# Axalta Coating Systems Ltd.: Form 10-Q for the period ended Jun 30, 2019

- Company: [Axalta Coating Systems Ltd.](/companies/axta.md) (CIK 1616862)
- Form: 10-Q
- Filed: 2019-07-25
- Accepted by EDGAR: Jul 25, 2019, 17:06 ET
- Period: 2019-06-30
- Accession: 0001616862-19-000063
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1616862/000161686219000063/a2019063010-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1616862/000161686219000063/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-04-01 to 2019-06-30 | $1.16bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2019-01-01 to 2019-06-30 | $2.28bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2019-04-01 to 2019-06-30 | $748.4m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2019-01-01 to 2019-06-30 | $1.50bn | us-gaap:CostOfGoodsAndServicesSold |
| Research and development | 3 months, 2019-04-01 to 2019-06-30 | $17.9m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2019-01-01 to 2019-06-30 | $36.1m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2019-04-01 to 2019-06-30 | $206.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2019-01-01 to 2019-06-30 | $423.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2019-04-01 to 2019-06-30 | $157.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2019-01-01 to 2019-06-30 | $256.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-04-01 to 2019-06-30 | $41.0m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2019-01-01 to 2019-06-30 | $82.3m | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-04-01 to 2019-06-30 | $17.9m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2019-01-01 to 2019-06-30 | $32.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-04-01 to 2019-06-30 | $98.4m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2019-01-01 to 2019-06-30 | $141.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-04-01 to 2019-06-30 | $0.42 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2019-01-01 to 2019-06-30 | $0.60 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-04-01 to 2019-06-30 | $0.42 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2019-01-01 to 2019-06-30 | $0.61 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-04-01 to 2019-06-30 | 235,400,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2019-01-01 to 2019-06-30 | 236,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Capital expenditure | 6 months, 2019-01-01 to 2019-06-30 | $47.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 6 months, 2019-01-01 to 2019-06-30 | $105.3m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2019-06-30 | $577.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-06-30 | $2.31bn | us-gaap:AssetsCurrent |
| Total assets | at 2019-06-30 | $6.69bn | us-gaap:Assets |
| Current liabilities | at 2019-06-30 | $996.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-06-30 | $5.39bn | us-gaap:Liabilities |
| Long-term debt | at 2019-06-30 | $3.90bn | us-gaap:LongTermDebt |
| Current portion of debt | at 2019-06-30 | $43.7m | us-gaap:DebtCurrent |
| Short-term borrowings | at 2019-06-30 | $19.4m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2019-06-30 | $1.25bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 47,879 characters.

*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 on Form 10-Q, as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.*

### 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 "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;
- the outcome or timing of our previously announced comprehensive review of strategic alternatives to maximize shareholder value;
- increased competition;
- reduced demand for some of our products as a result of improved safety features on vehicles, insurance company influence, new business models or new methods of travel
- 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 business 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 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;
- risks associated with the United Kingdom’s withdrawal from the European Union;
- 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;
- 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;
- risks associated with changes in tax rates or regulations, including unexpected impacts of the new U.S. TCJA 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, 2018 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 47 manufacturing facilities, four technology centers, 47 customer training centers and approximately 14,000 employees allows us to meet the needs of customers in over 135 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 decreased 4.5% for the six months ended June 30, 2019 compared with the six months ended June 30, 2018, primarily driven by the impacts of unfavorable currency translation which contributed to a 4.2% decrease. Further contributing to the decrease in net sales was a net decline in volumes of 3.4%, primarily driven by our Transportation Coatings segment, as well as the negative net impacts of portfolio changes, which included the sale of our consolidated joint venture, which contributed to a decrease of 0.3% to volumes. Partially offsetting these declines were increases in average selling prices across both segments, resulting in an increase of 3.1%. The following trends have impacted our segment and end-market sales performance:

- *Performance Coatings:* Net sales decreased 3.1% driven primarily by the impacts of unfavorable foreign currency translation of 4.1%, as well as a decline in volumes across both end-markets of 3.0%, inclusive of the negative net impacts of portfolio changes of 0.5%, which included the sale of our consolidated joint venture. Partially offsetting these declines were increases in average selling prices of 4.0%, of which both end-markets positively contributed.
- *Transportation Coatings:* Net sales decreased 7.0% driven primarily by the impacts of unfavorable foreign currency translation of 4.2%, as well as a decline in volumes of 4.2%. Partially offsetting these declines were higher average selling prices of 1.4% driven by light vehicle contributions.

