# Axalta Coating Systems Ltd.: Form 10-Q for the period ended Sep 30, 2016

- Company: [Axalta Coating Systems Ltd.](/companies/axta.md) (CIK 1616862)
- Form: 10-Q
- Filed: 2016-10-27
- Accepted by EDGAR: Oct 27, 2016, 16:27 ET
- Period: 2016-09-30
- Accession: 0001616862-16-000091
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1616862/000161686216000091/a201693010-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1616862/000161686216000091/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-07-01 to 2016-09-30 | $1.03bn | us-gaap:Revenues |
| Revenue | 9 months, 2016-01-01 to 2016-09-30 | $3.06bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2016-07-01 to 2016-09-30 | $630.4m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2016-01-01 to 2016-09-30 | $1.89bn | us-gaap:CostOfGoodsSold |
| Research and development | 3 months, 2016-07-01 to 2016-09-30 | $14.9m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2016-01-01 to 2016-09-30 | $41.6m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2016-07-01 to 2016-09-30 | $242.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2016-01-01 to 2016-09-30 | $699.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-07-01 to 2016-09-30 | $120.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2016-01-01 to 2016-09-30 | $374.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2016-07-01 to 2016-09-30 | $42.9m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2016-01-01 to 2016-09-30 | $140.8m | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-07-01 to 2016-09-30 | −$600.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2016-01-01 to 2016-09-30 | $34.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-07-01 to 2016-09-30 | −$10.7m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2016-01-01 to 2016-09-30 | $67.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-07-01 to 2016-09-30 | −$0.04 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2016-01-01 to 2016-09-30 | $0.28 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-07-01 to 2016-09-30 | −$0.04 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2016-01-01 to 2016-09-30 | $0.28 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-07-01 to 2016-09-30 | 238,500,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2016-01-01 to 2016-09-30 | 242,400,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2016-01-01 to 2016-09-30 | $323.8m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 9 months, 2016-01-01 to 2016-09-30 | $95.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2016-09-30 | $528.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-09-30 | $2.07bn | us-gaap:AssetsCurrent |
| Total assets | at 2016-09-30 | $6.14bn | us-gaap:Assets |
| Current liabilities | at 2016-09-30 | $916.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-09-30 | $4.81bn | us-gaap:Liabilities |
| Long-term debt | at 2016-09-30 | $3.53bn | us-gaap:LongTermDebt |
| Current portion of debt | at 2016-09-30 | $54.2m | us-gaap:DebtCurrent |
| Short-term borrowings | at 2016-09-30 | $26.7m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2016-09-30 | $1.21bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 63,829 characters.

*The following discussion and analysis of our financial condition and results of operations includes statements regarding industry outlook, our expectations regarding the performance of our business and other forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in "Non-GAAP Financial Measures," and "Forward-Looking Statements" as well as "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2015. These statements include those that are related to estimates reflected in our financial results as well as management’s plan and outlook. Our actual results may differ materially from those contained in or implied by any forward-looking statements. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the interim unaudited condensed consolidated financial statements and the condensed notes thereto included elsewhere in this quarterly report, as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.*

### FORWARD-LOOKING STATEMENTS

Many statements made in this Quarterly Report on Form 10-Q that are not statements of historical fact, including statements about our beliefs and expectations, are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and should be evaluated as such. Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plan, strategies and capital structure. These statements often include words such as "anticipate," "expect," "suggests," "plan," "believe," "intend," "estimates," "targets," "projects," "should," "could," "would," "may," "will," "forecast," and other similar expressions. We base these forward-looking statements or projections on our current expectations, plans and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances and at such time. As you read and consider this Quarterly Report on Form 10-Q, you should understand that these statements are not guarantees of performance or results. The forward-looking statements and projections are subject to and involve risks, uncertainties and assumptions and you should not place undue reliance on these forward-looking statements or projections. Although we believe that these forward-looking statements and projections are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements and projections. Factors that may materially affect such forward-looking statements and projections include:

- adverse developments in economic conditions and, particularly, in conditions in the automotive and transportation industries;
- volatility in the capital, credit and commodities markets;
- our inability to successfully execute on our growth strategy;
- risks associated with our non-U.S. operations;
- currency-related risks;
- increased competition;
- risks of the loss of any of our significant customers or the consolidation of MSOs, distributors and/or body shops;
- our reliance on our distributor network and third-party delivery services for the distribution and export of certain of our products
- price increases or interruptions in our supply of raw materials;
- failure to develop and market new products and manage product life cycles;
- litigation and other commitments and contingencies;
- significant environmental liabilities and costs as a result of our current and past operations or products, including operations or products related to our business prior to the Acquisition;
- unexpected liabilities under any pension plans applicable to our employees;
- risk that the insurance we maintain may not fully cover all potential exposures;
- failure to comply with the anti-corruption laws of the United States and various international jurisdictions;
- failure to comply with anti-terrorism laws and regulations and applicable trade embargoes;
- business disruptions, security threats and security breaches;
- our ability to protect and enforce intellectual property rights;
- intellectual property infringement suits against us by third parties;
- our substantial indebtedness;
- our ability to obtain additional capital on commercially reasonable terms may be limited;
- our ability to realize the anticipated benefits of any acquisitions and divestitures;
- our joint ventures’ ability to operate according to our business strategy should our joint venture partners fail to fulfill their obligations;
- the risk of impairment charges related to goodwill, identifiable intangible assets and fixed assets;
- our ability to recruit and retain the experienced and skilled personnel we need to compete;
- work stoppages, union negotiations, labor disputes and other matters associated with our labor force;
- terrorist acts, conflicts, wars and natural disasters that may materially adversely affect our business, financial condition and results of operations;
- transporting certain materials that are inherently hazardous due to their toxic nature;
- weather conditions that may temporarily reduce the demand for some of our products;
- reduced demand for some of our products as a result of improved safety features on vehicles and insurance company influence;
- the amount of the costs, fees, expenses and charges related to being a public company;
- any statements of belief and any statements of assumptions underlying any of the foregoing;
- other factors disclosed in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2015 and our other filings with the Securities and Exchange Commission; and
- other factors beyond our control.

These cautionary statements should not be construed by you to be exhaustive and are made only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise

### OVERVIEW

We are a leading global manufacturer, marketer and distributor of high performance coatings systems. We have a 150-year heritage in the coatings industry and are known for manufacturing high-quality products with well-recognized brands supported by market-leading technology and customer service. Our diverse global footprint of 42 manufacturing facilities, 4 technology centers, 46 customer training centers and approximately 13,000 employees allows us to meet the needs of customers in approximately 130 countries. We serve our customer base through an extensive sales force and technical support organization, as well as through approximately 4,000 independent, locally-based distributors.

We operate our business in two operating segments, Performance Coatings and Transportation Coatings. Our segments are based on the type and concentration of customers served, service requirements, methods of distribution and major product lines.

