# Axalta Coating Systems Ltd.: Form 10-Q for the period ended Mar 31, 2017

- Company: [Axalta Coating Systems Ltd.](/companies/axta.md) (CIK 1616862)
- Form: 10-Q
- Filed: 2017-04-26
- Accepted by EDGAR: Apr 26, 2017, 16:06 ET
- Period: 2017-03-31
- Accession: 0001616862-17-000032
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1616862/000161686217000032/a201733110-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1616862/000161686217000032/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2017-01-01 to 2017-03-31 | $1.01bn | us-gaap:Revenues |
| Research and development | 3 months, 2017-01-01 to 2017-03-31 | $15.6m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2017-01-01 to 2017-03-31 | $225.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2017-01-01 to 2017-03-31 | $110.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2017-01-01 to 2017-03-31 | $35.8m | us-gaap:InterestExpense |
| Income tax | 3 months, 2017-01-01 to 2017-03-31 | $9.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-01-01 to 2017-03-31 | $64.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-01-01 to 2017-03-31 | $0.26 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-01-01 to 2017-03-31 | $0.27 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-01-01 to 2017-03-31 | 246,100,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2017-01-01 to 2017-03-31 | −$4.7m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 3 months, 2017-01-01 to 2017-03-31 | $32.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2017-03-31 | $439.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-03-31 | $1.94bn | us-gaap:AssetsCurrent |
| Total assets | at 2017-03-31 | $5.96bn | us-gaap:Assets |
| Current liabilities | at 2017-03-31 | $851.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-03-31 | $4.58bn | us-gaap:Liabilities |
| Long-term debt | at 2017-03-31 | $3.33bn | us-gaap:LongTermDebt |
| Current portion of debt | at 2017-03-31 | $29.0m | us-gaap:DebtCurrent |
| Short-term borrowings | at 2017-03-31 | $9.2m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2017-03-31 | $1.26bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 43,990 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, 2016 and in this quarterly report. These statements include those that 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, 2016.*

### 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;
- increased competition;
- 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;
- 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;
- business disruptions, security threats and security breaches, including cyber security risks;
- risks associated with our non-U.S. operations, including our Venezuelan operations;
- currency-related risks, including those associated with our Venezuelan operations;
- terrorist acts, conflicts, wars and natural disasters that may materially adversely affect our business, financial condition and results of operations;
- 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;
- 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;
- transporting certain materials that are inherently hazardous due to their toxic nature;
- litigation and other commitments and contingencies;
- our ability to recruit and retain the experienced and skilled personnel we need to compete;
- unexpected liabilities under any pension plans applicable to our employees;
- work stoppages, union negotiations, labor disputes and other matters associated with our labor force;
- our ability to protect and enforce intellectual property rights;
- intellectual property infringement suits against us by third parties;
- 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;
- risk that the insurance we maintain may not fully cover all potential exposures;
- the risk of impairment charges related to goodwill, identifiable intangible assets and fixed assets;
- our substantial indebtedness;
- our ability to obtain additional capital on commercially reasonable terms may be limited;
- 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, 2016 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 over 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 44 manufacturing facilities, 4 technology centers, 47 customer training centers and over 13,000 employees allows us to meet the needs of customers in over 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

#### General Business Highlights

Our net sales increased 5.5% for the three months ended March 31, 2017 compared to the three months ended March 31, 2016, driven primarily by volume growth of 8.9% across all regions and end-markets. Recent acquisition, inclusive of acquisitions that occurred subsequent to March 31, 2016, contributed volumes of 4.5% of the increase. Offsetting these increases were slight declines in average selling prices resulting from pricing pressures in select regions which contributed to decreases of 1.2%. Unfavorable currency translation contributed to a further decline of net sales of 2.2%. The following trends have impacted our segment and end-market sales performance:

- *Performance Coatings:* Net sales excluding currency translation increased approximately 11% driven primarily by stronger volumes in our industrial end-market, including the impacts of our recent acquisitions combined with organic growth across North America and Asia.
- *Transportation Coatings:* Net sales excluding currency translation increased approximately 3% driven by stronger volumes in our light vehicle end-market across all regions. These volume increases were offset by lower average selling prices primarily in North America and Asia.