Our business serves four end-markets globally with net sales for the three and six months ended June 30, 2019 and 2018, as follows:

*(In millions)*

| Performance Coatings | Three Months Ended June 30, 2019 | 2018 | 2019 vs 2018 % change | Six Months Ended June 30, 2019 | 2018 | 2019 vs 2018 % change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Refinish | $447.3 | $448.4 | (0.2)% | $852.8 | $862.6 | (1.1)% |
| Industrial | 309.4 | 337.6 | (8.4)% | 617.2 | 654.4 | (5.7)% |
| Total Net sales Performance Coatings | 756.7 | 786.0 | (3.7)% | 1,470.0 | 1,517.0 | (3.1)% |
| **Transportation Coatings** |  |  |  |  |  |  |
| Light Vehicle | 306.1 | 333.3 | (8.2)% | 622.0 | 686.5 | (9.4)% |
| Commercial Vehicle | 94.7 | 92.9 | 1.9% | 184.8 | 180.7 | 2.3% |
| Total Net sales Transportation Coatings | 400.8 | 426.2 | (6.0)% | 806.8 | 867.2 | (7.0)% |
| Total Net sales | $1,157.5 | $1,212.2 | (4.5)% | $2,276.8 | $2,384.2 | (4.5)% |

#### Acquisitions and Divestitures Highlights

During the three months ended June 30, 2019, we completed the previously announced sale of our 60% interest in a consolidated joint venture within our Performance Coatings segment. On the divestiture, we recorded a pre-tax gain of $1.3 million and a pre-tax loss $3.9 million in our condensed consolidated statements of operations for the three and six months ended June 30, 2019, respectively. See Note 3 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.

During the six months ended June 30, 2019, we purchased the remaining 40% interest owned by a third party in one of our consolidated joint venture's entities and pursuant to the stock purchase agreement for a joint venture acquired during the year ended December 31, 2016, we were required to purchase the remaining 24.5% interest owned by a third party in one of our consolidated entities, increasing our total ownership percentage in both entities to 100%. During the six months ended June 30, 2019, total consideration paid for these purchases was $31.1 million.

#### Capital and Liquidity Highlights

During the six months ended June 30, 2019, we repurchased 4.1 million shares for total consideration of $105.3 million as we continue to execute against our previously approved share repurchase program.

On June 28, 2019, we amended our $400 million Revolving Credit Facility to extend the maturity from August 2021 to March 2024 and improve the terms. See Note 16 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.

#### Strategic Review

On June 19, 2019, we announced that our Board of Directors had initiated a comprehensive review of strategic alternatives to maximize shareholder value. There can be no assurances regarding the outcome or timing of the strategic review process.

### 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, 2018.

### RESULTS OF OPERATIONS

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

### Net sales

|  | Three Months Ended June 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | Six Months Ended June 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $1,157.5 | $1,212.2 | $(54.7) | (4.5)% | $2,276.8 | $2,384.2 | $(107.4) | (4.5)% |
| Volume effect |  |  |  | (4.1)% |  |  |  | (3.1)% |
| Impact of portfolio changes |  |  |  | (0.9)% |  |  |  | (0.3)% |
| Price/product mix effect |  |  |  | 4.0% |  |  |  | 3.1% |
| Exchange rate effect |  |  |  | (3.5)% |  |  |  | (4.2)% |

#### Three months ended June 30, 2019 compared to three months ended June 30, 2018

Net sales decreased due to the following:

n Lower sales volumes across refinish, industrial and light vehicle end-markets, partially offset by an increase within our commercial vehicle end-market

n Unfavorable impacts of currency translation, due primarily to the weakening of the Euro, Chinese Renminbi and Brazilian Real compared to the U.S. dollar

n Negative impacts as a result of portfolio changes, which included the sale of our consolidated joint venture interests within our industrial end-market in the Performance Coatings segment, as noted in Note 3 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q

