Form: S-1

General form of registration statement for all companies including face-amount certificate companies

July 14, 2015

Table of Contents

As filed with the Securities and Exchange Commission on July 13, 2015

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

AXALTA COATING SYSTEMS LTD.

(Exact name of registrant as specified in its charter)

 

 

 

Bermuda   2851   98-1073028

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

Two Commerce Square

2001 Market Street

Suite 3600

Philadelphia, Pennsylvania 19103

(855) 547-1461

(Address, including zip code, and telephone number, including area code, of the registrant’s principal executive offices)

 

 

Michael F. Finn

Senior Vice President, General Counsel and Corporate Secretary

Axalta Coating Systems Ltd.

Two Commerce Square

2001 Market Street

Suite 3600

Philadelphia, Pennsylvania 19103

(855) 547-1461

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Patrick H. Shannon

Jason M. Licht

Latham & Watkins LLP

555 Eleventh Street, NW

Washington, D.C. 20004

(202) 637-2200

 

Craig F. Arcella

Cravath, Swaine & Moore LLP

825 Eighth Avenue

New York, NY 10019

(212) 474-1000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

¨ Large accelerated filer   ¨ Accelerated filer    x Non-accelerated filer   ¨ Smaller reporting company

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of securities to be registered   Amount to be
registered(a)
 

Proposed maximum

offering price

per share(b)

 

Proposed maximum

aggregate offering
price(a)(b)

 

Amount of

registration fee

Common Shares, $1.00 par value per share

  40,250,000   $32.41   $1,304,502,500   $151,584

 

 

(a) Includes additional common shares that may be purchased by the underwriters.
(b) Estimated solely for purposes of calculating the amount of the registration fee. In accordance with Rule 457(c) of the Securities Act of 1933, as amended, the price shown is the average of the high and low selling prices of the common shares on July 6, 2015, as reported on the New York Stock Exchange.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. The selling shareholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated July 13, 2015

PROSPECTUS

35,000,000 Shares

 

LOGO

Axalta Coating Systems Ltd.

Common Shares

 

 

The selling shareholders named in this prospectus, including affiliates of The Carlyle Group (“Carlyle”), are selling 35,000,000 common shares in this offering. We will not receive any proceeds from the sale of our common shares by the selling shareholders, including from any exercise by the underwriters of their option to purchase additional common shares described below.

Our common shares are listed on the New York Stock Exchange (the “NYSE”) under the symbol “AXTA”. On July 13, 2015, the closing sale price of our common shares as reported on the NYSE was $33.13 per share.

Investing in the common shares involves risks that are described in the “Risk Factors” section beginning on page 19 of this prospectus.

 

 

 

    Per Share     Total  

Public offering price

  $                   $                

Underwriting discount(1)

  $        $     

Proceeds, before expenses, to the selling shareholders

  $        $     

 

  (1) We have agreed to reimburse the underwriters for certain expenses in connection with this offering.

The underwriters may also purchase up to an additional 5,250,000 common shares from the selling shareholders, at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The common shares will be ready for delivery on or about                     , 2015.

 

 

 

Citigroup   Goldman, Sachs & Co.   Deutsche Bank Securities   J.P. Morgan
BofA Merrill Lynch   Barclays   Credit Suisse   Jefferies   UBS Investment Bank
Morgan Stanley   BB&T Capital Markets   Nomura   SMBC Nikko   Academy Securities

The date of this prospectus is                     , 2015.


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     19   

Forward Looking Statements

     41   

Market Price of our Common Shares

     43   

Use Of Proceeds

     44   

Dividend Policy

     45   

Capitalization

     46   

Selected Historical Financial Information

     47   

Unaudited Pro Forma Consolidated and Combined Financial Information

     50   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     56   

Our Industry

     104   

Business

     106   

Management

     125   

Compensation Discussion and Analysis

     132   

Certain Relationships and Related Person Transactions

     149   

Principal and Selling Shareholders

     152   

Description of Share Capital

     155   

Shares Eligible for Future Sale

     162   

Bermuda Company Considerations

     164   

Taxation

     170   

Underwriting

     174   

Legal Matters

     181   

Experts

     181   

Where You Can Find More Information

     181   

Enforcement of Judgments

     182   

Index to Consolidated Financial Statements

     F-1   

 

 

We are responsible only for the information contained in this prospectus and in any related free-writing prospectus we prepare or authorize. We and the selling shareholders have not, and the underwriters have not, authorized anyone to give you any other information and take no responsibility for any other information that others may give you. The selling shareholders are offering to sell, and seeking offers to buy, the common shares only in jurisdictions where offers and sales are permitted.

Consent under the Exchange Control Act 1972 (and its related regulations) has been obtained from the Bermuda Monetary Authority for the issue and transfer of the common shares to and between residents and non-residents of Bermuda for exchange control purposes provided our common shares remain listed on an appointed stock exchange, which includes the NYSE. In granting such consent, the Bermuda Monetary does not accept any responsibility for our financial soundness or the correctness of any of the statements made or opinions expressed in this prospectus.

 

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MARKET, INDUSTRY AND OTHER DATA

This prospectus includes estimates regarding market and industry data and forecasts, which are based on publicly available information, industry publications and surveys, reports from government agencies, reports by market research firms or other independent sources such as Orr & Boss, Inc. (“Orr & Boss”) and LMC Automotive (“LMC Automotive”), and our own estimates based on our management’s knowledge of and experience in the market sectors in which we compete. Although we believe them to be accurate, we have not independently verified market and industry data from third-party sources. This information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process, and other limitations and uncertainties inherent in industry research and surveys of market size.

References to market share are based on sales generated in the relevant market. Except as otherwise noted, market position data is derived from Orr & Boss and/or management estimates.

References to EMEA refer to Europe, the Middle East and Africa. References to Latin America include Mexico and references to North America exclude Mexico.

References to emerging markets refer collectively to Latin America (including Mexico) and Asia (excluding Japan).

Certain monetary amounts, percentages and other figures included in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables or charts may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.

TRADEMARKS

We own or otherwise have rights to the trademarks, service marks, copyrights and trade names, including those mentioned in this prospectus, used in conjunction with the marketing and sale of our products and services. This prospectus includes trademarks, such as Alesta®, Abcite®, AquaEC™, Centari®, Chemophan™, Corlar®, Cromax®, Cromax Mosaic™, Imron Elite™, Imron ExcelPro™, Lutophen™, Nap-Gard®, Nason®, Rival™, Spies Hecker®, Stollaquid™, Syntopal™, Voltatex®, Eco-Concept, 3-Wet™ and 2-Wet Monocoat™, which are protected under applicable intellectual property laws and are our property and the property of our subsidiaries. This prospectus also contains trademarks, service marks, copyrights and trade names of other companies, which are the property of their respective owners. We do not intend our use or display of other companies’ trademarks, service marks, copyrights or trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies. Solely for convenience, our trademarks, service marks and trade names referred to in this prospectus may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and trade names.

OUR INITIAL PUBLIC OFFERING

In November 2014, Carlyle sold 57,500,000 of our common shares at a price of $19.50 per share in our initial public offering (our “IPO”). Upon the completion of the IPO, our common shares were listed on the NYSE under the symbol “AXTA”.

SECONDARY OFFERING AND PRIVATE PLACEMENT

On April 8, 2015, we completed a secondary public offering, pursuant to which Carlyle sold 46,000,000 of our common shares at a price of $28.00 per share (the “Secondary Offering”).

On April 8, 2015, Carlyle sold 20,000,000 of our common shares in a private placement (the “Private Placement”) to an affiliate of Berkshire Hathaway, Inc. (“Berkshire”) at a price of $28.00 per share.

We did not receive any proceeds from these sales of our common shares by Carlyle.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. You should read this entire prospectus and should consider, among other things, the matters set forth under “Risk Factors,” “Selected Historical Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our financial statements and related notes thereto appearing elsewhere in this prospectus before making your investment decision. On February 1, 2013, Axalta Coating Systems Ltd. (“ACS”) acquired from E. I. du Pont de Nemours and Company (“DuPont”) all of the capital stock, other equity interests and assets of certain entities that, together with their subsidiaries, comprised the DuPont Performance Coatings business (“DPC”), which is referred to herein as the “Acquisition.” Following the Acquisition, we renamed our business Axalta Coating Systems (“Axalta”). References herein to the “Company,” “we,” “us,” “our” and “our company” refer to ACS and its consolidated subsidiaries. References herein to “fiscal year” refer to our fiscal years, which end on December 31. References herein to the “LTM Period” refer to the twelve months ended March 31, 2015. References herein to the financial measures “EBITDA” and “Adjusted EBITDA” refer to financial measures that do not comply with generally accepted accounting principles in the United States (“U.S. GAAP”). For information about how we calculate EBITDA and Adjusted EBITDA, see footnote 4 to the table under the heading “—Summary Historical and Pro Forma Financial Information.”

Our Company

We are a leading global manufacturer, marketer and distributor of high performance coatings systems. We generate approximately 90% of our revenue in markets where we hold the #1 or #2 global market position, including the #1 position in our core automotive refinish end-market with approximately a 25% global market share. We have a nearly 150-year heritage in the coatings industry and are known for manufacturing high-quality products with well-recognized brands supported by market-leading technology and customer service. Over the course of our history we have remained at the forefront of our industry by continually developing innovative coatings technologies designed to enhance the performance and appearance of our customers’ products, while improving their productivity and profitability.

Our diverse global footprint of 35 manufacturing facilities, 7 technology centers, 45 customer training centers and approximately 12,600 employees allows us to meet the needs of customers in over 130 countries. We serve our customer base through an extensive sales force and technical support organization, as well as through over 4,000 independent, locally-based distributors. Our scale and strong local presence are critical to our success, allowing us to leverage our technology portfolio and customer relationships globally while meeting customer demands locally.

For the year ended December 31, 2014, our net sales were $4,362 million, Adjusted EBITDA was $841 million, or 19.3% of net sales, and net income was $35 million. For the LTM Period, our net sales were $4,304 million, Adjusted EBITDA was $836 million, or 19.4% of net sales, and net income was $85 million. We have renewed the organization’s focus on profitable growth, achieving year-over-year Adjusted EBITDA growth for seven of the eight full quarters following the Acquisition. Additionally, we have undertaken several transformational initiatives that we believe have laid the foundation for future growth, resulting in significant new business wins, many of which we expect to contribute to sales beginning in 2015. We have also begun implementing several EBITDA enhancement initiatives that we believe will drive meaningful earnings growth over the next several years. As of March 31, 2015, we had cash and cash equivalents of $223 million and outstanding indebtedness of $3,608 million, which may limit the availability of financial resources to pursue our growth initiatives.

 

 

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Our business is organized into two segments, Performance Coatings and Transportation Coatings, serving four end-markets globally as highlighted below:

 

LOGO LOGO

Performance Coatings

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 as described below.

Refinish End-Market (#1 global market position): We provide waterborne and solventborne coatings to approximately 80,000 independent body shops, dealers and multi-shop operators (“MSOs”) to facilitate high-quality, efficient automotive collision repairs. Our advanced color matching technology and library of over four million color variations comprise an advanced color system that enables body shops to refinish vehicles regardless of vehicle brand, color, age, or original paint supplier.

Industrial End-Market: We provide a wide range of liquid and powder coatings to customers who use them in diverse applications, including industrial machinery, electrical insulation, automotive components, architectural cladding and fittings, appliances, outdoor furniture and oil & gas pipelines. Our coatings are often used under severe operating conditions and require high performance such as high mechanical resistance, corrosion protection, elasticity and colorfastness.

Transportation Coatings

Through our Transportation Coatings segment, we provide advanced coatings technologies to original equipment manufacturers (“OEMs”) of light and commercial vehicles. These increasingly global customers require a high level of technical support coupled with cost-effective, environmentally responsible coatings systems that can be applied with a high degree of precision, consistency and speed.

Light Vehicle End-Market (#2 global market position): We provide light vehicle OEMs and Tier 1 component suppliers a full range of waterborne and solventborne coatings systems that are a critical, integrated step in the vehicle assembly process. We compete and win new business on the basis of our quality, service and proprietary products that generate significant energy and cost savings for our customers while enhancing productivity and first pass quality. Our global capabilities and focus on technology enable us to provide our global customers with next-generation offerings to enhance appearance, durability and corrosion protection and comply with increasingly strict environmental regulations.

 

 

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Commercial Vehicle End-Market: We provide liquid coatings to commercial vehicle OEMs, including those in the heavy duty truck (“HDT”), bus, rail and agricultural and construction equipment (“ACE”) markets, as well as related markets such as trailers, recreational vehicles and personal sport vehicles. As the #1 global supplier in both the HDT and bus markets, we meet the demands of our customers with an extensive offering of over 70,000 colors.

Transformational Initiatives

Since the Acquisition, we have migrated from a business segment of DuPont to an independent global company exclusively focused on coatings. We have completed the separation from DuPont and implemented several initiatives designed to unlock our business’s full potential, including:

 

  •   Enhanced Senior Leadership Team: We have augmented our management team with world-class talent and significant end-market expertise, with 12 of our 16 most senior managers joining since the Acquisition, including our CEO and CFO. We have also recruited key regional and local managers with both operational and commercial leadership experience.

