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

- Company: [Axalta Coating Systems Ltd.](/companies/axta.md) (CIK 1616862)
- Form: 10-Q
- Filed: 2019-10-25
- Accepted by EDGAR: Oct 25, 2019, 07:03 ET
- Period: 2019-09-30
- Accession: 0001616862-19-000079
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1616862/000161686219000079/a2019093010-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1616862/000161686219000079/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-07-01 to 2019-09-30 | $1.11bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2019-01-01 to 2019-09-30 | $3.38bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2019-07-01 to 2019-09-30 | $707.4m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2019-01-01 to 2019-09-30 | $2.21bn | us-gaap:CostOfGoodsAndServicesSold |
| Research and development | 3 months, 2019-07-01 to 2019-09-30 | $17.4m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2019-01-01 to 2019-09-30 | $53.5m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2019-07-01 to 2019-09-30 | $231.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2019-01-01 to 2019-09-30 | $655.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2019-07-01 to 2019-09-30 | $123.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2019-01-01 to 2019-09-30 | $379.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-07-01 to 2019-09-30 | $40.2m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2019-01-01 to 2019-09-30 | $122.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-07-01 to 2019-09-30 | $18.3m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2019-01-01 to 2019-09-30 | $50.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-07-01 to 2019-09-30 | $65.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2019-01-01 to 2019-09-30 | $207.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-07-01 to 2019-09-30 | $0.28 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2019-01-01 to 2019-09-30 | $0.88 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-07-01 to 2019-09-30 | $0.28 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2019-01-01 to 2019-09-30 | $0.89 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-07-01 to 2019-09-30 | 235,500,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2019-01-01 to 2019-09-30 | 235,800,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2019-01-01 to 2019-09-30 | $289.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2019-01-01 to 2019-09-30 | $73.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2019-01-01 to 2019-09-30 | $105.3m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2019-09-30 | $767.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-09-30 | $2.43bn | us-gaap:AssetsCurrent |
| Total assets | at 2019-09-30 | $6.69bn | us-gaap:Assets |
| Current liabilities | at 2019-09-30 | $1.03bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-09-30 | $5.35bn | us-gaap:Liabilities |
| Long-term debt | at 2019-09-30 | $3.86bn | us-gaap:LongTermDebt |
| Current portion of debt | at 2019-09-30 | $42.4m | us-gaap:DebtCurrent |
| Short-term borrowings | at 2019-09-30 | $18.1m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2019-09-30 | $1.29bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 48,373 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 people 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 decreased 4.1% for the nine months ended September 30, 2019 compared with the nine months ended September 30, 2018, primarily driven by a net decrease in volumes of 4.1%, inclusive of portfolio changes, which included the sale of our consolidated joint venture, which contributed to a decrease of 0.8% in volumes. Further contributing was the impacts of unfavorable currency translation which contributed to a 3.4% decrease. Partially offsetting these declines was an increase in average selling prices across both segments and all regions, resulting in an increase of 3.4%. The following trends have impacted our segment and end-market net sales performance:

- *Performance Coatings:* Net sales decreased 3.5% driven primarily by a decrease in volumes across both end-markets of 4.3%, inclusive of the negative net impacts of portfolio changes of 1.2% associated with a consolidated powder joint venture in China, as well as the impacts of unfavorable foreign currency translation of 3.5%. An increase in average selling prices of 4.3%, of which both end-markets positively contributed, offset the decline of volumes during the period.
- *Transportation Coatings:* Net sales decreased 5.3% driven primarily by the impacts of unfavorable foreign currency translation of 3.5%, as well as a decrease in volumes of 3.5% driven by global light vehicle production. Partially offsetting the decline in volumes was higher average selling prices of 1.7% driven by light vehicle contributions.