Partially offset by:

n Higher average selling prices across both segments, reflecting positive contribution across both end-markets within the Performance Coatings segment and the light vehicle end-market

#### Six months ended June 30, 2019 compared to six months ended June 30, 2018

Net sales decreased due to the following:

n Unfavorable impacts of currency translation, due primarily to the weakening of the Euro, Chinese Renminbi and Brazilian Real compared to the U.S. dollar

n Lower sales volumes across both segments, partially offset by an increase within our commercial vehicle end-market

n Negative impacts as a result of portfolio changes, which included the sale of our consolidated joint venture interests within our industrial end-market in the Performance Coatings segment, as noted in Note 3 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q

Partially offset by:

n Higher average selling prices across both segments, reflecting positive contribution across both end markets within the Performance Coatings segment and the light vehicle end-market

34

### Cost of sales

|  | Three Months Ended June 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | Six Months Ended June 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of sales | $748.4 | $793.8 | $(45.4) | (5.7)% | $1,499.7 | $1,569.8 | $(70.1) | (4.5)% |
| % of net sales | 64.7% | 65.5% |  |  | 65.9% | 65.8% |  |  |

#### Three months ended June 30, 2019 compared to three months ended June 30, 2018

Cost of sales decreased due to the following:

n Lower sales volumes across both segments

n Favorable impacts of currency translation of 3.3%, due primarily to the weakening of the Euro, Chinese Renminbi and Brazilian Real compared to the U.S. dollar

n Decline in stock-based compensation expense of $2.2 million, primarily due to forfeitures in the quarter

Partially offset by:

n Increased raw material costs across both segments

n Incremental accelerated depreciation expense of $6.7 million associated with our Mechelen, Belgium facility, for which there were no similar costs in the comparable period

Cost of sales as a percentage of net sales decreased due to the following:

n Increase in price and product mix impacts in net sales as well as a decline in stock-based compensation expense of $2.2 million, primarily due to forfeitures, offset by lower sales volumes and the incremental accelerated depreciation expense of $6.7 million

#### Six months ended June 30, 2019 compared to six months ended June 30, 2018

Cost of sales decreased due to the following:

n Favorable impacts of currency translation of 3.9%, due primarily to the weakening of the Euro, Chinese Renminbi and Brazilian Real compared to the U.S. dollar

n Lower sales volumes across both segments

n Decline in stock-based compensation expense of $3.0 million, primarily due to forfeitures in the quarter

Partially offset by:

n Increased raw material costs across both segments

n Incremental accelerated depreciation expense of $12.8 million associated with our Mechelen, Belgium facility, for which there were no similar costs in the comparable period

Cost of sales as a percentage of net sales decreased due to the following:

n Increase in price and product mix in net sales as well as a decline in stock-based compensation expense of $3.0 million, primarily due to forfeitures, offset by lower sales volumes covering fixed costs and the incremental accelerated depreciation expense of $12.8 million

35

### Selling, general and administrative expenses

|  | Three Months Ended June 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | Six Months Ended June 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| SG&A | $206.2 | $224.6 | $(18.4) | (8.2)% | $423.7 | $452.4 | $(28.7) | (6.3)% |

#### Three months ended June 30, 2019 compared to three months ended June 30, 2018

Selling, general and administrative expenses decreased due to the following:

n Favorable impacts of currency translation of 3.6%, due primarily to the weakening of the Euro, Chinese Renminbi and Brazilian Real compared to the U.S. dollar

n Decline in commissions and sales incentive compensation driven by lower sales volume

n Decline in stock-based compensation expense of $8.9 million, primarily due to forfeitures

n Reductions in costs due to operational efficiencies associated with our cost savings initiatives

Partially offset by:

n Increases in costs associated with our Axalta Way cost savings initiatives and acquisition and divestiture-related costs of $4.7 million, resulting in costs of $3.8 million for the three months ended June 30, 2019 compared to income of $0.9 million for the three months ended June 30, 2018 driven by changes to estimates

#### Six months ended June 30, 2019 compared to six months ended June 30, 2018

Selling, general and administrative expenses decreased due to the following:

n Favorable impacts of currency translation of 4.2%, due primarily to the weakening of the Euro, Chinese Renminbi and Brazilian Real compared to the U.S. dollar

n Decline in stock-based compensation expense of $9.8 million, primarily due to forfeitures

n Decline in commissions and sales incentive compensation driven by lower sales volume

n Reductions in costs due to operational efficiencies associated with our cost savings initiatives

