Axalta Coating Systems Ltd.: Form 10-Q for the period ended Sep 30, 2023

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, 2022.

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 "anticipates," "expect," "believe," "intended," "estimates," "projections," "could," "should," "would," "may," "will," "future," "potential" and "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 and uncertainties, including, but not limited to, economic, competitive, governmental, geopolitical and technological factors outside of our control, as well as impacts from operational disruptions related to our ERP system implementation, that may cause our business, industry, strategy, financing activities or actual results to differ materially. More information on potential factors that could affect our financial results is available in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 as well as "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 and in other documents we have filed with, or furnished to, the Securities and Exchange Commission ("SEC"), 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" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, 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 forward-looking 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 of the forward-looking statements contained herein, whether as a result of new information, future events or otherwise.

We intend to use our investor relations page at ir.axalta.com as a means of disclosing material information to the public in a broad, non-exclusionary manner for purposes of the SEC’s Regulation Fair Disclosure (or Reg. FD). Investors should routinely monitor that site, in addition to our press releases, SEC filings and public conference calls and webcasts, as information posted on that page could be deemed to be material information.

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 43 manufacturing facilities, four technology centers, 49 customer training centers and approximately 12,000 team members 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 both large regional and global OEMs and to a fragmented and local customer base. These customers comprise independent or multi-shop operator body shops as well as a wide variety of industrial manufacturers. 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 for light vehicle and commercial vehicle OEMs. These global customers are faced with evolving megatrends in electrification, sustainability, personalization and autonomous driving that require a high level of technical expertise. The OEMs require efficient, 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 6.6%, including a 0.1% headwind from foreign currency translation, for the nine months ended September 30, 2023 compared with the nine months ended September 30, 2022. The increased net sales were driven by higher average selling price and product mix of 7.4% and the absence of a $20.3 million reduction to net sales from the restructuring of a Performance Coatings commercial agreement in 2022 discussed further in Note 2 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q ("Customer Contract Restructuring") creating a 0.6% benefit, partially offset by lower volumes of 1.3%. The following trends impacted our segment net sales performance for the nine months ended September 30, 2023:

• Performance Coatings: Net sales increased 2.0% for the nine months ended September 30, 2023 compared with the nine months ended September 30, 2022. The increased net sales were driven by higher average selling price and product mix of 8.2% and the absence of the Customer Contract Restructuring creating a 0.8% benefit, partially offset by lower sales volumes of 7.0%.
• Mobility Coatings: Net sales increased 16.5% for the nine months ended September 30, 2023 compared with the nine months ended September 30, 2022. The increased net sales were driven by higher sales volumes of 11.3% and higher average selling price and product mix of 5.3%.

Our business serves four end-markets globally with net sales for the three and nine months ended September 30, 2023 and 2022, as follows:

(In millions)

Enterprise resource planning ("ERP") system implementation

During the nine months ended September 30, 2023, we experienced temporary operational disruptions in North America from our multi-year ERP system implementation. Warehouse management and slower shipping activities in the year resulted in a negative impact to net sales during the three months ended June 30, 2023 in North America, most notably in our Performance Coatings segment. We believe the delays were temporary and were substantially resolved as of June 30, 2023.

Capital and Liquidity Highlights

During the nine months ended September 30, 2023, we voluntarily prepaid $150.0 million of the outstanding principal amount of the 2029 Dollar Term Loans. See Note 15 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.

During the three months ended September 30, 2023, we repurchased 1.8 million shares of our common stock for total consideration of $50.0 million as we continued to execute against our previously-approved share repurchase program.

During August 2023, we entered into the Thirteenth Amendment to the Credit Agreement to lower the interest rate spread applicable to the 2029 Dollar Term Loans from 3.00% to 2.50% when bearing interest at a rate based on SOFR. The other material terms of the Credit Agreement, including the outstanding principal amount and maturity date of the 2029 Dollar Term Loans, remain unchanged. As a result of the repricing, we recorded a $4.0 million loss on financing-related costs, of which $2.1 million related to the write-off of unamortized deferred financing costs and original issuance discount and $1.9 million related to additional fees.

