S-1/A 1 d254159ds1a.htm AMENDMENT NO. 8 TO FORM S-1 Amendment No. 8 to Form S-1
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As filed with the Securities and Exchange Commission on March 12, 2012

Registration No. 333-172932

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 8

TO

FORM S-1

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 

 

ALLISON TRANSMISSION HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   3714   26-0414014

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 

 

One Allison Way

Indianapolis, IN 46222

(317) 242-5000

(Address, including zip code, and telephone number, including area code, of the registrant’s principal executive offices)

Eric C. Scroggins

Vice President — General Counsel and Secretary

Allison Transmission Holdings, Inc.

One Allison Way

Indianapolis, IN 46222

(317) 242-5000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Rachel W. Sheridan, Esq.

Jason M. Licht, Esq.

Latham & Watkins LLP

555 11th Street, NW

Washington, DC 20004

(202) 637-2200

 

William F. Gorin, Esq.

Cleary Gottlieb Steen & Hamilton LLP

One Liberty Plaza

New York, NY 10006

(212) 225-2000

 

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

¨  Large accelerated filer   ¨  Accelerated filer    x  Non-accelerated filer   ¨  Smaller reporting company

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 


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The information in this prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated March 12, 2012

PROSPECTUS

21,739,130 Shares

 

LOGO

Allison Transmission Holdings, Inc.

Common Stock

 

 

This is Allison Transmission Holdings, Inc.’s initial public offering. The selling stockholders are offering 21,739,130 shares of our common stock in this offering. We will not receive any proceeds from the sale of shares held by the selling stockholders. The selling stockholders in this offering are affiliates of The Carlyle Group, or Carlyle, and affiliates of Onex Corporation, or Onex.

We expect the public offering price to be between $22.00 and $24.00 per share. Currently, no public market exists for the shares. Our common stock has been authorized for listing on the New York Stock Exchange, or the NYSE, under the symbol “ALSN.”

Investing in the common stock involves risks that are described in the “Risk Factors” section beginning on page 17 of this prospectus.

 

 

 

     Per Share      Total  

Public offering price

   $                    $                

Underwriting discount(1)

   $         $     

Proceeds, before expenses, to the selling stockholders

   $         $     

 

 

(1) In addition, upon completion of this offering, we will pay up to $1,200,000 for certain financial consulting services to a broker-dealer not part of the underwriting syndicate. See “Underwriting.”

The underwriters may also purchase up to an additional 3,260,868 shares from the selling stockholders, at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover overallotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The shares will be ready for delivery on or about                     , 2012.

 

 

 

BofA Merrill Lynch   Citigroup   J.P. Morgan
Credit Suisse   Morgan Stanley   Goldman, Sachs & Co.

 

 

 

Barclays Capital   Deutsche Bank Securities

 

 

Baird

 

 

 

KeyBanc Capital Markets   SMBC Nikko

 

 

The date of this prospectus is                     , 2012.


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LOGO

Each of the vehicles pictured above contains an Allison transmission. However, the Company does not manufacture the vehicles themselves.


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     17   

Forward-Looking Statements

     36   

Use of Proceeds

     38   

Dividend Policy

     39   

Capitalization

     40   

Dilution

     42   

Selected Consolidated Financial Data

     43   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     44   

Business

     66   

Management

     84   

Compensation Discussion and Analysis

     92   

Certain Relationships and Related Party Transactions

     110   

Principal and Selling Stockholders

     112   

Description of Capital Stock

     117   

Shares Eligible For Future Sale

     121   

Material U.S. Federal Tax Considerations For Non-U.S. Holders of Our Common Stock

     123   

Underwriting

     127   

Validity of Common Stock

     134   

Experts

     134   

Where You Can Find More Information

     134   

Index to Consolidated Financial Statements

     F-1   

 

 

We are responsible for the information contained in this prospectus and in any related free-writing prospectus we prepare or authorize. We have not authorized anyone to give you any other information, and we take no responsibility for any other information that others may give you. The selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this document may only be accurate on the date of this document, regardless of its time of delivery or of any sales of shares of our common stock. Our business, financial condition, results of operations or cash flows may have changed since such date.

 

 

 

 

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MARKET AND INDUSTRY DATA

We obtained the industry, market and competitive position data used throughout this prospectus from our own internal estimates and research as well as from industry publications and research, surveys and studies conducted by third parties, including Americas Commercial Transportation Research, which we refer to as ACT Research, including their N.A. Commercial Vehicle OUTLOOK report, dated February 10, 2012, and Frost & Sullivan’s May 2010 report titled: Strategic Analysis of North American and European Hybrid Truck, Bus and Van Market, which we refer to as Frost & Sullivan. Industry publications, studies and surveys generally state that they have been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe each of these studies and publications is reliable, we have not independently verified market and industry data from third-party sources. While we believe our internal company research is reliable and the market definitions are appropriate, neither such research nor these definitions have been verified by any independent source. Estimates of historical growth rates in the markets where we operate are not necessarily indicative of future growth rates in such markets.

CERTAIN TRADEMARKS

This prospectus includes trademarks, such as Allison Transmission and ReTran, which are protected under applicable intellectual property laws and are our property and/or the property of our subsidiaries. This prospectus also contains trademarks, service marks, copyrights and trade names of other companies, which are the property of their respective owners. We do not intend our use or display of other companies’ trademarks, service marks, copyrights or trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies. Solely for convenience, our trademarks and tradenames referred to in this prospectus may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and tradenames.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. You should read this entire prospectus and should consider, among other things, the matters set forth under “Risk Factors,” “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our financial statements and related notes thereto appearing elsewhere in this prospectus before making your investment decision. Unless otherwise noted in this prospectus, the term “Allison Holdings” means Allison Transmission Holdings, Inc. “Allison,” “the Company,” “Successor,” “we,” “us,” “our” and “our company” means Allison Holdings and its subsidiaries, including Allison Transmission, Inc., our primary operating company and a wholly-owned subsidiary of Allison Holdings, which we refer to as “ATI.”

Company Overview

We are the world’s largest manufacturer of fully-automatic transmissions for medium- and heavy-duty commercial vehicles, medium- and heavy-tactical U.S. military vehicles and hybrid-propulsion systems for transit buses. Allison transmissions are used in a wide variety of applications, including on-highway trucks (distribution, refuse, construction and fire and emergency), buses (primarily school and transit), motorhomes, off-highway vehicles and equipment (primarily energy and mining) and military vehicles (wheeled and tracked). We believe the Allison brand is one of the most recognized in our industry as a result of the performance, reliability and fuel efficiency of our transmissions. We estimate that globally, in 2011, we sold approximately 62% of all fully-automatic transmissions for medium- and heavy-duty on-highway commercial vehicle applications, and we believe we are well-positioned to capitalize on attractive growth opportunities. For the years ended December 31, 2011, 2010, 2009 and 2008 we generated net sales of $2,162.8 million, $1,926.3 million, $1,766.7 million and $2,061.4 million, respectively, net income (loss) of $103.0 million, $29.6 million, $(323.9) million and $(328.1) million, respectively, Adjusted net income of $305.4 million, $273.7 million, $49.6 million and $92.7 million, respectively, and Adjusted EBITDA of $711.9 million, $617.0 million, $501.3 million and $544.0 million, respectively, representing a 32.9%, 32.0%, 28.4% and 26.4% Adjusted EBITDA margin, respectively.

We introduced the world’s first fully-automatic transmission for commercial vehicles over 60 years ago. Since that time, we have driven the trend in North America and Western Europe towards increasing adoption of fully-automatic transmissions, or automaticity, by targeting a diverse range of commercial vehicle vocations. As compared to manual transmissions and automated manual transmissions, or AMTs, we believe the superior performance attributes of our fully-automatic transmissions in vocations with a high degree of “start and stop” activity, as well as in urban environments, include lower maintenance costs, reduced vehicle downtime, ease of operation, increased safety and improved driver and passenger comfort. We believe our transmissions offer increased fuel efficiency and faster acceleration, resulting in lower operating costs and increased productivity when they are used in vehicles with duty cycles that require a high degree of “start and stop” activity. As a result of these attributes, our fully-automatic transmissions are the standard or exclusive transmission offered in the powertrain configuration of certain types of vehicles in North America, including school buses, fire and emergency vehicles, medium- and heavy-tactical U.S. military vehicles and certain mining trucks. In applications where our transmission is offered as an alternative to a manual transmission or an AMT, such as distribution and refuse trucks, we believe end users frequently specify an “Allison” transmission when ordering a commercial vehicle, which can create pull-through demand for our products to our OEM customers. Our transmissions are also commonly used in various oil and natural gas drilling and extraction equipment where we believe our products’ performance, reliability, equipment uptime and ease of operation is critical to end users.

We believe the Allison brand is one of the most recognized and respected names in the commercial vehicle industry and is associated with high quality, reliability, durability, vocational value, technological leadership and superior customer service. We believe our brand helps us to maintain our leading market position and to price our products commensurate with the value provided to the end user. Allison transmissions are optimized for the unique performance requirements of end users, which typically vary by vocation. Our products are highly

 

 

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engineered, requiring advanced manufacturing processes, and employ complex software algorithms for our transmission controls to maximize end user performance. We have developed over 100 different models that are used in more than 2,500 different vehicle configurations and are compatible with more than 500 combinations of engine brands, models and ratings (including diesel, gasoline, compressed natural gas and other alternative fuels). In 2011, over 10,000 unique Allison-developed calibrations were used with our transmission control modules. We believe our scale, experience and culture of innovation reinforce our leading market position and provide us with a competitive advantage.

Based on our market leadership, history of innovation, brand recognition and global presence, we believe we are well-positioned to capitalize on attractive growth opportunities globally. Our core North American on-highway market, which we define as Class 4-7 trucks, Class 8 straight trucks, buses (school, conventional transit, shuttle and coach) and motorhomes, is poised for continued recovery. According to ACT Research, on-highway commercial vehicle production in North America (excluding transit and coach bus, and motorhome) reached a 20-year low in 2009, increased by 54% from 2009 to 2011, and is anticipated to experience a compounded annual growth rate, or CAGR, of 9.0% from 2011 to 2014, with increases of 7.7%, 16.7% and 3.1% from 2011 to 2012, 2012 to 2013 and 2013 to 2014, respectively, although we cannot assure you that such growth rates will materialize. In addition, we believe markets outside North America represent a major growth opportunity for us, as we estimate less than 5% of the medium- and heavy-duty commercial vehicles sold outside North America in 2011 were equipped with fully-automatic transmissions, as compared to 74% in our core North American market as defined above. We intend to drive the rate of adoption of fully-automatic transmissions in commercial vehicles globally by pursuing the same vocational strategy we employ in North America, though we cannot provide any assurances that our business strategies will be successful or that fully-automatic transmissions will be increasingly adopted outside North America. Our anticipated growth outside of North America will be facilitated by our established international operations and customer relationships. For example, we are the leading provider of fully-automatic transmissions for medium- and heavy-duty commercial vehicles in China with a substantial installed base of over 35,000 Allison transmissions. In addition, in response to the evolving global focus on fuel consumption, we are developing new products to improve fuel efficiency without compromising performance. Over the last four years, we have accelerated and significantly increased our investment in research and development. Examples of our key innovations include the development of a fully-automatic hybrid-propulsion system for the medium- and heavy-duty commercial truck and bus markets and a fully-automatic transmission for a portion of the Class 8 tractor truck market, where we have a limited presence.

We continue to execute on a number of manufacturing and purchasing initiatives to increase efficiency, reduce operating costs and enhance our profitability and cash flow generation capabilities. For example, in 2008, we negotiated a mutually beneficial labor agreement with the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America, or UAW, which introduced a multi-tier wage and benefit structure and an annual profit-sharing incentive compensation plan for the hourly workforce tied to identical performance metrics as those used for the management team and salaried employees. As a result of our focus on improving our operating effectiveness and efficiency, we have been able to improve our Adjusted EBITDA margin by 450 basis points since 2009, despite experiencing one of the most severe economic downturns our industry has ever faced. We have also established new manufacturing facilities in Chennai, India and in Szentgotthard, Hungary, both of which provide access to low-cost manufacturing and a geographic presence to support our growth efforts in emerging markets. As we execute our growth strategy, we believe our strong operating leverage will position us for earnings growth and cash flow generation.

Allison Transmission, Inc., which is headquartered in Indianapolis, Indiana, was acquired by Carlyle and Onex, which we collectively refer to as our Sponsors, in August 2007 from General Motors Corporation, or General Motors, which we refer to as the Acquisition Transaction. The Acquisition Transaction was structured as an asset purchase for U.S. federal income tax purposes, which resulted in a step-up in the U.S. federal income tax basis of our assets that allows us to take substantial amortization deductions for U.S. federal income tax purposes. As of December 31, 2011, we had $3.3 billion of unamortized intangible assets which may be amortized over a period of approximately 10.6 years. These assets are expected to generate U.S. federal income tax deductions of approximately $315.0 million annually through 2021 and approximately $183.0 million in

 

 

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2022. If we generate taxable income in the future, the amortization of these assets, together with existing U.S. net operating losses of $382.0 million as of December 31, 2011, will be used to reduce or eliminate our U.S. federal cash income tax payments.

Our Industry & Served Markets

Commercial vehicles typically employ one of three transmission types: manual, AMT or fully-automatic. According to Frost & Sullivan, manual transmissions are the most prevalent transmission type used in Class 8 tractors in North America and in medium- and heavy-duty commercial vehicles, generally, outside North America. Manual transmissions utilize a disconnect clutch causing power to be interrupted during each gear shift resulting in energy loss related inefficiencies and less work being accomplished for a given amount of fuel consumed. In long-distance trucking, this power interruption is not a significant factor, as the manual transmission provides its highest degree of fuel economy during steady-state cruising. However, steady-state cruising is only one part of the duty cycle. As the duty cycle experiences increasing degrees of “start and stop” activity, common in many vocations as well as in urban environments, we believe manual transmissions result in reduced performance, lower fuel efficiency, lower average speed for a given amount of fuel consumed and inferior ride quality. Moreover, the clutches must be replaced regularly, resulting in increased maintenance expense and vehicle downtime. Manual transmissions also require a skilled driver to operate the disconnect clutch when launching the vehicle and shifting gears. AMTs are manual transmissions that feature automated operation of the disconnect clutch. Fully-automatic transmissions utilize technology that smoothly shifts gears instead of a disconnect clutch, thereby delivering uninterrupted power to the wheels during gear shifts and requiring minimal driver input. These transmissions deliver superior acceleration, higher productivity, increased fuel efficiency, reduced operating costs, less driveline shock and smoother shifting relative to both manual transmissions and AMTs in vocations with a high degree of “start and stop” activity, as well as in urban environments.

We sell our transmissions globally for use in medium- and heavy-duty on-highway commercial vehicles (with limited exposure to the Class 8 tractor market), off-highway vehicles and equipment and military vehicles. In addition to the sale of transmissions, we also sell branded replacement parts, support equipment and other products necessary to service the installed base of vehicles utilizing our transmissions. The following table provides a summary of our business by end market, for the fiscal year ended December 31, 2011.

 

     NORTH AMERICA   OUTSIDE  NORTH
AMERICA
  MILITARY   SERVICE
PARTS ,
SUPPORT
EQUIPMENT &
OTHER
END MARKET   ON-HIGHWAY   HYBRID TRANSIT
BUS
  OFF-HIGHWAY      

2011 NET SALES

(IN MILLIONS)

  $727   $134   $280   $364   $304   $354

% OF TOTAL

  34%   6%   13%   17%   14%   16%
MARKET POSITION  

• #1 supplier of fully-automatic transmissions

 

• #1 supplier of hybrid- propulsion systems

 

• A leading independent supplier

 

• #1 supplier of fully-automatic transmissions in China and India

 

• Established presence in Western Europe

 

• #1 supplier of transmissions to the U.S. military

 

• Approximately 1,500 dealers and distributors worldwide

VOCATIONS OR END USE  

• Distribution

 

• Emergency

 

• Refuse

 

• Construction

 

• Utility

 

• School, transit, shuttle and coach buses

 

• Motorhome

 

• Hybrid transit bus

 

• Hybrid shuttle bus

 

• Energy

 

• Mining

 

• Construction

 

• Specialty vehicle

 

• Transit bus

 

• On-highway trucks

 

• Off-highway vehicles and equipment

 

• Medium- and heavy-tactical wheeled platforms

 

• Tracked combat platforms

 

• Parts

 

• Support equipment

 

• Remanufactured transmissions

 

• Fluids

 

 

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We anticipate a number of industry trends, which are outlined below. These trends will impact demand for our transmissions if they materialize, although we cannot assure you they will result in growth for us.

Continued recovery of commercial vehicle demand in North America.    The global economic downturn in 2009 led to a significant decline in commercial vehicle volumes in our core North American on-highway market from which we derive approximately 34% of our sales. Since the downturn, we believe industry production has been supported by pent up demand resulting from deferred purchases as well as modest economic expansion in the region. We expect these trends to continue with North American on-highway commercial production expected to increase by a 9.0% CAGR from 234,000 units in 2011 to 303,000 units in 2014, representing increases of 7.7%, 16.7% and 3.1% from 2011 to 2012, 2012 to 2013 and 2013 to 2014, respectively, according to ACT Research. These 2014 volumes are still below the average annual production from 1999 to 2008 of approximately 337,000 units. While we believe these trends will continue to support our growth rate, we cannot assure you such growth will actually materialize.

 

LOGO

Growth in commercial vehicle demand in emerging markets.    The long-term growth in demand for commercial vehicles in emerging markets is supported by broad macroeconomic trends, including population growth, increasing urbanization and greater globalization of trade. This growth and development will require greater infrastructure spending, which we believe will enhance demand for commercial vehicles in these markets. However, there can be no assurances that such growth will materialize or occur at the expected rate. Currently, manual transmissions are the predominant transmissions used in commercial vehicles in these markets, such as China. The modernization of vehicle fleets in emerging markets is also driving demand for vehicles with increased durability and enhanced functionality, both of which we believe are factors that influence buyers of commercial vehicles to specify our transmissions. Evidence of these trends can be seen in many Chinese cities, where refuse trucks have recently been introduced to collect consumer waste and in India where original equipment manufacturers, or OEMs, have been actively upgrading commercial vehicle specifications in response to government emphasis on equipment modernization.

Increasing penetration of fully-automatic transmissions.    Globally, we believe that penetration of fully-automatic transmissions was less than 10% in 2011, with far higher penetration in North America than in the rest of the world. For example, Frost & Sullivan estimates that in 2010 fully-automatic transmissions represented 37.8% of transmissions sold in the North American medium- and heavy-duty commercial vehicle markets, compared to 6.1% in Western Europe, which are expected to be 41.8% and 10.9%, respectively, in 2017. We believe emerging markets will also adopt fully-automatic transmissions in medium- and heavy-duty commercial vehicles where end users are modernizing their vehicle fleets and are educated on the value proposition of fully-automatic transmissions. This belief is based in part on our experiences in the Beijing bus market and the New Delhi bus market. However, there can be no assurances that such growth will materialize or occur at the expected rate. Increasing sales of vocational vehicles such as fire and emergency, construction and specialty vehicles,

 

 

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where automatics are often offered as standard equipment, will provide additional opportunities for automatic transmission growth.

Increasing emphasis on fuel efficiency and lower emissions.    In response to changes in global vehicle emissions regulations and rising fuel prices, end users and commercial vehicle OEMs are seeking more environmentally friendly vehicles that, for example, consume less fuel and produce less greenhouse gases. Although demand for our hybrid-propulsion systems for transit buses decreased in 2011 and 2010, we believe these trends are driving demand for our transmissions, rather than manual transmissions and AMTs, and, although there can be no assurance of such growth, that the emphasis on fuel efficiency and the corresponding reduction in emissions will result in strong demand for the fully-automatic hybrid-propulsion system we are developing for the medium- and heavy-duty truck and bus markets.

Rising demand for commodities and energy.    The global economic recovery, resurgence in commodity prices and innovations in extraction techniques are expected to continue to drive an increase in energy exploration and mining activities. Although there can be no assurance of such growth, these factors traditionally lead to strong demand for capital equipment utilizing our off-highway transmissions. For example, new methods of extracting oil and natural gas from shale formations have driven demand for oil and natural gas drilling and extraction equipment that utilize highly engineered heavy-duty fully-automatic transmissions. Fully-automatic transmissions are typically offered as standard equipment for these applications, as performance, reliability, equipment uptime and ease of operation are particularly critical in stationary applications.

Changing demand for reliable fully-automatic transmissions in military products.    The performance characteristics of fully-automatic transmissions, including reliability, durability and ease of use, combined with the standardization of the fleet, have driven military demand for fully-automatic transmissions rather than for manual transmissions and AMTs in wheeled vehicles. Ground-based global conflicts over the past 10 years have necessitated the investment in and upgrade of wheeled and tracked vehicles, driving military spending to historically high levels. However, largely as a result of reduced military activity in Iraq and Afghanistan, our military sales have decreased from 23% of net sales in 2010 to 14% of net sales in 2011.

Our Competitive Strengths

Global Market Leader

We are the largest global manufacturer of fully-automatic transmissions for the commercial vehicle market. We estimate that globally, in 2011, we sold approximately 62% of all fully-automatic transmissions for medium- and heavy-duty on-highway commercial vehicle applications. Within North America, we believe we sell substantially all of the fully-automatic transmission products for use in Class 6-7 trucks, Class 8 straight trucks and Type C and D school buses. We are also the number one supplier of hybrid-propulsion systems for the North American hybrid transit bus market, having sold nearly 80% of all units in 2011, and we are also the number one supplier of transmissions for medium- and heavy-tactical U.S. military vehicles. Although a substantial percentage of our net sales are generated in North America, we have a global presence, serving customers in Europe, Asia, South America and Africa. We are the leading provider of fully-automatic transmissions for use in medium- and heavy-duty commercial vehicles in China and India, markets where we believe we have the greatest long-term growth opportunities.

Premier Brand and Value Proposition

In applications where our transmission is offered as an alternative to a manual transmission or an AMT, we believe end users frequently specify our transmissions by name (an “Allison” transmission) when purchasing a new vehicle, which we believe is a result of our value proposition. We also believe our premier brand, value proposition and differentiated technology, combined with our market position and long history, make us the “de facto” standard for fully-automatic transmissions in the medium- and heavy-duty commercial vehicle industry.

 

 

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The critical function performed by Allison transmissions in commercial vehicles enables us to achieve pricing commensurate with the value our transmissions provide to end users. We intend to build Allison brand equity by seeking to deliver end users strong returns on their investments in our transmissions.

Technology Leadership and Customization Capabilities

We believe our product technology is highly differentiated and provides us with a competitive advantage. Our decades of experience in acquiring knowledge and expertise about duty cycles and performance requirements across multiple platforms, vocations and applications resulted in the use of over 10,000 unique transmission calibrations with our transmission control modules in 2011. We leverage this knowledge to develop highly customized software algorithms that control the operation, performance and special functions of our fully-automatic transmissions. This expertise allows us to offer advanced designs properly matched to an OEM’s engines and optimized for the intended vocation. We employ approximately 350 engineers and technical specialists in our product engineering group who are singularly focused on developing innovative new products and end user driven enhancements. Our engineering organization, collaboratively with our end users and OEMs, identifies and develops new products and technologies to remain at the forefront of industry innovation. As evidence of our commitment to innovation and technology, we have invested over $450.0 million in product-related research and development from 2008 to 2011.

Long-Standing OEM Customer Relationships

We maintain relationships with over 300 OEM customers and have been a long-standing key supplier to the leading commercial vehicle OEMs such as BAE Systems plc, BJ Services Company, Blue Bird Corporation, Daimler AG, Dennis Eagle Ltd., Hino Motors, Ltd., Halliburton Company, Iveco S.p.A., Isuzu Motors Limited, MAN SE, Navistar International Corporation, New Flyer Industries Inc., Oshkosh Corporation, PACCAR Inc, Scania AB, Terex Corporation and AB Volvo. We have also developed relationships with OEMs in emerging markets, such as Ashok Leyland Limited, Dongfeng Motor Co., Ltd., China FAW Group Corporation and Tata Motors Limited, and continue to be the leading supplier to the U.S. military medium- and heavy-tactical vehicle program. Many of our relationships with our largest customers span over 45 years. Our OEM customers often seek to ensure supply of our products by entering into long-term agreements with us that generally include defined levels of mutual commitment with respect to growing Allison’s presence in the OEMs’ products and promotional efforts, pricing and sharing of commodity cost risk. The typical length of our customer agreements is five years. OEM customers representing approximately 90% of our 2011 North American on-highway unit volume participate in long-term supply agreements with us. We have also enjoyed over a half century of government collaboration on military and defense products, and we continue to work closely with various government agencies on hybrid-propulsion systems and technologies.

Well-Positioned to Capitalize on Multiple Growth Opportunities

We believe we are in a strong position to benefit from multiple secular growth trends in our industry as well as actively develop new areas of growth due to our market leadership, history of innovation, technological capabilities, brand recognition, global presence and service network supporting a large installed-base of vehicles and equipment utilizing Allison transmissions. We believe our significant presence supplying our transmissions for use in bus applications will serve as an entry point for additional vocation and platform penetration in markets outside North America, including China, India, Brazil and Eastern Europe. In addition, we are developing a new fully-automatic transmission for a portion of the Class 8 tractor market we call the “metro” tractor market, a term for tractors that are used primarily in urban environments more than 60% of the time. We have a very limited presence in the metro tractor market, which we estimate to have comprised approximately 30% of the Class 8 tractor market between 1998 and 2011, and we believe our new, fully-automatic transmission will be well suited to meet the unique duty cycle requirements of this market.

 

 

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Improved Margins and Free Cash Flow Generation

Improved margins, low maintenance capital expenditures and limited cash income taxes helped us to generate strong free cash flow through the recent global economic downturn which allowed us to service and reduce indebtedness despite our net losses in 2008 and 2009. We believe our demonstrated ability to achieve strong margins is supported by our vocational pricing model, our premier brand, superior product attributes and operational scale. In addition, the ability to shift our production and flex our workforce to match demand helps us closely manage our manufacturing costs and increase labor productivity. We believe our recent investments in manufacturing facilities located in low-cost countries position us to realize incremental cost savings. Additionally, as approximately 55% of our U.S. hourly labor force is currently retirement eligible, we expect our U.S. multi-tier labor agreement will enable us to improve our cost structure over time. As production volumes continue to recover in our developed markets and we execute on our growth strategies, we expect to benefit from future margin expansion through improved operating leverage.

Diverse End Markets

We benefit from serving a wide range of end markets and vocations. This diversification provides stability by mitigating the impact of cyclical declines in any one end market in any given period. Our end markets include a wide array of on-highway trucks (distribution, refuse, construction, fire and emergency), buses (primarily school and transit), motorhomes, off-highway vehicles and equipment (primarily energy and mining) and military vehicles (wheeled and tracked). We also benefit from a recurring base of aftermarket sales and service sales driven by the total number of Allison-equipped vehicles in service, a number that has increased over time. We have virtually no exposure today to the highly cyclical Class 8 tractor market. We believe our diverse end markets and the lack of exposure to the Class 8 tractor market helped moderate the impact of the recent global economic downturn on our financial performance.

Experienced Management Team

Our management team has established a track record for operational excellence and profitable growth. Our top six executives have an average tenure of 22 years with Allison and an average of 27 years of industry experience. The management team has consistently demonstrated its ability to improve our operations. For example, the management team successfully managed our separation from General Motors in 2007, implemented work force and manufacturing optimization initiatives, and negotiated a mutually-beneficial Allison specific U.S. hourly labor agreement with the UAW, establishing a multi-tier wage and benefit structure and a profit-sharing incentive compensation plan for the hourly workforce tied to identical performance metrics as those used for the management team and salaried employees. As a result, we have been able to improve our Adjusted EBITDA margin by 450 basis points since 2009. In addition, the management team has expanded manufacturing capacity in Chennai, India and Szentgotthard, Hungary and led the effort to significantly increase our investment in research and development with an emphasis on new products and more advanced transmission technologies.

Our Business Strategy

Expand Our Global Leadership

We will continue to leverage our brand and reputation to grow our share in all of our served markets. We remain committed to aggressively investing in research and development to enhance our leadership in advanced fuel efficient transmission technologies and innovative new products. We expect to introduce new vocational offerings that provide a value proposition to our customers with specific calibrations customized for their particular duty cycles. Additionally, we expect to continue to invest in end user and dealer targeted marketing programs to sustain pull-through demand for our products.

 

 

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Accelerate Penetration of Our Products in Emerging Markets

We intend to drive the rate of adoption of fully-automatic transmissions in commercial vehicles globally by pursuing the same vocational strategy we employ in North America. We believe the current low rate of penetration of fully-automatic transmissions outside North America represents a major growth opportunity, and that we can increase our penetration rate in these markets as we further educate end users on the value proposition of our products and they continue to modernize their fleets. According to Frost & Sullivan, fully-automatic transmission market share in Western Europe is projected to increase to 10.9% over the next 7 years, from 6.1% in 2010. We also believe China, India, Brazil and Eastern Europe represent significant growth markets for us, although we cannot assure you that such growth will materialize, as we estimate automaticity to be low in these markets due to the entrenched use of manual transmissions and high levels of OEM integration. In China and India, we intend to leverage our existing presence in transit bus and off-highway vehicles and equipment to gain additional vehicle releases with OEMs and drive automaticity in targeted vocations. In China, for example, we have grown significantly in commercial vehicles used to transport cargo at shipping ports (dock spotters), increasing our share from essentially 0% in 2004 to virtually 100% in 2010, which we have maintained in 2011. In targeted vocations such as fire and emergency, construction and specialty vehicles (e.g., crane carriers), we have increased the number of vehicle configurations in which our transmissions are available from 17 in 2008 to 72 in 2011 and we expect this trend to continue in the coming years. In Brazil, Eastern Europe and India we will continue to pursue a similar vocational strategy in addition to focusing on growth opportunities in wheeled military vehicles in India and Turkey and off-highway vehicles and equipment in Brazil and India.

To support our strategies in these emerging markets, we established a new manufacturing facility in Chennai, India in 2010 and in Szentgotthard, Hungary in 2011. These facilities are used to manufacture components for our global manufacturing operations as well as assemble transmission products for emerging markets. In addition, since 2007, we have increased our marketing, sales and service headcount in the China, India, Brazil and Russia regions by 80%, including a 182% increase in China and India.

Continue Development of New Technologies and Products

We have more new products under development today than at any time in our history. We are leveraging our success in hybrid transit buses to introduce a new hybrid-propulsion system for medium- and heavy-duty commercial trucks and buses for which we received a $62.8 million cost-share grant from the U.S. Department of Energy, or the Grant Program. We will pursue sales in the Class 6-7 and Class 8 straight truck markets as well as other end markets with this technology. The objective for this family of hybrid-propulsion systems is to create an improvement in fuel efficiency of 25% to 35% for a typical vehicle, depending upon vocation and duty cycle. Additionally, we are developing a fully-automatic transmission, which is currently being tested by end users, that meets the unique duty cycle requirements of the Class 8 metro tractor market. We will continue to invest in these and other advanced fuel efficient technologies.

Leverage Our Cost Structure to Deliver Strong Cash Flow

We intend to capitalize on our scalable cost structure to enhance our margins and deliver improved earnings and cash flow. In connection with the Acquisition Transaction, we incurred indebtedness of approximately $4.2 billion, of which approximately $3.4 billion remains outstanding as of December 31, 2011. We intend to continue to reduce our overall levels of indebtedness in the future. Additionally, we had net income of $103.0 million and $29.6 million for the years ended December 31, 2011 and 2010, respectively, after incurring a net loss of ($323.9) million and ($328.1) million for the years ended December 31, 2009 and 2008, respectively. We have improved our cost structure and manufacturing efficiency through the implementation of lean manufacturing strategies, among other operational efficiency-focused initiatives, and we expect these improvements to continue. Additionally, management expects to continue to employ a disciplined approach to capital expenditures and operating working capital consistent with past practice, all of which we believe will result in strong earnings growth and cash flow generation.

 

 

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Recent Developments

Redemption of the 11.0% Senior Notes

On February 27, 2012, ATI redeemed $200.0 million in aggregate principal amount of its 11.0% senior cash pay notes due 2015, or the 11.0% Senior Notes at a redemption price of 105.5% of the principal amount thereof, plus accrued and unpaid interest on the 11.0% Senior Notes. After giving effect to this redemption, ATI has $109.8 million in aggregate principal amount of its 11.0% Senior Notes outstanding.

Amendment to Senior Secured Credit Facility

On March 9, 2012, ATI entered into an amendment with its term loan lenders under its Senior Secured Credit Facility to extend the maturity from August 7, 2014 to August 7, 2017 of approximately $801.0 million in principal amount of the term loans with an increase in the applicable margin over the London Interbank Offered Rate, or LIBOR, for such extended term loans from 2.50% to 3.50%. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Description of the Senior Secured Credit Facility.”

Amendment to Certificate of Incorporation

On March 12, 2012, we filed our amended and restated certificate of incorporation with the Secretary of State of Delaware. The amended and restated certificate of incorporation, among other things, converted our non-voting common stock to common stock, other than 1,000 shares of non-voting common stock (1,185 shares of non-voting common stock after giving effect to the stock split described herein) and effected a 1.185-for-1 split of all of our common stock and non-voting common stock. The amended and restated certificate of incorporation was approved by our Board of Directors and the holders of our common stock.

Risks Related to Our Business

Investing in our common stock involves substantial risk. You should carefully consider all of the information in this prospectus prior to investing in our common stock. There are several risks related to our business that are described under “Risk Factors” elsewhere in this prospectus. Among these important risks are the following:

 

   

risks related to our substantial indebtedness;

 

   

our participation in markets that are competitive;

 

   

general economic and industry conditions;

 

   

our ability to prepare for, respond to and successfully achieve our objectives relating to technological and market developments and changing customer needs;

 

   

failure of markets outside North America to increase adoption of fully-automatic transmissions in our markets served due to such factors as entrenched use of manual transmissions and high levels of OEM integration;

 

   

the discovery of defects in our products, resulting in delays in new model launches, recall campaigns and/or increased warranty costs and reduction in future sales or damage to our brand and reputation;

 

   

the concentration of our net sales in our top five customers and the loss of any one of these;

 

   

labor strikes, work stoppages or similar labor disputes, which could significantly disrupt our operations or those of our principal customers;

 

   

our ability to maintain cost controls;

 

 

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Carlyle and Onex will be able to control our common stock; and

 

   

other risks and uncertainties, including those listed under the caption “Risk Factors.”

Our Sponsors

As of December 31, 2011, Carlyle and Onex each owned approximately 49.8% of our common stock with the remainder owned by certain current directors and employees.

Carlyle is a global alternative asset manager with over $148 billion of assets under management across 89 funds and 52 fund of fund vehicles. Carlyle invests across four segments—Corporate Private Equity, Real Assets, Global Market Strategies and Fund of Funds Solutions—in the United States, Asia, Europe, Japan, the Middle East, North Africa, South America and Sub-Saharan Africa. Carlyle’s Corporate Private Equity business has developed particular industry expertise in aerospace, defense & government services, consumer & retail, energy, financial services, healthcare, industrial, technology & business services, telecommunications & media and transportation. Carlyle employs more than 1,200 people in 33 offices across six continents.

Onex is one of North America’s oldest and most successful investment firms committed to acquiring and building high-quality businesses in partnership with talented management teams. Onex makes private equity investments through the Onex Partners and ONCAP families of funds and has completed approximately 340 acquisitions with a total value of approximately $44 billion. Over Onex’s history, it has had extensive experience investing in industrial businesses. Onex’s recent investments in industrial manufacturing businesses include JELD-WEN Holdings, Inc., Tomkins Limited and Husky International Ltd. Onex’s businesses generate annual revenues of $37 billion, have assets of $42 billion and employ approximately 230,000 people worldwide. Onex shares trade on the Toronto Stock Exchange under the stock symbol OCX.

