# Axalta Coating Systems Ltd.: Form 10-Q for the period ended Mar 31, 2018

- Company: [Axalta Coating Systems Ltd.](/companies/axta.md) (CIK 1616862)
- Form: 10-Q
- Filed: 2018-04-25
- Accepted by EDGAR: Apr 25, 2018, 16:13 ET
- Period: 2018-03-31
- Accession: 0001616862-18-000028
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1616862/000161686218000028/a201833110-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1616862/000161686218000028/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Research and development | 3 months, 2018-01-01 to 2018-03-31 | $19.3m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2018-01-01 to 2018-03-31 | $227.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-01-01 to 2018-03-31 | $120.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-01-01 to 2018-03-31 | $39.4m | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-01-01 to 2018-03-31 | $11.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-01-01 to 2018-03-31 | $69.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-01-01 to 2018-03-31 | $0.28 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-01-01 to 2018-03-31 | $0.29 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-01-01 to 2018-03-31 | 245,800,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2018-01-01 to 2018-03-31 | −$21.0m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 3 months, 2018-01-01 to 2018-03-31 | $39.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 3 months, 2018-01-01 to 2018-03-31 | $3.3m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2018-03-31 | $600.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-03-31 | $2.30bn | us-gaap:AssetsCurrent |
| Total assets | at 2018-03-31 | $6.95bn | us-gaap:Assets |
| Current liabilities | at 2018-03-31 | $1.02bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-03-31 | $5.42bn | us-gaap:Liabilities |
| Long-term debt | at 2018-03-31 | $3.99bn | us-gaap:LongTermDebt |
| Current portion of debt | at 2018-03-31 | $41.8m | us-gaap:DebtCurrent |
| Short-term borrowings | at 2018-03-31 | $16.9m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2018-03-31 | $1.42bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 44,057 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, 2017 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, 2017.*

### FORWARD-LOOKING STATEMENTS

Many statements made in the following discussion and analysis of our financial condition and results of operations and elsewhere 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 federal securities laws 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, including, but not limited to, the risks and uncertainties described in "Non-GAAP Financial Measures" and "Forward-Looking Statements," as well as "Risk Factors" 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 or severe storms 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 or change in purchasing levels 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;
- credit risk exposure from our customers;
- 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 to our information technology systems;
- risks associated with our outsourcing strategies;
- risks associated with our non-U.S. operations;
- currency-related risks;
- 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;
- risks associated with protecting data privacy;
- 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 our acquisition of DuPont Performance Coatings;
- 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;
- risks associated with changes in tax rates or regulations, including unexpected impacts of the new U.S. Tax Cuts and Jobs Act legislation, which may differ with further regulatory guidance and changes in our current interpretations and assumptions;
- our substantial indebtedness;
- our ability to obtain additional capital on commercially reasonable terms may be limited;
- 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, 2017 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 49 manufacturing facilities, 4 technology centers, 47 customer training centers and approximately 14,000 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 15.7% for the three months ended March 31, 2018 compared to the three months ended March 31, 2017, driven primarily by volume growth of 8.6% across both segments. Acquisitions contributed 8.4% to our overall volume increase. Increases in average selling prices, primarily within our Performance Coatings segment, contributed to an increase of 0.8%. Favorable currency translation contributed to a further increase in net sales of 6.3%, due primarily to the impacts of the strengthening Euro and Chinese Renminbi compared to the U.S. dollar. The following trends have impacted our segment and end-market sales performance:

- *Performance Coatings:* Net sales increased approximately 24.3% driven primarily by stronger volumes in our industrial end-market, including the impacts of our recent acquisitions combined with organic growth in Europe and Asia. Further contributing to these increases were higher average selling prices of 3.3% across all regions coupled with foreign currency tailwinds, which contributed 7.3%.
- *Transportation Coatings:* Net sales increased approximately 3.7% driven by 1.3% organic volume growth coupled with foreign currency tailwinds, which contributed 5.0%, offset by 2.6% lower average selling prices, primarily in our light vehicle end-market.

Our business serves four end-markets globally with net sales for the three months ended March 31, 2018 and 2017 as follows:

*(In millions)*

| Performance Coatings | Three Months Ended March 31, 2018 | 2017 | 2017 vs 2016 % change |
| --- | ---: | ---: | ---: |
| Refinish | $412.6 | $388.6 | 6.2% |
| Industrial | 316.1 | 197.8 | 59.8% |
| Total Net sales Performance Coatings | 728.7 | 586.4 | 24.3% |
| **Transportation Coatings** |  |  |  |
| Light Vehicle | 349.5 | 340.0 | 2.8% |
| Commercial Vehicle | 87.6 | 81.4 | 7.6% |
| Total Net sales Transportation Coatings | 437.1 | 421.4 | 3.7% |
| Total Net sales | $1,165.8 | $1,007.8 | 15.7% |

#### Acquisitions Highlights

During the three months ended March 31, 2018, we successfully completed two strategic acquisitions in North America that benefited our Performance Coatings segment. Our 2018 aggregate spending for these acquisitions was $75.4 million.

