# Axalta Coating Systems Ltd.: Form 10-K for the period ended Dec 31, 2019 - Company: [Axalta Coating Systems Ltd.](/companies/axta.md) (CIK 1616862) - Form: 10-K - Filed: 2020-02-19 - Accepted by EDGAR: Feb 19, 2020, 16:45 ET - Period: 2019-12-31 - Accession: 0001616862-20-000012 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/1616862/000161686220000012/a12201910-kdocument.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1616862/000161686220000012/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2019-12-31. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2019-10-01 to 2019-12-31 | $1.10bn | us-gaap:Revenues | | Revenue | 12 months, 2019-01-01 to 2019-12-31 | $4.48bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Cost of revenue | 3 months, 2019-10-01 to 2019-12-31 | $710.8m | us-gaap:CostOfGoodsAndServicesSold | | Cost of revenue | 12 months, 2019-01-01 to 2019-12-31 | $2.92bn | us-gaap:CostOfGoodsAndServicesSold | | Research and development | 12 months, 2019-01-01 to 2019-12-31 | $70.2m | us-gaap:ResearchAndDevelopmentExpense | | Selling, general and administrative | 12 months, 2019-01-01 to 2019-12-31 | $822.1m | us-gaap:SellingGeneralAndAdministrativeExpense | | Operating income | 3 months, 2019-10-01 to 2019-12-31 | $108.7m | us-gaap:OperatingIncomeLoss | | Operating income | 12 months, 2019-01-01 to 2019-12-31 | $488.2m | us-gaap:OperatingIncomeLoss | | Interest expense | 12 months, 2019-01-01 to 2019-12-31 | $162.6m | us-gaap:InterestExpense | | Income tax | 12 months, 2019-01-01 to 2019-12-31 | $77.4m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2019-10-01 to 2019-12-31 | $41.7m | us-gaap:NetIncomeLoss | | Net income | 12 months, 2019-01-01 to 2019-12-31 | $249.0m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2019-10-01 to 2019-12-31 | $0.18 | us-gaap:EarningsPerShareDiluted | | Diluted EPS | 12 months, 2019-01-01 to 2019-12-31 | $1.06 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2019-10-01 to 2019-12-31 | $0.18 | us-gaap:EarningsPerShareBasic | | Basic EPS | 12 months, 2019-01-01 to 2019-12-31 | $1.06 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 12 months, 2019-01-01 to 2019-12-31 | 235,800,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 12 months, 2019-01-01 to 2019-12-31 | $573.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 12 months, 2019-01-01 to 2019-12-31 | $112.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Share repurchases | 12 months, 2019-01-01 to 2019-12-31 | $105.3m | us-gaap:PaymentsForRepurchaseOfCommonStock | | Cash and equivalents | at 2019-12-31 | $1.02bn | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2019-12-31 | $2.57bn | us-gaap:AssetsCurrent | | Total assets | at 2019-12-31 | $6.82bn | us-gaap:Assets | | Current liabilities | at 2019-12-31 | $1.07bn | us-gaap:LiabilitiesCurrent | | Total liabilities | at 2019-12-31 | $5.41bn | us-gaap:Liabilities | | Long-term debt | at 2019-12-31 | $3.88bn | us-gaap:LongTermDebt | | Current portion of debt | at 2019-12-31 | $43.9m | us-gaap:DebtCurrent | | Short-term borrowings | at 2019-12-31 | $19.6m | us-gaap:ShortTermBorrowings | | Shareholders' equity | at 2019-12-31 | $1.35bn | us-gaap:StockholdersEquity | ## Business As filed, 33,640 characters. Axalta Coating Systems Ltd. ("Axalta," the "Company," "we," "our" and "us"), is 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. Over the course of our history we have remained at the forefront of our industry by continually developing innovative coatings technologies designed to enhance the performance and appearance of our customers' products, while improving their productivity and profitability. Axalta is a Bermuda exempted company incorporated at the direction of an affiliate of The Carlyle Group L.P. ("Carlyle") on August 24, 2012 for the purpose of consummating the acquisition of DuPont Performance Coatings ("DPC"), a business formerly owned by E. I. du Pont de Nemours and Company ("DuPont"), including certain assets of DPC and all of the capital stock and other equity interests of certain entities engaged in the DPC business (the "Acquisition"). Axalta, through its wholly-owned indirect subsidiaries, acquired DPC on February 1, 2013. Axalta is a holding company with no business operations or assets other than primarily cash and cash equivalents. Our global operations are conducted by indirect wholly-owned subsidiaries and indirect majority-owned subsidiaries. Our diverse global footprint of 48 manufacturing facilities, 4 technology centers, 54 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. Our scale and strong local presence are critical to our success, allowing us to leverage our technology portfolio and customer relationships globally while meeting customer demands locally. We operate our business in two operating segments, Performance Coatings and Transportation Coatings, serving four end-markets globally as highlighted below. The table above reflects numbers for the year ended December 31, 2019. Adjusted EBIT Margin is calculated as Adjusted EBIT divided by Net sales. See the discussion and reconciliation of Adjusted EBIT to the closest U.S. GAAP numbers in Item 7 and Note 20 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Net sales for our four end-markets and four regions for the year ended December 31, 2019 are highlighted below: Note: Latin America includes Mexico. EMEA represents Europe, Middle East and Africa. ### SEGMENT OVERVIEW ### Performance Coatings Through our Performance Coatings segment, we provide high-quality liquid and powder coatings solutions to a fragmented and local customer base, as well as a number of regional and global customers. 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. ### Performance Coatings End-Markets #### Refinish Sales in the refinish end-market are driven by the number of vehicle collisions, owners’ propensity to repair their vehicles, the number of miles vehicle owners drive and the size of the car parc. Although refinish coatings typically represent only a small portion of the overall vehicle repair cost, they are critical to the vehicle owner’s satisfaction given their impact on appearance. As a result, body shop operators are most focused on coatings brands with a strong track record of performance and reliability. Body shops look for suppliers and brands with productivity enhancements, regulatory compliance, consistent quality, the presence of ongoing technical support and exact color match technologies. Color matching is a critical component of coatings supplier selection, since inexact matching adversely impacts vehicle appearance, and if repainting is required due to a poor match, it can significantly impact the speed and volume of repairs at a given shop. We develop, market and supply a complete portfolio of innovative coatings systems and color matching technologies to facilitate faster automotive collision repairs relative to competing technologies. Our color matching technology provides Axalta-specific formulations that enable body shops to accurately match thousands of vehicle colors, regardless of vehicle brand, color, age or supplier of the original paint during production. It would be time consuming and costly for a new entrant to create such an extensive color inventory. #### Industrial The industrial end-market is comprised of liquid and powder coatings used in a broad array of end-market applications. Within the industrial end-market, we focus on the following: - *General Industrial*: coatings for a wide and diverse array of applications, including HVAC, shelving, appliances and electrical storage components, metal furniture, industrial components, sports equipment and playground equipment as well as ACE, fencing, valves and specialized coatings used for coating the interior of metal drums and packaging and coatings for the exterior of glass bottles. - *Electrical Insulation Systems*: coatings to insulate copper wire used in motors and transformers and coatings to insulate sheets forming magnetic circuits of motors and transformers, computer elements and other electrical components. - *Architectural*: exterior powder and liquid coatings typically used in the construction of extrusions for commercial structures, residential windows, doors and cladding. - *Transportation*: liquid and powder coatings for vehicle components, chassis and wheels to protect against corrosion, provide increased durability and impart appropriate aesthetics. - *Oil & Gas*: liquid and powder products to coat tanks, pipelines, valves and fittings protecting against chemicals, corrosion and extreme temperatures in the oil & gas industry. - *Coil:* coatings utilized in various applications such as metal building roof and wall panels, residential and commercial steel roofing, gutters, appliances, lighting, garage and entry doors, HVAC, office furniture and truck trailers. - *Wood:* coatings utilized in OEM and aftermarket industrial wood markets, including building products, cabinets, flooring and furniture. Demand in this end-market is driven by a wide variety of macroeconomic factors, such as growth in GDP, new residential and commercial construction, automotive production, and industrial production. There has also been an increase in demand for products that enhance environmental sustainability, corrosion resistance, productivity, and color aesthetics. These global trends are affected by regional and industry specific trends. Customers select industrial coatings based on protection, durability and appearance. ### Performance Coatings Products and Brands We offer a comprehensive range of specially-formulated waterborne and solventborne products and systems used by the global automotive refinish industry to repair damaged vehicles. Our refinish products and systems include a range of coatings layers required to match the vehicle’s color and appearance, producing a repair surface indistinguishable from the adjacent surface. We provide systems that enable body shops to match more than 200,000 color variations, using a database with more than four million formulations, in the global market. Our color technology is manifested in the pigment and dispersion technology that are utilized in our tints, one of the most technologically advanced parts of the refinish coatings system, which makes up most of our products in a body shop. We have a large color library and several well-known, long-standing premium brands, including Cromax®, Standox®, Spies Hecker®, and our newest mainstream product, Syrox™, as well as other regional and local brands. Our color matching and retrieval systems allow customers to quickly match any color, preventing body shop technicians from having to repeat the color matching process, saving time and materials. The color matching process begins with a technician scanning a damaged vehicle with one of our advanced color matching tools, such as our Acquire Plus EFX™ hand-held spectrophotometer. The Acquire Plus EFX reads the vehicle color, evaluating both the unique flake and color characteristics of the specific vehicle. These characteristics may vary significantly, even for vehicles of the same make, model and original color, due to a variety of factors, including a vehicle’s age, plant at which it was assembled, weather conditions and operating history. The Acquire Plus EFX electronically connects with our ColorNet® database and generates for the body shop technician the precise mix of tints and colors needed to recreate that specific color for the part being repaired. In addition to the Acquire Plus EFX, we offer customers several other color matching tools, including our VINdicator® database, which identifies vehicle color based on its vehicle identification number, and traditional color matching fan decks. We are also a leading global developer, manufacturer and supplier of functional and decorative liquid and powder coatings for a large number of diversified applications in the industrial end-market. We provide a full portfolio of products for applications including architectural cladding and fittings, automotive components, general industrial, job coaters, electrical insulation coatings, HVAC, appliances, aluminum extrusions, rebar and oil & gas pipelines. Through an acquisition completed in 2017, we have also become a leading manufacturer and supplier of wood coatings sold into the building product, cabinet, flooring and furniture end-markets in North America. Our liquid systems are used to provide insulation and corrosion protection for electrical conductors and components, provide chemical resistance for the interiors of metal packaging drums, protect automotive parts and serve as primers, basecoats, and clearcoats for alloy and steel wheels. Powder coatings products are often an environmentally responsible, higher transfer efficiency alternative to liquid coatings. These coatings are typically electrostatically sprayed using a specialized spray gun and cured to create a uniform, high-quality finish. In the oil & gas industry our powder and liquid products are used to protect components from corrosion and severe conditions such as extreme temperatures. Our major industrial brands include Voltatex®, AquaEC™, Durapon®, Hydropon™, UNRIVALED™, Tufcote™, and Ceranamel® for liquid coatings and Alesta®, Nap-Gard®, Abcite® and Plascoat® for powder. ### Performance Coatings Sales, Marketing and Distribution We leverage a large global refinish sales and technical support team to effectively serve our broad refinish customer base of approximately 80,000 body shops. Most of our products are supplied by our network of approximately 4,000 independent local distributors. In select regions, including parts of Europe, we also sell directly to customers. Distributors maintain an inventory of our products to fill orders from body shops in their market and assume credit risk and responsibility for logistics, delivery and billing. In certain countries, we utilize importers that buy directly from us and actively market our products to body shops. Our relationships with our top ten distributors are longstanding and continue to contribute to our success in the global refinish market. Our large sales force manages relationships directly with our end-customers to drive demand for our products, which in turn are purchased through customers in our distributor network. Due to the local nature of the refinish industry, our sales force operates on a regional/country basis to provide clients with responsive customer service and local insight. As part of their coverage efforts, salespeople introduce new products to body shops and provide technical support and ongoing training. We have 54 customer training centers established globally, which helps to deepen our customer relationships. Our sales force also helps to drive shop productivity improvements and to install or upgrade body shop color matching and mixing equipment to improve shop profitability. Once a coating and color system is installed, a body shop almost exclusively uses its specific supplier’s products. The proprietary nature of a coatings supplier’s color systems, the substantial inventory needed to support a body shop and the body shop’s familiarity with an established brand lead to high levels of customer retention. Our customer retention rate levels have been and continue to be strong. To effectively reach our customers in the industrial end-market we generally ship directly and leverage a dedicated sales force and technical service team that operates on a regional basis. We are one of only three truly global powder coatings producers that can satisfy the needs and specifications of a customer in multiple regions of the world, while maximizing productivity from the broad scale and scope of our operations. ### Performance Coatings Customers Within our Performance Coatings segment, we sell coatings to customers in more than 130 countries. Our top ten customers accounted for approximately 20% of our Performance Coatings net sales during the year ended December 31, 2019. In our industrial and refinish end-markets we serve a broad, fragmented customer base. Our industrial end-market is comprised of a wide variety of industrial manufacturers, while our refinish end-market is comprised of approximately 80,000 body shops, including: - *Independent Body Shops:* Single location body shops that utilize premium, mainstream or economy brands based on the local market. - *Multi-Shop Operators ("MSOs"):* Body shops with more than one location focused on providing premium paint jobs with industry leading efficiency. MSOs use premium/mainstream coatings and state-of-the-art painting technology to increase shop productivity, allowing them to repair more vehicles faster. - *Original Equipment Manufacturer Dealership Body Shops*: High-productivity body shops, located in OEM car dealerships, that operate like MSOs and provide premium services to customers using premium/mainstream coatings. ### Performance Coatings Competition Our primary competitors in the refinish end-market include PPG, BASF and AkzoNobel, but we also compete against regional players in local markets. Similarly, in the industrial end-market, we compete against multi-national suppliers, such as AkzoNobel, PPG and Sherwin-Williams as well as a large number of local and regional players in local markets. We are one of the few performance coatings companies that can provide the customer service, technology, color design capability and product performance necessary to deliver exceptional value to our customers. ### Transportation Coatings Through our Transportation Coatings segment, we provide advanced coatings technologies to OEMs of light and commercial vehicles. These increasingly global customers require a high level of technical support coupled with productive, environmentally responsible coatings systems that can be applied with a high degree of precision, consistency and speed. ### Transportation Coatings End-Markets #### Light Vehicle Demand for light vehicle products is driven by the production of light vehicles in a particular region. Light vehicle OEMs select coatings providers on the basis of their global ability to deliver advanced technological solutions that improve exterior appearance and durability and provide long-term corrosion protection. These customers also look for suppliers that can enhance process efficiency to improve productivity and provide superior technical service support. Rigorous environmental and durability testing as well as obtaining engineering approvals are also key criteria used by global light vehicle OEMs when selecting coatings providers. Globally integrated suppliers are important because they offer products with consistent standards across regions and are able to deliver high-quality products in sufficient quantity while meeting OEM service requirements. Our global scale, people expertise, innovative technology platforms, and customer focus, position us to be a global partner and solutions provider to the most discerning and demanding light vehicle OEMs. We are one of the few coatings producers that can provide OEMs with global product specifications, standardized color development, compatibility with an ever-increasing number of substrates, increasingly complex colors and environmentally responsible coatings while continuing to simplify and reduce steps in the coating application process. #### Commercial Vehicle Sales in the commercial vehicle end-market are generated from a variety of applications, including non-automotive transportation (*e.g.*, HDT, bus and rail), motorcycles, marine and aviation, as well as related markets such as trailers, recreational vehicles and personal sport vehicles. This end-market is primarily driven by global commercial vehicle production, which is influenced by overall economic activity, government infrastructure spending, equipment replacement cycles and evolving environmental standards. Commercial vehicle OEMs select coatings providers on the basis of their ability to consistently deliver advanced technological solutions that improve exterior appearance, protection and durability and provide extensive color libraries and matching capabilities at the lowest total cost-in-use, while meeting stringent environmental requirements. Particularly for HDT applications, truck owners demand a greater variety of custom colors and advanced product technologies to enable custom designs. Our strong market position and growth are driven by our ability to provide customers with our market-leading brand, Imron®, as well as leveraging our global product lines, regional knowledge and service. Additionally, to capture further growth we are launching a new suite of products to meet our customers’ evolving needs. ### Transportation Coatings Products and Brands We develop and supply a complete coatings product line for light vehicle OEMs. Products are designed to enhance the styling and appearance of a vehicle’s exterior while providing protection from the elements, extending the life of the vehicle. Widely recognized in the industry for our advanced and patented technologies, our products not only increase productivity and profitability for OEMs but also produce attractive and durable finishes. Our light vehicle coatings portfolio is one of the broadest in the industry. The coatings operation is a critical component of the vehicle assembly process, requiring a high degree of precision, speed and productivity. The paint shop process typically includes a dip process, three application zones and three high-temperature ovens that cure each coating layer at temperatures ranging from 320°F to 400°F (i.e., "high bake"). Our key products consist of the four main coatings layers: electrocoat (AquaEC™), primer (HyperDur™), basecoat (ChromaDyne™) and clearcoat (Lumeera™). The coatings process accounts for a majority of the total energy consumed during the vehicle manufacturing process. As a result, we have developed Harmonized Coating TechnologiesTM, including 3-Wet, Eco-Concept and 2-Wet Monocoat, that help our OEM customers lower costs by reducing energy consumption while increasing productivity. OEMs are also increasingly looking to reduce the weight of vehicles in response to increasing vehicle emissions and fuel consumption regulations. As a result, OEMs are constructing vehicle platforms using a variety of new materials in addition to steel and plastic, including aluminum, carbon fiber and other substrates, each of which requires specialized coatings formulations to create a uniform color and finish. We continue to innovate with our OEM customers in driving this trend, as evidenced by use of our coatings on their flagship vehicle platforms. We also develop and supply a wide array of coatings systems for a broad range of commercial vehicle applications including HDT, bus, and rail. These products simultaneously enhance aesthetic appearance and provide protection from the elements. We meet the demands of commercial vehicle customers with our extensive offering of over 75,000 different colors. In the HDT market, because the metal and composite components are painted simultaneously in an automatic process, most truck OEMs use low bake coatings to ensure that the plastic composite parts on a truck’s exterior do not deform during the process. Truck owners demand a wide variety of custom colors that are formulated using a combination of on-site mixing machines at the OEM or direct shipments of premixed high-volume colors from us. Our commercial vehicle brands include Imron®, Imron Elite®, Centari®, Rival®, Corlar® epoxy undercoats and AquaEC™. ### Transportation Coatings Sales, Marketing and Distribution We have