On August 7, 2007, the Sponsors entered into a services agreement with ATI, pursuant to which ATI pays the Sponsors an annual fee of approximately $3.0 million for certain advisory, consulting and other services to be performed by the Sponsors. In connection with the consummation of this offering, ATI will pay Carlyle and Onex a termination fee of $16.0 million in consideration of the Sponsors’ agreement to terminate the services agreement.

Corporate Information

Allison Transmission Holdings, Inc. was incorporated in Delaware on June 22, 2007. Our principal executive offices are located at One Allison Way, Indianapolis, IN 46222 and our telephone number is (317) 242-5000. Our internet address is www.allisontransmission.com. The contents of our website are not part of this prospectus.

 

 

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The Offering

 

Common stock offered by the selling stockholders

21,739,130 shares

 

Selling stockholders

The selling stockholders in this offering are affiliates of Carlyle and affiliates of Onex. See “Principal and Selling Stockholders.”

 

Common stock and non-voting common stock outstanding after this offering

181,375,783 shares

 

Overallotment option

The selling stockholders have granted the underwriters a 30-day option to purchase up to an additional 3,260,868 shares of our common stock at the initial public offering price to cover overallotments, if any.

 

Use of proceeds

We will not receive any net proceeds from the sale of shares by the selling stockholders, including with respect to the underwriters’ overallotment option. See “Use of Proceeds” for additional information.

 

Dividend Policy

The declaration and payment of all future dividends, if any, will be at the discretion of our Board of Directors and will depend upon our results of operations, cash requirements, financial condition, contractual restrictions, restrictions imposed by the Senior Secured Credit Facility and the indentures governing the Senior Notes or applicable laws and other factors that our Board of Directors may deem relevant.

 

  Following this offering, we intend to pay quarterly cash dividends. We expect that our first dividend will be paid in the second quarter of 2012 and will be $0.06 per share of our common stock. However, there is no assurance that sufficient cash will be available to pay any such dividends. See “Dividend Policy.”

 

Proposed NYSE symbol

“ALSN.”

 

Risk factors

See “Risk Factors” beginning on page 17 of this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

The number of shares of our common stock and non-voting common stock to be outstanding after completion of this offering is based on 181,375,783 shares outstanding as of December 31, 2011, which includes 21,739,130 shares to be sold by the selling stockholders and excludes:

 

   

14,864,059 shares of common stock issuable upon the exercise of options outstanding at a weighted average exercise price of $13.40 per share; and

 

   

15,302,998 shares of common stock reserved for issuance under our 2011 Equity Incentive Award Plan, which we plan to adopt in connection with this offering.

Unless we specifically state otherwise, all information in this prospectus assumes:

 

   

no exercise of the overallotment option by the underwriters; and

 

   

an initial offering price of $23.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus.

 

 

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Unless we specifically state otherwise, the share information in this prospectus (i) reflects the increase in the authorized number of our common stock to 1,880,000,000 shares (the number of our authorized non-voting common stock remains 20,000,000 shares), (ii) gives effect to the conversion of non-voting common stock to common stock, other than 1,000 shares of non-voting common stock (1,185 shares of non-voting common stock after giving effect to the stock split described herein) and (iii) gives effect to the 1.185-for-1 split of our common stock and non-voting common stock, each of which occurred with the filing of our amended and restated certificate of incorporation on March 12, 2012.

 

 

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Summary Historical Financial Data

The following tables set forth our summary historical financial data for the years ended December 31, 2011, 2010 and 2009. Our summary historical balance sheet data as of December 31, 2011, 2010 and 2009 and income statement data for each of the years in the three-year period ended December 31, 2011 has been derived from our audited financial statements. The financial data set forth below are not necessarily indicative of future results of operations. This data should be read in conjunction with, and is qualified in its entirety by reference to, the “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Capitalization” sections and our financial statements and notes thereto included elsewhere in this prospectus.

 

    For the year ended
December 31,
 

(in millions, except for share and per share data)

  2011     2010     2009  

Consolidated Statement of Operations Data:

   

Net sales

  $ 2,162.8      $ 1,926.3      $ 1,766.7   

Cost of sales

    1,208.3        1,098.1        1,146.9   

Gross profit

    954.5        828.2        619.8   

Operating Expenses:

     

Selling, general and administrative expenses

    409.1        384.9        391.2   

Engineering — research and development

    116.4        101.5        89.7   

Trade name impairment

    —          —          190.0   

Total operating expenses

    525.5        486.4        670.9   

Operating income (loss)

    429.0        341.8        (51.1

Other (expense) income, net:

     

Interest income

    0.9        3.5        1.4   

Interest expense

    (218.2     (281.0     (235.6

Premiums and expenses on tender offer for long-term debt

    (56.9     —          —     

Other (expense) income, net

    (4.2     19.0        2.8   

Total other expense, net

    (278.4     (258.5     (231.4

Income (loss) before income taxes

    150.6        83.3        (282.5

Income tax expense

    (47.6     (53.7     (41.4

Net income (loss)

  $ 103.0      $ 29.6      $ (323.9

Earnings (Loss) Per Share Data:

     

Basic earnings (loss) per share

  $ 0.57      $ 0.16      $ (1.79

Weighted-average shares outstanding (in thousands)

    181,375        181,367        181,322   

Diluted earnings (loss) per share

  $ 0.56      $ 0.16      $ (1.79

Diluted weighted-average shares outstanding (in thousands)

    183,275        181,367        181,322   

Consolidated Balance Sheet Data:

     

Cash and cash equivalents

  $ 314.0      $ 252.2      $ 153.1   

Property, plant & equipment — net

    581.8        595.3        621.1   

Total assets

    5,192.6        5,310.4        5,410.8   

Total current liabilities

    449.9        417.5        393.6   

Total debt

    3,378.6        3,671.1        3,874.1   

Stockholders’ equity

    821.7        741.7        736.6   

Statement of Cash Flows Data:

     

Net cash provided by operating activities

  $ 469.2      $ 388.9      $ 168.7   

Net cash used for investing activities

    (55.9     (95.3     (113.2

Net cash used for financing activities

    (369.9     (197.9     (135.4

Other Financial and Operating Data:

     

Capital expenditures

  $ 96.9      $ 73.8      $ 88.2   

Adjusted net income(1)

    305.4        273.7        49.6   

Adjusted EBITDA(1)

    711.9        617.0        501.3   

Adjusted EBITDA margin(1)

    32.9     32.0     28.4

 

 

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(1) We use Adjusted net income, Adjusted EBITDA and Adjusted EBITDA margin to evaluate our performance relative to that of our peers. In addition, the Senior Secured Credit Facility has certain covenants that incorporate Adjusted EBITDA. However, Adjusted net income, Adjusted EBITDA and Adjusted EBITDA margin are not measurements of financial performance under the generally accepted accounting principles in the United States, or GAAP, and these metrics may not be comparable to similarly titled measures of other companies. Adjusted net income is calculated as the sum of net income (loss), interest expense, net, income tax expense, trade name impairment and amortization of intangible assets, less cash interest expense, net and cash income taxes. Adjusted EBITDA is calculated as the sum of Adjusted net income, cash interest expense, net, cash income taxes, depreciation of property, plant and equipment and other adjustments as defined by the Senior Secured Credit Facility and as further described below. Adjusted EBITDA margin is calculated as Adjusted EBITDA divided by net sales.

We use Adjusted net income to measure our overall profitability because it better reflects our cash flow generation by capturing the actual cash taxes paid rather than our tax expense as calculated under GAAP and excludes the impact of the non-cash annual amortization of certain intangible assets that were created at the time of the Acquisition Transaction. We use Adjusted EBITDA and Adjusted EBITDA margin to evaluate and control our cash operating costs and to measure our operating profitability. We believe the presentation of Adjusted net income, Adjusted EBITDA and Adjusted EBITDA margin enhances our investors’ overall understanding of the financial performance and cash flow of our business.

You should not consider Adjusted net income, Adjusted EBITDA and Adjusted EBITDA margin as an alternative to net income (loss), determined in accordance with GAAP, as an indicator of operating performance, or as an alternative to net cash provided by operating activities, determined in accordance with GAAP, as an indicator of Allison’s cash flow.

A directly comparable GAAP measure to Adjusted net income and Adjusted EBITDA is net income (loss). The following is a reconciliation of net income (loss) to Adjusted net income, Adjusted EBITDA and Adjusted EBITDA margin:

 

     For the year ended December 31,  
(in millions)    2011     2010     2009  

Net income (loss)

   $ 103.0      $ 29.6      $ (323.9

plus:

      

Interest expense, net

     217.3        277.5        234.2   

Cash interest expense, net

     (208.6     (239.1     (242.5

Income tax expense

     47.6        53.7        41.4   

Cash income taxes

     (5.8     (2.2     (5.5

Trade name impairment

                   190.0   

Amortization of intangible assets

     151.9        154.2        155.9   
  

 

 

   

 

 

   

 

 

 

Adjusted net income

   $ 305.4      $ 273.7      $ 49.6   

Cash interest expense, net

     208.6        239.1        242.5   

Cash income taxes

     5.8        2.2        5.5   

Depreciation of property, plant and equipment

     103.8        99.6        105.9   

Premiums and expenses on tender offer for long-term debt(a)

     56.9                 

Dual power inverter module extended coverage(b)

            (1.9     11.4   

Loss (gain) on repurchases of long-term debt(c)

     16.0        (3.3     (8.9

Unrealized loss (gain) on hedge contracts(d)

     6.8        0.1        (5.8

Reduction of supply contract liability(e)

            (3.4       

Restructuring charges(f)

                   47.9   

Legacy employee benefits(g)

                   36.6   

Equity income(h)

                   3.1   

Benefit plan adjustment(i)

     (2.5            2.5   

Transitional costs(j)

                   2.0   

Pension curtailment adjustment(k)

                   (1.3

Other, net(l)

     11.1        10.9        10.3   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 711.9      $ 617.0      $ 501.3   
  

 

 

   

 

 

   

 

 

 

Net sales

   $ 2,162.8      $ 1,926.3      $ 1,766.7   

Adjusted EBITDA margin

     32.9     32.0     28.4

 

 

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  (a) Represents $56.9 million (recorded in other (expense) income, net) of premiums and expenses related to the tender offer for ATI’s 11.25% senior toggle notes due 2015, or the Senior Toggle Notes, in the second quarter of 2011.

 

  (b) During June 2007 our Predecessor, Allison Transmission, an operating unit of General Motors, provided its customers an extended coverage program for the Dual Power Inverter Module, or DPIM, used on H 40/50 EP hybrid-propulsion transit bus systems. Certain units were falling short of their expected service life and the Predecessor decided to cover repair/replacement for an extended period. In accordance with the terms of an agreement with General Motors, we are responsible for the first $12.0 million of cost and General Motors is responsible for the next $34.0 million of costs, with any amount over $46.0 million being shared one-third by Allison and two-thirds by General Motors for shipments through June 30, 2009. Special coverage expenses associated with shipments subsequent to June 30, 2009 are our responsibility. The estimated total cost of servicing the installed base required us to record charges of $11.4 million (recorded in selling, general and administrative expenses) for the year ended 2009 for our pro-rata share under the terms of the agreement.

During 2010, we conducted a review of the DPIM liability using current claim and field information. The completion of the review resulted in a $22.7 million reduction of the DPIM liability, partially offset by a $20.8 million reduction of the General Motors receivable totaling a net credit of $1.9 million (recorded in selling, general and administrative expenses). The total liability and General Motors receivable will continue to be reviewed for any changes in estimate as additional claims data and field information become available.

 

  (c) Represents $16.0 million, ($3.3) million and ($8.9) million of losses (gains) (recorded in other (expense) income, net) realized on repurchases and redemptions of our long-term debt in 2011, 2010 and 2009, respectively.

 

  (d) Represents $6.8 million, $0.1 million and ($5.8) million of unrealized losses (gains) (recorded in other (expense) income, net) on the mark-to-market of our commodities contracts and foreign currency contracts in 2011, 2010 and 2009, respectively.

 

  (e) Represents an adjustment of ($3.4) million (recorded in other income, net) due to the elimination of a severance liability required under the contract manufacturing agreement with Opel Szentgotthard Automotive Manufacturing Ltd., an affiliated company of General Motors. The original contract manufacturing agreement was replaced with a new agreement that expires in the second quarter of 2016.

 

  (f) Represents restructuring expenses related to the employee headcount reduction programs announced in the fourth quarter of 2008 (salaried retirement incentive program) and the first quarter of 2009 (hourly retirement incentive program and salaried reduction in force program), collectively referred to as the Employee Headcount Reduction Programs. The $47.9 million ($29.4 million recorded in cost of sales, $1.0 million recorded in selling, general and administrative expenses, $0.2 million recorded in engineering — research and development, and $17.3 million recorded in other income, net) represents the expense recorded in 2009. Expenses include severance costs, pension curtailment loss and other post employment benefits, or OPEB, related expenses.

 

  (g) Represents a charge of $36.6 million (recorded in cost of sales) to eliminate the OPEB receivables with General Motors, resulting from a Cure Agreement pursuant to General Motors’ emergence from bankruptcy in 2009. As a result, we have no further obligation to reimburse General Motors for our pro-rata share of OPEB expenses.

 

  (h) Represents a $3.1 million adjustment (recorded in cost of sales) of shared income with General Motors. In August 2007, we entered into an agreement with General Motors to share income from General Motors’ Brazil transmission business until we could establish our own legal entity in Brazil. We established our Brazil legal entity in December 2008 at which time we, with agreement from General Motors, accrued the adjustment for shared income. This adjustment was considered a sharing of equity income until cash was received from General Motors according to the Senior Secured Credit Facility. General Motors disbursed the funds in February of 2009.

 

 

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  (i) Represents a ($2.5) million favorable adjustment ($0.8 million recorded in cost of sales, $0.9 million recorded in selling, general and administrative expenses and $0.8 million recorded in engineering – research and development) in 2011 and a $2.5 million charge ($0.8 million recorded in cost of sales, $0.9 million recorded in selling, general and administrative expenses and $0.8 million recorded in engineering – research and development) in 2009 related to certain differences between benefits promised under a certain benefit plan and the administration of the plan.

 

  (j) Represents costs to establish us as a stand-alone entity of $2.0 million ($1.1 million recorded in selling, general and administrative expenses and $0.9 million recorded in engineering — research and development) in 2009. These costs include, but are not limited to, costs associated with information technology, legal, human resources, government compliance, payroll, accounts receivable, accounts payable, tax, treasury and engineering.

 

  (k) Represents a curtailment adjustment of ($1.3) million (recorded in selling, general and administrative expenses) for our European subsidiary’s defined benefit plan resulting from an adjustment in retirement benefits for its employees.

 

  (l) Represents employee stock compensation expense, service fees (recorded in selling, general and administrative expenses) paid to our Sponsors and a third quarter 2010 adjustment of ($0.4) million (recorded in selling, general and administrative expenses) related to the settlement of litigation which originated with the Predecessor but was assumed by the Company as part of the Acquisition Transaction.

 

 

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RISK FACTORS

An investment in our common stock involves a high degree of risk. You should consider carefully the following risks and other information contained in this prospectus before you decide whether to buy our common stock. If any of the events contemplated by the following discussion of risks should occur, our business, results of operations and financial condition could suffer significantly. As a result, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock. The following is a summary of all the material risks known to us.

Risks Related to Our Business

Our substantial indebtedness could adversely affect our financial health, restrict our activities and affect our ability to meet our obligations.

We have a significant amount of indebtedness. As of December 31, 2011 after giving effect to the amendment to the Senior Secured Credit Facility, we had total indebtedness of $3,378.6 million and we would have been able to borrow an additional $400.0 million under the revolving portion of ATI’s Senior Secured Credit Facility, less $30.8 million of offsetting outstanding letters of credit. As of December 31, 2011, ATI had no outstanding borrowings against the revolving credit facility. Of our total indebtedness at December 31, 2011, $2,594.9 million consists of the term loans under ATI’s Senior Secured Credit Facility, approximately $801.0 million of which matures in 2017 and the remaining balance of which matures in 2014; $309.8 million consists of the 11.0% Senior Notes; $471.3 million consists of the 7.125% senior notes due 2019, or the 7.125% Senior Notes; and 200 million yen (approximately $2.6 million) consists of Japanese Yen denominated unsecured short-term notes. For a complete description of the terms of the Senior Secured Credit Facility and the 11.0% Senior Notes, the Senior Toggle Notes and the 7.125% Senior Notes, which collectively we refer to as the Senior Notes, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Description of the Senior Secured Credit Facility and —Description of the Senior Notes.”

Our substantial indebtedness could have important consequences. For example, it could:

 

   

make it more difficult for us to satisfy our obligations under our indebtedness;

 

   

require us to further dedicate a substantial portion of our cash flow from operations to payments of principal and interest on our indebtedness, thereby reducing the availability of our cash flow to fund acquisitions, working capital, capital expenditures, research and development efforts and other general corporate purposes;

 

   

increase our vulnerability to and limit our flexibility in planning for, or reacting to, downturns or changes in our business and the industry in which we operate;

 

   

restrict us from making strategic acquisitions or cause us to make non-strategic divestitures;

 

   

expose us to the risk of increased interest rates as borrowings under the Senior Secured Credit Facility are subject to variable rates of interest;

 

   

place us at a competitive disadvantage compared to our competitors that have less debt; and

 

   

limit our ability to borrow additional funds.

In addition, the Senior Secured Credit Facility contains a maximum total senior secured leverage ratio. The Senior Secured Credit Facility and the indentures governing the Senior Notes also contain other negative and affirmative covenants that will limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with any of the covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness.

 

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We have experienced significant losses and we cannot assure you that we will maintain profitability.

Although our net income for fiscal year 2011 and 2010 was $103.0 million and $29.6 million, respectively, for the 2007 period following the Acquisition Transaction (August 7, 2007 to December 31, 2007) and fiscal years 2008 and 2009, we had net losses of $164.3 million, $328.1 million and $323.9 million, respectively. Our ability to achieve or maintain profitability is dependent upon a number of risks and uncertainties, many of which are beyond our control. We cannot assure you that we will be successful in executing our business strategy and achieving or maintaining profitability, and our failure to do so could have a material adverse effect on the price of our common stock and our ability to satisfy our obligations, including making payments on our indebtedness.

We participate in markets that are competitive, and our competitors’ actions could have a material adverse effect on our business, results of operations and financial condition.

Our business operates in competitive markets. We compete against other global manufacturers on the basis of product performance, quality, price, distribution capability and service in addition to other factors. Actions by our competitors could lead to downward pressure on prices and/or a decline in our market share, either or both of which could adversely affect our results. We face competition from domestic manufacturers of manual transmissions, AMTs and fully-automatic transmissions for commercial vehicles. In particular, we could face competition from well-capitalized entrants into the transmission market, as well as from aggressive pricing tactics by other transmission manufacturers trying to gain market share. We also face competition from international manufacturers in our international operations and from international manufacturers entering our domestic market.

In addition, some of our customers or future customers are OEMs that manufacture or could in the future manufacture transmissions for their own products. Despite their transmission manufacturing abilities, our existing OEM customers have chosen to purchase certain transmissions from us due to customer demand, resulting from the quality of our transmission products, and in order to reduce fixed costs, eliminate production risks and maintain company focus. However, we cannot be certain these customers will continue to purchase our products in the future. Increased levels of production insourcing by these customers could result from a number of factors, such as shifts in our customers’ business strategies, acquisition by a customer of another transmission manufacturer, the inability of third-party suppliers to meet specifications and the emergence of low-cost production opportunities in foreign countries. As a result, these OEMs may use transmissions produced internally or by another manufacturer and no longer choose to purchase transmissions from us. A significant reduction in the level of external sourcing of transmission production by our OEM customers could significantly impact our net sales and cash flows and, accordingly, have a material adverse effect on our business, results of operations and financial condition.

Continued volatility in and disruption to the global economic environment may have a material adverse effect on our business, results of operations and financial condition.

The global economy has recently experienced a period of significant volatility and disruption. The commercial vehicle industry as a whole has been more adversely affected by the economic conditions than many other industries, as the purchase or replacement of commercial vehicles, which are durable items, can be deferred for many reasons, including reduced spending by end users. These deferred acquisitions have had a material adverse effect on our results of operations, particularly in 2008 and 2009 in which our net losses were $328.1 million and $323.9 million, respectively. Many of the economic and market conditions that drove the drop in commercial vehicle sales, primarily continued reduced spending by end users, continue to affect sales. Furthermore, financial instability or bankruptcy at any of our suppliers or customers could disrupt our ability to manufacture our products and impair our ability to collect receivables, any or all of which may have a material adverse effect on our business, results of operations and financial condition.

 

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Certain of our end users operate in highly cyclical industries, which can result in uncertainty and significantly impact the demand for our products, which could have a material adverse effect on our business, results of operations and financial condition.

Some of the markets in which we operate, including energy, mining, construction, distribution and motorhome, exhibit a high degree of cyclicality. Decisions to purchase our transmissions are largely a result of the performance of these and other industries we serve. If demand for output in these industries decreases, the demand for our products will likely decrease. Demand in these industries is impacted by numerous factors including prices of commodities, rates of infrastructure spending, housing starts, real estate equity values, interest rates, consumer spending, fuel costs, energy demands, municipal spending and commercial construction, among others. Increases or decreases in these variables globally may significantly impact the demand for our products, which could have a material adverse effect on our business, results of operations and financial condition. If we are unable to accurately predict demand, we may be unable to meet our customers’ needs, resulting in the loss of potential sales, or we may manufacture excess products, resulting in increased inventories and overcapacity in our production facilities, increasing our unit production cost and decreasing our operating margins.

Our long-term growth prospects and results of operations may be impaired if the rate of adoption of fully-automatic transmissions in commercial vehicles outside North America does not increase.

Our long-term growth strategy depends in part on an increased rate of automaticity outside North America. As part of that strategy, we have established new manufacturing facilities in India and Hungary. We have also dedicated significant human resources to serve markets where we anticipate increased adoption of automaticity, including China, India, Brazil and Russia. However, manual transmissions remain the market leader outside North America and there can be no assurance that adoption of automatic transmissions will increase. Factors potentially impacting adoption of automatic transmissions outside of North America may include the large existing installed base of manual transmissions, customer preferences for manual transmissions, commercial vehicle OEM integration into manual transmission and AMT manufacturing, and failure to further develop the Allison brand. If the rate of adoption of fully-automatic transmissions does not increase as we have anticipated, our long-term growth prospects and results of operations may be impaired.

Any events that impact our brand name, including if the products we manufacture or distribute are found to be defective, could have an adverse effect on our reputation, cause us to incur significant costs and negatively impact our business, results of operations and financial condition.

We face exposure to product liability claims in the event that the use of our products has, or is alleged to have, resulted in injury, death or other adverse effects. We currently maintain product liability insurance coverage, but we cannot be assured that we will be able to obtain such insurance on acceptable terms in the future, if at all, or that any such insurance will provide adequate coverage against potential claims. Product liability claims can be expensive to defend and can divert the attention of management and other personnel for long periods of time, regardless of the ultimate outcome. An unsuccessful product liability defense could have a material adverse effect on our business, results of operation, financial condition or prospects. If one of our products is determined to be defective, we may face substantial warranty costs and may be responsible for significant costs associated with a product recall or a redesign. We have had defect and warranty issues associated with certain of our products in the past, such as our H 40/50 EP hybrid-propulsion transit bus system, where certain units were falling short of their expected service life and our Predecessor decided to cover repair and replacement for an extended period. See NOTE 9 to our Consolidated Financial Statements for the year ended December 31, 2011 for additional details regarding this warranty issue. We cannot assure you similar product defects will not occur in the future.

Furthermore, our business depends on the strong brand reputation we have developed. In addition to the risk of defective products we face with our new product installations, we also face significant risks in our efforts to penetrate new markets, where we have limited brand recognition. We also rely on our reputation with end users of our transmissions to specify our transmissions when purchasing new vehicles from our OEM customers. In the

 

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event we are not able to maintain or enhance our brand in these new markets or our reputation is damaged in our existing markets as a result of product defects or recalls, we may face difficulty in maintaining our pricing positions with respect to some of our products or experience reduced demand for our products, which could negatively impact our business, results of operations and financial condition.

We may not be successful in introducing our new products and responding to customer needs.

We currently have more new products under development than at any time in our history as a result of increased spending on new product development. The development of new products is difficult and the timetable for commercial release is uncertain, and we may not be successful in introducing our new products and responding to customer needs. If we do not adequately anticipate the changing needs of our customers by developing and introducing new and effective products on a timely basis, our competitive position and prospects could be harmed. If our competitors are able to respond to changing market demands and adopt new technologies more quickly than we do, demand for our products could decline, our competitive position could be harmed, and we will not be able to recoup a return on our development investments. Moreover, changing customer demands as well as evolving safety and environmental standards could require us to adapt our products to address such changes. As a result, in the future we may experience delays in the introduction of some or all of our new products or modifications or enhancements of existing products. Furthermore, there may be production delays due to unanticipated technological setbacks, which may, in turn, delay the release of new products to our end users. If we experience significant delays in production, our net sales and results of operations may be materially adversely affected.

Our success depends on continued research and development efforts, the outcome of which is uncertain.

Our success depends on our ability to improve the efficiency and performance of our transmissions, and we invest significant resources in research and development in order to do so. Nevertheless, the research and development process is time-consuming and costly, and offers uncertain results. We may not be able through our research and development efforts to keep pace with improvements in transmission-related technology of our competitors, and licenses for technologies that would enable us to keep pace with our competitors may not be available on commercially reasonable terms if at all. Finally, our research and development efforts, and generally our ability to introduce improved products in the marketplace, may be constrained by the patents and other intellectual property rights of competitors and others.

Sales of our hybrid-propulsion systems may be negatively impacted if governmental entities elect not to subsidize the purchase of such products by end users.

The sales of our hybrid-propulsion systems for use in transit buses may be negatively impacted if governmental entities elect not to subsidize the purchase of such products by end users. In 2011, we derived approximately 6% of our net sales from the sale of hybrid-propulsion systems for use in transit buses to city, state and federal governmental end users. Such end users may be eligible to receive certain subsidies as a result of their purchase of vehicles using hybrid-propulsion systems. For example, the Federal Transit Authority and the U.S. Department of Energy, or the DOE, provide funds for end users to pursue alternative fuel propulsion systems. While we do not directly receive these subsidies, if any of the subsidizing entities elect to curtail such subsidies to end users for any reason, including governmental budget reductions and related fiscal matters, failure of our hybrid technology to qualify for such subsidies or redundancy by alternative technologies created by our competitors, our sales from our hybrid-propulsion systems may be negatively impacted. For the years ended December 31, 2011 and 2010, we experienced a 14% and 23%, respectively, decrease in revenue generated from hybrid-propulsion systems for transit buses.

 

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Our sales are concentrated among our top five OEM customers and the loss or consolidation of any one of these customers or the discontinuation of particular vehicle models for which we are a significant supplier could reduce our net sales and have a materially adverse effect on our results of operations.

We have in the past and may in the future derive a significant portion of our net sales from a relatively limited number of OEM customers. For the years ended December 31, 2011, 2010 and 2009, our top five customers accounted for approximately 38%, 41% and 43% of our net sales, respectively. Our top two customers, Navistar and Daimler, accounted for approximately 12% and 10%, respectively, of our net sales during 2011. As discussed earlier in this section, the vehicle industry, including our customers and suppliers, experienced significant disruption during the current economic downturn. The loss of, or consolidation of any one of these customers, or a significant decrease in business from, one or more of these customers could harm our business. In January 2010, we received a late payment of $14.2 million from one of our top five customers that was due in December 2009. We cannot assure you that we will not experience future late payments by our customers, and any late payments in the future may be material. In addition, the discontinuation of, particular vehicle models for which we are a significant supplier could reduce our net sales and have a material adverse effect on our results of operations.

Our international operations, in particular our emerging markets, are subject to various risks which could have a material adverse effect on our business, results of operations and financial condition.

Our business is subject to certain risks associated with doing business internationally, particularly in emerging markets. Non-North American net sales represented approximately 20% of our net sales for 2011. Most of our operations are in the U.S., but we also have a manufacturing facility in India, a manufacturing facility in Hungary with a services agreement with Opel Szentgotthard Automotive Manufacturing Ltd., an affiliated company of General Motors, and customization centers in Brazil, The Netherlands, India and China. Further, we intend to continue to pursue growth opportunities for our business in a variety of business environments outside the U.S., which could exacerbate the risks set forth below. Our international operations are subject to, without limitation, the following risks:

 

   

the burden of complying with multiple and possibly conflicting laws and any unexpected changes in regulatory requirements;

 

   

foreign currency exchange controls, import and export restrictions and tariffs, including restrictions promulgated by the Office of Foreign Assets Control of the U.S. Department of the Treasury, and other trade protection regulations and measures;

 

   

political risks, including risks of loss due to civil disturbances, acts of terrorism, acts of war, guerilla activities and insurrection;

 

   

unstable economic, financial and market conditions and increased expenses as a result of inflation, or higher interest rates;

 

   

difficulties in enforcement of third-party contractual obligations and intellectual property rights and collecting receivables through foreign legal systems;

 

   

difficulty in staffing and managing international operations and the application of foreign labor regulations;

 

   

differing local product preferences and product requirements;

 

   

fluctuations in currency exchange rates to the extent that our assets or liabilities are denominated in a currency other than the functional currency of the country where we operate;

 

   

potentially adverse tax consequences from changes in tax laws, requirements relating to withholding taxes on remittances and other payments by subsidiaries and restrictions on our ability to repatriate dividends from our subsidiaries; and

 

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exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act, or FCPA, and similar laws and regulations in other jurisdictions.

Any one of these factors could materially adversely affect our sales of products or services to international customers or harm our reputation, which could materially adversely affect our business, results of operations and financial condition.

Our international operations require us to comply with anti-corruption laws and regulations of the U.S. government and various international jurisdictions.

Doing business on a worldwide basis requires us and our subsidiaries to comply with the laws and regulations of the U.S. government and various international jurisdictions, and our failure to comply with these rules and regulations may expose us to liabilities. These laws and regulations may apply to companies, individual directors, officers, employees and agents, and may restrict our operations, trade practices investment decisions and partnering activities. In particular, our international operations are subject to U.S. and foreign anti-corruption laws and regulations, such as the FCPA. The FCPA prohibits U.S. companies and their officers, directors, employees and agents acting on their behalf from corruptly offering, promising, authorizing or providing anything of value to foreign officials for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining favorable treatment. The FCPA also requires companies to make and keep books, records and accounts that accurately and fairly reflect transactions and dispositions of assets and to maintain a system of adequate internal accounting controls. As part of our business, we deal with state-owned business enterprises, the employees and representatives of which may be considered foreign officials for purposes of the FCPA. In addition, some of the international locations in which we operate lack a developed legal system and have elevated levels of corruption. As a result of the above activities, we are exposed to the risk of violating anti-corruption laws. Violations of these legal requirements are punishable by criminal fines and imprisonment, civil penalties, disgorgement of profits, injunctions, debarment from government contracts as well as other remedial measures. We have established policies and procedures designed to assist us and our personnel in complying with applicable U.S. and international laws and regulations. However, our employees, subcontractors and agents could take actions that violate these requirements, which could adversely affect our reputation, business, financial condition and results of operations.

The current economic environment could adversely affect our ability and the ability of our customers and suppliers to obtain credit.

In the current economic environment, some of our customers and suppliers may experience serious cash flow problems and, thus, may find it difficult to obtain financing, if financing is available at all. As a result, our customers’ need for and ability to purchase our products or services may decrease, and our suppliers may increase their prices, reduce their output or change their terms of sale. Any inability of customers to pay us for our products and services, or any demands by suppliers for different payment terms, may materially and adversely affect our results of operations and financial condition. For example, in 2009, we experienced higher accounts receivable due to a late payment by a significant customer. Furthermore, our suppliers may not be successful in generating sufficient sales or securing alternate financing arrangements, and therefore may no longer be able to supply goods and services to us. In that event, we would need to find alternate sources for these goods and services, and there is no assurance we would be able to find such alternate sources on favorable terms, if at all. Any such disruption in our supply chain could adversely affect our ability to manufacture and deliver our products on a timely basis, and thereby affect our results of operations.

Labor unrest could have a material adverse effect on our business, results of operations and financial condition.

As of December 31, 2011, approximately 60% of our U.S. employees, representing over 50% of our total employees, were represented by the UAW and are subject to a collective bargaining agreement. This agreement expires in November 2012. While we intend to negotiate in good faith with the UAW, we cannot guarantee we will be able to renew a collective bargaining agreement on similar or more favorable terms than those that

 

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presently exist. We may incur increased labor costs as a result of any of these renegotiations. In addition, many of our direct and indirect customers and vendors have unionized work forces. Strikes, work stoppages or slowdowns experienced by these customers or vendors or their other suppliers could result in slowdowns or closings of assembly plants that use our products or supply materials for use in the production of our products. Organizations responsible for shipping our products may also be impacted by strikes. Any interruption in the delivery of our products could reduce demand for our products and could have a material adverse effect on us.

In general, we consider our labor relations with all of our employees to be good. However, in the future we may be subject to labor unrest. The inability to reach a new agreement could delay or disrupt our operations in the affected regions, including the acquisition of raw materials and components, the manufacture, sales and distribution of products and the provision of services. If strikes, work stoppages or lock-outs at our facilities or at the facilities of our vendors or customers occur or continue for a long period of time, our business, results of operations and financial condition may be materially adversely affected.

In the event of a catastrophic loss of one of our key manufacturing facilities, our business would be adversely affected.

While we manufacture our products in several facilities and maintain insurance covering our facilities, including business interruption insurance, a catastrophic loss of the use of all or a portion of one of our manufacturing facilities due to accident, labor issues, weather conditions, acts of war, political unrest, terrorist activity, natural disaster or otherwise, whether short- or long-term, would have a material adverse effect on our business, results of operations and financial condition. Our most significant concentration of manufacturing is around our corporate headquarters in Indianapolis, Indiana where we maintain approximately 90% of our production capacity. In addition to our Indianapolis manufacturing facilities, we currently operate manufacturing facilities in both Szentgotthard, Hungary and Chennai, India. However, those facilities are smaller and newer than the Indianapolis facility. In the event of a disruption at the Indianapolis facility, they may not be adequately equipped to operate at a level sufficient to compensate for the volume of production at the Indianapolis facility due to their size and the fact that they have not yet been tested for such significant increases in production volume.

Increases in cost, disruption of supply or shortage of raw materials or components used in our products could harm our business and profitability.

We use various raw materials in our business, including corrosion-resistant steel, non-ferrous metals such as aluminum and nickel, and precious metals such as platinum and palladium. We use raw materials directly in manufacturing and in approximately 90% of the transmission components that we purchase from our suppliers. We generally purchase our raw materials on the open market. The prices for these raw materials fluctuate depending on market conditions. In recent years, we have experienced significant increases in the cost of raw materials such as steel, aluminum and nickel, as well as in freight charges, and such volatility in the prices of these commodities could increase the cost of manufacturing our products and providing our services. We may not be able to pass on these costs to our customers, and this could have a material adverse effect on our business, results of operations and financial condition. Even in the event that increased costs can be passed through to customers, our gross margin percentages would decline. Additionally, our suppliers are also subject to fluctuations in the prices of raw materials and may attempt to pass all or a portion of such increases on to us. In the event they are successful in doing so, our margins would decline.

