Axalta Coating Systems Ltd.: Form 10-Q for the period ended Mar 31, 2020

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the interim unaudited condensed consolidated financial statements and the condensed notes thereto included elsewhere in this Quarterly Report on Form 10-Q, as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 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 Quarterly Report on Form 10-Q that are not statements of historical fact, including statements about our beliefs and expectations, are "forward-looking statements" within the meaning of federal securities laws and should be evaluated as such. Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plan, strategies and capital structure. These statements often include words such as "anticipate," "expect," "suggests," "plan," "believe," "intend," "estimates," "targets," "projects," "should," "could," "would," "may," "will," "forecast" and other similar expressions. We base these forward-looking statements or projections on our current expectations, plans and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances and at such time. As you read and consider this Quarterly Report on Form 10-Q, you should understand that these statements are not guarantees of performance or results. The forward-looking statements and projections are subject to and involve risks, uncertainties and assumptions, including, but not limited to, the risks and uncertainties described in "Forward-Looking Statements," as well as "Risk Factors" and you should not place undue reliance on these forward-looking statements or projections. Although we believe that these forward-looking statements and projections are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements and projections. Factors that may materially affect such forward-looking statements and projections include:

• adverse developments in economic conditions as a result of global coronavirus pandemic ("COVID-19") or otherwise;
• the duration and spread of COVID-19 outbreak; its severity; actions taken to contain the virus, including government actions to mitigate the economic impact of the outbreak; how quickly and to what extent normal economic and operating conditions can resume; and how quickly and to what extent our customers and counterparties can recover from the negative impacts of the outbreak;
• volatility in the capital, credit and commodities markets;
• our inability to successfully execute on our growth strategy;
• 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, laws or regulations, or the interpretation or application of tax laws and regulations, including unexpected impacts of the new U.S. TCJA legislation, which may differ with further regulatory guidance and changes in our current interpretations and assumptions;
• our substantial indebtedness;
• our ability to obtain additional capital on commercially reasonable terms may be limited;
• any statements of belief and any statements of assumptions underlying any of the foregoing;
• other factors disclosed in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2019 and our other filings with the Securities and Exchange Commission; and
• other factors beyond our control.

These cautionary statements should not be construed by you to be exhaustive and are made only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

OVERVIEW

We are a leading global manufacturer, marketer and distributor of high performance coatings systems. We have over a 150-year heritage in the coatings industry and are known for manufacturing high-quality products with well-recognized brands supported by market-leading technology and customer service. Our diverse global footprint of 48 manufacturing facilities, four technology centers, 54 customer training centers and approximately 13,000 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 12.1% for the three months ended March 31, 2020 compared with the three months ended March 31, 2019, primarily driven by a net decrease in volumes of 11.8% as a result of decreased demand largely due to COVID-19 impacts, inclusive of negative impacts of portfolio changes of 1.5%, associated with the prior year sale of a consolidated joint venture, as well as impacts of unfavorable currency translation of 2.1%. Partially offsetting these declines was an increase from higher average selling price and product mix across both segments and all regions of 1.8%. The following trends have impacted our segment and end-market net sales performance:

• Performance Coatings: Net sales decreased 9.2% driven primarily by a decrease in volumes of 9.8% as a result of decreased demand largely due to COVID-19 across both end-markets, inclusive of the negative net impacts of portfolio changes of 2.3% associated with the sale of our consolidated powder joint venture in China, as well as the impacts of unfavorable foreign currency translation of 1.9%. Partially offsetting the decline in volumes during the period was an increase in average selling prices of 2.5%, of which both end-markets positively contributed.
• Transportation Coatings: Net sales decreased 17.3% driven primarily by a decrease in volumes of 15.2% as a result of decreased demand largely due to COVID-19 as well as the impacts of unfavorable foreign currency translation of 2.6%. Partially offsetting the decline in volumes during the period was an increase in average selling prices and product mix of 0.5% of which both end-markets positively contributed.