 

  •   Implemented New Customer Strategies: We have realigned our resources to more effectively meet the varying demands of our customers. In end-markets characterized by large global customers such as light and commercial vehicle OEMs, we transitioned from a regional to a global management and sales model. In the refinish end-market, we have reorganized our sales force to target and meet the needs of additional customers in high-growth areas of the market.

 

  •   Aligned Incentives: We have implemented a performance-based compensation structure that closely aligns the interests of our global leadership team with those of our shareholders. We have also transitioned to a more incentive-based compensation structure for our global sales force designed to increase their focus on profitable growth.

 

  •   Investing for Growth: As an independent company, we are able to focus our time and capital exclusively on coatings. As a result, we are pursuing investments with attractive returns such as low-risk capacity expansion projects in China, Germany, Mexico and Brazil that will position us to grow with our customers. We are also investing in operational improvement initiatives such as the realignment of our European manufacturing operations, a global commercial and comprehensive cost improvement initiative, as well as growing our sales force in emerging markets and end-markets where we are currently underrepresented.

Our Industry

In 2013, we were the fourth largest supplier in the $127 billion global coatings industry as measured by sales, according to Orr & Boss. The global coatings industry is characterized by multiple end-markets and applications. Market participants include a few global coatings suppliers and many smaller, regionally focused suppliers that maintain a presence in select product categories and local markets.

 

 

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Within the broad global coatings market, we focus on the automotive refinish, light vehicle, commercial vehicle and industrial end-markets, which Orr & Boss estimates to collectively represent $37 billion of annual sales. The chart below illustrates the composition of the global coatings industry by application and indicates the end-markets in which we participate:

 

 

LOGO

We operate in attractive end-markets, with the top four suppliers collectively holding an estimated 67% market share in the automotive refinish end-market and 74% market share in the light vehicle end-market. This structure is a result of few suppliers having the technological capabilities, global manufacturing footprint, efficient supply chain and overall scale to meet customer needs. These characteristics allow global coatings providers to serve customers locally while continuing to leverage global innovation, product platforms, relationships and best practices.

The refinish, industrial, light vehicle and commercial vehicle end-markets are collectively expected to grow at a compound annual growth rate (“CAGR”) of 5.8%, or $12.2 billion, from 2013 to 2018, according to Orr & Boss. This growth is due to specific end-market drivers as well as key industry trends, which favor large multi-national suppliers, including:

 

  •   Increasingly stringent environmental regulations: Evolving regulations in all major geographies have placed limits on the emission of volatile organic compounds (“VOCs”) and hazardous air pollutants (“HAPs”). As a result, customers are shifting toward regulation-compliant, low-VOC solventborne and waterborne coatings. Few coatings suppliers have the technology and products to meet these increasingly stringent requirements.

 

  •   Global procurement model: Multi-national light vehicle OEMs are increasingly utilizing global procurement teams to stipulate product specifications and color standardization requirements, which are implemented at the local level. These customers select coatings providers on the basis of their ability to consistently deliver advanced technological solutions on a global basis.

 

  •   Increased efficiency: Customers are encouraging coatings manufacturers to invest in new product offerings that require fewer application steps, resulting in lower capital and energy costs.

 

  •   Vehicle light-weighting: With more stringent vehicle emissions and fuel consumption regulations, light vehicle OEMs are focused on reducing vehicle weight to improve fuel economy. This is driving the need for new, and frequently multiple, substrates on the exterior of the vehicle. Historically, OEMs have manufactured vehicles primarily with steel components but are now increasingly incorporating other materials, including aluminum, carbon fiber and plastics. These materials often require specialized primers and low-temperature curing formulations to achieve uniform appearance, color and finish.

 

 

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  •   Emerging market growth: Emerging market demand in our end-markets is expected to grow at a CAGR of approximately 8.4% from 2013 to 2018, according to Orr & Boss. This is primarily due to increased government infrastructure spending and increased middle class consumption, which will increase the car parc (the number of vehicles in use). As per-capita wealth expands, consumers are also demanding higher-quality products, driving demand for more advanced coatings systems in these markets.

Performance Coatings

Refinish

The refinish end-market represented an estimated $7.3 billion in 2013 global sales, according to Orr & Boss. Sales in this end-market are driven by the number of vehicle collisions and owners’ propensity to repair their vehicles. The number of vehicle collisions in a given market is primarily determined by the size of the car parc and the aggregate number of miles driven in that market. The global automotive refinish end-market is expected to grow at a CAGR of approximately 4.3% from 2013 to 2018, with emerging markets expected to grow at a CAGR of approximately 7.7% over the same period, according to Orr & Boss.

Refinish products are critical to vehicle appearance and customer satisfaction but typically represent a small percentage of the overall cost of repair. As a result, body repair shop operators are most focused on coatings brands with a strong track record of performance and reliability. Such brands offer exact color matching technologies, productivity enhancements, regulatory compliance, consistent quality and ongoing technical support in order to facilitate timely repairs that restore a damaged vehicle’s appearance to its original condition.

Industrial

The industrial end-market represented an estimated $19.7 billion in 2013 global sales and is forecasted to grow at a CAGR of approximately 6.8% from 2013 to 2018, according to Orr & Boss. This end-market is comprised of liquid and powder coatings with demand driven by a wide variety of macroeconomic factors, such as growth in GDP and industrial production. Customers select industrial coatings based on protection, durability and appearance.

Transportation Coatings

Light Vehicle

The light vehicle end-market represented an estimated $7.3 billion in 2013 global sales and is expected to grow at a CAGR of approximately 4.9% from 2013 to 2018, according to Orr & Boss. Sales in this end-market are driven by new vehicle production, which is expected to grow in both the developed markets and the emerging markets. Light vehicle production growth is expected to be highest in emerging markets where OEMs plan to open 68 new assembly plants between 2014 and 2017.

Light vehicle OEMs select coatings providers on the basis of their global ability to deliver advanced technological solutions that improve exterior appearance and durability and provide long-term corrosion protection. Customers also look for suppliers that can enhance process efficiency to reduce overall manufacturing costs and provide on-site technical support. Rigorous environmental and durability testing as well as engineering approvals are also key criteria used by global light vehicle OEMs when selecting coatings providers.

Commercial Vehicle

The commercial vehicle end-market represented an estimated $3.3 billion in 2013 global sales and is expected to grow at a CAGR of approximately 4.8% from 2013 to 2018, according to Orr & Boss. Sales in this end-market are generated from a variety of applications including non-automotive transportation (e.g., HDT, bus and rail)

 

 

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and ACE as well as related markets such as trailers, recreational vehicles and personal sport vehicles. This end-market is primarily driven by global commercial vehicle production, which is influenced by overall economic activity, government infrastructure spending, equipment replacement cycles and evolving environmental standards.

Commercial vehicle OEMs select coatings providers on the basis of their ability to consistently deliver advanced technological solutions that improve exterior appearance, protection and durability and provide extensive color libraries and matching capabilities at the lowest total cost-in-use, while meeting stringent environmental requirements.

Our Competitive Strengths

Leading positions in attractive end-markets

We are a global leader in manufacturing, marketing and distributing advanced coatings systems with approximately 90% of our revenue generated in markets where we hold the #1 or #2 global market position. We are one of only a small number of global coatings suppliers in each of our end-markets, which positions us favorably in an industry where global scale is a competitive advantage.

 

 

LOGO

Market-leading refinish business driven by recurring aftermarket sales: We are the leading coatings supplier to the global automotive refinish end-market where we hold an estimated 25% share and the top four global suppliers hold an estimated 67% share. This end-market has consistently grown across economic cycles as the overall rate of collisions and repairs are not highly cyclical. Our refinish products offer quality, durability and superior color technology supported by a large color formula library that enables customers to precisely match colors. We supply our fragmented customer base of approximately 80,000 body shops through a global network of over 4,000 independent local distributors. Furthermore, body shops utilize our color matching system, inventory replacement process and training capabilities, which foster brand loyalty and have historically resulted in a high customer retention rate.

Well positioned in light vehicle end-market poised for growth: We are the second largest coatings provider to the global light vehicle end-market, which is expected to grow at a CAGR of approximately 4.9% from 2013 to 2018, according to Orr & Boss. In this end-market, the top four suppliers hold an estimated 74% share. We have developed a full complement of unique consolidated coating systems. These integrated solutions include our “Eco-Concept,” “3-Wet” and “2-Wet Monocoat” products that provide our customers with advanced, environmentally responsible systems that eliminate either a coatings layer or steps in the coatings process, thereby increasing productivity and reducing energy costs. In addition, we offer our customers on-site technical services as well as “just-in-time” product delivery. We are an integrated part of our customers’ assembly lines, which allows our technical support teams to improve operating efficiency and provide real-time performance

 

 

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feedback to our formulating chemists and manufacturing teams. We have been awarded new business in over 30 OEM plants globally since the beginning of 2013, demonstrating the strength of our competitive positioning. We expect to recognize sales from the majority of these new contracts in 2015, although we cannot provide any assurance regarding the amount of revenue or profit our new business awards will generate in the future.

Sustainable competitive advantages driven by global scale, established brands and technology

We believe we are one of only a few coatings providers that have the scale, manufacturing capabilities, brand reputation and technology to meet the purchasing criteria that are most critical to our customers on a global basis.

Our extensive manufacturing and distribution networks as well as our high-caliber technical capabilities enable us to meet customers’ volume and service requirements without interruption. Our global footprint also enables us to react quickly to changing local dynamics while leveraging our overall scale to cost-effectively develop and deliver leading edge technologies and solutions. In refinish, our scale gives us the ability to convert a large number of body shops to our systems in a short period of time, which has been a key competitive advantage in the growing North American MSO segment. Additionally, our scale and technical abilities enable us to meet the needs of our multi-national light vehicle customers, who increasingly require dedicated global account teams and high-quality, advanced coatings systems that can be applied consistently to global vehicle platforms.

Branding is another key factor that customers consider when choosing a coatings provider. Customers typically look to established brands when making their purchase decisions in our refinish, industrial and commercial vehicle end-markets. We have an extensive portfolio of established brands that leverage our advanced technology and a nearly 150-year heritage including our flagship global brand families of Cromax, Standox, Spies Hecker and Imron liquid products, our Alesta and Nap-Gard powder products and our Voltatex electrical insulation coatings.

Our technology is also a key competitive advantage. Our technology portfolio includes over 1,500 patents issued or pending and includes key assets such as our extensive color database and color matching technology, advanced multi-substrate formulations, process technology and VOC-compliant products. We also benefit from technology synergies across our end-markets. The colors, coatings properties and multi-substrate formulations we develop as a light vehicle coatings manufacturer help us sustain our leading refinish market position as we leverage insights from new light vehicle coatings to help develop innovative refinish coatings in the future.

Diverse revenue base

We generate our revenue from diverse end-markets, customers and geographies, which has historically reduced the financial impact of any single end-market, customer or region and limited the impact of economic cycles. Net sales in our end-markets of refinish, light vehicle, industrial and commercial vehicle represented 42.0%, 32.0%, 16.7% and 9.3% of net sales during the LTM Period, respectively. We also serve a globally diverse and highly fragmented customer base, with no single customer representing more than 8.0% of our net sales and our top ten customers representing approximately 33% of our net sales during the LTM Period. The percentage of our net sales generated by our top customers, however, may increase as we grow our sales to the light vehicle end-market. Additionally, we generated approximately 37% of our net sales in EMEA, 31% in North America, 17% in Asia Pacific and 15% in Latin America during the LTM Period.

Strong financial performance and cash flow characteristics

We have an attractive financial profile with gross margins of 34.6% and Adjusted EBITDA margins of 19.4% for the LTM Period.

 

 

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The refinish end-market serves as the foundation of our financial profile, representing 42.0% of our consolidated net sales for the LTM Period. Our track record of consistent price increases driving strong Adjusted EBITDA performance and low levels of maintenance capital expenditures has allowed us to consistently generate strong cash flows that we are re-investing in the business to position us for future earnings growth.

 

 

LOGO

We have generated year-over-year Adjusted EBITDA growth for seven of the eight full quarters since the Acquisition, driven in part by the initial impact of our transformational growth initiatives. In addition, we have implemented numerous initiatives intended to reduce our fixed and variable costs and improve working capital productivity. We believe that these initiatives will continue to generate significant cost savings in the future, although we cannot provide any assurance regarding the amount of cost savings these initiatives will generate. Many are in their early stages of implementation and have only recently begun to contribute to our financial results.

Experienced management team

We have augmented our management team with world-class talent and meaningful end-market expertise, with 12 of our 16 most senior managers joining since the Acquisition. This team has added new and diverse perspectives to the business from a range of industries. Our management team is led by our CEO, Charlie Shaver, who has over 34 years of chemical and global operating experience, including most recently President and CEO of TPC Group. He is supported by a senior management team comprised of global, regional and country focused leaders with diverse backgrounds and skill sets. The management team has extensive international experience with a strong track record of improving operations and executing strategic growth initiatives, including mergers and acquisitions.

Our Business Strategy

Pursue and execute new business wins in high-growth areas of our end-markets

We have aligned our resources to better serve the high-growth areas of our refinish and light vehicle end-markets. In the North American refinish end-market, we have created dedicated sales, conversion and service teams to serve MSOs, which are gaining share in the North American collision repair market by reducing insurance company costs and providing consistently high customer satisfaction. Through new business wins with MSO customers, we have become a leading coatings provider to the North American MSO market, which we expect to grow from 14% of the North American collision repair market in 2012 to 24% by 2017. We are targeting growth opportunities with both existing MSO and new MSO accounts and believe that we are well positioned to gain additional market share as a result of our dedicated account teams, high productivity offerings and broad distribution network.