full-time technical representatives stationed at OEM facilities around the world. These on-site representatives provide customer support, monitor the painting process and track paint demand at each assembly plant. Monitoring OEM line performance in real-time allows our technical support teams to help improve paint department operating efficiency and provide performance feedback to our formulating chemists and paint manufacturing teams. Our customer technical support representatives also help OEMs manage their physical inventory by forecasting facility coatings demand based on the customer’s build schedule. We sell and ship products directly to light vehicle OEMs in each of our four regions coordinated via a global point of contact for each customer and assist OEMs with on-site customer support. Located in 11 countries, our manufacturing facilities provide a local presence that enables us to cultivate strong relationships, gain intimate customer knowledge, provide superior technical support to our key customers and maintain "just-in-time" product delivery capabilities critical to OEMs. Our local presence also allows us to quickly react to changing local dynamics, offer high-quality products and provide excellent customer service. In the commercial vehicle end-market, we employ a dedicated sales and technical service team to support our diverse customer base, including a direct sales force supporting the HDT market. We ship our coatings directly to commercial vehicle OEMs and provide on-site technical service representatives that play an important role by helping optimize the painting process and by providing responsive customer support. ### Transportation Coatings Customers We provide our products and services to light and commercial vehicle customers at over 200 assembly plants worldwide, including nine of the top ten global automotive manufacturers. We have a stable customer base with several relationships dating back approximately 90 years and believe we are well positioned with the fastest growing OEMs in both the developed and emerging markets. Our top ten customers accounted for approximately 65% of our Transportation Coatings net sales during the year ended December 31, 2019. ### Transportation Coatings Competition We primarily compete against large multi-national suppliers such as PPG and BASF in the light and commercial vehicle end-markets. Additionally, we compete against certain regional players in Asia Pacific. With our state-of-the-art coatings solutions and local presence in key OEM markets, we are one of the few competitors in the industry that offers global manufacturers the combination of high-quality products, personalized, top-rate technical service and short lead-times for product delivery. ### KEY RAW MATERIALS We use thousands of different raw materials, which fall into seven broad categories: liquid resins, powder resins, pigments, solvents, monomers, isocyanates and additives. On average, our total raw material spend represents between 45% and 55% of our cost of sales. We purchase raw materials from a diverse group of suppliers, with our top ten suppliers representing approximately 32% of our 2019 spending on raw materials. Approximately 65% of the raw materials we procure are derived from crude oil and natural gas. While prices for these raw materials fluctuate with energy prices, such fluctuations are somewhat mitigated by the fact that the majority of our raw materials are fourth to sixth generation derivatives of crude oil and natural gas. The dynamics of supply and demand play a much more critical role in our cost of raw materials than just the price of crude oil. Non-petrochemical based inputs such as minerals that are used to manufacture coating pigments are not significantly affected by volatility in crude oil prices but tend to be impacted by the supply-demand dynamics of their industry. Historically, to manage raw material volatility, we have used a combination of price increases to customers and, in limited circumstances, contractual raw material recovery mechanisms. Since 2001, our variable cost of sales has remained stable between 35% and 43% of net sales. ### RESEARCH AND DEVELOPMENT Our focus on technology has allowed us to proactively provide customers with next-generation offerings that enhance product performance, improve productivity and satisfy increasingly strict environmental regulations. Since our entry into the coatings industry over 150 years ago, we believe we have consistently been at the forefront of coatings technology innovation. These innovations have played a fundamental role in our ability to maintain and grow our global market share as well as deliver substantial financial returns. We believe that we are a technology leader well positioned to benefit from continued industry shifts in customer needs. Our markets are among the most demanding in the coatings industry with high levels of product performance that continuously evolves, with increasing expectations for productivity on customer lines and with environmentally responsible products. Our technology development is led by a highly experienced and educated workforce that is focused on new product development, color development, technical customer support and improving our manufacturing processes. As such, our technology development covers two critical interrelated aspects for us, including research and development as well as technical support and manufacturing. In total, as of December 31, 2019, we have approximately 1,400 people dedicated to technology development. We operate four major technology centers throughout the world where we develop and align our technology investments with regional business needs complemented by approximately 30 regional laboratories which provide local connection to our global customer base. This includes our Global Innovation Center located in Philadelphia, Pennsylvania which opened in 2018 for global research, product development and technology initiatives. ### PATENTS, LICENSES AND TRADEMARKS As of December 31, 2019, we had a portfolio of approximately 750 issued patents and more than 400 trademarks. We actively apply for and obtain U.S. and foreign patents and trademarks on new products and process innovations and as of December 31, 2019, 182 patent applications were pending throughout the world. Our primary purpose in obtaining patents is to protect the results of our research for use in operations and licensing. We are also party to a substantial number of patent licenses and other technology agreements. We have a significant number of trademarks and trademark registrations in the United States and in other countries, as described below. We own or otherwise have rights to the trademarks, service marks, copyrights and trade names used in conjunction with the marketing and sale of our products and services. These trademarks include Abcite®, Alesta®, AquaEC®, AudurraTM, Centari®, Ceranamel®, ChallengerTM, ChemophanTM, ColorNet®, Corlar®, Cromax®, Cromax Mosaic®, Durapon 70®, DuxoneTM, Harmonized Coating Technologies®, Hydropon®, Imron®, Imron EliteTM, Imron ExcelProTM, LutophenTM, Nap-Gard®, Nason®, Rival®, Spies Hecker®, Standox®, StollaquidTM, SyntopalTM, SyroxTM, Vermeera® and Voltatex®, which are protected under applicable intellectual property laws and are the property of us and our subsidiaries. Although we consider that our patents, licenses and trademarks in the aggregate constitute a valuable asset, we do not regard our business as being materially dependent on any single or group of related patents, licenses or trademarks. ### JOINT VENTURES At December 31, 2019, we were party to 11 joint ventures, of which four were focused on the refinish end-market, three were focused on the light vehicle end-market, three were focused on the industrial end-market and one was focused on the commercial vehicle end-market. At December 31, 2019, we were the majority shareholder, and/or exercise control in our eight consolidated joint ventures. Our fully consolidated joint venture-related net sales were $254.7 million, $315.6 million and $296.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. See Part I, Item 1A, "Risk Factors—Risks Related to our Business—Risks Related to Other Aspects of our Business—Our joint ventures may not operate according to our business strategy if our joint venture partners fail to fulfill their obligations." ### EMPLOYEES As of December 31, 2019, we had approximately 14,000 people located throughout the world consisting of sales, technical, manufacturing operations, supply chain, administrative and customer service personnel. As of December 31, 2019, approximately 42% of our people globally were covered by organized labor agreements, including works councils, with fewer than 10 people in the United States covered by organized labor agreements. We consider our employee relations to be good overall. ### ENVIRONMENTAL, HEALTH AND SAFETY We are committed to environmental stewardship and to health, safety and sustainability excellence in our global operations. As such, we operate in compliance with applicable laws and regulations governing the protection of the environment and health and safety of our employees and neighboring communities. Safety is integrated into the way we do business. Our safety program is structured on the foundation that every employee is engaged and committed to improving safe operating practices and eliminating injuries. When health and safety incidents do occur, we strive to determine the causes and eliminate the potential for future similar incidents. In 2019, Axalta’s injury and illness performance resulted in a 0.27 OSHA Recordable Incident Rate, compared to the 1.9 OSHA Recordable Incident Rate for the Paint and Coating Manufacturing Industry (according to the US Bureau of Labor Statistics 2018 data). Our Environment, Health, Safety (EHS) and Sustainability policies and standards are a key element of the foundation upon which we develop, market, manufacture, and distribute products and services to our global customers. In 2017, we established a Board-level committee responsible for our EHS and Sustainability policies, performance, strategy and compliance matters. We operate our manufacturing facilities using a common set of internal standards. These standards support a consistent approach to EHS and Sustainability performance improvement. We strive to assure that all our manufacturing and distribution facilities are operated in compliance in all known material respects to applicable environmental requirements. Many of our manufacturing sites have a long history of industrial operations and government required remediation is or may be required at a number of these locations. We do not expect outstanding remediation obligations to have a material impact on our financial position, the ultimate cost of remediation is subject to a number of variables and difficult to accurately predict. We may also incur significant additional costs as a result of contamination that is discovered and/or government required remediation obligations that are imposed at these or other properties in the future. During 2016, Axalta achieved and continues to maintain a global, multi-site certification for RC14001. This certification incorporates the elements of the American Chemistry Council’s Responsible Care Program including product safety and compliance, process safety and security, which builds upon the ISO 14001 certification specifically related to our environmental stewardship program. ### WHERE YOU CAN FIND MORE INFORMATION Our website address is www.axalta.com. We post, and shareholders may access without charge, our recent filings and any amendments thereto of our annual reports on Form 10-K, quarterly reports on Form 10-Q and proxy statements as soon as reasonably practicable after such reports are filed with the Securities and Exchange Commission ("SEC"). We also post all financial press releases, including earnings releases, to our website. All other reports filed or furnished to the SEC on the SEC’s website, www.sec.gov, including current reports on Form 8-K, are available via direct link on our website. Reference to our and the SEC’s websites herein do not incorporate by reference any information contained on those websites and such information should not be considered part of this Form 10-K. ## Risk factors As filed, 89,055 characters. *As a global manufacturer, marketer and distributor of high performance coatings systems, we operate in a business environment that includes risks. These risks are not unlike the risks we have faced in the recent past nor are they unlike risks faced by our competitors. If any of the events contemplated by the following discussion of risks should occur, our business, results of operations, financial condition and cash flows could suffer materially and adversely. While the factors listed here are considered to be the more significant factors, they should not be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors, including those in other documents we file from time to time with the Securities and Exchange Commission, may present significant additional obstacles which may materially and adversely affect our businesses and our results of operations.* ### Risks Related to our Business ### Risks Related to Execution of our Strategic and Operating Plans ### 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. ***Our financial position, results of operations and cash flows could be materially adversely affected by difficult economic conditions, and/or significant volatility in the capital, credit and commodities markets.*** Several of the end-markets we serve are cyclical, and macroeconomic and other factors beyond our control could reduce demand from these end-markets for our products, materially adversely affecting our business, financial condition and results of operations. Weak economic conditions could depress new car sales and/or production, reducing demand for our light vehicle OEM coatings and limit the growth of the car parc. These factors could, in turn, cause a related decline in demand for our automotive refinish coatings because, as the age of a vehicle increases, the propensity of car owners to pay for cosmetic repairs generally decreases. Also, during difficult economic times, car owners may refrain from seeking repairs for their damaged vehicles. Similarly, periods of reduced global economic activity could hinder global industrial output, which could decrease demand for our industrial and commercial coating products. Our global business is adversely affected by decreases in the general level of economic activity, such as decreases in business and consumer spending, construction activity and industrial manufacturing. Disruptions in the United States, Europe or other economies, or weakening of emerging markets, such as Brazil or China, could adversely affect our sales, profitability and/or liquidity. Further, a tightening of credit in financial markets could adversely affect the ability of our customers and suppliers to obtain financing for significant purchases and operations, could result in a decrease in or cancellation of orders for our products and services and could impact the ability of our customers to make payments owed to us. Similarly, a tightening of credit in financial markets could adversely affect our supplier base and increase the potential for one or more of our suppliers to experience financial distress or bankruptcy. ***We may be unable to successfully execute on our growth initiatives, business strategies or operating plans.*** We are executing on a number of growth initiatives, strategies and operating plans designed to enhance our business, including productivity enhancements and cost reduction. For example, we are undertaking certain operational improvement initiatives with respect to realigning our manufacturing facilities in multiple regions. In 2018, we announced the closing of our Mechelen, Belgium manufacturing facility as part of our restructuring initiative. Axalta commenced the closure in the third quarter of 2018 and anticipates completion of the closure activities during the first half of 2020. We are also growing our sales force in emerging markets and end-markets where we are underrepresented. The anticipated benefits from these efforts are based on several assumptions that may prove to be inaccurate. A variety of risks could cause us not to realize some or all of the expected benefits, including growth and cost savings. These risks include, among others, delays in the anticipated timing of activities related to such growth initiatives, strategies and operating plans; increased difficulty and cost in implementing these efforts; and the incurrence of other unexpected costs associated with operating the business. Further, our continued implementation of these programs may disrupt our operations and performance. As a result, we cannot assure you that we will realize these benefits. If, for any reason, the benefits we realize are less than our estimates or the implementation of these growth initiatives, strategies and operating plans adversely affect our operations or cost more or take longer to effectuate than we expect, or if our assumptions prove inaccurate, our results of operations may be materially adversely affected. ***Increased competition may adversely affect our business, financial condition and results of operations.*** We face substantial competition from many international, national, regional and local competitors of various sizes in the manufacturing, distribution and sale of our coatings and related products. Some of our competitors are larger than us and have greater financial resources than we do, particularly in light of the significant consolidation our industry has experienced. Other competitors are smaller and may be able to offer more specialized products. We believe that technology, product quality, product innovation, breadth of product line, technical expertise, distribution, service, local presence and price are the key competitive factors for our business. Competition in any of these areas may reduce our net sales and adversely affect our earnings or cash flow by resulting in decreased sales volumes, reduced prices and increased costs of manufacturing, distributing and selling our products. ***Improved safety features on vehicles, insurance company influence, the introduction of new business models or new methods of travel, and weather conditions may reduce the demand for some of our products and could have a negative effect on our business, financial condition and results of operations.*** Vehicle manufacturers continue to develop new safety features such as collision avoidance technology and self-driving vehicles that may reduce vehicle collisions in the future, potentially negatively impacting demand for our refinish coatings. Insurance companies may influence vehicle owners to use body shops that do not use our products, which could also potentially negatively impact demand for our refinish coatings. In addition, through the introduction of new technologies, new business models or new methods of travel, such as ridesharing, the number of automotive OEM new-builds may decline, potentially reducing demand for our automotive OEM coatings. Furthermore, from time to time, weather conditions have an adverse effect on our sales of coatings and related products. For example, unusually mild weather during winter months may lead to fewer vehicle collisions, reducing market demand for our refinish coatings. Any resulting reduction in demand for our refinish coatings could have a material adverse effect on our business, financial condition and results of operations. ***The loss of or reduced purchases by any of our largest customers, or the consolidation of MSOs, distributors and/or body shops, could adversely affect our business, financial condition and results of operations.*** We have some customers that purchase a large amount of products from us and we are also reliant on distributors to assist us in selling our products. Our largest single customer accounted for approximately 6% of our 2019 net sales and our largest distributor accounted for approximately 4% of our 2019 net sales. Consolidation of any of our customers, including MSOs, distributors and body shops, could decrease our customer base and impact our results of operations if the resulting business seeks different sales terms or chooses to use one of our competitors for the consolidated business. The loss of any of our large customers or significant changes in their level of purchases, as a result of changes in business conditions, working capital levels, product requirements, consolidation or otherwise, could have a material adverse effect on our business, financial condition and results of operations. ***We rely on our distributor network and third-party delivery services for the distribution and export of certain of our products. A significant disruption in these services or significant increases in prices for those services may disrupt our ability to export material or increase our costs.*** We ship a significant portion of our products to our customers through our distributor network as well as independent third-party delivery companies. If any of our key distributors or third-party delivery providers experiences a significant disruption our products may not be delivered in a timely fashion. In addition, if our distributors or third-party delivery providers increase prices and we are not able to pass along these increases to customers, find comparable alternatives or adjust our delivery network, our business, financial condition and results of operations could be adversely affected. ***We take on credit risk exposure from our customers in the ordinary course of our business.*** We routinely offer customers pre-bates, loans and other financial incentives to purchase our products. These arrangements generally obligate the customer to purchase products from us and/or repay us such incentives. In the event that a customer is unwilling or unable to fulfill its obligations under these arrangements, we may incur a financial loss. In addition, in the ordinary course of our business, we guarantee certain of our customers’ obligations to third parties. Any default by our customers on their obligations could force us to make payments to the applicable creditor. It is possible that customer defaults on obligations owed to us and on third-party obligations that we have guaranteed could be significant, which could have a material adverse effect on our business, financial condition and results of operations. Our level of credit risk exposure from our customers has remained stable in recent years. ***Price increases, business interruptions or declines in the supply of raw materials could have a significant impact on our ability to grow or sustain earnings.