In 2011, approximately 80% of our total spending on raw materials and components were sourced from approximately 50 suppliers. All of the suppliers from which we purchase the raw materials and components used in our business are fully validated suppliers, meaning the suppliers’ manufacturing processes and inputs have been validated under a production part approval process, or PPAP. Furthermore, there are only a limited number of suppliers for certain of the materials used in our business, such as corrosion-resistant steel. As a result, our business is subject to the risk of additional price fluctuations and periodic delays in the delivery of our raw materials or components if supplies from a validated supplier are interrupted and a new supplier must be validated or materials and components must be purchased from a supplier without a completed PPAP. Any

 

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such price fluctuations or delays, if material, could harm our profitability or operations. In addition, the loss of a supplier could result in material cost increases or reduce our production capacity. We also cannot guarantee we will be able to maintain favorable arrangements and relationships with these suppliers. An increase in the cost or a sustained interruption in the supply or shortage of some of these raw materials or components that may be caused by a deterioration of our relationships with suppliers or by events such as natural disasters, power outages, labor strikes, or the like could negatively impact our business, results of operations and financial condition.

Although we have agreements with many of our customers that we will pass such price increases through to them, such contracts may be cancelled by our customers and/or we may not be able to recoup the costs of such price increases. Additionally, if we are unable to continue to purchase our required quantities of raw materials on commercially reasonable terms, or at all, if we are unable to maintain or enter into purchasing contracts for commodities, or if delivery of materials from suppliers is delayed or non-conforming, our operations could be disrupted or our profitability could be adversely impacted.

Exchange rate fluctuations could adversely affect our results of operations and financial position.

As a result of the expansion of our international operations, currency exchange rate fluctuations could affect our results of operations and financial position. We expect to generate an increasing portion of our net sales and expenses in such foreign currencies as the Japanese Yen, the Euro, the Chinese Yuan Renminbi, the Brazilian Real, the Canadian Dollar, the British Pound, the Hungarian Forint and the Indian Rupee. Although we may enter into foreign exchange agreements with financial institutions in order to reduce our exposure to fluctuations in the value of these and other foreign currencies, these transactions, if entered into, will not eliminate that risk entirely. To the extent that we are unable to match net sales received in foreign currencies with expenses paid in the same currency, exchange rate fluctuations could have a negative impact on our results of operations and financial condition. Additionally, because our consolidated financial results are reported in U.S. Dollars, if we generate net sales or earnings in other currencies, the conversion of such amounts into U.S. Dollars can result in an increase or decrease in the amount of our net sales or earnings. Furthermore, we sell certain of our products in our non-North American markets denominated in the U.S. Dollar. To the extent that certain of the local currencies in our non-North American markets are relatively weaker than the U.S. Dollar, whether as a result of foreign governments’ influence or otherwise, we could become less price competitive, which could have a material adverse effect on the results of our operations.

A majority of our sales to the military end market are to U.S. government entities, and the loss of a significant number of our contracts would have a material adverse effect on our results of operations and financial condition.

Our net sales to the military end market are predominantly derived from contracts (revenue arrangements) with agencies of, and prime system contractors to, the U.S. government. The loss of all or a substantial portion of our net sales to the U.S. government would have a material adverse effect on our results of operations and financial condition. Approximately 12%, or $259.0 million, of our net sales for the year ended December 31, 2011 were made directly or indirectly to U.S. government agencies, including the DOD, which compares to 21% of our net sales in 2010, with this decrease primarily being driven by lower U.S. military spending, largely as a result of reduced military activity in Iraq and Afghanistan.

A significant portion of our total net sales are for products and services under contracts with various agencies and procurement offices of the DOD or with prime contractors to the DOD. Although these various agencies, procurement offices and prime contractors are subject to common budgetary pressures and other factors, our customers exercise independent purchasing decisions. Because of this concentration of contracts, if a significant number of our DOD contracts and subcontracts are simultaneously delayed or cancelled for budgetary, performance or other reasons, it would have a material adverse effect on our results of operations and financial condition.

Furthermore, we have benefited from the upward trend in DOD budget authorization and spending outlays over recent years, including supplemental appropriations for military operations in Iraq and Afghanistan.

 

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However, we expect future DOD spending on wheeled and tracked vehicles will likely decline. In particular, significant volume reductions in one of our Indianapolis plants, which primarily produces our U.S. military tracked products, may increase operating costs, which directly impacts our competitive advantage and would materially adversely affect our business, results of operations and financial condition. Moreover, as U.S. involvement in Iraq and Afghanistan continues to diminish, the demand for our products may decline significantly, which could have a material adverse effect on our results of operations and financial condition.

In addition to contract cancellations and declines in agency budgets, our future financial results may be adversely affected by:

 

   

curtailment of the U.S. government’s use of technology or other services and product providers, including curtailment due to government budget reductions and related fiscal matters;

 

   

developments in Iraq or Afghanistan, or other geopolitical developments that affect demand for our products and services; and

 

   

technological developments that impact purchasing decisions or our competitive position.

Our business and financial results may be adversely affected by government contracting risks.

We are subject to various laws and regulations applicable to parties doing business with the U.S. government, including laws and regulations governing performance of U.S. government contracts, the use and treatment of U.S. government furnished property and the nature of materials used in our products. We may be unilaterally suspended or barred from conducting business with the U.S. government, or become subject to fines or other sanctions if we are found to have violated such laws or regulations. As a result of the need to comply with these laws and regulations, we are subject to increased risks of governmental investigations, civil fraud actions, criminal prosecutions, whistleblower law suits and other enforcement actions. The laws and regulations to which we are subject include, but are not limited to, Export Administration Regulations, Federal Acquisition Regulation, International Traffic in Arms Regulations, Foreign Assets Control documentation and regulations from the Bureau of Alcohol, Tobacco and Firearms and the FCPA.

U.S. government contracts are subject to modification, curtailment or termination by the U.S. government without prior written notice, either for convenience or for default as a result of our failure to perform under the applicable contract. If terminated by the U.S. government as a result of our default, we could be liable for additional costs the U.S. government incurs in acquiring undelivered goods or services from another source and any other damages it suffers. Additionally, we cannot assign prime U.S. government contracts without the prior consent of the U.S. government contracting officer, and we are required to register with the Central Contractor Registration Database. Furthermore, the U.S. government periodically audits our governmental contract costs, which could result in fines, penalties or adjustment of costs and prices under the contracts.

We are subject to the requirements of the National Industrial Security Program Operating Manual for our facility security clearance, which is a prerequisite for our ability to perform on classified contracts for the U.S. government.

Certain contracts with the various departments and agencies of the U.S. government, including the DOD, require that our offices be issued facility security clearances under the National Industrial Security Program. The National Industrial Security Program requires that a corporation maintaining a facility security clearance be effectively insulated from foreign ownership, control or influence, or FOCI. Because one of our principal stockholders is a Canadian entity, we have agreed to, and have implemented, a Security Control Agreement with the Defense Security Service, or DSS, as a suitable FOCI mitigation arrangement under the National Industrial Security Program Operating Manual. A FOCI arrangement is necessary for us to continue to maintain the requisite security clearances to complete performance under these contracts. Failure to reach and/or maintain an appropriate agreement with DSS regarding the appropriate FOCI mitigation arrangement could result in invalidation or termination of the security clearances, which in turn would mean that we would not be able to enter into future contracts with the U.S. government requiring facility security clearances, and may result in the loss of our ability to complete certain of our existing contracts with the U.S. government.

 

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Our brand and reputation are dependent on the continued participation and level of service of our numerous independent distributors and dealers.

We work with a network of approximately 1,500 independent distributors and dealers that provide post-sale service and parts and support equipment. Because we depend on the pull-through demand generated by end users for our products, any actions by the independent distributors or dealers, which are not in our control, may harm our reputation and damage the brand loyalty among our customer base. In the event that we are not able to maintain our brand reputation because of the actions of our independent distributors and dealers, we may face difficulty in maintaining our pricing positions with respect to some of our products or have reduced demand for our products, which could negatively impact our business, results of operations and financial condition. In addition, if a significant number of independent distributors or dealers were to terminate their contracts, it could adversely impact our business, results of operations and financial condition.

Many of the key patents and unpatented technology we use in our business are licensed to us, not owned by us, and our ability to use and enforce such patents and technology is restricted by the terms of the license.

Protecting our intellectual property rights is critical to our ability to compete and succeed as a company. In connection with the Acquisition Transaction, General Motors granted us an irrevocable, perpetual, royalty-free, worldwide license under a large number of U.S. and foreign patents and patent applications, as well as certain unpatented technology and know-how, to design, develop, manufacture, use and sell fully-automatic transmissions and H 40/50 EP hybrid-propulsion transit bus systems for use in certain vocational vehicles, military vehicles and off-road products, which we refer to as Patent and Technology License Agreement. With respect to the bulk of the intellectual property licensed to us under such license agreement, such license is exclusive with respect to the design, development, manufacture, use and sale of fully-automatic transmissions and H 40/50 EP hybrid-propulsion transit bus systems in vocational vehicles above certain weight rating thresholds, certain military vehicles and certain off-road products and non-exclusive with respect to certain other products that are within the scope of the licensed patents or to which the licensed technology can be applied. We consider the patents and technology licensed under such license agreement, as a whole, to be critical to preserving our competitive position in the market. However, General Motors continues to own such patents and technology, and pursuant to the terms of such license agreement, General Motors has the right, in the first instance, to control the maintenance, enforcement and defense of such patents and the prosecution of the licensed patent applications. In addition, the license agreement limits our ability to sublicense our rights. The Patent and Technology License Agreement permits us to utilize the bulk of the intellectual property rights on an exclusive basis in non-military vehicles with gross vehicle weights above 5900 kilograms (typically Class 4 and higher) with some limited exceptions for General Motors light-duty pickup truck and van platforms. It also permits us to utilize the bulk of the intellectual property rights on an exclusive basis in military vehicles that exceed 4250 kilograms (generally Class 3 to Class 4 and higher). General Motors continues to have the right under such patents and technology to utilize the licensed intellectual property for use in vehicles below the above mentioned rating thresholds as well as some light-duty van and pickup truck platforms.

We rely on unpatented and patented technology, which exposes us to certain risks.

We currently do, and may continue in the future to, rely on unpatented proprietary technology. In such regard, we cannot be assured that any of our applications for protection of our intellectual property rights will be approved or that others will not infringe or challenge our intellectual property rights. It is possible our competitors will independently develop the same or similar technology or otherwise obtain access to our unpatented technology.

Although we believe the loss or expiration of any single patent would not have a material effect on our business, results of operations or financial position, there can be no assurance that any one, or more, of the patents licensed from General Motors, or any other intellectual property owned by or licensed to us, will not be challenged, invalidated or circumvented by third parties. In fact, a number of the patents licensed to us by General Motors have expired since the date of the Acquisition Transaction, and others are set to expire in the

 

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next few years. When a patent expires, the inventions it discloses can be used freely by others. Thus, the competitive advantage that we gain from the patents licensed to us from General Motors pursuant to the Acquisition Transaction will decrease over time, and a greater burden will be placed on our own research and development and licensing efforts to develop and otherwise acquire technologies to keep pace with improvements of transmission-related technology in the marketplace. We enter into confidentiality and invention assignment agreements with employees, and into non-disclosure agreements with suppliers and appropriate customers so as to limit access to and disclosure of our proprietary information. We cannot be assured that these measures will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure. If we are unable to maintain the proprietary nature of our technologies, our ability to sustain margins on some or all of our products may be affected, which could reduce our sales and profitability. Moreover, the protection provided for our intellectual property by the laws and courts of foreign nations may not be as advantageous to us as the protection available under U.S. law.

Our pension funding obligations could increase significantly due to a reduction in funded status as a result of a variety of factors.

Our earnings may be positively or negatively impacted by the amount of income or expense recorded for our defined benefit pension plans and other post-retirement benefits. GAAP requires that income or expense for defined benefit pension plans be calculated at the annual measurement date using actuarial assumptions and calculations. These calculations reflect certain assumptions, the most significant of which relate to the capital markets, interest rates and other economic conditions. Changes in key economic indicators can change these assumptions. These assumptions, along with the actual value of assets at the measurement date, will impact the calculation of pension expense for the year. Although GAAP pension expense and pension contributions are not directly related, the key economic indicators that affect GAAP pension expense also affect the amount of cash that we would contribute to our defined benefit pension plans. Because the values of these defined benefit pension plans’ assets have fluctuated and will fluctuate in response to changing market conditions, the amount of gains or losses that will be recognized in subsequent periods, the impact on the funded status of the defined benefit pension plans and the future minimum required contributions, if any, could have a material adverse effect on our business, results of operations and financial condition. The magnitude of such impact cannot be determined with certainty at this time. However, the effect of a one percentage point decrease in the assumed

discount rate would result in an increase in the December 31, 2011 defined benefit pension plans obligation of approximately $14.4 million. Likewise, a one percentage point decrease in the effective interest rate for determining defined benefit pension plans contributions would result in an increase in the minimum required contributions for 2012 of approximately $4.2 million. Similarly, a one percentage point decrease in the assumed discount rate would result in an increase in the December 31, 2011 other post-retirement benefits obligation of approximately $29.6 million. As of December 31, 2011 the unfunded status of our defined benefit pension plans and other post-retirement benefits was $16.3 million and $156.6 million, respectively.

Environmental, health and safety laws and regulations may impose significant compliance costs and liabilities on us.

We are subject to many environmental, health and safety laws and regulations governing emissions to air, discharges to water, the generation, handling and disposal of waste and the clean up of contaminated properties. Compliance with these laws and regulations is costly. We have incurred and expect to continue to incur significant costs to maintain or achieve compliance with applicable environmental, health and safety laws and regulations. Moreover, if these environmental, health and safety laws and regulations become more stringent in the future, we could incur additional costs in order to ensure that our business and products comply with such regulations. We cannot assure we are in full compliance with all environmental, health and safety laws and regulations. Our failure to comply with applicable environmental, health and safety laws and regulations and permit requirements could result in civil or criminal fines, penalties or enforcement actions, third-party claims for property damage and personal injury, requirements to clean up property or to pay for the costs of cleanup or regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, including the installation of pollution control equipment or remedial actions. Our failure to comply could also result in our

 

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failure to secure adequate insurance for our business, resulting in significant exposure, diminished ability to hedge our risks and material modifications of our business operations.

We may be subject to liability under the Comprehensive Environmental Response, Compensation and Liability Act and similar state or foreign laws for contaminated properties that we currently own, lease or operate or that we or our predecessors have previously owned, leased or operated, and sites to which we or our predecessors sent hazardous substances. Such liability may be joint and several so that we may be liable for more than our share of contamination, and any such liability may be determined without regard to causation or knowledge of contamination. We or our predecessors have been named potentially responsible parties at contaminated sites from time to time. General Motors continues to perform remedial activities at our Indianapolis, Indiana manufacturing facilities relating to historical soil and groundwater contamination at the facilities. General Motors is performing such activities pursuant to a voluntary Corrective Action Agreement with the U.S. Environmental Protection Agency, or EPA, which we refer to as the Corrective Action. General Motors retained responsibility for completing all remediation activities covered by the Corrective Action at the Indianapolis, Indiana facilities, and agreed to indemnify us against certain environmental liabilities. See “Business — Environmental.” There can be no assurances that General Motors will comply with its indemnity obligations or with its remedial obligations at the Indianapolis, Indiana facilities, or that future environmental remediation obligations will not have a material adverse effect on our results of operations. In addition, we occasionally evaluate various alternatives with respect to our facilities, including possible dispositions or closings. Investigations undertaken in connection with these activities may lead to discoveries of contamination that must be remediated, and closings of facilities may trigger remediation requirements that are not applicable to operating facilities. We may also face lawsuits brought by third parties that either allege property damage or personal injury as a result of, or seek reimbursement for costs associated with, such contamination.

We could be materially adversely affected by any failure to maintain cost controls.

We rely on our cost structure and operating discipline to achieve strong operating margins. There are many factors that could affect our ability to realize expected cost savings or achieve expected cost savings in the future that we are not able to control, including the inability to meet demand through our low-cost country sourcing model; the need for unexpected significant capital expenditures; unexpected changes in commodity or component pricing that we are unable to pass on to our suppliers or customers; our inability to maintain efficiencies gained from our workforce optimization initiatives; and our failure to achieve and maintain expected cost savings from our multi-tier wage and benefit structure. Additionally, we have substantial indebtedness of approximately $3.4 billion as of December 31, 2011 and had net income (losses) of $103.0 million, $29.6 million, ($323.9) million and ($328.1) million for the years ended December 31, 2011, 2010, 2009 and 2008, respectively. Our inability to maintain our cost controls could adversely impact our operating margins.

We will incur increased costs as a result of operating as a publicly traded company, and our management will be required to devote substantial time to new compliance initiatives.

As a publicly traded company, we will incur additional legal, accounting and other expenses that we did not previously incur. Although we are currently unable to estimate these costs with any degree of certainty, they may be material in amount. In addition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules of the Securities and Exchange Commission, or the SEC, and the NYSE, have imposed various requirements on public companies. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur additional costs to maintain the same or similar coverage.

Furthermore, if we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, the market price of our common stock could decline and we could be subject to potential

 

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delisting by the NYSE and review by such exchange, the SEC, or other regulatory authorities, which would require the expenditure by us of additional financial and management resources. As a result, our stockholders could lose confidence in our financial reporting, which would harm our business and the market price of our common stock.

General Motors’ actions may materially affect our business and results of operations.

Although we are an independent company as a result of the Acquisition Transaction, General Motors’ future actions may still have a material impact on our business and results of operations. Pursuant to the Cure Agreement resulting from General Motors’ emergence from bankruptcy in 2009, General Motors has assumed certain agreements from its predecessor, including the Asset Purchase Agreement, intellectual property and software license agreements, lease agreements, engineering services agreements, an employee matters agreement and a hybrid co-branding agreement. General Motors’ failure to comply with any portion of these agreements for any reason, including the indemnities therein, could inhibit us from operating and expanding our business in the future.

Additionally, General Motors has received a non-exclusive, royalty-free, worldwide license to use the “Allison Transmission” name and certain related trademarks on General Motors’ line of A1000 transmission for use primarily in Class 2 and 3 pick up trucks. If General Motors, or any of its subsidiaries or affiliated entities, or any third party uses the trade name “Allison Transmission” in ways that adversely affect such trade name or trademark, our reputation could suffer damage, which in turn could have a material adverse effect on our business, results of operations and financial condition.

In connection with the Acquisition Transaction, we entered into a mutual non-compete agreement with General Motors that restricts General Motors from competing with us in non-military vehicles in North America with gross vehicle weights above 5900 kilograms (typically Class 4 and higher) with some limited exceptions for certain General Motors light-duty pickup truck and van platforms. It also restricts General Motors from competing with us in military vehicles globally and in non-military vehicles outside North America that exceed 3500 kilograms (generally Class 3 to Class 4 and higher) with some limited exceptions. The non-compete periods extend until 2017 globally, except in Europe, where they expire in 2012. While we do not expect the expiration of this non-compete agreement in Europe to have an impact on our business, we cannot assure you that General Motors will not compete with us in these markets in the future. Similarly, we are restricted from competing with General Motors in weight classes below the above mentioned thresholds for similar periods of time. Upon expiration of the non-competition periods, both Allison and General Motors will be permitted to compete with each other, but such expiration will generally not affect Allison’s rights under the Patent and Technology License Agreement to use on an exclusive basis within its respective weight classes (subject to previously mentioned exceptions) the intellectual property that is licensed to Allison on an exclusive basis.

In addition, because of our current manufacturing services agreement with Opel Szentgotthard Automotive Manufacturing Ltd., an affiliated company of General Motors, we may be materially adversely affected by the failure of General Motors to perform as expected. This non-performance may consist of delays or failures caused by production issues. The risk of non-performance may also result from the insolvency or bankruptcy of General Motors. General Motors’ ability to provide personnel and technical resources to us is also subject to a number of risks, including destruction of our equipment or work stoppages. In addition, our failure to provide an adequate facility, or order sufficient quantities of inventory for General Motors, may increase the cost of production or may lead to General Motors refusing to provide resources to us at all. Our efforts to protect against and to minimize these risks may not always be effective.

An impairment in the carrying value of goodwill or other indefinite-lived intangible assets could negatively affect our consolidated results of operations and net worth.

Pursuant to GAAP, we are required to assess our goodwill and indefinite-lived intangible assets to determine if they are impaired on an annual basis, or more often if events or changes in circumstances indicate that impairment may have occurred. Intangible assets with finite lives are amortized over the useful life and are reviewed for impairment on triggering events such as events or changes in circumstances indicating that an impairment may have occurred. If the testing performed indicates that impairment has occurred, we are required

 

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to record a non-cash impairment charge for the difference between the carrying value of the goodwill and the implied fair value of the goodwill or the carrying value of the intangible assets and the fair value of the intangible assets in the period the determination is made. Disruptions to our business, end market conditions, protracted economic weakness and unexpected significant declines in operating results may result in charges for goodwill and other asset impairments.

Our annual goodwill impairment test for the year ended December 31, 2011 resulted in no goodwill impairment. Although our analysis regarding the fair value of goodwill indicates that it exceeds its carrying value, materially different assumptions regarding the future performance of our business could result in goodwill impairment losses. We recorded a trade name impairment charge of $190.0 million in 2009. The impairment charge was triggered principally by lower projected net sales as a result of general economic conditions in 2009. The effects of the impairment did not result in any other charges to goodwill, other intangible assets or long-lived assets. See “Notes to Consolidated Financial Statements.”

Usage of our net operating losses may be subject to limitations in the future.

As of December 31, 2011, we had $382.0 million of net operating losses for U.S. federal income tax purposes. Although these net operating losses currently are subject to a valuation allowance, if we generate taxable income in the future, we may be able to utilize these net operating losses to offset future federal income tax liabilities. In addition, our future financial performance may diminish our tax savings more rapidly than we currently anticipate. To the extent possible, we will structure our operating activities to minimize our income tax liabilities. However, there can be no assurance we will be able to reduce it to a specified level. In addition, while this offering will not result in a change of control under Section 382 of the U.S. Internal Revenue Code of 1986, any subsequent accumulations of common stock ownership leading to a change of control under that section, including through sales of stock by large stockholders after this offering, all of which are out of our control, could limit our ability to utilize our net operating losses to offset future federal income tax liabilities.

Risks Related to Our Indebtedness

To service our indebtedness, we will require a significant amount of cash and our ability to generate cash depends on many factors beyond our control.

Our ability to make cash payments on our indebtedness and to fund planned capital expenditures will depend on our ability to generate significant operating cash flow in the future. This, to a significant extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the Senior Secured Credit Facility in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. In such circumstances, we may need to refinance all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances. We cannot assure you that any such actions, if necessary, could be effected on commercially reasonable terms or at all.

If we are unable to generate sufficient cash flow or are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under the Senior Secured Credit Facility could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future

 

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need to obtain waivers from the required lenders under the Senior Secured Credit Facility to avoid being in default. If we or any of our subsidiaries breach the covenants under the Senior Secured Credit Facility and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under the Senior Secured Credit Facility, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.

Despite current indebtedness levels, we and our subsidiaries may still be able to incur additional indebtedness, which could further exacerbate the risks associated with our substantial financial leverage.

We and our subsidiaries may be able to incur additional indebtedness in the future because the terms of our indebtedness do not fully prohibit us or our subsidiaries from doing so. Subject to covenant compliance and certain conditions our indebtedness permits additional borrowing, including total borrowing up to $400.0 million under the revolving portion of the Senior Secured Credit Facility as of December 31, 2011. If new debt is added to our current debt levels and our subsidiaries’ current debt levels, the related risks that we and they now face could intensify.

Risks Related to this Offering and Ownership of our Common Stock

There is no existing market for our common stock, and we do not know if one will develop to provide you with adequate liquidity to sell our common stock at prices equal to or greater than the price you paid in this offering.

Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the NYSE or otherwise or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling any of our common stock that you buy. The initial public offering price for the common stock will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell our common stock at prices equal to or greater than the price you paid in this offering, or at all.

The price of our common stock may fluctuate significantly, and you could lose all or part of your investment.

Volatility in the market price of our common stock may prevent you from being able to sell your common stock at or above the price you paid for your common stock. The market price of our common stock could fluctuate significantly for various reasons, including:

 

   

our operating and financial performance and prospects;

 

   

our quarterly or annual earnings or those of other companies in our industry;

 

   

the public’s reaction to our press releases, our other public announcements and our filings with the SEC;

 

   

changes in, or failure to meet, earnings estimates or recommendations by research analysts who track our common stock or the stock of other companies in our industry;

 

   

the failure of research analysts to cover our common stock;

 

   

strategic actions by us, our customers or our competitors, such as acquisitions or restructurings;

 

   

new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

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the impact on our profitability temporarily caused by the time lag between when we experience cost increases until these increases flow through cost of sales because of our method of accounting for inventory;

 

   

material litigations or government investigations;

 

   

changes in general conditions in the U.S. and global economies or financial markets, including those resulting from war, incidents of terrorism or responses to such events;

 

   

changes in key personnel;

 

   

sales of common stock by us, our principal stockholders or members of our management team;

 

   

termination of lock-up agreements with our management team and principal stockholders;

 

   

the granting or exercise of employee stock options;

 

   

volume of trading in our common stock; and

 

   

the realization of any risks described under “Risk Factors.”

In addition, in the past three years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our common stock could fluctuate based upon factors that have little or nothing to do with our company, and these fluctuations could materially reduce our share price and cause you to lose all or part of your investment. Further, in the past, market fluctuations and price declines in a company’s stock have led to securities class action litigations. If such a suit were to arise, it could have a substantial cost and divert our resources regardless of the outcome.

If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired and investors’ views of us could be harmed.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, with auditor attestation of the effectiveness of our internal controls, beginning with our annual report on Form 10-K for the fiscal year ending December 31, 2013. If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of shares of common stock could decline and we could be subject to sanctions or investigations by the NYSE, the SEC or other regulatory authorities, which would require additional financial and management resources.

Our ability to successfully implement our business plan and comply with Section 404 requires us to be able to prepare timely and accurate financial statements. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, may cause our operations to suffer and we may be unable to conclude that our internal control over financial reporting is effective and to obtain an unqualified report on internal controls from our auditors as required under Section 404 of the Sarbanes-Oxley Act. Moreover, we cannot be certain that these measures would ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Even if we were to conclude, and our auditors were to concur, that our internal control over financial reporting provided reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP,

 

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because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. This, in turn, could have an adverse impact on trading prices for our shares of common stock, and could adversely affect our ability to access the capital markets.

We are controlled by Carlyle and Onex, whose interests in our business may be different than yours.

As of December 31, 2011, Carlyle and Onex each owned 49.8% of our common stock and non-voting common stock and are able to control our affairs in all cases. Following this offering, Carlyle and Onex will each continue to own approximately 43.8% of our equity (or 42.9% if the underwriters exercise their overallotment option in full). Pursuant to an amended and restated stockholders agreement, a majority of the Board of Directors has been designated by Carlyle and Onex and is affiliated with Carlyle and Onex. See “Certain Relationships and Related Party Transactions.” As a result, Carlyle and Onex or their nominees to the Board of Directors have the ability to control the appointment of our management, the entering into of mergers, sales of substantially all of our assets and other extraordinary transactions and influence amendments to our certificate of incorporation. So long as Carlyle and Onex continue to own a majority of our equity, they will have the ability to control the vote in any election of directors and will have the ability to prevent any transaction that requires stockholder approval regardless of whether others believe the transaction is in our best interests. In addition, the Company has historically paid Carlyle and Onex an annual fee for certain advisory and consulting services pursuant to a Management Agreement. See “Certain Relationships and Related Party Transactions.” The Company will pay Carlyle and Onex a fee of $16.0 million to terminate the Management Agreement in connection with the consummation of this offering. The interests of Carlyle and Onex could conflict with yours. In addition, Carlyle and Onex may in the future own businesses that directly compete with ours.

Our ability to pay regular dividends on our common stock is subject to the discretion of our Board of Directors and may be limited by our structure and statutory restrictions and restrictions imposed by the Senior Secured Credit Facility and the indentures governing the Senior Notes as well as any future agreements.

Following completion of this offering, we intend to declare cash dividends on our common stock as described in “Dividend Policy.” However, the payment of future dividends will be at the discretion of our Board of Directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our Board of Directors deems relevant. The Senior Secured Credit Facility and the indentures governing the Senior Notes also effectively limit our ability to pay dividends. As a consequence of these limitations and restrictions, we may not be able to make, or may have to reduce or eliminate, the payment of dividends on our common stock. Accordingly, you may have to sell some or all of your common stock after price appreciation in order to generate cash flow from your investment. You may not receive a gain on your investment when you sell your common stock and you may lose the entire amount of the investment. Additionally, any change in the level of our dividends or the suspension of the payment thereof could adversely affect the market price of our common stock.

You will suffer immediate and substantial dilution.

The initial public offering price per share of our common stock is substantially higher than our net tangible book value per common share immediately after the offering. As a result, you will pay a price per share that substantially exceeds the book value of our assets after subtracting our liabilities. At an offering price of $23.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, you will incur immediate and substantial dilution in the amount of $39.65 per share. We also had 14,864,059 shares of common stock issuable upon the exercise of options outstanding as of December 31, 2011 at a weighted average exercise price of $13.40 per share. To the extent these options are exercised, there will be further dilution. See “Dilution.”

 

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Provisions of our amended and restated certificate of incorporation and amended and restated bylaws and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, as a result, depress the trading price of our common stock.

As of March 12, 2012, our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:

 

   

authorize the issuance of blank check preferred stock that our Board of Directors could issue to increase the number of outstanding shares and to discourage a takeover attempt;

 

   

limit the ability of stockholders to remove directors only “for cause” if the Sponsors and their respective affiliates (other than Allison Holdings) collectively cease to own more than 50% of our common stock;

 

   

prohibit our stockholders from calling a special meeting of stockholders if the Sponsors and their respective affiliates (other than Allison Holdings) collectively cease to own more than 50% of our common stock;

 

   

prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders, if the Sponsors and their respective affiliates (other than Allison Holdings) collectively cease to own more than 50% of our common stock;

 

   

provide that the Board of Directors is expressly authorized to adopt, or to alter or repeal our bylaws;

 

   

establish advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings;

 

   

establish a classified Board of Directors, with three staggered terms; and

 

   

require the approval of holders of at least two-thirds of the outstanding shares of common stock to amend the bylaws and certain provisions of the certificate of incorporation if the Sponsors and their respective affiliates (other than Allison Holdings) collectively cease to own more than 50% of our common stock

These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take corporate actions other than those you desire. See “Description of Capital Stock.”

Future sales of our common stock in the public market could lower our share price, and any additional capital raised by us through the sale of equity or convertible debt securities may dilute your ownership in us and may adversely affect the market price of our common stock.

We and substantially all of our stockholders, including the selling stockholders, may sell additional shares of common stock in subsequent public offerings. We may also issue additional shares of common stock or convertible debt securities to finance future acquisitions. After the consummation of this offering, we will have 1,880,000,000 shares of common stock and 20,000,000 shares of non-voting common stock authorized and 181,374,598 shares of common stock and 1,185 shares of non-voting common stock outstanding. This number includes 21,739,130 shares of common stock that the selling stockholders are selling in this offering, which may be resold immediately in the public market. All of the remaining shares, or approximately 159,636,653, or 88.0% of our total outstanding shares, are restricted from immediate resale under the lock-up agreements between our current stockholders, including our existing selling stockholders, and the underwriters described in “Underwriting,” but may be sold into the market in the near future. These shares and any shares which may be issued upon exercise of outstanding options will become available for sale following the expiration of the lock-up

 

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agreements, which, without the prior consent of the representatives of the underwriters, is 180 days after the date of this prospectus, subject to compliance with the applicable requirements under Rule 144 of the Securities Act of 1933, or the Securities Act.

We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including sales pursuant to Carlyle and Onex’s registration rights and shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock. See “Certain Relationships and Related Party Transactions” and “Shares Eligible for Future Sale.”

We are a “controlled company” within the meaning of the NYSE rules and, as a result, expect to qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

Following the consummation of this offering, we expect Carlyle and Onex will continue to control a majority of the voting power of our outstanding common stock. As a result, we expect to be a “controlled company” within the meaning of the NYSE corporate governance standards. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

   

the requirement that a majority of the Board of Directors consist of independent directors;

 

   

the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the requirement for an annual performance evaluation of the nominating and corporate governance committee and compensation committee.

Following this offering, we intend to utilize these exemptions, if we continue to qualify as a “controlled company.” If we do utilize the exemption, we will not have a majority of independent directors and our nominating and corporate governance and compensation committees will not consist entirely of independent directors and such committees will not be subject to annual performance evaluations. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements other than statements of historical fact included in this prospectus are forward-looking statements. The words “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Although forward-looking statements reflect management’s good faith beliefs, reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements speak only as of the date the statements are made. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to:

 

   

risks related to our substantial indebtedness;

 

   

our participation in markets that are competitive;

 

   

general economic and industry conditions;

 

   

our ability to prepare for and respond to technological and market developments and changing customer needs;

 

   

failure of markets outside North America to increase adoption of fully-automatic transmissions in our markets served due to such factors as entrenched use of manual transmissions and high levels of OEM integration;

 

   

risk of failure of technological advances to occur at the expected pace or made redundant by alternative technologies;

 

   

the discovery of defects in our products;

 

   

the concentration of our net sales in our top five customers and the loss of any one of these;

 

   

risks associated with our international operations;

 

   

environmental risks;

 

   

brand and reputational risks;

 

   

labor strikes, work stoppages or similar labor disputes;

 

   

our ability to maintain cost controls;

 

   

Carlyle and Onex will be able to control our common stock;

 

   

our intention to pay dividends; and

 

   

other risks and uncertainties, including those listed under the caption “Risk Factors.”

We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions, including industry data referenced elsewhere in this prospectus. While we believe our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations are disclosed under “Risk Factors” and

 

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“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements as well as other cautionary statements that are made from time to time in our other SEC filings or public communications. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.

We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences we anticipate or affect us or our operations in the way we expect.

 

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USE OF PROCEEDS

All of the shares of common stock offered by this prospectus are being sold by the selling stockholders. The selling stockholders in this offering are affiliates of Carlyle and affiliates of Onex. We will not receive any of the proceeds from the sale of shares by the selling stockholders in this offering, including from any exercise by the underwriters of their overallotment option. For information about the selling stockholders, see “Principal and Selling Stockholders.”

 

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DIVIDEND POLICY

Following this offering, we intend to pay quarterly cash dividends. We expect that our first dividend will be paid in the second quarter of 2012 and will be $0.06 per share of our common stock. The declaration and payment of this dividend and any future dividends will be at the discretion of our Board of Directors and will depend upon our results of operations, cash requirements, financial condition, contractual restrictions, restrictions imposed by our Senior Secured Credit Facility and the indentures governing our Senior Notes, any future debt agreements or applicable laws, including the laws of the State of Delaware, and other factors that our Board of Directors may deem relevant. Our dividend policy has certain risks and limitations, particularly with respect to liquidity, and we may not pay dividends according to our policy, or at all. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and “Risk Factors—Our ability to pay regular dividends on our common stock is subject to the discretion of our Board of Directors and may be limited by our structure and statutory restrictions and restrictions imposed by the Senior Secured Credit Facility and the indentures governing the Senior Notes as well as any future agreements.”

 

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CAPITALIZATION

The following table sets forth our consolidated cash and cash equivalents and capitalization as of December 31, 2011 on an actual basis and as adjusted basis giving effect to (i) the consummation of this offering, including payment of related fees and expenses, (ii) the redemption of $200.0 million in aggregate principal amount of the 11.0% Senior Notes on February 27, 2012 as described in “Prospectus Summary—Recent Developments,” (iii) our amended and restated certificate of incorporation that provides that our authorized capital stock consists of 1,880,000,000 shares of common stock, $0.01 par value per share, 20,000,000 shares of our non-voting common stock, $0.01 par value per share, and 100,000,000 shares of preferred stock, $0.01 par value per share, and (iv) the conversion of all shares of non-voting common stock to common stock, other than 1,185 shares, that occurred on March 12, 2012.