 

 

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We have been awarded new business in over 30 OEM plants globally since the beginning of 2013, with 16 of these plants located in China, where OEMs are rapidly expanding production to meet increasing demand for new vehicles. We expect that many of these new contracts will begin generating sales in 2015. Our success in this end-market has been driven by a new leadership team that has restructured our organization to mirror the increasingly global focus of OEMs. We will continue to pursue new business by leveraging our proprietary manufacturing processes, our broad range of VOC-compliant coatings and our substantial sales and technical support organizations.

Accelerate growth in emerging markets

We have a strong presence in emerging markets, which generated 32% of our sales during the LTM Period. These markets are characterized by increasing levels of vehicle production, a growing car parc, an expanding middle class and GDP growth above the global average, all of which drive greater demand for coatings. We believe that we are well positioned to capitalize on this increasing demand with local manufacturing facilities and extensive sales and technical service teams dedicated to these markets. In China, where we have operated a wholly owned business for 30 years, we are expanding our sales force and have invested in new plant capacity, including a $50 million waterborne capacity expansion at our Jiading facility, which came on line in March 2015. We are also in the process of expanding our production capacity in Mexico and Brazil to drive future earnings growth.

 

LOGO

Globalize existing product lines

Since the Acquisition, we have identified significant opportunities to leverage our existing products across geographies. For example, we are the market leader in the North American HDT market, but only recently began serving the Chinese market, which produces nearly four times the number of heavy duty trucks produced in the United States. This initiative has generated early positive results; for example, in 2014 we began serving Foton Daimler, one of the largest truck manufacturers in the region, with our high performance waterborne coatings. In refinish, we are leveraging legacy formulations from developed markets to satisfy growing mainstream demand in emerging markets. We also intend to pursue similar geographic opportunities with several of our other industrial and commercial vehicle product offerings.

Invest in high-return projects to drive earnings growth

We are in the early stages of implementing several initiatives that we believe will continue to generate significant earnings growth, including establishing a global procurement organization, executing improvement programs we have named “Fit-For Growth” and “The Axalta Way” and investing capital in growth projects with high expected returns. Since the Acquisition, we have built a global procurement organization, which is executing several programs to reduce costs by streamlining inputs, reducing the number of sole-sourced raw materials and partnering with new, high-quality suppliers to meet our purchasing needs. These purchasing programs are in their

 

 

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early stages and we believe they will continue to generate significant earnings growth over the next several years. Our Fit-For-Growth improvement initiative is focused in Europe, where we are investing to upgrade, automate and re-align disparate manufacturing operations to bring the region’s cost structure in line with the rest of the world and better position us to meet increasing local demand. We believe that Fit-For-Growth, which we began in 2014, will generate approximately $100 million of incremental Adjusted EBITDA by 2017 on a run-rate basis, of which we realized approximately $37 million during 2014. Our recently announced Axalta Way program, which commenced in 2015, is a global initiative focused on commercial alignment and cost reduction that we believe will generate an incremental $100 million of Adjusted EBITDA by the end of 2017 on a run-rate basis. Finally, we believe we have significant opportunities to pursue high return projects identified since the Acquisition. These include capacity expansion projects in China, Germany, Mexico and Brazil and productivity initiatives from which we expect to benefit over the next several years.

Maintain and further develop technology leadership

We will continue to build on our nearly 150-year heritage of developing market-leading technology. We leverage our intimate customer relationships and network of customer training centers to align product innovation with customer needs. For example, in the North American refinish end-market we have recently launched Cromax Mosaic, a new VOC-compliant solventborne coatings line, to complement our broad waterborne coatings portfolio. Body shops have embraced this product, which enables them to meet environmental regulations while using existing application equipment and techniques. We have a robust pipeline of over 100 new product innovations, the majority of which we intend to launch over the next two years, including several products focused on emerging markets. Similarly in the light vehicle end-market, our proprietary 3-Wet, Eco-Concept, 2-Wet monocoat systems and high throw electrocoat products have generated new customer wins as OEMs seek to increase efficiency and reduce costs. We believe this commitment to new product development will help us maintain our technology leadership and strong market position.

Risks Related to Our Business

Investing in our common shares involves substantial risk. You should carefully consider all of the information in this prospectus prior to investing in our common shares. There are several risks related to our business and our ability to leverage our strengths described elsewhere in this prospectus that are described under “Risk Factors” elsewhere in this prospectus. Among these important risks are the following:

 

  •   adverse developments in economic conditions and, particularly, in conditions in the automotive and transportation industries and our other end-markets;

 

  •   risks of losing any of our significant customers or the consolidation of MSOs, distributors and/or body shops;

 

  •   our ability to successfully execute our growth strategy and leverage our strengths;

 

  •   risks associated with our non-U.S. operations and global scale;

 

  •   currency-related risks;

 

  •   increased competition;

 

  •   price increases or interruptions in our supply of raw materials;

 

  •   failure to develop and market new products and manage product life cycles;

 

  •   litigation and other commitments and contingencies;

 

  •   our substantial indebtedness;

 

 

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  •   Carlyle’s ability to significantly influence our decisions; and

 

  •   other risks and uncertainties, including those listed under the caption “Risk Factors.”

Our Principal Shareholders

Our principal shareholders are certain investment funds affiliated with Carlyle.

Founded in 1987, Carlyle is a global alternative asset manager and one of the world’s largest global private equity firms with approximately $193 billion of assets under management across 130 funds and 156 fund of funds vehicles as of March 31, 2015. Carlyle invests across four segments—Corporate Private Equity, Real Assets, Global Market Strategies and Fund of Funds Solutions—in Africa, Asia, Australia, Europe, the Middle East, North America and South America. In addition to the industrials & transportation industry, Carlyle has expertise in various industries, including aerospace, defense & government services, consumer & retail, energy, financial services, healthcare, industrials & transportation, technology, media & telecommunications. Carlyle employs more than 1,650 employees, including more than 700 investment professionals, in 40 offices across six continents.

Company Information

Axalta Coating Systems Ltd. was incorporated pursuant to the laws of Bermuda on August 24, 2012. Our principal executive offices are located at Two Commerce Square, 2001 Market Street, Suite 3600, Philadelphia, Pennsylvania 19103, and our telephone number is (855) 547-1461. Our website address is www.axaltacoatingsystems.com. Information on, or accessible through, our website is not part of this prospectus, nor is such content incorporated by reference herein.

We maintain a registered office in Bermuda at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda. The telephone number of our registered office is (441) 295-5950.

 

 

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The Offering

 

Common shares offered by the selling shareholders

35,000,000 common shares.

 

Selling shareholders

The selling shareholders identified in “Principal and Selling Shareholders.”

 

Common shares outstanding after this offering

235,258,147 common shares.

 

Option to purchase additional shares

The selling shareholders have granted the underwriters a 30-day option from the date of this prospectus to purchase up to 5,250,000 additional common shares at the initial public offering price, less underwriting discounts and commissions.

 

Use of proceeds

We will not receive any net proceeds from the sale of common shares by the selling shareholders, including from any exercise by the underwriters of their option to purchase additional common shares. See “Use of Proceeds” for additional information.

 

Dividend policy

We do not currently pay and do not currently anticipate paying dividends on our common shares following this offering. Any declaration and payment of future dividends to holders of our common shares may be limited by restrictive covenants in our debt agreements, and will be at the sole discretion of the board of directors of Axalta Coating Systems Ltd. (our “Board of Directors”), and will depend on many factors, including our financial condition, earnings, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our Board of Directors deems relevant. See “Dividend Policy,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness” and “Description of Share Capital.”

 

NYSE symbol

“AXTA”.

 

Risk factors

See “Risk Factors” for a discussion of factors you should carefully consider before deciding to invest in our common shares.

Unless we specifically state otherwise, throughout this prospectus the number of our common shares to be outstanding after completion of this offering is based on common shares outstanding as of June 1, 2015, which includes 35,000,000 common shares to be sold by the selling shareholders and excludes:

 

  •   782,756 common shares issued pursuant to the exercise of options subsequent to June 1, 2015;

 

  •   713,171 common shares issuable pursuant to unvested restricted stock units;

 

  •   12,836,506 common shares issuable upon the exercise of options outstanding at a weighted average exercise price of $11.50 per share; and

 

  •   9,160,713 common shares reserved for issuance under our 2014 Incentive Plan (the “2014 Plan”).

Unless we specifically state otherwise, all information in this prospectus assumes no exercise of the option to purchase additional common shares by the underwriters.

 

 

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Summary Historical and Pro Forma Financial Information

The following table sets forth summary historical and pro forma financial information of Axalta. As a result of the Acquisition, we applied acquisition accounting whereby the purchase price paid was allocated to the acquired assets and liabilities at fair value. The financial reporting periods presented are as follows:

 

  •   The period from January 1, 2013 through January 31, 2013 and the year ended December 31, 2012 (“Predecessor” periods) reflect the combined results of operations of the DPC business.

 

  •   The years ended December 31, 2014 and 2013 and the three-month periods ended March 31, 2015 and 2014 (“Successor” periods) reflect the consolidated results of operations of Axalta, which include the effects of acquisition accounting commencing on the acquisition date of February 1, 2013 and the effects of the financing of the Acquisition commencing on February 1, 2013.

 

  •   The pro forma year ended December 31, 2013 reflects the combined historical results of operations of the DPC business for the period from January 1, 2013 through January 31, 2013 and Axalta for the year ended December 31, 2013, as adjusted for the pro forma effects of certain transactions as described in “Unaudited Pro Forma Consolidated and Combined Financial Information.”

The historical results of operations and cash flow data for the three months ended March 31, 2015 and 2014 and the historical balance sheet data as of March 31, 2015 presented below were derived from our Successor unaudited financial statements and the related notes thereto included elsewhere in this prospectus. The historical results of operations and cash flow data for the years ended December 31, 2014 and 2013 and the historical balance sheet data as of December 31, 2014 and 2013 presented below were derived from our Successor audited financial statements and the related notes thereto included elsewhere in this prospectus. As of and for the Successor period of August 24, 2012 (inception date) through December 31, 2012, the Successor had no operations or activity, other than merger and acquisition costs of $29.0 million, which consisted primarily of investment banking, legal and other professional advisory services costs. The historical combined financial data for the year ended December 31, 2012 and the period January 1, 2013 through January 31, 2013 and the historical balance sheet data as of December 31, 2012 presented below have been derived from the Predecessor audited combined financial statements and the related notes thereto for the DPC business included elsewhere in this prospectus.

Our historical financial data and that of the DPC business are not necessarily indicative of our future performance, nor does such data reflect what our financial position and results of operations would have been had we operated as an independent publicly traded company during the periods shown. The unaudited pro forma financial data presented below was derived from our audited financial statements for the year ended December 31, 2013 and the related notes thereto and the audited financial statements of the DPC business for the period from January 1, 2013 through January 31, 2013 and the related notes thereto, each of which are included elsewhere in this prospectus.

The pro forma results for the year ended December 31, 2013 represent the addition of the Predecessor period January 1, 2013 through January 31, 2013 and the Successor year ended December 31, 2013 as well as the pro forma adjustments to reflect the Acquisition and the related financing as if they had occurred on January 1, 2013. This pro forma information has been prepared in a form consistent with Article 11 of Regulation S-X and is included in “Unaudited Pro Forma Consolidated and Combined Financial Information.” The pro forma results do not reflect the actual results we would have achieved had the Acquisition been completed as of January 1, 2013 and are not indicative of our future results of operations.

We have also presented summary unaudited consolidated financial data for the twelve-month period ended March 31, 2015, which does not comply with U.S. GAAP (this period is referred to elsewhere in this prospectus as the LTM Period). This data has been calculated by subtracting the unaudited statements of operations and cash flow data for the three-month period ended March 31, 2014 from the statements of operations and cash flow data for the year ended December 31, 2014 and then adding the unaudited statements of operations and cash flow data for the three-month period ended March 31, 2015 included elsewhere in this prospectus. We have presented this financial data because we believe it provides our investors with useful information to assess our recent performance.

 

 

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The unaudited pro forma information set forth below is based upon available information and assumptions that we believe are reasonable. The unaudited pro forma information is for illustrative and informational purposes only and is not intended to represent or be indicative of what our financial condition or results of operations would have been had the above transactions occurred on the dates indicated. The unaudited pro forma information also should not be considered representative of our future financial condition or results of operations. You should read the information contained in this table in conjunction with “Selected Historical Financial Information,” “Unaudited Pro Forma Consolidated and Combined Financial Information,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical audited and unaudited financial statements and the related notes thereto included elsewhere in this prospectus.