*** Our manufacturing processes consume significant amounts of raw materials, the costs of which are subject to worldwide supply and demand as well as other factors beyond our control. We use a significant amount of raw materials derived from crude oil and natural gas. As a result, volatile oil and gas prices can cause significant variations in our raw materials costs, affecting our operating results. In rising raw material price environments, we may be unable to pass along these increased costs to our customers. In declining raw material price environments, customers may seek price concessions from us greater than any raw material cost savings we realize. If we are not able to fully offset the effects of higher raw materials costs, or if customers demand greater raw material price concessions than we obtain in low raw material cost environments, our financial results could deteriorate. In addition to the risks associated with raw materials prices, supplier capacity constraints, supplier production disruptions, including supply disruptions, increasing costs for energy, or the unavailability of certain raw materials could result in harm to our manufacturing capabilities or supply imbalances that may have a material adverse effect on our business, financial condition and results of operations. ***Failure to develop and market new products and manage product life cycles could impact our competitive position and have a material adverse effect on our business, financial condition and results of operations.*** Our operating results are largely dependent on our development and management of our portfolio of current, new and developing products and services as well as our ability to bring those products and services to market. We plan to grow our business by focusing on developing and marketing our solutions to meet increasing demand for productivity. Our ability to execute this strategy and our other growth plans successfully could be adversely affected by difficulties or delays in product development, such as the inability to identify viable new products, successfully complete research and development, obtain relevant regulatory approvals, effectively manage our manufacturing process or costs, obtain intellectual property protection, or gain market acceptance of new products and services. Because of the lengthy and costly development process, technological challenges and intense competition, we cannot assure you that any of the products we are currently developing, or that we may develop in the future, will achieve substantial commercial success. For example, in addition to developing technologically advanced products, commercial success of those products will depend on customer acceptance and implementation of those products. A failure to develop commercially successful products or to develop additional uses for existing products could materially adversely affect our business, financial results or results of operations. Further, sales of our new products could replace sales of some of our current products, offsetting the benefit of even a successful product introduction. ### Our information technology systems are subject to security risks. We rely on information technology systems to conduct business. Information security risks have generally increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of cyber attackers. In addition, by utilizing third parties to perform certain business and administrative functions, we may be exposed to greater risk of data security breaches. Our information technology systems may be susceptible to damage, disruptions or shutdowns due to power outages, hardware failures, computer viruses, attacks by computer hackers, telecommunication failures, user errors, catastrophes or other unforeseen events. Any such event relating to our systems (or the systems of third parties that we rely on), could result in theft, misuse, modification or destruction of information, including trade secrets and confidential business information, and cause business disruptions, reputational damage and third-party claims, any of which could have a material adverse effect on our business, financial condition or results of operations. Since the techniques used to obtain unauthorized access to systems or to otherwise sabotage them, change frequently and are often not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. As these threats continue to evolve, particularly around cybersecurity, we may be required to expend significant resources to enhance our control environment, processes, practices, and other countermeasures. While we have designed and implemented controls to restrict access to our data and information technology infrastructure, it is still vulnerable to unauthorized access through cyber attacks, theft and other security breaches. These types of attacks have occurred against our systems from time to time, with no material adverse impacts to date. We expect these attacks to continue and our protective measures may not be adequate to ensure that our operations will not be disrupted, should another such event occur in the future. Although we continually seek to improve our countermeasures to prevent such events, we may be unable to anticipate every scenario and it is possible that certain cyber threats or vulnerabilities will be undetected or unmitigated in time to prevent an attack on us and our customers. ***Our ability to conduct our business might be negatively impacted if we experience difficulties with outsourcing and similar third-party relationships.*** We outsource certain business and administrative functions and rely on third parties to perform certain services on our behalf. We may do so increasingly in the future. If we fail to develop and implement our outsourcing strategies, such strategies prove to be ineffective or fail to provide expected cost savings, or our third-party providers fail to perform as anticipated, we may experience operational difficulties, increased costs, reputational damage and a loss of business that may have a material adverse effect on our business, financial condition and results of operations. ### Risks Related to our Global Operations ***As a global business, we are subject to risks associated with our non-U.S. operations that are not present in the United States.*** We conduct our business on a global basis, with approximately 63% of our 2019 net sales occurring outside the United States. We anticipate that international sales will continue to represent a substantial portion of our net sales and that our strategy for continued growth and profitability will entail further international expansion, particularly in emerging markets. Changes in local and regional economic conditions could affect product demand in our non-U.S. operations. Specifically, our financial results could be affected by changes in trade, monetary and fiscal policies, laws and regulations, or other activities of U.S. and non-U.S. governments, agencies and similar organizations. These conditions include, but are not limited to, changes in a country’s or region’s social, economic or political conditions, trade regulations affecting production, pricing and marketing of products, local labor conditions and regulations, reduced protection of intellectual property rights in some countries, changes in the regulatory or legal environment, restrictions on currency exchange activities, burdensome taxes and tariffs and other trade barriers, as well as the imposition of economic or other trade sanctions, each of which could impact our ability to do business in certain jurisdictions or with certain persons. For example, the U.S. government has taken actions or made proposals that are intended to address trade imbalances, specifically with China, among other countries, which include encouraging increased production in the United States. These actions and proposals have resulted or could result in increased customs duties and the renegotiation of some U.S. trade agreements. In addition, it is not known how the withdrawal by the United States from the Trans-Pacific Partnership trade agreement may also affect our business. As another example, new legislation known as the Worldwide Harmonized Light Vehicle Testing Procedure ("WLTP"), which requires all vehicles sold in Europe to comply with new fuel economy testing and carbon emissions standards, has and may continue to impact light vehicle production in Europe, which could result in reduced net sales and profitability. Our international operations also present risks associated with terrorism, political hostilities, war and other civil disturbances, the occurrence of which could lead to reduced net sales and profitability. Our international sales and operations are also sensitive to changes in foreign national priorities, including government budgets. Our day-to-day operations outside the United States are subject to cultural and language barriers and the need to adopt different business practices in different geographic areas. In addition, we are required to create compensation programs, employment policies and other administrative programs that comply with the laws of multiple countries. We also must communicate and monitor standards and directives across our global operations. Our failure to successfully manage our geographically diverse operations could impair our ability to react quickly to changing business and market conditions and to enforce compliance with non-U.S. standards and procedures. Any payment of distributions, loans or advances to and from our subsidiaries could be subject to restrictions on or taxation of, dividends or repatriation of earnings under applicable local law, monetary transfer restrictions, foreign currency exchange regulations in the jurisdictions in which our subsidiaries operate or other restrictions imposed by current or future agreements, including debt instruments, to which our non-U.S. subsidiaries may be a party. In particular, our operations in Brazil, China and India where we maintain local currency cash balances are subject to import authorization or pricing controls. ### Currency risk may adversely affect our financial condition and cash flows. We derive a significant portion of our net sales from outside the United States and conduct our business and incur costs in the local currency of most countries in which we operate. Because our financial statements are presented in U.S. dollars, we must translate our financial results as well as assets and liabilities into U.S. dollars for financial statement reporting purposes at exchange rates in effect during or at the end of each reporting period, as applicable. Therefore, increases or decreases in the value of the U.S. dollar against other currencies in countries where we operate will affect our results of operations and the value of balance sheet items denominated in foreign currencies. In particular, we are exposed to the Euro, the Brazilian real, the Chinese yuan, the British pound, the Australian dollar and the Russian ruble. For example, unfavorable movement in the Euro negatively impacted our results of operations in prior periods and future declines of the Euro could affect future periods. Furthermore, many of our local businesses import or buy raw materials in a currency other than their functional currency, which can impact the operating results for these operations if we are unable to mitigate the impact of the currency exchange fluctuations. We cannot accurately predict the effects of exchange rate fluctuations upon our future operating results because of the number of currencies involved, the variability of currency exposures and the potential volatility of currency exchange rates. Accordingly, fluctuations in foreign exchange rates may have an adverse effect on our financial condition and cash flows. ***Terrorist acts, conflicts, wars, natural disasters, pandemics and other health crises, among other events beyond our control, may materially adversely affect our business, financial condition and results of operations.*** As a multinational company with a large international footprint, we are subject to increased risk of damage or disruption to us, our employees, facilities, partners, suppliers, distributors, resellers or customers due to terrorist acts, conflicts, wars, adverse weather conditions, natural disasters, power outages, pandemics or other public health crises and environmental incidents, wherever located around the world. The potential for future terrorist acts, conflicts, wars, adverse weather conditions, natural disasters, power outages, pandemics or other public health crises and environmental incidents, the national and international responses to such events or perceived threats or potential conflicts relating to or arising out of such events may create economic and political uncertainties and challenges for us, our customers, suppliers and logistic partners that could have a materially adverse effect our business, financial and results of operations. A loss of the use of all or a portion of one of our key manufacturing facilities due to accident, labor issues, weather conditions, acts of war, political unrest, geopolitical risk, terrorist activity, pandemic or other public health crises, natural disaster or otherwise, whether short- or long-term, and any interruption in production capability could require us to make substantial capital expenditures to remedy the situation, which could negatively affect our business, financial condition and results of operations. ***The United Kingdom’s withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.*** In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union ("EU") in a national referendum (commonly referred to as "Brexit"). The United Kingdom formally left the EU on January 31, 2020, and is now in a transition period through December 31, 2020. We have substantial R&D and manufacturing operations in Europe and a significant portion of our business involves cross border transactions throughout the region. Although the United Kingdom will remain in the EU single market and customs union during the transition period, the long-term nature of the United Kingdom's relationship with the EU is unclear and there is considerable uncertainty as to when any agreement will be reached and implemented. The full effect of Brexit is uncertain and depends on any agreements the United Kingdom may make with the EU and others. The full consequences for the economies of the EU members and of the United Kingdom exiting the European Union are unknown and unpredictable. Depending on the final terms of agreements that the United Kingdom may make with the EU or others, we could face new regulatory costs and challenges and greater volatility in the Pound Sterling and the Euro. Any adjustments we make to our business and operations as a result of Brexit could result in significant time and expense to complete. In addition, these developments, or the perception that any of them could occur, have caused and may continue to cause significant volatility in the global financial markets as well as business conditions in Europe and beyond. This volatility may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Any of these factors could depress economic activity and restrict our access to capital, which could have a material adverse effect on our business, financial condition and results of operations and reduce the price of our common shares. ### Risks Related to Legal and Regulatory Compliance and Litigation ***Our failure to comply with the anti-corruption laws of the United States and various international jurisdictions could negatively impact our reputation and results of operations.*** Doing business on a global basis requires us to comply with the laws and regulations of the U.S. government and those of various international and sub-national jurisdictions, and our failure to successfully comply with these rules and regulations may expose us to liabilities. These laws and regulations apply to companies, individual directors, officers, employees and agents, and may restrict our operations, trade practices, investment decisions and partnering activities. In particular, our international operations are subject to U.S. and foreign anti-corruption laws and regulations, such as the U.S. Foreign Corrupt Practices Act (the "FCPA"), the United Kingdom Bribery Act 2010 (the "Bribery Act") as well as anti-corruption laws of the various jurisdictions in which we operate. The FCPA, the Bribery Act and other laws prohibit us and our officers, directors, employees and agents acting on our behalf from corruptly offering, promising, authorizing or providing anything of value to foreign officials for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining favorable treatment. As part of our business, we deal with state-owned business enterprises, the employees and representatives of which may be considered foreign officials for purposes of the FCPA or the Bribery Act. We are subject to the jurisdiction of various governments and regulatory agencies outside of the United States, which may bring our personnel into contact with foreign officials responsible for issuing or renewing permits, licenses or approvals or for enforcing other governmental regulations. In addition, some of the international locations in which we operate lack a developed legal system and have elevated levels of corruption. Our global operations expose us to the risk of violating, or being accused of violating, the foregoing or other anti-corruption laws. Such violations could be punishable by criminal fines, imprisonment, civil penalties, disgorgement of profits, injunctions and exclusion from government contracts, as well as other remedial measures. Investigations of alleged violations can be very expensive, disruptive and damaging to our reputation. Although we have implemented anti-corruption policies and procedures and introduced training since becoming an independent company, there can be no guarantee that these policies, procedures and training will effectively prevent violations by our employees or representatives in the future. Additionally, we face a risk that our distributors and other business partners may violate the FCPA, the Bribery Act or similar laws or regulations. Such violations could expose us to FCPA and Bribery Act liability and/or our reputation may potentially be harmed by their violations and resulting sanctions and fines. ***Evolving environmental, safety or other regulations and laws could have a material adverse effect on our business and consolidated financial condition.*** Our manufacturing activities and products, both in and outside of the United States, are subject to regulation by various federal, state, provincial and local laws, regulations and government agencies, including the U.S. Environmental Protection Agency, as well as other authorities both inside and outside of the United States. In addition, legal and regulatory systems in emerging and developing markets may be less developed, and less certain. Laws and regulations, and the interpretation and enforcement thereof, may change as a result of a variety of factors, including political, economic, regulatory or social events. The specific impact of changing laws and regulations, or the interpretation or enforcement of current or future laws and regulations, on our business may vary depending on a number of factors, including the age and location of operating facilities and production processes used in such facilities. As a result of changing laws and regulations, or the interpretation or enforcement of current or future laws and regulations, we may be required to make expenditures to modify operations, relocate operations, perform site cleanups or other environmental remediation or curtail or cease operations, which could have a material adverse effect on our business, financial condition and results of operations. ***Our international operations require us to comply with anti-terrorism laws and regulations and applicable trade embargoes.*** We are subject to trade and economic sanctions laws and other restrictions on international trade. The U.S. and other governments and their agencies impose sanctions and embargoes on certain countries, their governments and designated parties. In the United States, the economic and trade sanctions programs are principally administered and enforced by the U.S. Treasury Department’s Office of Foreign Assets Control. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other remedial measures and legal expenses, which could adversely affect our business, financial condition and results of operations. Although we have implemented trade-related policies and procedures and introduced training since becoming an independent company, we cannot assure you that such policies, procedures and training will effectively prevent violations in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations. We cannot predict the nature, scope or effect of future regulatory requirements to which our international sales and manufacturing operations might be subject or the manner in which existing laws might be administered or interpreted. Future regulations could limit the countries in which some of our products may be manufactured or sold, or could restrict our access to, or increase the cost of obtaining, products from foreign sources. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations. ### We are subject to complex and evolving data privacy laws. Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection and other matters. We could be liable for loss or misuse of our customers’ personal information and/or our employee’s personally-identifiable information if we fail to prevent or mitigate such misuse or loss. Although we have developed systems and processes that are designed to protect customer and employee information and prevent misuse of such information and other security breaches, failure to prevent or mitigate such misuse or breaches may affect our reputation and operating results negatively and may require significant management time and attention. ***As a result of our current and past operations and/or products, including operations and/or products related to our businesses prior to the Acquisition, we could incur significant environmental liabilities and costs.*** We are subject to various laws and regulations around the world governing the protection of the environment and health and safety, including the discharge of pollutants to air and water and the management and disposal of hazardous substances. These laws and regulations not only govern our current operations and products, but also impose potential liability on us for our or our predecessors’ past operations. We could incur fines, penalties and other sanctions as a result of violations of such laws and regulations. In addition, as a result of our operations and/or products, including our past operations and/or products related to our businesses prior to the Acquisition, we could incur substantial costs, including costs relating to remediation and restoration activities and third-party claims for property damage or personal injury. The ultimate costs under environmental laws and the timing of these costs are difficult to accurately predict. Our accruals for costs and liabilities at sites where contamination is being investigated or remediated may not be adequate because the estimates on which the accruals are based depend on a number of factors including the nature of the matter, the complexity of the site, site geology, the nature and extent of contamination, the type of remedy, the outcome of discussions with regulatory agencies and, at multi-party sites, other Potentially Responsible Parties ("PRPs") and the number and financial viability of other PRPs. Additional contamination may also be identified, and/or additional cleanup obligations may be incurred, at these or other sites in the future. For example, periodic monitoring or investigation activities are ongoing at a number of our sites where contaminants have been detected or are suspected, and we may incur additional costs if more active or extensive remediation is required. In addition, in connection with the Acquisition, DuPont has, subject to certain exceptions and exclusions, agreed to indemnify us for certain liabilities relating to environmental remediation obligations and certain claims relating to the exposure to hazardous substances and products manufactured prior to our separation from DuPont. We could incur material additional costs if DuPont fails to meet its obligations, if the indemnification proves insufficient or if we otherwise are unable to recover costs associated with such liabilities. The costs of our current operations complying with complex environmental laws and regulations, as well as internal voluntary programs, are significant and will continue to be so for the foreseeable future as environmental regulations become more stringent. These laws and regulations also change frequently, and we may incur additional costs complying with stricter environmental requirements that are promulgated in the future. Concerns over global climate change as well as more frequent and severe weather events have also promoted a number of legal and regulatory measures as well as social initiatives intended to reduce greenhouse gas and other carbon emissions. We cannot predict the impact that changing climate conditions or more frequent and severe weather events, if any, will have on our business, results of operations or financial condition. Moreover, we cannot predict how legal, regulatory and social responses to concerns about global climate change will impact our business. ***As a producer of coatings, we transport certain materials that are inherently hazardous due to their toxic nature.