The information in this table should be read in conjunction with “Use of Proceeds,” “Selected Consolidated Financial Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes thereto included elsewhere in this prospectus.

 

     December 31, 2011  
     Actual     As Adjusted   
           (unaudited)  
    

(dollars in millions,

except share data)

 

Cash and cash equivalents

   $ 314.0      $ 86.1 (1) 
  

 

 

   

 

 

 

Long-term debt, less current portion:

    

Senior Secured Credit Facility

   $ 2,563.9      $ 2,563.9   

Senior Notes, fixed 11.0%, due 2015

     309.8        109.8   

Senior Notes, fixed 7.125%, due 2019

     471.3        471.3   
  

 

 

   

 

 

 

Total long-term debt, less current portion

     3,345.0        3,145.0   

Total stockholders’ equity:

    

Common stock, $0.01 par value per share: 180,000,000 shares authorized; 177,157,498 shares issued and outstanding, actual; 1,880,000,000 shares authorized, 181,398,298 shares issued and 181,374,598 shares outstanding, as adjusted

     1.8        1.8   

Non-voting common stock, $0.01 par value per share: 20,000,000 shares authorized; 4,241,979 shares issued and 4,218,279 shares outstanding, actual; 20,000,000 shares authorized, 1,185 shares issued and outstanding, as adjusted

              

Preferred stock, $0.01 par value per share: 20,000,000 shares authorized, no shares issued and outstanding, actual; 100,000,000 shares authorized, no shares issued and outstanding, as adjusted

              

Treasury stock

     (0.2     (0.2

Additional paid-in capital

     1,560.8        1,560.8   

Accumulated other comprehensive loss

     (57.0     (57.0

Accumulated deficit

     (683.7     (718.3 )(2) 
  

 

 

   

 

 

 

Total stockholders’ equity

     821.7        787.1   
  

 

 

   

 

 

 

Total capitalization

   $ 4,166.7      $ 3,932.1   
  

 

 

   

 

 

 

 

(1) Reflects (i) $211.0 million cash paid (including $11.0 million of premium) in connection with the redemption of $200.0 million in aggregate principal amount of the 11.0% Senior Notes, (ii) $16.0 million of fees to terminate our services agreement with our Sponsors and (iii) an additional $0.9 million of estimated fees and expenses expected to be incurred in connection with this offering.

 

(2) Reflects (i) write off of $2.5 million of deferred financing fees and $11.0 million of premium paid in connection with the redemption of $200.0 million in aggregate principal amount of the 11.0% Senior Notes, (ii) $16.0 million of fees to terminate our services agreement with our Sponsors and (iii) $5.1 million of estimated expenses incurred in connection with this offering.

 

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The table set forth above is based on the number of shares of our common stock outstanding as of December 31, 2011, and assumes that the 1.185-for-1 stock split, which occurred on March 12, 2012, had occurred as of December 31, 2011. The actual column in the table does not reflect the conversion of our non-voting common stock to common stock described herein. The table does not reflect:

 

   

14,864,059 shares of common stock issuable upon the exercise of options outstanding at a weighted average exercise price of $13.40 per share;

 

   

15,302,998 shares of common stock reserved for issuance under our 2011 Equity Incentive Award Plan, which we plan to adopt in connection with this offering; and

 

   

exercise of the overallotment option by the underwriters.

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share and the net tangible book value per share after this offering.

As of December 31, 2011, we had net tangible book value of approximately $(2,985.4) million, or $(16.46) per share. Net tangible book value per share represents total tangible assets less total liabilities and noncontrolling interests divided by the number of shares of common stock and non-voting common stock outstanding. After giving effect to (i) the sale of 21,739,130 shares of common stock in this offering, based upon an assumed initial public offering price of $23.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated offering expenses payable by us, (ii) $16.0 million of fees to terminate our services agreement with our Sponsors and (iii) the redemption of $200.0 million in aggregate principal amount of the 11.0% Senior Notes on February 27, 2012, our net tangible book value as of December 31, 2011 would have been approximately $(3,020.0) million, or $(16.65) per share. This represents an immediate decrease in net tangible book value of $(0.19) per share to existing stockholders and an immediate dilution of $39.65 per share to new investors purchasing common stock in this offering. The following table illustrates this dilution on a per share basis:

 

     Per Share  

Assumed initial public offering price per share

     $ 23.00   

Net tangible book value per share as of December 31, 2011

   $ (16.46  

Decrease in net tangible book value per share attributable to this offering

     (0.19  
  

 

 

   

Net tangible book value per share after this offering

       (16.65
    

 

 

 

Dilution per share to new investors

     $ 39.65   
    

 

 

 

The following table sets forth, as of December 31, 2011, the total number of shares of common stock and non-voting common stock owned by existing stockholders, including the selling stockholders, and to be owned by new investors, the total consideration paid, and the average price per share paid by our existing stockholders and to be paid by new investors purchasing shares of common stock in this offering. The calculation below is based on an assumed initial public offering price of $23.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average
Price  Per
Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     159,636,653         88   $ 1,347,333,351         73   $ 8.44   

New investors

     21,739,130         12        499,999,990         27        23.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     181,375,783         100   $ 1,847,333,341         100   $ 10.19   
  

 

 

    

 

 

   

 

 

    

 

 

   

A $1.00 increase (decrease) in the assumed initial offering price would increase (decrease) total consideration paid by new investors, total consideration paid by all stockholders and average price per share paid by all stockholders by $21,739,130, $21,739,130 and $0.11 per share, respectively. An increase (decrease) of 1.0 million in the number of shares offered by the selling stockholders would increase (decrease) total consideration paid by new investors, total consideration paid by all stockholders and average price per share paid by all stockholders by $23,000,000, $14,560,000 and $0.08 per share, respectively.

The tables and calculations above assume no exercise of outstanding options. As of December 31, 2011, there were 14,864,059 shares of common stock issuable upon exercise of outstanding options at a weighted average exercise price of approximately $13.40 per share. To the extent that the outstanding options are exercised, there will be further dilution to new investors purchasing common stock in the offering. See “Description of Capital Stock.”

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth certain financial information for the five years ended December 31, 2011. The following table should be read in conjunction with the information contained in our audited consolidated financial statements and the notes thereto included in this prospectus. The consolidated financial statements and other data for each of the years ended December 31, 2011, 2010 and 2009 and the consolidated balance sheet data as of December 31, 2011 and 2010 have been derived from our audited consolidated financial statements that are included in this prospectus. The consolidated financial statements and other data for the year ended December 31, 2008, for the period from August 7, 2007 to December 31, 2007 and for the period from January 1 to August 6, 2007 and the consolidated balance sheet data as of December 31, 2009, 2008 and 2007 and as of August 6, 2007 have been derived from audited consolidated financial statements that are not included in this prospectus. The combined financial statements of the Predecessor for the period from January 1, 2007 to August 6, 2007, herein present the combined operations of the Predecessor as a formerly wholly-owned business of General Motors. The historical results of operations set forth below and elsewhere may not necessarily reflect what would have occurred if the Predecessor had been a separate, stand-alone entity during the periods presented. While the results of the Successor and Predecessor are prepared on a different basis of presentation, management does believe the combined periods are meaningful for comparability.

 

(in millions)

  Successor         Predecessor  
  Dec. 31,
2011
    Dec. 31,
2010
    Dec. 31,
2009
    Dec. 31,
2008
    Aug. 7 to
Dec. 31,
2007
        Jan. 1 to
Aug. 6,
2007
 

Consolidated Statement of Operations:

             

Net sales

  $ 2,162.8      $ 1,926.3      $ 1,766.7      $ 2,061.4      $ 841.1        $ 1,333.2   

Gross profit

    954.5        828.2        619.8        735.9        254.9          546.2   

Operating expenses:

             

Selling, general and administrative expenses

    409.1        384.9        391.2        412.6        171.1          172.2   

Engineering — research and development

    116.4        101.5        89.7        88.6        30.0          46.1   

Trade name impairment

    —          —          190.0        179.8        —            —     

Total operating expenses

    525.5        486.4        670.9        681.0        201.1          218.3   

Operating income (loss)

    429.0        341.8        (51.1     54.9        53.8          327.9   

Other income (expense) net:

             

Interest income

    0.9        3.5        1.4        5.1        3.1          1.7   

Interest expense

    (218.2     (281.0     (235.6     (391.0     (190.6       (1.0

Premiums and expenses on tender offer for long-term debt

    (56.9     —          —          —          —            —     

Other (expense) income, net

    (4.2     19.0        2.8        40.0        0.6          (4.0

Total other expense, net

    (278.4     (258.5     (231.4     (345.9     (186.9       (3.3

Income (loss) before income taxes

    150.6        83.3        (282.5     (291.0     (133.1       324.6   

Income tax expense

    (47.6     (53.7     (41.4     (37.1     (31.2       (118.8

Net income (loss)

  $ 103.0      $ 29.6      $ (323.9   $ (328.1   $ (164.3     $ 205.8   

Earnings (Loss) Per Share Data:

             

Basic earnings (loss) per share

  $ 0.57      $ 0.16      $ (1.79   $ (1.81   $ (0.91       N/A   

Weighted-average shares outstanding (in thousands)

    181,375        181,367        181,322        181,448        181,019          N/A   

Diluted earnings (loss) per share

  $ 0.56      $ 0.16      $ (1.79   $ (1.81   $ (0.91       N/A   

Diluted weighted-average shares outstanding (in thousands)

    183,275        181,367        181,322        181,448        181,019          N/A   

Consolidated Balance Sheet Data:

             

Cash and cash equivalents

  $ 314.0      $ 252.2      $ 153.1      $ 237.9      $ 231.1        $ 8.0   

Total assets

    5,192.6        5,310.4        5,410.8        5,977.8        6,411.1          728.6   

Total debt

    3,378.6        3,671.1        3,874.1        3,991.3        4,201.2          7.3   

Stockholders’ equity

    821.7        741.7        736.6        1,015.5        1,372.6          191.0   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward looking statements as a result of various factors, including, without limitation, those set forth in “Risk Factors,” “Forward-Looking Statements” and other matters included elsewhere in this prospectus. The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the notes thereto included elsewhere in this prospectus, as well as the information presented under “Selected Consolidated Financial Data.”

Overview

We design and manufacture fully-automatic transmissions for medium- and heavy-duty commercial vehicles, medium- and heavy-tactical U.S. military vehicles and hybrid-propulsion systems for transit buses. We generate our net sales primarily from the sale of transmissions, transmission parts, support equipment, military kits, engineering services and extended transmission warranty coverage to a wide array of OEMs, distributors and the U.S. government. Although approximately 80% of our net sales were generated in North America in 2011, we have a global presence, serving customers in Europe, Asia, South America and Africa. As of December 31, 2011, we have approximately 2,800 employees and 12 different transmission product lines. We serve customers through an established network of approximately 1,500 authorized independent distributors and dealers worldwide. Since the introduction of our first fully-automatic transmission over 60 years ago, our products have gained acceptance in a wide variety of applications, including on-highway trucks (distribution, refuse, construction, fire and emergency), buses (primarily school and transit), motorhomes, off-highway vehicles and equipment (primarily energy and mining) and military vehicles (wheeled and tracked).

Allison Transmission, which is headquartered in Indianapolis, Indiana, was founded in 1915 and acquired by our Sponsors in August 2007 from General Motors. The Acquisition Transaction was structured as an asset purchase for U.S. federal income tax purposes, which resulted in a step-up in the U.S. federal income tax basis of our assets that allows us to take substantial amortization deductions for U.S. federal income tax purposes. As of December 31, 2011, we had $3.3 billion of unamortized intangible assets which may be amortized over a period of approximately 10.6 years. These assets are expected to generate U.S. federal income tax deductions of approximately $315.0 million annually through 2021 and approximately $183.0 million in 2022. If we generate taxable income in the future, the amortization of these assets, together with existing U.S. net operating losses of $382.0 million as of December 31, 2011, will be used to reduce or eliminate our U.S. federal cash income tax payments.

Trends impacting our business

Our net sales are driven by commercial vehicle production, which tends to be highly correlated to macroeconomic conditions. The recent global economic downturn led to a significant decline in annual commercial vehicle production volumes. According to ACT Research, commercial truck and bus production volumes in our North American on-highway markets are projected to continue to grow, but to remain below the 1998-2008 average production levels through 2014. However, we believe the anticipated increase in global commercial vehicle production, together with pent up demand in the North American market that resulted from the deferral of purchases during the economic downturn, will support our continued growth and result in increased net sales.

Sales in our core North American on-highway market represented approximately 34% of our total sales in 2011. Our core North American on-highway market for fully-automatic transmissions includes the Class 4-5, Class 6-7 and Class 8 straight trucks, buses (school, conventional transit, shuttle and coach) and motorhomes, with approximately 72% of our sales in this market being derived from vehicles in the Class 6-7 truck and Class 8 straight truck markets. We have minimal exposure to the more cyclical Class 8 tractor market. The North

 

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American commercial vehicle market has adopted automatic transmissions at a faster rate than the rest of the world which is still dominated by manual transmissions. According to our estimates, fully-automatic transmissions account for less than 10% of the global medium- and heavy-duty commercial vehicle transmission market. We expect adoption of fully-automatic transmissions will increase outside of North America. As it does, we will increase our net sales into these markets and these markets will constitute a greater percentage of our annual net sales in the future.

The off-highway transmission end market is composed primarily of energy, mining and heavy construction vehicles. The energy and mining industries have seen growth in the last two years, driven primarily by the global economic recovery, resurgence in commodity prices and innovations in drilling and extraction techniques such as hydraulic fracturing. These factors have led to strong demand for vehicles and capital equipment utilizing our off-highway transmissions to support these activities, which include increased shale oil and natural gas exploration in North America. We expect this trend of increasing net sales to continue as long as energy and commodity prices continue to rise or remain near the current elevated levels. To the extent that energy and commodity prices decline or regulatory changes restrict extraction techniques, we expect that demand for our products in this end market would decline.

The military market we serve consists of medium- and heavy-tactical wheeled and tracked vehicles. We are the primary supplier of fully-automatic transmissions for these types of vehicles to the U.S. military, with which we have had a long-standing relationship, dating back to 1945, when we developed our first-generation tank transmission. While demand for wheeled vehicles had been above historical averages due to increased military activity through 2010, reduced activity in Iraq and Afghanistan in 2011 has resulted in a corresponding decrease in demand for our military products. As a result, military sales have declined from 23% of net sales in 2010 to 14% of net sales in 2011. To the extent future military activity and budgets were to decline at a greater rate than expected, it could result in further decreases in our military sales as a percentage of our net sales.

The global focus on conserving fuel and reducing greenhouse gas emissions is driving a rapidly evolving demand for alternative propulsion systems, technologies and products in commercial vehicles. Since 2006, we have seen growth in the business of hybrid-propulsion systems and have become the leading provider of hybrid-propulsion systems for transit buses. As a result of our leadership in the hybrid transit bus market and our well-established commercial vehicle OEM and end-user relationships, we believe we are well positioned to play a leading role as hybrid-propulsion system acceptance gains momentum in other vocations, especially in various medium- and heavy-duty truck markets. In recent years the growth of hybrid-propulsion systems has been accelerated by government subsidies. To the extent these subsidies do not continue, it could reduce our sales of these products.

The aftermarket is composed of the traditional aftermarket and support equipment. Traditional aftermarket products include branded replacement parts, remanufactured transmissions and the military transmission rebuild kits for tracked vehicles. Support equipment includes parts purchased by OEMs to install new transmission units and is dependent on new unit sales. Sales of aftermarket parts are tied to the growth in the overall population of vehicles with Allison transmissions, partially offset by improvements in product quality and durability. The aftermarket continues to be less volatile than the market for new product sales.

Key Components of our Results of Operations

Net sales

We generate our net sales primarily from the sale of transmissions, transmission parts, support equipment, military kits, engineering services and extended transmission coverage, or ETC, to a wide array of OEMs, distributors and the U.S. government. Sales are recorded net of provisions for customer allowances and other rebates. Engineering services are recorded as net sales in accordance with the terms of the contract. The associated costs are recorded in cost of sales. We also have royalty agreements with third parties that provide net sales as a result of joint efforts in developing marketable products.

 

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Cost of sales

Our most significant components of cost of sales are purchased parts, the overhead expense related to our manufacturing operations and direct labor associated with the manufacture and assembly of transmissions and parts. For the year ended December 31, 2011, direct material costs were approximately 69%, overhead costs were approximately 24%, and direct labor costs were approximately 7% of total cost of sales. We are subject to changes in our cost of sales caused by movements in underlying commodity prices. We seek to hedge against this risk by using forward contracts and Long-Term Supply Agreements, or LTSAs. See “—Quantitative and Qualitative Disclosure about Market Risk—Commodity Price Risk.”

Selling, general and administrative expenses

The principal components of our selling, general and administrative expenses are salaries and benefits for our office personnel, advertising and promotional expenses, warranty expense, expenses relating to certain information technology systems and amortization of our intangibles.

Engineering — research and development

We incur costs in connection with research and development programs that are expected to contribute to future earnings. Such costs are expensed as incurred. In 2009, we were notified by the DOE that we were selected to receive matching funds from the Grant Program. All applicable costs associated with the Grant Program have been charged to engineering — research and development, or in the case of capital expenditure, as a reduction in the cost basis of the capital asset. The U.S. government’s matching reimbursement is recorded to other income, net in the Consolidated Statements of Operations.

Critical Accounting Policies and Significant Accounting Estimates

The preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of some assets and liabilities and, in some instances, the reported amounts of net sales and expenses during the applicable reporting period. Differences between actual amounts and estimates are recorded in the period identified. Management believes the accounting estimates discussed below represent those accounting estimates that require the exercise of judgment where a different set of judgments could result in changes to our reported results.

Revenue recognition

We record sales when title has transferred to the customer, there is evidence of an agreement, the sales price is fixed and determinable, and the collection of the related accounts receivable is reasonably assured. We sell ETC for which sales are deferred. ETC sales are recognized ratably over the period of the ETC, which typically ranges from three to five years. Distributor and customer sales incentives, consisting of allowances and other rebates, are estimated at the time of sale based upon our history and experience and are recorded as a reduction to net sales. Incentive programs are generally product specific or region specific. Some factors used in estimating the cost of incentives include the number of transmissions that will be affected by the incentive program and rate of acceptance of any incentive program. If the actual number of affected transmissions differs from this estimate, or if a different mix of incentives is actually paid, the impact on net sales would be recorded in the period that the change was identified.

Sales under U.S. government production contracts are recorded when the product is accepted and title has transferred to the U.S. government. Under the terms of the U.S. government contracts, there are certain price reduction clauses and provisions for potential price reductions which are estimated at the time of sale based upon our history and experience and are recorded as a reduction to net sales. Potential reductions may be attributed to a change in projected sales volumes or plant efficiencies which impact overall costs.

 

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Inventory

We value our inventory using the first-in, first-out method, and state our inventories at the lower of cost or net realizable value. In order to determine net realizable value, we analyze our inventory on a periodic basis to determine whether it is excess or obsolete inventory. Any decline in carrying value of estimated excess or obsolete inventory is recorded as a reduction of inventory and as an expense included in cost of sales in the period it is identified.

Impairment of goodwill and other intangibles

Goodwill represents the excess of purchase price paid over the fair value of net assets acquired. In accordance with the Financial Accounting Standards Board, or FASB, authoritative accounting guidance on goodwill, we do not amortize goodwill but rather evaluate it for impairment on an annual basis, or more often if events or circumstances change that could cause goodwill to become impaired. We have elected to perform our annual impairment test on October 31 of every year. A two-step impairment test is performed on goodwill. In the first step, we compare the fair value of our reporting unit to its carrying value. We have one reporting unit which is consistent with our one operating and reportable segment. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not considered impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.

Our 2011 annual goodwill impairment test indicated that the fair value of the reporting unit exceeded its carrying value of net assets by approximately 75%, indicating no impairment. The fair value was determined utilizing a discounted cash flow model which includes key assumptions. Key assumptions incorporated into the analysis comprised of net sales growth derived from market information, industry reports, marketing programs and future new product introductions; operating margin improvements derived from cost reduction programs and fixed cost leverage driven by higher sales volumes; and a risk-adjusted discount rate. Events or circumstances that could unfavorably impact the key assumptions include lower net sales driven by market conditions, our inability to execute on marketing programs and/or delay in the introduction of new products; lower gross margins as a result of market conditions or failure to obtain forecasted cost reductions; or higher discount rate as a result of market conditions. While unpredictable and inherently uncertain, we believe our forecast estimates were reasonable and incorporate information that market participants would use in their estimates of fair value.

Other intangible assets have both indefinite and finite useful lives. Intangible assets with indefinite useful lives, such as our trade name, are not amortized but are tested annually for impairment. Our 2011 annual trade name impairment test indicated that the fair value of the trade name exceeded its carrying value by approximately 14%, indicating no impairment. The fair value was determined utilizing an income approach by which the relief from royalty method was applied. Key assumptions incorporated into the analysis were net sales growth derived from market information, industry reports, marketing programs and new production introductions and risk-adjusted discount rates. Events or circumstances that could unfavorably impact the key assumptions include lower net sales driven by market conditions, our inability to execute on marketing programs and/or delay in introduction of new products; and higher discount rate as a result of market conditions. While unpredictable and inherently uncertain, we believe its forecast estimates are reasonable and incorporate those that market participants would use in their estimates of fair value. Intangible assets with finite lives are amortized over their estimated useful lives and reviewed for impairment when circumstances change that would create a triggering event. Customer relationships are amortized over the life in which expected benefits are to be consumed. The remaining finite useful life other intangibles are amortized on a straight-line basis over their useful lives. We evaluate the remaining useful life of other intangible assets on a periodic basis to determine whether events or circumstances warrant a revision to the remaining useful life. Assumptions and estimates about future values and remaining useful lives of our intangible and other long-lived assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal

 

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factors such as changes in our business strategy and our internal forecasts. Although we believe the historical assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results.

In the second quarter of 2009, we recorded a trade name impairment charge of $190.0 million. The impairment charge was triggered by lower projected net sales as a result of weak general economic conditions at that time.

Impairment of long-lived assets

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the carrying value of a long-lived asset to be held and used is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair market value adjusted for estimated disposal costs.

Warranty

We provide reserves for costs associated with warranty claims at the time the products are sold. Warranty claims arise when a transmission fails while in service during the relevant warranty period. The warranty reserve is provided for by adjusting selling, general and administrative expenses by an amount based on our current and historical warranty claims paid and associated repair costs. These estimates are established using historical information including the nature, frequency, and average cost of warranty claims and are adjusted as actual information becomes available. Costs associated with ETC are recorded as incurred during the extended coverage period. From time to time, we may get involved in a specific field action program. As a result of the uncertainty surrounding the nature and frequency of specific field action programs, the liability for such programs is recorded when we commit to a specific field action. We review and assess the liability for these programs on a quarterly basis. We also assess our ability to recover certain costs from our suppliers and record a receivable from the supplier when we believe a recovery is probable.

Pension and post-retirement obligations

For pension and OPEB plans in which employees participate, costs are determined within the FASB’s authoritative accounting guidance set forth on employers’ defined benefit pensions including accounting for settlements and curtailments of defined benefit pension plans, termination of benefits and accounting for post-retirement benefits other than pensions. In accordance with the authoritative accounting guidance, we recognize the funded status of our defined benefit pension plans and OPEB plan in our Consolidated Balance Sheets with a corresponding adjustment to Accumulated other comprehensive income.

Post-retirement benefit costs consist of service cost, interest cost on accrued obligations and the expected return on assets (calculated using a smoothed market value of assets). Any difference between actual and expected returns on assets during a year and actuarial gains and losses on liabilities together with any prior service costs are charged (or credited) to income over the average remaining service lives of employees.

The benefit cost components shown in the Consolidated Statements of Operations are based upon certain data specific to our company, actuarial assumptions that were used for OPEB accounting disclosures, and certain allocation methodologies such as population demographics.

Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The future tax benefits

 

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associated with operating loss and tax credit carryforwards are recognized as deferred tax assets. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The need to establish a valuation allowance against the deferred tax assets is assessed periodically based on a more-likely-than-not realization threshold, in accordance with 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.

Stock-based compensation

We account for all stock-based compensation awards to employees (including executive officers), consultants and members of our board of directors based upon their fair values as of the date of grant using a fair value method and recognize the fair value of each award as an expense over the requisite service period.

In accordance with FASB’s authoritative accounting guidance on stock compensation, each option grant is to be recorded at fair value. For purposes of calculating stock-based compensation, we estimate the fair value of stock options using a Black-Scholes option pricing model, which requires the use of certain subjective assumptions including expected volatility, expected dividend yield, expected term, risk-free interest rate, expected forfeitures, and the fair value of our common stock. These assumptions generally require significant judgment and may differ significantly between grant dates because of changes in the actual results of these inputs that occur over time. See NOTE 13 of our consolidated financial statements included elsewhere in this prospectus for the principal assumptions used in applying the Black-Scholes option pricing model to determine the estimated fair value of stock options at the date of grant.

The fair value of the common stock that underlies our stock options has historically been determined by our Compensation Committee based upon information available to it at the time of grant. Stock option grants to certain key employees have been granted with staggered exercise prices equal to or greater than the fair value of our common stock underlying the options in increments of 1.5 times and 2 times, thereby creating an incentive for these employees to generate increased stockholder value. Because there has been no public market for our common stock, our Compensation Committee has determined the fair value of our common stock based on an analysis of relevant factors, including the following:

 

   

our historical and projected operating and financial performance;

 

   

observed market multiples for comparable businesses;

 

   

the uncertainty in our business associated with uncertain economic conditions;

 

   

the fact that the option grants involve illiquid securities in a private company; and

 

   

the likelihood of achieving a liquidity event, such as an initial public offering or sale of our company.

In October 2007, we granted equity instruments for the first time at a fair market value based upon the price paid in the Acquisition Transaction, which was an orderly transaction between a willing buyer and a willing seller. As a result of the economic turmoil of 2008 and 2009 and our decline in net sales and corresponding impairment charges during that period, the Compensation Committee determined that the fair market value of our common stock underlying option grants, derived based on historic multiples and the price paid for the Acquisition Transaction, had either declined or not increased above the share price paid in the Acquisition Transaction. Beginning in early 2010, in order to better assess the effects of the recession and the nascent recovery on the fair market value of our common stock, the Compensation Committee directed management to engage an independent third-party valuation firm to provide a valuation of our common stock as of March 31, 2010. In performing its valuation analysis, the valuation firm engaged in discussions with management, analyzed

 

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historical and forecasted financial statements and reviewed our corporate documents. The valuation was based on several generally accepted valuation techniques, including a discounted cash flow analysis and a comparable public company analysis. Estimates used in connection with the discounted cash flow analysis were consistent with the plans and estimates that we use to manage the business although there is inherent uncertainty in these estimates. In addition, this valuation study was based on a number of assumptions, including industry, general economic, market and other conditions that could reasonably be evaluated at the time of the valuation. The valuation analysis resulted in a wide range of derived values with the final value determined by our Compensation Committee being at the high end of that range and in line with the historical fair market value determinations. The completion of the initial public offering may add value to the shares due to, among other things, increased liquidity and marketability; however, the extent (if any) of such additional value cannot be measured with precision or certainty and the shares could suffer a decrease in value.

Results of Operations

The following table sets forth certain financial information for the years ended December 31, 2011, 2010 and 2009, and should be read in conjunction with our historical audited and unaudited consolidated financial statements and the notes thereto. Our historical results of operations set forth below and elsewhere may not reflect what will occur in the future.

 

     For the year ended December 31,  
(dollars in millions)    2011     2010     2009  

Consolidated Statement of Operations:

      

Net sales

   $ 2,162.8      $ 1,926.3      $ 1,766.7   

Gross profit

     954.5        828.2        619.8   

Operating expenses:

      

Selling, general and administrative expenses

     409.1        384.9        391.2   

Engineering — research and development

     116.4        101.5        89.7   

Trade name impairment

     —         —          190.0   

Total operating expenses

     525.5        486.4        670.9   

Operating income (loss)

     429.0        341.8        (51.1

Other income (expense), net:

      

Interest income

     0.9        3.5        1.4   

Interest expense

     (218.2     (281.0     (235.6

Premiums and expenses on tender offer for long-term debt

     (56.9     —          —     

Other (expense) income, net

     (4.2     19.0        2.8   

Total other expense, net

     (278.4     (258.5     (231.4

Income (loss) before income taxes

     150.6        83.3        (282.5

Income tax expense

     (47.6     (53.7     (41.4

Net income (loss)

   $ 103.0      $ 29.6      $ (323.9

 

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Comparison of years ended December 31, 2011 and 2010

 

     Year ended December 31,  
(dollars in millions)    2011     %
of net sales
    2010     %
of net sales
 

Net sales

   $ 2,162.8        —        $ 1,926.3         

Gross profit

     954.5        44.1 %      828.2        43.0

Operating expenses:

        

Selling, general and administrative expenses

     409.1        18.9        384.9        20.0   

Engineering — research and development

     116.4        5.3        101.5        5.3   

Total operating expenses

     525.5        24.2        486.4        25.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     429.0        19.9        341.8        17.7   

Other (expense) income, net:

        

Interest expense, net

     (217.3 )      (10.1 )      (277.5     (14.4

Premiums and expenses on tender offer for long-term debt

     (56.9 )      (2.6 )      —         —    

Other (expense) income, net

     (4.2 )      (0.2 )      19.0        1.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (278.4 )      (12.9 )      (258.5     (13.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     150.6        7.0        83.3        4.3   

Income tax expense

     (47.6 )      (2.2 )      (53.7     (2.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 103.0        4.8 %    $ 29.6        1.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Net sales

Net sales for the year ended December 31, 2011 were $2,162.8 million compared to $1,926.3 million for the year ended December 31, 2010, an increase of 12.3%. The increase was principally driven by a $403.3 million, or 30.6%, increase in net sales of global off-highway and on-highway commercial products, parts and other products, partially offset by a $144.7 million, or 32.2%, decrease in net sales of military products driven by lower U.S. military spending, a decrease in net sales of $22.1 million, or 14.1%, for hybrid-propulsion systems for transit buses primarily driven by lower municipal spending and a decrease in net sales of $7.3 million, or 50.7%, for saleable engineering services.

Gross profit

Gross profit for the year ended December 31, 2011 was $954.5 million compared to $828.2 million for the year ended December 31, 2010, an increase of 15.2%. The increase was principally driven by $138.2 million related to increased net sales, $20.4 million of price increases on certain products, $8.8 million related to the elimination of unfavorable 2010 remanufacturing costs, $4.1 million of favorable foreign exchange and $0.8 million related to certain benefit plan discrepancies, partially offset by $24.1 million of unfavorable material costs and $21.9 million of higher manufacturing expense commensurate with increased sales. The increase in material costs was principally driven by increased commodity prices and higher component prices driven by increased demand for off-highway products.

Selling, general and administrative expenses

Selling, general and administrative expenses for the year ended December 31, 2011 were $409.1 million compared to $384.9 million for the year ended December 31, 2010, an increase of 6.3%. The increase was principally driven by $11.9 million of increased spending commensurate with expanded global commercial activities, $6.8 million of less favorable product warranty expense adjustments from prior period estimates, $6.4 million of increased product warranty expense commensurate with increased sales and $1.9 million of unfavorable DPIM warranty expense adjustments from prior period estimates, partially offset by lower bad debt expense of $1.9 million, driven by a reduction in the aged accounts receivable balances in North America and Europe, and $0.9 million related to certain benefit plan discrepancies.

 

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Engineering — research and development

Engineering expenses for the year ended December 31, 2011 were $116.4 million compared to $101.5 million for the year ended December 31, 2010, an increase of 14.7%. The increase was principally driven by $8.8 million of higher technology-related license expense and $6.9 million of higher product initiatives spending, partially offset by $0.8 million related to certain benefit plan discrepancies.

Interest expense, net

Interest expense, net for the year ended December 31, 2011 was $217.3 million compared to $277.5 million for the year ended December 31, 2010, a decrease of 21.7%. The decrease was principally driven by $22.8 million of lower interest expense as a result of debt repayments and repurchases, $21.8 million of lower mark-to-market expense for our interest rate derivatives, approximately $17.2 million of lower interest expense as a result of lower interest rates and $0.2 million of decreased financing fees, partially offset by a one-time payment of $1.8 million to eliminate certain collateral requirements for our interest rate derivatives.

Premiums and expenses on tender offer for long-term debt

In May 2011, ATI completed a cash tender offer to purchase any and all of its Senior Toggle Notes. The tender offer resulted in ATI purchasing $468.1 million of $505.3 million of its outstanding Senior Toggle Notes with premiums and expenses totaling $56.9 million.

Other (expense) income, net

Other (expense) income, net for the year ended December 31, 2011 was ($4.2) million compared to $19.0 million for the year ended December 31, 2010. The decrease was principally driven by $19.3 million of higher premiums and expenses related to additional repurchases, repayments and redemptions of long-term debt, $6.7 million of higher unrealized losses on derivative contracts, $4.4 million of unfavorable foreign exchange and $3.4 million of lower miscellaneous income, partially offset by a $3.7 million vendor settlement, $3.6 million of increased Grant Program income and $3.3 million of increased realized gains on derivative contracts.

Income tax expense

Income tax expense for the year ended December 31, 2011 was $47.6 million resulting in an effective rate of 31.6% versus an effective rate of 64.5% for the year ended December 31, 2010. The change in the effective tax rate was primarily driven by the increase in income before tax and book treatment of certain indefinite life intangibles and the maintaining of a full valuation allowance against our non-current deferred tax asset. A sustained period of profitability in our operations is required before we would change our judgment regarding the need for a full valuation allowance against our net deferred tax assets. Accordingly, although we were profitable in 2010 and 2011, we continue to record a full valuation allowance against the net deferred tax assets. Although the weight of negative evidence related to cumulative losses is decreasing, we believe that this objectively-measured negative evidence outweighs the subjectively-determined positive evidence and, as such, we have not changed our judgment regarding the need for a full valuation allowance in 2011. Continued improvement in our operating results, however, could lead to reversal of all of our valuation allowance as early as the second quarter of 2012.

 

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Comparison of years ended December 31, 2010 and 2009

The following table was derived from our consolidated income statements for the years ended December 31, 2010 and 2009 included elsewhere in this prospectus.

 

     For the year ended December 31,  
     2010     % of net sales     2009     % of net sales  
(dollars in millions)  

Net sales

   $ 1,926.3        —        $ 1,766.7        —     

Gross profit

     828.2        43.0     619.8        35.1

Operating expenses:

        

Selling, general and administrative expenses

     384.9        20.0        391.2        22.1   

Engineering — research and development

     101.5        5.3        89.7        5.1   

Trade name impairment

     —          —          190.0        10.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     486.4        25.3        670.9        38.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     341.8        17.7        (51.1     (2.9

Other income (expense), net:

        

Interest income

     3.5        0.2        1.4        0.1   

Interest expense

     (281.0     (14.6     (235.6     (13.3

Other income, net

     19.0        1.0        2.8        0.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     (258.5     (13.4     (231.4     (13.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (Loss) before income taxes

     83.3        4.3        (282.5     (16.0

Income tax expense

     (53.7     (2.8     (41.4     (2.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 29.6        1.5   $ (323.9     (18.3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net sales

Net sales for the year ended December 31, 2010 were $1,926.3 million compared to $1,766.7 million for the year ended December 31, 2009, an increase of 9.0%. The increase represents the impact of increased demand for global on-highway and off-highway commercial, wheeled military and aftermarket products, and price increases on certain products, partially offset by a 23.0% decrease in revenue generated from hybrid-propulsion systems for transit buses, and lower demand for tracked military products. Our net sales in North America were $1,574.9 million compared to $1,483.2 million in 2009, representing an increase of 6.2%. Our non-North American net sales increased from $283.5 million in 2009 to $351.4 million in 2010, representing an increase of 24.0%.