Partially offset by:

n Increases in costs associated with our Axalta Way cost savings initiatives and acquisition and divestiture-related costs of $7.9 million, resulting in costs of $5.7 million for the six months ended June 30, 2019 compared to income of $2.2 million for the six months ended June 30, 2018 driven by changes to estimates

### (Gain) loss on divestiture

|  | Three Months Ended June 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | Six Months Ended June 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| (Gain) loss on divestiture | $(1.3) | $— | $(1.3) | 100.0% | $3.9 | $— | $3.9 | 100.0% |

#### Three months ended June 30, 2019 compared to three months ended June 30, 2018

(Gain) loss on divestiture increased due to the following:

n During the three months ended June 30, 2019, we recorded a gain on the completed sale of our interest in a consolidated joint venture due to a decrease in the carrying value of the net assets divested

#### Six months ended June 30, 2019 compared to six months ended June 30, 2018

(Gain) loss on divestiture increased due to the following:

n During the six months ended June 30, 2019, we recorded a net loss on the sale of our interest in a consolidated joint venture as discussed above in "Business Highlights - Acquisitions and Divestitures"

36

### Research and development expenses

|  | Three Months Ended June 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | Six Months Ended June 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Research and development expenses | $17.9 | $18.0 | $(0.1) | (0.6)% | $36.1 | $37.3 | $(1.2) | (3.2)% |

#### Three months ended June 30, 2019 compared to three months ended June 30, 2018

Research and development expenses decreased due to the following:

n Favorable impacts of currency translation, which reduced expenses by 1.2% due primarily to the weakening of the Euro and Chinese Renminbi compared to the U.S. dollar

#### Six months ended June 30, 2019 compared to six months ended June 30, 2018

Research and development expenses decreased due to the following:

n Favorable impacts of currency translation, which reduced expenses by 1.3% due primarily to the weakening of the Euro and Chinese Renminbi compared to the U.S. dollar

### Amortization of acquired intangibles

|  | Three Months Ended June 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | Six Months Ended June 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Amortization of acquired intangibles | $28.4 | $29.3 | $(0.9) | (3.1)% | $56.9 | $58.2 | $(1.3) | (2.2)% |

#### Three months ended June 30, 2019 compared to three months ended June 30, 2018

Amortization of acquired intangibles decreased due to the following:

n Favorable impacts of foreign currency of 1.3%, primarily related to the weakening of the Euro, Chinese Renminbi and Brazilian Real compared to the U.S. dollar

#### Six months ended June 30, 2019 compared to six months ended June 30, 2018

Amortization of acquired intangibles decreased due to the following:

n Favorable impacts of foreign currency of 1.7%, primarily related to the weakening of the Euro, Chinese Renminbi and Brazilian Real compared to the U.S. dollar

### Interest expense, net

|  | Three Months Ended June 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | Six Months Ended June 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest expense, net | $41.0 | $39.3 | $1.7 | 4.3% | $82.3 | $78.7 | $3.6 | 4.6% |

#### Three months ended June 30, 2019 compared to three months ended June 30, 2018

Interest expense, net increased due to the following:

n Increases in average interest rates due to LIBOR increases on our variable rate debt, largely offset by impacts of our derivative instruments

n Increases in interest costs associated with finance leases under the new accounting standard adopted on January 1, 2019, of which certain leases were historically treated as sale-leaseback financing transactions

#### Six months ended June 30, 2019 compared to six months ended June 30, 2018

Interest expense, net increased due to the following:

n Increases in average interest rates due to LIBOR increases on our variable rate debt over the comparable period, largely offset by impacts of our derivative instruments

n Increases in interest costs associated with finance leases under the new accounting standard adopted on January 1, 2019, of which certain leases were historically treated as sale-leaseback financing transactions

37

### Other (income) expense, net

|  | Three Months Ended June 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | Six Months Ended June 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Other (income) expense, net | $(0.9) | $8.1 | $(9.0) | (111.1)% | $(1.9) | $5.9 | $(7.8) | (132.2)% |

