# Axalta Coating Systems Ltd.: Form 10-Q for the period ended Sep 30, 2022

- Company: [Axalta Coating Systems Ltd.](/companies/axta.md) (CIK 1616862)
- Form: 10-Q
- Filed: 2022-10-25
- Accepted by EDGAR: Oct 25, 2022, 16:28 ET
- Period: 2022-09-30
- Accession: 0001616862-22-000041
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1616862/000161686222000041/axta-20220930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1616862/000161686222000041/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-07-01 to 2022-09-30 | $1.24bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2022-01-01 to 2022-09-30 | $3.65bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2022-07-01 to 2022-09-30 | $876.6m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2022-01-01 to 2022-09-30 | $2.60bn | us-gaap:CostOfGoodsAndServicesSold |
| Research and development | 3 months, 2022-07-01 to 2022-09-30 | $16.5m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2022-01-01 to 2022-09-30 | $49.6m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2022-07-01 to 2022-09-30 | $186.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2022-01-01 to 2022-09-30 | $571.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-07-01 to 2022-09-30 | $123.5m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-01-01 to 2022-09-30 | $313.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-07-01 to 2022-09-30 | $35.0m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2022-01-01 to 2022-09-30 | $101.1m | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-07-01 to 2022-09-30 | $21.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-01-01 to 2022-09-30 | $51.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-07-01 to 2022-09-30 | $62.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-01-01 to 2022-09-30 | $148.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.28 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-01-01 to 2022-09-30 | $0.66 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.28 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-01-01 to 2022-09-30 | $0.67 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-07-01 to 2022-09-30 | 221,200,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-01-01 to 2022-09-30 | 222,600,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-01-01 to 2022-09-30 | $48.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-01-01 to 2022-09-30 | $107.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2022-01-01 to 2022-09-30 | $200.1m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2022-09-30 | $517.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-09-30 | $2.67bn | us-gaap:AssetsCurrent |
| Total assets | at 2022-09-30 | $6.82bn | us-gaap:Assets |
| Current liabilities | at 2022-09-30 | $1.35bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-09-30 | $5.50bn | us-gaap:Liabilities |
| Current portion of debt | at 2022-09-30 | $66.7m | us-gaap:DebtCurrent |
| Short-term borrowings | at 2022-09-30 | $42.4m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2022-09-30 | $1.27bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 47,705 characters.

*The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the interim unaudited condensed consolidated financial statements and the condensed notes thereto included elsewhere in this Quarterly Report on Form 10-Q, as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.*

### 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," "believe," "intended," "estimates," "estimated", "projections," "can," "could," "would," "may," "will," "forecasts" and the negative of these words or other comparable or similar terminology. 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" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021, 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, including, but not limited to, those described in "Risk 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.

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 and products. We have over a 150-year heritage in the coatings industry and are known for manufacturing high-quality products with well-recognized brands supported by market-leading technology and customer service. Our diverse global footprint of 47 manufacturing facilities, four technology centers, 48 customer training centers and approximately 12,000 employees allows us to meet the needs of customers in over 140 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 Mobility 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 Mobility Coatings segment, we provide coatings technologies while focusing on supporting the accelerating demand for e-mobility and the evolving coatings needs of established and emerging light and commercial vehicle OEMs, fleet owners and shared mobility providers. These global customers are faced with evolving megatrends in sustainability, personalization and autonomous driving that 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. The end-markets within this segment are light vehicle and commercial vehicle.

### BUSINESS HIGHLIGHTS

#### General Business Highlights

Our net sales increased 11.2%, including a 4.8% headwind from foreign currency translation, for the nine months ended September 30, 2022 compared with the nine months ended September 30, 2021. The increased net sales were primarily driven by higher average selling price and product mix of 9.5%, higher volumes of 4.2% and 2.3% contributions from acquisitions, net of the impact from a commercial agreement restructuring impacting Performance Coatings ("One-Time Event"), which is discussed in more detail in Note 2 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. The following trends have impacted our segment net sales performance:

- *Performance Coatings:* Net sales increased 9.4% for the nine months ended September 30, 2022 compared with the nine months ended September 30, 2021. The increased net sales were primarily driven by higher average selling price and product mix of 10.6% and contributions from acquisitions, net of the impact from the One-Time Event, of 3.3%, partially offset by a 5.4% headwind from unfavorable foreign currency translation driven primarily by the weakening of the Euro and Turkish Lira compared to the U.S. Dollar.
- *Mobility Coatings:* Net sales increased 15.5% for the nine months ended September 30, 2022 compared with the nine months ended September 30, 2021. The increased sales were driven by higher sales volumes of 11.9% and higher average selling price and product mix of 7.0%, partially offset by unfavorable currency impact of 3.4%, driven primarily by the weakening of the Euro and Turkish Lira compared to the U.S. Dollar, partially offset by the strengthening of the Brazilian Real.