Gross profit

Gross profit for the year ended December 31, 2010 was $828.2 million compared to $619.8 million for the year ended December 31, 2009, an increase of 33.6%. The increase in gross profit was principally driven by the increase in demand for global on-highway and off-highway commercial vehicles, wheeled military and aftermarket products of $73.0 million, price increases totaling $28.0 million on certain products, favorable material pricing of $30.1 million, lower manufacturing expense of $15.3 million, the elimination of the 2009 settlement of $36.6 million of the OPEB arrangement with GM and the elimination of 2009 restructuring costs of $29.4 million. These factors were partially offset by unfavorable foreign exchange of $4.4 million.

Selling, general and administrative expenses

Selling, general and administrative expenses for the year ended December 31, 2010 were $384.9 million compared to $391.2 million for the year ended December 31, 2009, a decrease of 1.6%. The decrease was primarily driven by the elimination of $11.4 million of 2009 warranty expense for our portion of the DPIM special coverage program, partially offset by increased spending commensurate with expanded global commercial activities.

 

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Engineering — research and development

Engineering — research and development expenses for the year ended December 31, 2010 were $101.5 million compared to $89.7 million for the year ended December 31, 2009, an increase of 13.2%. The increase was principally driven by $20.0 million of increased research and development expense associated with the Grant Program and other product initiatives, partially offset by $8.1 million of a technology-related license expense.

Trade Name impairment

In 2010, our annual impairment test indicated that the fair value of the trade name exceeded its carrying, or book value, and therefore was not subject to impairment. In 2009, we recorded a trade name impairment charge of $190.0 million driven by lower projected net sales as a result of weak economic conditions at that time.

Interest expense, net

Interest expense, net for the year ended December 31, 2010 was $277.5 million compared to $234.2 million for the year ended December 31, 2009, an increase of 18.5%. The increase was principally driven by higher mark-to-market expense of $58.2 million for our interest rate derivatives, partially offset by lower interest rates, the impact of debt repayments and repurchases on interest expense, lower accretion driven by reduced balances of assumed non-current assets and liabilities, and lower amortization of deferred financing costs resulting from debt repayments and repurchases.

Other income, net

Other income, net for the year ended December 31, 2010 was $19.0 million compared to $2.8 million for the year ended December 31, 2009. The increase in other income was principally driven by the elimination of the ($17.3) million 2009 unrealized loss as a result of the Employee Headcount Reduction Programs, $10.2 million increase in Grant Program matching reimbursement and $3.4 million related to the elimination of a severance liability reserve resulting from the new contract manufacturing agreement with Opel Szentgotthard Automotive Manufacturing Ltd., an affiliated company of General Motors. These factors were partially offset by lower gains of $5.6 million related to the repurchases and repayments of our outstanding debt, $4.3 million of lower gains on commodity and foreign currency hedging contracts and $2.2 million increase in foreign exchange losses.

Income tax expense

Income tax expense for the year ended December 31, 2010 was $53.7 million resulting in an effective tax rate of 64.5% versus an effective tax rate of (14.7%) for the year ended 2009. Cash income taxes paid for the year ended December 31, 2010 were $2.2 million, as compared to $5.5 million for the year ended December 31, 2009. The change in effective tax rate was primarily driven by the increase in income before tax, the difference in tax and book treatment of certain indefinite life intangibles and our continuing policy of recording a full valuation allowance against our non-current deferred tax asset. We have taken a position that any non-current deferred tax asset is less than likely to be realized in future periods because of our lack of taxable income for purposes of our U.S. federal income tax payments.

Liquidity and Capital Resources

We generate cash primarily from our operating activities. We had total available cash and cash equivalents of $314.0 million and $252.2 million as of December 31, 2011 and 2010, respectively. Of the available cash and cash equivalents, approximately $188.1 million and $134.3 million was deposited in operating accounts while approximately $125.9 million and $117.9 million was invested in U.S. government backed securities as of December 31, 2011 and 2010, respectively.

 

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Additionally, we had $369.2 million and $307.3 million available under the revolving credit facility, net of approximately $30.8 million and $10.2 million in letters of credit issued and outstanding and net of $0.0 and $82.5 million reduction in availability as a result of the Lehman bankruptcy as of December 31, 2011 and 2010, respectively.

In May 2011, we amended some of the terms of ATI’s revolving credit facility, including extending the term from August 2013 to August 2016, effectively increasing the borrowing capacity from $317.5 million to $400.0 million and giving us the flexibility to extend the maturity of our term loan. On March 9, 2012, ATI entered into an amendment with its term loan lenders under its Senior Secured Credit Facility to extend the maturity from August 7, 2014 to August 7, 2017 of approximately $801.0 million in principal amount of the term loans with an applicable margin over LIBOR of 3.50% for such extended term loans, with the remaining term loans of approximately $1,793.9 million with an applicable margin over LIBOR of 2.50% maturing in August 2014. As of December 31, 2011, we had no outstanding borrowings against the revolving credit facility.

Our principal uses of cash are operating expenses, capital expenditures, debt service and working capital needs. The following table shows our sources and uses of funds for the years ended December 31, 2011, 2010 and 2009 (in millions):

 

     Year ended December 31,  
Statement of Cash Flows Data    2011     2010     2009  

Cash flows from operating activities

     469.2      $ 388.9      $ 168.7   

Cash flows used for investing activities

     (55.9     (95.3     (113.2

Cash flows used for financing activities

     (369.9     (197.9     (135.4

Generally, cash provided by operating activities has been adequate to fund our operations. Due to fluctuations in our cash flows and the growth in our operations, it may be necessary from time to time in the future to borrow under the Senior Secured Credit Facility to meet cash demands. We anticipate cash provided by operating activities, cash and cash equivalents and borrowing capacity under the Senior Secured Credit Facility will be sufficient to meet our cash requirements for the next twelve months.

Cash provided by operating activities

Operating activities for the year ended December 31, 2011 generated $469.2 million of cash compared to $388.9 million for the year ended December 31, 2010. The increase was primarily driven by increased net sales, higher accounts payable commensurate with increased net sales and lower interest expense, partially offset by higher accounts receivable commensurate with increased net sales, increased spending commensurate with expanded global commercial activities and engineering — research and development costs and decreased other income, net.

Operating activities for the year ended December 31, 2010 generated $388.9 million of cash compared to $168.7 million for the year ended December 31, 2009. The increase was primarily driven by increased net sales, higher accounts payable commensurate with increased net sales, lower accounts receivable driven by a 2009 late payment received from a significant customer in 2010, lower compensation costs resulting from the Employee Headcount Reduction Programs, improved manufacturing performance, lower warranty costs, lower interest expense, net and higher other income. These factors were partially offset by higher finished goods inventories commensurate with increase net sales, increased spending commensurate with expanded global commercial activities and increased engineering — research and development costs.

Cash used for investing activities

Investing activities for the year ended December 31, 2011 used $55.9 million of cash compared to using $95.3 million for the year ended December 31, 2010. The decrease was primarily driven by the reduction in collateral requirements related to certain of our interest rate derivatives of $60.4 million and increased proceeds related to the sale of property of $2.2 million, partially offset by an increase of $23.1 million in capital expenditures. The increase in capital expenditures was attributable to the construction of our Hungary and India manufacturing facilities and increased investments in productivity and replacement initiatives.

 

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Investing activities for the year ended December 31, 2010 used $95.3 million of cash compared to $113.2 million for the year ended December 31, 2009. The decrease was primarily driven by a reduction of $14.4 million in capital expenditures as the construction of our India facility was completed and the 2009 purchase of $3.4 million of available-for-sale securities.

Cash used for financing activities

Financing activities for the year ended December 31, 2011 used $369.9 million of cash compared to $197.9 million of cash used for the year ended December 31, 2010. The difference was driven by the increased repurchases of ATI’s 7.125% Senior Notes, Senior Toggle Notes and 11.0% Senior Notes and principal payments on the Senior Secured Credit Facility, partially offset by ATI’s issuance of the 7.125% Senior Notes in the second quarter of 2011.

In May 2011, ATI completed a cash tender offer to purchase any and all of its Senior Toggle Notes. The tender offer resulted in ATI purchasing $468.1 million of $505.3 million of its outstanding Senior Toggle Notes during May 2011, with a premium paid of $50.3 million and expenses of $6.6 million, including unamortized deferred issuance costs.

In May 2011, ATI completed an offering of $500.0 million of the 7.125% Senior Notes due 2019. The proceeds from the offering, together with cash on hand, were used to repay ATI’s Senior Toggle Notes due 2015 plus accrued and unpaid interest, applicable premiums, and expenses. As a result of the offering, we recorded approximately $10.8 million as deferred financing fees in the Consolidated Balance Sheets.

In June 2011, ATI also repurchased $53.0 million of its 11.0% Senior Notes resulting in a loss (the premium between the purchase price of the notes and the face value of such notes) of $5.8 million, net of deferred financing fees written off.

In June 2011, ATI repurchased $18.1 million of Senior Toggle Notes resulting in a loss (the premium between the purchase price of the notes and the face value of such notes) of $1.9 million, net of deferred financing fees written off.

In August 2011, ATI repurchased $2.9 million of the Senior Toggle Notes and $58.2 million of the 11.0% Senior Notes resulting in a loss (the premium between the purchase price of the notes and the face value of such notes) of $0.2 million and $3.9 million, net of deferred financing fees written off, respectively.

In August 2011, ATI repurchased $5.0 million of the 7.125% Senior Notes resulting in a gain (the discount between the purchase price of the notes and the face value of such notes) of $0.3 million, net of deferred financing fees written off.

In September 2011, ATI repurchased $4.1 million of 11.0% Senior Notes resulting in a loss (the premium between the purchase price of the notes and the face value of such notes) of $0.3 million, net of deferred financing fees written off.

In September 2011, ATI repurchased $23.7 million of the 7.125% Senior Notes resulting in a gain (the discount between the purchase price of the notes and the face value of such notes) of $1.0 million, net of deferred financing fees written off.

In November 2011, ATI repurchased $12.9 million of the 11.0% Senior Notes and redeemed $16.2 million of the Senior Toggle Notes and $40.0 million of the 11.0% Senior Notes resulting in a loss (the premium between the purchase price of the notes and the face value of such notes) of $0.9 million, $1.1 million, and $2.7 million, net of deferred financing fees written off, respectively.

On February 27, 2012, ATI redeemed $200.0 million of the 11.0% Senior Notes. See “Prospectus Summary—Recent Developments.”

 

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Financing activities for the year ended December 31, 2010 used $197.9 million of cash compared to $135.4 million for the year ended December 31, 2009. The increase was primarily driven by $71.4 million of additional voluntary repurchases and principal payments on our long-term debt, partially offset by $8.9 million of 2009 repayments on Japanese Yen denominated short-term notes.

Our liquidity requirements are significant, primarily due to our debt service requirements. A one-eighth percent change in assumed interest rates for the Senior Secured Credit Facility, if fully drawn, for the year ended December 31, 2011 would have a yearly impact of $2.3 million on interest expense, which includes the partial offset of our interest rate swaps. Our ability to make payments on and to refinance our indebtedness, and to fund planned capital expenditures will depend on our ability to generate cash in the future. This is subject to general economic, financial, competitive, legislative, regulatory and other factors that may be beyond our control.

In November 2008, we entered into an amendment related to the Senior Secured Credit Facility that permits us to make discounted voluntary prepayments of our term loan in an aggregated amount not to exceed $750 million pursuant to a modified Dutch auction. As part of the May 2011 amendment to the Senior Secured Credit Facility, the amount available for discounted voluntary prepayments of the term loan pursuant to a modified Dutch auction was reset to $750 million. This provision is available to us for so long as the term loan is outstanding. For the years ended December 31, 2011, 2010 and 2009, we repurchased $0.0 million, $97.2 million and $58.5 million of our term loan under this amendment, respectively. The repurchases of the term loan resulted in gains (the discount between the purchase price of the term loan and the face value of such term loan) for the years ended December 31, 2011, 2010 and 2009 of $0.0 million, $4.1 million, $4.4 million, net of deferred financing fees written off, respectively.

In addition, we made principal payments of $90.5 million, $106.0 million and $52.2 million on the Senior Secured Credit Facility for the years ended December 31, 2011, 2010 and 2009, respectively. The principal payments made on the Senior Secured Credit Facility for the years ended December 31, 2011, 2010 and 2009 resulted in losses of $0.6 million, $0.8 million and $0.3 million associated with the write off of related deferred debt financing fees, respectively.

The Senior Secured Credit Facility requires us to maintain a specified maximum total senior secured leverage ratio of 5.50x for the remainder of the term of the loan.

As of December 31, 2011, we were in compliance with the maximum total senior secured leverage ratio, achieving a 3.20x ratio. Within the terms of the Senior Secured Credit Facility, a senior secured leverage ratio below 3.50x results in a 25 basis point reduction to the applicable margin, a 12.5 basis point reduction to the commitment fee and elimination of excess cash flow payments on the term loan for the applicable year. These reductions remain in effect as long as we continue to achieve a senior secured leverage ratio below 3.50x.

In addition to the maximum total secured leverage ratio, the Senior Secured Credit Facility and the indentures governing the Senior Notes include, among other things customary restrictions (subject to certain exceptions) on our ability to incur certain indebtedness or liens, make certain investments or declare or pay any dividends. As of December 31, 2011, we are in compliance with all covenants under the Senior Secured Credit Facility.

To manage interest rate risk associated with our variable rate debt, we currently have eight interest rate swap contracts as of December 31, 2011 that qualify as derivatives under authoritative accounting guidance for derivative instruments and hedging activities. We have not elected hedge accounting treatment for the interest rate swaps and, as a result, fair value adjustments are charged directly to interest expense in the Consolidated Statements of Operations. Despite the fact that we have elected a mark-to-market approach as opposed to hedge accounting treatment, the contracts are used strictly as an economic hedge and not for speculative purposes.

In the second quarter of 2011, Interest Rate Swap B matured which had a notional amount of $250.0 million of the Senior Secured Credit Facility at an all-in-rate of 3.39% plus the applicable margin. In the third quarter of 2011, Interest Rate Swap H and Interest Rate Swap I became effective, each having a notional amount of $350.0 million of the Senior Secured Credit Facility at all-in-rates of 3.75% and 3.77%, respectively.

 

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As of December 31, 2011, certain of our interest rate derivatives contain credit-risk and collateral contingent features. Certain interest rate derivatives contain provisions under which downgrades in our credit rating could require us to increase our collateral. Certain interest rate derivatives also contain provisions under which we may be required to post additional collateral if LIBOR reaches certain levels. As of December 31, 2011, we have been required to post collateral of $2.0 million and letters of credit of $25.5 million. The additional collateral requirements were driven by lower interest rates. Our collateral requirements are driven by changes in interest rates, and therefore we may be required to post collateral in the future with no maximum collateral requirements. In June 2011, we amended certain of our interest rate swap agreements to eliminate the requirement for us to post collateral. This resulted in a return of $51.4 million of collateral in exchange for a one-time payment of $1.8 million and letters of credit. We recorded the one-time $1.8 million payment to interest expense.

Assuming all collateral contingent features remain the same, a 1% increase or decrease in the LIBOR interest rate curve as of December 31, 2011 would correspondingly reduce our collateral requirement by approximately $15.1 million or increase our collateral requirement by approximately $10.2 million, respectively.

Description of the Senior Secured Credit Facility

Our wholly owned subsidiary ATI is the borrower under the Senior Secured Credit Facility, which consists of a term loan facility and a revolving credit facility. The term loan facility has a principal amount outstanding of $2,594.9 million as of December 31, 2011. The revolving credit facility has a principal amount of $400.0 million, less an allowance for up to $50.0 million in outstanding letters of credit. As of December 31, 2011, there were no outstanding borrowings against the revolving credit facility and $30.8 million in letters of credit issued and outstanding. The revolving credit facility is available for general corporate purposes, subject to certain conditions. The ability to draw on the revolving credit facility is conditioned upon, among other things, continued compliance with covenants in the credit agreement, the ability to bring down the representations and warranties contained in the credit agreement and the absence of any default or event of default under the Senior Secured Credit Facility. As of December 31, 2011, the available amount under the revolving credit facility was $369.2 million, net of $30.8 million of issued and outstanding letters of credit.

The revolving credit facility matures in 2016, and term loan facility matures in 2014. The term loan facility amortizes in quarterly installments of 0.25%, or $7.75 million, beginning on the last business day in December 2007 until maturity, whereby the final installment of the term loan facility will be paid on the maturity date in an amount equal to the aggregate unpaid principal amount.

The obligations under the Senior Secured Credit Facility are secured and fully and unconditionally guaranteed jointly and severally by us and each of our material wholly owned restricted U.S. subsidiaries currently existing or that we may create or acquire (other than the borrower), with certain exceptions as set forth in the credit agreement, pursuant to the terms of a separate guarantee and collateral agreement.

In November of 2008, ATI entered into an amendment to the Senior Secured Credit Facility that permits it to make discounted voluntary prepayments of the term loan in an aggregated amount not to exceed $750 million pursuant to a modified Dutch auction. This provision is available to ATI for so long as the term loan is outstanding. The amounts of any future voluntary prepayments may be material.

In May 2011, ATI entered into an amendment to extend the maturity of the revolving portion of the Senior Secured Credit Facility from August 7, 2013 to August 7, 2016 and to give it flexibility to extend the maturity of the term loan portion of the Senior Secured Credit Facility at a later date. The amendment also increases ATI’s ability to make foreign and general investments and resets the amount available for discounted voluntary prepayments of the term loan to $750 million.

In March 2012, ATI entered into an amendment to extend the maturity from August 7, 2014 to August 7, 2017 of approximately $801.0 million in principal amount of the term loans with an applicable margin over LIBOR of 3.50% for such extended term loans, with the remaining term loans of approximately $1,793.9 million with an applicable margin over LIBOR of 2.50% maturing in August 2014.

The borrowings under the Senior Secured Credit Facility, all guarantees thereof, the obligations under specified hedging agreements and certain cash management obligations are secured by a perfected first priority

 

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security interest in: all of ATI’s capital stock and all of the capital stock or other equity interests held by us, ATI and each of our existing and future U.S. subsidiary guarantors (subject to certain limitations for equity interests of foreign subsidiaries and other exceptions as set forth in the credit agreement); and substantially all of our and ATI’s tangible and intangible assets and the tangible and intangible assets of each of the existing and future U.S. subsidiary guarantors, with certain exceptions as set forth in the credit agreement.

The borrowings under the Senior Secured Credit Facility bear interest at a rate equal to an applicable margin plus, at our option, either: a base rate determined by reference to the higher of the prime lending rate set forth on the British Banking Association Telerate Page 5 and the federal funds rate plus 0.5%; or a LIBOR rate on deposits in U.S. Dollars for one-, two-, three- or six-month periods (or nine- or twelve-month periods if, at the time of the borrowing, available from all relevant lenders). When the senior secured leverage ratio is above 3.50x, the applicable margin on the term loan portion of the Senior Secured Credit Facility is 1.75% for base rate loans and 2.75% for LIBOR rate loans. When the senior secured leverage ratio is below 3.50x, the applicable margin on the term loan portion of the Senior Secured Credit Facility is 1.50% for base rate loans and 2.50% for LIBOR rate loans. As of December 31, 2011, our applicable margin was 2.50%. ATI also pays the lenders a commitment fee on the unused commitments under the revolving credit facility, which is payable quarterly in arrears. The commitment fee is subject to change depending on our total senior secured leverage ratio. As of December 31, 2011, the commitment fee was 0.375%.

Subject to exceptions for reinvestment of proceeds and other exceptions and materiality thresholds, ATI is required to prepay outstanding loans under the Senior Secured Credit Facility with the net proceeds of certain asset dispositions and casualty and condemnation events and, the incurrence of certain debt (to the extent not permitted under the Senior Secured Credit Facility), and 50% or 25% of its excess cash flow, as defined, subject to reduction to 0% if certain total senior secured leverage ratios are met. For the year ended December 31, 2011, the excess cash flow percentage was 0%, and as a result, ATI is not required to make any excess cash flow payments. ATI may voluntarily prepay loans or reduce commitments under the Senior Secured Credit Facility, in whole or in part, subject to minimum amounts. As discussed above, ATI can also voluntarily prepay term loans at a discount subject to certain covenants. If we prepay LIBOR rate loans other than at the end of an applicable interest period, we are required to reimburse lenders for their losses or expenses sustained as a result of breakage costs incurred by such prepayment.

The Senior Secured Credit Facility contains a maximum total senior secured leverage ratio, and also includes customary negative and affirmative covenants affecting ATI and our existing and future restricted subsidiaries, with certain exceptions set forth in the credit agreement. The Senior Secured Credit Facility contains the following negative covenants and restrictions, among others: restrictions on liens, debt, dividends and other restricted payments, redemptions and stock repurchases, consolidations and mergers, acquisitions, investments, loans, advances, changes in line of business, changes in fiscal year, restrictive agreements with subsidiaries, transactions with affiliates, speculative hedging agreements, and no modification of the Senior Notes in a materially adverse manner without lender consent. The Senior Secured Credit Facility contains the following affirmative covenants, among others: delivery of financial and other information to the administrative agent, notice to the administrative agent upon the occurrence of certain defaults, litigation and other material events, conduct of business and existence, payment of material taxes and other governmental charges, maintenance of properties, licenses and insurance, access to books and records by the lenders, use of proceeds, compliance with applicable laws and regulations, further assurances and provision of additional collateral and guarantees. As of December 31, 2011, ATI was in compliance with all covenants.

The Senior Secured Credit Facility specifies certain events of default, including, among others: failure to pay principal, interest or fees, violation of covenants, material inaccuracy of representations and warranties, cross-defaults to material indebtedness for borrowed money, certain bankruptcy and insolvency events, certain material judgments, certain Employee Retirement Income Security Act events, change of control and invalidity of guarantees or security documents.

 

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Description of the Senior Notes

On October 16, 2007, ATI issued $550.0 million of its 11.0% Senior Notes. On October 17, 2007, ATI issued $550.0 million of its Senior Toggle Notes. On May 6, 2011, ATI issued $500 million of its 7.125% Senior Notes. The 11.0% Senior Notes will mature on November 1, 2015. Interest on the 11.0% Senior Notes accrues at a rate of 11.0% per year and is payable semi-annually in arrears on May 1 and November 1 of each year. In November 2011, ATI redeemed the remaining outstanding amount of its Senior Toggle Notes. Interest on the Senior Toggle Notes accrued at a rate of 11.25% per year with respect to cash payments and 12.0% per year with respect to PIK interest payments, payable semi-annually in arrears on May 1 and November 1 of each year. The 7.125% Senior Notes will mature on May 15, 2019. Interest on the 7.125% Senior Notes accrues at a rate of 7.125% per year and is payable semi-annually in arrears on May 15 and November 15 of each year, commencing on November 15, 2011.

The Senior Notes are unsecured and guaranteed by the subsidiaries that guarantee the Senior Secured Credit Facility and will be unconditionally guaranteed, jointly and severally, by any future domestic subsidiaries that guarantee the Senior Secured Credit Facility. We or our affiliates may from time to time seek to retire the Senior Notes through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

ATI may redeem some or all of the 11.0% Senior Notes at the redemption prices specified in the indenture governing the 11.0% Senior Notes. Prior to May 15, 2015, ATI may redeem some or all of the 7.125% Senior Notes by paying the applicable “make-whole” premium. At any time on or after May 15, 2015, ATI may redeem some or all of the 7.125% Senior Notes at redemption prices specified in the indenture governing the 7.125% Senior Notes. In June 2011, we purchased $53.0 million in aggregate principal amount of the 11.0% Senior Notes. In August 2011, we purchased $58.2 million in aggregate principal amount of the 11.0% Senior Notes and $5.0 million in aggregate principal amount of the 7.125% Senior Notes. In September 2011, we purchased $4.1 million in aggregate principal amount of the 11.0% Senior Notes and $23.7 million in aggregate principal amount of the 7.125% Senior Notes. In November 2011, ATI repurchased $12.9 million of the 11.0% Senior Notes and redeemed $16.2 million of the Senior Toggle Notes and $40.0 million of the 11.0% Senior Notes. As a result of the November 2011 purchase of the Senior Toggle Notes, the outstanding balance on the Senior Toggle Notes was repaid and that series of notes was retired. On February 27, 2012, ATI redeemed $200.0 million in aggregate principal amount of the 11.0% Senior Notes. See “Prospectus Summary—Recent Developments.” Upon a change of control event, ATI may be required to make an offer to purchase the Senior Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. In certain instances in accordance with the terms of the indentures, ATI may be required to make an offer to repurchase the Senior Notes at a purchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, with the excess proceeds from asset sales.

The indentures governing the Senior Notes contain negative covenants restricting or limiting ATI’s ability to, among other things: incur or guarantee additional indebtedness, incur liens; pay dividends on, redeem or repurchase our capital stock; make certain investments, permit payment or dividend restrictions on certain of our subsidiaries, sell assets, engage in certain transactions with affiliates, and consolidate or merge or sell all or substantially all of ATI’s assets. Certain of these covenants would be suspended if the Senior Notes were to reach investment grade.

 

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Contractual Obligations, Contingent Liabilities and Commitments

The following table summarizes our contractual obligations as of December 31, 2011 (dollars in millions):

 

     Payments due by period  
Contractual Obligations    Total      Less than
1 year
     1-3
years
     3-5
years
     More than
5 years
 

11.0% Senior Notes(1)

   $ 446.2       $ 34.1       $ 68.2       $ 343.9       $   

7.125% Senior Notes(2)

     740.0         33.6         67.2         67.2         572.0   

Senior Secured Credit Facility(3)

     2,779.0         102.2         2,676.8                   

Operating leases

     10.1         6.2         3.3         0.6         0.0   

Service fee(4)

     15.0         3.0         6.0         6.0         see (4) below   

Pension & OPEB liabilities(5)

     65.7         16.6         32.3         16.8         see (5) below   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total(6)(7)

   $ 4,056.0       $ 195.7       $ 2,853.8       $ 434.5       $ 572.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(1) 11.0% Senior Notes include principal and interest payments based on a fixed interest rate of 11.0%. On February 27, 2012, ATI redeemed $200.0 million in aggregate principal amount of the 11.0% Senior Notes. See “Prospectus Summary—Recent Developments.”

 

(2) 7.125% Senior Notes include principal and interest payments based on a fixed interest rate of 7.125%.

 

(3) Senior Secured Credit Facility includes principal payments and estimated interest payments excluding the effects of our interest rate swaps. A portion of the interest is at a variable rate and for the purposes of this table has been calculated using LIBOR as of December 31, 2011, plus the applicable margin of 2.5%, resulting in an applied rate of 2.78%. Actual payments will vary.

 

(4) As described in Certain Relationships and Related Party Transactions in NOTE 19 of our consolidated financial statements included in this prospectus, we entered into a service agreement with the Sponsors in connection with the Acquisition Transaction. Pursuant to this agreement, subject to certain conditions, we would be obligated to pay the Sponsors an annual service fee of $3.0 million for certain advisory, consulting and other services. This service fee is excluded from the table beyond year 5, though we would expect it to continue as long as the service agreement remains in place. However, in connection with the consummation of this offering, the Company will pay Carlyle and Onex a fee of $16.0 million to terminate this agreement.

 

(5) Estimated pension funding and post-retirement benefit payments are based on an increasing discount rate and effective interest rate for funding purposes between 4.8% and 6.0%. Pension funding and post-retirement benefit payments are excluded from the table beyond year 5, though we expect funding and payments to continue beyond year 5. See NOTE 12 in our consolidated financial statements included in this prospectus for the funding status of our pension plans and other post-retirement plan as of December 31, 2011.

 

(6) Estimated warranty obligations, sales allowance programs and military price reduction reserves, which total $115.4 million, $32.3 million and $34.0 million as of December 31, 2011, respectively, have been excluded from this table as amounts and timing of any payments are unknown.

 

(7) As of December 31, 2011, we have paid Torotrak plc, or Torotrak, approximately 11.9 million GBP (or approximately $18.0 million USD). In addition, we will pay Torotrak approximately 3.3 million GBP in March 2012, as a result of extending our agreement for another two years. We also have the right, at our option, to purchase exclusive perpetual full licenses for 10.6 million GBP. All of these payments have been excluded from the table.

 

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The following table summarizes our contractual obligations as of December 31, 2011 (dollars in millions) after giving effect to (i) the redemption of $200.0 million in aggregate principal amount of the 11.0% Senior Notes on February 27, 2012 and (ii) the extension of the maturity of approximately $801.0 million in principal amount of the term loans under ATI’s existing Senior Secured Credit Facility from August 7, 2014 to August 7, 2017:

 

     Payments due by period  
Contractual Obligations    Total      Less than
1 year
     1-3
years
     3-5
years
     More than
5 years
 

11.0% Senior Notes(1)

   $ 158.2       $ 12.1       $ 24.2       $ 121.9       $   

7.125% Senior Notes(2)

     740.0         33.6         67.2         67.2         572.0   

Senior Secured Credit Facility(3)

     2,879.9         110.8         1,919.6         74.2         775.3   

Operating leases

     10.1         6.2         3.3         0.6         0.0   

Service fee(4)

     15.0         3.0         6.0         6.0         see (4) below   

Pension & OPEB liabilities(5)

     65.7         16.6         32.3         16.8         see (5) below   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total(6)(7)

   $ 3,868.9       $ 182.3       $ 2,052.6       $ 286.7       $ 1,347.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 11.0% Senior Notes include principal and interest payments based on a fixed interest rate of 11.0%. On February 27, 2012, ATI redeemed $200.0 million in aggregate principal amount of the 11.0% Senior Notes. See “Prospectus Summary—Recent Developments.”

 

(2) 7.125% Senior Notes include principal and interest payments based on a fixed interest rate of 7.125%

 

(3) Senior Secured Credit Facility includes principal payments and estimated interest payments excluding the effects of our interest rate swaps. A portion of the interest is at a variable rate and for the purposes of this table has been calculated using LIBOR as of December 31, 2011, (i) plus the applicable margin of 2.5%, resulting in an applied rate of 2.78% on $1,793.9 million and (ii) plus the applicable margin of 3.5%, resulting in an applied rate of 3.78% on $801.0 million. Actual payments will vary.

 

(4) As described in Certain Relationships and Related Party Transactions in NOTE 19 of our consolidated financial statements included in this prospectus, we entered into a service agreement with the Sponsors in connection with the Acquisition Transaction. Pursuant to this agreement, subject to certain conditions, we would be obligated to pay the Sponsors an annual service fee of $3.0 million for certain advisory, consulting and other services. This service fee is excluded from the table beyond year 5, though we would expect it to continue as long as the service agreement remains in place. However, in connection with the consummation of this offering, the Company will pay Carlyle and Onex a fee of $16.0 million to terminate this agreement.

 

(5) Estimated pension funding and post-retirement benefit payments are based on an increasing discount rate and effective interest rate for funding purposes between 4.8% and 6.0%. Pension funding and post-retirement benefit payments are excluded from the table beyond year 5, though we expect funding and payments to continue beyond year 5. See NOTE 12 in our consolidated financial statements included in this prospectus for the funding status of our pension plans and other post-retirement plan as of December 31, 2011.

 

(6) Estimated warranty obligations, sales allowance programs and military price reduction reserves, which total $115.4 million, $32.3 million and $34.0 million as of December 31, 2011, respectively, have been excluded from this table as amounts and timing of any payments are unknown.

 

(7) As of December 31, 2011, we have paid Torotrak plc, or Torotrak, approximately 11.9 million GBP (or approximately $18.0 million USD). In addition, we will pay Torotrak approximately 3.3 million GBP in March 2012, as a result of extending our agreement for another two years. We also have the right, at our option, to purchase exclusive perpetual full licenses for 10.6 million GBP. All of these payments have been excluded from the table.

Contingencies

We are a party to various legal actions and administrative proceedings and subject to various claims arising in the ordinary course of business, including those related to commercial transactions, product liability, safety, health, taxes, environmental and other matters. For more information, see “Business — Litigation” and NOTE 16 of our consolidated financial statements included elsewhere in this prospectus.

 

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Sales Outside North America

Approximately 20%, 18% and 16% of our net sales from continuing operations in 2011, 2010 and 2009, respectively, were derived from sales made to customers outside of North America. Because of these sales outside North America, our business is subject to the risks of doing business abroad, including currency exchange rate fluctuations, limits on repatriation of funds, compliance with foreign laws and other economic and political uncertainties.

Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements.

Recently Adopted Accounting Pronouncements

In December 2011, the FASB issued authoritative accounting guidance on enhancing disclosures to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. The guidance requires improved information and disclosures about gross and net amounts of recognized assets and liabilities of financial and derivative instruments that are offset in an entity’s statement of financial position. The guidance is to be applied retrospectively for reporting periods beginning on or after January 1, 2013. The adoption of this amendment is not expected to have a material effect on our consolidated financial statements.

In September 2011, the FASB issued authoritative accounting guidance on testing goodwill for impairment. Under the revised guidance, entities testing goodwill for impairment have the option of performing a qualitative assessment before calculating fair value (i.e., Step 1 of the goodwill impairment test). If entities determine, on the basis of qualitative factors, that fair value is more likely than not less than carrying value, the two-step impairment test would be required. The guidance does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test goodwill annually for impairment. In addition, it does not amend the requirement to test goodwill for impairment between annual tests if events or circumstances warrant; however, it does revise the examples of events and circumstances that an entity should consider. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption was permitted; however, we did not early adopt this guidance and continued to perform Step 1 of the goodwill impairment analysis for 2011. The adoption of this amendment is not expected to have a material effect on our consolidated financial statements.

In June 2011, the FASB issued authoritative accounting guidance on improving comparability, consistency, and transparency of items reported in other comprehensive income. The guidance eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and requires either a single continuous statement of comprehensive income or in two separate but consecutive statements. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. In December 2011, the FASB issued additional authoritative accounting guidance indefinitely deferring the requirement to present reclassifications of items out of accumulated other comprehensive income. The accounting guidance also establishes a common approach with International Financial Reporting Standards, or IFRS. The guidance is to be applied retrospectively for interim and annual reporting periods beginning after December 15, 2011 for public entities and after December 15, 2012 for nonpublic entities. The adoption of this amendment is not expected to have a material effect on our consolidated financial statements, but will require a change in the presentation of comprehensive income from the notes of our consolidated financial statements, where it is currently disclosed, to the face of our consolidated financial statements.

 

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In May 2011, the FASB issued authoritative accounting guidance that amended wording used to describe many of the requirements in measuring fair value and disclosing information about fair value measurements. The changes are not intended to change the application of the requirements of fair value measurement, but to clarify the application and disclosure of information. The amendments to the accounting guidance also establish a common approach with IFRS. The guidance is to be applied prospectively for entities interim and annual reporting periods beginning after December 15, 2011. The adoption of this amendment will not have a material effect on our consolidated financial statements.

Quantitative and Qualitative Disclosures about Market Risk

Our exposure to market risk consists of changes in interest rates, foreign currency rate fluctuations and movements in commodity prices.

Interest Rate Risk

We are subject to interest rate market risk in connection with a portion of our long-term debt. Our principal interest rate exposure relates to outstanding amounts under the Senior Secured Credit Facility. The Senior Secured Credit Facility provides for variable rate borrowings of up to $2,964.1 million including $369.2 million under our revolving credit facility, net of $30.8 million of letters of credit. Assuming the Senior Secured Credit Facility is fully drawn, each one-eighth percentage point increase or decrease in the applicable interest rates would correspondingly change our interest expense on the Senior Secured Credit Facility by approximately $2.3 million per year. This includes the partial offset of the interest rate swaps described below. As of December 31, 2011, we had no outstanding borrowings against the revolving credit facility.