*** In our business, we handle and transport hazardous materials. If mishandled or released into the environment, these materials could cause substantial property damage or personal injuries resulting in significant legal claims against us. In addition, evolving regulations concerning the handling and transportation of certain materials could result in increased future capital or operating costs. ### Our results of operations could be adversely affected by litigation. We face risks arising from various litigation matters that have been asserted against us or that may be asserted against us in the future, including, but not limited to, claims for product liability, patent and trademark infringement, antitrust, warranty, contract and third-party property damage or personal injury. For instance, we have noted a nationwide trend in purported class actions against chemical manufacturers generally seeking relief such as medical monitoring, property damages, off-site remediation and punitive damages arising from alleged environmental torts without claiming present personal injuries. We have also noted a trend in public and private nuisance suits being filed on behalf of states, counties, cities and utilities alleging harm to the general public. In addition, various factors or developments can lead to changes in current estimates of liabilities such as a final adverse judgment, significant settlement or changes in applicable law. A future adverse ruling or unfavorable development could result in future charges that could have a material adverse effect on us. An adverse outcome in any one or more of these matters could be material to our business, financial condition and results of operations. In particular, product liability claims, regardless of their merits, could be costly, divert management’s attention and adversely affect our reputation and demand for our products. ### Risks Related to Human Resources ***We may not be able to recruit and retain the experienced and skilled personnel we need to compete.*** Our future success depends on our ability to attract, retain, develop and motivate highly skilled personnel. We must have talented personnel to succeed and competition for senior management in our industry is intense. Our ability to meet our performance goals depends upon the personal efforts and abilities of the principal members of our senior management who provide strategic direction, develop our business, manage our operations and maintain a cohesive and stable work environment. We cannot assure you that we will retain or successfully recruit senior management, particularly in light of the ongoing strategic review. We rely on qualified managers and skilled employees, such as scientists, with technical and manufacturing industry experience in order to operate our business successfully. From time to time, there may be a shortage of skilled labor, which may make it more difficult and expensive for us to attract and retain qualified employees. If we are unable to attract and retain sufficient numbers of qualified individuals or our costs to do so increase significantly, our operations could be materially adversely affected. ***If we are required to make unexpected payments to any pension plans applicable to our employees, our financial condition may be adversely affected.*** We have defined benefit pension plans in which many of our current and former employees outside the United States participate or have participated. Many of these plans are underfunded or unfunded and the liabilities in relation to these plans will need to be satisfied as they mature from our operating reserves. In jurisdictions where the defined benefit pension plans are intended to be funded with assets in a trust or other funding vehicle, the liabilities exceed the corresponding assets in many of the plans. Various factors, such as changes in actuarial estimates and assumptions (including as to life expectancy, discount rates and rate of return on assets) as well as changes in asset allocations and actual return on assets, can increase the expenses and liabilities of the defined benefit pension plans. The assets and liabilities of the plans must be valued from time to time under applicable funding rules and as a result we may be required to increase the cash payments we make in relation to these defined benefit pension plans. Our financial condition and results of operations may be adversely affected to the extent that we are required to make any additional payments to any relevant defined benefit pension plans in excess of the amounts assumed in our current projections and assumptions or report higher pension plan expenses under relevant accounting rules. ***We are subject to work stoppages, union negotiations, labor disputes and other matters associated with our labor force, which may adversely impact our operations and cause us to incur incremental costs.*** Many of our employees globally are in unions or otherwise covered by labor agreements, including works councils. As of December 31, 2019, approximately 0.01% of our U.S. workforce was unionized and approximately 56% of our workforce outside the United States was unionized or otherwise covered by labor agreements. Consequently, we may be subject to potential union campaigns, work stoppages, union negotiations and other potential labor disputes. Additionally, negotiations with unions or works councils in connection with existing labor agreements may result in significant increases in our cost of labor, divert management’s attention away from operating our business or break down and result in the disruption of our operations. The occurrence of any of the preceding outcomes could impair our ability to manufacture our products and result in increased costs and/or decreased operating results. Further, we may be impacted by work stoppages at our suppliers or customers that are beyond our control. ### Risks Related to Intellectual Property ***Our inability to protect and enforce our intellectual property rights could adversely affect our financial results.*** Intellectual property rights both in the United States and in foreign countries, including patents, trade secrets, confidential information, trademarks and trade names, are important to our business and will be critical to our ability to grow and succeed in the future. We make strategic decisions on whether to apply for intellectual property protection and what kind of protection to pursue based on a cost benefit analysis. While we endeavor to protect our intellectual property rights in certain jurisdictions in which our products are produced or used and in jurisdictions into which our products are imported, the decision to file for intellectual property protection is made on a case-by-case basis. Because of the differences in foreign trademark, patent and other laws concerning proprietary rights, our intellectual property rights may not receive the same degree of protection in foreign countries as they would in the United States. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, financial condition and results of operations. We have applied for patent protection relating to certain existing and proposed products, processes and services in certain jurisdictions. While we generally consider applying for patents in those countries where we intend to make, have made, use or sell patented products, we may not accurately assess all of the countries where patent protection will ultimately be desirable. If we fail to timely file a patent application in any such country, we may be precluded from doing so at a later date. Furthermore, we cannot assure you that our pending patent applications will not be challenged by third parties or that such applications will eventually be issued by the applicable patent offices as patents. We also cannot assure you that the patents issued as a result of our foreign patent applications will have the same scope of coverage as our U.S. patents. It is possible that only a limited number of the pending patent applications will result in issued patents, which may have a materially adverse effect on our business and results of operations. The patents we own could be challenged, invalidated or circumvented by others and may not be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage. Furthermore, our existing patents are subject to challenges from third parties that may result in invalidations and will all eventually expire, after which we will not be able to prevent our competitors from using our previously patented technologies, which could materially adversely affect our competitive advantage stemming from those products and technologies. We also cannot assure you that competitors will not infringe our patents, or that we will have adequate resources to enforce our patents. We also rely on unpatented proprietary technology. It is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology. To protect our trade secrets and other proprietary information, we require certain employees, consultants, advisors and collaborators to enter into confidentiality agreements as we deem appropriate. We cannot assure you that we will be able to enter into these confidentiality agreements or that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. If we are unable to maintain the proprietary nature of our technologies, we could be materially adversely affected. We rely on our trademarks, trade names and brand names to distinguish our products from the products of our competitors and have registered or applied to register many of these trademarks. We cannot assure you that our trademark applications will be approved. Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition, and could require us to devote resources to advertising and marketing new brands. Further, we cannot assure you that competitors will not infringe our trademarks, or that we will have adequate resources to enforce our trademarks. We also license third parties to use our trademarks. In an effort to preserve our trademark rights, we enter into license agreements with these third parties that govern the use of our trademarks and contain limitations on their use. Although we make efforts to police the use of our trademarks by our licensees, we cannot assure you that these efforts will be sufficient to ensure that our licensees abide by the terms of their licenses. In the event that our licensees fail to do so, our trademark rights could be diluted. ***If we are sued for infringing intellectual property rights of third parties, it may be costly and time consuming, and an unfavorable outcome in any litigation could harm our business.*** We cannot assure you that our activities will not, unintentionally or otherwise, infringe on the patents, trademarks or other intellectual property rights owned by others. We may spend significant time and effort and incur significant litigation costs if we are required to defend ourselves against intellectual property rights claims brought against us, regardless of whether the claims have merit. If we are found to have infringed on the patents, trademarks or other intellectual property rights of others, we may be subject to substantial claims for damages, which could materially impact our cash flow, business, financial condition and results of operations. We may also be required to cease development, use or sale of the relevant products or processes, or we may be required to obtain a license on the disputed rights, which may not be available on commercially reasonable terms, if at all. ### Risks Related to Other Aspects of our Business ***We may continue to engage in acquisitions and divestitures, and may encounter difficulties integrating acquired businesses with, or disposing of divested businesses from, our current operations and, as a result, we may not realize the anticipated benefits of these acquisitions and divestitures.*** We may continue to seek to grow through strategic acquisitions, joint ventures or other arrangements. Our due diligence reviews in these transactions may not identify all of the material issues necessary to accurately estimate the cost or potential loss contingencies with respect to a particular transaction, including potential exposure to regulatory sanctions resulting from a counterparty’s previous activities. We may incur unanticipated costs or expenses, including post-closing asset impairment charges, expenses associated with eliminating duplicate facilities, litigation and other liabilities. We may also face regulatory scrutiny as a result of perceived concentration in certain markets, which could cause additional delay or prevent us from completing certain acquisitions that would be beneficial to our business. We may also encounter difficulties in integrating acquisitions with our operations, applying our internal controls processes to these acquisitions or in managing strategic investments. Additionally, we may not achieve the benefits, including synergies and cost savings, we anticipate when we first enter into a transaction in the amount or on the timeframe anticipated. Any of the foregoing could adversely affect our business and results of operations. In addition, accounting requirements relating to business combinations, including the requirement to expense certain acquisition costs as incurred, may cause us to experience greater earnings volatility and generally lower earnings during periods in which we acquire new businesses. Furthermore, we may make strategic divestitures from time to time. These divestitures may result in continued financial involvement in the divested businesses, such as through indemnities, guarantees or other financial arrangements. These arrangements could result in financial obligations imposed upon us and could affect our future financial condition and results of operations. Acquisitions and divestitures may also require us to devote significant internal resources and could divert management's attention away from operating our business. ***Our joint ventures may not operate according to our business strategy if our joint venture partners fail to fulfill their obligations.*** As part of our business, we have entered into certain joint venture arrangements, and may enter into additional joint venture arrangements in the future. The nature of a joint venture requires us to share control over significant decisions with unaffiliated third parties. Since we may not exercise control over our current or future joint ventures, we may not be able to require our joint ventures to take actions that we believe are necessary to implement our business strategy. Additionally, differences in views among joint venture participants may result in delayed decisions or failures to agree on major issues. If these differences cause the joint ventures to deviate from our business strategy, our results of operations could be materially adversely affected. ### The insurance we maintain may not fully cover all potential exposures. Our product liability, property, business interruption and casualty insurance coverages may not cover all risks associated with the operation of our business and may not be sufficient to offset the costs of any losses, lost sales or increased costs experienced during business interruptions. For some risks, we may elect not to obtain insurance. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance policies may become unavailable or available only for reduced amounts of coverage. As a result, we may not be able to renew our insurance policies or procure other desirable insurance on commercially reasonable terms, if at all. Losses and liabilities from uninsured or underinsured events and delay in the payment of insurance proceeds could have a material adverse effect on our business, financial condition and results of operations. ***DuPont’s potential breach of its obligations in connection with the Acquisition, including failure to comply with its indemnification obligations, may materially affect our business and operating results.*** Although the Acquisition closed on February 1, 2013, DuPont still has performance obligations to us, including fulfilling certain indemnification requirements. We could incur material additional costs if DuPont fails to meet its obligations or if we otherwise are unable to recover costs associated with such liabilities. ***We may be subject to changes in our tax rates and the adoption of tax legislation or exposure to additional tax liabilities that may adversely affect our results of operations.*** We are subject to taxes in the U.S. and non-U.S. jurisdictions where our subsidiaries are organized. Due to economic and political conditions, tax rates, tax laws and other non-tax legislation, such as economic substance regulations, in various jurisdictions may be subject to significant change. Our future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in available tax credits or tax deductions and changes in tax and other non-tax laws or their interpretation, such as interpretations as to the legality of tax advantages granted under the EU state aid rules. Additionally, we and our subsidiaries are engaged in a number of intercompany transactions across multiple tax jurisdictions. Although we believe we have clearly reflected the economics of these transactions and the proper local transfer pricing documentation is in place, tax authorities may propose and sustain adjustments that could result in changes that may impact our mix of earnings in countries with differing statutory tax rates. The Organization of Economic Cooperation and Development, which represents a coalition of member countries, is supporting changes to numerous long-standing tax principles through its base erosion and profit shifting (“BEPS”) project, which is focused on a number of issues, including the shifting of profits among affiliated entities located in different tax jurisdictions. Given the scope of the Company's international operations and the fluid and uncertain nature of how the BEPS project might ultimately lead to future legislation, it is difficult to assess how any changes in tax laws would impact the Company's income tax expense. Our tax returns and other tax matters are subject to examination by local tax authorities and governmental bodies. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of our provision for taxes. There can be no assurance as to the outcome of these examinations. If our effective tax rates were to increase, or if the ultimate determination of the taxes owed by us is for an amount in excess of amounts previously accrued, our operating results, cash flows and financial condition could be adversely affected. On December 22, 2017, the U.S. Tax Cuts and Jobs Act ("U.S. TCJA") legislation was enacted into law, which significantly revised the U.S. Internal Revenue Code of 1986 ("the Code"), as amended. While our current tax accounting is complete based on legislative updates relating to the U.S. TCJA currently, further interpretive guidance of the U.S TCJA's provisions could result in further adjustments that could have an impact on our future results of operations, cash flows or financial positions. ***If we are treated as a financial institution under FATCA, withholding tax may be imposed on payments on our common shares.*** Sections 1471 through 1474 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), and applicable Treasury Regulations commonly referred to as “FATCA” may impose 30% withholding on “foreign passthru payments” made by a “foreign financial institution” (as defined in the Code) that has entered into an agreement with the U.S. Internal Revenue Service to perform certain diligence and reporting obligations with respect to the foreign financial institution’s U.S.-owned accounts. Such withholding on “foreign passthru payments” will apply from January 1, 2019 at the earliest. The applicable Treasury Regulations treat an entity as a “financial institution” if it is a holding company formed in connection with or availed of by a private equity fund or other similar investment vehicle established with an investment strategy of investing, reinvesting or trading in financial assets. The term “foreign passthru payment” is currently not defined. The United States has entered into an intergovernmental agreement (an “IGA”) with Bermuda, which modifies the FATCA withholding regime described above. It is not clear whether we would be treated as a financial institution subject to the diligence, reporting and withholding obligations under FATCA or the Bermuda IGA. Furthermore, it is not yet clear how the Bermuda IGA will address foreign passthru payments. Prospective investors should consult their tax advisors regarding the potential impact of FATCA, the Bermuda IGA and any non-U.S. legislation implementing FATCA, on their investment in our common shares. ***We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. holders of our common shares.*** Based on the market price of our common shares and the composition of our income, assets and operations, we do not expect to be treated as a passive foreign investment company ("PFIC") for U.S. federal income tax purposes for the current taxable year or in the foreseeable future. However, the application of the PFIC rules is subject to uncertainty in several respects, and we cannot assure you the U.S. Internal Revenue Service will not take a contrary position. Furthermore, this is a factual determination that must be made annually after the close of each taxable year. If we are a PFIC for any taxable year during which a U.S. person holds our common shares, certain adverse U.S. federal income tax consequences could apply to such U.S. person. ### Risks Related to our Indebtedness ***Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy and our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations with respect to our indebtedness.