Our business serves four end-markets globally with net sales for the three months ended March 31, 2020 and 2019, as follows:

(In millions)

Coronavirus (COVID-19) Pandemic

During the three months ended March 31, 2020, the COVID-19 pandemic had a significant adverse impact on the demand for our products, and, thus, our income from operations. These impacts were initially and more significantly prevalent in China; however, towards the end of the quarter, we began to see impacts in the rest of the countries and regions where we operate. We have taken action to both plan for and address the near-term impact on the decline in demand in certain areas of our business. The focus is on dynamically adjusting our cost structure as needed and has already included initial actions related to reducing discretionary spend across the organization. We are structurally positioned to adjust to demand disruptions given our highly variable cost structure. If the global pandemic continues to grow and evolves into an even more prolonged health crisis, the effects could have a material adverse impact to the Company's results of operations, financial condition and cash flows.

Consistent with the actions taken or recommended by governmental authorities, in March 2020, we elected to shut down certain of our manufacturing operations in regions around the world outside of China, where manufacturing operations were shut down in January and resumed in March. While the majority of our sites have remained in operation, production levels have been lowered to match customer demand. At our sites which are still in operation, we have taken steps to enhance safety standards in place to protect workers. A continued disruption to our production levels will have a substantial adverse effect on our financial condition, liquidity, and results of operations.

We are actively monitoring and managing supply chain challenges, including logistics, but thus far, there have been no significant disruptions. Our supply chain team is coordinating with our suppliers to identify and mitigate potential areas of risk and manage inventories. Further, we are actively monitoring our customers credit situations, but at this point are not aware of any material changes to our customers' ability to settle outstanding receivables.

A significant portion of our workforce continues to work remotely while we monitor COVID-19 and adhere to government guidelines for safe operation. We currently expect to continue to be able to meet our customers' needs while ensuring the safety of our employees, customers and communities.

While we remain committed to our Axalta Way cost savings initiative and expect to meet our full year 2020 savings goals, the timing of achieving our established savings goals during the year may change as our focus has shifted to maximizing short-term liquidity amid the COVID-19 downturn. Our response to the COVID-19 downturn is anticipated to result in over $225 million in cash flow in 2020, comprised of over $100 million in cost savings as well as over $125 million in additional cash flow principally from reduced capital expenditures and deferred payments.

From a liquidity standpoint, we have $657.2 million of cash and cash equivalents and $361.3 million of available borrowing capacity under our Senior Secured Credit Facilities. We have no outstanding borrowing on the Revolving Credit Facility and therefore, are not currently subject to any financial covenants under the Senior Secured Credit Facility.

Capital and Liquidity Highlights

During the three months ended March 31, 2020, we voluntarily prepaid $300.0 million of the outstanding principal on the 2024 Dollar Term Loans. See Note 14 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.

Strategic Review

On March 31, 2020, we announced that our Board of Directors concluded that the previously announced review of strategic alternatives was complete and that the ongoing execution of our strategic plan is the best alternative to maximize value for Axalta’s shareholders.

FACTORS AFFECTING OUR OPERATING RESULTS

Except as described in "Risk Factors" below, there have been no changes in the factors affecting our operating results previously reported in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019 other than the impact of COVID-19 as discussed herein.

RESULTS OF OPERATIONS

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

Net sales

Net sales decreased due to the following:

n Lower sales volumes across both segments and all regions driven by subdued global automotive production and accelerated industrial slowdown primarily as a result of COVID-19 impacts as well as previously anticipated muted industrial trends and declines in light and commercial vehicle builds

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

n Negative impacts as a result of portfolio changes resulting from the sale of our consolidated joint venture interests within our Performance Coatings segment

Partially offset by:

n Higher average selling prices across both segments and all regions

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Cost of sales

Cost of sales decreased due to the following:

n Lower sales volumes across both segments and all regions

n Lower costs as a result of portfolio changes resulting from the sale of our consolidated joint venture interests within our Performance Coatings segment

n Favorable impacts of currency translation of 1.6%, due primarily to the weakening of the Euro, Brazilian Real and Chinese Renminbi compared to the U.S. dollar

n Decline in stock-based compensation expense of $0.7 million due to management attrition in the prior year

n Decline in depreciation expense for operating equipment

n Decreased variable input costs across both segments

n Reduction in costs due to operational efficiencies associated with our cost savings initiatives, as well as decreased compensation-related expense