In order to mitigate our exposure to LIBOR on the Senior Secured Credit Facility, we have entered into certain interest rate swap agreements as follows:

 

    

Counterparty

   Effective
Date
     Notional
Amount

(in  millions)
     LIBOR
Fixed Rate
 

Interest Rate Swap D

   Fifth Third Bank      2009-2013       $ 125.0         4.26

Interest Rate Swap E

   Barclays Capital      2010-2013       $ 150.0         2.79

Interest Rate Swap F

   Barclays Capital      2010-2013       $ 75.0         2.66

Interest Rate Swap G

   Barclays Capital      2010-2013       $ 75.0         2.99

Interest Rate Swap H

   Barclays Capital      2011-2014       $ 350.0         3.75

Interest Rate Swap I

   Deutsche Bank      2011-2014       $ 350.0         3.77

Interest Rate Swap J

   UBS      2013-2014       $ 125.0         2.96

Interest Rate Swap K

   UBS      2013-2014       $ 125.0         3.05

In certain circumstances, we and the counterparty are required to provide additional collateral under these swaps. We are exposed to increased interest expense if a counterparty defaults. Refer to NOTE 7 and NOTE 8 of our consolidated financial statements included elsewhere in this prospectus.

Exchange Rate Risk

While our net sales and costs are denominated primarily in U.S. Dollars, net sales, costs, assets and liabilities are generated in other currencies including Japanese Yen, Euro, Chinese Yuan Renminbi, Canadian Dollar, British Pound, Hungarian Forint, Brazilian Real and Indian Rupee. The expansion of our business outside North America may further increase the risk that cash flows resulting from these activities may be adversely affected by changes in currency exchange rates. As of December 31, 2011, we hold hedging contracts in the British Pound, Canadian Dollar and Indian Rupee, which are intended to hedge either known or forecasted cash flow payments denominated in such currencies. We do not intend to hold financial instruments for trading or speculative purposes.

 

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Assuming current levels of foreign currency transactions, a 10% increase or decrease in the Japanese Yen, Euro, Chinese Yuan Renminbi, Canadian Dollar and Indian Rupee would correspondingly change our earnings by an estimated $4 million per year, respectively. This includes the partial offset of our hedging contracts described above. All other exposure to foreign currencies is considered immaterial.

Commodity Price Risk

We are subject to changes in our cost of sales caused by movements in underlying commodity prices. Approximately two-thirds of our cost of sales consists of purchased components with significant raw material content. A substantial portion of the purchased parts are made of aluminum and steel. The cost of aluminum parts include an adjustment factor on future purchases for fluctuations in aluminum prices based on accepted industry indices. In addition, a substantial amount of steel-based contracts also include an index-based component. As our costs change, we are able to pass through a portion of the charges to certain of our customers according to our long-term supply agreements. We historically have not entered into long-term purchase contracts related to the purchase of aluminum and steel. We currently hold financial forward contracts that are intended to hedge forecasted aluminum and steel purchases. Based on our forecasted demand for 2012, as of December 31, 2011, the hedge contracts cover approximately 28% of our aluminum requirements and 6% of our steel requirements. Based on our forecasted demand for 2013, as of December 31, 2011, the hedge contracts cover approximately 14% of our aluminum requirements and 0% of our steel requirements. We do not intend to hold financial instruments for trading or speculative purposes.

Assuming current levels of commodity purchases, a 10% increase or decrease in aluminum and steel would correspondingly change our earnings by approximately $1 million and $4 million per year, respectively. This includes the partial offset of our hedging contracts described above.

Many of our recently renewed long term customer supply agreements have incorporated a cost-sharing arrangement related to future commodity price fluctuations. Our hedging policy is that we only hedge for our exposure and do not hedge any portion of the customers’ exposure. For purposes of the sensitivity analysis above, the impact of these cost sharing arrangements have not been included.

 

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BUSINESS

Our Business

We are the world’s largest manufacturer of fully-automatic transmissions for medium- and heavy-duty commercial vehicles, medium- and heavy-tactical U.S. military vehicles and hybrid-propulsion systems for transit buses. Allison transmissions are used in a wide variety of applications, including on-highway trucks (distribution, refuse, construction, fire and emergency), buses (primarily school and transit), motorhomes, off-highway vehicles and equipment (primarily energy and mining) and military vehicles (wheeled and tracked). We believe the Allison brand is one of the most recognized in our industry as a result of the performance, reliability and fuel efficiency of our transmissions. We estimate that globally, in 2011, we sold approximately 62% of all fully-automatic transmissions for medium- and heavy-duty on-highway commercial vehicle applications, and we believe we are well-positioned to capitalize on attractive growth opportunities. For the years ended December 31, 2011, 2010, 2009 and 2008 we generated net sales of $2,162.8 million, $1,926.3 million, $1,766.7 million and $2,061.4 million, respectively, net income (loss) of $103.0 million, $29.6 million, $(323.9) million and $(328.1) million, respectively, Adjusted net income of $305.4 million, $273.7 million, $49.6 million and $92.7 million, respectively, and Adjusted EBITDA of $711.9 million, $617.0 million, $501.3 million and $544.0 million, respectively, representing a 32.9% 32.0%, 28.4% and 26.4%, Adjusted EBITDA margin, respectively.

We introduced the world’s first fully-automatic transmission for commercial vehicles over 60 years ago. Since that time, we have driven the trend in North America and Western Europe towards increasing automaticity by targeting a diverse range of commercial vehicle vocations. As compared to manual transmissions and AMTs, we believe the superior performance attributes of our fully-automatic transmissions in vocations with a high degree of “start and stop” activity, as well as in urban environments, include lower maintenance costs, reduced vehicle downtime, ease of operation, increased safety and improved driver and passenger comfort. We believe our transmissions offer increased fuel efficiency and faster acceleration, resulting in lower operating costs and increased productivity when they are used in vehicles with duty cycles that require a high degree of “start and stop” activity. As a result of these attributes, our fully-automatic transmissions are the standard or exclusive transmission offered in the powertrain configuration of certain types of vehicles in North America, including school buses, fire and emergency vehicles, medium- and heavy-tactical U.S. military vehicles and certain mining trucks. In applications where our transmission is offered as an alternative to a manual transmission or an AMT, such as distribution and refuse trucks, we believe end users frequently specify an “Allison” transmission when ordering a commercial vehicle, which can create pull-through demand for our products to our OEM customers. Our transmissions are also commonly used in various oil and natural gas drilling and extraction equipment where we believe our products’ performance, reliability, equipment uptime and ease of operation is critical to end users.

We believe the Allison brand is one of the most recognized and respected names in the commercial vehicle industry and is associated with high quality, reliability, durability, vocational value, technological leadership and superior customer service. We believe our brand helps us maintain our leading market position and price our products commensurate with the value provided to the end user. Allison transmissions are optimized for the unique performance requirements of end users, which typically vary by vocation. Our products are highly engineered, requiring advanced manufacturing processes, and employ complex software algorithms for our transmission controls to maximize end user performance. We have developed over 100 different models that are used in more than 2,500 different vehicle configurations and are compatible with more than 500 combinations of engine brands, models and ratings (including diesel, gasoline, compressed natural gas and other alternative fuels). In 2011, over 10,000 unique Allison-developed calibrations were used with our transmission control modules. We believe our scale, experience and culture of innovation reinforce our leading market position and provide us with a competitive advantage.

Based on our market leadership, history of innovation, brand recognition and global presence, we believe we are well-positioned to capitalize on attractive growth opportunities globally. Our core North American on-highway market, which we define as Class 4-7 trucks, Class 8 straight trucks, buses (school, conventional transit, shuttle and coach) and motorhomes, is poised for continued recovery. According to ACT Research, on-highway

 

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commercial vehicle production in North America (excluding transit and coach bus, and motorhome) reached a 20-year low in 2009, increased by 54% from 2009 to 2011, and is anticipated to experience a CAGR of 9.0% from 2011 to 2014, representing increases of 7.7%, 16.7% and 3.1% from 2011 to 2012, 2012 to 2013 and 2013 to 2014, respectively, although we cannot assure you that such growth rates will materialize. In addition, we believe markets outside North America represent a major growth opportunity for us, as we estimate less than 5% of the medium- and heavy-duty commercial vehicles sold outside North America in 2011 were equipped with fully-automatic transmissions, as compared to 74% in our core North American market as defined above. We intend to drive the rate of adoption of fully-automatic transmissions in commercial vehicles globally by pursuing the same vocational strategy we employ in North America, though we cannot provide assurances that our business strategies will be successful or that fully-automatic transmissions will be increasingly adopted outside North America. Our anticipated growth outside of North America will be facilitated by our established international operations and customer relationships. For example, we are the leading provider of fully-automatic transmissions for medium- and heavy-duty commercial vehicles in China with a substantial installed base of over 35,000 Allison transmissions. In addition, in response to the evolving global focus on fuel consumption, we are developing new products to improve fuel efficiency without compromising performance. Over the last four years, we have accelerated and significantly increased our investment in research and development. Examples of our key innovations include the development of a fully-automatic hybrid-propulsion system for the medium- and heavy-duty commercial truck and bus markets and a fully-automatic transmission for a portion of the Class 8 tractor truck market, where we have a limited presence.

We continue to execute on a number of manufacturing and purchasing initiatives to increase efficiency, reduce operating costs and enhance our profitability and cash flow generation capabilities. For example, in 2008, we negotiated a mutually beneficial labor agreement with the UAW, which introduced a multi-tier wage and benefit structure and an annual profit-sharing incentive compensation plan for the hourly workforce tied to identical performance metrics as those used for the management team and salaried employees. As a result of our focus on improving our operating effectiveness and efficiency, we have been able to improve our Adjusted EBITDA margin by 450 basis points since 2009, despite experiencing one of the most severe economic downturns our industry has ever faced. We have also established new manufacturing facilities in Chennai, India and in Szentgotthard, Hungary, both of which provide access to low-cost manufacturing and a geographic presence to support our growth efforts in emerging markets. As we execute our growth strategy, we believe our strong operating leverage will position us for earnings growth and cash flow generation.

Our Industry

Commercial vehicles typically employ one of three transmission types: manual, AMT or fully-automatic. According to Frost & Sullivan, manual transmissions are the most prevalent transmission type used in Class 8 tractors in North America and in medium- and heavy-duty commercial vehicles, generally, outside North America. Manual transmissions utilize a disconnect clutch causing power to be interrupted during each gear shift resulting in energy loss-related inefficiencies and less work being accomplished for a given amount of fuel consumed. In long-distance trucking, this power interruption is not a significant factor, as the manual transmission provides its highest degree of fuel economy during steady-state cruising. However, steady-state cruising is only one part of the duty cycle. When the duty cycle requires a high degree of “start and stop” activity, as is common in many vocations as well as in urban environments, we believe manual transmissions result in reduced performance, lower fuel efficiency, lower average speed for a given amount of fuel consumed and inferior ride quality. Moreover, the clutches must be replaced regularly, resulting in increased maintenance expense and vehicle downtime. Manual transmissions also require a skilled driver to operate the disconnect clutch when launching the vehicle and shifting gears. AMTs are manual transmissions that feature automated operation of the disconnect clutch. Fully-automatic transmissions utilize technology that smoothly shifts gears instead of a disconnect clutch, thereby delivering uninterrupted power to the wheels during gear shifts and requiring minimal driver input. These transmissions deliver superior acceleration, higher productivity, increased fuel efficiency, reduced operating costs, less driveline shock and smoother shifting relative to both manual transmissions and AMTs in vocations with a high degree of “start and stop” activity, as well as in urban environments.

 

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We believe fuel efficiency, the measure of work performed for a given amount of fuel consumed, is the best method to assess fuel consumption of commercial vehicles as compared to the more commonly-used metric of fuel economy miles-per-gallon, or MPG. MPG is inadequate for commercial vehicles because it does not encompass two key elements of efficiency that we believe are important to vehicle owners and operators: payload and transport time. For example, if more work can be completed or more payload hauled using the same amount of fuel or over a shorter period of time, then we believe the vehicle is more fuel efficient. Since fuel economy and its MPG metric only accounts for distance traveled and fuel consumed, ignoring time and work performed, it is therefore an inferior metric to fuel efficiency when it comes to assessing commercial vehicles.

Our Served Markets

We sell our transmissions globally for use in medium- and heavy-duty on-highway commercial vehicles (with limited exposure to the Class 8 tractor market), off-highway vehicles and equipment and military vehicles. In addition to the sale of transmissions, we also sell branded replacement parts, support equipment and other products necessary to service the installed base of vehicles utilizing our transmissions. The following table provides a summary of our business by end market, for the fiscal year ended December 31, 2011.

 

     NORTH AMERICA    OUTSIDE  NORTH
AMERICA
  MILITARY   SERVICE
PARTS ,
SUPPORT
EQUIPMENT &
OTHER
END MARKET   ON-HIGHWAY   HYBRID
TRANSIT BUS
  OFF-HIGHWAY       

2011 NET SALES

(IN MILLIONS)

  $727   $134   $280    $364   $304   $354

% OF TOTAL

  34%   6%   13%    17%   14%   16%
MARKET POSITION  

• #1 supplier of fully-automatic transmissions

 

• #1 supplier of hybrid-propulsion systems

 

• A leading independent supplier

  

• #1 supplier of fully-automatic transmissions in China and India

 

• Established presence in Western Europe

 

• #1 supplier of transmissions to the U.S. military

 

• Approximately 1,500 dealers and distributors worldwide

VOCATIONS OR END USE  

• Distribution

 

• Emergency

 

• Refuse

 

• Construction

 

• Utility

 

• School, transit, shuttle and coach buses

 

• Motorhome

 

 

• Hybrid transit bus

 

• Hybrid shuttle bus

 

• Energy

 

• Mining

 

• Construction

 

• Specialty vehicle

  

• Transit bus

 

• On-highway trucks

 

• Off-highway vehicles and equipment

 

• Medium- and heavy-tactical wheeled platforms

 

• Tracked combat platforms

 

• Parts

 

• Support equipment

 

• Remanufactured transmissions

 

• Fluids

For the years ended December 31, 2011, 2010 and 2009, our top five OEM customers accounted for approximately 38%, 41% and 43% of our net sales, respectively. Our top two OEM customers, Navistar and Daimler, accounted for approximately 12% and 10%, respectively, of our net sales in 2011.

 

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We anticipate a number of trends will continue to impact demand for our transmissions in our industry. For example, we expect the continued recovery of medium- and heavy-duty commercial vehicle demand in developed markets will continue to result in increased production volumes, which we believe is supported by pent up demand in the North American market from deferred purchases during the economic downturn. However, we cannot assure you such growth will actually materialize. In addition, we anticipate growth in commercial vehicle demand in key emerging markets supported by broad macroeconomic trends. We also expect customers to continue to adopt fully-automatic transmissions in medium- and heavy-duty commercial vehicles in both developed and emerging markets. We anticipate accelerating demand for fuel efficient technologies in response to rising fuel prices, greater demand for hybrid-propulsion systems in response to changes in global regulations and an increased focus on fuel efficiency. We also expect increased demand for capital equipment utilizing our off highway transmissions as a result of rising demand for commodities and energy.

LOGO

Governments are mandating restrictions on emissions that lead to vehicle system changes. New emission standards increase overall vehicle cost relating to pollutant-reducing systems. The emission standards and resultant compliance costs create uncertainty among vehicle owners about the quality, fuel efficiency and maintenance needs of the new engines. In anticipation of an emission regulation change, commercial vehicle buyers may “pre-buy” vehicles with prior-year emissions compliant engines in the year preceding the regulation change. The act of pre-buying causes irregularity in transmission purchase patterns and creates forecasting challenges. In North America, a reduction in permitted emissions came into effect in January 2007, which resulted in a significant vehicle pre-buy in 2006. Another tightening of emission standards took place in January 2010, which resulted in a significantly smaller vehicle pre-buy in 2009. More emissions regulation is expected in 2013. Generally, the degree of pre-buy in any end market directly correlates with the weight class of the commercial vehicle because the heavier the vehicle, the greater the cost to a buyer of complying with these new emission standards. Outside North America, engine emission level compliance varies by the levels established by European Union regulations. As countries change from one emission level to the next, OEMs must change their powertrain configurations and validate the resulting combinations. OEMs have cadenced their vehicle releases and product upgrades to incorporate emissions compliant improvements as they evolve and are regionally deployed. Supply agreements with key OEMs enhance our position with those OEMs as they adjust their products to comply with new regulations.

North America

We are the largest manufacturer of fully-automatic transmissions for the on-highway medium- and heavy-duty commercial vehicle market in North America. Our core markets are those in which the value proposition of a fully-automatic transmission to end users is highest, typically where the vehicle is operated with a high degree of “start and stop” activity. We believe end user preferences for superior acceleration, higher productivity, increased fuel efficiency, reduced operating costs, less driveline shock and smoother shifting relative to both manual transmissions and AMTs results in a willingness to pay a meaningful premium for the attributes of our fully-automatic transmissions. Overall, we believe the demand for on-highway fully-automatic transmissions in our core markets is increasing in North America.

 

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Our core North American on-highway market includes Class 4-5, Class 6-7 and Class 8 straight trucks, conventional transit, shuttle and coach buses, school buses and motorhomes. Class 8 trucks are subdivided into two markets: straight and tractor. Class 8 straight trucks are those with a unified body (e.g., refuse, construction, and dump trucks), while tractors have a vehicle chassis that is separable from the trailer they haul. We have been supplying transmissions for Class 8 straight trucks for decades and it is a core end market for us. Today, we have very limited exposure to the Class 8 tractor market because lower priced manual transmissions generally meet the needs of these vehicles which are primarily used in long distance hauling. However, we have identified a portion of the Class 8 tractor market that we call metro tractors that are used primarily in urban environments more than 60% of the time. We are developing a new fully-automatic transmission that meets the unique duty cycle requirements of the Class 8 metro tractor market and believe this represents a significant growth opportunity.

We sell substantially all of our transmissions in the North American on-highway market to OEMs, including Blue Bird, Daimler, Hino, Navistar, PACCAR, Spartan Motors, Inc., Volvo and many others. These OEMs, in turn, install our transmissions in vehicles in which our transmission is either the exclusive transmission available or is specifically requested by end users who are choosing between a manual transmission, an AMT or a fully-automatic transmission. OEM customers representing approximately 90% of our 2011 North American on-highway unit volume participate in long-term supply agreements with us. Generally, these supply agreements offer the OEM customer defined levels of mutual commitment with respect to growing Allison’s presence in the OEMs’ products and promotional efforts, pricing and sharing of commodity cost risk. The typical length of our customer agreements is five years. We often compete in this market against independent manufacturers of manual transmissions and AMTs, and, to a lesser extent, against OEMs in certain weight classes that use their own internally manufactured transmissions in certain vehicles. For example, Ford Motor Company, or Ford, offers its own fully-automatic transmission in its Class 4-5 vehicles in North America, though we supply Ford with our fully-automatic transmissions for their Class 6-7 trucks.

On-Highway

The following is a summary of our on-highway net sales by vehicle class in North America.

 

LOGO

Class 4-5 Trucks.    Class 4-5 trucks are generally used in urban applications, including distribution, commercial lease and rental, as well as ambulance. The primary demand drivers impacting the purchase of these trucks are economic factors, such as gross domestic product growth, industrial activity and fuel costs, as well as government spending.

 

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The largest Class 4-5 truck OEM is Ford, which offers its own transmission in these vehicles. Until 2009, Ford and General Motors were the largest OEMs in this end market with a combined market share of 88% in 2008, but General Motors exited the medium-duty truck market after emerging from bankruptcy. Since Ford uses its own fully-automatic transmission in this vehicle class, General Motors’ departure from this market resulted in a decline in our sales of fully-automatic transmissions for use in the Class 4-5 truck market, which we had served almost exclusively through General Motors. To partially offset the loss of General Motors’ presence in this market, we are the exclusive transmission supplier to the new Navistar Class 4-5 TerraStar truck specifically targeted at this end market. We also intend to pursue business with other OEMs, should they choose to participate in this end market.

Class 6-7 Trucks.    Class 6-7 trucks are generally used in urban applications, including larger distribution, commercial lease and rental, ambulance, rescue and fire trucks. While demand drivers for the Class 6-7 truck end market are generally similar to those of the Class 4-5 truck end market, economic and pre-buy volatility are higher in these classes. The largest OEMs in this end market are Navistar, Daimler, Ford, Hino and PACCAR. Our overall penetration of the Class 6-7 truck transmission end market was approximately 68% in 2011, and we supply virtually all of the fully-automatic transmissions sold in this end market. In this market, we compete primarily with manual transmissions and AMTs manufactured by Eaton Corp., or Eaton.

Class 8 Straight Trucks.    The most common vocations that utilize straight trucks are refuse, construction, fire and emergency. Primary drivers of Class 8 straight truck demand are general economic conditions and federal, state and municipal spending, which affect the purchases of many fire and emergency trucks, refuse vehicles and construction vehicles, and the purchases of other private refuse fleet operators. The largest Class 8 straight truck OEMs are Navistar, Daimler, PACCAR and Volvo. In 2011, our overall penetration of the Class 8 straight truck transmission end market was approximately 54%, and we supply virtually all of the fully-automatic transmissions sold in this end market. In this market, we compete primarily with manual transmissions and AMTs manufactured by Eaton.

Buses.    School buses have historically comprised approximately 75% of the North American bus market by volume. While school buses vary in weight and engine size, the majority of our transmissions are used in Class 6-7 buses. The primary demand driver for school bus purchases is municipal spending, specifically school district budgets and the capital expenditure plans of private fleet operators. School bus demand is also affected by the number of school-age children, which is driven by birth rates and immigration. The demand in this end market has generally been stable, although it does experience declines during economic downturns as municipalities defer purchases. The largest school bus OEMs are Navistar, Daimler and Blue Bird. We supply our transmissions for virtually all of the school buses produced in North America and currently face little competition from other suppliers to this end market. The bus market also encompasses non-hybrid transit and conventional coach and shuttle buses. We have the leading market share in the non-hybrid transit bus market, where we primarily compete against Voith GmbH, or Voith and ZF Friedrichshafen AG, or ZF.

Motorhomes.    We sell our transmissions for use primarily in larger motorhomes (Type A). Substantially all of the Type A motorhomes used fully-automatic transmissions in this market in 2011. The motorhome market was severely impacted by the recent economic downturn with volumes declining approximately 60% from 2007 to 2011. We expect motorhome demand will benefit from improving economic conditions, increased availability of credit and favorable demographic trends such as the aging of “baby boomers.” We typically sell to the chassis manufacturers, such as Navistar and Daimler, that supply body manufacturers, such as Thor Industries, Winnebago Industries, Inc. and Fleetwood RV, Inc. We had approximately a 42% share of the fully-automatic transmissions used in Type A diesel and gasoline powered motorhomes and substantially all of the share of the fully-automatic transmissions sold in Type A diesel powered motorhomes. In this market, we compete primarily with Ford, who uses its own internally-produced transmission in the lighter-duty motorhomes.

Hybrid Transit Buses

The global interest in conserving fuel and reducing greenhouse gas emissions is driving demand for more fuel efficient commercial vehicles. As of December 31, 2011, we have delivered over 5,000 H 40/50 EP hybrid-propulsion transit bus systems globally to 230 cities in 13 countries, making us the world’s largest supplier of the hybrid-propulsion transit bus systems. In North America, we sold nearly 80% of all units for the

 

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hybrid transit bus market in 2011. Our customers in this end market are typically city, state and federal governmental entities, which utilize government funds to subsidize a portion of the purchase price for the transit buses containing our hybrid-propulsion system. In this market, we compete primarily with BAE.

Off-Highway

We have provided products used in vehicles and equipment that serve energy, mining and construction applications for over 50 years.

Off-highway energy applications include well-stimulation equipment, pumping equipment, and well-servicing rigs, which often use a fully-automatic transmission to propel the vehicle and drive auxiliary equipment. We maintain a leadership position in this end market, with nearly all producers of well stimulation and well servicing equipment utilizing our heavy-duty off-highway transmissions. Customers include Halliburton Company, BJ Services Company, Weatherford International Ltd., National Oilwell Varco, Inc., and Key Energy Services, Inc. For example, new methods of drilling and extracting oil and natural gas from shale formations, such as hydraulic fracturing, have driven demand for oil and natural gas equipment, which utilize highly engineered heavy-duty fully-automatic transmissions. Competition in both the well stimulation and well servicing markets comes primarily from Caterpillar Inc., or Caterpillar and Twin Disc, Incorporated.

We also provide heavy-duty transmissions used in mining trucks and other specialty vehicles. Mining applications include trucks used to haul various commodities and other products, including rigid dump trucks, underground trucks and long-haul tractor trailer trucks with load capacities between 40 to 110 tons. Our major competitors in this end market are Caterpillar and Komatsu, Ltd., or Komatsu, both of which are vertically integrated and manufacture fully-automatic transmissions for their own vehicles. Specialty vehicles using our heavy-duty transmissions include airport rescue and firefighting vehicles and heavy-equipment transporters.

Outside North America

We are the largest manufacturer of fully-automatic transmissions for the commercial vehicle market outside of North America. The following is a summary of our net sales by region outside of North America.

 

LOGO

While the use of fully-automatic transmissions in the medium- and heavy-duty commercial vehicle market has been widely accepted in North America, the markets outside North America continue to be dominated by manual transmissions. In 2011, fully-automatic transmission-equipped medium- and heavy-duty commercial vehicles represented less than 5% of the vehicles in markets outside North America and are concentrated in certain vocational end markets. In other global regions, like Western Europe, where, according to Frost & Sullivan, penetration is expected to grow to 10.9% in 2017 from 6.1% in 2010, we believe we have attractive opportunities for expansion for our fully-automatic transmissions as end users increasingly recognize the benefits that result from the use of our products. However, we cannot assure you that such growth will materialize in any of these emerging markets.

 

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Europe, Middle East, Africa.    The Europe, Middle East, Africa region, or EMEA, is composed of several different markets, each of which differs significantly from our core North American market by the degree of market maturity, sophistication and acceptance of fully-automatic transmission technology.

Within Europe, we serve Western European developed markets, as well as Russian and Eastern European emerging markets. Our key on-highway customers in these markets are Daimler, Iveco, Scania, and Volvo. Fully-automatic transmission technology has approximately a 5% market share in European truck applications. We lead this end market with approximately a 68% share of the fully-automatic transmissions sold in 2011. Transit bus transmission sales are more evenly divided between manual and fully-automatic transmissions. However, we face strong competition from European-based bus-focused competitors in this market such as ZF and Voith. Europe is most notably characterized by a high level of vertical powertrain integration with OEMs such as Daimler, Scania and Volvo often utilizing their own manual transmissions and AMTs in their vehicles. These OEMs have not generally elected to manufacture fully-automatic commercial vehicle transmissions. We believe they have not done so due to the large initial investment required that would be amortized over a limited number of medium and heavy-duty commercial vehicles utilizing fully-automatic transmissions in their European market. The Middle East and Africa regions are generally characterized by very limited local vehicle production, with imports from the U.S., South America, Turkey, China, India and Europe accounting for the majority of vehicles.

Although we have low market penetration today, we supply transmissions to all major European OEMs. We have targeted specific vocations in EMEA that we believe benefit from our value proposition. For example, we are the exclusive transmission in refuse chassis with Daimler, Dennis Eagle and Renault SA. We also supply mining OEMs such as Atlas Copco UK Holdings Ltd., Perlini Equipment, Sandvik AB and Terex. Our major off-highway competitors are Caterpillar and Komatsu, both of which are vertically integrated manufacturers of off-highway mining vehicles, including the specific fully-automatic transmission used in their mining trucks.

Asia-Pacific.     Currently, manual transmissions are the predominant transmissions used in commercial vehicles in the Asia-Pacific region. We believe we are well-positioned to capitalize on the relatively low penetration rate of automatic transmissions because of our transmissions’ established reputation for performance and durability, as well as our distributor and dealer network presence in most of the key Asia-Pacific markets, particularly in China, where commercial truck sales continue to grow as significant investment is being made in the infrastructure.

In China, our largest growth market, we are the leading provider of fully-automatic commercial vehicle transmissions with a substantial installed base of over 35,000 Allison transmissions, including 23,000 units in transit buses, operated by 71 different bus fleets in 53 cities as of December 31, 2011. Our success in penetrating the domestic commercial vehicle OEMs combined with the value of our fully-automatic transmissions have generated a significant growth opportunity for us as Chinese OEMs have begun to export products. For example, we have grown significantly in commercial vehicles used to transport cargo at shipping ports (dock spotters) in China, increasing our share from essentially 0% in 2004 to virtually 100% in 2010, which we have maintained in 2011. In targeted vocations such as fire and emergency, construction and specialty vehicles (e.g. crane carriers), we have increased the number of vehicle configurations in which our transmissions are available from 17 in 2008 to 72 in 2011. Specifically we increased our availability in heavy duty mining and construction dump trucks by 13 vehicle configurations and our transmissions are now offered by all major Chinese OEMs serving this market. In 2010, we obtained the first exclusive fully-automatic transmission vehicle configuration in a Chinese fire truck that is being aggressively promoted by FAW and Allison. Our off-highway transmissions are also used in China for energy, mining and construction, by OEM customers including 4th Petroleum and Yantai Jereh Oilfield Services Group Co., Ltd. in energy applications and Qinhuangdao Tolian Speciality Transporter Co., Ltd and Sany Group Co., Ltd and North Hauler in mining and construction applications.

In addition to China, we actively participate in several other important Asia-Pacific countries. Currently, Taiwan, Indonesia, Malaysia and Thailand are primarily importers of commercial vehicles, with limited domestic manufacturing capabilities. Australia and South Korea have a few OEMs with domestic production capabilities for which we are a supplier, including Iveco, Hyundai Motor Company and Daewoo International Corporation.

 

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The distribution of our fully-automatic transmissions throughout the broader Asia-Pacific region helps to develop end user relationships and represents an attractive growth opportunity.

The Japanese market for commercial vehicles is unique due to the country’s compact size and its transportation congestion constraints, as well as a lack of an “interstate” highway system. This generally encourages the use of smaller engines and commensurately lighter-duty commercial vehicles than those used in North America. Sales of fully-automatic transmissions for use in the domestic Japanese commercial vehicle market are expected to grow over the long-term as a result of the declining number of drivers in the active workforce who are trained to operate manual transmissions. Historically, the Japanese commercial vehicle fully-automatic transmission market has been served by local suppliers such as Aisin, who supplies its products predominantly for vehicles in the Class 4-5 equivalent and lighter weight categories, but through building our relationships with domestic Japanese vehicle OEMs, including Hino, Isuzu, Mitsubishi and Nissan, we are working to expand our commercial vehicle releases in the Japanese market. We recently secured an exclusive Mitsubishi bus chassis release for the domestic Japanese market and expect our market share in buses to grow. Opportunities for vehicles exported to Australia, Thailand and Indonesia, which are produced by Japanese OEMs, are improving with the Australia refuse, construction and distribution markets representing the most significant near-term potential.

Competition in the Asia-Pacific region includes fully-automatic transmissions from Aisin Seiki Co., Ltd., or Aisin and JATCO Ltd for lighter-duty trucks and ZF and Voith for buses. We also face competition from the captive OEM production of manual transmissions and AMTs from companies such as Mitsubishi Fuso Truck and Bus Corporation, or Mitsubishi, Hino, Isuzu and Nissan Diesel, or Nissan. Shaanxi Fast Gear Co., Ltd., or Fast Gear, has a leading market share of the manual transmissions sold for use in the Chinese truck market, while Qijiang is the leading Chinese tour-coach manual transmission supplier. Both Fast Gear and Qijiang are seeing their market shares erode as the heavy-duty commercial truck OEMs, such as Sinotruk, manufacture both engines and manual transmissions. In the off-highway market our primary competitors are Caterpillar and Danyang Winstar Auto Parts Co., Ltd., in energy applications and vertically integrated OEMs Caterpillar and Komatsu in mining applications.

India.    Currently, manual transmissions are the predominant transmissions used in commercial vehicles in India. Since 2007, we have had an established foothold in the India on-highway market, beginning with the low-floor transit bus. We have been successful in obtaining releases and generating sales in support of the desire of the Indian government to upgrade its public transportation infrastructure. Over the last few years, our presence in the bus market has grown, with Allison transmissions operating in over 21 major cities across India.

In order for us to take a more direct and proactive role in the Indian market, we opened a regional office and customization center in 2009 and a manufacturing facility in 2010. At this point, our manufacturing capabilities in India are limited to the production of certain components used in our transmissions, but we expect to have the ability to assemble finished products in India by the end of 2012. We have also launched vehicle release programs within Indian OEMs in the truck, bus, military and off-highway markets.

India’s commercial vehicle industry is dominated by manual transmissions. We believe our opportunity for growth is strong, especially as the various Indian vocational end markets seek to upgrade and modernize their equipment to global specifications. Competition primarily comes from the locally produced manual transmissions, as well as from ZF and Voith, which compete with us predominantly in the bus market with their fully-automatic transmissions. Allison is or is expected to be offered as an option by Indian bus and truck OEMs such as Tata, Ashok Leyland, JCBL Ltd., Asia Motor Works Limited and BEML, and we expect to continue to increase our penetration in this region.

South America.    Currently, manual transmissions are the predominant transmissions used in commercial vehicles in South America. We have a long history in South America, dating back to our initial entry into Brazil in 1975, and we continue to maintain a presence supporting OEMs such as Daimler, MAN, Navistar, Agrale S.A., Encava C.A., Scania, Iveco, Randon Veículos Ltda., Technología Avanzada en Transporte S.A. and Ford. Over the past three years, the vast majority of the net sales of our products in the region were for use in buses, while on-highway and off-highway trucks accounted for a small portion of our net sales. Off-highway vehicles

 

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and equipment represent a growth opportunity due to heavy mining activity in Chile, Brazil, Colombia and Peru. The South American region is characterized by a high level of integration, with captive manual transmission and AMT manufacturing by OEMs such as Scania and Daimler.

Military

We have a long-standing relationship with the U.S. military, dating back to 1945, when we developed our first-generation tank transmission. Today, we sell substantially all of the transmissions for medium- and heavy-tactical wheeled vehicle platforms including the Family of Medium Tactical Vehicles, Armored Security Vehicles, Heavy Expanded Mobility Tactical Trucks, Heavy Equipment Transporters, Palletized Loading Systems, M915 Series Trucks, Medium Tactical Vehicle Replacements and the Logistic Vehicle System Replacement. Additionally, we supply transmissions for the majority of MRAP Vehicles and the MRAP All Terrain Vehicle and for all three potential manufacturers of the Joint Light Tactical Vehicles, or JLTV. However, the MRAP vehicle production program is in the process of winding down. Transmissions for our wheeled vehicle platforms are typically sold to OEMs, including BAE, Daimler, General Dynamics Land Systems, Oshkosh, Navistar, Force Protection, Inc. and Textron Marine & Land Systems.

We are also the supplier on two of the three key tracked vehicle platforms, the Abrams tank and the M113 family of vehicles, which are sold directly to the U.S. military. Additionally, we sell parts kits to licensees for the production of transmissions for tracked vehicles manufactured outside North America. We have been selected as the transmission supplier for one of the prime contractors bidding for the new U.S. Army ground combat vehicle. Overall, we expect the demand for U.S. military vehicles to decrease as the funding for military vehicles declines as the Iraq and Afghanistan operations wind down. Additionally, DOD budgets and supplemental spending have allowed the military to recapitalize and reset many vehicle systems, which has reduced the average age of the fleet and the need to procure new vehicles.