Our business serves four end-markets globally with net sales for the three months ended March 31, 2017 and 2016 as follows:

*(In millions)*

| Performance Coatings | Three Months Ended March 31, 2017 | 2016 | 2017 vs 2016 % change |
| --- | ---: | ---: | ---: |
| Refinish | $388.6 | $378.7 | 2.6% |
| Industrial | 197.8 | 164.3 | 20.4% |
| Total Net sales Performance Coatings | 586.4 | 543.0 | 8.0% |
| **Transportation Coatings** |  |  |  |
| Light Vehicle | 340.0 | 329.4 | 3.2% |
| Commercial Vehicle | 81.4 | 83.2 | (2.2)% |
| Total Net sales Transportation Coatings | 421.4 | 412.6 | 2.1% |
| Total Net sales | $1,007.8 | $955.6 | 5.5% |

#### Acquisitions Highlights

During the three months ended March 31, 2017, we successfully completed two strategic business acquisitions in North America that benefit our Performance Coatings business. Our 2017 aggregate spending for these acquisitions was $56.9 million, net of cash acquired, and contributed $8.9 million to net sales during the three months ended March 31, 2017.

#### Other Highlights

In March 2017, our Board of Directors authorized a common share repurchase program of up to $675.0 million. We expect the share repurchases to be made from time to time in the open market or through privately-negotiated transactions, or otherwise, subject to applicable laws, regulations and approvals. The pace of repurchase activity will be subject to our discretion, and will be based upon market conditions and other capital allocation decisions, while incorporating key factors including cash balances and needs of the business, cash flow from operations, stock price, and acquisition opportunities. There is no expiration date on the share repurchase program.

### 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, 2016.

### NON-GAAP FINANCIAL MEASURES

### Reconciliation of Net Income 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 (as defined herein); 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 net income to the EBITDA and Adjusted EBITDA measures discussed above for the periods presented:

*(In millions)*

|  | Three Months Ended March 31, 2017 | 2016 |
| --- | ---: | ---: |
| Net income | $65.9 | $31.8 |
| Interest expense, net | 35.8 | 50.1 |
| Provision for income taxes | 9.9 | 13.4 |
| Depreciation and amortization | 82.4 | 76.0 |
| EBITDA | 194.0 | 171.3 |
| Foreign exchange remeasurement (gains) losses (a) | (1.2) | 7.5 |
| Long-term employee benefit plan adjustments (b) | 0.4 | 0.6 |
| Termination benefits and other employee related costs (c) | 0.8 | 1.9 |
| Consulting and advisory fees (d) | (0.1) | 3.0 |
| Transactional costs (gains) (e) | (1.0) | — |
| Stock-based compensation (f) | 10.4 | 10.2 |
| Other adjustments (g) | 0.2 | 1.8 |
| Dividends in respect of noncontrolling interest (h) | (0.4) | (1.5) |
| Adjusted EBITDA | $203.1 | $194.8 |

(a) Eliminates foreign exchange (gains) 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.

(b) Eliminates the non-cash non-service cost components of long-term employee benefit costs.

(c) 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.

(d) Represents fees paid to consultants, and associated true-ups to estimates, for professional services primarily related to our Axalta Way initiatives, which are not considered indicative of our ongoing operating performance.

(e) Represents acquisition-related expenses, including changes in the fair value of contingent consideration, which are not considered indicative of our ongoing operating performance.

(f) Represents non-cash costs associated with stock-based compensation.

(g) Represents 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 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.

(h) 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.

### 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 March 31, 2017 compared to the three months ended March 31, 2016

The following table was derived from the unaudited condensed consolidated statements of operations for the three months ended March 31, 2017 and 2016 included elsewhere in this Quarterly Report on Form 10-Q.

*(In millions)*

|  | Three Months Ended March 31, 2017 | 2016 |
| --- | ---: | ---: |
| Net sales | $1,007.8 | $955.6 |
| Other revenue | 5.9 | 6.0 |
| Total revenue | 1,013.7 | 961.6 |
| Cost of goods sold | 641.1 | 606.4 |
| Selling, general and administrative expenses | 225.3 | 219.1 |
| Research and development expenses | 15.6 | 12.6 |
| Amortization of acquired intangibles | 21.7 | 20.2 |
| Income from operations | 110.0 | 103.3 |
| Interest expense, net | 35.8 | 50.1 |
| Other (income) expense, net | (1.6) | 8.0 |
| Income before income taxes | 75.8 | 45.2 |
| Provision for income taxes | 9.9 | 13.4 |
| Net income | 65.9 | 31.8 |
| Less: Net income attributable to noncontrolling interests | 1.8 | 0.9 |
| Net income attributable to controlling interests | $64.1 | $30.9 |