 

    Successor     Pro forma     Successor          Predecessor  
    Twelve
Months
Ended
March 31,
    Three
Months
Ended
March 31,
    Three
Months
Ended
March 31,
    Year
Ended
December 31,
    Year
Ended
December 31,
    Year
Ended
December 31,
         January 1
through
January 31,
    Year
Ended
December 31,
 

(dollars and shares

in millions, except per
share data)

  2015     2015     2014     2014     2013     2013          2013     2012  

Statement of operations data:

                   

Net sales

  $ 4,303.5      $ 989.2      $ 1,047.4      $ 4,361.7      $ 4,277.3      $ 3,951.1          $ 326.2      $ 4,219.4   

Other revenue

    31.1        8.3        7.0        29.8        36.8        35.7            1.1        37.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Total revenue

  4,334.6     997.5      1,054.4      4,391.5      4,314.1      3,986.8        327.3      4,256.8   

Cost of goods sold(1)

  2,843.5     649.8      703.5      2,897.2      2,909.0      2,772.8        232.2      2,932.6   

Selling, general and administrative
expenses(2)

  957.8     213.0      246.7      991.5      1,113.6      1,040.6        70.8      873.4   

Research and development expenses

  51.1     12.9      11.3      49.5      44.2      40.5        3.7      41.5   

Amortization of acquired intangibles

  82.7      20.0      21.1      83.8      86.5      79.9        —        —     

Merger and acquisition related expenses

  —        —        —        —        —        28.1        —        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Income from operations

  399.5      101.8      71.8      369.5      160.8      24.9        20.6      409.3   

Interest expense, net(3)

  208.7      50.0      59.0      217.7      234.8      215.1        —        —     

Bridge financing commitment fees

  —        —        —        —        —        25.0        —        —     

Other expense, net

  114.4      3.9      4.5      115.0      34.1      48.5        5.0      16.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Income (loss) before income taxes

  76.4      47.9      8.3      36.8      (108.1   (263.7     15.6      393.0   

Provision (benefit) for income taxes

  (8.7   1.2      12.0      2.1      (1.3   (44.8     7.1      145.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Net income (loss)

  85.1      46.7      (3.7   34.7      (106.8   (218.9     8.5      247.8   

Less: Net income attributable to noncontrolling interests

  8.3      1.6      0.6      7.3      6.6      6.0        0.6      4.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Net income (loss) attributable to controlling interests

$ 76.8    $ 45.1    $ (4.3 $ 27.4    $ (113.4 $ (224.9   $ 7.9    $ 243.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Per share data:

 

Earnings (loss) per share:

 

Basic

$ 0.33    $ 0.20    $ (0.02 $ 0.12    $ (0.50 $ (0.97  

Diluted

$ 0.33    $ 0.19    $ (0.02 $ 0.12    $ (0.50 $ (0.97  

Weighted average shares outstanding:

 

Basic

  229.5      229.8      229.1      229.3      228.3      228.3     

Diluted

  233.4      237.0      229.1      230.3      228.3      228.3     

 

 

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    Successor     Pro forma     Successor          Predecessor  
    Twelve
Months
Ended
March 31,
    Three
Months
Ended
March 31,
    Three
Months
Ended
March 31,
    Year
Ended
December 31,
    Year
Ended
December 31,
    Year
Ended
December 31,
         January 1
through
January 31,
    Year
Ended
December 31,
 

(dollars and shares

in millions, except

per share data)

  2015     2015     2014     2014     2013     2013          2013     2012  

Other financial data:

                   

Cash flows from:

                   

Operating activities

  $ 219.9      $ (98.7   $ (67.2   $ 251.4        $ 376.8          $ (37.7   $ 388.8   

Investing activities

    (156.3     (30.2     (52.4     (178.5       (5,011.2         (8.3     (88.2

Financing activities

    (146.1     (19.7     3.2        (123.2       5,098.1            43.0        (290.6

Depreciation and amortization

    300.2       72.6        81.1        308.7        327.3        300.7            9.9        110.7   

Capital expenditures

    (169.7 )     (31.5     (50.2     (188.4     (109.7     (107.3         (2.4     (73.2

Adjusted EBITDA(4)

    835.8       182.0        186.7        840.5        737.6        699.0            38.4        661.8   

 

    Successor     Pro Forma     Successor          Predecessor  
    Twelve
Months
Ended
March 31,
    Three
Months
Ended
March 31,
    Three
Months
Ended
March 31,
    Year
Ended
December 31,
    Year
Ended
December 31,
    Year
Ended
December 31,
         Period from
January 1
through
January 31,
    December 31,  

(in millions)

  2015     2015     2014     2014     2013     2013          2013     2012  

Selected financial data:

                   

Net sales

  $ 4,303.5     $ 989.2      $ 1,047.4      $ 4,361.7      $ 4,277.3      $ 3,951.1          $ 326.2      $ 4,219.4   

Net income (loss)

  $ 85.1     $ 46.7      $ (3.7   $ 34.7      $ (106.8   $ (218.9       $ 8.5      $ 247.8   

Adjusted EBITDA(4)

  $ 835.8     $ 182.0      $ 186.7      $ 840.5      $ 737.6      $ 699.0          $ 38.4      $ 661.8   

 

     Successor           Predecessor  
     March 31,      December 31,     December 31,           December 31,  

(in millions)

   2015      2014     2013           2012  

Balance sheet data (at end of period):

              

Cash and cash equivalents

   $ 222.9       $ 382.1      $ 459.3           $ 28.7   

Working capital(5)

     952.8        926.2        952.2             605.2   

Total assets

     5,898.4         6,252.8        6,737.1             2,878.6   

Debt, net of discount

     3,608.3        3,696.4        3,920.9             0.2   

Net debt(6)

     3,385.4        3,314.3        3,461.6             (28.5

Total liabilities

     4,850.2         5,140.8        5,525.3             1,181.6   

Total shareholders’ equity/combined equity

     1,048.2         1,112.0        1,211.8             1,697.0   

 

(1) In the Successor year ended December 31, 2013, cost of goods sold included the impact of $103.7 million attributable to the increase in inventory value resulting from the fair value adjustment associated with our acquisition accounting for inventories.
(2) Selling, general and administrative expense included costs related to transition-related and cost savings initiatives of $105.2 million, $8.2 million, $30.1 million, $127.1 million and $231.5 million for the LTM Period, the Successor three months ended March 31, 2015 and 2014 and the Successor years ended December 31, 2014 and 2013, respectively. Additionally, during the Predecessor period ended December 31, 2012, $0.7 million in employee separation and asset related costs were recorded.
(3) In February 2014, we refinanced our borrowings under the term loan facilities of our Senior Secured Credit Facilities (as defined under “Capitalization”). If the refinancing was reflected in the pro forma results for the year ended December 31, 2013, pro forma interest expense would have been reduced by $24.0 million, or $210.8 million.
(4) To supplement our financial information presented in accordance with U.S. GAAP, we use the following additional non-GAAP financial measures to clarify and enhance an understanding of past performance: EBITDA and Adjusted EBITDA. We believe that the presentation of these financial measures enhances an investor’s understanding of our financial performance. We further believe that these financial measures are useful financial metrics to assess our operating performance from period-to-period by excluding certain items that we believe are not representative of our core business. We use certain of these financial measures for business planning purposes and in measuring our performance relative to that of our competitors. We utilize Adjusted EBITDA as the primary measure of segment performance.

EBITDA consists of net income (loss) before interest, taxes, depreciation and amortization. Adjusted EBITDA consists of EBITDA adjusted for (i) non-operating income or expense, (ii) the impact of certain non-cash, nonrecurring or other items that are included in net income and EBITDA that we do not consider indicative of our ongoing operating performance and (iii) certain unusual or nonrecurring items impacting results in a particular period. In addition, for the Predecessor periods, Adjusted EBITDA gives pro forma effect to the difference between the Predecessor allocated costs and the estimated standalone

 

 

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costs. We believe that making such adjustments provides investors meaningful information to understand our operating results and ability to analyze financial and business trends on a period-to-period basis.

We believe these financial measures are commonly used by investors to evaluate our performance and that of our competitors. However, our use of the terms EBITDA and Adjusted EBITDA may vary from that of others in our industry. These financial measures should not be considered as alternatives to income from operations, net income (loss), earnings per share or any other performance measures derived in accordance with U.S. GAAP as measures of operating performance.

EBITDA and Adjusted EBITDA have important limitations as analytical tools and you should not consider them in isolation or as substitutes for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

 

  •   EBITDA and Adjusted EBITDA:

 

  •   do not reflect the significant interest expense on our debt, including the Senior Secured Credit Facilities and the Senior Notes (as defined under “Capitalization”);

 

  •   eliminate the impact of income taxes on our results of operations; and

 

  •   contain certain estimates for periods prior to the Acquisition of standalone costs;

 

  •   although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any expenditures for such replacements; and

 

  •   other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures.

In particular, Adjusted EBITDA for Predecessor periods contains an adjustment to our net income (loss) for estimates of our standalone costs versus the allocated corporate costs from DuPont reflected in our historical financial statements. These estimates may not be reflective of our actual standalone costs during such period had we been a standalone business.

We compensate for these limitations by using EBITDA and Adjusted EBITDA along with other comparative tools, together with U.S. GAAP measurements, to assist in the evaluation of operating performance. Such U.S. GAAP measurements include operating income (loss), net income (loss), earnings per share and other performance measures.

In evaluating these financial measures, you should be aware that in the future we may incur expenses similar to those eliminated in this presentation. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.

 

 

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The following table reconciles net income (loss) to EBITDA and Adjusted EBITDA for the periods presented:

 

    Successor     Pro forma     Successor          Predecessor  
    Twelve
Months
Ended
March 31,
    Three
Months
Ended
March 31,
    Three
Months
Ended
March 31,
    Year
Ended
December 31,
    Year
Ended
December 31,
    Year
Ended
December 31,
         Period from
January 1
through
January 31,
    Year
Ended
December 31,
 

(in millions)

  2015     2015     2014     2014     2013     2013          2013     2012  

Net income (loss)

  $ 85.1     $ 46.7      $ (3.7   $ 34.7      $ (106.8   $ (218.9       $ 8.5      $ 247.8   

Interest expense,
net(a)

    208.7       50.0        59.0        217.7        234.8        215.1            —          —     

Provision (benefit) for income taxes

    (8.7 )     1.2        12.0        2.1        (1.3     (44.8         7.1        145.2   

Depreciation and amortization

    300.2       72.6        81.1        308.7        327.3        300.7            9.9        110.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

EBITDA

  585.3     170.5      148.4      563.2      454.0      252.1        25.5      503.7   

Inventory step-up(b)

  —        —        —        —        —        103.7        —        —     

Merger and acquisition related costs(c)

  —        —        —        —        —        28.1        —        —     

Financing costs and debt extinguishment(d)

  3.0     —        3.1      6.1      —        25.0        —        —     

Foreign exchange remeasurement losses(e)

  89.8     8.7      0.1      81.2      34.0      48.9        4.5      17.7   

Long-term employee benefit plan
adjustments(f)

  (2.7 )   0.2      2.3      (0.6   11.8      9.5        2.3      36.9   

Termination benefits and other employee related costs(g)

  18.9     3.7      3.2      18.4      147.8      147.5        0.3      8.6   

Consulting and advisory fees(h)

  26.4     3.1      13.0      36.3      54.7      54.7        —        —     

Transition-related costs(i)

  87.9     —        13.9      101.8      29.3      29.3        —        —     

Offering-related costs(j)

  23.7     1.4      —        22.3      —        —          —        —     

Other adjustments(k)

  5.9     (2.1   2.8      10.8      2.4      2.3        0.1      12.6   

Dividends in respect of noncontrolling interest(l)

  (4.8 )   (3.5   (0.9   (2.2   (5.2   (5.2     —        (1.9

Management fee
expense(m)

  2.4     —        0.8      3.2      3.1      3.1        —        —     

Allocated corporate and standalone costs, net(n)

  —        —        —        —        5.7      —          5.7      84.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Adjusted EBITDA

$ 835.8   $ 182.0    $ 186.7    $ 840.5    $ 737.6    $ 699.0      $ 38.4    $ 661.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

 

  (a) In February 2014, we refinanced our borrowings under the term loan facilities of our Senior Secured Credit Facilities. If the refinancing was reflected in the pro forma results for the year ended December 31, 2013, pro forma interest expense would have been reduced by $24.0 million, or $210.8 million.
  (b) During the Successor year ended December 31, 2013, we recorded a non-cash fair value adjustment associated with our acquisition accounting for inventories. These amounts increased cost of goods sold by $103.7 million.
  (c) In connection with the Acquisition, we incurred $28.1 million of merger and acquisition costs during the Successor year ended December 31, 2013. These costs consisted primarily of investment banking, legal and other professional advisory services costs.
  (d)

On August 30, 2012, we signed a debt commitment letter, which included an interim credit facility (the “Bridge Facility”). Upon the issuance of the Senior Notes and the entry into the Senior Secured Credit Facilities, the commitments under the Bridge Facility terminated. Commitment fees related to the Bridge Facility of $21.0 million and associated fees of $4.0 million were expensed upon the termination of the Bridge Facility. In connection with the amendment to the Senior Secured Credit Facilities in February 2014, we recognized $3.1 million of costs during the year ended December 31, 2014. In addition to the credit facility amendment, we also incurred a $3.0 million loss on extinguishment of debt recognized during the Successor year ended December 31, 2014, which resulted directly from the pro-rata write off of unamortized

 

 