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 have historically constituted less than 1.5% of our net sales, a significant escalation or expansion of economic disruption, 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 benefits of $0.2 million and $1.5 million related to changes in estimates of reserves for accounts receivable and inventory during the three and nine months ended September 30, 2023, respectively. Net assets of our Russian subsidiaries at September 30, 2023 was approximately $6.3 million, with $6.8 million comprising cash and cash equivalents.

Raw material costs

During the three and nine months ended September 30, 2023, our results reflect deflationary benefits in raw material pricing sequentially compared to the three months ended June 30, 2023 and compared to the three and nine months ended September 30, 2022. We expect to continue to offset the cumulative increased costs through the realization of improved pricing on our products, as well as continuing to monitor raw material pricing and take actions that we believe will help mitigate costs and other operational impacts as needed.

Leadership transitions

Chief Financial Officer transition

On July 17, 2023, the Company appointed Carl Anderson as the Company’s new Senior Vice President and Chief Financial Officer, and Sean M. Lannon, the Company’s then current Senior Vice President and Chief Financial Officer, and the Company mutually agreed that Mr. Lannon would resign from such positions. Mr. Anderson started on August 14, 2023, immediately prior to which Mr. Lannon ceased to serve as Senior Vice President and Chief Financial Officer.

General Counsel transition

During September 2023, Brian A. Berube, the Company's Senior Vice President, General Counsel and Corporate Secretary, informed the Company’s Board of Directors (the “Board”) of his decision to retire from such positions, effective as of December 31, 2023. The Board has appointed Alex Tablin-Wolf to succeed Mr. Berube as Senior Vice President, General Counsel and Corporate Secretary, effective January 1, 2024.

FACTORS AFFECTING OUR OPERATING RESULTS

There have been no changes in the factors affecting our operating results previously disclosed under such heading in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022.

RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the information contained in the accompanying unaudited condensed consolidated 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, 2023 compared to the three months ended September 30, 2022

Net sales increased primarily due to the following:

n Higher average selling prices and product mix in both segments and most regions, primarily as a result of pricing actions taken to offset cumulative input cost inflation

n Favorable impacts of currency translation due primarily to the strengthening of the Euro, Mexican Peso, Brazilian Real and British Pound, partially offset by the weakening of the Chinese Yuan, compared to the U.S. Dollar

Partially offset by:

n Lower sales volumes in Performance Coatings primarily as a result of a deprioritization of certain low-margin Refinish products and a weaker Industrial market environment, partially offset by higher sales volumes within Mobility Coatings

n Increased amortization related to BIPs of $4.6 million

Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

Net sales increased primarily due to the following:

n Higher average selling prices and product mix in both segments and all regions, primarily as a result of pricing actions taken to offset cumulative input cost inflation

n The absence of a $20.3 million reduction in the prior year period from the Customer Contract Restructuring

Partially offset by:

n Lower sales volumes primarily as a result of temporary operational delays in North America from our multi-year ERP system implementation, a deprioritization of certain low-margin Refinish products and a weaker Industrial market environment, partially offset by higher sales volumes within Mobility Coatings

n Increased amortization related to BIPs of $5.2 million

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Cost of sales

Three months ended September 30, 2023 compared to the three months ended September 30, 2022

Cost of sales increased primarily due to the following:

n Higher operating expenses due primarily to increased labor costs

n Higher costs of $15.0 million associated with our multi-year ERP system implementation and fees for third-party consultants focused on productivity programs

n Unfavorable impacts of currency translation due primarily to the strengthening of the Euro, Mexican Peso, Brazilian Real and British Pound, partially offset by the weakening of the Chinese Yuan, compared to the U.S. Dollar

n Increase of $5.6 million in inventory obsolescence charges compared to the prior year period