### Net sales

Net sales increased $52.2 million, or 5.5%, to $1,007.8 million for the three months ended March 31, 2017, as compared to net sales of $955.6 million for the three months ended March 31, 2016. Our net sales increase for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 was due primarily to increases in sales volumes of 8.9% across both segments in all regions. Recent acquisitions contributed 4.5% to the volume increase. This increase was partially offset by lower average sales prices in North America and Asia, which contributed to a 1.2% decrease, and unfavorable impacts of currency translation, which reduced net sales by 2.2% due primarily to the impacts of the weakening Euro and certain currencies within Latin America and Asia compared to the U.S. dollar.

### Other revenue

Other revenue remained relatively consistent at $5.9 million for the three months ended March 31, 2017 compared to $6.0 million for the three months ended March 31, 2016. The impacts of currency exchange did not have a material impact on the comparable periods.

### Cost of sales

Cost of sales increased $34.7 million, or 5.7%, to $641.1 million for the three months ended March 31, 2017 compared to $606.4 million for the three months ended March 31, 2016. The increase for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 resulted primarily from higher volumes of 8.9% which include the impacts from our recent acquisitions. The increase in volumes was offset slightly due to the benefit of currency translation resulting from the impacts of the weakening Euro and certain currencies within Latin America and Asia compared to the U.S. dollar, which contributed to a 1.2% decrease. Cost of sales as a percentage of net sales remained relatively consistent at 63.6% for the three months ended March 31, 2017 compared to 63.5% for the three months ended March 31, 2016.

### Selling, general and administrative expenses

Selling, general and administrative expenses increased $6.2 million, or 2.8%, to $225.3 million for the three months ended March 31, 2017 compared to $219.1 million for the three months ended March 31, 2016. The increase for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 resulted primarily from our focus on opportunities to expand our market presence and invest in commercial capabilities, as well as increases of $5.6 million resulting from our recent acquisitions. Selling, general and administrative expenses for the three months ended March 31, 2017 included $1.4 million of costs related to our cost-savings initiatives as compared to $4.9 million of costs for the three months ended March 31, 2016, resulting in a decrease of $3.5 million over the comparable period. Further offsetting the increase was the favorable impact of currency exchange during the three months ended March 31, 2017 compared to the three months ended March 31, 2016, which contributed to a 2.1% reduction in selling, general and administrative expenses due primarily to the impact of the weakening Euro and certain countries within Latin America and Asia compared to the U.S. dollar.

### Research and development expenses

Research and development increased $3.0 million, or 23.8%, to $15.6 million for the three months ended March 31, 2017 compared to $12.6 million for the three months ended March 31, 2016. This increase was a result of additional spend as we focus on developing new and existing coatings products as well as sourcing additional internal capabilities, as well as the impacts from our recent acquisitions. This increase was partially offset due to favorable impacts of currency exchange resulting from the weakening Euro and certain currencies in Latin America and Asia against the U.S. dollar, which contributed a 3.4% decrease.

### Amortization of acquired intangibles

Amortization of acquired intangibles increased $1.5 million, or 7.4%, to $21.7 million for the three months ended March 31, 2017 compared to $20.2 million for the three months ended March 31, 2016. 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 compared to the U.S. dollar.

### Interest expense, net

Interest expense, net decreased $14.3 million, or 28.5%, to $35.8 million for the three months ended March 31, 2017 compared to $50.1 million for the three months ended March 31, 2016. The decrease was driven by the prepayments of principal balances associated with our Term Loans in 2016 combined with the refinancing of our indebtedness during 2016 which reduced the overall interest rates of our debt portfolio.

### Other (income) expense, net

Other (income) expense, net decreased $9.6 million, or 120.0%, to income of $1.6 million for the three months ended March 31, 2017 compared to expense of $8.0 million for the three months ended March 31, 2016. Foreign exchange (gains) losses, net decreased $8.7 million to gains of $1.2 million during the three months ended March 31, 2017 compared to losses of $7.5 million for the three months ended March 31, 2016. The decrease was primarily associated with exchange losses during the three months ended March 31, 2016 driven by certain currencies within Latin America, which did not occur during the three months ended March 31, 2017.