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  deferred financing costs and original issue discounts associated with the pay-down of $100.0 million of principal on the New Dollar Term Loan (discussed further in Note 15 to our Unaudited Condensed Consolidated Financial Statements and Note 22 to our Audited Consolidated and Combined Financial Statements included elsewhere in this prospectus).
  (e) Eliminates foreign exchange gains and losses resulting from the remeasurement of assets and liabilities denominated in foreign currencies, including a $19.4 million loss related to the Acquisition date settlement of a foreign currency contract used to hedge the variability of Euro-based financing.
  (f) For the LTM Period, the Successor three months ended March 31, 2015 and 2014 and the Successor periods ended December 31, 2014 and 2013, eliminates the non-service cost components of employee benefit costs. Additionally, we deducted a pension curtailment gain of $7.3 million recorded during the Successor year ended December 31, 2014. For the Predecessor period January 1, 2013 through January 31, 2013 and the Predecessor year ended December 31, 2012, eliminates (1) all U.S. pension and other long-term employee benefit costs that were not assumed as part of the Acquisition and (2) the non-service cost component of the pension and other long-term employee benefit costs.
  (g) Represents expenses primarily related to employee termination benefits, including our initiative to improve the overall cost structure within the European region, and other employee-related costs. Termination benefits include the costs associated with our headcount initiatives for establishment of new roles and elimination of old roles and other costs associated with cost saving opportunities that were related to our transition to a standalone entity and, in 2015, our Axalta Way cost savings initiatives.
  (h) Represents fees paid to consultants, advisors, and other third-party professional organizations for professional services rendered in conjunction with the transition from DuPont to a standalone entity during 2014. Amounts incurred for the Successor three months ended March 31, 2015 primarily relate to our Axalta Way cost savings initiatives.
  (i) Represents charges associated with the transition from DuPont to a standalone entity, including branding and marketing, information technology related costs, and facility transition costs.
  (j) Represents costs associated with the IPO and the Secondary Offering, including a $13.4 million pre-tax charge associated with the termination of the management agreement with Carlyle Investment Management, L.L.C., an affiliate of Carlyle, upon the completion of the IPO. See note (m) below. Amounts incurred for the three months ended March 31, 2015 relate to costs associated with the Secondary Offering of our common shares by Carlyle.
  (k) Represents costs for certain unusual or non-operational (gains) and losses, including a $5.4 million gain recognized during the Successor three months ended March 31, 2015 resulting from the remeasurement of our previously held interest in an equity-method investee upon the acquisition of a controlling interest therein, the non-cash impact of natural gas and currency hedge losses allocated to DPC by DuPont, stock-based compensation, asset impairments, equity investee dividends, indemnity (income) losses associated with the Acquisition, gains (losses) resulting from amendments to long-term benefit plans and loss (gain) on sale and disposal of property, plant and equipment.
  (l) Represents the payment of dividends to our joint venture partners by our consolidated entities that are not wholly owned.
  (m) Pursuant to Axalta’s management agreement with Carlyle Investment Management, L.L.C., for management and financial advisory services and oversight provided to Axalta and its subsidiaries, Axalta was required to pay an annual management fee of $3.0 million and out-of-pocket expenses. This agreement terminated upon completion of the IPO.
  (n) Represents (1) the add-back of corporate allocations from DuPont to DPC for the usage of DuPont’s facilities, functions and services; costs for administrative functions and services performed on behalf of DPC by centralized staff groups within DuPont; a portion of DuPont’s general corporate expenses; and certain pension and other long-term employee benefit costs, in each case because we believe these costs are not indicative of costs we would have incurred as a standalone company net, of (2) estimated standalone costs based on a corporate function resource analysis that included a standalone executive office, the costs associated with supporting a standalone information technology infrastructure, corporate functions such as legal, finance, treasury, procurement and human resources and certain costs related to facilities management. This resource analysis included anticipated headcount and the associated overhead costs of running these functions effectively as a standalone company of our size and complexity. This estimate is provided for additional information and analysis only, as we believe that it facilitates enhanced comparability between Predecessor and Successor periods. It represents the difference between the costs that were allocated to our predecessor by its parent and the costs that we believe would be incurred if it operated as a standalone entity. This estimate is not intended to represent a pro forma adjustment presented within the guidance of Article 11 of Regulation S-X. Although we believe this estimate is reasonable, actual results may have differed from this estimate, and any difference may be material. See “Forward-Looking Statements” and “Risk Factors—Risks Related to our Business.”

 

     Predecessor Period
from January 1, 2013
through
January 31, 2013
     Predecessor Year Ended
December 31, 2012
 

Allocated corporate costs

   $ 25.4       $ 333.3   

Standalone costs

     (19.7      (249.1
  

 

 

    

 

 

 

Total

$ 5.7    $ 84.2   
  

 

 

    

 

 

 

 

(5) Working capital is defined as current assets less current liabilities.
(6) Net debt is defined as debt, net of discount, less cash and cash equivalents.

 

 

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RISK FACTORS

An investment in our common shares involves a high degree of risk. You should consider carefully the following risks, together with the other information contained in this prospectus, before you decide whether to buy our common shares. If any of the events contemplated by the following discussion of risks should occur, our business, results of operations, financial condition and cash flows could suffer significantly. As a result, the market price of our common shares could decline, and you may lose all or part of the money you paid to buy our common shares. The following is a summary of all the material risks known to us.

Risks Related to our Business

Risks Related to Execution of our Strategic and Operating Plans

Our business performance is impacted by economic conditions and, particularly, by conditions in the light and commercial vehicle end-markets. Adverse developments in the global economy, in regional economies or in the light and commercial vehicle end-markets could adversely affect our business, financial condition and results of operations.

The growth of our business and demand for our products is affected by changes in the health of the overall global economy, regional economies and, in particular, of the light and commercial vehicle end-markets. Our business is adversely affected by decreases in the general level of global economic activity, such as decreases in business and consumer spending, construction activity and industrial manufacturing. Economic developments affect businesses such as ours in a number of ways. A tightening of credit in financial markets could adversely affect the ability of our customers and suppliers to obtain financing for significant purchases and operations, could result in a decrease in or cancellation of orders for our products and services and could impact the ability of our customers to make payments owed to us. Similarly, a tightening of credit in financial markets could adversely affect our supplier base and increase the potential for one or more of our suppliers to experience financial distress or bankruptcy.

Our financial position, results of operations and cash flows could be materially adversely affected by difficult economic conditions and/or significant volatility in the capital, credit and commodities markets.

Several of the end-markets we serve are cyclical, and macroeconomic and other factors beyond our control could reduce demand from these end-markets for our products, materially adversely affecting our business, financial condition and results of operations. Weak economic conditions could depress new car sales and/or production, reducing demand for our light vehicle OEM coatings and limit the growth of the car parc. These factors could, in turn, cause a related decline in demand for our automotive refinish coatings because, as the age of a vehicle increases, the general propensity of car owners to pay for cosmetic repairs decreases. Also, during difficult economic times, car owners may refrain from seeking repairs for their damaged vehicles. Similarly, periods of reduced global economic activity could hinder global industrial output, which could decrease demand for our industrial and commercial coating products.

Our global business is adversely affected by decreases in the general level of economic activity, such as decreases in business and consumer spending, construction activity and industrial manufacturing. Disruptions in the United States, Europe or in other economies, or weakening of emerging markets, such as Brazil, could adversely affect our sales, profitability and/or liquidity.

We may be unable to successfully execute on our growth initiatives, business strategies or operating plans.

We are executing on a number of growth initiatives, strategies and operating plans designed to enhance our business. For example, we are undertaking certain operational improvement initiatives with respect to realigning our manufacturing facilities in Europe and are growing our sales force in emerging markets and end-markets

 

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where we are underrepresented. The anticipated benefits from these efforts are based on several assumptions that may prove to be inaccurate. Moreover, we may not be able to successfully complete these growth initiatives, strategies and operating plans and realize all of the benefits, including growth targets and cost savings, we expect to achieve or it may be more costly to do so than we anticipate. A variety of risks could cause us not to realize some or all of the expected benefits. These risks include, among others, delays in the anticipated timing of activities related to such growth initiatives, strategies and operating plans; increased difficulty and cost in implementing these efforts; and the incurrence of other unexpected costs associated with operating the business. Moreover, our continued implementation of these programs may disrupt our operations and performance. As a result, we cannot assure you that we will realize these benefits. If, for any reason, the benefits we realize are less than our estimates or the implementation of these growth initiatives, strategies and operating plans adversely affect our operations or cost more or take longer to effectuate than we expect, or if our assumptions prove inaccurate, our results of operations may be materially adversely affected.

Increased competition may adversely affect our business, financial condition and results of operations.

We face substantial competition from many international, national, regional and local competitors of various sizes in the manufacturing, distribution and sale of our coatings and related products. Some of our competitors are larger than us and have greater financial resources than we do. Other competitors are smaller and may be able to offer more specialized products. We believe that technology, product quality, product innovation, breadth of product line, technical expertise, distribution, service, local presence and price are the key competitive factors for our business. Competition in any of these areas may reduce our net sales and adversely affect our earnings or cash flow by resulting in decreased sales volumes, reduced prices and increased costs of manufacturing, distributing and selling our products.

Weather conditions may reduce the demand for some of our products and could have a negative effect on our business, financial condition and results of operations.

From time to time, weather conditions have an adverse effect on our sales of coatings and related products. For example, unusually mild weather during winter months may lead to fewer vehicle collisions, reducing market demand for our refinish coatings. Conversely, harsh weather conditions can force our customers to reduce or suspend operations, thereby reducing the amount of products they purchase from us. Any such reductions in customer purchases could have a material adverse effect on our business, financial condition and results of operations.

Improved safety features on vehicles and insurance company influence may reduce the demand for some of our products and could have a negative effect on our business, financial condition and results of operations.

Vehicle manufacturers continue to develop new safety features such as collision avoidance technology and self-driving vehicles that may reduce vehicle collisions in the future, potentially negatively impacting demand for our refinish coatings. In addition, insurance companies may influence vehicle owners to use body shops that do not use our products, which could also potentially negatively impact demand for our refinish coatings. Any resulting reduction in demand for our refinish coatings could have a material adverse effect on our business, financial condition and results of operations.

The loss of any of our largest customers or the consolidation of MSOs, distributors and/or body shops could adversely affect our business, financial condition and results of operations.

We have some customers that purchase a large amount of products from us and we are also reliant on distributors to assist us in selling our products. Our largest single customer accounted for approximately 8% of our net sales for the LTM Period, and our largest distributor accounted for approximately 3% of our net sales for the LTM Period. Consolidation of any of our customers, including MSOs, distributors and body shops, could decrease our customer base and impact our results of operations if the resulting business chooses to use one of our competitors for the consolidated business. The loss of any of our large customers or distributors, as a result of consolidation or otherwise, could have a material adverse effect on our business, financial condition and results of operations.

 

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We rely on our distributor network and third-party delivery services for the distribution and export of certain of our products. A significant disruption in these services or significant increases in prices for those services may disrupt our ability to export material or increase our costs.

We ship a significant portion of our products to our customers through our distributor network as well as independent third-party delivery companies. If any of our key distributors or third-party delivery providers experiences a significant disruption such that our products cannot be delivered in a timely fashion or such that we incur additional shipping costs that we could not pass on to our customers, our costs may increase and our relationships with certain of our customers may be adversely affected. In addition, if our distributors or third-party delivery providers increase prices and we are not able to pass along these increases to customers, find comparable alternatives or adjust our delivery network, our business, financial condition and results of operations could be adversely affected.

We take on credit risk exposure from our customers in the ordinary course of our business.

We routinely offer customers pre-bates, loans and other financial incentives to purchase our products. These arrangements generally obligate the customer to purchase products from us and/or repay us for products over time. In the event that a customer is unwilling or unable to fulfill its obligations under these arrangements, we may incur a financial loss. In addition, in the ordinary course of our business, we guarantee certain of our customers’ obligations to third parties. Any default by our customers on their obligations could force us to make payments to the applicable creditor. It is possible that customer defaults on obligations owed to us and on third-party obligations that we have guaranteed could be significant, which could have a material adverse effect on our business, financial condition and results of operations.

Price increases or interruptions in the supply of raw materials could have a significant impact on our ability to grow or sustain earnings.

Our manufacturing processes consume significant amounts of raw materials, the costs of which are subject to worldwide supply and demand as well as other factors beyond our control. We use a significant amount of raw materials derived from crude oil and natural gas. As a result, volatile oil and gas prices can cause significant variations in our raw materials costs, affecting our operating results. Depending on our contractual arrangements and economic conditions, we may be unable to pass increased raw materials costs to our customers. If we are not able to fully offset the effects of higher raw materials costs, our financial results could deteriorate. In addition to the risks associated with raw materials price increases, supplier capacity constraints, supplier production disruptions or the unavailability of certain raw materials could result in supply imbalances that may have a material adverse effect on our business, financial condition and results of operations.

Failure to develop and market new products and manage product life cycles could impact our competitive position and have a material adverse effect on our business, financial condition and results of operations.