Partially offset by:

n Decreased variable input costs across both segments and all regions due to deflationary benefits

n Decreased costs associated with lower sales volumes

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

n Higher average selling prices in both segments and most regions

n Decreased variable input costs across both segments and all regions due to deflationary benefits

Partially offset by:

n Higher operating expenses due primarily to increased labor costs

n Higher costs of $15.0 million associated with our multi-year ERP system implementation and fees for third-party consultants focused on productivity programs

n Increase of $5.6 million in inventory obsolescence charges compared to the prior year period

n Less effective coverage of fixed costs as a result of lower sales volume

Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

Cost of sales increased primarily due to the following:

n Higher operating expenses due primarily to increased labor costs

n Higher costs of $33.3 million associated with our multi-year ERP system implementation and fees for third-party consultants focused on productivity programs

n Increase of $8.4 million in inventory obsolescence charges compared to the prior year period

n Impairment charge of $8.2 million due to the decision to demolish assets at a previously closed manufacturing site

Partially offset by:

n Decreased costs associated with lower sales volumes

n Lower variable input costs in Mobility Coatings as a result of deflationary benefits

n Impacts of currency translation were immaterial when compared to the prior year period

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

n Higher average selling prices in both segments and all regions

n The absence of a $20.3 million reduction to net sales in the prior year period from the Customer Contract Restructuring which had no corresponding impact on cost of sales

n Lower variable input costs in Mobility Coatings as a result of deflationary benefits

Partially offset by:

n Higher operating expenses due primarily to increased labor costs

n Higher costs of $33.3 million associated with our multi-year ERP system implementation and fees for third-party consultants focused on productivity programs

n Increase of $8.4 million in inventory obsolescence charges compared to the prior year period

n Impairment charge of $8.2 million due to the decision to demolish assets at a previously closed manufacturing site

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Selling, general and administrative expenses

Three months ended September 30, 2023 compared to the three months ended September 30, 2022

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

n Higher operating expenses due primarily to increased labor costs

n Increased commissions resulting from increased sales

n Unfavorable currency translation impact of approximately 3.2% due primarily to the strengthening of the Euro and Mexican Peso, partially offset by the weakening of the Chinese Yuan, compared to the U.S. Dollar

Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

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

n Higher operating expenses due primarily to increased labor costs

n Increased commissions resulting from increased sales

n Increase of $6.0 million in bad debt expense

n Impacts of currency translation were immaterial when compared to the prior year period

Other operating charges

Three months ended September 30, 2023 compared to the three months ended September 30, 2022

Other operating charges increased primarily due to the following:

n Increase of $6.5 million in termination benefits and other employee-related costs associated with our cost saving initiatives, including $9.9 million of third-party consultant costs related to productivity programs recorded during the current period, of which there was no comparable activity in the prior year period

Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

Other operating charges increased primarily due to the following:

n Impairment charges increased $7.3 million primarily related to the exit of a non-core business category in Mobility Coatings

n Increase of $3.5 million in termination benefits and other employee-related costs associated with our cost saving initiatives, including $9.9 million of third-party consultant costs related to productivity programs recorded during the current period, of which there was no comparable activity in the prior year period

Partially offset by:

n Decrease of $4.8 million from expenses of $3.2 million in the prior year period to benefits of $1.6 million in the current period as a result of changes in estimates of reserves for accounts receivable related to Russia's conflict with Ukraine

n Decrease of $2.0 million in acquisition and divestiture-related costs in the current year

Research and development expenses

Three months ended September 30, 2023 compared to the three months ended September 30, 2022

Research and development expenses increased primarily due to the following:

n Increased labor costs

n Impacts of currency translation were immaterial when compared to the prior year period

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Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

Research and development expenses increased primarily due to the following:

n Increased labor costs

n Impacts of currency translation were immaterial when compared to the prior year period

Amortization of acquired intangibles

Three months ended September 30, 2023 compared to the three months ended September 30, 2022

Amortization of acquired intangibles decreased primarily due to the following:

n Reduced amortization from certain intangibles reaching the end of their useful lives

n Impacts of currency translation were immaterial when compared to the prior year period

Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

Amortization of acquired intangibles decreased primarily due to the following:

n Reduced amortization from certain intangibles reaching the end of their useful lives

n Impacts of currency translation were immaterial when compared to the prior year period

Interest expense, net

Three months ended September 30, 2023 compared to the three months ended September 30, 2022

Interest expense, net increased primarily due to the following:

• Unfavorable impact of approximately $19.0 million due to the interest rate on the 2029 Dollar Term Loans, which were issued in December 2022 to replace the Company's term loan due 2024, partially offset by a lower interest rate from repricing the 2029 Dollar Term Loans in August 2023

n Decreased benefit of $3.0 million from derivative instruments used to hedge the variable interest rate exposure on certain debt arrangements

Partially offset by:

n Favorable impact of a lower principal balance of the 2029 Dollar Term Loans during the current year period, primarily as a result of $150.0 million of voluntary payments during the current year

n Impacts of currency translation were immaterial when compared to the prior year period

Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

Interest expense, net increased primarily due to the following:

• Unfavorable impact of approximately $71.0 million due to the interest rate on the 2029 Dollar Term Loans, which were issued in December 2022 to replace the 2024 Dollar Term Loans, partially offset by a lower interest rate from repricing the 2029 Dollar Term Loans in August 2023

Partially offset by:

n Favorable impact of a lower principal balance of the 2029 Dollar Term Loans during the current year period, primarily as a result of $150.0 million of voluntary payments during the current year

n Increased benefit of $7.0 million from derivative instruments used to hedge the variable interest rate exposure on certain debt arrangements

n Impacts of currency translation were immaterial when compared to the prior year period

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Other expense, net

Three months ended September 30, 2023 compared to the three months ended September 30, 2022

Other expense, net increased primarily due to the following:

n Increased debt extinguishment and refinancing related costs of $4.4 million primarily driven by the repricing of our 2029 Dollar Term Loans in August 2023

n Unfavorable impact of foreign exchange losses of $0.9 million when compared with the prior year period

Partially offset by:

n Increased miscellaneous income, net of $3.0 million

Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

Other expense, net increased primarily due to the following:

n Increased debt extinguishment and refinancing related costs of $7.6 million primarily driven by the repricing of our 2029 Dollar Term Loans in August 2023 and $150.0 million of voluntary prepayments on our 2029 Dollar Term Loans

n Unfavorable impact of foreign exchange losses of $5.3 million when compared with the prior year period, including a devaluation of net monetary assets denominated in the Turkish Lira and Argentinian Peso due to hyperinflationary conditions

Partially offset by:

n Increased miscellaneous income, net of $5.1 million

n The absence of a $4.7 million charge recorded in 2022 for the Customer Contract Restructuring

Provision for income taxes

(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, 2023 compared to the three months ended September 30, 2022

Net sales increased primarily due to the following:

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 cumulative input cost inflation

n Favorable impacts of currency translation due primarily to the strengthening of the Euro, Mexican Peso and British Pound, partially offset by the weakening of the Chinese Yuan, compared to the U.S. Dollar

Partially offset by:

n Lower sales volumes across both end-markets and all regions primarily as a result of a deprioritization of certain low-margin Refinish products and a weaker Industrial market environment

n Increased amortization related to BIPs of $4.4 million

Adjusted EBIT and Adjusted EBIT margin increased primarily due to the following:

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 cumulative input cost inflation

n Decreased variable input costs across both end-markets and all regions due to deflationary benefits

Partially offset by:

n Higher operating expenses due primarily to increased labor costs

n Lower sales volumes across both end-markets and most regions primarily as a result of a deprioritization of certain low-margin Refinish products and a weaker Industrial market environment

n Less effective coverage of fixed costs as a result of lower sales volume

n Increased amortization related to BIPs of $4.4 million, which reduced net sales

Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

Net sales increased primarily 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 cumulative input cost inflation

n The absence of a $20.3 million reduction in the prior year period from the Customer Contract Restructuring, creating a 0.8% benefit in the current year period