#### Three months ended June 30, 2019 compared to three months ended June 30, 2018

Other (income) expense, net increased due to the following:

n A reduction in debt extinguishment and refinancing related costs of $8.4 million which was incurred during the three months ended June 30, 2018, for which there was no corresponding expense in the current comparative period

#### Six months ended June 30, 2019 compared to six months ended June 30, 2018

Other (income) expense, net increased due to the following:

n A reduction in debt extinguishment and refinancing related costs of $8.4 million which was incurred during the six months ending June 30, 2018 with no corresponding expense for the current comparative period

### Provision for income taxes

|  | Three Months Ended June 30, 2019 | 2018 | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Income before income taxes | $117.8 | $99.1 | $176.1 | $181.9 |
| Provision for income taxes | 17.9 | 22.0 | 32.1 | 33.8 |
| Statutory U.S. Federal income tax rate | 21.0% | 21.0% | 21.0% | 21.0% |
| Effective tax rate | 15.2% | 22.2% | 18.2% | 18.6% |
| Effective tax rate vs. statutory U.S. Federal income tax rate | (5.8)% | 1.2% | (2.8)% | (2.4)% |

| Items impacting the effective tax rate vs. statutory U.S. federal income tax rate | (Favorable) Unfavorable Impact 2019 | 2018 | 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Earnings generated in jurisdictions where the statutory rate is lower than the U.S. Federal rate (1) | $(4.7) | $(17.0) | $(13.9) | $(21.3) |
| Changes in valuation allowance | (21.8) | 11.3 | (19.2) | 12.7 |
| Foreign exchange gain (loss), net | (2.0) | 3.7 | 3.9 | (0.3) |
| Stock-based compensation excess tax benefits, net | (3.2) | (1.8) | (6.8) | (4.1) |
| Non-deductible expenses and interest | 0.6 | 2.0 | 2.2 | 5.1 |
| Increase in unrecognized tax benefits | 6.4 | 1.1 | 7.2 | 7.2 |
| Foreign taxes (2) | 16.8 | 1.6 | 18.4 | 2.9 |
| U.S. tax reform (3) | — | — | — | (12.4) |

(1) Primarily related to earnings in Bermuda, Germany, Luxembourg, and Switzerland.

(2) $14.4 million relates to an adjustment for certain tax attributes for which the Company has determined are no longer realizable. This is mostly offset by a tax benefit of $12.7 million for the decrease to the valuation allowance on the tax attributes previously recorded as a result of changes under U.S. tax reform.

(3) Primarily related to the realizability of certain interest carryforwards.

### SEGMENT RESULTS

The Company's products and operations are managed and reported in two operating segments: Performance Coatings and Transportation Coatings. During the three and six months ended June 30, 2019, the primary measure of performance used to review the operating segments was transitioned to Adjusted EBIT from Adjusted EBITDA. See Note 18 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.

### Performance Coatings Segment

|  | Three Months Ended June 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | Six Months Ended June 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $756.7 | $786.0 | $(29.3) | (3.7)% | $1,470.0 | $1,517.0 | $(47.0) | (3.1)% |
| Volume effect |  |  |  | (3.5)% |  |  |  | (2.5)% |
| Impact of portfolio changes |  |  |  | (1.4)% |  |  |  | (0.5)% |
| Price/product mix effect |  |  |  | 4.7% |  |  |  | 4.0% |
| Exchange rate effect |  |  |  | (3.5)% |  |  |  | (4.1)% |
| Adjusted EBIT | $127.6 | $108.9 | $18.7 | 17.2% | $206.2 | $184.9 | $21.3 | 11.5% |
| Adjusted EBIT Margin | 16.9% | 13.9% |  |  | 14.0% | 12.2% |  |  |

#### Three months ended June 30, 2019 compared to three months ended June 30, 2018

Net sales decreased due to the following:

n Unfavorable currency translation primarily related to the weakening of the Euro, Chinese Renminbi and Brazilian Real compared to the U.S. dollar

n Lower organic volumes across both end-markets

n Negative impacts as a result of the sale of our consolidated joint venture interests within our industrial end-market as noted in Note 3 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q