Our operating results are largely dependent on our development and management of our portfolio of current, new and developing products and services as well as our ability to bring those products and services to market. We plan to grow our business by focusing on developing and marketing our solutions to meet increasing demand for productivity. Our ability to execute this strategy and our other growth plans successfully could be adversely affected by difficulties or delays in product development, such as the inability to identify viable new products, successfully complete research and development, obtain relevant regulatory approvals, effectively manage our manufacturing process or costs, obtain intellectual property protection, or gain market acceptance of new products and services. Because of the lengthy and costly development process, technological challenges and intense competition, we cannot assure you that any of the products we are currently developing, or that we may develop in the future, will achieve substantial commercial success. For example, in addition to developing technologically advanced products, commercial success of those products will depend on customer acceptance and implementation of those products. A failure to develop commercially successful products or to develop

 

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additional uses for existing products could materially adversely affect our business, financial results or results of operations. Further, sales of our new products could replace sales of some of our current products, offsetting the benefit of even a successful product introduction.

Our business, financial condition and results of operations could be adversely impacted by business disruptions, security threats and security breaches.

Business disruptions, including supply disruptions, increasing costs for energy, temporary plant and/or power outages and information technology system and network disruptions, could harm our operations as well as the operations of our customers, distributors or suppliers. We face security threats and risks of security breaches to our facilities, data and information technology infrastructure. Although it is impossible to predict the occurrence or consequences of business disruptions, security threats or security breaches, they could harm our reputation, subject us to material liabilities, result in reduced demand for our products, make it difficult or impossible for us to deliver products to our customers or distributors or to receive raw materials from suppliers, and create delays and inefficiencies in our supply chain. Further, while we have designed and implemented controls to restrict access to our data and information technology infrastructure, it is still vulnerable to unauthorized access through cyber-attacks, theft and other security breaches.

Our efforts to minimize business disruptions and security breaches may fail. Such business disruptions and security breaches could significantly increase our cost of doing business, damage our reputation and/or have a material adverse effect on our business, financial condition and results of operations.

Our ability to conduct our business might be negatively impacted if we experience difficulties with outsourcing and similar third-party relationships.

We outsource certain business and administrative functions and rely on third parties to perform certain services on our behalf. We may do so increasingly in the future. If we fail to develop and implement our outsourcing strategies, such strategies prove to be ineffective or fail to provide expected cost savings, or our third party providers fail to perform as anticipated, we may experience operational difficulties, increased costs, reputational damage and a loss of business that may have a material adverse effect on our business, financial condition and results of operations. By utilizing third parties to perform certain business and administrative functions, we may be exposed to greater risk of data security breaches. Any breach of data security could damage our reputation and/or result in monetary damages, which, in turn could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to our Global Operations

As a global business, we are subject to risks associated with our non-U.S. operations that are not present in the United States.

We conduct our business on a global basis, with approximately 72% of our net sales for the LTM Period occurring outside the United States. We anticipate that international sales will continue to represent a substantial portion of our net sales and that our strategy for continued growth and profitability will entail further international expansion, particularly in emerging markets. Changes in local and regional economic conditions could affect product demand in our non-U.S. operations, including our Venezuelan operations. Specifically, our financial results could be affected by changes in trade, monetary and fiscal policies, laws and regulations, or other activities of U.S. and non-U.S. governments, agencies and similar organizations. These conditions include, but are not limited to, changes in a country’s or region’s social, economic or political conditions, trade regulations affecting production, pricing and marketing of products, local labor conditions and regulations, reduced protection of intellectual property rights in some countries, changes in the regulatory or legal environment, restrictions on currency exchange activities, burdensome taxes and tariffs and other trade barriers, as well as the imposition of economic or other trade sanctions, each of which could impact our ability to do business in certain jurisdictions or with certain persons. Our international operations also present risks associated

 

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with terrorism, political hostilities, war and other civil disturbances, the occurrence of which could lead to reduced net sales and profitability. Our international sales and operations are also sensitive to changes in foreign national priorities, including government budgets.

Our day-to-day operations outside the United States are subject to cultural and language barriers and the need to adopt different business practices in different geographic areas. In addition, we are required to create compensation programs, employment policies and other administrative programs that comply with the laws of multiple countries. We also must communicate and monitor standards and directives across our global operations. Our failure to successfully manage our geographically diverse operations could impair our ability to react quickly to changing business and market conditions and to enforce compliance with non-U.S. standards and procedures.

Any payment of distributions, loans or advances to and from our subsidiaries could be subject to restrictions on or taxation of, dividends or repatriation of earnings under applicable local law, monetary transfer restrictions, foreign currency exchange regulations in the jurisdictions in which our subsidiaries operate or other restrictions imposed by current or future agreements, including debt instruments, to which our non-U.S. subsidiaries may be a party. In particular, our operations in Brazil, China, India and Venezuela where we maintain local currency cash balances are subject to import authorization or pricing controls.

Since December 2014, we have utilized Venezuela’s Complementary System of Foreign Currency Administration (“SICAD I”) to translate our Venezuelan subsidiary’s financial statements into U.S. dollars. As a result of the continued challenging economic conditions in Venezuela, we have re-evaluated the exchange rate used for our Venezuelan subsidiary’s operations, including the impact on our non-U.S. dollar denominated monetary and non-monetary assets and liabilities. We believe that the equity of our Venezuelan subsidiary would be realized through a dividend utilizing the Marginal Foreign Exchange System (“SIMADI”) auction process due to the current illiquidity of SICAD I. Accordingly, as of June 30, 2015, we changed our foreign exchange rate to SIMADI, which currently approximates 197 Venezuelan Bolivars to 1 USD. The SIMADI rate compares to the SICAD I rate of 12 Venezuelan Bolivars to 1 USD. For additional information, see Note 9 to our Unaudited Condensed Consolidated Financial Statements included elsewhere in this prospectus.

We expect that this change in the exchange rate and the associated remeasurement will have a negative financial impact on our Venezuelan subsidiary’s non-U.S. dollar denominated net monetary assets, but we do not know the magnitude of the impact at this time. We are also currently assessing whether a potential impairment exists with respect to our non-monetary assets held by our Venezuelan subsidiary as a result of this change. Such assets are principally comprised of a real estate investment, plant, property & equipment, and definite-lived intangible assets which represent approximately $158.7 million as of June 30, 2015. Based on our preliminary analysis, we believe the impact of this translation rate change will have a significant, non-cash, impact on the current carrying value of our real estate investment which is currently $52.6 million of the $158.7 million as of June 30, 2015. As of the date of this prospectus, our impairment assessment on the remainder of our non-monetary assets has not been completed.

Our results of operations and/or financial condition could be adversely impacted, possibly materially, if we are unable to successfully manage these and other risks of international operations in a volatile environment.

Currency risk may adversely affect our financial condition and cash flows.

We derive a significant portion of our net sales from outside the United States and conduct our business and incur costs in the local currency of most countries in which we operate. Because our financial statements are presented in U.S. dollars, we must translate our financial results as well as assets and liabilities into U.S. dollars for financial statement reporting purposes at exchange rates in effect during or at the end of each reporting period, as applicable. Therefore, increases or decreases in the value of the U.S. dollar against other currencies in countries where we operate will affect our results of operations and the value of balance sheet items denominated in foreign currencies. In particular, we are exposed to the Euro, the Brazilian Real, the Chinese Yuan, the Venezuelan Bolívar and the Russian Ruble. For example, unfavorable movement in the Euro negatively impacted our results of operations in the second half of 2014, and the decline of the Euro could affect future periods.

 

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Furthermore, many of our local businesses import or buy raw materials in a currency other than their functional currency, which can impact the operating results for these operations if we are unable to mitigate the impact of the currency exchange fluctuations. We cannot accurately predict the effects of exchange rate fluctuations upon our future operating results because of the number of currencies involved, the variability of currency exposures and the potential volatility of currency exchange rates. Accordingly, fluctuations in foreign exchange rates may have an adverse effect on our financial condition and cash flows.

Terrorist acts, conflicts, wars and natural disasters may materially adversely affect our business, financial condition and results of operations.

As a multinational company with a large international footprint, we are subject to increased risk of damage or disruption to us, our employees, facilities, partners, suppliers, distributors, resellers or customers due to terrorist acts, conflicts, wars, adverse weather conditions, natural disasters, power outages, pandemics or other public health crises and environmental incidents, wherever located around the world. The potential for future terrorist attacks and natural disasters, the national and international responses to terrorist attacks and natural disasters or perceived threats to national security and other actual or potential conflicts or wars may create economic and political uncertainties. In addition, as a multinational company with headquarters and significant operations located in the United States, actions against or by the United States could result in a decrease in demand for our products, make it difficult or impossible to deliver products to our customers or to receive components from our suppliers, create delays and inefficiencies in our supply chain and pose risks to our employees, resulting in the need to impose travel restrictions. A catastrophic loss of the use of all or a portion of one of our key manufacturing facilities due to accident, labor issues, weather conditions, acts of war, political unrest, geopolitical risk, terrorist activity, natural disaster or otherwise, whether short- or long-term, and any interruption in production capability could require us to make substantial capital expenditures to remedy the situation, which could negatively affect our business, financial condition and results of operations.

Risks Related to Legal and Regulatory Compliance and Litigation

Our failure to comply with the anti-corruption laws of the United States and various international jurisdictions could negatively impact our reputation and results of operations.

Doing business on a global basis requires us to comply with the laws and regulations of the U.S. government and those of various international and sub-national jurisdictions, and our failure to successfully comply with these rules and regulations may expose us to liabilities. These laws and regulations apply to companies, individual directors, officers, employees and agents, and may restrict our operations, trade practices, investment decisions and partnering activities. In particular, our international operations are subject to U.S. and foreign anti-corruption laws and regulations, such as the U.S. Foreign Corrupt Practices Act (the “FCPA”), the United Kingdom Bribery Act 2010 (the “Bribery Act”) as well as anti-corruption laws of the various jurisdictions in which we operate. The FCPA, the Bribery Act and other laws prohibit us and our officers, directors, employees and agents acting on our behalf from corruptly offering, promising, authorizing or providing anything of value to foreign officials for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining favorable treatment. As part of our business, we deal with state-owned business enterprises, the employees and representatives of which may be considered foreign officials for purposes of the FCPA or the Bribery Act. We are subject to the jurisdiction of various governments and regulatory agencies outside of the United States, which may bring our personnel into contact with foreign officials responsible for issuing or renewing permits, licenses or approvals or for enforcing other governmental regulations. In addition, some of the international locations in which we operate lack a developed legal system and have elevated levels of corruption. Our global operations expose us to the risk of violating, or being accused of violating, the foregoing or other anti-corruption laws. Such violations could be punishable by criminal fines, imprisonment, civil penalties, disgorgement of profits, injunctions and exclusion from government contracts, as well as other remedial measures. Investigations of alleged violations can be very expensive, disruptive and damaging to our reputation. Although we have implemented anti-corruption policies and procedures and introduced training since becoming an independent

 

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company, there can be no guarantee that these policies, procedures and training will effectively prevent violations by our employees or representatives in the future. Additionally, we face a risk that our distributors and other business partners may violate the FCPA, the Bribery Act or similar laws or regulations. Such violations could expose us to FCPA and Bribery Act liability and/or our reputation may potentially be harmed by their violations and resulting sanctions and fines.

Our international operations require us to comply with anti-terrorism laws and regulations and applicable trade embargoes.

We are subject to trade and economic sanctions laws and other restrictions on international trade. The U.S. and other governments and their agencies impose sanctions and embargoes on certain countries, their governments and designated parties. In the United States, the economic and trade sanctions programs are principally administered and enforced by the U.S. Treasury Department’s Office of Foreign Assets Control. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other remedial measures and legal expenses, which could adversely affect our business, financial condition and results of operations. Although we have implemented trade-related policies and procedures and introduced training since becoming an independent company, we cannot assure you that such policies, procedures and training will effectively prevent violations in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations.

We cannot predict the nature, scope or effect of future regulatory requirements to which our international sales and manufacturing operations might be subject or the manner in which existing laws might be administered or interpreted. Future regulations could limit the countries in which some of our products may be manufactured or sold, or could restrict our access to, or increase the cost of obtaining, products from foreign sources. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.

We are subject to complex and evolving data privacy laws.

Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection and other matters. We could be liable for loss or misuse of our customers’ personal information and/or our employee’s personally-identifiable information if we fail to prevent or mitigate such misuse or breach. Although we have developed systems and processes that are designed to protect customer and employee information and prevent misuse of such information and other security breaches, failure to prevent or mitigate such misuse or breaches may affect our reputation and operating results negatively and may require significant management time and attention.

As a result of our current and past operations and/or products, including operations and/or products related to our businesses prior to the Acquisition, we could incur significant environmental liabilities and costs.