Through our Performance Coatings segment we provide high-quality liquid and powder coatings solutions to a fragmented and local customer base. We are one of only a few suppliers with the technology to provide precise color matching and highly durable coatings systems. The end-markets within this segment are refinish and industrial.

Through our Transportation Coatings segment we provide advanced coating technologies to OEMs of light and commercial vehicles. These increasingly global customers require a high level of technical support coupled with cost-effective, environmentally responsible, coatings systems that can be applied with a high degree of precision, consistency and speed. The end-markets within this segment are light vehicle and commercial vehicle.

### BUSINESS HIGHLIGHTS AND TRENDS

Our net sales decreased 1.3% for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015, primarily due to unfavorable currency translation which reduced net sales by 5.2%. This decrease was largely offset as a result of higher average selling prices as well as stronger volumes which together contributed to 3.9% of growth. The following trends have impacted our segment and end-market sales performance:

- *Performance Coatings:* Net sales decreased slightly as a result of unfavorable foreign currency translation impacts, driven by the weakening of currencies across all regions. Higher average selling prices in Latin America and North America combined with increases in sales volumes in EMEA and Asia largely offset these currency effects. The increase in sales volumes included the benefits of our business acquisitions in North America.
- *Transportation Coatings:* Net sales decreased as a result of unfavorable foreign currency translation impacts, primarily driven by the weakening of currencies across all regions. Strong volumes in both North America and Asia were outpaced by volume declines in Latin America. These decreases were partially offset by higher average selling prices in both our light vehicle and commercial vehicle end-markets, particularly in Latin America and EMEA. The increase in sales volumes included the benefits of our business acquisitions in North America.

Our business serves four end-markets globally as follows:

*(In millions)*

| Performance Coatings | Three Months Ended September 30, 2016 | 2015 | 2016 vs 2015 % change | Nine Months Ended September 30, 2016 | 2015 | 2016 vs 2015 % change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Refinish | $434.5 | $426.9 | 1.8% | $1,262.0 | $1,280.2 | (1.4)% |
| Industrial | 184.8 | 173.7 | 6.4% | 532.4 | 516.4 | 3.1% |
| Total Net sales Performance Coatings | 619.3 | 600.6 | 3.1% | 1,794.4 | 1,796.6 | (0.1)% |
| **Transportation Coatings** |  |  |  |  |  |  |
| Light Vehicle | 321.1 | 303.7 | 5.7% | 994.9 | 984.1 | 1.1% |
| Commercial Vehicle | 83.0 | 96.0 | (13.5)% | 254.8 | 302.9 | (15.9)% |
| Total Net sales Transportation Coatings | 404.1 | 399.7 | 1.1% | 1,249.7 | 1,287.0 | (2.9)% |
| Total Net sales | $1,023.4 | $1,000.3 | 2.3% | $3,044.1 | $3,083.6 | (1.3)% |

33

### FACTORS AFFECTING OUR OPERATING RESULTS

There have been no changes in the factors affecting our operating results previously reported in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015.

### NON-GAAP FINANCIAL MEASURES

### Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA

To supplement our financial information presented in accordance with U.S. GAAP, we use the following non-GAAP financial measures to clarify and enhance an understanding of past performance: EBITDA and Adjusted EBITDA. We believe that the presentation of these financial measures enhances an investor’s understanding of our financial performance. We further believe that these financial measures are useful financial metrics to assess our operating performance from period-to-period by excluding certain items that we believe are not representative of our core business. We define our core business as those operations relating to the Company's ongoing performance and the concept is used to make resource allocation and performance evaluation decisions. We use certain of these financial measures for business planning purposes and in measuring our performance relative to that of our competitors. We utilize Adjusted EBITDA as the primary measure of segment performance.

EBITDA consists of net income before interest, taxes, depreciation and amortization. Adjusted EBITDA consists of EBITDA adjusted for (i) non-cash items included within net income, (ii) items the Company does not believe are indicative of ongoing operating performance or (iii) non-recurring, unusual or infrequent items that the Company believes are not reasonably likely to recur within the next two years. We believe that making such adjustments provides investors meaningful information to understand our operating results and ability to analyze financial and business trends on a period-to-period basis.

We believe these financial measures are commonly used by investors to evaluate our performance and that of our competitors. However, our use of the terms EBITDA and Adjusted EBITDA may vary from that of others in our industry. These financial measures should not be considered as alternatives to income before income taxes, net income, earnings per share or any other performance measures derived in accordance with U.S. GAAP as measures of operating performance.

EBITDA and Adjusted EBITDA have important limitations as analytical tools and you should not consider them in isolation or as substitutes for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

- EBITDA and Adjusted EBITDA:
- do not reflect the significant interest expense on our debt, including the Senior Secured Credit Facilities and the New Senior Notes; and
- eliminate the impact of income taxes on our results of operations;
- although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any expenditures for such replacements; and
- other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures.

We compensate for these limitations by using EBITDA and Adjusted EBITDA along with other comparative tools, together with U.S. GAAP measurements, to assist in the evaluation of operating performance. Such U.S. GAAP measurements include income before income taxes, net income, earnings per share and other performance measures.

In evaluating these financial measures, you should be aware that in the future we may incur expenses similar to those eliminated in this presentation. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by the excluded items noted above.

The following table reconciles the net income (loss) to EBITDA and Adjusted EBITDA calculations discussed above for the periods presented:

*(In millions)*

|  | Three Months Ended September 30, 2016 | 2015 | Nine Months Ended September 30, 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: |
| Net income (loss) | $(9.5) | $36.4 | $71.2 | $58.8 |
| Interest expense, net | 42.9 | 50.8 | 140.8 | 150.0 |
| Provision (benefit) for income taxes | (0.6) | 17.8 | 34.3 | 48.5 |
| Depreciation and amortization | 81.2 | 75.4 | 235.8 | 225.5 |
| EBITDA | 114.0 | 180.4 | 482.1 | 482.8 |
| Debt extinguishment and refinancing related costs (a) | 81.9 | — | 84.2 | — |
| Foreign exchange remeasurement losses (b) | 4.5 | 23.7 | 30.0 | 90.2 |
| Long-term employee benefit plan adjustments (c) | 0.8 | (0.5) | 2.1 | (0.1) |
| Termination benefits and other employee related costs (d) | 16.3 | 0.8 | 25.2 | 19.3 |
| Consulting and advisory fees (e) | 2.7 | 7.2 | 8.3 | 17.1 |
| Offering and transactional costs (f) | 3.0 | 1.4 | 4.4 | (2.3) |
| Stock-based compensation (g) | 10.0 | 7.9 | 31.6 | 22.1 |
| Other adjustments (h) | 1.5 | (3.7) | 5.2 | (0.9) |
| Dividends in respect of noncontrolling interest (i) | (1.5) | (0.3) | (3.0) | (4.4) |
| Asset impairment (j) | — | — | 10.5 | 30.6 |
| Adjusted EBITDA | $233.2 | $216.9 | $680.6 | $654.4 |

(a) During the three and nine months ended September 30, 2016, we prepaid outstanding principal on our term loans, resulting in non-cash pre-tax losses on extinguishment of $4.3 million and $6.6 million, respectively. During the three and nine months ended September 30, 2016, we amended the terms of the Credit Agreement, resulting in a non-cash pre-tax loss on extinguishment of $2.3 million. In connection with the refinancings during the three and nine months ended September 30, 2016, we recorded a non-cash pre-tax loss on extinguishment of $18.6 million and incurred call premiums and other fees of $56.7 million. We do not consider these items to be indicative of our ongoing operating performance.