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

*(In millions)*

| Performance Coatings | Three Months Ended September 30, 2019 | 2018 | 2019 vs 2018 % change | Nine Months Ended September 30, 2019 | 2018 | 2019 vs 2018 % change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Refinish | $441.5 | $441.3 | —% | $1,294.3 | $1,303.9 | (0.7)% |
| Industrial | 282.2 | 314.9 | (10.4)% | 899.4 | 969.3 | (7.2)% |
| Total Net sales Performance Coatings | 723.7 | 756.2 | (4.3)% | 2,193.7 | 2,273.2 | (3.5)% |
| **Transportation Coatings** |  |  |  |  |  |  |
| Light Vehicle | 295.7 | 303.7 | (2.6)% | 917.7 | 990.2 | (7.3)% |
| Commercial Vehicle | 87.6 | 86.1 | 1.7% | 272.4 | 266.8 | 2.1% |
| Total Net sales Transportation Coatings | 383.3 | 389.8 | (1.7)% | 1,190.1 | 1,257.0 | (5.3)% |
| Total Net sales | $1,107.0 | $1,146.0 | (3.4)% | $3,383.8 | $3,530.2 | (4.1)% |

#### Acquisitions and Divestitures Highlights

During the nine months ended September 30, 2019, we completed the sale of our 60% interest in a consolidated joint venture within our Performance Coatings segment. As a result of the divestiture, we recorded a pre-tax loss of $3.4 million in our condensed consolidated statements of operations for the nine months ended September 30, 2019.

During the nine months ended September 30, 2019, we purchased additional interests in certain previously consolidated joint ventures within our industrial end-market, increasing our total ownership to 100% for total consideration of $31.1 million. These included the remaining 40% interest in a joint venture in our Asia Pacific region and the remaining 24.5% interest pursuant to the stock purchase agreement for a joint venture acquired during the year ended December 31, 2016.

#### Capital and Liquidity Highlights

During the nine months ended September 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 $400.0 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.

During the quarter, we established a retention program, under which certain of the Company’s and its subsidiaries’ employees, are eligible to participate, to ensure continuity of the Company’s business through the completion of the previously-announced review of strategic alternatives. Under the retention program, each eligible employee will receive a cash award payable under the terms of the respective agreement. The maximum anticipated cost of the retention program is approximately $40.0 million to be earned over 18 to 24 months.

### 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 September 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | Nine Months Ended September 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $1,107.0 | $1,146.0 | $(39.0) | (3.4)% | $3,383.8 | $3,530.2 | $(146.4) | (4.1)% |
| Volume effect |  |  |  | (3.4)% |  |  |  | (3.3)% |
| Impact of portfolio changes |  |  |  | (1.8)% |  |  |  | (0.8)% |
| Price/product mix effect |  |  |  | 3.8% |  |  |  | 3.4% |
| Exchange rate effect |  |  |  | (2.0)% |  |  |  | (3.4)% |

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

Net sales decreased due to the following:

n Lower sales volumes across both segments, which is inclusive of an increase within our commercial vehicle end-market

n Unfavorable impacts of currency translation, due primarily to the weakening of the Euro, Chinese Renminbi, British Pound and Argentine Peso 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 and all regions, reflecting positive contribution across both end-markets within the Performance Coatings segment and the light vehicle end-market

#### Nine months ended September 30, 2019 compared to nine months ended September 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, Brazilian Real and Argentine Peso compared to the U.S. dollar

n Lower sales volumes across both segments, which is inclusive of 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 and all regions, reflecting positive contribution across both end-markets within the Performance Coatings segment and the light vehicle end-market

33

### Cost of sales

|  | Three Months Ended September 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | Nine Months Ended September 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of sales | $707.4 | $759.1 | $(51.7) | (6.8)% | $2,207.1 | $2,328.9 | $(121.8) | (5.2)% |
| % of net sales | 63.9% | 66.2% |  |  | 65.2% | 66.0% |  |  |

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

Cost of sales decreased due to the following:

n Lower sales volumes across both segments

n Favorable impacts of currency translation of 2.0%, due primarily to the weakening of the Euro, Chinese Renminbi, British Pound and Argentine Peso compared to the U.S. dollar

n Decline in stock-based compensation expense of $2.3 million due to lower overall costs

Partially offset by:

n Increased raw material costs across both segments

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

n Price and product mix increases to net sales more than offset higher raw material inflation, partially offset by lower sales volumes covering fixed costs

n Decline in stock-based compensation expense of $2.3 million due to lower overall costs

#### Nine months ended September 30, 2019 compared to nine months ended September 30, 2018

Cost of sales decreased due to the following:

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

n Lower sales volumes across both segments

n Decline in stock-based compensation expense of $5.3 million due to lower overall costs

Partially offset by:

n Increased raw material costs across both segments

n Incremental accelerated depreciation expense of $18.2 million in the current year associated with the announced closure of our Mechelen, Belgium facility, compared to $4.2 million for the comparable period