We are subject to various laws and regulations around the world governing the protection of environment and health and safety, including the discharge of pollutants to air and water and the management and disposal of hazardous substances. These laws and regulations not only govern our current operations and products, but also impose potential liability on us for our or our predecessors’ past operations. We could incur fines, penalties and other sanctions as a result of violations of such laws and regulations. In addition, as a result of our operations and/or products, including our past operations and/or products related to our businesses prior to the Acquisition, we could incur substantial costs, including costs relating to remediation and restoration activities and third-party claims for property damage or personal injury. The ultimate costs under environmental laws and the timing of these costs are difficult to accurately predict. Our accruals for costs and liabilities at sites where contamination is being investigated or remediated may not be adequate because the estimates on which the accruals are based depend on a number of factors including the nature of the matter, the complexity of the site, site geology, the nature and extent of contamination, the type of remedy, the outcome of discussions with regulatory agencies and,

 

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at multi-party sites, other Potentially Responsible Parties (“PRPs”) and the number and financial viability of other PRPs. Additional contamination may also be identified, and/or additional cleanup obligations may be incurred, at these or other sites in the future. For example, periodic monitoring or investigation activities are ongoing at a number of our sites where contaminants have been detected or are suspected, and we may incur additional costs if more active or extensive remediation is required. In addition, in connection with the Acquisition, DuPont has, subject to certain exceptions and exclusions, agreed to indemnify us for certain liabilities relating to environmental remediation obligations and certain claims relating to the exposure to hazardous substances and products manufactured prior to our separation from DuPont. We could incur material additional costs if DuPont fails to meet its obligations, if the indemnification proves insufficient or if we otherwise are unable to recover costs associated with such liabilities. The costs of our current operations complying with complex environmental laws and regulations, as well as internal voluntary programs, are significant and will continue to be so for the foreseeable future as environmental regulations become more stringent. These laws and regulations also change frequently, and we may incur additional costs complying with stricter environmental requirements that are promulgated in the future. Concerns over global climate change as well as more frequent and severe weather events have also promoted a number of legal and regulatory measures as well as social initiatives intended to reduce greenhouse gas and other carbon emissions. We cannot predict the impact that changing climate conditions or more frequent and severe weather events, if any, will have on our business, results of operations or financial condition. Moreover, we cannot predict how legal, regulatory and social responses to concerns about global climate change will impact our business.

As a producer of coatings, we transport certain materials that are inherently hazardous due to their toxic nature.

In our business, we handle and transport hazardous materials. If mishandled or released into the environment, these materials could cause substantial property damage or personal injuries resulting in significant legal claims against us. In addition, evolving regulations concerning the handling and transportation of certain materials could result in increased future capital or operating costs.

Our results of operations could be adversely affected by litigation.

We face risks arising from various litigation matters that have been asserted against us or that may be asserted against us in the future, including, but not limited to, claims for product liability, patent and trademark infringement, antitrust, warranty, contract and claims for third party property damage or personal injury. For instance, we have noted a nationwide trend in purported class actions against chemical manufacturers generally seeking relief such as medical monitoring, property damages, off-site remediation and punitive damages arising from alleged environmental torts without claiming present personal injuries. We have also noted a trend in public and private nuisance suits being filed on behalf of states, counties, cities and utilities alleging harm to the general public. In addition, various factors or developments can lead to changes in current estimates of liabilities such as a final adverse judgment, significant settlement or changes in applicable law. A future adverse ruling or unfavorable development could result in future charges that could have a material adverse effect on us. An adverse outcome in any one or more of these matters could be material to our business, financial condition and results of operations. In particular, product liability claims, regardless of their merits, could be costly, divert management’s attention and adversely affect our reputation and demand for our products.

Risks Related to Human Resources

We may not be able to recruit and retain the experienced and skilled personnel we need to compete.

Our future success depends on our ability to attract, retain, develop and motivate highly skilled personnel. We must have talented personnel to succeed and competition for senior management in our industry is intense. Our ability to meet our performance goals depends upon the personal efforts and abilities of the principal members of our senior management who provide strategic direction, develop our business, manage our operations and

 

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maintain a cohesive and stable work environment. We cannot assure you that we will retain or successfully recruit senior executives, or that their services will remain available to us.

We rely on qualified managers and skilled employees, such as scientists, with technical and manufacturing industry experience in order to operate our business successfully. From time to time, there may be a shortage of skilled labor, which may make it more difficult and expensive for us to attract and retain qualified employees. If we are unable to attract and retain sufficient numbers of qualified individuals or our costs to do so increase significantly, our operations could be materially adversely affected.

If we are required to make unexpected payments to any pension plans applicable to our employees, our financial condition may be adversely affected.

We have defined benefit pension plans in which many of our current and former employees outside the United States participate or have participated. Many of these plans are underfunded or unfunded and the liabilities in relation to these plans will need to be satisfied as they mature from our operating reserves. In jurisdictions where the defined benefit pension plans are intended to be funded with assets in a trust or other funding vehicle, the liabilities exceed the corresponding assets in many of the plans. Various factors, such as changes in actuarial estimates and assumptions (including as to life expectancy, discount rates and rate of return on assets) as well as actual return on assets, can increase the expenses and liabilities of the defined benefit pension plans. The assets and liabilities of the plans must be valued from time to time under applicable funding rules and as a result we may be required to increase the cash payments we make in relation to these defined benefit pension plans.

Our financial condition and results of operations may be adversely affected to the extent that we are required to make any additional payments to any relevant defined benefit pension plans in excess of the amounts assumed in our current projections and assumptions or report higher pension plan expenses under relevant accounting rules.

We are subject to work stoppages, union negotiations, labor disputes and other matters associated with our labor force, which may adversely impact our operations and cause us to incur incremental costs.

Many of our employees globally are in unions or otherwise covered by labor agreements, including works councils. As of March 31, 2015, approximately 0.5% of our U.S. workforce was unionized and approximately 64% of our workforce outside the United States was unionized or otherwise covered by labor agreements. Consequently, we may be subject to potential union campaigns, work stoppages, union negotiations and other potential labor disputes. Additionally, negotiations with unions or works councils in connection with existing labor agreements may result in significant increases in our cost of labor, divert management’s attention away from operating our business or break down and result in the disruption of our operations. The occurrence of any of the preceding outcomes could impair our ability to manufacture our products and result in increased costs and/or decreased operating results. Further, we may be impacted by work stoppages at our suppliers or customers that are beyond our control.

Risks Related to Intellectual Property

Our inability to protect and enforce our intellectual property rights could adversely affect our financial results.

Intellectual property rights both in the United States and in foreign countries, including patents, trade secrets, confidential information, trademarks and trade names are important to our business and will be critical to our ability to grow and succeed in the future. We make strategic decisions on whether to apply for intellectual property protection and what kind of protection to pursue based on a cost benefit analysis. While we endeavor to protect our intellectual property rights in certain jurisdictions in which our products are produced or used and in jurisdictions into which our products are imported, the decision to file for intellectual property protection is made on a case-by-case basis. Because of the differences in foreign trademark, patent and other laws concerning

 

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proprietary rights, our intellectual property rights may not receive the same degree of protection in foreign countries as they would in the United States. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, financial condition and results of operations.

We have applied for patent protection relating to certain existing and proposed products, processes and services in certain jurisdictions. While we generally consider applying for patents in those countries where we intend to make, have made, use, or sell patented products, we may not accurately assess all of the countries where patent protection will ultimately be desirable. If we fail to timely file a patent application in any such country, we may be precluded from doing so at a later date. Furthermore, we cannot assure you that our pending patent applications will not be challenged by third parties or that such applications will eventually be issued by the applicable patent offices as patents. We also cannot assure that the patents issued as a result of our foreign patent applications will have the same scope of coverage as our U.S. patents. It is possible that only a limited number of the pending patent applications will result in issued patents, which may have a materially adverse effect on our business and results of operations.

The patents we own could be challenged, invalidated or circumvented by others and may not be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage. Furthermore, our existing patents are subject to challenges from third parties that may result in invalidations and will all eventually expire, after which we will not be able to prevent our competitors from using our previously patented technologies, which could materially adversely affect our competitive advantage stemming from those products and technologies. We also cannot assure that competitors will not infringe our patents, or that we will have adequate resources to enforce our patents.

We also rely on unpatented proprietary technology. It is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology. To protect our trade secrets and other proprietary information, we require certain employees, consultants, advisors and collaborators to enter into confidentiality agreements as we deem appropriate. We cannot assure you that we will be able to enter into these confidentiality agreements or that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. If we are unable to maintain the proprietary nature of our technologies, we could be materially adversely affected.

We rely on our trademarks, trade names and brand names to distinguish our products from the products of our competitors, and have registered or applied to register many of these trademarks. We cannot assure you that our trademark applications will be approved. Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition, and could require us to devote resources to advertising and marketing new brands. Further, we cannot assure you that competitors will not infringe our trademarks, or that we will have adequate resources to enforce our trademarks. We also license third parties to use our trademarks. In an effort to preserve our trademark rights, we enter into license agreements with these third parties that govern the use of our trademarks and contain limitations on their use. Although we make efforts to police the use of our trademarks by our licensees, we cannot assure you that these efforts will be sufficient to ensure that our licensees abide by the terms of their licenses. In the event that our licensees fail to do so, our trademark rights could be diluted.

If we are sued for infringing intellectual property rights of third parties, it may be costly and time consuming, and an unfavorable outcome in any litigation could harm our business.

We cannot assure you that our activities will not, unintentionally or otherwise, infringe on the patents, trademarks or other intellectual property rights owned by others. We may spend significant time and effort and incur significant litigation costs if we are required to defend ourselves against intellectual property rights claims

 

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brought against us, regardless of whether the claims have merit. If we are found to have infringed on the patents, trademarks or other intellectual property rights of others, we may be subject to substantial claims for damages, which could materially impact our cash flow, business, financial condition and results of operations. We may also be required to cease development, use or sale of the relevant products or processes, or we may be required to obtain a license on the disputed rights, which may not be available on commercially reasonable terms, if at all.

Risks Related to Other Aspects of our Business

We may engage in acquisitions and divestitures, and may encounter difficulties integrating acquired businesses with, or disposing of divested businesses from, our current operations and, as a result, we may not realize the anticipated benefits of these acquisitions and divestitures.

We may seek to grow through strategic acquisitions, joint ventures or other arrangements. Our due diligence reviews in these transactions may not identify all of the material issues necessary to accurately estimate the cost or potential loss contingencies with respect to a particular transaction, including potential exposure to regulatory sanctions resulting from a counterparty’s previous activities. We may incur unanticipated costs or expenses, including post-closing asset impairment charges, expenses associated with eliminating duplicate facilities, litigation and other liabilities. We may also face regulatory scrutiny as a result of perceived concentration in certain markets, which could cause additional delay or prevent us from completing certain acquisitions that would be beneficial to our business. We may also encounter difficulties in integrating acquisitions with our operations, applying our internal controls processes to these acquisitions or in managing strategic investments. Additionally, we may not achieve the benefits we anticipate when we first enter into a transaction in the amount or timeframe anticipated. Any of the foregoing could adversely affect our business and results of operations. In addition, accounting requirements relating to business combinations, including the requirement to expense certain acquisition costs as incurred, may cause us to experience greater earnings volatility and generally lower earnings during periods in which we acquire new businesses. Furthermore, we may make strategic divestitures from time to time. These divestitures may result in continued financial involvement in the divested businesses, such as through indemnities, guarantees or other financial arrangements. These arrangements could result in financial obligations imposed upon us and could affect our future financial condition and results of operations.

Our joint ventures may not operate according to our business strategy if our joint venture partners fail to fulfill their obligations.

As part of our business, we have entered into certain joint venture arrangements, and may enter into additional joint venture arrangements in the future. The nature of a joint venture requires us to share control over significant decisions with unaffiliated third parties. Since we may not exercise control over our current or future joint ventures, we may not be able to require our joint ventures to take actions that we believe are necessary to implement our business strategy. Additionally, differences in views among joint venture participants may result in delayed decisions or failures to agree on major issues. If these differences cause the joint ventures to deviate from our business strategy, our results of operations could be materially adversely affected.

The insurance we maintain may not fully cover all potential exposures.

Our product liability, property, business interruption and casualty insurance coverages may not cover all risks associated with the operation of our business and may not be sufficient to offset the costs of any losses, lost sales or increased costs experienced during business interruptions. For some risks, we elect not to obtain insurance. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance policies may become unavailable or available only for reduced amounts of coverage. As a result, we may not be able to renew our insurance policies or procure other desirable insurance on commercially reasonable terms, if at all. Losses and liabilities from uninsured or underinsured events and delay in the payment of insurance proceeds could have a material adverse effect on our business, financial condition and results of operations.

 

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We may need to recognize impairment charges related to goodwill, identifiable intangible assets and fixed assets.

Under the acquisition method of accounting, the net assets acquired were recorded at fair value as of the date of the Acquisition, with any excess purchase price allocated to goodwill. The Acquisition resulted in significant balances of goodwill and identifiable intangible assets. We are required to test goodwill and any other intangible asset with an indefinite life for possible impairment on the same date each year, unless conditions exist that would require a more frequent evaluation. We are also required to evaluate amortizable intangible assets and fixed assets for impairment if there are indicators of a possible impairment.

There is significant judgment required in the analysis of a potential impairment of goodwill, identified intangible assets and fixed assets. If, as a result of a general economic slowdown, deterioration in one or more of the markets in which we operate or impairment in our financial performance and/or future outlook, the estimated fair value of our long-lived assets decreases, we may determine that one or more of our long-lived assets is impaired. An impairment charge would be determined based on the estimated fair value of the assets and any such impairment charge could have a material adverse effect on our results of operations and financial position.

We recently completed the transition of our IT systems. If we experience any issues related to the recent transition, it may have a material adverse effect on our results of operations.

We recently completed the transition of IT systems from DuPont to our own platform, including the establishment of a global IT support team. There are inherent risks associated with transitioning and changing these types of systems, and while we completed the transition in October 2014, if there are any issues surrounding this recent transition, it could result in a potential disruption of our business and substantial unplanned costs, which could have a material adverse effect on our business, financial condition or results of operations.