(b) Eliminates foreign exchange losses resulting from the remeasurement of assets and liabilities denominated in foreign currencies, net of the impacts of our foreign currency instruments used to hedge our balance sheet exposures. Exchange effects attributable to the remeasurement of our Venezuelan subsidiary represented losses of $1.2 million and $23.9 million for the three and nine months ended September 30, 2016, respectively, and gains of $0.6 million and losses of $52.6 million for the three and nine months ended September 30, 2015, respectively.

(c) Eliminates the non-cash non-service cost components of long-term employee benefit costs (discussed further at Note 6 to the condensed consolidated financial statements included elsewhere in this in this Quarterly Report on Form 10-Q).

(d) Represents expenses primarily related to employee termination benefits including our initiative to improve the overall cost structure within the European region as well as costs associated with our Axalta Way initiatives, which are not considered indicative of our ongoing operating performance.

(e) Represents fees paid to consultants for professional services primarily related to our Axalta Way initiatives, which are not considered indicative of our ongoing operating performance.

(f) Represents costs associated with the offerings of our common shares by Carlyle, acquisition-related costs, including a $5.4 million gain recognized during the nine months ended September 30, 2015 resulting from the remeasurement of our previously held interest in an equity method investee upon the acquisition of a controlling interest, and costs associated with changes in the fair value of contingent consideration associated with our acquisitions, all of which are not considered indicative of our ongoing operating performance.

(g) Represents non-cash costs associated with stock-based compensation, including $8.2 million of expense during the nine months ended September 30, 2015 attributable to the accelerated vesting of all issued and outstanding stock options issued under the 2013 Plan as a result of the Change in Control.

(h) Represents costs for certain non-operational or non-cash (gains) and losses unrelated to our core business and which we do not consider indicative of ongoing operations, including equity investee dividends, indemnity losses (gains) associated with the Acquisition, losses (gains) on sale and disposal of property, plant and equipment, losses (gains) on the remaining foreign currency derivative instruments and non-cash fair value inventory adjustments associated with our business combinations.

(i) Represents the payment of dividends to our joint venture partners by our consolidated entities that are not wholly owned, which are reflected to show the cash operating performance of these entities on Axalta's financial statements.

(j) As a result of currency devaluations in Venezuela, we recorded non-cash impairment charges relating to a real estate investment of $10.5 million and $30.6 million during the nine months ended September 30, 2016 and 2015, respectively (discussed further at Note 20 to the condensed consolidated financial statements included elsewhere in this in this Quarterly Report on Form 10-Q). We do not consider these impairments to be indicative of our ongoing operating performance.

### RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the information contained in the accompanying unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. Our historical results of operations set forth below may not necessarily reflect what will occur in the future.

### Three months ended September 30, 2016 compared to the three months ended September 30, 2015

The following table was derived from the unaudited condensed consolidated statements of operations for the three months ended September 30, 2016 and 2015 included elsewhere in this Quarterly Report on Form 10-Q.

*(In millions)*

|  | Three Months Ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| Net sales | $1,023.4 | $1,000.3 |
| Other revenue | 5.7 | 4.8 |
| Total revenue | 1,029.1 | 1,005.1 |
| Cost of goods sold | 630.4 | 628.6 |
| Selling, general and administrative expenses | 242.3 | 219.2 |
| Research and development expenses | 14.9 | 13.0 |
| Amortization of acquired intangibles | 21.3 | 20.4 |
| Income from operations | 120.2 | 123.9 |
| Interest expense, net | 42.9 | 50.8 |
| Other expense, net | 87.4 | 18.9 |
| Income (loss) before income taxes | (10.1) | 54.2 |
| Provision (benefit) for income taxes | (0.6) | 17.8 |
| Net income (loss) | (9.5) | 36.4 |
| Less: Net income attributable to noncontrolling interests | 1.2 | 1.3 |
| Net income (loss) attributable to controlling interests | $(10.7) | $35.1 |

### Net sales

Net sales increased $23.1 million, or 2.3%, to $1,023.4 million for the three months ended September 30, 2016, compared to net sales of $1,000.3 million for the three months ended September 30, 2015. This increase for the three months ended September 30, 2016 was primarily a result of increases in sales volumes of 2.5%. The impacts of our recent acquisitions contributed 2.6% in volumes for the period. Higher average selling prices across both our segments also contributed to an increase of 1.9% compared to the three months ended September 30, 2015. These increases were partially offset by unfavorable impacts of currency exchange of 2.1% due to the impacts of the weakening of certain currencies across all regions compared to the U.S. dollar.

### Other revenue

Other revenue increased $0.9 million, or 18.8%, to $5.7 million for the three months ended September 30, 2016, as compared to $4.8 million for the three months ended September 30, 2015. This increase was mainly related to increases in royalty revenues in North America. The impacts of currency exchange did not have a material impact on the comparable periods.

### Cost of sales

Cost of sales increased $1.8 million, or 0.3%, to $630.4 million for the three months ended September 30, 2016 compared to $628.6 million for the three months ended September 30, 2015. This increase is consistent with the increase in sales volumes resulting primarily from our recent acquisitions, offset slightly due to currency exchange resulting from the impact of certain currencies weakening against the U.S. dollar within Latin America and Asia, which contributed a 1.1% decrease. Cost of sales as a percentage of net sales decreased from 62.8% for the three months ended September 30, 2015 to 61.6% for the three months ended September 30, 2016 as a result of fixed cost reductions from our cost savings initiatives as well as lower raw material prices and higher average selling prices.

### Selling, general and administrative expenses

Selling, general and administrative expenses increased $23.1 million, or 10.5%, to $242.3 million for the three months ended September 30, 2016 compared to $219.2 million for the three months ended September 30, 2015, largely due to costs associated with our cost savings initiatives of $21.9 million for the three months ended September 30, 2016, representing an incremental $12.5 million in costs over the comparable period. Further contributing to the increase during the three months ended September 30, 2016 over the comparable period were increases in selling expense associated with increased sales volumes and ongoing operational expenditures for planned growth initiatives, as well as increases resulting from our recent acquisitions.