Furthering this decrease in expense was the absence of losses of $2.4 million on our derivative instruments associated with our foreign currency contracts, which resulted in decreases of $2.3 million for the three months ended March 31, 2016 compared to losses of $0.1 million for the three months ended March 31, 2017.

### Provision for income taxes

We recorded a provision for income taxes of $9.9 million for the three months ended March 31, 2017, which represents a 13.1% effective tax rate in relation to the income before income taxes of $75.8 million. The effective tax rate for the three months ended March 31, 2017 differs from the U.S. Federal statutory rate by 21.9%, which is the result of various items that impacted the effective rate both favorably and unfavorably. We recorded adjustments for earnings in jurisdictions where the statutory rate is lower than the U.S. Federal rate, primarily related to China, Germany, Luxembourg, Netherlands and Switzerland, which had a net favorable impact of $11.2 million, current year excess tax benefits related to stock-based compensation of $5.8 million and we recognized a benefit of $7.2 million associated with currency exchange losses. These adjustments were partially offset by the impact of pre-tax losses attributable to jurisdictions where a tax benefit is not expected to be realized of $4.0 million and non-deductible expenses and interest of $3.7 million.

We recorded a provision for income taxes of $13.4 million for the three months ended March 31, 2016, which represents a 29.6% effective tax rate in relation to the income before income taxes of $45.2 million. The effective tax rate for the three months ended March 31, 2016 differs from the U.S. Federal statutory rate by 5.4%, which is the result of various items that impacted the effective rate both favorably and unfavorably. We recorded adjustments for earnings in jurisdictions where the statutory rate is lower than the U.S. Federal rate, primarily in China, Germany, Luxembourg and Netherlands, which had a net favorable impact of $5.3 million and we recognized a benefit of $5.3 million associated with currency exchange losses. These adjustments were partially offset by the impact of pre-tax losses attributable to jurisdictions where a tax benefit is not expected to be realized of $7.5 million and non-deductible expenses and interest of $1.8 million. The provision for income taxes for the three months ended March 31, 2016 has been amended to reflect the adoption of ASU 2016-09, resulting in a decrease of the provision of $1.2 million from the originally filed $14.6 million.

### SEGMENT RESULTS

### Three months ended March 31, 2017 compared to the three months ended March 31, 2016

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

*(In millions)*

| Net Sales | Three Months Ended March 31, 2017 | 2016 |
| --- | ---: | ---: |
| Performance Coatings | $586.4 | $543.0 |
| Transportation Coatings | 421.4 | 412.6 |
| Total | $1,007.8 | $955.6 |
| Segment Adjusted EBITDA |  |  |
| Performance Coatings | $116.9 | $110.1 |
| Transportation Coatings | 86.2 | 84.7 |
| Total | $203.1 | $194.8 |

### Performance Coatings Segment

Net sales increased $43.4 million, or 8.0%, to $586.4 million for the three months ended March 31, 2017 compared to net sales of $543.0 million for the three months ended March 31, 2016. The increase in net sales during the three months ended March 31, 2017 was primarily driven by an 11.0% increase in sales volumes across both end-markets, offset by unfavorable impacts of currency exchange related to the weakening Euro and certain currencies within Latin America and Asia, which contributed to a 3.0% reduction in net sales. Volume growth included a 6.7% benefit from our recent acquisitions. Average selling prices remained consistent with the comparable period.

Adjusted EBITDA increased $6.8 million, or 6.2%, to $116.9 million for the three months ended March 31, 2017 compared to Adjusted EBITDA of $110.1 million for the three months ended March 31, 2016. The increase in Adjusted EBITDA for the three months ended March 31, 2017 was primarily driven by increases in sales volumes, including the impacts of our recent acquisitions, and lower variable costs. This increase was partially offset by higher operating costs combined with the unfavorable impacts of the weakening of the Euro and certain currencies within Latin America and Asia compared to the U.S. dollar.