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

n Price and product mix increases to net sales to more than offset still higher raw materials, partially offset by lower sales volumes covering fixed costs

n Decline in stock-based compensation expense of $5.3 million due to lower overall costs, partially offset by an increase in incremental accelerated depreciation expense of $14.0 million associated with our Mechelen, Belgium facility

### Selling, general and administrative expenses

|  | Three Months Ended September 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | Nine Months Ended September 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| SG&A | $231.5 | $293.4 | $(61.9) | (21.1)% | $655.2 | $745.8 | $(90.6) | (12.1)% |

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

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

n Favorable impacts of currency translation of 1.7%, due primarily to the weakening of the Euro, Chinese Renminbi, British Pound and Argentine Peso compared to the U.S. dollar

n Decline in stock-based compensation expense of $2.9 million due to lower overall costs

n Reductions in severance costs associated with our cost savings initiatives of $52.2 million, from $81.4 million to $29.2 million for the three months ended September 30, 2018 and 2019, respectively

Partially offset by:

n Increases in advisory costs pertaining to our previously announced comprehensive review of strategic alternatives of $3.0 million for the three months ended September 30, 2019, for which there were no such costs for the comparable period

34

#### Nine months ended September 30, 2019 compared to nine months ended September 30, 2018

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

n Favorable impacts of currency translation of 3.2%, due primarily to the weakening of the Euro, Chinese Renminbi, Brazilian Real and Argentine Peso compared to the U.S. dollar

n Decline in stock-based compensation expense of $12.7 million due to lower overall costs

n Decline in commissions and sales incentive compensation driven by decrease in net sales

n Reductions in severance costs associated with our cost savings initiatives of $46.6 million, from $79.9 million to $33.3 million for the nine months ended September 30, 2018 and 2019, respectively

Partially offset by:

n Increases in advisory costs pertaining to our previously announced comprehensive review of strategic alternatives of $3.8 million for the nine months ended September 30, 2019, for which there were no such costs for the comparable period

### (Gain) loss on divestiture

|  | Three Months Ended September 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | Nine Months Ended September 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| (Gain) loss on divestiture | $(0.5) | $— | $(0.5) | (100.0)% | $3.4 | $— | $3.4 | 100.0% |

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

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

n During the three months ended September 30, 2019, we recorded a gain of $0.5 million associated with a change in estimate associated with the net assets that were divested during the three months ended June 30, 2019 and is discussed above in "Business Highlights - Acquisitions and Divestitures Highlights"

#### Nine months ended September 30, 2019 compared to nine months ended September 30, 2018

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

n During the nine months ended September 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 Highlights"

### Research and development expenses

|  | Three Months Ended September 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | Nine Months Ended September 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Research and development expenses | $17.4 | $17.0 | $0.4 | 2.4% | $53.5 | $54.3 | $(0.8) | (1.5)% |

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

Research and development expenses increased due to the following:

n Overall increased spend associated with developing new and existing coatings products, partially offset by the favorable impacts of currency exchange from the weakening Euro and Chinese Renminbi compared to the U.S. Dollar of 0.8%

#### Nine months ended September 30, 2019 compared to nine months ended September 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

### Amortization of acquired intangibles

|  | Three Months Ended September 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | Nine Months Ended September 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Amortization of acquired intangibles | $28.2 | $28.7 | $(0.5) | (1.7)% | $85.1 | $86.9 | $(1.8) | (2.1)% |

35

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

Amortization of acquired intangibles decreased due to the following:

n Favorable impacts of foreign currency of 0.9%, primarily related to the weakening of the Euro and Chinese Renminbi compared to the U.S. dollar

#### Nine months ended September 30, 2019 compared to nine months ended September 30, 2018

Amortization of acquired intangibles decreased due to the following:

n Favorable impacts of foreign currency of 1.4%, primarily related to the weakening of the Euro and Chinese Renminbi compared to the U.S. dollar

### Interest expense, net

|  | Three Months Ended September 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | Nine Months Ended September 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest expense, net | $40.2 | $39.8 | $0.4 | 1.0% | $122.5 | $118.5 | $4.0 | 3.4% |

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

Interest expense, net increased primarily due to the following:

n Increases associated with imputed interest on higher average lease liability balances resulting from the new accounting standard adopted on January 1, 2019, which were lower under the historical standard