Globally, we face competition for the supply of our transmissions in tracked military vehicles primarily from Renk AG, L-3 Communications Corporation and ZF. Additionally, we face limited competition from Caterpillar in certain U.S. military wheeled vehicle platforms.

Service Parts, Support, Equipment and Other (Aftermarket)

Aftermarket provides us with a relatively stable source of revenues as the installed base of vehicles and equipment utilizing our transmissions continues to grow. The need for replacement parts is driven by normal vehicle and equipment maintenance requirements and is not significantly impacted by economic cycles. Uninterrupted operation is generally critical for end users’ profitability. End users focus on getting the vehicle back in service, which in some cases results in the aftermarket purchase decision being less price-sensitive.

The sale of Allison-branded parts and fluids, remanufactured transmissions and support equipment is fundamental to our brand promise. We have assembled a worldwide network of approximately 1,500 distributor and dealer locations to sell, service and support our transmissions. As part of our brand strategy, our independent distributors and dealers are required to sell genuine Allison-branded parts. Within the aftermarket, we offer remanufactured transmissions under our ReTran brand, which provides a cost-effective alternative for transmission repairs and replacements. We also provide support equipment to our OEMs to assist in installing new Allison transmissions into vehicles, and, therefore, sales of support equipment are dependent upon sales of new transmissions.

Over the last few years, our growth in traditional aftermarket sales has been tempered by improvements in product quality and durability. While traditional aftermarket sales are expected to grow, support equipment sales fluctuate with the introduction of new transmissions. The competition for service parts and ReTran remanufactured transmissions comes from a variety of smaller-scale companies sourcing non-genuine “will-fit” parts from unauthorized manufacturers. These “will-fit” parts often do not meet our product specifications, and therefore may be of lesser quality than genuine Allison parts.

 

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Our Product Offering

Allison transmissions are sold under the Allison Transmission brand name and remanufactured transmissions are sold under the ReTran brand name, which we believe are recognized throughout the industry for delivering the combination of quality, reliability, durability, vocational value and superior customer service. We have 12 transmission product lines with over 100 different product models. Allison transmissions are included in more than 2,500 vehicle configurations that are compatible with more than 500 combinations of engine brands, models and ratings worldwide.

 

LOGO

 

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LOGO

In addition to our current product offerings, we have various products under development, including the H 3000 and the H 4000 hybrid-propulsion systems designed for use in medium- and heavy-duty commercial trucks and buses and the Class 8 metro truck fully-automatic transmission.

In August 2009, our success with the hybrid-propulsion systems for transit buses helped us secure a $62.8 million DOE cost-share grant award, which along with approximately $86.0 million that we expect to self-fund, will be used to develop and produce another family of hybrid-propulsion systems, including the H 3000 and the H 4000. The first of the two new products, which are hybrid variants of our current 3000 and 4000 products for use in commercial trucks and buses, is expected to begin production in 2013, and the second new product is expected to begin production in 2014. The objective for this family of hybrid-propulsion systems is to create an improvement in fuel efficiency of 25% to 35% for a typical vehicle, dependent upon the vocation and duty cycle. The reduction in fuel consumption, while delivering the same productive work in the same amount of time, also reduces greenhouse gas emissions and reduces other air pollutants from commercial trucks. The combustion of a lower quantity of fuel within the engine also reduces the wear on the engine and the hybrid regenerative braking captures and stores deceleration energy, thereby reducing wear on the vehicle’s service brakes, helping reduce vehicle maintenance and service costs.

The H 3000/4000 products will initially serve medium- and heavy-duty distribution vehicles, shuttle buses, refuse trucks and utility trucks. Given our 20 years of experience with hybrid vehicle technology, eight years production experience with the successful Allison hybrid-propulsion system for transit buses and decades of vocational truck expertise, we will be able to produce a hybrid-propulsion system for the commercial truck and bus markets that we believe will provide a value proposition to end users relative to competing non-automatic hybrid transmission offerings. Demand for our hybrid-propulsion systems has historically been supported by various governmental subsidies to end users. If such subsidies were to be discontinued or if our products failed to qualify for such subsidies, sales of our hybrid-propulsion systems could be negatively impacted.

We are developing a fully-automatic transmission for the Class 8 metro tractor market, in which we have a very limited presence and that accounts for approximately 30% of the Class 8 tractor market. We believe our new metro product is more fuel efficient than the incumbent manual transmissions and AMTs currently used in these vehicles, and is well suited to address end user demands in this market given the high “start and stop” frequency of the Class 8 metro tractor duty cycle.

Product Development and Engineering

We maintain an industry leading product development and engineering capability dedicated to the design, development, refinement and support of our fully-automatic transmissions and hybrid-propulsion systems. Our approximately 350 product development and engineering staff are distinguished by their depth of analytical skills and industry experience and significantly contribute to our product performance. With decades of experience,

 

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knowledge and expertise in our markets, we believe we have the skills to create, evolve and apply products to a wide variety of uses under various vocations and operating conditions. Within the product development engineering process, insights gained in one area can be leveraged across our entire portfolio.

We believe our customers expect our products to provide unparalleled performance and value defined in various ways, including delivering maximum cargo in minimum time, using the least amount of fuel possible while employing the fewest vehicles possible and experiencing maximum vehicle uptime. In response to those needs and the evolving customer focus on fuel efficiency, we provide vehicle specification guidelines, superior transmission control software and mechanical components to optimize fuel economy while delivering desired vehicle performance. Further, we are developing new technology and products to improve fuel efficiency and fuel economy by allowing engines to operate more efficiently and at lower speeds to avoid consuming fuel without compromising performance. Building on our engineering capabilities, we pioneered hybrid propulsion in commercial vehicles and are developing new hybrid variants and alternative technologies for use in our global commercial vehicle markets.

We maintain a test track on our Indianapolis, Indiana campus for vehicle drive, testing and calibration activities in addition to being a demonstration venue for customers. We opened a comparable facility in October 2011, at our location in Szentgotthard, Hungary. We also lease test track facilities in New Carlisle, Indiana, Apache Junction, Arizona, and Sweden. In 2011, we hosted approximately 1,300 OEM and end user representatives at these facilities.

Sales and Marketing Organization

Our sales and marketing effort is organized along geographic and customer lines and is comprised of marketing, sales and service professionals, supported by application engineers worldwide. In North America, selling efforts in the on-highway end market, our largest end market, are organized by distributor area responsibility, OEM sales and national accounts, for our large end users. Outside North America, we manage our sales, marketing, service and application engineering professionals through regional areas of responsibility. These regional management teams distribute OEM service and application engineering resources globally. Since 2007, we have significantly expanded our sales and marketing teams and distribution relationships in emerging markets to capitalize on growth opportunities in these regions. We manage our military products sales, marketing, service and application engineering through an Indianapolis-based group of professionals with extensive defense industry experience.

We have developed a marketing strategy to reach OEM customers as well as end users. We target our end users primarily through marketing activities by our sales staff, who directly call end users and attend local trade shows, targeting specific vocations globally and through our plant tour program, where end users may test our products on the Indianapolis test track. We are creating an enhanced test track experience at our new Hungary facility, to provide our global end users an opportunity to test our products.

While our marketing management uses the term “customer” interchangeably for OEMs and end users, the primary objective of our marketing strategy is to create demand for fully-automatic transmissions through:

 

   

OEM promotion of our products and incorporation of fully-automatic transmissions in their commercial vehicle product offerings;

 

   

Allison representative and/or Allison distributor contact with identified, major end users; and

 

   

our network of independent dealers who contact other end users.

The process is interactive, as Allison representatives, Allison distributors and OEM dealers educate customers and respond to the specific applications, requirements and needs of numerous specialty markets.

 

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Similarly, we work with customers, dealers and OEMs to educate, improve and simplify how they specify vehicles and vehicle systems in order to optimize vehicle performance and fuel consumption. This instructional initiative is known as “Science to Sales.” Our field organization also works closely with distributors who, in turn, work with dealers to provide end users with education, parts, service and warranty support. The military marketing group follows a defined plan that identifies country, vehicle and specific OEMs and then approaches the ultimate end user through a variety of channels.

Manufacturing

Our manufacturing strategy provides for distributed capability in manufacturing and assembly of our products for the global commercial vehicle market. Our primary manufacturing facilities, located in Indianapolis, Indiana, consist of 3.2 million square feet of usable manufacturing space in seven plants. We also have established customization and parts distribution centers in The Netherlands, Brazil, China, Hungary and India. We are further expanding our global manufacturing presence to provide access to low-cost manufacturing and a regional presence to support our emerging market growth strategy. Our facilities are designed and located globally to respond to customer orders within competitive lead times and to minimize tangible and intangible market entry costs, while taking full advantage of our global supply chain. In support of these initiatives, we recently opened a plant in Chennai, India in 2010 and a plant in Szentgotthard, Hungary in 2011. Our Chennai facility manufactures gear components for our global manufacturing operations and allows us to control the quality and durability of the gears, consistent with those produced in our U.S. facilities, at a lower cost. We expect this facility will assemble finished products by the end of 2012. Our new Hungarian facility has relocated our existing assembly and final test operations from a nearby General Motors plant, with which we have had a contract manufacturing arrangement, into a wholly-owned Allison plant. This new Allison facility is equipped to customize the units it produces to meet unique customer demands, a process formerly handled by our operations in The Netherlands. Our Chennai and Szentgotthard facilities will also provide us with a meaningful level of manufacturing redundancy for our high volume on-highway transmission products.

Our day-to-day manufacturing operations are sustained through the fundamentals of the Allison Transmission Global Manufacturing System, or GMS. This system supports five key principles to ensure the highest quality and reliable products for our customers: people involvement, standardization, built-in quality, short lead time, and continuous improvement. All on-highway products manufacturing plants embrace these concepts in total, while production areas of lower product volumes apply specific GMS concepts applicable to their operations. Each of these principles is supported by key elements that serve as criteria for process execution that ensure minimized waste within the production system.

Our high volume on-highway products are produced in multiple global locations while off-highway, hybrid-propulsion and military tracked products are produced in Indianapolis. The type of facility employed in a given area depends on regional product demand and delivery time requirements. Assemble-to-order is achieved through lean manufacturing processes with short lead times intended to respond to customer line sets in less than 10 days. GMS supports product-focused factories, which include lean-configured manufacturing cells and efficiently designed assembly lines that align with a specific product. We believe a comprehensive quality system and a regimented system structured around Kanban fundamentals are the foundation for the system’s dependability. Each factory is structured with its own dedicated leadership team. We have extensive in-house machining capabilities, significant technical expertise and advanced processes for component manufacturing and total product assembly. Manufacturing operations consist of the vast majority of machining processes utilized in the conversion of cast iron, steel and aluminum products into transmission components, as well as the heat treating facilities that exist in four of our plants.

Approximately 90% of the part numbers that make up our transmissions are purchased from outside suppliers. Based on thorough on-going analyses of our own manufacturing competencies in the context of supply base capabilities, the proportion of purchased parts has increased in our most recent product designs. This has enabled our valuable operations resources to be focused on the most complex, competitively differentiating, value-adding machining and assembly process elements at optimally efficient levels of capital expenditure.

 

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Quality and Reliability

We maintain a dedicated staff of approximately 35 full-time employees reporting to the Vice President of Quality and Reliability focused on driving quality improvements in support of Allison’s products and business processes in the fulfillment of the Allison Brand Promise to deliver an unrivaled combination of quality, reliability, durability, vocational value and superior customer service. In addition to the dedicated staff there are approximately 25 salaried and 50 hourly employees dedicated to our quality system execution and reporting throughout the global Allison organization.

Suppliers and Raw Materials

During 2011, we purchased over $830.0 million of direct materials and components from outside suppliers. The largest elements of our direct spending are aluminum and steel castings and forgings that are formed by our suppliers into our larger transmission components and assemblies for use in our transmissions. However, our spending on aluminum and steel raw materials directly and indirectly through our purchase of these components constituted less than 10% of our direct material and component costs in 2011. The balance of our direct and indirect materials and components costs are primarily composed of value-added services and conversion costs. Over 78% of our supply contracts are for terms of greater than one year. Such contracts, along with an intensive supplier selection and performance monitoring process, have enabled us to establish and maintain close relationships with suppliers and have contributed to our overall operating efficiency and industry-leading quality.

Information Technology

We recognize the importance of Information Technology, or IT, in the operation of our business. We utilize several industry standard IT solutions, including a centralized SAP Enterprise Resource Planning system that supports our global business operations in an integrated fashion. In addition, we have developed many custom applications designed to address our specific business needs. These applications are supported by a strong IT infrastructure that operates in four primary data centers (internal and external), to facilitate availability of substantially all mission-critical IT components. Our IT systems and infrastructure have recently undergone a significant expansion to enable stand alone business operations following the separation from General Motors and to support global growth and new product development.

Our Information Systems & Services, or IS&S, organization is responsible for our enterprise-wide IT environment. Our IT operations and services are based largely on a multi-vendor outsourced model with IT services contracts with several “tier-one” and specialized service providers. Our IS&S organization employs processes and methodologies including metrics and status reports to evaluate IT supplier performance against contractual service-level agreements.

Intellectual Property

In conjunction with the sale of Allison by General Motors, we acquired an irrevocable, royalty-free, worldwide license of a large number of U.S. and foreign patents and patent applications, as well as certain unpatented technology and know-how, to manufacture, use and sell fully-automatic transmissions and certain hybrid-propulsion systems for use in vocational and military vehicles and off-highway products. Such licenses are subject to certain limitations. See “Risk Factors” for a complete discussion of these risks and limitations. In addition, we acquired from General Motors an irrevocable, royalty-free, worldwide license under computer software programs that we use to run our business, including product design. Allison also acquired ownership of trademarks and copyrights relating to our business, subject in some cases to a non-exclusive license back to General Motors for use in connection with its existing six-speed A1000 transmission products, but only up to the termination of production of the A1000 transmission product by General Motors.

Our products are highly engineered, requiring advanced manufacturing processes and complex software algorithms for our transmission controls to maximize end user performance. We have developed over 100 different product models that are used in more than 2,500 different vehicle configurations. Our transmissions are

 

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compatible with more than 500 combinations of engine brands, models and ratings (including diesel, gasoline, compressed natural gas and other alternative fuels). In 2011, over 10,000 unique Allison-developed calibrations were used with our transmission control modules. We believe our scale, experience and culture of innovation reinforce our leading market position and provide us with a competitive advantage.

Seasonality

Overall, the demand for our products is relatively consistent over the year. However, in typical market conditions, the North American truck market experiences a higher level of production in the first half of the year due to fewer holidays and the practice of plant shutdowns in July and December. However, this pattern has not always held in recent business cycles, particularly during and following an economic downturn. Working capital levels do not fluctuate significantly in the normal course for our business.

Employees

As of December 31, 2011, we had approximately 2,800 employees, with more than 90% of those employees in the U.S. Approximately 60% of our U.S. employees are represented by the UAW and are subject to a collective bargaining agreement. At the time of Allison’s divestiture from General Motors, we agreed to assume from General Motors the existing national and local collective bargaining agreements with the UAW. Subsequently, we negotiated a new agreement that expires in November 2012. This agreement included a multi-tier wage and benefits structure and created a profit-sharing incentive compensation plan for the UAW-represented hourly employees tied to identical performance metrics as those used for the management team and salaried employees. As 55% of our represented employees are currently retirement eligible, we anticipate a significant shift toward increasing the number of second tier employees over the coming years. In addition, our UAW-represented hourly employees have received an incentive compensation plan payout for every plan year since such program was established in 2008. There have been no strikes or work stoppages due to Allison-specific issues in over 30 years.

During the fourth quarter of 2008 and the first quarter of 2009, we began implementing expense reduction programs in an effort to better align our cost structure with decreased net sales driven by global economic conditions. The restructuring charges related to these initiatives included retirement incentive and reduction in force programs that resulted in the elimination of approximately 450 hourly and 150 salaried positions. The impact of the programs resulted in restructuring charges of approximately $47.9 million recorded in the Consolidated Statements of Operations for the year ended December 31, 2009.

In 2011 and 2010, we increased the size of our overall hourly and salaried workforce to respond to improved global economic conditions.

Environmental

We are subject to a variety of Federal, state, local and foreign environmental laws and regulations, including those governing the discharge of pollutants into the air or water, the management and disposal of hazardous substances or wastes, and the cleanup of contaminated sites. Some of our operations require environmental permits and controls to prevent and reduce air and water pollution. These permits are subject to modification, renewal and revocation by issuing authorities. We believe we are in substantial compliance with all applicable material laws and regulations in the U.S. Historically, our costs of achieving and maintaining compliance with environmental, health and safety requirements have not been material to our results.

In addition, increasing efforts globally to control emissions of carbon dioxide, methane and other greenhouse gases have the potential to impact our facilities, costs, products and customers. Pursuant to the Clean Air Act, or CAA, the EPA has recently taken action to control greenhouse gases from certain stationary and mobile sources. These actions include issuance of a greenhouse gas reporting rule applicable to specified stationary sources, as well as a rule requiring limits on greenhouse gas emissions for certain sources under the

 

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CAA New Source Review of Significant Deterioration and Title V Operating Permit programs. The U.S. Congress is also considering proposals to limit greenhouse gas emissions, and several states have taken steps, such as adoption of cap and trade programs or other regulatory systems, to address greenhouse gases. At the same time, opponents of greenhouse gas regulation have initiated litigation, as well as introduced legislation in Congress, to delay, limit or eliminate the EPA’s, and possibly states’, actions to regulate greenhouse gases. There have also been international efforts seeking legally binding reductions in emissions of greenhouse gases. These developments and further actions that may be taken in the U.S. and in other countries, states or provinces could affect our operations both positively and negatively (e.g., by affecting the demand for or suitability of some of our products). As described above, we believe increased regulation of greenhouse gases will increase demand for green technologies, including our hybrid technologies.

Also, under the Asset Purchase Agreement, General Motors agreed to indemnify us against certain environmental liabilities, including pre-acquisition offsite waste disposal from our facilities, former facilities associated with our business and any properties or facilities relating to our business that General Motors retained. General Motors also continues to perform remedial activities at our Indianapolis, Indiana manufacturing facilities relating to historical soil and groundwater contamination at the facilities. General Motors is performing such activities pursuant to a voluntary Corrective Action Agreement with EPA and pursuant to the Asset Purchase Agreement retained responsibility for completing all remediation activities covered by the Corrective Action Agreement. Except to the extent specifically retained by General Motors, we would be responsible for environmental liabilities that may arise at any of our properties, including with respect to contamination that may have occurred at our properties prior to the Acquisition Transaction. Additionally, there can be no assurances that General Motors will comply with its indemnity obligations or with its remedial obligations at the Indianapolis, Indiana facility, or that future environmental remediation obligations will not have a material adverse impact on our results.

We also may be subject to liability under the Comprehensive Environmental Response, Compensation and Liability Act and similar state or foreign laws for contaminated properties that we currently own, lease or operate or that we or our predecessors have previously owned, leased or operated, and sites to which we or our predecessors sent hazardous substances. Such liability may be joint and several so that we may be liable for more than our share of contamination, and any such liability may be determined without regard to causation or knowledge of contamination. We or our predecessors have been named potentially responsible parties at contaminated sites from time to time. We do not anticipate our liabilities relating to contaminated sites will be material to our results.

Competition

We compete on the basis of product performance, quality, price, distribution capability and service in addition to other factors. We face competition from numerous manufacturers of manual transmissions, AMTs and fully-automatic transmissions for commercial vehicles. We also face competition from manufacturers in our international operations and from international manufacturers entering our domestic market. Furthermore, some of our customers are OEMs that manufacture transmissions for their own products. Despite their transmission manufacturing abilities, our existing OEM customers have chosen to purchase certain transmissions from us due to the quality, reliability and strong brand of our transmissions and in order to limit fixed costs, minimize production risks and maintain company focus on commercial vehicle design, production and marketing.

 

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Properties

Our world headquarters, which we own, is located at One Allison Way, Indianapolis, Indiana 46222. As of December 31, 2011, we have a total of 16 manufacturing and certain other facilities in six countries. The following table sets forth certain information regarding these facilities.

 

Plant

   Location    Approximate
Size (ft2)
     Owned /
Leased
   

Description

Plant #3

   Indianapolis      927,000         Own      Engineering, Operational Support

Plant #4

   Indianapolis      425,900         Own      Manufacturing

Plant #6

   Indianapolis      431,500         Own      Manufacturing

Plant #16

   Indianapolis      391,700         Own      Manufacturing

Plant #12

   Indianapolis      534,900         Own      Manufacturing

Plant #14

   Indianapolis      481,100         Own      Manufacturing

Plant #15

   Indianapolis      126,400         Lease      Manufacturing

Plant #17

   Indianapolis      389,000         Own      Parts Distribution Center

Plant #20 Tech. Center

   Indianapolis      59,000         Own      Engineering & Testing

Plant #21 Tech. Center

   Indianapolis      10,000         Own      Engineering & Testing

Szentgotthard

   Hungary      149,000         Own (1)(2)    Manufacturing & Customization

Shanghai

   China      38,000         Lease      Customization & Distribution

Santo Amaro/Sorocabo

   Brazil      31,400         Own      Customization & Distribution

Chennai

   India      258,500         Own      Manufacturing

Chennai

   India      9,500         Lease      Customization Center

Chennai

   India      3,000         Lease      Parts Distribution Center

 

 

(1) The manufacturing facility in Szentgotthard, Hungary was completed and commenced production in the second quarter of 2011.

 

(2) Customization and distribution activities in the Netherlands were moved to our Hungarian facility or outsourced to a third party in 2011.

We believe all our facilities are suitable for their intended purpose, are being efficiently utilized and provide adequate capacity to meet demand for the next several years. The table above does not include sales offices located in various countries.

Litigation

During the second quarter of 2009, we identified certain differences between benefits promised under a certain benefit plan and the administration of the plan. We have amended our plan documents to correct these differences and have filed a request with the Internal Revenue Service, or the IRS, to enter into a closing agreement to correct the differences retroactively to the original adoption of our benefit plan. During the third quarter 2011, we reached an agreement with the IRS to resolve the difference between benefits promised and the administration of the plan. As a result of the agreement, we added additional benefits of $0.5 million to the plan.

We are subject to various other contingencies, including routine legal proceedings and claims arising out of the normal course of business. These proceedings primarily involve commercial claims, product liability claims, personal injury claims and workers’ compensation claims. The outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty. Nevertheless, we believe the outcome of any of these currently existing proceedings, even if determined adversely, would not have a material adverse effect on our financial condition or results of operations.

 

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MANAGEMENT

Management

The following table provides information regarding the executive officers and Board of Directors of Allison Holdings:

 

Name

   Age     

Position

Lawrence E. Dewey

     55       Chairman, President and Chief Executive Officer

David S. Graziosi

     46       Executive Vice President, Chief Financial Officer and Treasurer

Mark A. Anspach

     54       Vice President, Global Procurement and Supplier Quality

Sharon L. Dean

     56       Vice President, Quality and Reliability

Edward L. Dyer

     62       Vice President, Military Programs

Michael G. Headly

     60       Vice President, Non-NAFTA Marketing, Sales, and Service

Randall R. Kirk

     56       Vice President, Product Engineering

Ryan A. Milburn

     40       Vice President and Chief Information Officer

David L. Parish

     61       Vice President, Operations

Robert M. Price

     54       Vice President, Human Resources

Eric C. Scroggins

     41       Vice President, General Counsel and Secretary

Laurie B. Tuttle

     57       Vice President, Hybrid Programs

James L. Wanaselja

     60       Vice President, NAFTA Marketing, Sales, and Service

Brian A. Bernasek

     39       Director

Kosty Gilis

     38       Director

Gregory S. Ledford

     54       Director

Seth M. Mersky

     52       Director

Thomas W. Rabaut

     63       Director

Francis Raborn

     68       Director

Richard V. Reynolds

     63       Director

Lawrence Dewey

Mr. Dewey joined Allison in February 1989. Mr. Dewey currently serves as the Chairman, President and Chief Executive Officer of Allison and has served in that capacity since the sale of Allison to Carlyle and Onex in August 2007. Prior to the sale, Mr. Dewey served in various capacities at Allison, including as President of Allison, a role he assumed in 2000; worldwide Director of Marketing, Sales and Service, Managing Director of Allison Transmission Europe, B.V., based in The Netherlands; Central Region (U.S.) Sales Manager; Marketing Manager; Manager of Aftermarket Products; and Production Manager. From 2003 until 2007, concurrent with his role as President of Allison, he took on the responsibilities of Group Director of Marketing, Sales, Brand Management and Customer Support for General Motors Powertrain group. Before joining Allison, Mr. Dewey held several positions of increasing responsibility in General Motors’ Diesel Equipment Division and Rochester Products Division. He began his career in 1974 as a General Motors co-op student at General Motors Institute (now Kettering University).

The Board of Directors has concluded that Mr. Dewey should serve as a director because in addition to his demonstrated leadership skills as Chief Executive Officer and President of Allison, he brings to our Board of

 

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Directors experience and institutional knowledge about Allison from his 22 years of experience with our company and valuable insights on the commercial vehicle industry as a result of his 37 years of experience in the industry. Mr. Dewey is a director nominee designated by Carlyle, one of our Sponsors, pursuant to the terms of the Stockholders Agreement described under “Certain Relationships and Related Party Transactions—Amended and Restated Stockholders Agreement.”

David Graziosi

Mr. Graziosi joined Allison in November 2007 as Executive Vice President, Chief Financial Officer and Treasurer and has served in that capacity since then. Before joining Allison, between 2006 and 2007, Mr. Graziosi served as Executive Vice President and Chief Financial Officer of Covalence Specialty Materials Corporation. Prior to joining Covalence Specialty Materials Corporation, Mr. Graziosi held various positions in the industry, including as Vice President of Finance Precursors and Epoxy Resins at Hexion Specialty Chemicals, Inc. from 2005 to 2006 and Executive Vice President and Chief Financial Officer at Resolution Performance Products LLC from 2004 to 2005. Prior to that, he served as Vice President and Chief Financial Officer of General Chemical Industrial Products Inc., as Finance Director of GenTek Inc., and as Internal Audit Director and Assistant Corporate Controller at Sun Chemical Group B.V. While Mr. Graziosi served as an executive officer of General Chemical Industrial Products Inc., the company filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code in December 2003 and emerged from bankruptcy proceedings in March 2004. Mr. Graziosi is also a Certified Public Accountant and a Certified Information Systems Auditor (non-practicing).

Mark Anspach

Mr. Anspach joined Allison as Vice President, Global Procurement and Supplier Quality in October 2008 and has served in that position since then. Before joining Allison, from 2005 to 2008, Mr. Anspach served as Director of Supply Chain at Raytheon Space and Airborne Systems, where his responsibilities included managing supply chain/procurement functions in the defense, telecommunications and semiconductor industries. Prior to that, he began his career with Lockheed Missiles & Space Company as a configuration engineer on ground based communications systems, joining in 1987. Mr. Anspach currently holds the rank of Colonel in the U.S. Army Reserve and serves as the Chief of Staff for the Deployment Support Command.

Sharon Dean

Ms. Dean joined Allison in June 1975. She currently serves as Vice President, Quality and Reliability, which includes responsibility for Allison Remanufacturing, and has held that position since 2007. Prior to that, from 1998 until 2007, Ms. Dean served as Director, Quality and Reliability, and from 1975 until 1998, she held various key positions in Sales/Service and Operations, including Director, Customer Support; Manager, Eastern Region (U.S.); Manager, Quality and Reliability and Manager, Product Service. Before joining Allison, Ms. Dean worked in the General Motors Assembly Division, beginning in 1973, when she joined General Motors as a General Motors Institute (now Kettering University) student, assuming full-time responsibilities after graduating in 1978.

Edward Dyer

Mr. Dyer joined Allison as Vice President, Military Programs in March 2010 and has served in that position since then. Before joining Allison, from 2001 until 2010, Mr. Dyer served as the Director of Technology at Lockheed Martin Corporation, where he managed the start up and implementation of a global defense research and engineering network, enabling real time technical collaboration and later managed a corporate Internal Research and Development program in advanced concepts. Prior to that, Mr. Dyer served on active duty in the U.S. Army for 29 years, during which time, he commanded tank and infantry units at every level from platoon to Division, including command of a tank battalion during the first Gulf War. In addition, he served on several senior staffs, including the U.S. Army Staff and Joint Chiefs of Staff where he was in charge of crisis planning and ran the National Military Command Center.

 

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Michael Headly

Mr. Headly joined Allison in November 1988. He currently serves as Vice President, Non-NAFTA Marketing, Sales and Service, a position he has held since 2007. Prior to that, from 2003 until 2007, Mr. Headly was responsible for General Motors Powertrain’s non-allied sales/application engineering and powertrain marketing and from 2000 until 2003, he was responsible for our military programs as well as the Business Planning activity in 2003. From 1997 until 2000, Mr. Headly served as Managing Director, Allison Transmission Europe, where he assumed a broader role in management of our international business, assuming responsibility for the Asia Pacific region in 1998 and the South American region in 1999. Before that, from 1988 until 1997, Mr. Headly held a wide variety of military and commercial positions focused both on NAFTA and Non-NAFTA markets. Prior to joining Allison, Mr. Headly worked in General Motors’ Military Vehicle Operation in Detroit as the Manager of New Business Development.

Randall Kirk

Mr. Kirk joined Allison in May 1976. He currently serves as Vice President, Product Engineering, a position he has held since 2009. Prior to that, from 2007 until 2009, Mr. Kirk served as Executive Director of the Transition Program Manager Office, leading a cross-functional team with responsibilities for the separation from General Motors, and from 2001 until 2007, he served as Director of Customer Support in Marketing Sales and Service. From 1997 until 2001, Mr. Kirk assumed the responsibilities of Product Team Leader for several product lines. Prior to that, he served in a number of roles with increasing responsibility in the Operations and Quality organizations, including Supervisor, General Supervisor, Production Superintendent, Quality/Reliability Manager, a dual role as Manager of Manufacturing Engineering and Quality and Divisional Program Manager.

Ryan Milburn

Mr. Milburn joined Allison in June 1990. He currently serves as Vice President and Chief Information Officer, a position that he has held since 2007 and where he is responsible for all aspects of Allison’s Information Technology Systems, infrastructure and services. Prior to that from 2003 to 2007, Mr. Milburn served as Chief Information Officer, and from 2002 to 2003, he held the positions of Manager of Engineering & Product Development Systems. Prior to that, he served as Manager of Information & Control Systems and was part of the leadership team responsible for the launch and operations of the green-field General Motors (formerly Allison) manufacturing facility in Baltimore, Maryland. Before joining the Information Technology organization, he performed various manufacturing automation and machine controls engineering roles of increasing responsibility in the manufacturing organization.

David Parish

Mr. Parish began his career with Allison in August 1977. He currently serves as Vice President, Operations, a position that he has held since 2007 and where he is responsible for global plant operations, service parts operations, supply chain facilities, environmental, and manufacturing engineering. In his current position, Mr. Parish has facilitated the growth of Allison’s global footprint through the construction of new facilities in India and Hungary. From 2006 to 2007, Mr. Parish served as Assistant General Director of Operations and General Director of Operations, and from 1997 to 2006, he was responsible for directing the Manufacturing Engineering and Manufacturing Services organization. Prior to that, Mr. Parish held various positions at Allison, including as Director, Manufacturing Engineering and Plant Manager for the heavy-duty commercial and military products. Prior to that, he held multiple positions in manufacturing at Allison, including industrial engineering, manufacturing engineering, production management, quality, and reliability.

Robert Price

Mr. Price joined Allison in May 2000. He currently serves as Vice President, Human Resources, a position he has held since 2007. From 2004 to 2007, Mr. Price served as Personnel Director, and from 2000 until 2004, he

 

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served as Director, Labor Relations. Before joining Allison, from 1997 to 2000, Mr. Price served as Director, Contract Administration for General Motors of Canada, and from 1993 to 1997, he served as Divisional Labor Relations Administrator at the General Motors Canadian headquarters. From 1988 until 1993, Mr. Price held the position of Supervisor, Labor Relations in the human resources group at General Motors, and from 1985 to 1988, he served as Labor Relations Representative in the same group. Before working in the human resources group, Mr. Price worked at General Motors as a Production Supervisor, and from 1978 until 1982, Mr. Price held a variety of positions in the human resources function, including employment, security, health and safety and workers compensation at the General Motors Windsor Transmission Plant.

Eric Scroggins

Mr. Scroggins joined Allison as Vice President, General Counsel and Secretary in December 2007 and has served in that position since then. He is responsible for advising the Board and leadership team on legal and business matters, managing our legal affairs and overseeing our Office of Export Compliance and Government & Community Relations. Prior to joining Allison, Mr. Scroggins served as General Counsel for Product Action International, LLC from 2006 until 2007, and was an attorney with the law firm of Ice Miller LLP from 2001 to 2006. Prior to joining Ice Miller LLP, Mr. Scroggins worked for the State of Indiana, serving in various roles with the Indiana State Personnel Department, including as Deputy Director of the Indiana State Personnel Department.

Laurie Tuttle

Ms. Tuttle joined Allison in January 1986. She currently serves as Vice President, Hybrid Programs, a position she has held since 2009. Prior to her current position, Ms. Tuttle served as Vice President, Product Engineering beginning in 2007, and from 2003 until 2007, she held the position of Engineering Director. Prior to that, Ms. Tuttle held a variety of management and executive positions of increasing responsibility in engineering, program management and product assurance engineering, including Program Director Light Commercial Transmission. Prior to joining Allison, she held positions in General Motors’ Detroit Diesel Allison Division from 1978 until 1986, including as a diesel engine test engineer, a design engineer and a Product Engineering Design Group Supervisor.

James Wanaselja

Mr. Wanaselja joined Allison in April 1995. He currently serves as Vice President, NAFTA Marketing, Sales and Service, a position he has held since 2007. Prior to that, from November 2000 until 2007, Mr. Wanaselja served as Director, NAFTA Marketing, Sales and Service and Global Business Systems, and from May 2000 until November 2000, he served as Director, NAFTA Sales. From 1998 until May 2000, Mr. Wanaselja assumed responsibility for our marketing and OEM sales, and from 1995 until 1998, he served as Manager, National Accounts. Prior to joining Allison, Mr. Wanaselja worked for Voith Transmission, Inc., where he held numerous positions, including Vice President, Product Manager On-Highway Transmissions and General Manager for the North American Voith On-Highway Products Division from 1982 through 1995. Prior to joining Voith Transmission, Inc., Mr. Wanaselja began his career with General Electric in 1974, completing the General Electric Technical Marketing Program and holding various positions there.

Brian Bernasek

Mr. Bernasek has served as a director of Allison Holdings since August 2007. He is currently a Managing Director of Carlyle, where he focuses on investment opportunities in the industrial and transportation sectors. Prior to joining Carlyle in 2000, he held positions with Investcorp International, a private equity firm, and Morgan Stanley & Co., in its Investment Banking Division. Mr. Bernasek currently serves on the Board of Directors of Hertz Global Holdings, Inc.

The Board of Directors has concluded that Mr. Bernasek should serve as a director because in addition to his demonstrated leadership skills as a Managing Director of Carlyle and his extensive experience in investment

 

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banking and private equity, he brings to our Board of Directors knowledge of complex financial and investment issues and valuable insights on the commercial vehicle industry as a result of his current and past service on boards of industrial and transportation related companies. Mr. Bernasek is a director nominee designated by Carlyle, one of our Sponsors, pursuant to the terms of the Stockholders Agreement described under “Certain Relationships and Related Party Transactions — Amended and Restated Stockholders Agreement.”