Partially offset by:

n Higher average selling prices across both end-markets within all regions

Adjusted EBIT increased due to the following:

n Higher average selling prices across both end-markets within all regions

n Lower operating expenses across both end-markets resulting from operational efficiencies associated with our cost savings initiatives and decreased stock compensation expense primarily due to forfeitures

Partially offset by:

n Lower organic volumes across both end-markets

n Higher raw materials costs across both end-markets

n Unfavorable currency translation primarily related to the weakening of the Euro, Chinese Renminbi and Brazilian Real compared to the U.S. dollar

39

#### Six months ended June 30, 2019 compared to six months ended June 30, 2018

Net sales decreased due to the following:

n Unfavorable currency translation primarily related to the weakening of the Euro, Chinese Renminbi and Brazilian Real compared to the U.S. dollar

n Lower organic volumes across both end-markets

n Negative impacts as a result of the sale of our consolidated joint venture interests within our industrial end-market as noted in Note 3 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q

Partially offset by:

n Higher average selling prices across both end-markets within all regions

Adjusted EBIT increased due to the following:

n Higher average selling prices across both end-markets within all regions

n Lower operating expenses across both end-markets resulting from operational efficiencies associated with our cost savings initiatives and decreased stock compensation expense primarily due to forfeitures

Partially offset by:

n Lower organic volumes across both end-markets

n Higher raw materials costs across both end-markets

n Unfavorable currency translation primarily related to the weakening of the Euro, Chinese Renminbi and Brazilian Real compared to the U.S. dollar

40

### Transportation Coatings Segment

|  | Three Months Ended June 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | Six Months Ended June 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $400.8 | $426.2 | $(25.4) | (6.0)% | $806.8 | $867.2 | $(60.4) | (7.0)% |
| Volume effect |  |  |  | (5.1)% |  |  |  | (4.2)% |
| Price/product mix effect |  |  |  | 2.7% |  |  |  | 1.4% |
| Exchange rate effect |  |  |  | (3.6)% |  |  |  | (4.2)% |
| Adjusted EBIT | $40.4 | $38.3 | $2.1 | 5.5% | $74.6 | $83.3 | $(8.7) | (10.4)% |
| Adjusted EBIT Margin | 10.1% | 9.0% |  |  | 9.2% | 9.6% |  |  |

#### Three months ended June 30, 2019 compared to three months ended June 30, 2018

Net sales decreased due to the following:

n Lower sales volumes in our light vehicle end-market and across all regions, excluding our Latin America region, partially offset by higher sales volumes in our commercial vehicle end-market, primarily within our Latin America region

n Unfavorable currency translation primarily related to the weakening of the Euro, Chinese Renminbi and Brazilian Real compared to the U.S. dollar

Partially offset by:

n Higher average selling prices in our light vehicle end-market and across all regions

Adjusted EBIT increased due to the following:

n Higher average selling prices in our light vehicle end-market and across all regions

n Lower operating expenses in the light vehicle end-market resulting from operational efficiencies associated with our cost savings initiatives and decreased stock compensation expense primarily due to forfeitures

Partially offset by:

n Lower sales volumes in our light vehicle end-market and across all regions, excluding our Latin America region, partially offset by higher sales volumes in our commercial vehicle end-market, primarily within our Latin America region

n Higher raw materials costs across both end-markets

n Unfavorable currency translation primarily related to the weakening of the Euro, Chinese Renminbi and Brazilian Real compared to the U.S. dollar

41

#### Six months ended June 30, 2019 compared to six months ended June 30, 2018

Net sales decreased due to the following:

n Lower sales volumes in our light vehicle end-market and across all regions, excluding our Latin America region, partially offset by higher sales volumes in our commercial vehicle end-market, primarily within our Latin America region

n Unfavorable currency translation primarily related to the weakening of the Euro, Chinese Renminbi and Brazilian Real compared to the U.S. dollar

Partially offset by:

n Higher average selling prices in our light vehicle end-market and across all regions, excluding Latin America

Adjusted EBIT decreased due to the following:

n Lower sales volumes in our light vehicle end-market and across all regions, excluding our Latin America region, partially offset by higher sales volumes in our commercial vehicle end-market, primarily within our Latin America region

n Higher raw materials costs across both end-markets

n Unfavorable currency translation primarily related to the weakening of the Euro, Chinese Renminbi and Brazilian Real compared to the U.S. dollar