*** As of December 31, 2019, we had approximately $3.8 billion of indebtedness on a consolidated basis. As of December 31, 2019, we were in compliance with all of the covenants under our outstanding debt instruments. Our substantial indebtedness could have important consequences to you. For example, it could: - limit our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions, general corporate purposes or other purposes; - require us to devote a substantial portion of our annual cash flow to the payment of interest on our indebtedness; - expose us to the risk of increased interest rates as, over the term of our debt, the interest cost on a significant portion of our indebtedness is subject to changes in interest rates; - limit our ability to repurchase our common shares or pay dividends; - hinder our ability to adjust rapidly to changing market conditions; - limit our ability to secure adequate bank financing in the future with reasonable terms and conditions or at all; and - increase our vulnerability to and limit our flexibility in planning for, or reacting to, a potential downturn in general economic conditions or in one or more of our businesses. We are more leveraged than some of our competitors, which could adversely affect our business plans. A relatively greater portion of our cash flow is used to service debt and other financial obligations. This reduces the funds we have available for working capital, capital expenditures, acquisitions and other purposes and may make it more difficult for us to borrow in the future. Similarly, our relatively greater leverage increases our vulnerability to, and limits our flexibility in planning for, adverse economic and industry conditions and creates other competitive disadvantages compared with other companies with relatively less leverage. In addition, the indentures governing the New Senior Notes and the agreements governing our Senior Secured Credit Facilities (as defined herein) contain affirmative and negative covenants that limit our and certain of our subsidiaries’ ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all of our debts. ***To service all of our indebtedness, we will require a significant amount of cash and our ability to generate cash depends on many factors beyond our control.*** Our operations are conducted through our subsidiaries and our ability to make cash payments on our indebtedness will depend on the earnings and the distribution of funds from our subsidiaries. None of our subsidiaries, however, are obligated to make funds available to us for payment on our indebtedness. Our ability to make cash payments on and refinance our debt obligations, to fund planned capital expenditures and to meet other cash requirements will depend on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to financial, business, legislative, regulatory and other factors beyond our control. We might not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. 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, issuing additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances. Such actions, if necessary, may not be effected on commercially reasonable terms or at all. The instruments governing our indebtedness restrict our ability to sell assets and our use of the proceeds from such sales, and we may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due. If we are unable to generate sufficient cash flow or are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under our Revolving Credit Facility could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to obtain waivers from the required lenders under the credit agreement governing our Senior Secured Credit Facilities or the indentures governing the Senior Notes to avoid being in default. If we breach our covenants under our Senior Secured Credit Facilities or Senior Notes or we are in default thereunder and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under the credit agreement governing our Senior Secured Credit Facilities and our New Senior Notes, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation. ***Despite our current level of indebtedness and restrictive covenants, we and our subsidiaries may incur additional indebtedness. This could further exacerbate the risks associated with our substantial financial leverage.*** We and our subsidiaries may incur significant additional indebtedness under the agreements governing our indebtedness. Although the indentures governing the Senior Notes and the credit agreement governing our Senior Secured Credit Facilities contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of thresholds, qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. Additionally, these restrictions also will not prevent us from incurring obligations that, although preferential to our common shares in terms of payment, do not constitute indebtedness. In addition, if new debt is added to our and/or our subsidiaries’ debt levels, the related risks that we now face as a result of our leverage would intensify. See Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financial Condition." ***We are dependent upon our lenders for financing to execute our business strategy and meet our liquidity needs. If our lenders are unable or unwilling to fund borrowings under their credit commitments or we are unable to borrow, it could negatively impact our business.*** We are dependent upon our lenders for financing to execute our business strategy and meet our liquidity needs. If our lenders are unable to fund borrowings under their credit commitments or we are unable to borrow from them for any reason, our business could be negatively impacted. During periods of volatile credit markets, there is risk that any lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their legal commitments and obligations under existing credit commitments, including, but not limited to, extending credit up to the maximum permitted by a credit facility, allowing access to additional credit features and otherwise accessing capital and/or honoring loan commitments. If our lenders are unable or unwilling to fund borrowings under their revolving credit commitments or we are unable to borrow from them, it could be difficult in such environments to obtain sufficient liquidity to meet our operational needs. ***Our ability to obtain additional capital on commercially reasonable terms may be limited.*** Although we believe our cash and cash equivalents, together with cash we expect to generate from operations and unused capacity available under our Revolving Credit Facility, provide adequate resources to fund ongoing operating requirements, we may need to seek additional financing to compete effectively. If we are unable to obtain capital on commercially reasonable terms, it could: - reduce funds available to us for purposes such as working capital, capital expenditures, research and development, strategic acquisitions and other general corporate purposes; - restrict our ability to introduce new products or exploit business opportunities; - increase our vulnerability to economic downturns and competitive pressures in the markets in which we operate; and - place us at a competitive disadvantage. ***Difficult and volatile conditions in the capital, credit and commodities markets and in the overall economy could have a material adverse effect on our financial position, results of operations and cash flows.*** Difficult global economic conditions, including concerns about sovereign debt and significant volatility in the capital, credit and commodities markets, could have a material adverse effect on our financial position, results of operations and cash flows. These global economic factors, combined with low levels of business and consumer confidence and high levels of unemployment in certain parts of the world, have precipitated a slow recovery from the global recession and concern about a return to recessionary conditions. The difficult conditions in these markets and the overall economy affect our business in a number of ways. For example: - as a result of the volatility in commodity prices, we may encounter difficulty in achieving sustained market acceptance of past or future price increases, which could have a material adverse effect on our financial position, results of operations and cash flows; - under difficult market conditions there can be no assurance that borrowings under our Revolving Credit Facility would be available or sufficient, and in such a case, we may not be able to successfully obtain additional financing on reasonable terms, or at all; - in order to respond to market conditions, we may need to seek waivers from various provisions in the credit agreement governing our Senior Secured Credit Facilities or the indentures governing the New Senior Notes, and in such case, there can be no assurance that we can obtain such waivers at a reasonable cost, if at all; - market conditions could cause the counterparties to the derivative financial instruments we may use to hedge our exposure to interest rate, commodity or currency fluctuations to experience financial difficulties and, as a result, our efforts to hedge these exposures could prove unsuccessful and, furthermore, our ability to engage in additional hedging activities may decrease or become more costly; and - market conditions could result in our key customers experiencing financial difficulties and/or electing to limit spending, which in turn could result in decreased sales and earnings for us. In general, downturns in economic conditions can cause fluctuations in demand for our and our customers’ products, product prices, volumes and margins. Future economic conditions may not be favorable to our industry and future growth in demand for our products, if any, may not be sufficient to alleviate any existing or future conditions of excess industry capacity. A decline in the demand for our products or a shift to lower-margin products due to deteriorating economic conditions could have a material adverse effect on our financial condition and results of operations and could also result in impairments of certain of our assets. We do not know if market conditions or the state of the overall economy will continue to improve in the near future. We cannot provide assurance that a continuation of current economic conditions or a further economic downturn in one or more of the geographic regions in which we sell our products would not have a material adverse effect on our business, financial condition and results of operations. ### Our debt obligations may limit our flexibility in managing our business. The indentures governing our New Senior Notes and the credit agreement governing our Senior Secured Credit Facilities require us to comply with a number of customary financial and other covenants, such as maintaining leverage ratios in certain situations and maintaining insurance coverage. See Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financial Condition." These covenants may limit our flexibility in our operations, and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness even if we had satisfied our payment obligations. If we were to default on the indentures governing our New Senior Notes, the credit agreement governing our Senior Secured Credit Facilities or other debt instruments, our financial condition and liquidity would be adversely affected. ***We are subject to risks associated with the current interest rate environment and to the extent we use debt to fund our operations, changes in interest rates will affect our cost of debt.*** A substantial portion of our indebtedness bears interest at variable rates, including LIBOR, which is the subject of recent proposals for reform. On July 27, 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if at that time LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, the potential effect of any such event on our cost of debt cannot yet be determined. These consequences cannot be reliably predicted and any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the value of any LIBOR-linked instruments and other financial obligations or extensions of credit held by or due to us and could have a material adverse effect on our business, financial condition and results of operations ### Risks Related to Ownership of our Common Shares ***Axalta Coating Systems Ltd. is a holding company with no operations of its own. Because our operations are conducted almost entirely through our subsidiaries and joint ventures, we are largely dependent on our receipt of distributions and dividends or other payments from our subsidiaries and joint ventures for cash to fund all of our operations and expenses, including to make future dividend payments, if any.*** Our operations are conducted almost entirely through our subsidiaries and our ability to generate cash to meet our debt service obligations or to make future dividend payments, if any, is highly dependent on the earnings and the receipt of funds from our subsidiaries in the form of dividends, loans or advances and through repayment of loans or advances from us. Payments to us by our subsidiaries and joint ventures will be contingent upon our subsidiaries’ or joint ventures’ earnings and other business considerations and may be subject to statutory or contractual restrictions. In addition, there may be significant tax and other legal restrictions on the ability of foreign subsidiaries or joint ventures to remit money to us. ***The price of our common shares may fluctuate significantly, and you could lose all or part of your investment.*** Volatility in the market price of our common shares may prevent you from being able to sell your common shares at or above the price you paid for your common shares. The market price of our common shares could fluctuate significantly for various reasons, including: - our operating and financial performance and prospects; - our quarterly or annual earnings or those of other companies in our industry; - the public’s reaction to our press releases, our other public announcements and our filings with the SEC; - changes in, or failure to meet, earnings estimates or recommendations by research analysts who track our common shares or the stock of other companies in our industry; - the failure of research analysts to cover our common shares; - strategic actions by us, our customers or our competitors, such as acquisitions, divestitures, restructurings or site closures, including asset closures, or market rumors regarding such actions; - new laws or regulations or new interpretations of existing laws or regulations applicable to our business; - changes in accounting standards, policies, guidance, interpretations or principles; - the impact on our profitability temporarily caused by the time lag between when we experience cost increases until these increases flow through cost of sales because of our method of accounting for inventory, or the impact from our inability to pass on such price increases to our customers; - material litigations or government investigations; - changes in general conditions in the United States and global economies or financial markets, including those resulting from war, incidents of terrorism or responses to such events; - risks and uncertainties relating to the change in our leadership; - changes in key personnel; - sales of common shares by us or members of our management team; - the granting of restricted common shares, stock options and other equity awards; - volume of trading in our common shares; and - the realization of any risks described under this “Risk Factors” section. In addition, over the past several years, the stock markets have experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our common shares could fluctuate based upon factors that have little or nothing to do with our company, and these fluctuations could materially reduce our share price and cause you to lose all or part of your investment. Further, in the past, market fluctuations and price declines in a company’s stock have led to securities class action litigations. If such a suit were to arise, it could have a substantial cost and divert our resources regardless of the outcome. ***We do not expect to pay dividends on our common shares and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common shares.*** At this time, we do not expect to declare and pay dividends on our common shares for the foreseeable future. Therefore, you are not likely to receive any dividends on your common shares for the foreseeable future and the success of an investment in our common shares will depend upon any future appreciation in their value. There is no guarantee that our common shares will appreciate in value or even maintain the price at which our shareholders have purchased their shares. The payment of future dividends, however, will be at the discretion of our Board of Directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our Board of Directors deems relevant. The credit agreement governing our Senior Secured Credit Facilities and the indentures governing the New Senior Notes also limit our ability to pay dividends. In addition, Bermuda law imposes requirements that may restrict our ability to pay dividends to holders of our common shares. As a consequence of these limitations and restrictions, we may not be able to make, or may have to reduce or eliminate, the payment of dividends on our common shares. ***Future sales of our common shares in the public market could lower our share price, and any additional capital raised by us through the sale of equity or convertible debt securities may dilute your ownership in us and may adversely affect the market price of our common shares.*** We and our shareholders may sell additional common shares in subsequent offerings. We may also issue additional common shares or convertible debt securities. As of February 12, 2020, we had 1,000,000,000 common shares authorized and 235,058,521 common shares outstanding. We cannot predict the size of future issuances or sales of our common shares or the effect, if any, that future issuances and sales of our common shares will have on the market price of our common shares. Sales of substantial amounts of our common shares (including sales that may occur pursuant to the registration rights of an affiliate of Berkshire Hathaway Inc., sales by members of management and shares that may be issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our common shares. See Part III, Item 13, “Certain Relationships and Related Transactions and Director Independence.” ***We are a Bermuda company and it may be difficult for you to enforce judgments against us or our directors and executive officers.*** We are a Bermuda exempted company. As a result, the rights of our shareholders are governed by Bermuda law and our memorandum of association and bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in another jurisdiction, and a substantial portion of our assets are located outside the United States. As a result, it may be difficult for investors to effect service of process on those persons in the United States or to enforce in the United States judgments obtained in U.S. courts against us or those persons based on the civil liability provisions of the U.S. securities laws. It is doubtful whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the United States, against us or our directors or officers under the securities laws of those jurisdictions or entertain actions in Bermuda against us or our directors or officers under the securities laws of other jurisdictions. ***Bermuda law differs from the laws in effect in the United States and may afford less protection to our shareholders.*** We are organized under the laws of Bermuda. As a result, our corporate affairs are governed by the Companies Act 1981 (the "Companies Act"), which differs in some material respects from laws typically applicable to U.S. corporations and shareholders, including the provisions relating to interested directors, amalgamations, mergers and acquisitions, takeovers, shareholder lawsuits and indemnification of directors. Generally, the duties of directors and officers of a Bermuda company are owed to the company only. Shareholders of Bermuda companies typically do not have rights to take action against directors or officers of the company and may only do so in limited circumstances. Shareholder class actions are not available under Bermuda law. The circumstances in which shareholder derivative actions may be available under Bermuda law are substantially more proscribed and less clear than they would be to shareholders of U.S. corporations. The Bermuda courts, however, would ordinarily be expected to permit a shareholder to commence an action in the name of a company to remedy a wrong to the company where the act complained of is alleged to be beyond the corporate power of the company or illegal, or would result in the violation of the company’s memorandum of association or bye-laws. Furthermore, consideration would be given by a Bermuda court to acts that are alleged to constitute a fraud against the minority shareholders or, for instance, where an act requires the approval of a greater percentage of the company’s shareholders than those who actually approved it. When the affairs of a company are being conducted in a manner that is oppressive or prejudicial to the interests of some shareholders, one or more shareholders may apply to the Supreme Court of Bermuda, which may make such order as it sees fit, including an order regulating the conduct of the company’s affairs in the future or ordering the purchase of the shares of any shareholders by other shareholders or by the company. Additionally, under our bye-laws and as permitted by Bermuda law, each shareholder has waived any claim or right of action against our directors or officers for any action taken by directors or officers in the performance of their duties, except for actions involving fraud or dishonesty. In addition, the rights of our shareholders and the fiduciary responsibilities of our directors under Bermuda law are not as clearly established as under statutes or judicial precedent in existence in jurisdictions in the United States, particularly the State of Delaware. Therefore, our shareholders may have more difficulty protecting their interests than would shareholders of a corporation incorporated in a jurisdiction within the United States. ***We have anti-takeover provisions in our bye-laws that may discourage a change of control.