In addition, as part of the Sale and Purchase Agreement for a joint venture acquisition during the year ended December 31, 2016, during the three months ended March 31, 2018, we were required to purchase an additional 24.5% interest for $26.9 million, increasing our total ownership percentage to 75.5%.

### 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, 2017.

### 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) nonrecurring, unusual or infrequent items that have not occurred within the last two years or we believe 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 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, 2018 | 2017 |
| --- | ---: | ---: |
| Net income | $71.0 | $65.9 |
| Interest expense, net | 39.4 | 35.8 |
| Provision for income taxes | 11.8 | 9.9 |
| Depreciation and amortization | 91.9 | 82.4 |
| EBITDA | 214.1 | 194.0 |
| Foreign exchange remeasurement gains (a) | — | (1.2) |
| Long-term employee benefit plan adjustments (b) | (0.5) | 0.4 |
| Termination benefits and other employee related costs (c) | (1.3) | 0.8 |
| Consulting and advisory fees (d) | — | (0.1) |
| Transition-related costs (e) | (0.2) | — |
| Offering and transactional costs (f) | 0.2 | (1.0) |
| Stock-based compensation (g) | 8.4 | 10.4 |
| Other adjustments (h) | 0.3 | 0.2 |
| Dividends in respect of noncontrolling interest (i) | (1.0) | (0.4) |
| Adjusted EBITDA | $220.0 | $203.1 |

(a) Eliminates foreign exchange gains 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 and associated adjustments to estimates primarily related to employee termination benefits and other employee-related costs associated with our Axalta Way initiatives, which are not considered indicative of our ongoing operating performance.

(d) Represents expenses and associated adjustments to estimates for professional services primarily related to our Axalta Way initiatives, which are not considered indicative of our ongoing operating performance.

(e) Represents integration costs and associated adjustments to estimates related to the 2017 acquisition of the Industrial Wood business that was a carve-out business from Valspar. We do not consider these items to be indicative of our ongoing operating performance.

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

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

(h) 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 gains and losses from the sale and disposal of property, plant and equipment, from the remaining foreign currency derivative instruments and from non-cash fair value inventory adjustments associated with business combinations.

(i) Represents the payment of dividends to our joint venture partners by our consolidated entities that are not 100% 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, 2018 compared to the three months ended March 31, 2017

The following table was derived from the unaudited condensed consolidated statements of operations for the three months ended March 31, 2018 and 2017 included elsewhere in this Quarterly Report on Form 10-Q.

*(In millions)*

|  | Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Net sales | $1,165.8 | $1,007.8 |
| Other revenue | 6.2 | 5.9 |
| Total revenue | 1,172.0 | 1,013.7 |
| Cost of goods sold | 776.0 | 641.4 |
| Selling, general and administrative expenses | 227.8 | 224.6 |
| Research and development expenses | 19.3 | 15.6 |
| Amortization of acquired intangibles | 28.9 | 21.7 |
| Income from operations | 120.0 | 110.4 |
| Interest expense, net | 39.4 | 35.8 |
| Other income, net | (2.2) | (1.2) |
| Income before income taxes | 82.8 | 75.8 |
| Provision for income taxes | 11.8 | 9.9 |
| Net income | 71.0 | 65.9 |
| Less: Net income attributable to noncontrolling interests | 1.1 | 1.8 |
| Net income attributable to controlling interests | $69.9 | $64.1 |

### Net sales

Net sales increased $158.0 million, or 15.7%, to $1,165.8 million for the three months ended March 31, 2018, as compared to net sales of $1,007.8 million for the three months ended March 31, 2017. Our net sales increase for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 was due primarily to increases in sales volumes of 8.6% across both segments. Recent acquisitions contributed 8.4% to the volume increase. Increases in average selling prices across both end-markets within the Performance Coatings segment were slightly offset by pricing pressures within the Transportation Coatings segment and contributed to a net increase of 0.8%. Favorable currency translation contributed to a further increase of net sales of 6.3% due primarily to the impacts of the strengthening Euro and Chinese Renminbi compared to the U.S. dollar.