Partially offset by:

n Lower sales volumes across both end-markets and most regions, primarily as a result of temporary operational delays in North America from our multi-year ERP system implementation, a deprioritization of certain low-margin Refinish products and a weaker Industrial market environment

n Increased amortization related to BIPs of $4.5 million

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Adjusted EBIT and Adjusted EBIT margin increased primarily 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 cumulative input cost inflation

Partially offset by:

n Lower sales volumes across both end-markets and most regions, primarily driven by impacts of temporary operational delays in North America from our multi-year ERP system implementation, a deprioritization of certain low-margin Refinish products and a weaker Industrial market environment

n Higher operating expenses due primarily to increased labor costs

n Less effective coverage of fixed costs as a result of lower sales volume

n Increased amortization related to BIPs of $4.5 million

In addition to the factors noted above, the current year period Adjusted EBIT margin was negatively impacted by:

n The absence of a $20.3 million reduction to net sales in the prior year period from the Customer Contract Restructuring

Mobility Coatings Segment

Three months ended September 30, 2023 compared to the three months ended September 30, 2022

Net sales increased primarily due to the following:

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

n Higher sales volumes across both end-markets and all regions

n Favorable impacts of currency translation due primarily to the strengthening of the Mexican Peso, Euro and Brazilian Real, partially offset by the weakening of the Chinese Yuan compared to the U.S. Dollar

Adjusted EBIT and Adjusted EBIT margin increased primarily due to the following:

n Decreased variable input costs across both end-markets and all regions due to deflationary benefits

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

n Higher sales volumes across both end-markets and all regions

Partially offset by:

n Higher operating expenses due primarily to increased labor costs

Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

Net sales increased primarily due to the following:

n Higher sales volumes across both end-markets and all regions

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 cumulative input cost inflation

Adjusted EBIT and Adjusted EBIT margin increased primarily 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 cumulative input cost inflation

n Decreased variable input costs across both end-markets and most regions due to deflationary benefits

n Higher sales volumes across both end-markets and all regions

Partially offset by:

n Higher operating expenses due primarily to increased labor costs

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LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash on hand, net cash provided by operating activities and available borrowing capacity under our Senior Secured Credit Facilities.

At September 30, 2023, availability under the Revolving Credit Facility was $529.7 million, net of $20.3 million of letters of credit outstanding. All such availability may be utilized without violating any covenants under the Credit Agreement or the indentures governing our senior notes (the "Senior Notes"). At September 30, 2023, we had $7.5 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 $50.6 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 2029 Dollar 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 unaudited condensed consolidated balance sheets. Our supplier financing programs are more fully described in Note 14 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Cash Flows

(In millions)

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Nine months ended September 30, 2023

Net Cash Provided by Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2023 was $289.3 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $479.0 million. This was partially offset by net uses of working capital of $189.7 million, for which the most significant drivers were increases in accounts and notes receivable and prepaid expenses and other assets of $212.9 million and $68.3 million, respectively, driven primarily by the timing of collections and payments of BIPs. These outflows were partially offset by decreases in inventories of $65.8 million as a result of lower production levels due to intentionally managing inventory levels, and increases in accounts payable of $17.3 million.

Net Cash Used for Investing Activities

Net cash used for investing activities for the nine months ended September 30, 2023 was $64.5 million. The primary use was for purchases of property, plant and equipment of $105.3 million, partially offset by proceeds of $38.5 million from settlements and interest from swaps designated as net investment hedges, which are discussed further in Note 16 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Net Cash Used for Financing Activities

Net cash used for financing activities for the nine months ended September 30, 2023 was $252.7 million. The primary uses were voluntary prepayments of $150.0 million of the outstanding principal amount of the 2029 Dollar Term Loans, contractual repayments of $51.9 million on borrowings, purchase of common stock totaling $50.0 million, payments of $8.5 million for fees associated with refinancing our 2024 Dollar Term Loans and repricing our 2029 Dollar Term Loans and payments totaling $7.7 million for acquisition-related consideration, partially offset by proceeds of $8.8 million from a short-term borrowing and $6.7 million net cash received from our stock-based compensation program. The 2029 Dollar Term Loans repricing in August 2023 resulted in $197.4 million of constructive financing cash inflows and corresponding constructive financing cash outflows.