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

n Price and product mix increases to net sales combined with variable cost savings, partially offset by lower sales volumes covering fixed costs

n Reduction in costs due to operational efficiencies associated with our cost savings initiatives, as well as decreased compensation-related expense

Selling, general and administrative expenses

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 Lower costs as a result of portfolio changes resulting from the sale of our consolidated joint venture interests within our Performance Coatings segment

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

n Favorable impacts of currency translation of 3.0%, due primarily to the weakening of the Euro, Chinese Renminbi, and Brazilian Real compared to the U.S. dollar

Other operating charges

Other operating charges increased due to the following:

n Expenses of $11.5 million associated with the recently concluded review of strategic alternatives as discussed above within "Business Highlights - Strategic Review" and retention costs

n Increase in termination benefits and other employee related costs associated with our cost saving initiatives of $18.2 million from $1.3 million in the prior year to $19.5 million in the current year

Partially offset by:

n Decrease driven by the absence of charges recognized during the three months ended March 31, 2019 within our Performance Coatings segment for a consolidated joint venture classified as held for sale at March 31, 2019 and sold during the three months ended June 30, 2019

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Research and development expenses

Research and development expenses decreased due to the following:

n Decrease in operating expenses as a result of operational efficiencies associated with cost savings initiatives

n Favorable impacts of currency translation, which reduced expenses by 0.8%, due primarily to the weakening of the Euro compared to the U.S. dollar

Amortization of acquired intangibles

Amortization of acquired intangibles decreased due to the following:

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

Interest expense, net

Interest expense, net decreased primarily due to the following:

n Decrease in principal base due to the prepayment of $300.0 million on our 2024 Dollar Term Loans in January 2020

n Decrease in average interest rates due to LIBOR decreases on our variable rate debt over the comparable period

n Weakening of the Euro compared to the U.S. Dollar of 3.0%

Partially offset by:

n Unfavorable impacts of our derivative instruments

Other expense (income), net

Other expense, net changed due to the following:

n Debt extinguishment and refinancing related costs of $2.4 million, driven primarily by the write off of unamortized deferred financing costs and original issue discounts in relation with the voluntary prepayment of $300.0 million of outstanding principal on our 2024 Dollar Term Loans in January 2020

Partially offset by:

n Increase in miscellaneous income, including pension curtailment benefits released from accumulated other comprehensive income for $1.2 million

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(Benefit) provision for income taxes

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

(2) Primarily related to charges recorded in connection with the income tax audit in Germany.

(3) Related to the step-up of tax-deductible basis upon transfer of certain intellectual property rights to our Swiss subsidiary.

SEGMENT RESULTS

The Company's products and operations are managed and reported in two operating segments: Performance Coatings and Transportation Coatings.

Performance Coatings Segment

Net sales decreased due to the following:

n Lower organic volumes across both end-markets and all regions due to decreased demand primarily as a result of COVID-19

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

n Negative impacts as a result of portfolio changes within our industrial end-market, which included the sale of consolidated joint venture interests during the second quarter of 2019 partially offset by an acquisition during the fourth quarter of 2019

Partially offset by:

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

Adjusted EBIT increased due to the following:

n Higher average selling prices across both end-markets 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 compensation expense and costs to support net sales

n Lower variable input costs across both end-markets

Partially offset by:

n Lower organic volumes across both end-markets and all regions due to decreased demand primarily as a result of COVID-19

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

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Transportation Coatings Segment

Net sales decreased due to the following:

n Lower organic volumes across both end-markets and all regions due to decreased demand primarily as a result of COVID-19 as well as a previously anticipated decrease in vehicle builds

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

Partially offset by:

n Higher average selling prices across both end-markets and all regions, except EMEA as a result of product-mix

Adjusted EBIT decreased due to the following:

n Lower organic volumes across both end-markets and all regions due to decreased demand primarily as a result of COVID-19

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

Partially offset by:

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

n Lower variable input costs across both end-markets

n Higher average selling prices across both end-markets and most regions

LIQUIDITY AND CAPITAL RESOURCES

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

At March 31, 2020, availability under the Revolving Credit Facility was $361.3 million, net of $38.7 million of letters of credit outstanding. All such availability may be utilized without violating any covenants under the credit agreement governing such facility or the indentures governing the Senior Notes. At March 31, 2020, we had $12.9 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 $8.7 million.