Our business serves four end-markets globally with net sales for the three and nine months ended September 30, 2022 and 2021, as follows:

*(In millions)*

| Performance Coatings | Three Months Ended September 30, 2022 | 2021 | 2022 vs 2021 % change | Nine Months Ended September 30, 2022 | 2021 | 2022 vs 2021 % change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Refinish | $498.7 | $443.4 | 12.5% | $1,451.2 | $1,305.5 | 11.2% |
| Industrial | 339.3 | 335.8 | 1.0% | 1,057.0 | 986.8 | 7.1% |
| Total Net sales Performance Coatings | 838.0 | 779.2 | 7.5% | 2,508.2 | 2,292.3 | 9.4% |
| **Mobility Coatings** |  |  |  |  |  |  |
| Light Vehicle | 303.0 | 235.4 | 28.7% | 861.5 | 758.2 | 13.6% |
| Commercial Vehicle | 97.7 | 74.0 | 32.0% | 278.0 | 228.5 | 21.7% |
| Total Net sales Mobility Coatings | 400.7 | 309.4 | 29.5% | 1,139.5 | 986.7 | 15.5% |
| Total Net sales | $1,238.7 | $1,088.6 | 13.8% | $3,647.7 | $3,279.0 | 11.2% |

#### CEO transition

On July 26, 2022, we announced that Robert Bryant would step down as President and Chief Executive Officer and a member of Axalta's Board of Directors, effective August 31, 2022. On August 31, 2022, Rakesh Sachdev, a member of Axalta's Board of Directors, assumed the role of Interim Chief Executive Officer and President. Axalta's Board of Directors has initiated a comprehensive search process to identify and hire a permanent Chief Executive Officer and President.

#### Semiconductor chip shortages, supply chain shortages and inflation

During the nine months ended September 30, 2022, we were negatively impacted globally by semiconductor chip shortages, primarily affecting production levels of our automotive original equipment manufacturer customers in our Light Vehicle end-market, as well as other supply chain shortages, inflation and freight and logistic constraints. While the semiconductor chip shortage has begun to wane, we anticipate inflation and other supply chain constraints, including the tightness of raw materials and freight and logistic challenges, will continue to negatively impact our results throughout the rest of the year. We will continue to monitor these conditions and take appropriate actions that we believe will help mitigate costs and other operational impacts.

#### Russia conflict with Ukraine

Russia's conflict with Ukraine and the sanctions and other measures imposed by various governments in response to this conflict have increased the level of economic and political uncertainty globally. While our operations in Russia and Ukraine constitute less than 1% of our net sales during the nine months ended September 30, 2022, a significant escalation or expansion of economic disruption or countries subject to sanctions or the conflict's scope could have a material adverse effect on our results of operations, financial condition and cash flows. We are actively monitoring the broader economic impact on commodities and currency exchange rates from the current conflict, especially on the price and supply of raw materials. We recorded expenses of $4.8 million related to incremental reserves for accounts receivable, inventory and Business Incentive Plan assets ("BIPs") as a result of sanctions imposed on Russia during the nine months ended September 30, 2022. Included in the $4.8 million are net benefits of $1.3 million recorded during the three months ended September 30, 2022, primarily related to changes in estimates associated with inventory obsolescence. Net assets of our Russian subsidiaries at September 30, 2022 were approximately $18.1 million, with $15.1 million comprised of cash and cash equivalents.

#### Coronavirus (COVID-19) Pandemic

During the nine months ended September 30, 2022, our business continued to recover from the significant adverse impact on the demand for our products and, thus, our income from operations, caused by the COVID-19 pandemic, which began in early 2020. While we have seen a return to more stable quarter-over-quarter demand for our products and services, we remain cognizant of future COVID-19 developments, such as impacts from new variants, employee absenteeism, lockdowns or other restrictions, that could impact our future results of operations, financial condition and cash flows. During the nine months ended September 30, 2022, our manufacturing sites and operations in China were temporarily impacted by the lockdowns imposed by the local authorities in response to COVID-19, which reduced demand in the country. The risks and uncertainties related to the COVID-19 pandemic are discussed in further detail within Note 1 to the interim unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

#### Capital and Liquidity Highlights

During the nine months ended September 30, 2022, we repurchased 7.4 million shares of our common stock for total consideration of $200.1 million as we continue to execute against our previously-approved share repurchase program.