Other Impacts on Cash

Currency exchange impacts on cash for the nine months ended September 30, 2023 were unfavorable by $18.9 million, which was driven primarily by the fluctuations of the Euro and Russian Ruble, partially offset by the Mexican Peso, compared to the U.S. Dollar.

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 partially 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.

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.

Financial Condition

We had cash and cash equivalents at September 30, 2023 and December 31, 2022 of $605.8 million and $645.2 million, respectively. Of these balances, $485.4 million and $433.6 million were maintained in non-U.S. jurisdictions at September 30, 2023 and December 31, 2022, respectively, with $6.8 million and $12.9 million, respectively, within Russia. We believe at this time our organizational structure allows us the necessary flexibility to move funds throughout our subsidiaries to meet our operational and working capital needs.

Our business may not generate sufficient net cash provided by operating activities 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, net cash provided by operating activities and available borrowing capacity under our Senior Secured Credit Facilities. Based on our forecasts, we believe that net cash provided by operating activities, 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 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 and elevated interest rates, as experienced during 2022 and continuing in 2023, may further increase our interest expense and weaken our financial condition.

The following table details our borrowings outstanding at the dates indicated:

(In millions)

Our indebtedness, including the Senior Secured Credit Facilities, Senior Notes and short-term borrowings, is more fully described in Note 18 to the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2022.

We believe that we continue to maintain sufficient liquidity to meet our cash requirements, including our debt service obligations as well as our working capital needs. Availability under the Revolving Credit Facility was $529.7 million and $529.3 million at September 30, 2023 and December 31, 2022, 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.

Pursuant to the Credit Agreement, on July 1, 2023, an interest rate based on the LIBOR was automatically replaced with an interest rate based on the SOFR as the interest rate benchmark for loans denominated in U.S. Dollars under the Revolving Credit Facility available under the Credit Agreement. On the same date, we entered into the Twelfth Amendment to the Credit Agreement to reflect this transition and make other related conforming changes to the Credit Agreement.

During August 2023, we entered into the Thirteenth Amendment to the Credit Agreement to lower the interest rate spread applicable to the 2029 Dollar Term Loans from 3.00% to 2.50% when bearing interest at a rate based on SOFR. The other material terms of the Credit Agreement, including the outstanding principal amount and maturity date of the 2029 Dollar Term Loans, remain unchanged. As a result of the repricing, we recorded a $4.0 million loss on financing-related costs, of which $2.1 million related to the write-off of unamortized deferred financing costs and original issuance discount and $1.9 million related to additional fees.

Contractual Obligations

Information related to our material contractual obligations and cash requirements can be found in Note 7 and Note 18 to the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022. As noted above and within Note 15 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, we have made voluntary prepayments during the nine months ended September 30, 2023 of $150.0 million of the outstanding principal amount of the 2029 Dollar Term Loans. There have been no other material changes in the Company's contractual obligations and cash requirements as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.

Off-Balance Sheet Arrangements

See Note 5 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 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

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. The preparation of our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q 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. There have been no material changes to our critical accounting policies and estimates previously disclosed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022.

There have been no material changes in the market risks previously disclosed in Part II, Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

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. 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 as of September 30, 2023.

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, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

We are in the midst of a multi-year project to upgrade our ERP system through a phased implementation approach. The gradual implementation is expected to occur in phases over the next several years. During the second quarter of 2023, we completed the migration to the upgraded ERP system in North America, with further implementations in other geographic regions expected to occur in phases over the next several years. In connection with this implementation, we have updated the processes that constitute our internal control over financial reporting, as necessary, to accommodate related changes to our business processes.

There have been no material changes in our risk factors from those previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022.