We, or our affiliates, at any time and from time to time, may purchase shares of our common stock, the Senior Notes, prepay our Term Loans or other indebtedness. Any such purchases of our common stock or Senior Notes 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

(In millions)

Three months ended March 31, 2020

Net Cash Used for Operating Activities

Net cash used for operating activities for the three months ended March 31, 2020 was $0.8 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $101.6 million. This was offset by net uses of working capital of $102.4 million, for which the most significant drivers were decreases in other accrued liabilities of $73.3 million and increases in prepaid expenses and other assets of $38.2 million and inventory of $27.1 million, during the three months ended March 31, 2020. These outflows were primarily related to the timing of cash payments for employee related benefits, customer incentive payments, and payments of normal seasonal operating activities. Partially offsetting these outflows were increases in accounts payable of $29.0 million.

Net Cash Used for Investing Activities

Net cash used for investing activities for the three months ended March 31, 2020 was $18.6 million. The primary use was for purchases of property, plant and equipment of $22.7 million partially offset by interest proceeds on swaps designated as net investment hedges of $3.7 million.

Net Cash Used for Financing Activities

Net cash used for financing activities for the three months ended March 31, 2020 was $321.3 million. This change was driven primarily by the voluntary prepayment of $300.0 million of the outstanding principal on the 2024 Dollar Term Loans, routine repayments of $17.8 million on short-term and long-term borrowings, investments in noncontrolling interests of $1.6 million, and net cash outflows related to stock-based awards of $1.1 million.

Other Impacts on Cash

Currency exchange impacts on cash for the three months ended March 31, 2020 were unfavorable by $19.8 million, which was driven primarily by weakening of the Mexican Peso, British Pound, South African Rand and Russian Ruble compared to the U.S. Dollar.

Three months ended March 31, 2019

Net Cash Used for Operating Activities

Net cash used for operating activities for the three months ended March 31, 2019 was $57.9 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $147.3 million. This was more than offset by net uses of working capital of $205.2 million. The most significant drivers of the uses of working capital were increases in accounts receivable of $90.4 million, prepaid expenses and other assets of $60.5 million and inventories of $22.2 million during the three months ended March 31, 2019, as well as a decrease in other accrued liabilities of $69.2 million. These outflows were primarily driven by customer incentive payments and payments of normal seasonal operating activities, including interest payments on our long-term indebtedness and timing of cash payments for annual employee performance related benefits. Partially offsetting these outflows were increases in accounts payable of $35.4 million.

Net Cash Used for Investing Activities

Net cash used for investing activities for the three months ended March 31, 2019 was $18.8 million. The primary uses were for business acquisitions of $1.7 million and purchases of property, plant and equipment of $20.5 million.

Net Cash Used for Financing Activities

Net cash used for financing activities for the three months ended March 31, 2019 was $101.8 million. This change was driven by payments of $18.6 million on short-term and long-term borrowings, purchases of treasury stock totaling $65.7 million, an investment in a non-controlling interest of $26.9 million and dividends to non-controlling interests. These payments were partially offset by cash received from stock option exercises of $11.4 million.

Other Impacts on Cash

Currency exchange impacts on cash for the three months ended March 31, 2019 were favorable by $0.8 million, which was driven primarily by the Chinese Renminbi.

Financial Condition

We had cash and cash equivalents at March 31, 2020 and December 31, 2019 of $657.2 million and $1,017.5 million, respectively. Of these balances, $471.8 million and $540.0 million were maintained in non-U.S. jurisdictions as of March 31, 2020 and December 31, 2019, respectively. We believe our organizational structure allows us the necessary flexibility to move funds throughout our subsidiaries to meet our operational working capital needs.