### Other revenue

Other revenue remained relatively consistent at $6.2 million for the three months ended March 31, 2018 compared to $5.9 million for the three months ended March 31, 2017 primarily driven by the impacts of the strengthening Euro compared to the U.S. dollar.

### Cost of sales

Cost of sales increased $134.6 million, or 21.0%, to $776.0 million for the three months ended March 31, 2018 compared to $641.4 million for the three months ended March 31, 2017. The increase for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 resulted primarily from higher volumes of 8.6% which include the impacts from our recent acquisitions. Furthering this increase were unfavorable currency effects resulting from the impacts of the strengthening Euro and Chinese Renminbi compared to the U.S. dollar, which contributed to a 5.5% increase. Cost of sales as a percentage of net sales increased to 66.6% for the three months ended March 31, 2018 compared to 63.6% for the three months ended March 31, 2017, primarily related to an increase in raw material pricing pressures across both segments, and from the impacts of the new revenue standard which resulted in a reclassification of $13.6 million of expenses from selling, general and administrative expenses to cost of sales, as discussed in Note 3 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

### Selling, general and administrative expenses

Selling, general and administrative expenses increased $3.2 million, or 1.4%, to $227.8 million for the three months ended March 31, 2018 compared to $224.6 million for the three months ended March 31, 2017. The increase for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 resulted primarily from the unfavorable impacts of currency exchange related to the strengthening Euro and Chinese Renminbi against the U.S. dollar. Largely offsetting this increase was the benefit resulting from the adoption of the new revenue standard and the associated reclassification of $13.6 million of expenses from selling, general and administrative expenses to cost of sales, as discussed in Note 3 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

### Research and development expenses

Research and development increased $3.7 million, or 23.7%, to $19.3 million for the three months ended March 31, 2018 compared to $15.6 million for the three months ended March 31, 2017. This increase was a result of additional spend as we focus on developing new and existing coatings products and sourcing additional internal capabilities, as well as the impacts from our recent acquisitions. Further contributing to this increase were unfavorable impacts of currency exchange resulting primarily from the strengthening of including the Euro and Chinese Renminbi against the U.S. dollar, which contributed a 3.5% increase in costs.

### Amortization of acquired intangibles

Amortization of acquired intangibles increased $7.2 million, or 33.2%, to $28.9 million for the three months ended March 31, 2018 compared to $21.7 million for the three months ended March 31, 2017. This increase was attributable to amortization of the definite-lived intangible assets acquired through our recent acquisitions, combined with the impacts of the strengthening of the Euro compared to the U.S. dollar.

### Interest expense, net

Interest expense, net increased $3.6 million, or 10.1%, to $39.4 million for the three months ended March 31, 2018 compared to $35.8 million for the three months ended March 31, 2017. The increase was driven by the strengthening of the Euro compared to the U.S. dollar and the incremental indebtedness used to finance the acquisition of our Industrial Wood business in June 2017, partially offset by the impact of the refinancing of our indebtedness during 2017 which reduced the overall interest rates of our debt portfolio.

### Other income, net

Other income, net remained relatively consistent at $2.2 million for the three months ended March 31, 2018 compared to $1.2 million for the three months ended March 31, 2017 driven primarily by miscellaneous income in non-operating accounts and a reduction in the impacts of non-service cost components of long-term employee benefit costs.

### Provision for income taxes

We recorded a provision for income taxes of $11.8 million for the three months ended March 31, 2018, which represents a 14.3% effective tax rate in relation to the income before income taxes of $82.8 million. The effective tax rate for the three months ended March 31, 2018 differs from the U.S. Federal statutory rate of 21% by 6.7%, which is the result of various items that impacted the effective tax 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 Bermuda, Germany, Luxembourg and Switzerland, which had a net favorable impact of $4.3 million, current year excess tax benefits related to stock-based compensation of $2.4 million and we recognized a benefit of $4.0 million associated with currency exchange losses. Additionally, we recorded a $12.4 million benefit to revise the provisional charge reported in the 2017 Annual Report on Form 10-K related to the U.S. TCJA based on additional guidance released by the Department of the Treasury. 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 $1.3 million, unrecognized tax benefits of $6.4 million and non-deductible expenses and interest of $3.1 million.

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 of 35% by 21.9%, which was the result of various items that impacted the effective tax rate both favorably and unfavorably. We recorded adjustments for earnings in jurisdictions where the statutory rate was lower than the U.S. Federal rate, primarily in China, Germany, Luxembourg, Netherlands and Switzerland, which had a net favorable impact of $18.1 million, current year excess tax benefits related to stock-based compensation of $5.8 million and we recognized a benefit of $0.3 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 was not expected to be realized of $4.0 million and non-deductible expenses and interest of $3.7 million.

