other comprehensive income, the Company reclassified approximately $7 million, as of January 1, 2019, from accumulated other comprehensive loss 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 accumulated other comprehensive loss for its investment securities.

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Table of Contents

 
Amounts reclassified from AOCL
 
Affected line item in the Condensed
Consolidated Statements of 
Comprehensive Income
AOCL Components
Three months ended June 30, 2019
 
Three months ended June 30, 2018
 
Amortization of benefit items:
 
 
 
 
 
Prior service cost
$
4

 
$
4

 
Other income, net
Total reclassifications, before tax
$
4

 
$
4

 
Income before income taxes
Income tax expense
(1
)
 
(2
)
 
Income tax expense
Total reclassifications
$
3

 
$
2

 
Net of tax
 
 
 
 
 
 
 
Amounts reclassified from AOCL
 
Affected line item in the Condensed
Consolidated Statements of 
Comprehensive Income
AOCL Components
Six months ended June 30, 2019
 
Six months ended June 30, 2018
 
Amortization of benefit items:
 
 
 
 
 
Prior service cost
$
7

 
$
7

 
Other income, net
Total reclassifications, before tax
$
7

 
$
7

 
Income before income taxes
Income tax expense
(2
)
 
(2
)
 
Income tax expense
Total reclassifications
$
5

 
$
5

 
Net of tax

Prior service cost and actuarial loss are included in the computation of the Company’s net periodic benefit cost. See NOTE M, “Employee Benefit Plans” for additional details.