Our business may not generate sufficient cash flow from operations and future borrowings may not be available under our Senior Secured Credit Facilities in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs, including planned capital expenditures. In such circumstances, we may need to refinance all or a portion of our indebtedness on or before maturity. We may not be able to refinance any of our indebtedness on commercially reasonable terms or at all. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances. Our primary sources of liquidity are cash on hand, cash flow from operations and available borrowing capacity under our Senior Secured Credit Facilities. Based on our forecasts, we believe that cash flow from operations, available cash on hand and available borrowing capacity under our Senior Secured Credit Facilities and existing lines of credit will be adequate to service debt, fund our cost saving initiatives, meet liquidity needs and fund necessary capital expenditures for the next twelve months.

Our ability to make scheduled payments of principal or interest on, or to refinance, our indebtedness or to fund working capital requirements, capital expenditures and other current obligations will depend on our ability to generate cash from operations. Such cash generation is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

If required, our ability to raise additional financing and our borrowing costs may be impacted by short and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on our performance as measured by certain credit metrics such as interest coverage and leverage ratios. Our highly leveraged nature may limit our ability to procure additional financing in the future.

The following table details our borrowings outstanding at the end of the periods indicated:

(In millions)

Our indebtedness, including the Senior Secured Credit Facilities and Senior Notes, is more fully described in Note 14 to unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and Note 18 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2019.

We believe that 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 $361.3 million and $361.2 million at March 31, 2020 and December 31, 2019, respectively, all of which may be borrowed by us without violating any covenants under the Credit Agreement governing such facility or the indentures governing the Senior Notes.

Contractual Obligations

Information related to our contractual obligations can be found in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. There have been no material changes in the Company's contractual obligations since December 31, 2019.

Off-Balance Sheet Arrangements

See Note 5 "Commitments and Contingencies" to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for disclosure of our guarantees of certain customers’ obligations to third parties.

Recent Accounting Guidance

See Note 1 "Basis of Presentation and Summary of Significant Accounting Policies" to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a summary of recent accounting guidance.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies are those accounting policies that can have a significant impact on the presentation of our financial condition and results of operations, and that require the use of complex and subjective estimates based upon past experience and management’s judgment. Because of the uncertainty inherent in such estimates, actual results may differ materially from these estimates. The policies applied in preparing our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q are those that management believes are the most dependent on estimates and assumptions. There have been no material changes to our critical accounting policies and estimates previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019. For a description of our critical accounting policies and estimates as well as a listing of our significant accounting policies, see “Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” and “Note 1 - Basis of Presentation and Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

There have been no material changes in the market risks previously disclosed in our financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Evaluation of disclosure controls and procedures

As required by Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), the Company carried out an evaluation, under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2020.

Changes in internal control over financial reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the three months ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

There have been no material changes in our risk factors from the risks previously reported in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, other than as set forth below.

Our business, results of operations, financial condition, cash flows and stock price can be adversely affected by pandemics, epidemics or other public health emergencies, such as the recent outbreak of COVID-19.

The impact of the coronavirus (COVID-19) has created significant volatility in the global economy and led to declining near-term, and uncertain longer-term, economic activity and conditions. There have been extraordinary actions taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world, including travel bans, quarantines, “stay-at-home” orders, and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations.

Although we have continued to operate our facilities to date consistent with applicable governmental orders, the outbreak of COVID-19 and any preventive, protective or other actions taken by governmental authorities may have a material adverse effect on our operations, supply chain, customers and logistics networks, including business shutdowns and other disruptions. The extent to which COVID-19 may adversely impact our business depends on future developments, which are highly uncertain and unpredictable, depending upon the severity and duration of the outbreak and the effectiveness of actions taken globally to contain or mitigate its effects. Any resulting financial impact cannot be estimated reasonably at this time, but may materially adversely affect our business, results of operations, financial condition and cash flows. Even after the COVID-19 pandemic has subsided, we may experience materially adverse impacts to our business due to any resulting economic recession or depression. Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets which has adversely impacted, and may continue to adversely impact, our stock price and our ability to access capital markets. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in our Annual Report on Form 10-K for the year ended December 31, 2019, such as those relating to our products and financial performance.