Offsetting these increases were favorable impacts of currency exchange during the three months ended September 30, 2016 which contributed to a 1.5% reduction in selling, general and administrative expenses, due to the weakening of certain currencies within Latin America compared to the U.S. dollar.

### Research and development expenses

Research and development expenses increased $1.9 million, or 14.6%, to $14.9 million for the three months ended September 30, 2016 compared to $13.0 million for the three months ended September 30, 2015. This increase was a result of additional spend as we focus on developing new and existing products in the market. The impacts of currency exchange did not have a material impact on the comparable periods.

### Amortization of acquired intangibles

Amortization of acquired intangibles increased $0.9 million, or 4.4%, to $21.3 million for the three months ended September 30, 2016 compared to $20.4 million for the three months ended September 30, 2015. This increase was attributable to amortization of the definite-lived intangible assets acquired through our recent acquisitions, offset slightly by the impacts of the weakening of certain currencies within Latin America compared to the U.S. dollar.

### Interest expense, net

Interest expense, net decreased $7.9 million, or 15.6%, to $42.9 million for the three months ended September 30, 2016 compared to $50.8 million for the three months ended September 30, 2015. The decrease was driven by the prepayment of principal balances associated with our New Dollar Term Loan made in 2015 and 2016, as well as the refinancing of our 2021 Dollar Senior Notes and 2021 Euro Senior Notes during the three months ended September 30, 2016, which reduced the overall interest rates of our debt portfolio. Furthering the decrease was a gain of $2.0 million and a loss of $1.0 million on our interest rate swaps for the three months ended September 30, 2016 and 2015, respectively.

### Other expense, net

Other expense, net increased $68.5 million, or 362.4%, to $87.4 million for the three months ended September 30, 2016 compared to $18.9 million for the three months ended September 30, 2015 primarily as a result of our debt refinancings during the three months ended September 30, 2016 which resulted in $81.9 million in costs. There were no comparable costs during the three months ended September 30, 2015.

This increase was offset by less exchange losses, net of $4.5 million for the three months ended September 30, 2016 compared to $23.7 million for the three months ended September 30, 2015. The decline in losses was primarily associated with exchange losses during the three months ended September 30, 2015 driven by certain currencies within Latin America, which did not occur during the three months ended September 30, 2016.

### Provision (benefit) for income taxes

We recorded an income tax benefit of $0.6 million for the three months ended September 30, 2016, which represents a 5.9% effective tax rate in relation to the loss before income taxes of $10.1 million. The effective tax rate for the three months ended September 30, 2016 differs from the U.S. Federal statutory rate by 29.1%, which is the result of various items that impacted the effective rate both favorably and unfavorably. We recorded favorable adjustments for earnings in jurisdictions where the statutory rate is lower than the U.S. Federal statutory rate of $10.3 million and we recognized a benefit of $6.4 million associated with currency exchange losses. These adjustments were partially offset by the impact of non-deductible expenses and interest of $4.3 million and pre-tax losses attributable to jurisdictions where a tax benefit is not expected to be realized of $14.0 million. Of this $14.0 million, approximately $7.4 million relates to the impact of pre-tax losses on debt extinguishment and other financing-related costs incurred in connection with the refinancing activities and voluntary prepayments during the three months ended September 30, 2016.

We recorded a provision for income taxes of $17.8 million for the three months ended September 30, 2015, which represents a 32.8% negative effective tax rate in relation to the income before income taxes of $54.2 million. The effective tax rate for the three months ended September 30, 2015 differs from the U.S. Federal statutory rate by 2.2%, which is the result of various items that impacted the effective rate both favorably and unfavorably. We recorded favorable adjustments related to earnings in jurisdictions where the statutory rate is lower than the U.S. Federal statutory rate of $3.3 million. These adjustments were offset by the unfavorable impact of pre-tax losses attributable to jurisdictions where a tax benefit is not expected to be realized of $3.2 million.

### Nine months ended September 30, 2016 compared to the nine months ended September 30, 2015

The following table was derived from the interim unaudited condensed consolidated statements of operations for the nine months ended September 30, 2016 and 2015 included elsewhere in this Quarterly Report on Form 10-Q.

*(In millions)*

|  | Nine Months Ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| Net sales | $3,044.1 | $3,083.6 |
| Other revenue | 18.7 | 20.1 |
| Total revenue | 3,062.8 | 3,103.7 |
| Cost of goods sold | 1,885.8 | 1,958.1 |
| Selling, general and administrative expenses | 699.1 | 677.7 |
| Research and development expenses | 41.6 | 38.7 |
| Amortization of acquired intangibles | 61.8 | 60.5 |
| Income from operations | 374.5 | 368.7 |
| Interest expense, net | 140.8 | 150.0 |
| Other expense, net | 128.2 | 111.4 |
| Income before income taxes | 105.5 | 107.3 |
| Provision for income taxes | 34.3 | 48.5 |
| Net income | 71.2 | 58.8 |
| Less: Net income attributable to noncontrolling interests | 3.7 | 3.7 |
| Net income attributable to controlling interests | $67.5 | $55.1 |

### Net sales

Net sales decreased $39.5 million, or 1.3%, to $3,044.1 million for the nine months ended September 30, 2016, as compared to net sales of $3,083.6 million for the nine months ended September 30, 2015. This decrease for the nine months ended September 30, 2016 was attributable to the unfavorable impacts of currency translation, which reduced net sales by 5.2% due to the impact of weakening currencies across all regions compared to the U.S. dollar. Offsetting the impact of currency, higher average selling prices across both our segments, primarily in Latin America, which contributed to an increase of 2.8% compared to the nine months ended September 30, 2015. Volumes in Europe, Asia and North America also contributed to net sales growth of 1.1%, including increases resulting from our recent acquisitions.

### Other revenue

Other revenue decreased $1.4 million, or 7.0%, to $18.7 million for the nine months ended September 30, 2016, as compared to $20.1 million for the nine months ended September 30, 2015. The decrease primarily related to decreases in service revenues in our light vehicle end-market and the impacts of weakening currencies in certain countries within Latin America compared to the U.S. dollar.

### Cost of sales

Cost of sales decreased $72.3 million, or 3.7% to $1,885.8 million for the nine months ended September 30, 2016 compared to $1,958.1 million for the nine months ended September 30, 2015. The decrease for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 resulted primarily from a 2.3% decrease associated with currency exchange due to weakening across all regions against the U.S. dollar. The decrease from currency translation was slightly offset by higher volumes of 1.1%, including the impacts of our recent acquisitions. Cost of sales as a percentage of net sales decreased from 63.5% for the nine months ended September 30, 2015 to 61.9% for the nine months ended September 30, 2016 as a result of reductions in costs resulting from our cost savings initiatives as well as lower raw material prices and higher average selling prices.