### Transportation Coatings Segment

Net sales increased $8.8 million, or 2.1%, to $421.4 million for the three months ended March 31, 2017 compared to net sales of $412.6 million for the three months ended March 31, 2016. The increase in net sales for the three months ended March 31, 2017 was primarily driven by a 6.1% increase in sales volumes across both end-markets and all regions, offset by decreases in average selling price across both end-markets, which resulted in declines in net sales of 2.9%. Unfavorable impacts of currency exchange related to the weakening of the Euro and certain currencies within Asia compared to the U.S. dollar further contributed to a 1.1% reduction in net sales.

Adjusted EBITDA increased $1.5 million, or 1.8%, to $86.2 million for the three months ended March 31, 2017 compared to Adjusted EBITDA of $84.7 million for the three months ended March 31, 2016. The increase in Adjusted EBITDA during the three months ended March 31, 2017 was driven by increases in sales volumes across all regions and lower variable costs in both end-markets. This increase was partially offset by higher operating costs combined with lower average selling prices and the unfavorable impacts of the weakening of the Euro and certain currencies within Asia compared to the U.S. dollar.

### 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 March 31, 2017, availability under the Revolving Credit Facility was $378.7 million, net of $21.3 million of letters of credit outstanding. All such availability may be utilized without violating any covenants under the credit agreement governing such facility or the indentures governing the New Senior Notes. At March 31, 2017, we had $7.2 million of outstanding borrowings under other lines of credit. Our remaining available borrowing capacity under other lines of credit in certain non-U.S. jurisdictions totaled $5.8 million.

We or our affiliates, at any time and from time to time, may purchase shares of our common stock, 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 0.9% and 0.5% of the consolidated cash and cash equivalents as of March 31, 2017 and December 31, 2016, 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

### Three months ended March 31, 2017 and 2016

*(In millions)*

| Net cash used for: Operating activities: | Three Months Ended March 31, 2017 | 2016 |
| --- | ---: | ---: |
| Net income | $65.9 | $31.8 |
| Depreciation and amortization | 82.4 | 76.0 |
| Deferred income taxes | — | (3.3) |
| Stock-based compensation | 10.4 | 10.2 |
| Amortization of financing costs and original issue discount | 2.1 | 5.1 |
| Foreign exchange losses | (3.7) | 7.5 |
| Other non-cash items | (0.3) | (2.9) |
| Net income adjusted for non-cash items | 156.8 | 124.4 |
| Changes in operating assets and liabilities | (161.5) | (137.7) |
| Operating activities | (4.7) | (13.3) |
| Investing activities | (89.4) | (43.2) |
| Financing activities | (4.6) | (7.0) |
| Effect of exchange rate changes on cash | 2.6 | (1.9) |
| Net decrease in cash and cash equivalents | $(96.1) | $(65.4) |

### Three Months Ended March 31, 2017

#### Net Cash Used for Operating Activities

Net cash used in operating activities for the three months ended March 31, 2017 was $4.7 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $156.8 million. This was partially offset by net increases in working capital of $161.5 million. The most significant drivers in working capital were increases in accounts receivable of $62.5 million related to the seasonal timing of sales, and decreases in other accrued liabilities of $54.8 million related to payments of normal seasonal operating activities, including interest payments on our long-term indebtedness and timing of cash payments for annual employee performance related benefits. In addition, there were increases in inventory and other assets of $38.7 million due to increased inventory builds to support ongoing operational demands.

#### Net Cash Used for Investing Activities

Net cash used for investing activities for the three months ended March 31, 2017 was $89.4 million. This use was comprised of business acquisitions of $56.9 million, purchases of property, plant and equipment of $32.3 million and net cash used for other investing activities of $0.2 million.

#### Net Cash Used for Financing Activities

Net cash used for financing activities for the three months ended March 31, 2017 was $4.6 million. This change was driven by repayments of short-term borrowings and Term Loans of $2.3 million and $5.0 million, respectively. Other payments consisted of payments on financing-related costs of $2.3 million, payments for deferred acquisition-related consideration of $3.4 million and dividends paid to noncontrolling interests of $0.4 million. Offsetting these payments was cash received from stock option exercises for $8.8 million.

#### Other Impacts on Cash

Currency exchange impacts on cash for the three months ended March 31, 2017 were $2.6 million, which was driven by favorable exchange impacts from various foreign currencies, was slightly offset by unfavorable impacts on cash resulting from the change in our translation rates for our Venezuelan subsidiary of $0.2 million.