Kosty Gilis

Mr. Gilis has served as a director of Allison Holdings since August 2007. He currently serves as a Managing Director of Onex, where he focuses on investment opportunities in the industrial products and business services sectors. Prior to joining Onex in 2004, he was a Vice President at Willis Stein & Partners, a Chicago-based private equity firm, and before that, Mr. Gilis served as a management consultant at Bain & Company in their Toronto, Canada and Johannesburg, South Africa offices. Mr. Gilis currently serves on the Board of Directors of Gates Corporation, Pinafore Holdings B.V., Tomkins Acquisition Limited, Tomkins Limited and Tomkins Building Products Inc.

The Board of Directors has concluded that Mr. Gilis should serve as a director because in addition to his demonstrated leadership as a Managing Director of Onex and his extensive experience in private equity, he brings to our Board of Directors knowledge of complex financial and investment issues as well as insights on the commercial vehicle industry. As a result of serving on the Boards of Directors of Gates Corporation, Pinafore Holdings B.V., Tomkins Acquisition Limited, Tomkins Limited and Tomkins Building Products Inc., as well as serving on the audit committee of Pinafore Holdings B.V., Mr. Gilis brings to our Board of Directors valuable knowledge of finance, corporate governance, and operations of other companies. Mr. Gilis is a director nominee designated by Onex, one of our Sponsors, pursuant to the terms of the Stockholders Agreement described under “Certain Relationships and Related Party Transactions — Amended and Restated Stockholders Agreement.”

Gregory Ledford

Mr. Ledford has served as a director of Allison Holdings since August 2007. He currently serves as a Managing Director of Carlyle and as head of the firm’s Industrial and Transportation practice. Since joining Carlyle in 1988, Mr. Ledford has held various positions, including serving as Chairman and Chief Executive Officer of The Reilly Corp., a former Carlyle portfolio company, from 1991 to 1997. Prior to joining Carlyle, Mr. Ledford was Director of Capital Leasing for MCI Communications.

The Board of Directors has concluded that Mr. Ledford should serve as a director because in addition to his demonstrated leadership and consensus building skills as Managing Director of Carlyle and his service as a director on a number of commercial vehicle industry boards, his years of experience in industrial-related positions provides our Board of Directors with valuable insights and a unique perspective on industrial and transportation related issues. Mr. Ledford is a director nominee designated by Carlyle, one of our Sponsors, pursuant to the terms of the Stockholders Agreement described under “Certain Relationships and Related Party Transactions — Amended and Restated Stockholders Agreement.”

Seth Mersky

Mr. Mersky has served as a director of Allison Holdings since August 2007. He currently serves as a Managing Director of Onex where he has worked since 1997, focusing on investment opportunities across the industrial sector. Prior to joining Onex in 1997, he served as Senior Vice President, Corporate Banking with The Bank of Nova Scotia for 13 years, and before that, Mr. Mersky worked for Exxon Corporation as a Tax Accountant. Mr. Mersky currently serves on the Board of Directors of Gates Corporation, SITEL Worldwide Corporation and Hawker Beechcraft Acquisition Company, LLC. He previously served on the Board of Directors of Spirit AeroSystems, Inc.

The Board of Directors has concluded that Mr. Mersky should serve as a director because in addition to his demonstrated leadership as a Managing Director of Onex, he has gained significant experience related to private and public company matters. As a result of his current and past board experience, Mr. Mersky brings to our

 

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Board of Directors valuable knowledge of finance, corporate governance, compensation programs and operations of other companies. Mr. Mersky is a director nominee designated by Onex, one of our Sponsors, pursuant to the terms of the Stockholders Agreement described under “Certain Relationships and Related Party Transactions — Amended and Restated Stockholders Agreement.”

Thomas Rabaut

Mr. Rabaut has served as a director of Allison Holdings since August 2007. He currently serves as a Senior Advisor to the Aerospace, Defense and Business/Government Services Group of Carlyle and has held that position since 2007. Prior to joining Carlyle in 2007, Mr. Rabaut served as President of the Land & Armaments Operating Group of BAE, a global leader in the design, development and production of military systems from 2005 to 2007, and as President and Chief Executive Officer of United Defense Industries, Inc., a former Carlyle portfolio company that was acquired by BAE in 2005, from 1994 to 2005. Prior to his tenure at United Defense Industries, Inc., Mr. Rabaut served 17 years in various roles at FMC Corporation where he ultimately became Vice President and General Manager of the Defense Systems Group. He also served five years in the U.S. Army. He currently serves on the Board of Directors of CYTEC Industries Inc., and the KAMAN Corporation.

The Board of Directors has concluded that Mr. Rabaut should serve as a director because in addition to his extensive senior executive leadership experience in the defense industry and his current role as senior advisor with Carlyle, he brings to our Board of Directors his knowledge and insight into providing products and services to the U.S. government. Mr. Rabaut’s professional and board experience provides our Board of Directors with additional perspectives about the defense markets, international markets, commercial acquisitions as well as market and sales trends. Mr. Rabaut is a director nominee designated by Carlyle, one of our Sponsors, pursuant to the terms of the Stockholders Agreement described under “Certain Relationships and Related Party Transactions — Amended and Restated Stockholders Agreement.”

Francis Raborn

Mr. Raborn has served as a director of Allison Holdings since August 2007. Until his retirement in 2005, Mr. Raborn served as Vice President and Chief Financial Officer of United Defense Industries, Inc. from its formation in 1994, and as a director since 1997. Mr. Raborn joined FMC Corporation, the predecessor of United Defense Industries, Inc., in 1977 and held a variety of financial and accounting positions, including Controller of the Defense Systems Group from 1985 to 1993, and Controller of the Special Products Group from 1979 to 1985. Prior to his tenure at FMC Corporation, Mr. Raborn worked for Chemetron Corporation and Ford Motor Company. Mr. Raborn currently serves on the Board of Directors of Spirit AeroSystems, Inc.

The Board of Directors has concluded that Mr. Raborn should serve as a director because, as a result of his senior financial and accounting positions at FMC Corporation and United Defense Industries, Inc. and his position as the Chairman of Spirit AeroSystems, Inc.’s audit committee, he brings with him significant experience in finance, accounting, defense, production and manufacturing. Mr. Raborn also brings to our Board of Directors valuable knowledge of finance, corporate governance, compensation programs, and operations of other companies gained from his previous service on the Board of Directors of other public and private companies. Mr. Raborn is an independent director appointed pursuant to the terms of our Security Control Agreement.

Richard Reynolds

Lieutenant General (retired) Reynolds has served as a director of Allison Holdings since November 2010. He is currently the owner of The VanFleet Group LLC, an aerospace consulting company and has served in that capacity since 2005. General Reynolds also served as Senior Manager/Senior Business Advisor of Bearing Point, Inc., an international management and technology consulting firm, from 2005 to 2008. He retired from the U.S. Air Force in 2005, after 34 years of active duty, where he served as a combat ready pilot, experimental test pilot,

 

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and program manager. While on active duty, General Reynolds commanded the Aeronautical Systems Center at Wright-Patterson Air Force Base, Ohio and the Air Force Flight Test Center at Edwards Air Force Base, California. He also served as Program Executive Officer, Airlift and Trainers in the Pentagon, and was Program Director for the B-2 Spirit. He currently serves on the Board of Directors of Air Force Museum Foundation, Inc., Apogee Enterprises, Inc. (Audit Committee), Barco Federal Systems, LLC and GE Rolls-Royce Fighter Engine Team.

The Board of Directors has concluded that Mr. Reynolds should serve as a director because, as a result of his service in senior leadership positions in the U.S. Air Force, which has provided valuable business, leadership and management experience, he brings with him expertise in government contracting and procurement; science and technology; major weapon system research, development and acquisition; system test and evaluation; business and operations risk assessment and mitigation; supply chain and logistics management; information technology and leadership development. Mr. Reynolds also brings to our Board of Directors valuable knowledge of finance, corporate governance, compensation programs, and operations of other companies gained from his previous service on the Board of Directors of other public and private companies. General Reynolds is an independent director appointed pursuant to the terms of our Security Control Agreement.

Controlled Company

For purposes of the NYSE rules, we expect to be a “controlled company.” Controlled companies under those rules are companies of which more than 50% of the voting power for the election of directors is held by an individual, a group or another company. We expect that Carlyle and Onex will continue to control more than 50% of the combined voting power of our common stock upon completion of this offering and will continue to have the right to designate a majority of the members of our Board of Directors for nomination for election and the voting power to elect such directors following this offering. Accordingly, we expect to be eligible to, and we intend to, take advantage of certain exemptions from corporate governance requirements provided in the NYSE rules. Specifically, as a controlled company, we would not be required to have (i) a majority of independent directors, (ii) a Nominating/Corporate Governance Committee composed entirely of independent directors, (iii) a Compensation Committee composed entirely of independent directors or (iv) an annual performance evaluation of the Nominating/Corporate Governance and Compensation Committees. Therefore, following this offering if we are able to rely on the “controlled company” exemption, we will not have a majority of independent directors, our Nominating and Corporate Governance and Compensation Committees will not consist entirely of independent directors and such committees will not be subject to annual performance evaluations; accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the applicable NYSE rules. The controlled company exemption does not modify the independence requirements for the audit committee, and we intend to comply with the requirements of the Sarbanes-Oxley Act and the NYSE rules, which require that our audit committee be composed of at least three members, one of whom will be independent upon the listing of our common stock on the NYSE, a majority of whom will be independent within 90 days of the date of this prospectus, and each of whom will be independent within one year of the date of this prospectus.

Board Composition

The Board of Directors of Allison Holdings currently consists of eight members. Lawrence E. Dewey, our Chief Executive Officer, is Chairman of the Board of Allison Holdings. Pursuant to our Stockholders Agreement, Carlyle has the right to appoint four members of the Board of Directors of Allison Holdings and Onex has the right to appoint two members of the Board of Directors of Allison Holdings. The Board of Directors (with the approval of the DOD) has the right to nominate two independent members of the Board of Directors of Allison Holdings. The exact number of members on our Board may be modified from time to time exclusively by resolution of our Board, subject to the terms of our Stockholders Agreement. Our Board will be divided into three classes whose members will serve three-year terms expiring in successive years.

 

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Board Committees

Our Board directs the management of our business and affairs as provided by Delaware law and conducts its business through meetings of the Board of Directors and four standing committees: the Audit Committee, the Executive Committee, the Compensation Committee and the Government Security Committee. Effective upon completion of this offering, our Board will form a Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee will consist of Messrs. Dewey, Ledford and Mersky. Upon completion of this offering, the Audit Committee will consist of Messrs. Raborn (chair), Reynolds, Gilis and Bernasek. The Board has determined that Mr. Raborn is the Audit Committee financial expert and that Messrs. Raborn and Reynolds are independent, determined using the NYSE standard, for purposes of the Audit Committee. The Executive Committee consists of Messrs. Dewey, Ledford and Mersky. The Compensation Committee consists of Messrs. Bernasek (chair) and Gilis. The Government Security Committee consists of Messrs. Dewey, Raborn and Reynolds (chair). In addition, from time to time, other committees may be established under the direction of the Board when necessary to address specific issues.

Compensation Committee Interlocks and Insider Participation

During fiscal 2011, our compensation committee consisted of Messrs. Bernasek and Gilis. Neither of the members of our compensation committee is currently one of our officers or employees. During fiscal 2011, none of our executive officers served as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any entity that has one or more executive officers who serve as members of our board of directors or our compensation committee.

Code of Ethics

We have adopted a code of ethics that applies to our executive officers. A copy of the code of ethics will be available on our website and will also be provided to any person without charge. Request should be made in writing to General Counsel at Allison Transmission, Inc., One Allison Way, Indianapolis, Indiana 46222.

 

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COMPENSATION DISCUSSION AND ANALYSIS

Executive Summary

This Compensation Discussion and Analysis provides an overview and analysis of (i) the elements of Company’s compensation program for our named executive officers identified below, (ii) the material compensation decisions made under that program and reflected in the executive compensation tables that follow this Compensation Discussion and Analysis and (iii) the material factors considered in making those decisions. We intend to provide our named executive officers with compensation that is significantly performance based. Our executive compensation program is designed to align executive pay with the performance of the Company on both short and long-term bases, link executive pay to specific, measurable results intended to create value for stockholders and utilize compensation as a tool to assist the Company in attracting and retaining the high-caliber executives that the Company believes are critical to its long-term success.

Compensation for our executive officers consists primarily of the elements, and their corresponding objectives, identified in the following table.

 

Compensation Element

  

Primary Objective

Base Salary

   To recognize performance of job responsibilities and to attract and retain individuals with superior talent.

iComp (annual performance-based compensation)

   To promote the Company’s near-term performance objectives across the entire workforce and reward individual contributions to the achievement of those objectives.

Discretionary long-term equity incentive awards

   To emphasize the Company’s long-term performance objectives, encourage the maximization of stockholder value and retain key executives by providing an opportunity to participate in the ownership of the Company.

Severance and change in control benefits

   To encourage the continued attention and dedication of key individuals when considering strategic alternatives.

Retirement savings (401(k)) and pension plans

   To provide an opportunity for tax-efficient savings and long-term financial security.

Other elements of compensation and perquisites

   To attract and retain talented executives in a cost-efficient manner by providing benefits with high perceived values at relatively low cost to the Company.

To serve the foregoing objectives, our overall compensation program is generally designed to be adaptive rather than purely formulaic. The compensation committee of our Board of Directors, or the Compensation Committee, has primary authority to determine and approve compensation decisions with respect to our executive officers. In alignment with the objectives set forth above, the Compensation Committee determines overall compensation, and its allocation among the elements described above, in reliance upon the judgment and general industry knowledge of its members obtained through years of service with comparably sized companies in our and similar industries.

For the year ended December 31, 2011, our named executive officers, or our NEOs, are:

 

   

Lawrence E. Dewey, Chairman, President and Chief Executive Officer,

 

   

David S. Graziosi, Executive Vice President, Chief Financial Officer and Treasurer,

 

   

David L. Parish, Vice President of Operations,

 

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Michael G. Headly, Vice President, Non-NAFTA Marketing, Sales and Service, and

 

   

Randall R.Kirk, Vice President of Product Engineering.

In addition, we have elected to provide information in this Compensation Discussion and Analysis for James L. Wanaselja, our Vice President, NAFTA Marketing, Sales and Service, who is not a named executive officer for 2011 but to whom we refer for simplicity as one of our NEOs in this Compensation Discussion and Analysis. Our compensation decisions for the NEOs in 2011 are discussed below in relation to each of the above-described elements of our compensation program. The below discussion is intended to be read in conjunction with the executive compensation tables and related disclosures that follow this Compensation Discussion and Analysis.

Compensation Overview

The Company’s overall compensation program is structured to attract, motivate and retain highly qualified executive officers by paying them competitively, consistent with the Company’s success and their contribution to that success. The Company believes compensation should be structured to ensure that a significant portion of compensation opportunity will be related to factors that directly and indirectly influence stockholder value. Accordingly, the Company sets goals designed to link each NEO’s compensation to the Company’s performance and the NEO’s own performance within the Company. Consistent with our performance-based philosophy, the Company provides a base salary to our executive officers and includes a significant incentive-based component, which includes variable awards under our annual incentive bonus program based on the financial and operational performance of the Company, as well as stock option awards and stock purchase rights granted to our NEOs at the time we became a standalone company as a result of the Acquisition Transaction or, if later, upon commencement of employment with us, which option awards and stock purchase rights are meant to align our NEOs’ interests with our long-term performance.

Total compensation for our NEOs has been allocated between cash and equity compensation, taking into consideration the balance between providing short-term incentives and long-term investment in our financial performance, to align the interests of management with the interests of stockholders. The variable annual incentive award and the equity awards are designed to ensure that total compensation reflects the overall success or failure of the Company and to motivate the NEOs to meet appropriate performance measures, thereby maximizing total return to stockholders. In connection with our initial public offering, we have adopted a new equity incentive plan, which we refer to as the “2011 Equity Incentive Plan,” or the 2011 Plan, and which will be effective as of the day prior to the consummation of this offering. The 2011 Plan is discussed in more detail under “2011 Equity Incentive Plan” below.

Determination of Compensation Awards

The Compensation Committee is provided with the primary authority to determine and approve the compensation awards available to the Company’s executive officers and is charged with reviewing executive officer compensation policies and practices to ensure (i) adherence to our compensation philosophies and (ii) that the total compensation paid to our executive officers is fair, reasonable and competitive, taking into account our position within our industry, including our comparative performance, and our named executive officers’ level of expertise and experience in their positions, as determined by the Compensation Committee based upon the judgment and industry experience of its members. The Compensation Committee is primarily responsible for (i) determining base salary and target bonus levels (representing the bonus that may be awarded expressed as a percentage of base salary or as a dollar amount for the year), (ii) assessing the performance of the Chief Executive Officer and other NEOs for each applicable performance period and (iii) determining the awards to be paid to our Chief Executive Officer and other NEOs under our annual incentive bonus program for each year. To aid the Compensation Committee in making its determinations, the Chief Executive Officer provides recommendations at least annually to the Compensation Committee regarding the compensation of all officers, excluding himself. The performance of our senior executive management team is reviewed at least annually by the Compensation Committee, and the Compensation Committee determines each NEO’s compensation at least annually.

 

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In determining compensation levels for our NEOs, the Compensation Committee considers each NEO’s unique position and responsibility and relies upon the judgment and industry experience of its members, including their knowledge of competitive compensation levels in our industry. We believe that executive officer base salaries should be competitive with salaries for executive officers in similar positions and with similar responsibilities in our marketplace, based on the Compensation Committee’s general industry knowledge, and adjusted for financial and operating performance and previous work experience. In this regard, each executive officer’s current and prior compensation, including compensation paid by our predecessor or the NEO’s prior employer, is considered as a reference point against which determinations are made as to whether increases are appropriate to retain the NEO in light of competition or in order to provide continuing performance incentives.

In making compensation determinations, the Compensation Committee historically has not made regular use of benchmarking or of compensation consultants, has not directly compared compensation levels with any other companies and has not referred to any specific compensation survey or other data. The Compensation Committee did not do any of the foregoing in determining 2011 compensation levels for our NEOs. Rather, in alignment with the considerations described above, the Compensation Committee determines the total amount of compensation for our NEOs, and the allocation of total compensation among each of our three main components of compensation, in reliance upon the judgment and general industry knowledge of its members obtained through years of service with comparably sized companies in our industry and other similar industries to ensure we attract, develop and retain superior talent.

The Company currently has no formal policy with respect to requiring officers and directors to own stock of the Company. However, we historically have encouraged direct stock ownership in the Company by NEOs and other employees by granting to such NEOs and other employees at the time we became a separate company or, if later, upon commencement of employment, the right to purchase shares of stock in the Company. We believe that direct ownership in the Company provides our NEOs with a strong incentive to increase the value of the Company.

Base Compensation For 2011

The Company sets base salaries for its NEOs generally at a level it deems necessary to attract and retain individuals with superior talent. Each year the Company determines base salary increases based upon the job responsibilities and demonstrated proficiency of the executive officers as assessed by the Compensation Committee, and for executive officers other than the Chief Executive Officer, in conjunction with recommendations made by the Chief Executive Officer. No formulaic base salary increases are provided to the NEOs.

In May 2011, the Compensation Committee determined to provide base salary increases to each of our NEOs to reward their continuing demonstrated leadership and proficiency in guiding the Company. The amount of each NEO’s base salary increase was determined by the Compensation Committee, and for NEOs other than the Chief Executive Officer, in conjunction with recommendations made by the Chief Executive Officer, based upon the Compensation Committee’s general industry knowledge to ensure base salary compensation is fair, reasonable and competitive with executive officers in similar positions and with similar responsibilities in our marketplace. In addition, Mr. Kirk’s base salary increase was intended as an affirmation of his successful transition into the role of Vice President, Product Engineering, following his promotion to that role in 2009.

 

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The base salaries for our NEOs both before and after the salary increases, which took effect on June 1, 2011 are set forth in the following table:

 

Name and Principal Position

   Base Salary
Before  Increase
($)
     Base Salary
After  Increase
($)
 

Lawrence E. Dewey

     450,000         500,000   

Chairman, President and Chief Executive Officer

     

David S. Graziosi

     390,000         425,000   

Executive Vice President, Chief Financial Officer and Treasurer

     

David L. Parish

     275,000         300,000   

Vice President, Operations

     

Michael G. Headly

     240,000         260,000   

Vice President, Non-NAFTA Marketing, Sales and Service

     

James L. Wanaselja

     240,000         255,000   

Vice President, NAFTA Marketing, Sales and Service

     

Randall R. Kirk

     230,000         260,000   

Vice President, Product Engineering

     

Annual Performance-Based Compensation For 2011

The Company structures its compensation programs to reward executive officers based on the Company’s performance and the individual executive’s relative contribution to that performance. This allows executive officers to receive incentive bonus compensation, which we refer to as iComp, in the event certain specified corporate performance measures are achieved. The annual iComp pool and the NEOs’ initial iComp awards are determined by the Compensation Committee based upon a formula with reference to the extent of achievement of corporate-level performance goals established annually by the Compensation Committee. The Compensation Committee may make discretionary adjustments to the initial, formulaic iComp awards to reflect its subjective determination of an individual’s impact and contribution to overall corporate performance, as discussed below.

Under the terms of the iComp program, the NEOs’ formulaic iComp awards are based upon a percentage of their base salaries and currently range from 40% to 100% for target-level achievement. Maximum formulaic iComp awards vary according to each executive and are set at levels that the Company determines are necessary to maintain competitive compensation practices and properly motivate our NEOs by rewarding them for the Company’s short-term performance and their contributions to that performance. None of our NEOs receives a guaranteed annual iComp award.

Once the extent of achievement of corporate iComp targets and the formulaic iComp calculations have been determined, the Compensation Committee may adjust the amount of iComp awards paid upward or downward based upon its overall subjective assessment of each NEO’s performance, business impact, contributions, leadership and attainment of individual objectives established periodically throughout the year, as well as other related factors. In addition, iComp funding amounts may be adjusted by the Compensation Committee to account for unusual events such as extraordinary transactions, asset dispositions and purchases, and mergers and acquisitions if, and to the extent, the Compensation Committee does not consider the effect of such events indicative of Company performance.

 

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The following chart sets forth the formulaic iComp awards for target-level achievement and the maximum formulaic iComp awards for our NEOs:

 

Name and Principal Position

   Formulaic iComp at target-level
performance (% of base salary)
    Maximum formulaic iComp
award (% of base salary)
 

Lawrence E. Dewey

     100     400

Chairman, President and Chief Executive Officer

    

David S. Graziosi

     75     300

Executive Vice President, Chief Financial Officer and Treasurer

    

David L. Parish

     50     162.5

Vice President, Operations

    

Michael G. Headly

     50     162.5

Vice President, Non-NAFTA Marketing, Sales and Service

    

James L. Wanaselja

     50     162.5

Vice President, NAFTA Marketing, Sales and Service

    

Randall R. Kirk

     50     162.5

Vice President, Product Engineering

    

For the year ended December 31, 2011, iComp performance goals were based upon Adjusted EBITDA, Gross Adjusted Free Cash Flow and Quality metrics. For this purpose, Adjusted EBITDA was defined as the Company’s consolidated earnings before interest expense or income, income tax expense or income, depreciation and amortization expenses and other adjustments as defined by the Senior Credit Facility. Adjusted Free Cash Flow was defined as net cash flow before debt repayments and repurchases, cash interest expense or income, government price reduction payments and hedging collateral change. The Quality metric was comprised of two separate components: 90 day (and under) incidents per thousand vehicles, or IPTV, claims for NAFTA markets and 90 day (and under) IPTV claims for non-NAFTA markets. The following chart sets forth the weighting of each performance metric, the threshold, target and maximum performance goals, and the actual performance achieved under our iComp program for the year ended December 31, 2011:

 

Performance Metric

   Weighting
(%)
     Threshold
($ MM)
     Target
($ MM)
     Maximum
($ MM)
     Achieved
($ MM)
 

Adjusted EBITDA

     75         538.1         633.0         791.3         711.9   

Gross Adjusted Free Cash Flow

     20         387.3         455.7         569.6         601.6   

NAFTA < 90 Day IPTV

     2.5         12.3         10.5         7.5         9.4   

Non-NAFTA < 90 Day IPTV

     2.5         17.8         14.5         9.0         20.9   

Based on the foregoing levels of corporate achievement, the formulaic iComp award calculations for Messrs. Dewey and Graziosi equaled 275% of their respective target awards (or approximately 275% of base salary for Mr. Dewey and 206% of base salary for Mr. Graziosi), and the formulaic iComp award calculations for Messrs. Headly, Kirk, Parish, and Wanaselja equaled 229% of their respective target awards (or approximately 115% of base salary for each of Messrs. Parish, Headly, Wanaselja and Kirk). The Compensation Committee determined to provide each NEO with discretionary iComp adjustments to reflect the committee’s subjective assessments of each NEO’s performance, business impact, contributions, and leadership, among other factors. Specifically, when determining the final 2011 iComp awards, the Compensation Committee primarily sought to recognize the Company’s extremely strong performance with respect to the Adjusted Free Cash Flow metric as well as the following individual achievements:

 

   

Mr. Dewey: the Company’s exceptional overall performance and his strong and sustained leadership;

 

   

Mr. Graziosi: his significant analytical contributions with respect to cost management and revenue generation, superior management of the Company’s capital structure and related transactions and, generally, the Company’s strong financial performance during 2011;

 

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Mr. Parish: his oversight of the timely opening of the Company’s manufacturing facility in Szentgotthard, strong budget performance and cost management efforts and continued maintenance of quality standards despite significant turnover in workforce;

 

   

Mr. Headly: the Company’s continued strong growth in international markets and superior sales and revenue growth performance;

 

   

Mr. Wanaselja: his management of the Company’s expanding North American market penetration and entry into long-term supply agreements with key North American customers; and

 

   

Mr. Kirk: his strong growth as the leader of our engineering department, resulting in the continued strong pace of new product development as well as software/calibration system and process enhancements.

The actual iComp awards earned by the NEOs for 2011 are set forth below in our Summary Compensation Table for 2011 under the column entitled “Non-Equity Incentive Plan Compensation.”

Discretionary Long-Term Equity Incentive Awards

The Company’s NEOs, along with other key Company employees, were granted Company stock options at the time we became a separate company or, if later, at the commencement of their employment with the Company and are eligible to receive additional awards of stock options or other equity or equity-based awards under our Equity Incentive Plan at the discretion of the Compensation Committee. However, the Compensation Committee has not historically made annual or regular equity grants to our NEOs or other employees.

Equity award grants are tied to time-based vesting requirements and are designed to not only compensate but to also motivate and retain the recipients by providing an opportunity for the recipients to participate in the ownership of the Company. The equity award grants to members of the senior management team also promote the Company’s long-term compensation objectives by aligning the interests of the executives with the interests of the Company’s stockholders.

Generally, stock options granted under our equity incentive plan have vesting schedules that are designed to encourage an optionee’s continued employment and option prices that are designed to reward an optionee for Company performance. Options generally expire ten years from the date of the grant and vest in five equal annual installments following the date of grant, subject to the optionee’s continued employment on each applicable vesting date.

The Company has historically granted to key employees options with staggered exercise prices, such that the exercise price of a portion of the option is substantially greater than (in increments of 1.5 times and 2 times) the fair market value of the stock underlying the option on the date of grant, thereby creating incentives for our NEOs and other key employees to seek to generate increased stockholder value.

None of our NEOs received stock options or other equity incentive awards during the year ended December 31, 2011.

Defined Contribution Plans

The Company maintains a defined contribution plan that is tax-qualified under Section 401(k) of the Internal Revenue Code, or the Code, and that we refer to as the 401(k) Plan. The 401(k) Plan permits eligible salaried employees of the Company to defer receipt of portions of their eligible salaries, subject to certain limitations imposed by the Code, by making contributions to the 401(k) Plan, including flexible compensation contributions, Roth contributions, catch-up contributions and after-tax contributions.

The Company provides matching contributions to the 401(k) Plan in an amount equal to one hundred percent of each participant’s pre-tax, after-tax, and Roth contributions, up to a maximum of four percent of the participant’s annual eligible salary and subject to certain other limits. The Company makes additional

 

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contributions to the 401(k) Plan on behalf of certain groups of participants, depending on the date of their commencement of service with our predecessor and whether they are eligible to participate in the Company’s defined benefit plan as described below. These contributions are in amounts of either one percent and/or four percent of eligible salary, subject to certain other limits. Rollover contributions are also permitted.

Plan participants are 100% vested in pre-tax and pre-tax catch-up contributions, flexible compensation contributions, after-tax contributions, Roth and Roth catch-up contributions, and rollover contributions. Plan participants vest in the amounts contributed by the Company on the earliest of: (i) completing three years of credited service with the Company, (ii) attaining age 65, or (iii) the participant’s death. Employees of the Company are eligible to participate in the 401(k) Plan on the first day of the first month on or after completing three months of service with the Company.

The 401(k) Plan is offered on a nondiscriminatory basis to all salaried employees of the Company, including NEOs, who meet the eligibility requirements. The Compensation Committee believes that matching and other contributions provided by the Company assist the Company in attracting and retaining talented employees and executives. The 401(k) Plan provides an opportunity for participants to save money for retirement on a tax-qualified basis and to achieve financial security, thereby promoting retention.

Defined Benefit Plans

Annual retirement benefits under the Allison Transmission Retirement Program for Salaried Employees accrue at a rate of 1.25% of base wages each year. Benefits are payable as a life annuity for the participant. If elected, joint & survivor and other payment options are available. The full retirement benefit is generally payable to participants who retire on or after attaining age 62 with 10 years of service, and a reduced early retirement benefit is generally available to participants who retire on or after age 55 with 10 years of service or who retire at any age with 30 years of service. No offsets are made for the value of any social security benefits earned.

Similar to the 401(k) Plan, this defined benefit plan is a nondiscriminatory tax-qualified retirement plan that provides eligible participants (generally, employees who commenced service with our predecessor on or before January 1, 2007) with an opportunity to earn retirement benefits and provides for financial security. Offering these benefits is an additional means for the Company to retain well-qualified executives.

Employment and Severance Arrangements

The Compensation Committee considers the maintenance of a sound management team to be essential to protecting and enhancing our best interests and the best interests of the Company. To that end, we recognize that the uncertainty that may exist among management with respect to their “at-will” employment with the Company may result in the departure or distraction of management personnel to the detriment of the Company. Accordingly, the Compensation Committee has determined that severance arrangements are appropriate to encourage the continued attention and dedication of certain members of our management and to allow them to focus on the value to stockholders of strategic alternatives without concern for the impact on their continued employment. Each of Messrs. Dewey and Graziosi has an employment agreement which provides for severance benefits upon termination of employment.

Mr. Dewey’s employment agreement, dated as of February 7, 2008, has an original five-year term and is extended automatically for successive one-year periods thereafter unless either party delivers notice within specified notice periods to terminate the agreement. Upon termination of Mr. Dewey’s employment either by us without cause, by Mr. Dewey for good reason or due to nonextension of the term by us or Mr. Dewey’s death or disability, subject to his timely executing a general release of claims against the Company, Mr. Dewey is entitled to receive a lump sum payment equal to 1.5 times his annual base salary plus 1.5 times his annual performance bonus (or his annual target bonus, if performance goals have not been set) for the year in which the termination occurs (calculated with reference to performance for the fiscal quarter that ended prior to the date of termination or the first quarter, if his termination occurs in the first quarter) and, at the Company’s expense, continued

 

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coverage for 18 months under our group medical plan in which Mr. Dewey and any of his dependents were participating immediately prior to his termination. During his employment and for 18 months following termination, Mr. Dewey’s employment agreement prohibits him from competing with certain businesses of the Company or from soliciting employees, customers or suppliers of the Company to terminate their employment or arrangements with the Company.

Mr. Graziosi’s employment agreement, dated as of November 1, 2007, has an original three-year term and is extended automatically for successive one-year periods thereafter unless either party delivers notice within specified notice periods to terminate the agreement. Upon termination of Mr. Graziosi’s employment either by us without cause, by Mr. Graziosi for good reason or due to nonextension of the term by us or Mr. Graziosi’s death or disability, subject to his timely executing a general release of claims against the Company, Mr. Graziosi is entitled to receive a lump sum payment equal to 1.25 times his stated annual base salary plus 1.25 times his annual performance bonus (or his annual target bonus, if performance goals have not been set) for the year in which the termination occurs (calculated with reference to performance for the fiscal quarter that ended prior to the date of termination or the first quarter, if his termination occurs in the first quarter) and, at the Company’s expense, continued coverage for 15 months under our group medical plan in which Mr. Graziosi and any of his dependents were participating immediately prior to his termination. During his employment and for 15 months following termination, Mr. Graziosi’s employment agreement prohibits him from competing with certain businesses of the Company or from soliciting employees, customers or suppliers of the Company to terminate their employment or arrangements with the Company.

“Cause” is defined in Messrs. Dewey’s and Graziosi’s employment agreements to mean (i) a determination by the Board of Directors that the executive has failed to perform his duties (other than a failure resulting from his disability) that is reasonably expected to result in, or has resulted in, material economic damage to us, (ii) a determination by the Board of Directors that the executive has failed to carry out or comply with any lawful and reasonable directive of the Board of Directors that is consistent with the applicable employment agreement, (iii) the executive’s conviction, plea of no contest or imposition of unadjudicated probation for any felony or crime involving moral turpitude, (iv) the executive’s use or possession of illegal drugs on our premises or while performing his duties and responsibilities to us or (v) the executive’s commission of an act of fraud, embezzlement, misappropriation, willful misconduct or breach of fiduciary duty against us. “Good reason” is defined in Mr. Dewey’s and Mr. Graziosi’s employment agreements to mean (i) a material diminution in the executive’s authorities, duties, or responsibilities, (ii) a material relocation of the executive’s principal place of employment or (iii) a material diminution in the executive’s annual base salary or target annual bonus amount.

Other Elements of Compensation and Perquisites

We provide our executive officers, including our NEOs, with certain personal benefits and perquisites, which we do not consider to be a significant component of executive compensation but which we recognize are an important factor in attracting and retaining talented executives. Executive officers are eligible under the same plans as all other employees for medical, dental, vision and short-term disability insurance, and may participate to the same extent as all other employees in our tuition reimbursement program, which provides assistance to salaried employees who wish to pursue accredited degree programs or selected courses related to their work and their qualified dependents. We provide higher levels of long-term disability and life insurance coverages to our executive officers than is generally available to our non-executive employees. We also provide our executive officers with the personal use of Company fleet automobiles and, for certain executives, an automobile allowance. We provide these supplemental benefits to our executive officers due to the relatively low cost of such benefits and the value they provide in assisting us in attracting and retaining talented executives. The value of personal benefits and perquisites we provide to each of our NEOs is set forth below in our Summary Compensation Table.

 

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Summary Compensation Table for 2011

The following table sets forth certain information with respect to the compensation paid to our NEOs during the years ended December 31, 2010 and 2011.

 

Name and Principal Position

   Year      Salary ($)      Non-Equity Incentive
Plan Compensation
($)(1)
     Change in
Pension
Value ($)
     All Other
Compensation ($)
    Total ($)  

Lawrence E. Dewey

     2011         479,167         1,646,850         48,823         39,866 (2)      2,214,706   

Chairman, President and

Chief Executive Officer

     2010         437,500         1,499,999         31,270         33,346        2,002,115   

David S. Graziosi

     2011         410,417         1,059,999                 26,075 (3)      1,496,491   

Executive Vice President,

Chief Financial Officer and

Treasurer

     2010         379,583         1,000,000                 23,793        1,403,376   

David L. Parish

     2011         289,583         509,999         58,733         35,282 (4)      893,597   

Vice President, Operations

     2010         264,583         500,000         41,659         32,329        838,571   

Michael G. Headly

     2011         251,667         409,999         58,095         33,540 (5)      753,301   

Vice President, Non-NAFTA

Marketing, Sales and Service

     2010         233,750         350,000         41,109         29,936        654,795