#### Environmental, Social and Governance ("ESG") Framework

In January 2022, we announced a new ESG framework that details longer-term ESG goals and strategies. For additional information, see Part I, Item 1, "Business—Environmental, Social and Governance" of our Annual Report on Form 10-K for the year ended December 31, 2021.

### FACTORS AFFECTING OUR OPERATING RESULTS

There have been no changes in the factors affecting our operating results previously reported in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021.

### RESULTS OF OPERATIONS

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

### Net sales

|  | Three Months Ended September 30, 2022 | 2021 | 2022 vs 2021 $ Change | % Change | Nine Months Ended September 30, 2022 | 2021 | 2022 vs 2021 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $1,238.7 | $1,088.6 | $150.1 | 13.8% | $3,647.7 | $3,279.0 | $368.7 | 11.2% |
| Price/Mix effect |  |  |  | 9.7% |  |  |  | 9.5% |
| Volume effect |  |  |  | 8.8% |  |  |  | 4.2% |
| Impact of acquisitions and one-time events |  |  |  | 1.6% |  |  |  | 2.3% |
| Exchange rate effect |  |  |  | (6.3)% |  |  |  | (4.8)% |

#### Three months ended September 30, 2022 compared to the three months ended September 30, 2021

Net sales increased due to the following:

n Higher average selling price in both segments and all regions as a result of pricing actions taken to offset input price inflation

n Higher sales volumes driven by our Mobility Coatings segment

n Sales contributions from a company acquired during September 2021

Partially offset by:

n Unfavorable impacts of currency translation due primarily to the weakening of the Euro, Turkish Lira, Chinese Renminbi and British Pound compared to the U.S. Dollar

#### Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021

Net sales increased due to the following:

n Higher average selling price in both segments and all regions as a result of pricing actions taken to offset input price inflation

n Higher sales volumes in both segments and most regions

n Sales contributions from companies acquired during 2021

Partially offset by:

n Decrease in net sales of $20.3 million due to the One-Time Event

n Unfavorable impacts of currency translation due primarily to the weakening of the Euro and Turkish Lira compared to the U.S. Dollar

28

### Cost of sales

|  | Three Months Ended September 30, 2022 | 2021 | 2022 vs 2021 $ Change | % Change | Nine Months Ended September 30, 2022 | 2021 | 2022 vs 2021 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of sales | $876.6 | $745.3 | $131.3 | 17.6% | $2,600.4 | $2,182.6 | $417.8 | 19.1% |
| % of net sales | 70.8% | 68.5% |  |  | 71.3% | 66.6% |  |  |

#### Three months ended September 30, 2022 compared to the three months ended September 30, 2021

Cost of sales increased due to the following:

n Higher variable input costs due to raw material, freight, logistics and energy inflation

n Costs associated with higher sales volumes, including costs from a company acquired during September 2021

n Higher operating expenses due primarily to inflation

Partially offset by:

n Favorable currency translation impact of approximately 6%, due primarily to the weakening of the Euro, Turkish Lira and Chinese Renminbi compared to the U.S. Dollar

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

n Higher variable input costs due to raw material, freight, logistics and energy inflation

Partially offset by:

n Higher average selling price in both segments and all regions as a result of pricing actions taken to offset input cost inflation

n More efficient fixed cost usage as a result of higher sales volumes

#### Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021

Cost of sales increased due to the following:

n Higher variable input costs due to raw material, freight, logistics and energy inflation

n Costs associated with higher sales volumes, including costs from companies acquired during 2021

n Higher operating expenses due primarily to inflation and the lapsing of temporary COVID-19 related cost savings initiatives during the first quarter of 2021

n Increase of $1.6 million in inventory obsolescence of which $1.1 million is related to sanctions imposed on Russia

Partially offset by:

n Favorable currency translation impact of approximately 5%, due primarily to the weakening of the Euro and Turkish Lira compared to the U.S. Dollar

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

n Higher variable input costs due to raw material, freight, logistics and energy inflation

n Decrease in net sales of $20.3 million, which had no corresponding impact on cost of sales, due to the One-Time Event