### Selling, general and administrative expenses

Selling, general and administrative expenses increased $21.4 million, or 3.2%, to $699.1 million for the nine months ended September 30, 2016 compared to $677.7 million for the nine months ended September 30, 2015 primarily as a result of an increase of $7.2 million in stock-based compensation associated with the granting of stock compensation awards during 2015 and 2016. Further contributing to the increase during the nine months ended September 30, 2016 over the comparable period were increases in selling expense associated with increased sales volumes and ongoing operational expenditures for planned growth initiatives, as well as increases resulting from our recent acquisitions.

Offsetting these increases were favorable impacts of currency exchange during the nine months ended September 30, 2016 which contributed to a 3.2% reduction in selling, general and administrative expenses due to the weakening of certain currencies within Latin America compared to the U.S. dollar, as well as costs associated with our cost savings initiatives of $38.1 million for the nine months ended September 30, 2016, representing a decrease of $1.4 million of costs over the comparable period.

### Research and development expenses

Research and development expenses increased $2.9 million, or 7.5%, to $41.6 million for the nine months ended September 30, 2016 compared to $38.7 million for the nine months ended September 30, 2015. This increase was a result of additional spend as we focus on developing new and existing products in the market. The impacts of currency exchange did not have a material impact on the comparable periods.

### Amortization of acquired intangibles

Amortization of acquired intangibles increased $1.3 million, or 2.1%, to $61.8 million for the nine months ended September 30, 2016 compared to $60.5 million for the nine months ended September 30, 2015. This increase was primarily attributable to amortization of the definite-lived intangible assets acquired through our recent acquisitions, offset slightly by the impacts of the weakening of certain currencies within Latin America compared to the U.S. dollar.

### Interest expense, net

Interest expense, net decreased $9.2 million, or 6.1%, to $140.8 million for the nine months ended September 30, 2016 compared to $150.0 million for the nine months ended September 30, 2015. This decrease was primarily driven by the prepayment of principal balances associated with our New Dollar Term Loan made in 2015 and 2016. In addition to these principal payments, interest expense decreased as a result of our refinancing of our 2021 Dollar Senior Notes and 2021 Euro Senior Notes during the nine months ended September 30, 2016, which reduced the overall interest rates of our debt portfolio.

### Other expense, net

Other expense, net increased $16.8 million, or 15.1%, to $128.2 million for the nine months ended September 30, 2016 compared to $111.4 million for the nine months ended September 30, 2015 primarily as a result of our debt refinancings during the nine months ended September 30, 2016 which resulted in $84.2 million in costs. There were no comparable costs during the nine months ended September 30, 2015.

During the nine months ended September 30, 2015, we entered into an agreement with one of our joint venture partners to acquire a controlling interest in an investment previously accounted for as an equity method investment. As a result of the acquisition of a controlling interest in the investment, we recognized a gain of $5.4 million on the remeasurement of our previously held equity interest as of the acquisition date, resulting in a net increase in other expense compared to the nine months ended September 30, 2016. Additionally, we recognized $4.4 million in losses on derivative instruments associated with our foreign currency contracts during the nine months ended September 30, 2016 as compared to $6.3 million in gains during the nine months ended September 30, 2015, resulting in an incremental $10.7 million in net expense.

Offsetting the year over year loss, exchange losses, net, decreased from $90.2 million during the nine months ended September 30, 2015 to $30.0 million during the nine months ended September 30, 2016. This decrease was primarily driven by losses from the revaluation of our Venezuela subsidiary from $52.6 million in losses for the nine months ended September 30, 2015 compared to $23.9 million in losses for the nine months ended September 30, 2016.

Further offsetting these increases was a decrease related to the impairment charges recorded during the nine months ended September 30, 2016 and 2015 of $10.5 million and $30.6 million, respectively, resulting from our evaluation of the carrying value associated with our real estate investment in Venezuela.

### Provision for income taxes

We recorded an income tax provision of $34.3 million for the nine months ended September 30, 2016, which represents a 32.5% effective tax rate in relation to the income before income taxes of $105.5 million. The effective tax rate for the nine months ended September 30, 2016 differs from the U.S. Federal statutory rate by 2.5%, which is the result of various items that impacted the effective rate both favorably and unfavorably. We recorded favorable adjustments for earnings in jurisdictions where the statutory rate is lower than the U.S. Federal statutory rate of $24.1 million and we recognized a benefit of $17.4 million associated with currency exchange losses. These adjustments were partially offset by the impact of non-deductible expenses and interest of $8.0 million and pre-tax losses attributable to jurisdictions where a tax benefit is not expected to be realized of $23.3 million. Of this $23.3 million, approximately $8.0 million relates to the impact of pre-tax losses on debt extinguishment and other financing-related costs incurred in connection with the refinancing activities and voluntary prepayments made during the nine months ended September 30, 2016. In addition, our pre-tax impairment charge in Venezuela of $10.5 million had an unfavorable $3.7 million impact on the effective rate as it was non-deductible.

We recorded a provision for income taxes of $48.5 million for the nine months ended September 30, 2015, which represents a 45.2% effective tax rate in relation to the income before income taxes of $107.3 million. The effective tax rate for the nine months ended September 30, 2015 differs from the U.S. Federal statutory rate by 10.2%, which is the result of various items that impacted the effective rate both favorably and unfavorably. We recorded favorable adjustments for earnings in jurisdictions where the statutory rate is lower than the U.S. Federal statutory rate of $11.4 million and $10.1 million related to currency exchange losses. These adjustments were offset by the pre-tax impairment charge in Venezuela of $30.6 million which had an unfavorable $10.7 million impact on the effective rate as it was nondeductible, the unfavorable impact of pre-tax losses attributable to jurisdictions where a tax benefit is not expected to be realized of $9.3 million, and the impact of nondeductible expenses and interest of $5.8 million and $7.1 million, respectively.

### SEGMENT RESULTS

### Three months ended September 30, 2016 compared to the three months ended September 30, 2015

The following table presents net sales by segment and segment Adjusted EBITDA for the periods presented:

*(In millions)*

| Net Sales | Three Months Ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| Performance Coatings | $619.3 | $600.6 |
| Transportation Coatings | 404.1 | 399.7 |
| Total | $1,023.4 | $1,000.3 |
| Segment Adjusted EBITDA |  |  |
| Performance Coatings | $148.5 | $139.0 |
| Transportation Coatings | 84.7 | 77.9 |
| Total | $233.2 | $216.9 |

### Performance Coatings Segment

Net sales increased $18.7 million, or 3.1%, to $619.3 million for the three months ended September 30, 2016 compared to net sales of $600.6 million for the three months ended September 30, 2015. The increase in net sales for the three months ended September 30, 2016 was driven by higher average selling prices primarily within Latin America and North America, which contributed to an increase in net sales of 2.9%. Volumes also contributed 2.9% in growth driven by contributions from acquisitions of 3.4%, offset partially by volume declines in Latin America. These increases were offset by the impacts of currency exchange, which contributed to a 2.7% reduction in net sales, resulting from the impacts of weakening currencies across all regions compared to the U.S. dollar.