#### Nine months ended September 30, 2019 compared to nine months ended September 30, 2018

Interest expense, net increased primarily due to the following:

n Increases associated with imputed interest on higher average lease liability balances resulting from the new accounting standard adopted on January 1, 2019, which were lower under the historical standard

### Other (income) expense, net

|  | Three Months Ended September 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | Nine Months Ended September 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Other (income) expense, net | $(1.9) | $5.5 | $(7.4) | (134.5)% | $(3.8) | $11.4 | $(15.2) | (133.3)% |

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

Other (income) expense, net change was primarily due to the following:

n Reduction in foreign exchange losses, net from $7.0 million during the three months ended September 30, 2018 to $0.7 million during the three months ended September 30, 2019

#### Nine months ended September 30, 2019 compared to nine months ended September 30, 2018

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

n Reduction in debt extinguishment and refinancing related costs of $8.2 million from $8.4 million to $0.2 million during the nine months ended September 30, 2018 and 2019, respectively

n Reduction in foreign exchange losses, net from $8.7 million during the nine months ended September 30, 2018 to $5.3 million during the nine months ended September 30, 2019

### Provision for income taxes

|  | Three Months Ended September 30, 2019 | 2018 | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Income before income taxes | $84.7 | $2.5 | $260.8 | $184.4 |
| Provision for income taxes | 18.3 | 14.1 | 50.4 | 47.9 |
| Statutory U.S. Federal income tax rate | 21.0% | 21.0% | 21.0% | 21.0% |
| Effective tax rate | 21.6% | 564.0% | 19.3% | 26.0% |
| Effective tax rate vs. statutory U.S. Federal income tax rate | 0.6% | 543.0% | (1.7)% | 5.0% |

36

| Items impacting the effective tax rate vs. statutory U.S. federal income tax rate | (Favorable) Unfavorable Impact Three Months Ended September 30, 2019 | 2018 | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Earnings generated in jurisdictions where the statutory rate is different from the U.S. Federal rate (1) | $(18.4) | $5.4 | $(32.3) | $(16.0) |
| Changes in valuation allowance | 5.6 | 3.6 | (13.6) | 16.3 |
| Foreign exchange gain (loss), net | 11.6 | (9.9) | 15.4 | (10.2) |
| Stock-based compensation excess tax benefits, net | (4.2) | (2.4) | (11.0) | (6.5) |
| Non-deductible expenses and interest | 1.1 | 2.9 | 3.3 | 8.0 |
| Increase in unrecognized tax benefits | 2.0 | 8.8 | 9.2 | 16.0 |
| Foreign taxes (2) | 0.3 | 1.9 | 18.7 | 4.7 |
| 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 nine months ended September 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 September 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | Nine Months Ended September 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $723.7 | $756.2 | $(32.5) | (4.3)% | $2,193.7 | $2,273.2 | $(79.5) | (3.5)% |
| Volume effect |  |  |  | (4.3)% |  |  |  | (3.1)% |
| Impact of portfolio changes |  |  |  | (2.7)% |  |  |  | (1.2)% |
| Price/product mix effect |  |  |  | 5.0% |  |  |  | 4.3% |
| Exchange rate effect |  |  |  | (2.3)% |  |  |  | (3.5)% |
| Adjusted EBIT | $124.9 | $104.1 | $20.8 | 20.0% | $331.1 | $289.0 | $42.1 | 14.6% |
| Adjusted EBIT Margin | 17.3% | 13.8% |  |  | 15.1% | 12.7% |  |  |

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

Net sales decreased due to the following:

n Lower organic volumes across both end-markets

n Negative impacts as a result of the sale of a 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

n Unfavorable impacts of currency translation, due primarily to the weakening of the Euro, Chinese Renminbi, Argentine Peso and British Pound compared to the U.S. dollar

Partially offset by:

n Higher average selling prices across both end-markets and 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 as well as lower costs to support net sales

Partially offset by:

n Lower organic volumes across both end-markets

n Higher raw materials costs across both end-markets

n Unfavorable impacts of currency translation, due primarily to the weakening of the Euro, Chinese Renminbi, British Pound and Argentine Peso compared to the U.S. dollar

#### Nine months ended September 30, 2019 compared to nine months ended September 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, Argentine Peso and British Pound compared to the U.S. dollar

n Lower organic volumes across both end-markets

n Negative impacts as a result of the sale of a 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 and all regions

38

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 as well as lower costs to support net sales