### Three Months Ended March 31, 2016

#### Net Cash Used for Operating Activities

Net cash used for operating activities for the three months ended March 31, 2016 was $13.3 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $124.4 million. This was partially offset by net increases in working capital of $137.7 million. The most significant driver in working capital was a decrease in other accrued liabilities of $69.9 million related to payments of normal seasonal operating activities, including interest payments on our long-term indebtedness and timing of cash payments for annual employee performance related benefits. In addition, there were increases in accounts receivable, inventory and other assets of $47.8 million due to the normal seasonality impact of sales during the three months ended March 31, 2016 and increased inventory builds to support ongoing operational demands.

#### Net Cash Used for Investing Activities

Net cash used for investing activities for the three months ended March 31, 2016, was $43.2 million. This use was comprised of purchases of property, plant and equipment of $40.3 million and net cash used for other investing activities of $2.9 million.

#### Net Cash Used for Financing Activities

Net cash used for financing activities for the three months ended March 31, 2016 was $7.0 million. The change was primarily driven by repayments of short-term borrowings and Term Loans of $0.3 million and $6.9 million. Offsetting these payments was cash received from stock option exercises for $2.0 million. Dividends paid to noncontrolling interests totaled $1.5 million for the three months ended March 31, 2016.

#### Other Impacts on Cash

Currency exchange impacts on cash for the three months ended March 31, 2016 were $1.9 million primarily driven by the impacts on cash resulting from the change in our translation for our Venezuelan subsidiary of $4.6 million, which was offset by favorable exchange impacts from other foreign currencies.

### Financial Condition

We had cash and cash equivalents at March 31, 2017 and December 31, 2016 of $439.1 million and $535.4 million, respectively. Of these balances, $233.2 million and $366.7 million were maintained in non-U.S. jurisdictions as of March 31, 2017 and December 31, 2016, 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 business may not generate sufficient cash flow from operations and future borrowings may not be available under our Senior Secured Credit Facilities in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs, including planned capital expenditures. In such circumstances, we may need to refinance all or a portion of our indebtedness on or before maturity. We may not 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. 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 Secured 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)*

|  | March 31, 2017 | December 31, 2016 |
| --- | ---: | ---: |
| 2023 Dollar Term Loans | $1,541.1 | $1,545.0 |
| 2023 Euro Term Loans | 428.3 | 417.6 |
| 2024 Dollar Senior Notes | 500.0 | 500.0 |
| 2024 Euro Senior Notes | 359.6 | 349.7 |
| 2025 Euro Senior Notes | 483.0 | 469.8 |
| Short-term and other borrowings | 51.3 | 39.8 |
| Unamortized original issue discount | (9.3) | (10.0) |
| Unamortized deferred financing costs | (46.7) | (48.0) |
|  | $3,307.3 | $3,263.9 |
| Less: |  |  |
| Short term borrowings | $9.2 | $8.3 |
| Current portion of long-term borrowings | 19.8 | 19.6 |
| Long-term debt | $3,278.3 | $3,236.0 |

Our indebtedness, including the Senior Secured Credit Facilities and New Senior 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 both March 31, 2017 and December 31, 2016, we had total availability under the Revolving Credit Facility of $378.7 million 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.

### Contractual Obligations

Information related to our contractual obligations can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. There have been no material changes in the Company’s contractual obligations since December 31, 2016.

### Scheduled Maturities

Below is a schedule of required future repayments of all borrowings outstanding at March 31, 2017.

*(In millions)*

|  |  |
| --- | ---: |
| Remainder of 2017 | $24.2 |
| 2018 | 21.4 |
| 2019 | 20.6 |
| 2020 | 20.5 |
| 2021 | 20.4 |
| Thereafter | 3,227.8 |
| Total | $3,334.9 |

### Off-Balance Sheet Arrangements

We directly guarantee certain obligations under agreements with third parties. As of March 31, 2017 and December 31, 2016 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, 2016. 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, 2016.

## 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, 2016.

## Controls and procedures

As filed, 1,096 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 March 31, 2017.

### 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 March 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 181 characters.

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, 2016.

Filed Apr 26, 2017.
Source: SEC EDGAR, the filing index for accession 0001616862-17-000032. Last ingested by Listed: Nov 12, 2026, 22:39 ET. No prices; not investment advice.