Partially offset by:

n Higher average selling price in both segments and all regions as a result of pricing actions taken to offset input cost inflation

n More efficient fixed cost usage as a result of higher sales volumes

29

### Selling, general and administrative expenses

|  | Three Months Ended September 30, 2022 | 2021 | 2022 vs 2021 $ Change | % Change | Nine Months Ended September 30, 2022 | 2021 | 2022 vs 2021 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| SG&A | $186.4 | $181.0 | $5.4 | 3.0% | $571.6 | $544.3 | $27.3 | 5.0% |

#### Three months ended September 30, 2022 compared to the three months ended September 30, 2021

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

n Higher operating expenses due primarily to inflation, including labor costs

n Costs from a company acquired during September 2021

n Increase in commissions and sales incentive compensation driven by increased sales

Partially offset by:

n Favorable currency translation impact of 8%, due primarily to the weakening of the Euro compared to the U.S. Dollar

#### Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021

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

n Higher operating expenses due primarily to inflation, including labor costs

n Costs from companies acquired during 2021

n Increase in commissions and sales incentive compensation driven by increased sales

Partially offset by:

n Favorable currency translation impact of 6%, due primarily to the weakening of the Euro compared to the U.S. Dollar

### Other operating charges (benefits)

|  | Three Months Ended September 30, 2022 | 2021 | 2022 vs 2021 $ Change | % Change | Nine Months Ended September 30, 2022 | 2021 | 2022 vs 2021 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Other operating charges (benefits) | $5.3 | $(7.6) | $12.9 | 169.7% | $17.8 | $49.5 | $(31.7) | (64.0)% |

#### Three months ended September 30, 2022 compared to the three months ended September 30, 2021

Other operating charges (benefits) changed due to the following:

n The absence of benefits of $18.7 million recorded in 2021 related to insurance recoveries and net changes to our estimates for probable liabilities for an operational matter in our Mobility Coatings segment discussed further in Note 6 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q

n Gain of $7.9 million in 2021 related to the sale of a manufacturing facility

Partially offset by:

n Decrease of $7.7 million in acquisition related costs

n Decrease of $4.6 million in termination benefits, which includes CEO transition costs, and other employee related costs associated with our cost saving initiatives from $9.6 million in the prior year to $5.0 million in the current year

n Decrease of $2.1 million associated with retention awards earned in 2021

n Impacts of currency translation were immaterial when compared to 2021

30

#### Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021

Other operating charges changed due to the following:

n Decrease of $25.0 million in termination benefits, which includes CEO transition costs, and other employee related costs associated with our cost saving initiatives from $35.1 million in the prior year to $10.1 million in the current year

n Decrease of $9.7 million associated with retention awards earned in 2021

n Decrease of $6.8 million in acquisition related costs in the current year

n Decrease of $3.8 million related to a charge recorded in 2021 related to probable liabilities for an operational matter in our Mobility Coatings segment discussed further in Note 6 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q

Partially offset by:

n Gain of $7.9 million in 2021 related to the sale of a manufacturing facility that is not present in the current quarter

n Increase of $3.2 million as a result of incremental reserves for accounts receivable related to sanctions imposed on Russia

n Impacts of currency translation were immaterial when compared to 2021

### Research and development expenses

|  | Three Months Ended September 30, 2022 | 2021 | 2022 vs 2021 $ Change | % Change | Nine Months Ended September 30, 2022 | 2021 | 2022 vs 2021 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Research and development expenses | $16.5 | $15.4 | $1.1 | 7.1% | $49.6 | $46.8 | $2.8 | 6.0% |

#### Three months ended September 30, 2022 compared to the three months ended September 30, 2021

Research and development expenses increased due to the following:

n Increased research and development activity, including activity from a company acquired during September 2021

n Increased labor costs as a result of inflation

n Favorable currency translation impact of 2%, due primarily to the weakening of the Euro compared to the U.S. Dollar

#### Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021

Research and development expenses increased due to the following:

n Increased research and development activity, including activity from companies acquired during 2021

n Increased labor costs as a result of inflation

n Favorable currency translation impact of 1%, due primarily to the weakening of the Euro compared to the U.S. Dollar

### Amortization of acquired intangibles

|  | Three Months Ended September 30, 2022 | 2021 | 2022 vs 2021 $ Change | % Change | Nine Months Ended September 30, 2022 | 2021 | 2022 vs 2021 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Amortization of acquired intangibles | $30.4 | $29.8 | $0.6 | 2.0% | $94.9 | $88.1 | $6.8 | 7.7% |