### SEGMENT RESULTS

### Three months ended March 31, 2018 compared to the three months ended March 31, 2017

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, 2018 | 2017 |
| --- | ---: | ---: |
| Performance Coatings | $728.7 | $586.4 |
| Transportation Coatings | 437.1 | 421.4 |
| Total | $1,165.8 | $1,007.8 |
| Segment Adjusted EBITDA |  |  |
| Performance Coatings | $143.2 | $116.9 |
| Transportation Coatings | 76.8 | 86.2 |
| Total | $220.0 | $203.1 |

### Performance Coatings Segment

Net sales increased $142.3 million, or 24.3%, to $728.7 million for the three months ended March 31, 2018 compared to net sales of $586.4 million for the three months ended March 31, 2017. The increase in net sales during the three months ended March 31, 2018 was driven by a 14.4% increase from our recent acquisitions, slightly offset by a decline in our organic sales volume of 0.7%. Higher average selling prices also contributed to the increase in net sales by 3.3%. Favorable impacts of currency exchange, primarily related to the strengthening of the Euro and Chinese Renminbi compared to the U.S. dollar, contributed to a 7.3% increase in net sales.

Adjusted EBITDA increased $26.3 million, or 22.5%, to $143.2 million for the three months ended March 31, 2018 compared to Adjusted EBITDA of $116.9 million for the three months ended March 31, 2017. The increase in Adjusted EBITDA for the three months ended March 31, 2018 was primarily driven by increases in sales volumes, including the impacts of our recent acquisitions, higher average selling prices, and favorable impacts of the strengthening Euro and Chinese Renminbi compared to the U.S dollar. This increase was partially offset by higher raw material costs.

### Transportation Coatings Segment

Net sales increased $15.7 million, or 3.7%, to $437.1 million for the three months ended March 31, 2018 compared to net sales of $421.4 million for the three months ended March 31, 2017. The increase in net sales for the three months ended March 31, 2018 was primarily driven by a 5.0% increase resulting from the favorable impacts of currency exchange related to the strengthening of the Euro and Chinese Renminbi compared to the U.S. dollar, combined with a 1.3% increase in sales volumes across both end-markets. These increases were partially offset by declines in average selling prices of 2.6% primarily within our light vehicle end-market, resulting from price concessions made with select customers in 2017 and adverse mix changes.

Adjusted EBITDA decreased $9.4 million, or 10.9%, to $76.8 million for the three months ended March 31, 2018 compared to Adjusted EBITDA of $86.2 million for the three months ended March 31, 2017. The decrease in Adjusted EBITDA during the three months ended March 31, 2018 was driven by lower average selling prices and higher raw material costs which were partially offset by increases in sales volumes across both end-markets. Further offsetting these decreases were favorable effects of the strengthening of the Euro and Chinese Renminbi 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, 2018, availability under the Revolving Credit Facility was $365.2 million, net of $34.8 million of letters of credit outstanding. All such availability may be utilized without violating any covenants under the Credit Agreement or the indentures governing the Senior Notes. At March 31, 2018, we had $16.4 million of outstanding borrowings under other lines of credit in certain non-U.S. jurisdictions. Our remaining available borrowing capacity under those other lines of credit totaled $1.9 million.

We or our affiliates, at any time and from time to time, may purchase shares of our common stock, the 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.

### Cash Flows

### Three months ended March 31, 2018 and 2017

*(In millions)*

| Net cash used for: Operating activities: | Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Net income | $71.0 | $65.9 |
| Depreciation and amortization | 91.9 | 82.4 |
| Amortization of financing costs and original issue discount | 1.9 | 2.1 |
| Deferred income taxes | (4.9) | — |
| Foreign exchange gains | (1.3) | (3.7) |
| Stock-based compensation | 8.4 | 10.4 |
| Other non-cash items | (5.3) | (0.3) |
| Net income adjusted for non-cash items | 161.7 | 156.8 |
| Changes in operating assets and liabilities | (182.7) | (161.5) |
| Operating activities | (21.0) | (4.7) |
| Investing activities | (144.6) | (89.4) |
| Financing activities | (14.3) | (4.6) |
| Effect of exchange rate changes on cash | 10.3 | 2.6 |
| Net decrease in cash and cash equivalents | $(169.6) | $(96.1) |

### Three Months Ended March 31, 2018

#### Net Cash Used for Operating Activities

Net cash used in operating activities for the three months ended March 31, 2018 was $21.0 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $161.7 million. This was partially offset by net increases in working capital of $182.7 million. The most significant drivers in working capital were increases in accounts receivable of $52.3 million related to the seasonal timing of sales, and decreases in other accrued liabilities of $87.0 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 of $42.9 million to support ongoing operational demands.