Adjusted EBITDA increased $9.5 million, or 6.8%, to $148.5 million for the three months ended September 30, 2016 compared to Adjusted EBITDA of $139.0 million for the three months ended September 30, 2015. The increase in Adjusted EBITDA for the three months ended September 30, 2016 was driven by higher average selling prices in the refinish end-market and impacts related to our recent acquisitions, as well as lower variable costs across all regions. These increases were partially offset by unfavorable impacts of the weakening of certain currencies across all regions compared to the U.S. dollar and higher operating costs related to increases in volumes across both end-markets.

### Transportation Coatings Segment

Net sales increased $4.4 million, or 1.1%, to $404.1 million for the three months ended September 30, 2016 compared to net sales of $399.7 million for the three months ended September 30, 2015. The increase in net sales for the three months ended September 30, 2016 was driven by an increase in volume of 1.8%, primarily attributable to increases in our Asia and North America light vehicle end-markets, as well as contributions from our recent acquisitions of 1.3%. Furthering the increase were higher average selling prices, primarily within Latin America, which contributed to an increase of 0.5%. These increases were offset by decreases resulting from unfavorable impacts of currency exchange, which contributed to a 1.2% reduction in net sales, resulting primarily from the impacts of the weakening of certain currencies within Asia and Europe compared to the U.S. dollar.

Adjusted EBITDA increased $6.8 million, or 8.7%, to $84.7 million for the three months ended September 30, 2016 compared to Adjusted EBITDA of $77.9 million for the three months ended September 30, 2015. The increase in Adjusted EBITDA for the three months ended September 30, 2016 was driven by higher average selling prices and lower variable costs, as well as volume growth within the light vehicle end-market and contributions related to the impacts of our recent acquisitions. The increases were offset by unfavorable impacts of the weakening of certain currencies within Asia and Europe compared to the U.S. dollar and higher operating costs related to increases in volumes in the light vehicle end-market.

### Nine months ended September 30, 2016 compared to the nine months ended September 30, 2015

The following table presents net sales by segment and segment Adjusted EBITDA for the periods presented:

*(In millions)*

| Net Sales | Nine Months Ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| Performance Coatings | $1,794.4 | $1,796.6 |
| Transportation Coatings | 1,249.7 | 1,287.0 |
| Total | $3,044.1 | $3,083.6 |
| Segment Adjusted EBITDA |  |  |
| Performance Coatings | $415.9 | $408.2 |
| Transportation Coatings | 264.7 | 246.2 |
| Total | $680.6 | $654.4 |

### Performance Coatings Segment

Net sales decreased $2.2 million, or 0.1%, to $1,794.4 million for the nine months ended September 30, 2016 compared to net sales of $1,796.6 million for the nine months ended September 30, 2015. The decrease in net sales for the nine months ended September 30, 2016 was driven by the unfavorable impacts of currency exchange across all regions compared to the U.S. dollar, which contributed to a 6.3% reduction in net sales. This decrease was largely offset by increases in average selling price, primarily through the Latin America and North America refinish end-markets, which contributed to an increase of 3.3%. Further offsetting the decrease was an increase in volume across both end-markets, primarily in Europe and Asia, which contributed to a net sales increase of 2.9%, partially driven by a 1.1% increase from our recent acquisitions.

Adjusted EBITDA increased $7.7 million, or 1.9%, to $415.9 million for the nine months ended September 30, 2016 compared to Adjusted EBITDA of $408.2 million for the nine months ended September 30, 2015. The increase in Adjusted EBITDA for the nine months ended September 30, 2016 was primarily driven by higher average selling prices, increases in volumes across both end-markets and lower variable costs across all regions and end-markets. These increases were offset by unfavorable impacts of the weakening of currencies across all regions compared to the U.S. dollar and higher operating costs related to support of our volume growth.

### Transportation Coatings Segment

Net sales decreased $37.3 million, or 2.9%, to $1,249.7 million for the nine months ended September 30, 2016 compared to net sales of $1,287.0 million for the nine months ended September 30, 2015. The decrease in net sales for the nine months ended September 30, 2016 was driven by unfavorable impacts of currency exchange, which contributed to a 3.5% reduction in net sales, resulting primarily from the impacts of the weakening of currencies across all regions compared to the U.S. dollar. Further contributing to the net sales decrease was a decrease in volumes which contributed to net sales decline of 1.4%, which includes increases resulting from our recent acquisitions of 0.4%. Volume increased within the light vehicle end-market as both North America and Asia showed growth, while Latin America and the commercial vehicle end-market more than offset this growth. These decreases were partially offset by higher average selling prices, primarily within Latin America, which contributed to an increase of 2.0% compared to the nine months ended September 30, 2015

Adjusted EBITDA increased $18.5 million, or 7.5%, to $264.7 million for the nine months ended September 30, 2016 compared to Adjusted EBITDA of $246.2 million for the nine months ended September 30, 2015. The increase in Adjusted EBITDA for the nine months ended September 30, 2016 was driven by higher average selling prices and lower variable costs across both end-markets, which were partially offset by higher fixed costs associated with support of our volume growth within the light vehicle end-market. Additionally, there were unfavorable impacts due to the weakening of certain currencies, primarily driven by certain currencies within Latin America and Asia compared to the U.S. dollar, and decreases in volumes in the commercial vehicle end-market.

### LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash on hand, cash flow from operations and available borrowing capacity under our Senior Secured Credit Facilities.

At September 30, 2016, availability under the Revolving Credit Facility was $378.5 million, net of the letters of credit issued which reduced the availability under the Revolving Credit Facility by $21.5 million. All such availability may be utilized without violating any covenants under the credit agreement governing the Revolving Credit Facility or the indentures governing the New Senior Notes. At September 30, 2016, we had no outstanding borrowings under other lines of credit. Our remaining available borrowing capacity under other lines of credit in certain non-U.S. jurisdictions totaled $5.0 million.

We or our affiliates, at any time and from time to time, may purchase the New Senior Notes or other indebtedness. Any such purchases may be made through the open market or privately negotiated transactions with third parties or pursuant to one or more redemption, tender or exchange offers or otherwise, upon such terms and at such prices, as well as with such consideration, as we, or any of our affiliates, may determine.

Our operations in Venezuela are subject to foreign exchange and price controls which have historically limited our ability to convert Venezuelan bolivars to U.S. dollars and transfer funds out of Venezuela. Approximately 0.2% and 2.7% of the consolidated cash and cash equivalents as of September 30, 2016 and December 31, 2015, respectively, were held in Venezuela. In Venezuela, government restrictions on the transfer of cash out of the country have limited our ability to repatriate cash. We do not consider the net assets of Venezuela to be integral to our ability to service our debt and operational requirements.