#### Three months ended September 30, 2022 compared to the three months ended September 30, 2021

Amortization of acquired intangibles increased due to the following:

n Amortization increase of $3.3 million related to the September 2021 acquisition

Partially offset by:

n Favorable currency translation impact of 4%, due primarily to the weakening of the Euro compared to the U.S. Dollar

#### Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021

Amortization of acquired intangibles increased due to the following:

n Amortization increase of $12.2 million related to the 2021 acquisitions

Partially offset by:

n Favorable currency translation impact of 3%, due primarily to the weakening of the Euro compared to the U.S. Dollar

31

### Interest expense, net

|  | Three Months Ended September 30, 2022 | 2021 | 2022 vs 2021 $ Change | % Change | Nine Months Ended September 30, 2022 | 2021 | 2022 vs 2021 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest expense, net | $35.0 | $33.8 | $1.2 | 3.6% | $101.1 | $100.7 | $0.4 | 0.4% |

#### Three months ended September 30, 2022 compared to the three months ended September 30, 2021

Interest expense, net increased primarily due to the following:

n Unfavorable impact of change in LIBOR rate related to our 2024 Dollar Term Loans

Partially offset by:

n Favorable impacts of our derivative instruments used to hedge the variable interest rate exposure on certain debt arrangements

n Favorable currency translation impact of 2%, due to the weakening of the Euro compared to the U.S. Dollar

#### Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021

Interest expense, net remained consistent primarily due to the following:

n Unfavorable impact of change in LIBOR rate related to our 2024 Dollar Term Loans

Partially offset by:

n Favorable impacts of our derivative instruments used to hedge the variable interest rate exposure on certain debt arrangements

n Favorable currency translation impact of 2%, due to the weakening of the Euro compared to the U.S. Dollar

### Other expense (income), net

|  | Three Months Ended September 30, 2022 | 2021 | 2022 vs 2021 $ Change | % Change | Nine Months Ended September 30, 2022 | 2021 | 2022 vs 2021 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Other expense (income), net | $3.4 | $(2.4) | $5.8 | 241.7% | $12.4 | $(10.9) | $23.3 | 213.8% |

#### Three months ended September 30, 2022 compared to the three months ended September 30, 2021

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

n Unfavorable impact of foreign exchange losses of $6.5 million when compared with the prior year period

#### Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021

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

n Unfavorable impact of foreign exchange losses of $10.4 million when compared with the prior year period

n Income of $8.3 million recorded in 2021 related to a law change with respect to certain Brazilian indirect taxes

- Expense of $4.7 million related to a charge recorded in 2022 for the One-Time Event

n Increased expenses of $1.2 million during 2022 as a result of non-service pension costs

32

### Provision for income taxes

|  | Three Months Ended September 30, 2022 | 2021 | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Income before income taxes | $85.1 | $93.3 | $199.9 | $277.9 |
| Provision for income taxes | 21.8 | 24.4 | 51.6 | 66.9 |
| Statutory U.S. Federal income tax rate | 21.0% | 21.0% | 21.0% | 21.0% |
| Effective tax rate | 25.6% | 26.2% | 25.8% | 24.1% |
| Effective tax rate vs. statutory U.S. Federal income tax rate | 4.6% | 5.2% | 4.8% | 3.1% |

| Items impacting the effective tax rate vs. statutory U.S. federal income tax rate | (Favorable) Unfavorable Impact Three Months Ended September 30, 2022 | 2021 | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Earnings generated in jurisdictions where the statutory rate is different from the U.S. Federal rate (1) | $(6.3) | $(3.7) | $(16.0) | $(10.7) |
| Changes in valuation allowance | 13.1 | 4.7 | 22.1 | 17.2 |
| Foreign exchange losses, net | (3.1) | (0.6) | (6.1) | (1.2) |
| Non-deductible expenses and interest | 2.1 | 2.1 | 4.2 | 4.2 |
| Changes in unrecognized tax benefits | (1.2) | 1.8 | 4.0 | 5.5 |
| Foreign taxes | 0.4 | 1.2 | 2.4 | 4.5 |

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

### SEGMENT RESULTS

The Company's products and operations are managed and reported in two operating segments: Performance Coatings and Mobility Coatings. See Note 17 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.