Partially offset by:

n Lower organic volumes across both end-markets

n Higher raw materials costs across both end-markets

n Unfavorable impacts of currency translation, due primarily to the weakening of the Euro, Chinese Renminbi, British Pound and Argentine Peso compared to the U.S. dollar

### Transportation Coatings Segment

|  | Three Months Ended September 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | Nine Months Ended September 30, 2019 | 2018 | 2019 vs 2018 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $383.3 | $389.8 | $(6.5) | (1.7)% | $1,190.1 | $1,257.0 | $(66.9) | (5.3)% |
| Volume effect |  |  |  | (1.5)% |  |  |  | (3.5)% |
| Price/product mix effect |  |  |  | 1.5% |  |  |  | 1.7% |
| Exchange rate effect |  |  |  | (1.7)% |  |  |  | (3.5)% |
| Adjusted EBIT | $37.2 | $25.6 | $11.6 | 45.3% | $111.8 | $108.9 | $2.9 | 2.7% |
| Adjusted EBIT Margin | 9.7% | 6.6% |  |  | 9.4% | 8.7% |  |  |

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

Net sales decreased due to the following:

n Lower organic volumes within our light vehicle end-market and across all regions, excluding our EMEA region, partially offset by an increase in volumes within our commercial vehicle end-market

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

Partially offset by:

n Higher average selling prices across all regions within our light vehicle end-market, partially offset by lower prices within our commercial vehicle end-market

Adjusted EBIT increased due to the following:

n Higher average selling prices within our light vehicle end-market, partially offset by lower prices within our commercial vehicle end-market

n Lower operating expenses across both end-markets resulting from operational efficiencies associated with our cost savings initiatives as well as lower costs to support net sales

Partially offset by:

n Lower sales volumes within our light vehicle end-market, partially offset by an increase in volumes within our commercial vehicle end-market

n Higher raw materials costs within our light vehicle end-market

#### Nine months ended September 30, 2019 compared to nine months ended September 30, 2018

Net sales decreased due to the following:

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

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 across all regions and within our light vehicle end-market, partially offset by lower prices within our commercial vehicle end-market

39

Adjusted EBIT increased due to the following:

n Higher average selling prices within our light vehicle end-market, partially offset by lower prices within our commercial vehicle end-market

n Lower operating expenses across both end-markets resulting from operational efficiencies associated with our cost savings initiatives as well as lower costs to support net sales

Partially offset by:

n Lower sales volumes within our light vehicle end-market, partially offset by an increase in volumes within our commercial vehicle end-market

n Higher raw materials costs across both end-markets

### 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 September 30, 2019, availability under the Revolving Credit Facility was $362.5 million, net of $37.5 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 September 30, 2019, we had $15.0 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 $6.1 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

### Nine months ended September 30, 2019 and 2018

*(In millions)*

| Net cash provided by (used for): Operating activities: | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: |
| Net income | $210.4 | $136.5 |
| Depreciation and amortization | 267.3 | 274.9 |
| Amortization of deferred financing costs and original issue discount | 6.7 | 5.8 |
| Debt extinguishment and refinancing related costs | 0.2 | 8.4 |
| Deferred income taxes | (5.6) | (1.8) |
| Realized and unrealized foreign exchange losses, net | 1.5 | 16.2 |
| Stock-based compensation | 9.5 | 27.5 |
| Loss on divestiture | 3.4 | — |
| Interest income on swaps designated as net investment hedges | (11.0) | (5.9) |
| Other non-cash, net | (3.5) | (3.9) |
| Net income adjusted for non-cash items | 478.9 | 457.7 |
| Changes in operating assets and liabilities | (189.1) | (212.2) |
| Operating activities | 289.8 | 245.5 |
| Investing activities | (59.0) | (177.6) |
| Financing activities | (145.0) | (239.4) |
| Effect of exchange rate changes on cash | (12.1) | (10.5) |
| Net increase (decrease) in cash, cash equivalents and restricted cash | $73.7 | $(182.0) |

40

### Nine months ended September 30, 2019

#### Net Cash Provided by Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2019 was $289.8 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $478.9 million. This was partially offset by net uses of working capital of $189.1 million. The most significant drivers of the uses of working capital were increases in accounts receivable of $128.9 million and prepaid expenses and other assets of $95.0 million, due to the seasonal increase in net sales, timing of collections and upfront customer incentive payments during the nine months ended September 30, 2019. Partially offsetting these outflows were increases in accounts payable of $29.9 million and other liabilities of $8.9 million.