*** Our bye-laws contain provisions that could make it more difficult for a third party to acquire us without the consent of our Board of Directors. These provisions provide for: - a classified Board of Directors with staggered three-year terms; although on May 2, 2018, our shareholders approved the elimination of our classified board structure over a three-year transition period; - directors only to be removed for cause; - restrictions on the time period in which directors may be nominated; and - our Board of Directors to determine the powers, preferences and rights of our preference shares and to issue the preference shares without shareholder approval. These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company and may prevent our shareholders from receiving the benefit from any premium to the market price of our common shares offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common shares if the provisions are viewed as discouraging takeover attempts in the future. These provisions could also discourage proxy contests, make it more difficult for you and other shareholders to elect directors of your choosing and cause us to take corporate actions other than those you desire. ## Properties As filed, 3,049 characters. Our corporate headquarters is located in Philadelphia, PA. Our extensive geographic footprint is comprised of 48 manufacturing facilities (including six manufacturing sites operated by our joint ventures), four major technology centers and 54 customer training centers supporting our global operations. The table below presents summary information regarding our facilities as of December 31, 2019. | Type of Facility/Country | Location | Segment | | --- | --- | --- | | **Manufacturing Facilities** | | | | North America | | | | Canada | Ajax | Transportation | | | Cornwall | Performance | | United States of America | Fridley, MN | Performance | | | Front Royal, VA | Performance; Transportation | | | Ft. Madison, IA | Performance; Transportation | | | High Point, NC | Performance | | | Hilliard, OH | Performance; Transportation | | | Houston, TX | Performance | | | Jacksonville, TX | Performance | | | Madison, AL | Performance | | | Mt. Clemens, MI | Performance; Transportation | | | Orrville, OH | Performance | | | Riverside, CA | Performance | | | Sacramento, CA | Performance | | Latin America | | | | Argentina | Buenos Aires | Performance; Transportation | | Brazil | Guarulhos | Performance; Transportation | | Mexico | Apodaca | Performance | | | Ocoyoacac | Performance | | | Tlalnepantla | Performance; Transportation | | EMEA | | | | Austria | Guntramsdorf | Performance; Transportation | | Belgium | Mechelen | Performance; Transportation | | France | Montbrison | Performance | | Germany | Landshut | Performance | | | Wuppertal | Performance; Transportation | | Netherlands | Zuidland | Performance | | Sweden | Västervik | Performance | | Switzerland | Bulle | Performance | | Turkey | Gebze | Performance; Transportation | | | Çerkezköy | Performance | | United Kingdom | Tewkesbury | Performance | | | Darlington | Performance | | | Farnham | Performance | | | Huthwaite | Performance | | | West Bromwich | Performance | | United Arab Emirates | Ras Al Khaimah | Performance | | Asia Pacific | | | | China | Changchun | Performance; Transportation | | | Jiading | Performance; Transportation | | | Qingpu | Performance | 30 | Type of Facility/Country Location India Savli Malaysia Kuala Lumpur Shah Alam Thailand Bangplee Joint Venture Manufacturing Facilities Colombia Cartagena de Indias Indonesia Cikarang Taiwan Taipei Guatemala Amatitlan Joint Venture Partner Manufacturing Facilities South Africa Port Elizabeth Russia Moscow Technology Centers China Shanghai Germany Wuppertal United States of America Mt. Clemens, MI Philadelphia, PA Customer Training Centers Location by Region | Segment Performance; Transportation Performance Performance Performance; Transportation Performance Performance Transportation Performance Transportation Transportation Performance; Transportation Performance; Transportation Performance; Transportation Performance; Transportation Number of Facilities | | --- | ---: | | North America | 14 | | Latin America | 3 | | EMEA | 18 | | Asia Pacific | 19 | ## Legal proceedings As filed, 411 characters. We are from time to time party to legal proceedings that arise in the ordinary course of business. We are not involved in any litigation other than that which has arisen in the ordinary course of business. We do not expect that any currently pending lawsuits will have a material effect on us as discussed in Note 6 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. ## Management's discussion and analysis As filed, 73,545 characters. *The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K, as well as the information presented under Part II, Item 6, "Selected Financial Data" of this Annual Report on Form 10-K.* *We have applied the FAST Act Modernization and Simplification of Regulation S-K, which allows for the discussion of the two most recent fiscal years. This discussion and analysis reflects comparisons of material changes in the consolidated financial statements for 2019 and 2018 for all matters excluding selling, general and administrative expenses, other operating charges and EBIT. Selling, general and administrative expenses and other operating charges also includes comparison for 2018 and 2017 as these items have not previously been disclosed with the current presentation. EBIT discussions also includes comparison for 2018 and 2017 as this has not previously been disclosed due to the change in our primary performance metric. For the comparison of 2018 and 2017 for all other operating results, see the Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our 2018 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 26, 2019.* ### FORWARD-LOOKING STATEMENTS Many statements made in the following discussion and analysis of our financial condition and results of operations and elsewhere in this Annual Report on Form 10-K 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 Annual Report on Form 10-K, you should understand that these statements are not guarantees of performance or results. The forward-looking statements and projections are subject to and involve risks, uncertainties and assumptions, including, but not limited to, the risks and uncertainties described in "Non-GAAP Financial Measures" and "Forward-Looking Statements," as well as "Risk Factors" and you should not place undue reliance on these forward-looking statements or projections. Although we believe that these forward-looking statements and projections are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements and projections. Factors that may materially affect such forward-looking statements and projections include: - adverse developments in economic conditions and, particularly, in conditions in the automotive and transportation industries; - volatility in the capital, credit and commodities markets; - our inability to successfully execute on our growth strategy; - 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, natural disasters, pandemics and other health crises 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K. 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 48 manufacturing facilities, four technology centers, 54 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 4.6% for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily driven by a net decrease in volumes of 4.8%, which included the impacts of the sale of our consolidated joint venture net of acquisitions, which contributed to a decrease of 1.1% in volumes, as well as the impacts of unfavorable foreign currency translation of 3.0%. Partially offsetting the decline in volumes during the period was an increase in higher average selling prices and product mix of 3.2%. The following trends have impacted our segment and end-market sales performance: - *Performance Coatings:* Net sales decreased 3.6% compared to 2018 driven primarily by a decrease in volumes across both end-markets of 4.7%, inclusive of the negative impacts of portfolio changes of 1.7% associated with the sale of our consolidated joint venture in China, as well as the impacts of unfavorable foreign currency translation of 2.9%. Partially offsetting the decline in volumes during the period was an increase in average selling prices and product mix of 4.0%, of which both end-markets positively contributed. - *Transportation Coatings:* Net sales decreased by 6.3% compared to 2018 driven primarily by a decrease in volumes of 4.9% as a result of declines in global light vehicle production as well as the impacts of unfavorable foreign currency translation of 3.0%. Partially offsetting the decline in volumes during the period was an increase in average selling prices and product mix of 1.6% as a result of light vehicle end-market contributions. Our business serves four end-markets globally as follows: *(In millions)* | Performance Coatings | Year Ended December 31, 2019 | 2018 | 2019 vs 2018 % change | | --- | ---: | ---: | ---: | | Refinish | $1,760.4 | $1,759.6 | —% | | Industrial | 1,163.0 | 1,273.5 | (8.7)% | | Total Net sales Performance Coatings | 2,923.4 | 3,033.1 | (3.6)% | | **Transportation Coatings** | | | | | Light Vehicle | 1,208.4 | 1,307.2 | (7.6)% | | Commercial Vehicle | 350.4 | 355.7 | (1.5)% | | Total Net sales Transportation Coatings | 1,558.8 | 1,662.9 | (6.3)% | | Total Net sales | $4,482.2 | $4,696.0 | (4.6)% | #### Acquisitions and Divestiture Highlights During the year ended December 31, 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 consolidated statements of operations for the year ended December 31, 2019. During the year ended December 31, 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. During the year ended December 31, 2019, we recognized impairments of $17.7 million primarily related to the abandonment of engineering work for aspects of our China footprint project which has been adjusted due to evolving market conditions. #### Capital and Liquidity Highlights During the year ended December 31, 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 18 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K 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 year, we established a retention program, under which certain of the Company’s and its subsidiaries’ employees, are eligible to participate, to help ensure continuity of the Company’s business. Under the retention program, each eligible employee will receive a cash award payable under the terms of the respective agreement. During the year December 31, 2019, approximately $26 million in cash payments were made associated with employee retention as well as advisory fees associated with the ongoing review of strategic alternatives. The maximum anticipated cost of the retention program is approximately $40 million to be earned over 18 to 24 months. ### Factors Affecting Our Operating Results The following discussion sets forth certain components of our statements of operations as well as factors that impact those items. During the year ended December 31, 2019, the presentation of the consolidated statements of operations was updated and the 2018 and 2017 consolidated statements of operations were updated for comparability with the current year presentation. For further information, refer to Note 1 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. #### Net sales We generate revenue from the sale of our products across all major geographic areas. Our net sales include total sales less estimates for returns and price allowances. Price allowances include discounts for prompt payment as well as volume-based incentives. Our overall net sales are generally impacted by the following factors: - fluctuations in overall economic activity within the geographic markets in which we operate; - underlying growth in one or more of our end-markets, either worldwide or in particular geographies in which we operate; - the type of products used within existing customer applications, or the development of new applications requiring products similar to ours; - changes in product sales prices (including volume discounts and cash discounts for prompt payment); - changes in the level of competition faced by our products, including price competition and the launch of new products by competitors; - our ability to successfully develop and launch new products and applications; - changes in buying habits of our customers (including our distributors); and - fluctuations in foreign exchange rates. While the factors described above impact net sales in each of our operating segments, the impact of these factors on our operating segments can differ, as described below. For more information about risks relating to our business, see Part I, Item 1A, "Risk Factors—Risks Related to our Business." #### Cost of goods sold ("cost of sales") Our cost of sales consists principally of the following: - *Production materials costs*. These include costs of the materials needed to manufacture products for distribution. These costs generally increase on an aggregate basis as production volumes increase. A significant amount of the materials used in production are purchased on a global lowest-cost basis. - *Employee costs*. These include the compensation and benefit costs, including share-based compensation expense, for employees involved in our manufacturing operations and on-site technical support services. These costs generally increase on an aggregate basis as production volumes increase and may decline as a percent of net sales as a result of economies of scale associated with higher production volumes. - *Depreciation expense.* Property, plant and equipment are stated at cost and depreciated or amortized on a straight-line basis over their estimated useful lives. Property, plant and equipment acquired through the Acquisition were recorded at their estimated fair value on the acquisition date resulting in a new cost basis for accounting purposes. - *Other*. Our remaining cost of sales consists of freight costs, warehousing expenses, purchasing costs, costs associated with closing or idling of production facilities, functional costs supporting manufacturing, product claims and other general manufacturing expenses, such as expenses for utilities and energy consumption. The main factors that influence our cost of goods sold as a percentage of net sales include: - changes in the price of raw materials; - production volumes; - the implementation of cost control measures aimed at improving productivity, including reduction of fixed production costs, refinements in inventory management and the coordination of purchasing within each subsidiary and at the business level; - fluctuations in foreign exchange rates; and - changes in sales volumes, average selling prices and product mix. #### Selling, general and administrative expenses ("SG&A") Our selling, general and administrative expense consists of all expenditures incurred in connection with the sales and marketing of our products, as well as technical support for our customers and administrative overhead costs, including: - compensation and benefit costs for management, sales personnel and administrative staff, including share-based compensation expense. Expenses relating to our sales personnel increase or decrease principally with changes in sales volume due to the need to increase or decrease sales personnel to meet changes in demand. Expenses relating to administrative personnel generally do not increase or decrease directly with changes in sales volume; and - depreciation, advertising and other selling expenses, such as expenses incurred in connection with travel and communications. Changes in selling, general and administrative expense as a percentage of net sales have historically been impacted by a number of factors, including: - changes in sales volume, as higher volumes enable us to spread the fixed portion of our administrative expense over higher sales; - changes in our customer base, as new customers may require different levels of sales and marketing attention; - new product launches in existing and new markets, as these launches typically involve a more intense sales activity before they are integrated into customer applications; - customer credit issues requiring increases to the allowance for doubtful accounts; and - fluctuations in foreign exchange rates. #### Other operating charges Our other operating charges include termination benefits and other employee related costs, strategic review and retention costs, acquisition and divestiture-related costs, and deconsolidation and impairment charges, details of which are included in our reconciliations of segment operating performance to income before income taxes. #### Research and development expenses Research and development expenses represent costs incurred to develop new products, services, processes and technologies or to generate improvements to existing products or processes. #### Interest expense, net Interest expense, net consists primarily of interest expense on institutional borrowings and other financing obligations and changes in fair value of interest rate derivative instruments, net of capitalized interest expense. Interest expense, net also includes the amortization of debt issuance costs and debt discounts associated with our Senior Secured Credit Facilities and other indebtedness. #### Other (income) expense, net Other (income) expense, net represents costs incurred, net of income, on various non-operational items including costs incurred in conjunction with our debt refinancing and extinguishment transactions, interest income, as well as foreign exchange gains and losses and non-operational impairment losses unrelated to our core business. #### Provision for income taxes We and our subsidiaries are subject to income tax in the various jurisdictions in which we operate. While the extent of our future tax liability is uncertain, changes to the debt and equity capitalization of our subsidiaries, and the realignment of the functions performed, and risks assumed by the various subsidiaries are among the factors that will determine the future book and taxable income of the respective subsidiary and the Company as a whole. ### 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 Annual Report on Form 10-K. Our historical results of operations summarized and analyzed below may not necessarily reflect what will occur in the future. During the year ended December 31, 2019, the presentation of the consolidated statements of operations was updated and the 2018 and 2017 consolidated statements of operations were updated for comparability with the current year presentation. For further information, refer to Note 1 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. ### Net sales | | Years Ended December 31, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | | --- | ---: | ---: | ---: | ---: | | Net sales | $4,482.2 | $4,696.0 | $(213.8) | (4.6)% | | Volume effect | | | | (3.7)% | | Impact of portfolio changes | | | | (1.1)% | | Price/Mix effect | | | | 3.2% | | Exchange rate effect | | | | (3.0)% | Net sales decreased due to the following: n Lower sales volumes across both segments driven by subdued global automotive production and accelerated industrial slowdown in various regions, partially offset by a modest volumes increase in our commercial vehicle end-market 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 Negative impacts as a result of portfolio changes, which included the sale of our consolidated joint venture interests within our Performance Coatings segment, as noted in Note 3 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K Partially offset by: n Higher average selling prices across both segments and all regions, except for our commercial vehicle end-market, which realized lower selling prices due to adverse changes in product mix 39 ### Cost of sales | | Years Ended December 31, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | | --- | ---: | ---: | ---: | ---: | | Cost of sales | $2,917.9 | $3,106.3 | $(188.4) | (6.1)% | | % of net sales | 65.1% | 66.1% | | | Cost of sales decreased due to the following: n Lower sales volumes across both segments n Favorable impacts of currency translation of 2.8%, 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 $6.9 million due to management attrition resulting in forfeitures n Decline in depreciation of operating equipment Partially offset by: n Increased raw material costs across both segments n Increased accelerated depreciation expense of $14.0 million to $24.3 million in the current year associated with the announced closure of our Mechelen, Belgium facility, compared to $10.3 million for the comparable period Cost of sales as a percentage of net sales decreased slightly due to the following: n Price and product mix increases to net sales to more than offset higher raw material costs, partially offset by lower sales volumes covering fixed costs n Decline in stock-based compensation expense of $6.9 million due to management attrition resulting in forfeitures, partially offset by increased accelerated depreciation expense of $14.0 million to $24.3 million in current year associated with the closure of our Mechelen, Belgium facility, compared to $10.3 million for the comparable period ### Selling, general and administrative expenses #### 2019 Compared to 2018 | | Years Ended December 31, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | | --- | ---: | ---: | ---: | ---: | | Selling, general and administrative expenses | $822.1 | $876.4 | $(54.3) | (6.2)% | Selling, general and administrative expenses decreased due to the following: n Decline in commissions and sales incentive compensation driven by decrease in net sales n Reduction in costs due to operational efficiencies associated with our cost savings initiatives n Favorable impacts of currency translation of 2.8%, 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 $14.7 million due to management attrition resulting in forfeitures 40 #### 2018 Compared to 2017 | | Years Ended December 31, 2018 | 2017 | 2018 vs 2017 $ Change | % Change | | --- | ---: | ---: | ---: | ---: | | Selling, general and administrative expenses | $876.4 | $934.7 | $(58.3) | (6.2)% | | Impact of ASU 2014-09 (1) | (64.0) | — | | | | Selling, general and administrative expenses, excluding impact of ASU 2014-09 | $940.4 | $934.7 | $5.7 | 0.6% | | % of net sales, excluding impact of ASU 2014-09 | 20.0% | 21.4% | | | (1) Related to the adoption of ASU 2014-09, "Revenue from Contracts with Customers," on January 1, 2018. See Note 2 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Selling, general and administrative expenses, excluding the impact of ASU 2014-09, increased due to the following: n Incremental impact from our acquisitions of $5.9 million n Unfavorable impacts of foreign currency translation of 1.0%, primarily related to the strengthening of the Euro and Chinese Renminbi against the U.S. Dollar Partially offset by: n Reduction in costs due to operational efficiencies associated with our cost savings initiatives ### Other operating charges | | Years Ended December 31, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | Years Ended December 31, 2018 | 2017 | 2018 v 2017 $ Change | % Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Other operating charges | $70.7 | $82.7 | $(12.0) | (14.5)% | $82.7 | $131.6 | $(48.9) | (37.2)% | #### 2019 Compared to 2018 Other operating charges decreased due to the following: n Reductions in termination benefits and other employee related costs associated with our costs savings initiatives of $46.5 million, from $81.7 million to $35.2 million for 2018 and 2019, respectively Partially offset by: n Losses recorded in 2019 on charges of $17.7 million, primarily in China related to the abandonment of engineering work for aspects of our China footprint project which has been adjusted due to evolving market conditions n Advisory costs pertaining to our previously announced comprehensive review of strategic alternatives of $7.3 million for 2019, for which there were no such costs for the comparable period n Costs associated with the amortization of retention awards to be earned over an 18 to 24 month period of $6.1 million. n Losses on the sale of our interest in a consolidated joint venture of $3.4 million in 2019, as discussed above in "Business Highlights - Acquisitions and Divestitures Highlights" #### 2018 Compared to 2017 Other operating charges decreased due to the following: n During the year ended December 31, 2017, we recorded a $70.9 million loss in conjunction with the deconsolidation of our Venezuelan subsidiary, while there were no corresponding losses recorded during the year ended December 31, 2018 Partially offset by: n An increase in Axalta Way cost savings initiatives and acquisition related costs of $21.4 million to $82.7 million, inclusive of $70.6 million of severance costs from the announced closure of our Mechelen, Belgium manufacturing