### Performance Coatings Segment

|  | Three Months Ended September 30, 2022 | 2021 | 2022 vs 2021 $ Change | % Change | Nine Months Ended September 30, 2022 | 2021 | 2022 vs 2021 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $838.0 | $779.2 | $58.8 | 7.5% | $2,508.2 | $2,292.3 | $215.9 | 9.4% |
| Price/Mix effect |  |  |  | 11.7% |  |  |  | 10.6% |
| Impact of acquisitions and one-time events |  |  |  | 2.2% |  |  |  | 3.3% |
| Volume effect |  |  |  | 0.5% |  |  |  | 0.9% |
| Exchange rate effect |  |  |  | (6.9)% |  |  |  | (5.4)% |
| Adjusted EBIT | $121.8 | $122.8 | $(1.0) | (0.8)% | $341.6 | $379.7 | $(38.1) | (10.0)% |
| Adjusted EBIT Margin | 14.5% | 15.8% |  |  | 13.6% | 16.6% |  |  |

#### Three months ended September 30, 2022 compared to the three months ended September 30, 2021

Net sales increased due to the following:

n Higher average selling prices and product mix across both end-markets and all regions, primarily as a result of pricing actions taken to offset input price inflation within both end-markets

n Sales from a company acquired during September 2021

n Higher sales volumes driven by Refinish, despite lower volumes in Industrial caused by weakening demand in EMEA coupled with impacts from the Russia-Ukraine conflict and the China COVID-19 lockdowns

Partially offset by:

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

Adjusted EBIT decreased due to the following:

n Higher variable input costs across both end-markets and all regions due to raw material, freight, logistics and energy inflation

n Higher operating expenses across all regions due primarily to inflation

n Unfavorable impacts of currency translation due primarily to the weakening of the Euro compared to the U.S. Dollar

Partially offset by:

n Higher average selling prices and product mix across both end-markets and all regions, which were in excess of variable input cost inflation

#### Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021

Net sales increased due to the following:

n Higher average selling prices and product mix across both end-markets and all regions, primarily as a result of pricing actions taken to offset input price inflation within both end-markets

n Sales from companies acquired in 2021

n Higher sales volumes driven by Refinish, despite impacts from the Russia-Ukraine conflict and the China COVID-19 lockdowns

Partially offset by:

n Unfavorable impacts of currency translation due primarily to the weakening of the Euro and Turkish Lira compared to the U.S. Dollar

n Decrease in net sales of $20.3 million due to the One-Time Event

34

Adjusted EBIT decreased due to the following:

n Higher variable input costs across both end-markets and all regions due to raw material, freight, logistics and energy inflation

n Higher operating expenses across all regions due to inflation and the lapsing of temporary COVID-19 related cost savings initiatives during the first quarter of 2021

n Unfavorable impacts of currency translation due primarily to the weakening of the Euro compared to the U.S. Dollar

Partially offset by:

n Higher average selling prices and product mix across both end-markets and all regions, which were in excess of variable input cost inflation

n Contributions from companies acquired in 2021

In addition to the factors noted above, Adjusted EBIT margin decreased due to the following:

n Decrease in net sales of $20.3 million due to the One-Time Event

### Mobility Coatings Segment

|  | Three Months Ended September 30, 2022 | 2021 | 2022 vs 2021 $ Change | % Change | Nine Months Ended September 30, 2022 | 2021 | 2022 vs 2021 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $400.7 | $309.4 | $91.3 | 29.5% | $1,139.5 | $986.7 | $152.8 | 15.5% |
| Volume effect |  |  |  | 29.9% |  |  |  | 11.9% |
| Price/Mix effect |  |  |  | 4.7% |  |  |  | 7.0% |
| Exchange rate effect |  |  |  | (5.1)% |  |  |  | (3.4)% |
| Adjusted EBIT | $3.6 | $(2.7) | $6.3 | 233.3% | $6.4 | $42.2 | $(35.8) | (84.8)% |
| Adjusted EBIT Margin | 0.9% | (0.9)% |  |  | 0.6% | 4.3% |  |  |

#### Three months ended September 30, 2022 compared to the three months ended September 30, 2021

Net sales increased due to the following:

n Higher sales volumes across both end-markets and all regions, despite impacts from the Russia-Ukraine conflict

n Higher average selling prices and product mix across both end-markets and most regions, primarily as a result of pricing actions taken to offset input price inflation

Partially offset by:

n Unfavorable impacts of currency translation due primarily to the weakening of the Euro, Turkish Lira and Chinese Renminbi compared to the U.S. Dollar