### Cash Flows

### Nine months ended September 30, 2016 and 2015

*(In millions)*

| Net cash provided by (used in): Operating activities: | Nine Months Ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| Net income | $71.2 | $58.8 |
| Depreciation and amortization | 235.8 | 225.5 |
| Amortization of financing costs and original issue discount | 14.6 | 15.5 |
| Debt extinguishment | 84.2 | — |
| Deferred income taxes | (14.0) | (1.1) |
| Realized and unrealized foreign exchange losses, net | 30.6 | 90.2 |
| Stock-based compensation | 31.6 | 22.1 |
| Asset impairment | 10.5 | 30.6 |
| Other non-cash items | (10.4) | 5.2 |
| Net income adjusted for non-cash items | 454.1 | 446.8 |
| Changes in operating assets and liabilities | (130.3) | (283.0) |
| Operating activities | 323.8 | 163.8 |
| Investing activities | (205.1) | (111.1) |
| Financing activities | (65.3) | 30.1 |
| Effect of exchange rate changes on cash | (10.1) | (53.3) |
| Net increase in cash and cash equivalents | $43.3 | $29.5 |

### Nine months ended September 30, 2016

#### Net Cash Provided by Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2016 was $323.8 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $454.1 million. This was partially offset by net increases in working capital of $130.3 million. The most significant drivers in working capital were increases in accounts receivables and other assets of $135.0 million primarily due to the seasonal timing of net sales.

#### Net Cash Used in Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2016 was $205.1 million. This use was substantially driven by business acquisitions of $103.5 million (net of cash acquired), purchases of property, plant and equipment of $95.3 million, and intangible asset acquisitions of $3.9 million.

#### Net Cash Used in Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2016 was $65.3 million. This use was driven by the redemption of our 2021 Dollar and Euro Senior Notes of $1,375.5 million, which also required us to pay a premium for early redemption of $56.6 million. These payments were offset by proceeds from the issuance of our new 2024 Senior Notes and 2025 Euro Senior Notes of $1,377.6 million, which also required us to pay financing costs of $21.7 million in relation to the issuance of our new debt. In addition, we had cash received from stock options exercised for $21.3 million (net of tax associated benefits), which is offset by repayments of short-term borrowings of $7.2 million and dividends paid to noncontrolling interests of $3.0 million.

#### Other Impacts on Cash

Currency exchange impacts on cash for the nine months ended September 30, 2016 were $10.1 million primarily driven by the impacts on cash resulting from the change in our translation rates for our Venezuelan subsidiary which contributed $13.9 million.

### Nine months ended September 30, 2015

#### Net Cash Provided by Operating Activities

Net cash provided by operating activities was $163.8 million for the nine months ended September 30, 2015. Net income before deducting depreciation, amortization and other non-cash items generated cash of $446.8 million. This was partially offset by net increases in working capital of $283.0 million. The most significant drivers in working capital were increases in accounts receivables, inventory, and other assets of $213.6 million due to the seasonal timing of sales during the nine months ended September 30, 2015 and increased inventory builds to support ongoing operational demands. Cash flows associated with other accrued liabilities of $41.5 million related to payments of normal operating activities, semi-annual interest payments associated with our New Senior Notes, as well as restructuring costs and transition-related costs incurred during 2014.

#### Net Cash Used in Investing Activities

Net cash used in investing activities for the nine months ending September 30, 2015 was $111.1 million. This use was substantially driven by purchases of property, plant and equipment of $93.8 million and acquisitions of $19.9 million (net of cash received), partially offset by a decrease of $1.7 million in restricted cash.

#### Net Cash Provided by Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2015 was $30.1 million. The change was substantially driven by cash received from stock options exercised of $67.8 million (net of tax associated benefits) and by proceeds received from short-term borrowings during the period of $3.0 million. These are offset by repayments of short-term borrowings and Term Loans of $15.6 million and $20.5 million, respectively, as well as dividends paid to noncontrolling interests of $4.4 million for the nine months ended September 30, 2015.

#### Other Impacts on Cash

Exchange impacts on cash for the nine months ended September 30, 2015 were $53.3 million primarily driven by the impacts on cash resulting from the change in our translation rates for our Venezuelan subsidiary which contributed $37.4 million.

### Financial Condition

We had cash and cash equivalents at September 30, 2016 and December 31, 2015 of $528.3 million and $485.0 million, respectively. Of these balances, $337.3 million and $372.6 million were maintained in non-U.S. jurisdictions as of September 30, 2016 and December 31, 2015, respectively. We believe our organizational structure allows us the necessary flexibility to move funds throughout our subsidiaries to meet our operational working capital needs.

Our primary sources of liquidity are cash on hand, cash flow from operations and available borrowing capacity under our Revolving Credit Facility. Based on our forecasts, we believe that cash flow from operations, available cash on hand and available borrowing capacity under our Senior Unsecured Credit Facilities and existing lines of credit will be adequate to service debt, fund our cost-savings initiatives, meet liquidity needs and fund necessary capital expenditures for the next twelve months.

Our ability to make scheduled payments of principal or interest on, or to refinance, our indebtedness or to fund working capital requirements, capital expenditures and other current obligations will depend on our ability to generate cash from operations. Such cash generation is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

If required, our ability to raise additional financing and our borrowing costs may be impacted by short and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on our performance as measured by certain credit metrics such as interest coverage and leverage ratios. Our highly leveraged nature may limit our ability to procure additional financing in the future.

The following table details our borrowings outstanding at the end of the periods indicated:

*(In millions)*

|  | September 30, 2016 | December 31, 2015 |
| --- | ---: | ---: |
| New Dollar Term Loan | $1,925.3 | $2,042.5 |
| New Euro Term Loan | 209.7 | 428.0 |
| 2021 Dollar Senior Notes | — | 750.0 |
| 2021 Euro Senior Notes | — | 274.4 |
| 2024 Dollar Senior Notes | 500.0 | — |
| 2024 Euro Senior Notes | 375.7 | — |
| 2025 Euro Senior Notes | 504.7 | — |
| Short-term and other borrowings | 37.0 | 26.5 |
| Unamortized original issue discount | (12.7) | (14.0) |
| Unamortized financing costs | (57.4) | (65.9) |
|  | $3,482.3 | $3,441.5 |
| Less: |  |  |
| Short term borrowings | 26.7 | 22.7 |
| Current portion of long-term borrowings | 27.5 | 27.4 |
| Long-term debt | $3,428.1 | $3,391.4 |

Our indebtedness, including the Senior Secured Credit Facilities and Senior Unsecured Notes, is more fully described in Note 14 to the interim unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

We continue to maintain sufficient liquidity to meet our requirements, including our leverage and associated interest as well as our working capital needs. At September 30, 2016 and December 31, 2015, we had total availability under the Revolving Credit Facility $378.5 million and $375.1 million, respectively, all of which may be borrowed by us without violating any covenants under the credit agreement governing such facility or the indentures governing the New Senior Notes.