#### Net Cash Used for Investing Activities

Net cash used for investing activities for the nine months ended September 30, 2019 was $59.0 million. The primary uses were for purchases of property, plant and equipment of $73.9 million, and business acquisitions of $2.1 million, partially offset by interest proceeds on swaps designated as net investment hedges of $11.0 million and net proceeds from the sale of our noncontrolling interest subsidiary of $8.2 million as discussed in Note 3 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

#### Net Cash Used for Financing Activities

Net cash used for financing activities for the nine months ended September 30, 2019 was $145.0 million. This change was driven by purchases of common stock totaling $105.3 million, payments of $49.5 million on short-term and long-term borrowings, investments in noncontrolling interests of $31.1 million and dividends to noncontrolling interests of $1.5 million. These payments were partially offset by cash received from stock option exercises of $46.0 million.

#### Other Impacts on Cash

Currency exchange impacts on cash for the nine months ended September 30, 2019 were unfavorable by $12.1 million, which was driven primarily by weakening of the Euro compared to the U.S. Dollar.

### Nine months ended September 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 nine months ended September 30, 2018.

#### Net Cash Provided by Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2018 was $245.5 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $457.7 million. This was partially offset by net uses of working capital of $212.2 million. The most significant drivers of the uses of working capital were accounts receivables of $119.5 million and prepaid expenses and other of $127.9 million, due to the seasonal increase in net sales and upfront customer incentive payments during the nine months ended September 30, 2018. Other drivers of the working capital uses were other accrued liabilities of $33.6 million related to payments of normal operating activities, including interest payments on our long-term indebtedness and timing of accruals for involuntary termination benefits associated with our productivity initiatives and annual employee performance related benefits.

#### Net Cash Used for Investing Activities

Net cash used for investing activities for the nine months ended September 30, 2018 was $177.6 million. This use was primarily comprised of acquisitions of $79.2 million and purchases of property, plant and equipment of $109.5 million.

#### Net Cash Used for Financing Activities

Net cash used for financing activities for the nine months ended September 30, 2018 was $239.4 million. This change was driven by payments of $538.9 million to pay down short-term and long-term borrowings that includes pay down of the Euro Term Loans, purchases of common stock totaling $147.8 million, an investment in a noncontrolling interest of $26.9 million as well as payments of $11.9 million consisting of financing-related costs, deferred acquisition-related consideration associated with historical acquisitions, and dividends to noncontrolling interests. 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 $17.2 million.

#### Other Impacts on Cash

Currency exchange impacts on cash for the nine months ended September 30, 2018 were unfavorable by $10.5 million, which was driven primarily from weakening of the Euro, Chinese Renminbi and certain currencies within Latin America compared to the U.S. Dollar.

### Financial Condition

We had cash and cash equivalents at September 30, 2019 and December 31, 2018 of $767.2 million and $693.6 million, respectively. Of these balances, $446.2 million and $417.1 million were maintained in non-U.S. jurisdictions as of September 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)*

|  | September 30, 2019 | December 31, 2018 |
| --- | ---: | ---: |
| 2024 Dollar Term Loans | $2,393.5 | $2,411.8 |
| 2024 Dollar Senior Notes | 500.0 | 500.0 |
| 2024 Euro Senior Notes | 365.9 | 383.3 |
| 2025 Euro Senior Notes | 491.5 | 514.9 |
| Short-term and other borrowings | 107.5 | 103.8 |
| Unamortized original issue discount | (11.0) | (12.6) |
| Unamortized deferred financing costs | (32.7) | (37.2) |
| Total borrowings | $3,814.7 | $3,864.0 |
| Less: |  |  |
| Short-term borrowings | $18.1 | $17.9 |
| Current portion of long-term borrowings | 24.3 | 24.3 |
| Long-term debt | $3,772.3 | $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 $362.5 million and $355.2 million at September 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, 1,110 characters.

### Evaluation of disclosure controls and procedures

As required by Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), the Company carried out an evaluation, under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of September 30, 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 September 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 Oct 25, 2019.
Source: SEC EDGAR, the filing index for accession 0001616862-19-000079. Last ingested by Listed: Nov 12, 2026, 22:39 ET. No prices; not investment advice.