Adjusted EBIT and Adjusted EBIT margins increased due to the following:

n Higher sales volumes across both end-markets and all regions, despite impacts from the Russia-Ukraine conflict

n Higher average selling prices and product mix across both end-markets and all regions, primarily as a result of pricing actions taken to offset input price inflation

Partially offset by:

n Higher variable input costs across both end-markets and all regions due to raw material, freight, logistics and energy inflation

n Higher operating expenses across all regions due primarily to inflation

35

#### Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021

Net sales increased due to the following:

n Higher sales volumes across both end-markets and all regions, despite impacts from the Russia-Ukraine conflict and the China COVID-19 lockdowns

n Higher average selling prices and product mix across both end-markets and most regions, primarily as a result of pricing actions taken to offset input price inflation

Partially offset by:

n Unfavorable impacts of currency translation due primarily to the weakening of the Euro and Turkish Lira compared to the U.S. Dollar partially offset by the strengthening of the Brazilian Real

Adjusted EBIT and Adjusted EBIT margins decreased due to the following:

n Higher variable input costs across both end-markets and all regions due to raw material, freight, logistics and energy inflation

n Higher operating expenses across all regions due to inflation, increased activity and the lapsing of temporary COVID-19 related cost savings initiatives during the first quarter of 2021

Partially offset by:

n Higher average selling prices and product mix across both end-markets and most regions, primarily as a result of pricing actions taken to offset input price inflation

n Higher sales volumes across both end-markets, despite impacts from the Russia-Ukraine conflict and the China COVID-19 lockdowns

### 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 September 30, 2022, availability under the Revolving Credit Facility was $528.9 million, net of $21.1 million of letters of credit outstanding. All such availability may be utilized without violating any covenants under the credit agreement governing such facility or the indentures governing the Senior Notes. At September 30, 2022, we had $13.0 million of outstanding borrowings under other lines of credit. Our remaining available borrowing capacity under other lines of credit in certain non-U.S. jurisdictions totaled $39.1 million.

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

We have various supplier finance programs in place around the world. We partner with large banking institutions and utilize these programs to enhance our liquidity profile. Depending on the program, the liabilities under the program are classified either as accounts payable or current portion of borrowings on our consolidated balance sheets. Our facility in China is more fully described in Note 15 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

### Cash Flows

*(In millions)*

| Net cash provided by (used for): Operating activities: | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: |
| Net income | $148.3 | $211.0 |
| Depreciation and amortization | 229.5 | 234.7 |
| Amortization of deferred financing costs and original issue discount | 7.2 | 6.7 |
| Deferred income taxes | 2.8 | 9.3 |
| Realized and unrealized foreign exchange losses, net | 5.5 | 9.5 |
| Stock-based compensation | 14.0 | 11.7 |
| Gain on sale of facility | — | (8.9) |
| Interest income on swaps designated as net investment hedges | (16.1) | (14.3) |
| Commercial agreement restructuring charge | 25.0 | — |
| Other non-cash, net | (1.5) | 11.3 |
| Net income adjusted for non-cash items | 414.7 | 471.0 |
| Changes in operating assets and liabilities | (366.5) | (181.0) |
| Operating activities | 48.2 | 290.0 |
| Investing activities | (67.9) | (719.9) |
| Financing activities | (274.9) | (279.5) |
| Effect of exchange rate changes on cash | (29.9) | (16.5) |
| Net decrease in cash | $(324.5) | $(725.9) |

### Nine months ended September 30, 2022

#### Net Cash provided by Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2022 was $48.2 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $414.7 million. This was offset by net uses of working capital of $366.5 million, for which the most significant drivers were increases in accounts and notes receivable, inventories and prepaid expenses and other assets of $242.4 million, $220.8 million and $78.9 million, respectively. These outflows were primarily driven by increased sales volumes and price-mix, increased inventory on hand combined with inflation of raw material, freight, logistics and energy costs and payments of BIPs. The outflows were partially offset by increases in accounts payable of $189.7 million primarily due to raw material cost inflation, as well as elevated freight, logistics and energy costs.

#### Net Cash Used for Investing Activities

Net cash used for investing activities for the nine months ended September 30, 2022 was $67.9 million. The primary use was for purchases of property, plant and equipment of $107.5 million, partially offset by proceeds of $41.1 million from settlements and interest from swaps designated as net investment hedges, which are discussed further in Note 16 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

#### Net Cash Used for Financing Activities

Net cash used for financing activities for the nine months ended September 30, 2022 was $274.9 million. The primary uses were for the purchase of our common stock totaling $200.1 million and payments of $72.8 million on borrowings.