facility, as compared to $61.3 million for the year ended December 31, 2017 41 ### Research and development expenses | | Years Ended December 31, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | | --- | ---: | ---: | ---: | ---: | | Research and development expenses | $70.2 | $73.1 | $(2.9) | (4.0)% | Research and development expenses decreased due to the following: n Impacts of the sale of our consolidated joint venture n Favorable impacts of currency translation, which reduced expenses by 1.0%, due primarily to the weakening of the Euro and Chinese Renminbi compared to the U.S. dollar ### Amortization of acquired intangibles | | Years Ended December 31, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | | --- | ---: | ---: | ---: | ---: | | Amortization of acquired intangibles | $113.1 | $115.4 | $(2.3) | (2.0)% | Amortization of acquired intangibles decreased due to the following: n Favorable impacts of foreign currency translation of 1.2%, primarily related to the weakening of the Euro and Chinese Renminbi compared to the U.S. dollar ### Interest expense, net | | Years Ended December 31, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | | --- | ---: | ---: | ---: | ---: | | Interest expense, net | $162.6 | $159.6 | $3.0 | 1.9% | Interest expense, net increased primarily due to the following: n Increases in average interest rates due to LIBOR increases on our variable rate debt over the comparable period n Increase 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, from $2.6 million during 2018 to $3.5 million during 2019 Partially offset by: n Weakening of the Euro compared to the U.S. Dollar of 2.4% n Favorable impacts of our derivative instruments and full year impacts of the 2018 refinancing ### Other (income) expense, net | | Years Ended December 31, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | | --- | ---: | ---: | ---: | ---: | | Other (income) expense, net | $(4.4) | $15.0 | $(19.4) | (129.3)% | Other income, net in 2019 and other expense, net in 2018 changed due to the following: n Reduction in debt extinguishment and refinancing related costs of $9.3 million, from $9.5 million to $0.2 million during 2018 and 2019, respectively n Increase in other miscellaneous income, net of $9.0 million, from $3.8 million during 2018 to $12.8 million during 2019 n Reduction in foreign exchange losses, net of $0.9 million, from $9.2 million during 2018 to $8.3 million during 2019 42 ### Provision for income taxes *($ in millions)* | | Years Ended December 31, 2019 | 2018 | | --- | ---: | ---: | | Income before income taxes | $330.0 | $267.5 | | Provision for income taxes | 77.4 | 54.2 | | Statutory U.S. Federal income tax rate | 21.0% | 21.0% | | Effective tax rate | 23.5% | 20.3% | | Effective tax rate vs. statutory U.S. Federal income tax rate | 2.5% | (0.7)% | *(In millions)* | Items impacting the effective tax rate vs. statutory U.S. federal income tax rate | (Favorable) Unfavorable Impact Years Ended December 31, 2019 | 2018 | | --- | ---: | ---: | | Earnings generated in jurisdictions where the statutory rate is different from the U.S. Federal rate (1) | $(16.3) | $(26.8) | | Changes in valuation allowance | 18.8 | (37.5) | | Foreign exchange gain (loss), net | (2.8) | 26.7 | | Stock-based compensation excess tax benefits | (11.4) | (6.6) | | Non-deductible expenses and interest | 4.1 | 8.6 | | Increase in unrecognized tax benefits | 11.2 | 18.9 | | Foreign taxes (2) | 21.4 | 6.7 | | U.S. tax reform (3) | — | (12.5) | (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. See Note 20 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information. ### Performance Coatings Segment ### Net sales | | Years Ended December 31, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | | --- | ---: | ---: | ---: | ---: | | Net sales | $2,923.4 | $3,033.1 | $(109.7) | (3.6)% | | Volume effect | | | | (3.0)% | | Impact of portfolio changes | | | | (1.7)% | | Price/Mix effect | | | | 4.0% | | Exchange rate effect | | | | (2.9)% | Net sales decreased due to the following: n Lower organic volumes across both end-markets as industrial production trends provided an unfavorable impact on most regions, while refinish was mostly stable 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 Negative impacts as a result of the sale of a consolidated joint venture interest within our industrial end-market, as noted in Note 3 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K Partially offset by: n Higher average selling prices across both end-markets and all regions 43 ### Adjusted EBIT | | Years Ended December 31, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | Years Ended December 31, 2018 | 2017 | 2018 vs 2017 $ Change | % Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Adjusted EBIT | $449.1 | $399.5 | $49.6 | 12.4% | $399.5 | $309.3 | $90.2 | 29.2% | | Adjusted EBIT Margin | 15.4% | 13.2% | | | 13.2% | 11.5% | | | #### 2019 Compared to 2018 Adjusted EBIT increased due to the following: n Higher average selling prices across both end-markets and 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 and all regions 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 and Argentine Peso compared to the U.S. dollar #### 2018 Compared to 2017 Adjusted EBIT increased due to the following: n Increases in sales volumes, including the impacts of acquisitions during 2018 n Higher average selling prices across all regions and end-markets n Favorable currency translation primarily related to the strengthening of the Euro and Chinese Renminbi compared to the U.S. Dollar Partially offset by: n Higher raw material costs across all regions and end-markets n Increased amortization expense associated with definite-lived intangible assets from acquisitions within our industrial end-market during 2018 ### Transportation Coatings Segment ### Net Sales | | Years Ended December 31, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | | --- | ---: | ---: | ---: | ---: | | Net sales | $1,558.8 | $1,662.9 | $(104.1) | (6.3)% | | Volume effect | | | | (4.9)% | | Price/Mix effect | | | | 1.6% | | Exchange rate effect | | | | (3.0)% | Net sales decreased due to the following: n Lower organic volumes across all regions within our light vehicle end-market, partially offset by an increase in volumes within our commercial vehicle end-market which saw lower selling prices due to adverse changes in product mix 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 44 ### Adjusted EBIT | | Years Ended December 31, 2019 | 2018 | 2019 vs 2018 $ Change | % Change | Years Ended December 31, 2018 | 2017 | 2018 vs 2017 $ Change | % Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Adjusted EBIT | $137.4 | $134.9 | $2.5 | 1.9% | $134.9 | $190.8 | $(55.9) | (29.3)% | | Adjusted EBIT Margin | 8.8% | 8.1% | | | 8.1% | 11.3% | | | #### 2019 Compared to 2018 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 which realized lower average selling prices due to adverse changes in product mix 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 Slightly higher raw materials costs across both end-markets #### 2018 Compared to 2017 Adjusted EBIT decreased due to the following: n Higher raw materials costs n Lower average selling prices across both end-markets, primarily driven by the light vehicle end-market in China n Unfavorable impacts of currency exchange related to the weakening of certain currencies in Latin America compared to the U.S. Dollar Partially offset by: n Increases in sales volumes in our North America and Latin America commercial vehicle 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 Senior Secured Credit Facilities. At December 31, 2019, availability under the Revolving Credit Facility was $361.2 million, net of $38.8 million in 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 December 31, 2019, we had $16.9 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 $6.5 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 ### Years ended December 31, 2019 and 2018 *(In millions)* | Net cash provided by (used for): Operating activities: | Year Ended December 31, 2019 | 2018 | | --- | ---: | ---: | | Net income | $252.6 | $213.3 | | Depreciation and amortization | 353.0 | 369.1 | | Amortization of deferred financing costs and original issue discount | 8.8 | 8.0 | | Debt extinguishment and refinancing related costs | 0.2 | 9.5 | | Deferred income taxes | 15.7 | 6.1 | | Realized and unrealized foreign exchange losses, net | 5.9 | 17.3 | | Stock-based compensation | 15.7 | 37.3 | | Divestitures and impairments charges | 21.1 | — | | Interest income on swaps designated as net investment hedges | (14.7) | (9.4) | | Other non-cash, net | (0.1) | (0.9) | | Net income adjusted for non-cash items | 658.2 | 650.3 | | Changes in operating assets and liabilities | (85.1) | (154.2) | | Operating activities | 573.1 | 496.1 | | Investing activities | (93.9) | (189.2) | | Financing activities | (158.4) | (368.2) | | Effect of exchange rate changes on cash | 3.3 | (15.2) | | Net increase (decrease) in cash | $324.1 | $(76.5) | ### Year Ended December 31, 2019 #### Net Cash Provided by Operating Activities Net cash provided by operating activities for the year ended December 31, 2019 was $573.1 million. Net income adjusted for non-cash items (depreciation, amortization and other non-cash items) generated cash of $658.2 million. This was partially offset by changes in operating assets and liabilities of $85.1 million. The most significant drivers were increases in prepaid expenses and other assets of $118.9 million due to business incentive payments and payments for employee retention, as well as accounts receivables of $10.1 million due to timing of collections. Partially offsetting these outflows were increases in accounts payable and other liabilities of $18.2 million and $9.6 million, respectively, and a decrease in inventory of $10.8 million. #### Net Cash Used for Investing Activities Net cash used for investing activities for the year ended December 31, 2019 was $93.9 million. These primary uses were for purchases of property, plant and equipment of $112.5 million and business acquisitions of $3.3 million, partially offset by interest proceeds on swaps designated as net investment hedges of $14.7 million and net proceeds from the sale of our consolidated joint venture of $8.2 million as discussed in Note 3 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. #### Net Cash Used for Financing Activities Net cash used for financing activities for the year ended December 31, 2019 was $158.4 million. This change was driven by purchases of common stock totaling $105.3 million, payments of $67.1 million on short-term and long-term borrowings, investments in noncontrolling interests of $31.1 million, deferred acquisition-related payments of $2.2 million and dividends paid to noncontrolling interests of $1.5 million. These payments were partially offset by cash received from stock option exercises of $50.3 million. #### Other Impacts on Cash Currency exchange impacts on cash for the year ended December 31, 2019 were favorable by $3.3 million, which was driven primarily by the strengthening of the British pound and Mexican Peso compared to the U.S. Dollar. ### Year Ended December 31, 2018 #### Net Cash Provided by Operating Activities Net cash provided by operating activities for the year ended December 31, 2018 was $496.1 million. Net income adjusted for non-cash items (depreciation, amortization and other non-cash items) generated cash of $650.3 million. This was partially offset by uses of working capital of $154.2 million. The most significant drivers of the uses of working capital were increases in prepaid expenses and other assets of $157.3 million, inventory of $48.1 million and accounts receivables of $22.3 million, and a decrease in other accrued liabilities of $8.4 million. These outflows were primarily driven by customer incentive payments, increased inventory builds to support ongoing operational demands and incremental net sales during the year ended December 31, 2018. Partially offsetting these outflows were increases in other liabilities and accounts payable of $32.4 million and $49.5 million, respectfully. #### Net Cash Used for Investing Activities Net cash used for investing activities for the year ended December 31, 2018 was $189.2 million. This use was driven by purchases of property, plant and equipment of $143.4 million and business acquisitions of $82.8 million (net of cash acquired). These outflows were partially offset by interest and settlement proceeds on swaps designated as net investment hedges of $9.4 million and $22.5 million, respectively, as well as $5.1 million of other investing activities, net. #### Net Cash Used for Financing Activities Net cash used for financing activities for the year ended December 31, 2018 was $368.2 million. This outflow was driven by payments of $556.0 million on short-term and long-term borrowings inclusive of the repayment of the 2023 Euro Term Loans, the purchases of treasury stock totaling $253.8 million, an investment in a non-controlling interest of $26.9 million and payments of $17.8 million consisting of financing-related costs, deferred acquisition-related consideration associated with historical acquisitions, and dividends to noncontrolling interests of consolidated joint ventures. These outflows were partially offset by net proceeds of $468.9 million relating to the refinancing of our 2024 Dollar Term Loans and proceeds from stock option exercises of $17.4 million. #### Other Impacts on Cash Currency exchange impacts on cash for the year ended December 31, 2018 were unfavorable by $15.2 million, which was driven primarily by the Euro, Chinese Renminbi and certain currencies within Latin America. ### Financial Condition We had cash and cash equivalents at December 31, 2019 and 2018 of $1,017.5 million and $693.6 million, respectively. Of these balances, $540.0 million and $417.1 million were maintained in non-U.S. jurisdictions as of December 31, 2019 and 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 periods indicated: *(In millions)* | | December 31, 2019 | 2018 | | --- | ---: | ---: | | 2024 Dollar Term Loans | $2,387.5 | $2,411.8 | | 2024 Dollar Senior Notes | 500.0 | 500.0 | | 2024 Euro Senior Notes | 375.2 | 383.3 | | 2025 Euro Senior Notes | 504.0 | 514.9 | | Short-term and other borrowings | 109.0 | 103.8 | | Unamortized original issue discount | (10.5) | (12.6) | | Deferred financing costs, net | (31.1) | (37.2) | | | 3,834.1 | 3,864.0 | | Less: | | | | Short term borrowings | 19.6 | 17.9 | | Current portion of long-term borrowings | 24.3 | 24.3 | | Long-term debt | $3,790.2 | $3,821.8 | Our indebtedness, including the Senior Secured Credit Facilities and Senior Notes, is more fully described in Note 18 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. 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 $361.2 million and $355.2 million at December 31, 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. On June 28, 2019, we executed the eighth amendment to the Credit Agreement which impacted the Revolving Credit Facility by (i) extending the maturity date to the earlier of March 2, 2024, the date of termination in whole of the Revolving Credit Facility, or the date that is 91 days prior to the maturity of the term loans borrowed under the Credit Agreement, and (ii) reducing the applicable interest margins on any outstanding borrowings. The following table details our borrowings outstanding, average effective interest rates and the associated interest expense, inclusive of the amortization of debt issuance costs, debt discounts and the impact of derivative instruments for the years ended December 31, 2019 and 2018, respectively: *(In millions)* | | Year Ended December 31, 2019 Principal | Average Effective Interest Rate | Interest Expense | 2018 Principal | Average Effective Interest Rate | Interest Expense | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Term Loans | $2,387.5 | 3.9% | $92.7 | $2,411.8 | 3.8% | $91.5 | | Revolving Credit Facility | — | N/A | 1.6 | — | N/A | 1.9 | | Senior Notes | 1,379.2 | 4.6% | 62.9 | 1,398.2 | 4.5% | 64.3 | | Short-term and other borrowings | 109.0 | Various | 5.4 | 103.8 | Various | 1.9 | | Total | $3,875.7 | | $162.6 | $3,913.8 | | $159.6 | 48 ### Contractual Obligations The following table summarizes our contractual obligations at December 31, 2019: *(In millions)* | Debt, including current portion Senior Secured Credit Facilities, consisting of the following: | Contractual Obligations Due In: Total | 2020 | 2021-2022 | 2023-2024 | Thereafter | | --- | ---: | ---: | ---: | ---: | ---: | | 2024 Dollar Term Loans | $2,387.5 | $24.3 | $48.6 | $2,314.6 | $— | | Senior Notes, consisting of the following: | | | | | | | 2024 Dollar Senior Notes | 500.0 | — | — | 500.0 | — | | 2024 Euro Senior Notes | 375.2 | — | — | 375.2 | — | | 2025 Euro Senior Notes | 504.0 | — | — | — | 504.0 | | Other borrowings | 43.9 | 16.6 | 27.3 | — | — | | Interest payments (1) | 719.7 | 153.2 | 303.0 | 254.0 | 9.5 | | Finance leases (2) | 100.8 | 5.9 | 11.4 | 11.6 | 71.9 | | Operating leases | 109.2 | 31.1 | 41.9 | 19.0 | 17.2 | | Pension contributions (3) | 5.8 | 5.8 | — | — | — | | Purchase obligations (4) | 165.0 | 86.3 | 67.3 | 3.1 | 8.3 | | Uncertain tax positions, including interest and penalties (5) | — | — | — | — | — | | Employee retention award payments (6) | 17.0 | — | 17.0 | — | — | | Total | $4,928.1 | $323.2 | $516.5 | $3,477.5 | $610.9 | (1) Interest payments are based on principal amounts of our Senior Secured Credit Facilities and Senior Notes at December 31, 2019 including commitment fees on the unused portion of the Revolving Credit Facility. Future interest payments assume December 31, 2019 variable rates will prevail throughout all future periods and do not consider the effect of our derivative instruments. See Note 18 and Note 19 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for disclosures of our interest rates and derivatives, respectively. (2) Finance lease payments, within the table above, represent total cash rental costs to be paid over the terms of these leases, which include principal and interest. (3) We expect to make contributions to our defined benefit pension plans beyond 2020; however, the amount of any contributions is dependent on the future economic environment and investment returns, and we are unable to reasonably estimate the pension contributions beyond 2020. (4) Purchase obligations include various commitments at December 31, 2019 and reflect the minimum contractual obligations under legally enforceable contracts. (5) At December 31, 2019, we had approximately $50.3 million of gross uncertain tax positions, including interest and penalties that could result in potential payments. Due to the high degree of uncertainty regarding future timing of cash flows associated with these liabilities, we are unable to estimate the years in which settlement will occur with the respective taxing authorities. (6) Employee retention award payments for certain employees contingent upon service through this point to help ensure continuity of the Company’s business. ### Off Balance Sheet Arrangements See Note 6 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for disclosure of our guarantees of certain customers’ obligations to third parties. ### Recent Accounting Guidance See Note 1 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a summary of recent accounting guidance. ### CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of results of operations and financial condition are based upon our consolidated financial statements. These financial statements have been prepared in accordance with U.S. GAAP unless otherwise noted. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts reported in the financial statements. We base our estimates and judgments on historical experiences and assumptions believed to be reasonable under the circumstances and re-evaluate them on an ongoing basis. Actual results could differ from our estimates under different assumptions or conditions. Our significant accounting policies, which may be affected by our estimates and assumptions, are more fully described in Note 1 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes the following critical accounting policies reflect its most significant estimates and assumptions used in the preparation of the financial statements. ### Accounting for Business Combinations Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, royalty rates, customer attrition rates, technology migration rates, asset lives and market multiples, among other items. The fair values of intangible assets are estimated using an income approach, either the excess earnings method (customer relationships) or the relief from royalty method (technology and trademarks). Under the excess earnings method, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows attributable solely to the intangible asset over its remaining useful life. With respect to customer relationships, fair values are calculated using the excess earnings method and customer attrition is a key input used to determine the applicable after-tax cash flows. Under the relief from royalty method, fair value is measured by estimating future revenue associated with the intangible asset over its useful life and applying a royalty rate to the revenue estimate. These intangible assets enable us to secure markets for our products, develop new products to meet the evolving business needs and competitively produce our existing products. The fair values of real properties acquired are based on the consideration of their highest and best use in the market. The fair values of property, plant and equipment, other than real properties, are based on the consideration that unless otherwise identified, they will continue to be used "as is" and as part of the ongoing business. In contemplation of the in-use premise and the nature of the assets, the fair value is developed primarily using a cost approach. The fair value of noncontrolling interests, when applicable, are estimated by applying an income approach and is based on significant inputs that are not observable in the market and thus represents a fair value measurement categorized within Level 3 of the fair value hierarchy. Key assumptions in the valuation of noncontrolling interest included a discount rate, a terminal value based on a range of long-term sustainable growth rates and adjustments because of the lack of control that market participants would consider when measuring the fair value of the noncontrolling interests. The fair value of the contingent consideration liabilities is estimated by applying an income approach using the Black-Scholes option pricing model. The fair value measurements are based on significant inputs that are not observable in the market and thus represents a fair value measurement categorized within Level 3 of the fair value hierarchy. Key assumptions in the valuation of contingent consideration liabilities included discount rates, expected terms, volatility rates and operating results as applicable based on the targets identified in the respective acquisition agreements. See Note 1 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information. ### Asset Impairments Factors that could result in future impairment charges or changes in useful lives, among others, include changes in worldwide economic conditions, changes in technology, changes in competitive conditions and customer preferences, and fluctuations in foreign currency exchange rates. These risk factors are discussed in Part I, Item 1A, "Risk