Partially offset by:

n Higher average selling prices in our light vehicle end-market and across all regions, excluding Latin America

n Lower operating expenses in our light vehicle end-market resulting from operational efficiencies associated with our cost savings initiatives and decreased stock compensation expense primarily due to forfeitures

### LIQUIDITY AND CAPITAL RESOURCES

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

At June 30, 2019, availability under the Revolving Credit Facility was $363.4 million, net of $36.6 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 Senior Notes. At June 30, 2019, we had $16.2 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 $2.8 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

### Six months ended June 30, 2019 and 2018

*(In millions)*

| Net cash provided by (used for): Operating activities: | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Net income | $144.0 | $148.1 |
| Depreciation and amortization | 180.3 | 182.1 |
| Amortization of deferred financing costs and original issue discount | 4.4 | 3.9 |
| Debt extinguishment and refinancing related costs | 0.2 | 8.4 |
| Deferred income taxes | (1.6) | 4.0 |
| Realized and unrealized foreign exchange losses, net | 2.8 | 6.1 |
| Stock-based compensation | 5.3 | 18.1 |
| Loss on divestiture | 3.9 | — |
| Interest income on swaps designated as net investment hedges | (7.2) | — |
| Other non-cash, net | (0.6) | 3.5 |
| Net income adjusted for non-cash items | 331.5 | 374.2 |
| Changes in operating assets and liabilities | (262.7) | (253.2) |
| Operating activities | 68.8 | 121.0 |
| Investing activities | (33.7) | (147.5) |
| Financing activities | (147.9) | (184.2) |
| Effect of exchange rate changes on cash | 1.0 | (8.4) |
| Net decrease in cash, cash equivalents and restricted cash | $(111.8) | $(219.1) |

### Six months ended June 30, 2019

#### Net Cash Provided by Operating Activities

Net cash provided by operating activities for the six months ended June 30, 2019 was $68.8 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $331.5 million. This was partially offset by net uses of working capital of $262.7 million. The most significant drivers of the uses of working capital were increases in accounts receivable of $152.9 million, prepaid expenses and other assets of $81.6 million and inventories of $1.4 million during the six months ended June 30, 2019, as well as a decrease in other accrued liabilities of $54.0 million. These outflows were primarily driven by customer incentive payments and 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. Partially offsetting these outflows were increases in accounts payable of $20.7 million and other liabilities of $6.5 million.

#### Net Cash Used for Investing Activities

Net cash used for investing activities for the six months ended June 30, 2019 was $33.7 million. The primary uses were for purchases of property, plant and equipment of $47.2 million, business acquisitions of $1.9 million, partially offset by proceeds from the sale of our noncontrolling interest subsidiary of $8.2 million as explained in Note 3 and interest proceeds on swaps designated as net investment hedges of $7.2 million.

#### Net Cash Used for Financing Activities

Net cash used for financing activities for the six months ended June 30, 2019 was $147.9 million. This change was driven by purchases of treasury stock totaling $105.3 million, payments of $34.2 million on short-term and long-term borrowings, investments in noncontrolling interests of $31.1 million and dividends to noncontrolling interests of $1.1 million. These payments were partially offset by cash received from stock option exercises of $25.9 million.

#### Other Impacts on Cash

Currency exchange impacts on cash for the six months ended June 30, 2019 were favorable by $1.0 million, which was driven primarily by the Chinese Renminbi.

### Six months ended June 30, 2018

See Note 1 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for information related to the revisions of net cash used for investing and financing activities for the six months ended June 30, 2018.

#### Net Cash Provided by Operating Activities

Net cash provided by operating activities for the six months ended June 30, 2018 was $121.0 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $374.2 million. This was partially offset by net uses of working capital of $253.2 million. The most significant drivers of the uses of working capital were accounts receivables of $133.5 million and prepaid expenses and other of $59.7 million, due to the seasonal increase in net sales and upfront customer incentive payments during the six months ended June 30, 2018. Other drivers of the working capital uses were other accrued liabilities of $60.6 million related to payments of normal operating activities, including interest payments on our long-term indebtedness and timing of cash payments for annual employee performance related benefits.