The Company continues to focus on optimizing our capital structure and we are actively monitoring developments in the debt markets.

### Contractual Obligations

The following table summarizes our contractual obligations at September 30, 2016:

*(In millions)*

| Debt, including current portion (1) Senior Secured Credit Facilities, consisting of the following: Term Loan Facilities: | Contractual Obligations Due In: Total | Remainder of 2016 | 2017-2018 | 2019-2020 | Thereafter |
| --- | ---: | ---: | ---: | ---: | ---: |
| Dollar Term Loan | $1,925.3 | $5.8 | $46.0 | $1,873.5 | $— |
| Euro Term Loan | 209.7 | 1.1 | 9.0 | 199.6 | — |
| Senior Notes, consisting of the following: |  |  |  |  |  |
| 2024 Dollar Senior Notes | 500.0 | — | — | — | 500.0 |
| 2024 Euro Senior Notes | 375.7 | — | — | — | 375.7 |
| 2025 Euro Senior Notes | 504.7 | — | — | — | 504.7 |
| Other borrowings (2) | 11.9 | 7.6 | 3.2 | 0.7 | 0.4 |
| Interest payments (3) | 751.3 | 35.7 | 283.6 | 208.1 | 223.9 |
| Operating leases (4) | 128.8 | 12.2 | 63.3 | 30.0 | 23.3 |
| Pension contributions (5) | 2.4 | 2.4 | — | — | — |
| Purchase obligations (6) | 198.5 | 16.6 | 114.1 | 53.0 | 14.8 |
| Uncertain tax positions, including interest and penalties (7) | — | — | — | — | — |
| Total | $4,608.3 | $81.4 | $519.2 | $2,364.9 | $1,642.8 |

(1) During the three and nine months ended September 30, 2016 we refinanced our 2021 Dollar Senior Notes with 2024 Senior Notes and our 2021 Euro Senior Notes with our 2025 Senior Notes (see Note 14 to our interim unaudited condensed consolidated financial statements). This resulted in a significant increase in our obligations for the years thereafter 2020. Amounts assume that the Senior Secured Credit Facilities and New Senior Notes are repaid upon maturity, and the Revolving Credit Facility remains undrawn, which may or may not reflect future events.

(2) Other borrowings exclude debt associated with a build-to-suit lease arrangement discussed further in note 4 below.

(3) Future interest payments include commitment fees on the unused portion of the Revolving Credit Facility, and reflect the interest payments on our New Dollar Term Loan, New Euro Term Loan and the New Senior Notes. Future interest payments assume September 30, 2016 interest rates will prevail throughout all future periods. Represents the timing of interest accruals. Actual interest payments and repayment amounts may change.

(4) During the year ended 2015, we entered into two build-to-suit lease arrangements, commencing after the year ended September 30, 2016, which collectively require $103.2 million to be paid over a twenty year period. Due to the uncertainty regarding future timing of cash flows associated with these leases, which are dependent on the construction completion dates, we are unable to reasonably estimate the years in which the lease payments will be made.

(5) We expect to make contributions to our defined benefit pension plans beyond 2016; however, the amount of any contributions is dependent on the future economic environment and investment returns, and we are unable to reasonably estimate the pension contributions beyond 2016.

(6) During the three and nine months ended September 30, 2016 we completed three business acquisitions, under which for two of these acquisitions we agreed to certain commitments, including to fund the remaining purchase price, acquire remaining interests and pay contingent consideration. At September 30, 2016 we are committed to pay $2.2 million, $39.3 million and $37.0 million during the years ended 2017, 2018 and 2019, respectively. Commitments related to contingent consideration arrangements are subject to change based on future performance.

(7) At September 30, 2016, we had approximately $5.9 million of uncertain tax positions, including interest and penalties that could result in potential payments. Due to the high degree of uncertainty regarding future timing of cash flows associated with these liabilities, we are unable to estimate the years in which settlement will occur with the respective taxing authorities.

### Scheduled Maturities

Below is a schedule of required future repayments of all borrowings outstanding at September 30, 2016.

*(In millions)*

|  |  |
| --- | ---: |
| Remainder of 2016 | $14.5 |
| 2017 | 29.7 |
| 2018 | 28.4 |
| 2019 | 27.9 |
| 2020 | 2,046.0 |
| Thereafter | 1,380.8 |
| Total | $3,527.3 |

### Off-Balance Sheet Arrangements

We directly guarantee certain obligations under agreements with third parties. At September 30, 2016 and December 31, 2015 these off-balance sheet arrangements were not material to our interim unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

### Recent Accounting Guidance

See Note 2 "Recent Accounting Guidance" to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a summary of recent accounting guidance.

### CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies are those accounting policies that can have a significant impact on the presentation of our financial condition and results of operations, and that require the use of complex and subjective estimates based upon past experience and management’s judgment. Because of the uncertainty inherent in such estimates, actual results may differ materially from these estimates. The policies applied in preparing our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q are those that management believes are the most dependent on estimates and assumptions. There have been no material changes to our critical accounting policies and estimates previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015. For a description of our critical accounting policies and estimates as well as a listing of our significant accounting policies, see “Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” and “Note 3 - Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

## Market risk

As filed, 205 characters.

There have been no material changes in the market risks previously disclosed in our financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

## Controls and procedures

As filed, 1,104 characters.

### Evaluation of disclosure controls and procedures

As required by Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), the Company carried out an evaluation, under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of September 30, 2016.

### Changes in internal control over financial reporting

There were no changes in the Company's internal control over financial reporting that occurred during the three months ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 2,163 characters.

Except for as set forth below, there have been no material changes in our risk factors from the risks previously reported in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015.

### Risks Related to our Global Operations

***The results of the United Kingdom’s referendum on withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.***

In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national referendum. The referendum was advisory, and the terms of any withdrawal are subject to a negotiation period that could last at least two years after the government of the United Kingdom formally initiates a withdrawal process. Nevertheless, the referendum has created significant uncertainty about the future relationship between the United Kingdom and the European Union, including with respect to the laws and regulations that will apply as the United Kingdom determines which European Union laws to replace or replicate in the event of a withdrawal. The referendum has also given rise to calls for the governments of other European Union member states to consider withdrawal. We have substantial R&D and manufacturing operations in Europe and a significant portion of our business involves cross border transactions throughout the region. We cannot predict how the British referendum or similar votes by other European Union member states will impact our operations and business. In addition, these developments, or the perception that any of them could occur, have caused and may continue to cause significant volatility in the global financial markets as well as business conditions in Europe and beyond. This volatility may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Any of these factors could depress economic activity and restrict our access to capital, which could have a material adverse effect on our business, financial condition and results of operations and reduce the price of our common shares.

Filed Oct 27, 2016.
Source: SEC EDGAR, the filing index for accession 0001616862-16-000091. Last ingested by Listed: Nov 12, 2026, 22:39 ET. No prices; not investment advice.