#### Net Cash Used for Investing Activities

Net cash used for investing activities for the three months ended March 31, 2018 was $144.6 million. This use was primarily comprised of acquisitions of $78.2 million, a payment for an incremental interest in a 2016 joint venture acquisition of $26.9 million, and purchases of property, plant and equipment of $39.5 million.

#### Net Cash Used for Financing Activities

Net cash used for financing activities for the three months ended March 31, 2018 was $14.3 million. This change was driven by repayments of short-term borrowings and quarterly principal payments on our Term Loans of $9.3 million and $6.9 million, respectively. Other payments include purchases of treasury stock of $3.3 million and dividends to non-controlling interests of $1.0 million. Offsetting these payments was cash received from stock option exercises for $6.2 million.

#### Other Impacts on Cash

Currency exchange impacts on cash for the three months ended March 31, 2017 were $10.3 million, which was driven by favorable exchange impacts primarily from the Euro and Chinese Renminbi.

### 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 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 changes in our translation rates for our Venezuelan subsidiary of $0.2 million.

### Financial Condition

We had cash and cash equivalents at March 31, 2018 and December 31, 2017 of $600.4 million and $769.8 million, respectively. Of these balances, $368.4 million and $398.9 million were maintained in non-U.S. jurisdictions as of March 31, 2018 and December 31, 2017, 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, 2018 | December 31, 2017 |
| --- | ---: | ---: |
| 2024 Dollar Term Loans | $1,955.0 | $1,960.0 |
| 2023 Euro Term Loans | 486.1 | 472.5 |
| 2024 Dollar Senior Notes | 500.0 | 500.0 |
| 2024 Euro Senior Notes | 412.3 | 399.7 |
| 2025 Euro Senior Notes | 553.8 | 536.9 |
| Short-term and other borrowings | 100.4 | 94.8 |
| Unamortized original issue discount | (8.8) | (9.1) |
| Unamortized deferred financing costs | (37.5) | (39.2) |
|  | $3,961.3 | $3,915.6 |
| Less: |  |  |
| Short term borrowings | $16.9 | $12.9 |
| Current portion of long-term borrowings | 24.9 | 24.8 |
| Long-term debt | $3,919.5 | $3,877.9 |

Our indebtedness, including the Senior Secured Credit Facilities and Senior Notes, is more fully described in Notes 16 and 23 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. Availability under the Revolving Credit Facility was $365.2 million and $364.5 million at March 31, 2018 and December 31, 2017, respectively, all of which may be borrowed by us without violating any covenants under the Credit Agreement or the indentures governing the Senior Notes.

In April 2018, we entered into the sixth amendment to the Credit Agreement (the "Sixth Amendment"), which repriced the 2024 Dollar Term Loans and increased the aggregate principal balance of our 2024 Dollar Term Loans by $475 million to $2,430.0 million. Proceeds from the Sixth Amendment, along with cash on the balance sheet, were used to extinguish the existing 2023 Euro Term Loans.

Concurrent with the refinancing, we executed a cross-currency interest rate swap to convert $475 million of the 2024 Dollar Term Loans principal into Euro fixed-rate debt at an interest rate of 1.95%, which matures in 2023. The combined effect of the refinancing and the swap are expected to result in annual cash interest savings of approximately $10 million.

### 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, 2017. There have been no material changes in the Company’s contractual obligations since December 31, 2017.

### Scheduled Maturities

Below is a schedule of required future repayments of all borrowings outstanding at March 31, 2018.

*(In millions)*

|  |  |
| --- | ---: |
| Remainder of 2018 | $37.1 |
| 2019 | 26.8 |
| 2020 | 25.8 |
| 2021 | 25.9 |
| 2022 | 52.6 |
| Thereafter | 3,823.7 |
| Total | $3,991.9 |

### Off-Balance Sheet Arrangements

We directly guarantee certain obligations under agreements with third parties. As of March 31, 2018 and December 31, 2017 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, 2017. 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, 2017.

## 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, 2017.

## 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, 2018.

### 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, 2018 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, 2017.

Filed Apr 25, 2018.
Source: SEC EDGAR, the filing index for accession 0001616862-18-000028. Last ingested by Listed: Nov 12, 2026, 22:39 ET. No prices; not investment advice.