#### Net Cash Used for Investing Activities

Net cash used for investing activities for the six months ended June 30, 2018 was $147.5 million. This use was primarily comprised of acquisitions of $78.2 million and purchases of property, plant and equipment of $74.6 million.

#### Net Cash Used for Financing Activities

Net cash used for financing activities for the six months ended June 30, 2018 was $184.2 million. This change was driven by payments of $521.5 million to pay down short-term and long-term borrowings that includes pay down of the Euro Term Loans, purchases of treasury stock totaling $103.8 million, an investment in a noncontrolling interest of $26.9 million as well as payments of $11.4 million consisting of financing-related costs, deferred acquisition-related consideration associated with historical acquisitions. These payments were offset by net proceeds of $468.9 million relating to the refinancing of our Dollar Term Loans and cash received from stock option exercises of $10.5 million.

#### Other Impacts on Cash

Currency exchange impacts on cash for the six months ended June 30, 2018 were unfavorable by $8.4 million, which was driven primarily from the Euro and Chinese Renminbi.

### Financial Condition

We had cash and cash equivalents at June 30, 2019 and December 31, 2018 of $577.3 million and $693.6 million, respectively. Of these balances, $367.5 million and $417.1 million were maintained in non-U.S. jurisdictions as of June 30, 2019 and December 31, 2018, 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 Senior Secured Credit Facilities. 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 saving 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)*

|  | June 30, 2019 | December 31, 2018 |
| --- | ---: | ---: |
| 2024 Dollar Term Loans | $2,399.6 | $2,411.8 |
| 2024 Dollar Senior Notes | 500.0 | 500.0 |
| 2024 Euro Senior Notes | 380.8 | 383.3 |
| 2025 Euro Senior Notes | 511.6 | 514.9 |
| Short-term and other borrowings | 109.9 | 103.8 |
| Unamortized original issue discount | (11.6) | (12.6) |
| Unamortized deferred financing costs | (34.2) | (37.2) |
|  | $3,856.1 | $3,864.0 |
| Less: |  |  |
| Short-term borrowings | $19.4 | $17.9 |
| Current portion of long-term borrowings | 24.3 | 24.3 |
| Long-term debt | $3,812.4 | $3,821.8 |

Our indebtedness, including the Senior Secured Credit Facilities and Senior Notes, is more fully described in Note 16 to the 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 $363.4 million and $355.2 million at June 30, 2019 and December 31, 2018, respectively, all of which may be borrowed by us without violating any covenants under the Credit Agreement governing such facility or the indentures governing the 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, 2018. There have been no material changes in the Company's contractual obligations since December 31, 2018.

### Off-Balance Sheet Arrangements

See Note 6 "Commitments and Contingencies" to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for disclosure of our guarantees of certain customers’ obligations to third parties.

### Recent Accounting Guidance

See Note 1 "Basis of Presentation and Summary of Significant Accounting Policies" 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, 2018. 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 1 - Basis of Presentation and Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

## 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, 2018.

## Controls and procedures

As filed, 1,100 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 June 30, 2019.

### Changes in internal control over financial reporting

There were no other changes in the Company’s internal control over financial reporting that occurred during the three months ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 1,352 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, 2018, other than as set forth below.

#### We are subject to risks and uncertainties related to our strategic review.

On June 19, 2019, we announced that our Board of Directors had initiated a comprehensive review of strategic alternatives to maximize shareholder value. There can be no assurance the review of strategic alternatives will result in any transaction, and the process of exploring strategic alternatives will involve the dedication of significant resources and the incurrence of significant costs and expenses. In addition, speculation and uncertainty regarding the strategic review process may cause or result in:

- disruption of our business;
- distraction of our employees;
- difficulty in recruiting, hiring, motivating, and retaining talented and skilled personnel;
- difficulty in maintaining or negotiating and consummating new business or strategic relationships or transactions; and
- increased stock price volatility.

If we are unable to mitigate these or other potential risks related to the uncertainty caused by the strategic review process, it may disrupt our business or adversely impact our net sales, operating results, and financial condition.

Filed Jul 25, 2019.
Source: SEC EDGAR, the filing index for accession 0001616862-19-000063. Last ingested by Listed: Nov 12, 2026, 22:39 ET. No prices; not investment advice.