#### Other Impacts on Cash

Currency exchange impacts on cash for the nine months ended September 30, 2022 were unfavorable by $29.9 million, which was driven primarily by the weakening in the Euro, British Pound and Chinese Renminbi compared to the U.S. Dollar.

### Nine months ended September 30, 2021

#### Net Cash Provided by Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2021 was $290.0 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $471.0 million. This was offset by net uses of working capital of $181.0 million, for which the most significant drivers were increases in accounts and notes receivable, inventory and prepaid expenses and other assets of $168.5 million, $107.8 million and $64.3 million, respectively. These outflows were primarily driven by insurance receivables related to the operational matter within our Mobility Coatings segment, which is discussed further in Note 6 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, inflation of raw material costs and building inventory to pre-COVID-19 levels to align with returning demand. The outflows were partially offset by increases in accounts payable of $88.3 million due to increased production and inflation of raw material costs and other accruals of $61.3 million due to accruals related to the operational matter within the Mobility Coatings segment.

#### Net Cash Used for Investing Activities

Net cash used for investing activities for the nine months ended September 30, 2021 was $719.9 million. The primary uses were $647.3 million for business acquisitions during April and September 2021 and purchases of property, plant and equipment of $98.7 million.

#### Net Cash Used for Financing Activities

Net cash used for financing activities for the nine months ended September 30, 2021 was $279.5 million. The primary uses were for the purchase of our common stock totaling $213.8 million and payments of $74.6 million on borrowings.

#### Other Impacts on Cash

Currency exchange impacts on cash for the nine months ended September 30, 2021 were unfavorable by $16.5 million, which was driven primarily by fluctuations in the Euro compared to the U.S. Dollar.

### Financial Condition

We had cash and cash equivalents at September 30, 2022 and December 31, 2021 of $517.4 million and $840.6 million, respectively. Of these balances, $328.4 million and $471.9 million were maintained in non-U.S. jurisdictions as of September 30, 2022 and December 31, 2021, respectively, with $15.1 million and $11.3 million, respectively, within Russia. 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, selling 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, including the effects of COVID-19 and Russia's conflict with Ukraine.

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)*

|  | September 30, 2022 | December 31, 2021 |
| --- | ---: | ---: |
| 2024 Dollar Term Loans | $2,020.7 | $2,038.9 |
| 2025 Euro Senior Notes | 435.6 | 508.8 |
| 2027 Dollar Senior Notes | 500.0 | 500.0 |
| 2029 Dollar Senior Notes | 700.0 | 700.0 |
| Short-term and other borrowings | 99.4 | 113.8 |
| Unamortized original issue discount | (3.2) | (4.6) |
| Unamortized deferred financing costs | (22.5) | (27.3) |
| Total borrowings, net | 3,730.0 | 3,829.6 |
| Less: |  |  |
| Short-term borrowings | 42.4 | 55.4 |
| Current portion of long-term borrowings | 24.3 | 24.3 |
| Long-term debt | $3,663.3 | $3,749.9 |

Our indebtedness, including the Senior Secured Credit Facilities and Senior Notes, is more fully described in Note 18 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021.

We believe that we continue to maintain sufficient liquidity to meet our cash requirements, including our leverage and associated interest as well as our working capital needs. Availability under the Revolving Credit Facility was $528.9 million and $527.9 million at September 30, 2022 and December 31, 2021, 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 material contractual obligations and cash requirements can be found in Note 7 and Note 18 of the Company's Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes in the Company's contractual obligations and cash requirements as reported in our Annual Report on Form 10-K for the year ended December 31, 2021.

### Off-Balance Sheet Arrangements

See Note 6 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, 2021. 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, 2021.

## Market risk

As filed, 205 characters.

There have been no material changes in the market risks previously disclosed in our financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

## Controls and procedures

As filed, 1,120 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 Interim 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 Interim Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of September 30, 2022.

### 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 September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 181 characters.

There have been no material changes in our risk factors from the risks previously reported in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021.

Filed Oct 25, 2022.
Source: SEC EDGAR, the filing index for accession 0001616862-22-000041. Last ingested by Listed: Nov 6, 2026, 18:21 ET. No prices; not investment advice.