Factors," included elsewhere in this Annual Report on Form 10-K. #### Goodwill and indefinite-lived intangible assets The Company tests indefinite-lived intangible assets and goodwill for impairment annually by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair values of a reporting unit or asset is less than its carrying amount. Fair values used under the quantitative impairment assessment are estimated using a combination of discounted projected future earnings or cash flow methods, that are based on projections of the amounts and timing of future revenue and cash flows, and multiples of earnings in estimating fair value. In conjunction with our impairment assessments of indefinite-lived intangible assets, we also review the reasonableness of the indefinite useful lives associated with these assets, in which we evaluate whether indicators exist that future cash flows associated with these assets could be realized over a finite period. In 2019, we forwent the qualitative test and tested goodwill and indefinite-lived intangible assets for impairment by performing a quantitative analysis. The quantitative analysis determined that all reporting units and indefinite-lived intangible assets had fair values in significant excess of carrying values. The inputs utilized in a quantitative analysis are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, *Fair Value Measurement*. The process of evaluating the potential impairment of goodwill and indefinite-lived intangible assets is subjective because it requires the use of estimates and assumptions as to our future cash flows, discount rates commensurate with the risks involved in the assets, future economic and market conditions, as well as other key assumptions. We believe that the amounts recorded in the financial statements related to goodwill and indefinite-lived intangible assets are based on the best estimates and judgments of the appropriate Axalta management, although actual outcomes could differ from our estimates. See Note 1 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information. #### Long-Lived Assets Long-lived assets, which includes property, plant and equipment, and definite-lived intangible assets, such as technology, trademarks, customer relationships and non-compete agreements, are continually assessed for impairment at the asset group level whenever events or changes in circumstances indicate the carrying amount of the asset group may not be recoverable. Such impairment assessments involve comparing the carrying amount of the asset group, determined at the lowest for which identifiable cash flows are largely independent of the cash flows of other assets, to the forecasted undiscounted future cash flows generated by that asset group (i.e. a recoverability test). In the event the carrying amount of the asset group exceeds the undiscounted future cash flows generated by that asset group and the carrying amount is not considered recoverable, an impairment exists. An impairment loss is measured as the excess of the asset group’s carrying amount over its fair value. ### Stock-Based Compensation Compensation expense related to service-based, non-qualified stock options is equivalent to the grant-date fair value of the awards determined under the Black-Scholes option pricing model and is recognized as compensation expense over the service period utilizing the graded vesting attribution method. Compensation expense related to the restricted stock awards and restricted stock units is equal to the grant-date fair value of the awards determined by the closing share price on the date of the grant. The related expense is recognized as compensation expense over the service period utilizing the graded vesting attribution method. Compensation expense related to performance stock awards and performance share units which are determined to have a market condition is determined at the grant-date of the awards using a valuation methodology (Monte Carlo simulation model) to account for the market conditions linked to these awards and are recognized as compensation expense over the service period utilizing the graded vesting attribution method. We recognize compensation expense net of forfeitures, which we have elected to record at the time of occurrence. See Note 9 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further detail on stock-based compensation. ### Retirement Benefits The amounts recognized in the audited financial statements related to pension benefits are determined from actuarial valuations. Inherent in these valuations are assumptions including expected return on plan assets, discount rates at which liabilities could have been settled, rate of increase in future compensations levels, and mortality rates. These assumptions are updated annually and are disclosed in Note 8 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. In accordance with U.S. GAAP, actual results that differed from the assumptions are accumulated and amortized over future periods and therefore, affect expense recognized in future periods. The estimated impact of either a 100 basis point increase or decrease of the discount rate to the net periodic benefit cost for 2020 would result in an increase of approximately $0.4 million or $0.2 million, respectively. The estimated impact of a 100 basis point increase or decrease of the expected return on asset assumption on the net periodic benefit cost for 2020 would result in a decrease or increase of approximately $2.5 million, respectively. ### Income taxes The provision for income taxes was determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the period. Deferred taxes result from differences between the financial and tax basis of our assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates applicable in the years in which they are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax law is recognized in income in the period that includes the enactment date. The Company records a valuation allowance if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company must generate approximately $279.7 million of taxable income to fully realize its consolidated net deferred tax assets as of December 31, 2019. We evaluate the recoverability of deferred tax assets on a jurisdictional basis by assessing the adequacy of future expected taxable income from all sources, including the reversal of taxable temporary differences, forecasted core business earnings and available tax planning strategies. Of our net deferred tax asset balance as of December 31, 2019, $101.3 million, net of valuation allowances of $2.5 million, relates to our operations within the U.S. In instances where we are in a three-year cumulative loss, we assess all positive and negative factors including any potential aberrational items which may be included within our taxable results. The aberrational items which have impacted our results include transition-related costs associated with the separation from our predecessor coupled with significant taxable losses associated with the exercises of pre-IPO stock options that were deep in the money at the time they were exercised, as well as debt extinguishment, refinancing and acquisition related costs. We believe, and have assumed, these types of losses are not indicative of our core earnings for purposes of assessing the appropriateness of a valuation allowance. Assumptions around sources of taxable income inherently rely heavily on estimates. We use our historical experience and our short and long-range business forecasts to provide insight. While the Company believes that its judgments and estimations regarding deferred tax assets are appropriate, significant differences in actual experience may require the Company to adjust its valuation allowance and could materially affect the Company’s future financial results. We provide for income and foreign withholding taxes, where applicable, on unremitted earnings of all subsidiaries and related companies to the extent that such earnings are not deemed to be permanently invested and cannot be repatriated in a tax-free manner. At December 31, 2019 and 2018, deferred income taxes of approximately $6.0 million and $7.4 million, respectively, have been provided on such subsidiary earnings, respectively. At December 31, 2019, and 2018, we have not recorded a deferred tax liability related to withholding taxes of approximately $16.3 million and $4.0 million, respectively, on unremitted earnings of subsidiaries that are permanently invested. The breadth of our operations and the global complexity of tax regulations require assessments of uncertainties and judgments in estimating taxes we will ultimately pay. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of disputes arising from federal, state and international tax audits in the normal course of business. A liability for unrecognized tax benefits is recorded when management concludes that the likelihood of sustaining such positions upon examination by taxing authorities is less than "more likely than not." Interest and penalties accrued related to unrecognized tax benefits are included in the provision for income taxes. At December 31, 2019 and 2018, the Company had gross unrecognized tax benefits, excluding interest and penalties, for both domestic and foreign operations of $45.3 million and $37.0 million, respectively. See Note 11 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further detail on our accounting for income taxes. ### Sales deductions In our refinish end-market, our product sales are typically supplied through a network of distributors. Control transfers and revenue is recognized when our products are delivered to our distribution customers. Variable consideration in the form of price, less discounts and rebates, are estimated and recorded, as a reduction to net sales, upon the sale of our products based on our ability to make a reasonable estimate of the amounts expected to be received or incurred. The estimates of variable consideration involve significant assumptions based on the best estimates of inventory held by distributors, applicable pricing, as well as the use of historical actuals for sales, discounts and rebates, which may result in changes in estimates in the future. The timing of payments associated with the above arrangements may differ from the timing associated with the satisfaction of our performance obligations. The period between the satisfaction of the performance obligation and the receipt of payment is dependent on terms and conditions specific to the customers. For transactions in which we expect, at contract inception, the period between the transfer of our products or services to our customer and when the customer pays for that good or service to be greater than one year, we adjust the promised amount of consideration for the effects of any significant financing components. See Note 2 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further detail on our revenue. ### Contingencies Contingencies, by their nature, relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has been incurred as well as in estimating the amount of potential loss. The most important contingencies impacting our financial statements are those related to environmental remediation, pending or threatened litigation against the Company and the resolution of matters related to open tax years. Environmental remediation costs are accrued when it is probable that a liability has been incurred and the amount can be reasonably estimated. Estimates of environmental reserves require evaluating government regulation, available technology, site-specific information and remediation alternatives. We accrue an amount equal to our best estimate of the costs to remediate based upon the available information. The extent of environmental impacts may not be fully known, and the processes and costs of remediation may change as new information is obtained or technology for remediation is improved. Our process for estimating the expected cost for remediation considers the information available, technology that can be utilized and estimates of the extent of environmental damage. Adjustments to our estimates are made periodically as additional information received as remediation progresses. We are subject to legal proceedings and claims arising out of our business operations. We routinely assess the likelihood of any adverse outcomes to these matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is made after analysis of each known claim. We have an active risk management program consisting of numerous insurance policies secured from many carriers. These policies often provide coverage that is intended to minimize the financial impact, if any, of the legal proceedings. The required reserves may change in the future due to new developments in each matter. For more information on these matters, see Note 6 and Note 11 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. ## Market risk As filed, 9,581 characters. We are exposed to changes in interest rates and foreign currency exchange rates because we finance certain operations through fixed and variable rate debt instruments and denominate our transactions in a variety of foreign currencies. We are also exposed to changes in the prices of certain commodities that we use in production. Changes in these rates and commodity prices may have an impact on future cash flows and earnings. We manage these risks through normal operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. We do not enter into derivative financial instruments for trading or speculative purposes. By using derivative instruments, we are subject to credit and market risk. The fair market value of the derivative instruments is determined by using valuation models whose inputs are derived using market observable inputs, including interest rate yield curves, as well as foreign exchange and commodity spot and forward rates, and reflects the asset or liability position as of the end of each reporting period. When the fair value of a derivative contract is positive, the counterparty owes us, thus creating a receivable risk for us. We are exposed to counterparty credit risk in the event of non-performance by counterparties to our derivative agreements. We minimize counterparty credit (or repayment) risk by entering into transactions with major financial institutions of investment grade credit rating. Our exposure to market risk is not hedged in a manner that completely eliminates the effects of changing market conditions on earnings or cash flow. ### Interest rate risk We are subject to interest rate market risk in connection with our borrowings. A one-eighth percent change in the applicable interest rate for borrowings under the Senior Secured Credit Facilities (assuming the Revolving Credit Facility is undrawn) would have an annual impact of approximately $1.5 million on cash interest expense considering the impact of our hedging positions currently in place. We selectively use derivative instruments to reduce market risk associated with changes in interest rates. The use of derivatives is intended for hedging purposes only and we do not enter into derivative instruments for speculative purposes. During the year ended December 31, 2017, we entered into four 1.5% interest rate caps with aggregate notional amounts totaling $850.0 million to hedge the variable interest rate exposures on our 2024 Dollar Term Loans. Three of these interest rate caps, comprising $600.0 million of the notional value, expired December 31, 2019 and had a deferred premium of $8.6 million at inception. The fourth interest rate cap, comprising the remaining $250.0 million of the notional value, expires December 31, 2021 and had a deferred premium of $8.1 million at inception. All deferred premiums are paid quarterly over the term of the respective interest rate caps. These interest rate caps are marked to market at each reporting date and any unrealized gains or losses are included in accumulated other comprehensive (loss) income ("AOCI") and reclassified to interest expense in the same period or periods during which the hedged transactions affect earnings. During the year ended December 31, 2018, we entered into three interest rate swaps and three fixed for fixed cross-currency swaps, both with aggregate notional amounts totaling $475.0 million, to hedge interest rate exposures related to variable rate borrowings and variability of exchange rate impacts between the U.S. Dollar and Euro, under the Senior Secured Credit Facilities. Under the terms of the interest rate swap agreements, the Company is required to pay the counter-parties a stream of fixed interest payments at a rate of 2.72% and in turn, receives variable interest payments based on 3-month LIBOR from the counter-parties. Under the terms of the cross-currency swap agreements, the Company notionally exchanged $475.0 million at a weighted average interest rate of 4.47% for €416.6 million at a weighted average interest rate of 1.44%. The interest rate swaps and the cross-currency swaps are designated as cash flow and net investment hedges, respectively, and expire on March 31, 2023. The interest rate swaps are marked to market at each reporting date and any unrealized gains or losses are included in AOCI and reclassified to interest expense in the same period or periods during which the hedged transactions affect earnings. The cross-currency swaps are marked to market at each reporting date and any unrealized gains or losses are included in unrealized currency translation adjustments, within AOCI, while the accrued and settled interest is recorded as interest expense, net in the statement of operations. During the year ended December 31, 2019, we entered into two interest rate swaps with aggregate notional amounts totaling $500.0 million, effective December 31, 2019, to hedge interest rate exposure associated with the 2024 Dollar Term Loans. Under the terms of the interest rate swap agreements, the Company is required to pay the counter-parties a stream of fixed interest payments at a rate of 2.59% and in turn, receives variable interest payments based on 3-month LIBOR from the counter-parties. The interest rate swaps are designated as cash flow hedges and expire on December 31, 2022. These interest rate swaps are marked to market at each reporting date and any unrealized gains or losses are included in AOCI and reclassified to interest expense in the same period or periods during which the hedged transactions affect earnings. ### Foreign exchange rates risk We are exposed to foreign currency exchange risk by virtue of the translation of our international operations from local currencies into the U.S. Dollar. The majority of our net sales for the years ended December 31, 2019, 2018 and 2017 were from operations outside the United States. At December 31, 2019 and 2018, the accumulated other comprehensive loss account on the consolidated balance sheets included a cumulative translation loss of $297.0 million and $299.4 million, respectively. A hypothetical 10% increase in the value of the U.S. Dollar relative to all foreign currencies would have increased the cumulative translation loss by $190.3 million. This sensitivity analysis is inherently limited as it assumes that rates of multiple foreign currencies are moving in the same direction relative to the value of the U.S. Dollar. Uncertainty in the global market conditions has resulted in, and may continue to cause, significant volatility in foreign currency exchange rates which could increase these risks. In the majority of our jurisdictions, we earn revenue and incur costs in the local currency of such jurisdiction. We earn significant revenues and incur significant costs in foreign currencies including the Euro, Mexican Peso, Brazilian Real and the Chinese Yuan/Renminbi. As a result, movements in exchange rates could cause our revenues and expenses to materially fluctuate, impacting our future profitability and cash flows. Our purchases of raw materials in Latin America, EMEA and Asia Pacific and future business operations and opportunities, including the continued expansion of our business outside North America, may further increase the risk that cash flows resulting from these activities may be adversely affected by changes in currency exchange rates. If and when appropriate, we intend to manage these risks through foreign currency hedges and/or by utilizing local currency funding of these expansions. We do not intend to hold financial instruments for trading or speculative purposes. Additionally, in order to fund the purchase price for certain assets of DPC and the capital stock and other equity interests of certain non-U.S. entities, a combination of equity contributions and intercompany loans were utilized to capitalize certain non-U.S. subsidiaries. In certain instances, the intercompany loans are denominated in currencies other than the functional currency of the affected subsidiaries. Where intercompany loans are not a component of permanently invested capital of the affected subsidiaries, increases or decreases in the value of the subsidiaries’ functional currency against other currencies will affect our results of operations. We use these intercompany loans to offset the exposure to profitability and cash flows created by external loans denominated in currencies that are different from the function currency of the issuing entities, including our 2024 and 2025 Euro Senior Notes, which are denominated in Euros. ### Commodity price risk We are subject to changes in our cost of sales caused by movements in underlying commodity prices (primarily oil and natural gas). Between 45% and 55% of our cost of sales is represented by raw materials. A substantial portion of the purchased raw materials include monomers, pigments, resins and solvents. Our price fluctuations generally follow industry indices. We historically have not entered into long-term purchase contracts related to the purchase of raw materials. If and when appropriate, we intend to manage these risks using purchase contracts with our suppliers. ### Treasury policy Our treasury policy seeks to ensure that adequate financial resources are available for the development of our businesses while managing our currency and interest rate risks. Our policy is to not engage in speculative transactions. Our policies with respect to the major areas of our treasury activity are set forth above. ## Controls and procedures As filed, 2,286 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 Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. No matter how well designed and operated, disclosure controls and procedures can provide only reasonable, rather than absolute, assurance of achieving the desired control objectives. 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 at a reasonable assurance level as of December 31, 2019. ### Management's report on internal control over financial reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in *Internal Control—Integrated Framework* (2013). Based on this assessment, management concluded that, as of December 31, 2019, the Company's internal control over financial reporting was effective. The effectiveness of our internal control over financial reporting has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report which is included herein. ### Changes in internal control over financial reporting There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Filed Feb 19, 2020. Source: SEC EDGAR, the filing index for accession 0001616862-20-000012. Last ingested by Listed: Nov 12, 2026, 22:39 ET. No prices; not investment advice.