Our Predecessor financial information may not be comparable to the Successor financial information.

Our Predecessor financial information may not reflect what our results of operations and cash flows would have been had we been a separate, standalone entity during those periods and may not be indicative of what our results of operations and cash flows will be in the future. As a result, you have limited information on which to evaluate our business. This is primarily because:

 

  •   Our Predecessor combined financial information has been derived from the financial statements and accounting records of DuPont and reflects assumptions made by DuPont. Those assumptions and allocations may be different from the comparable expenses we would have incurred as a standalone company;

 

  •   Certain general corporate expenses were historically allocated to the Predecessor period by DuPont that, while reasonable, may not be indicative of the actual expenses that would have been incurred had we been operating as a standalone company, nor are they indicative of the costs that will be incurred in the future as a standalone company;

 

  •   Our working capital requirements historically were satisfied as part of DuPont’s corporate-wide cash management policies. Since becoming a standalone company, we no longer rely on DuPont for working capital. In connection with the Acquisition, we incurred a large amount of indebtedness and will therefore assume significant debt service costs. As a result, our cost of debt and capitalization is significantly different from that reflected in the Predecessor financial information; and

 

  •   Following the Acquisition, we have experienced increases in our costs, including the cost to establish an appropriate accounting and reporting system, debt service obligations, providing healthcare and other costs of being a standalone company.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 8 to our Audited Consolidated and Combined Financial Statements contained elsewhere in this prospectus.

 

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DuPont’s potential breach of its obligations in connection with the Acquisition, including failure to comply with its indemnification obligations, may materially affect our business and operating results.

Although the Acquisition closed on February 1, 2013, DuPont still has performance obligations to us, such as transferring pension assets and fulfilling indemnification requirements. We could incur material additional costs if DuPont fails to meet its obligations or if we otherwise are unable to recover costs associated with such liabilities.

If we are treated as a financial institution under FATCA, withholding tax may be imposed on payments on our common shares.

Sections 1471 through 1474 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), and applicable Treasury Regulations commonly referred to as “FATCA” may impose 30% withholding on “foreign passthru payments” made by a “foreign financial institution” (each as defined in the Code) that has entered into an agreement with the U.S. Internal Revenue Service to perform certain diligence and reporting obligations with respect to the foreign financial institution’s U.S.-owned accounts. Such withholding on “foreign passthru payments” will apply from January 1, 2017 at the earliest. The applicable Treasury Regulations treat an entity as a “financial institution” if it is a holding company formed in connection with or availed of by a private equity fund or other similar investment vehicle established with an investment strategy of investing, reinvesting, or trading in financial assets. The term “foreign passthru payment” is currently not defined. The United States has entered into an intergovernmental agreement (an “IGA”) with Bermuda, which modifies the FATCA withholding regime described above. It is not clear whether we would be treated as a financial institution subject to the diligence, reporting and withholding obligations under FATCA or the Bermuda IGA. Furthermore, it is not yet clear how the Bermuda IGA will address foreign passthru payments. Prospective investors should consult their tax advisors regarding the potential impact of FATCA, the Bermudan IGA and any non-U.S. legislation implementing FATCA, on their investment in our common shares.

We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. Holders of our common shares.

Based on the anticipated market price of our common shares in this offering and expected price of our common shares following this offering, and the composition of our income, assets and operations, we do not expect to be treated as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes for the current taxable year or in the foreseeable future. However, the application of the PFIC rules is subject to uncertainty in several respects, and we cannot assure you the U.S. Internal Revenue Service will not take a contrary position. Furthermore, this is a factual determination that must be made annually after the close of each taxable year. If we are a PFIC for any taxable year during which a U.S. person holds our common shares, certain adverse U.S. federal income tax consequences could apply to such U.S. person. See “Taxation—U.S. Federal Income Tax Considerations—Passive Foreign Investment Company.”

Risks Related to our Indebtedness

Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy and our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations with respect to our indebtedness.

As of March 31, 2015, we had approximately $3.6 billion of indebtedness on a consolidated basis, including $750.0 million of our Dollar Senior Notes, $270.4 million of our Euro Senior Notes, $2,159.8 million of the Dollar Term Loan Facility (as defined herein) and $425.0 million of the Euro Term Loan Facility (as defined herein). In addition, we had no outstanding borrowings under our Revolving Credit Facility (as defined herein) and approximately $378.7 million in borrowing capacity available under our Revolving Credit Facility, after

 

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giving effect to $21.3 million of outstanding letters of credit. As of March 31, 2015, we were in compliance with all of the covenants under our outstanding debt instruments.

Our substantial indebtedness could have important consequences to you. For example, it could:

 

  •   limit our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions, general corporate purposes or other purposes;

 

  •   require us to devote a substantial portion of our annual cash flow to the payment of interest on our indebtedness;

 

  •   expose us to the risk of increased interest rates as, over the term of our debt, the interest cost on a significant portion of our indebtedness is subject to changes in interest rates;

 

  •   hinder our ability to adjust rapidly to changing market conditions;

 

  •   limit our ability to secure adequate bank financing in the future with reasonable terms and conditions or at all; and

 

  •   increase our vulnerability to and limit our flexibility in planning for, or reacting to, a potential downturn in general economic conditions or in one or more of our businesses.

We are more leveraged than some of our competitors, which could adversely affect our business plans. A relatively greater portion of our cash flow is used to service debt and other financial obligations. This reduces the funds we have available for working capital, capital expenditures, acquisitions and other purposes and, given current credit constriction, may make it more difficult for us to make borrowings in the future. Similarly, our relatively greater leverage increases our vulnerability to, and limits our flexibility in planning for, adverse economic and industry conditions and creates other competitive disadvantages compared with other companies with relatively less leverage.

In addition, the indentures governing the Senior Notes and the agreements governing our Senior Secured Credit Facilities contain affirmative and negative covenants that limit our and certain of our subsidiaries’ ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all of our debts.

To service all of our indebtedness, we will require a significant amount of cash and our ability to generate cash depends on many factors beyond our control.

Our operations are conducted through our subsidiaries and our ability to make cash payments on our indebtedness will depend on the earnings and the distribution of funds from our subsidiaries. None of our subsidiaries, however, is obligated to make funds available to us for payment on our indebtedness. Further, the terms of the instruments governing our indebtedness significantly restrict our subsidiaries from paying dividends and otherwise transferring assets to us. Our ability to make cash payments on and refinance our debt obligations, to fund planned capital expenditures and to meet other cash requirements will depend on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to financial, business, legislative, regulatory and other factors beyond our control. We might not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

Our business may not generate sufficient cash flow from operations and future borrowings may not be available under our Senior Secured Credit Facilities in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs, including planned capital expenditures. In such circumstances, we may need to refinance all or a portion of our indebtedness on or before maturity. We may not be able to refinance any of our indebtedness on commercially reasonable terms or at all. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures,

 

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strategic acquisitions, investments and alliances. Such actions, if necessary, may not be effected on commercially reasonable terms or at all. The instruments governing our indebtedness restrict our ability to sell assets and our use of the proceeds from such sales, and we may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due.

If we are unable to generate sufficient cash flow or are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under our Revolving Credit Facility could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to obtain waivers from the required lenders under the credit agreement governing our Senior Secured Credit Facilities to avoid being in default. If we breach our covenants under our Senior Secured Credit Facilities or we are in default thereunder and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under the credit agreement governing our Senior Secured Credit Facilities, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.

Despite our current level of indebtedness and restrictive covenants, we and our subsidiaries may incur additional indebtedness or we may pay dividends in the future. This could further exacerbate the risks associated with our substantial financial leverage.

We and our subsidiaries may incur significant additional indebtedness under the agreements governing our indebtedness. Although the indentures governing the Senior Notes and the credit agreement governing our Senior Secured Credit Facilities contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of thresholds, qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. Additionally, these restrictions also will not prevent us from incurring obligations that, although preferential to our common shares in terms of payment, do not constitute indebtedness. As of March 31, 2015, we had $378.7 million of additional borrowing capacity under our Revolving Credit Facility, after giving effect to $21.3 million of outstanding letters of credit.

In addition, if new debt is added to our and/or our subsidiaries’ debt levels, the related risks that we now face as a result of our leverage would intensify. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.”

We are dependent upon our lenders for financing to execute our business strategy and meet our liquidity needs. If our lenders are unable or unwilling to fund borrowings under their credit commitments or we are unable to borrow, it could negatively impact our business.

We are dependent upon our lenders for financing to execute our business strategy and meet our liquidity needs. If our lenders are unable to fund borrowings under their credit commitments or we are unable to borrow from them for any reason, our business could be negatively impacted. During periods of volatile credit markets, there is risk that any lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their legal commitments and obligations under existing credit commitments, including, but not limited to, extending credit up to the maximum permitted by a credit facility, allowing access to additional credit features and otherwise accessing capital and/or honoring loan commitments. If our lenders are unable or unwilling to fund borrowings under their revolving credit commitments or we are unable to borrow from them, it could be difficult in such environments to obtain sufficient liquidity to meet our operational needs.

Our ability to obtain additional capital on commercially reasonable terms may be limited.

Although we believe our cash and cash equivalents, together with cash we expect to generate from operations and unused capacity available under our Revolving Credit Facility, provide adequate resources to fund ongoing operating requirements, we may need to seek additional financing to compete effectively.

 

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If we are unable to obtain capital on commercially reasonable terms, it could:

 

  •   reduce funds available to us for purposes such as working capital, capital expenditures, research and development, strategic acquisitions and other general corporate purposes;

 

  •   restrict our ability to introduce new products or exploit business opportunities;

 

  •   increase our vulnerability to economic downturns and competitive pressures in the markets in which we operate; and

 

  •   place us at a competitive disadvantage.

Difficult and volatile conditions in the capital, credit and commodities markets and in the overall economy could have a material adverse effect on our financial position, results of operations and cash flows.

Difficult global economic conditions, including concerns about sovereign debt and significant volatility in the capital, credit and commodities markets, could have a material adverse effect on our financial position, results of operations and cash flows. These global economic factors, combined with low levels of business and consumer confidence and high levels of unemployment, have precipitated a slow recovery from the global recession and concern about a return to recessionary conditions. The difficult conditions in these markets and the overall economy affect our business in a number of ways. For example:

 

  •   as a result of the volatility in commodity prices, we may encounter difficulty in achieving sustained market acceptance of past or future price increases, which could have a material adverse effect on our financial position, results of operations and cash flows;

 

  •   under difficult market conditions there can be no assurance that borrowings under our Revolving Credit Facility would be available or sufficient, and in such a case, we may not be able to successfully obtain additional financing on reasonable terms, or at all;

 

  •   in order to respond to market conditions, we may need to seek waivers from various provisions in the credit agreement governing our Senior Secured Credit Facilities, and in such case, there can be no assurance that we can obtain such waivers at a reasonable cost, if at all;

 

  •   market conditions could cause the counterparties to the derivative financial instruments we may use to hedge our exposure to interest rate, commodity or currency fluctuations to experience financial difficulties and, as a result, our efforts to hedge these exposures could prove unsuccessful and, furthermore, our ability to engage in additional hedging activities may decrease or become more costly; and

 

  •   market conditions could result in our key customers experiencing financial difficulties and/or electing to limit spending, which in turn could result in decreased sales and earnings for us.

In general, downturns in economic conditions can cause fluctuations in demand for our and our customers’ products, product prices, volumes and margins. Future economic conditions may not be favorable to our industry and future growth in demand for our products, if any, may not be sufficient to alleviate any existing or future conditions of excess industry capacity. A decline in the demand for our products or a shift to lower-margin products due to deteriorating economic conditions could have a material adverse effect on our financial condition and results of operations and could also result in impairments of certain of our assets. We do not know if market conditions or the state of the overall economy will continue to improve in the near future. We cannot provide assurance that a continuation of current economic conditions or a further economic downturn in one or more of the geographic regions in which we sell our products would not have a material adverse effect on our business, financial condition and results of operations.

Our debt obligations may limit our flexibility in managing our business.

The indentures governing our Senior Notes and the credit agreement governing our Senior Secured Credit Facilities require us to comply with a number of customary financial and other covenants, such as maintaining

 

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leverage ratios in certain situations and maintaining insurance coverage. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.” These covenants may limit our flexibility in our operations, and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness even if we had satisfied our payment obligations. If we were to default on the indentures governing our Senior Notes, the credit agreement governing our Senior Secured Credit Facilities or other debt instruments, our financial condition and liquidity would be adversely affected.

Risks Related to this Offering and Ownership of our Common Shares

Axalta Coating Systems Ltd. is a holding company with no operations of its own. Because our operations are conducted almost entirely through our subsidiaries and joint ventures, we are largely dependent on our receipt of distributions and dividends or other payments from our subsidiaries and joint ventures for cash to fund all of our operations and expenses, including to make future dividend payments, if any.

Our operations are conducted almost entirely through our subsidiaries and our ability to generate cash to meet our debt service obligations or to make future dividend payments, if any, is highly dependent on the earnings and the receipt of funds from our subsidiaries in the form of dividends, loans or advances and through repayment of loans or advances from us. Payments to us by our subsidiaries and joint ventures will be contingent upon our subsidiaries’ or joint ventures’ earnings and other business considerations and may be subject to statutory or contractual restrictions. We do not currently expect to declare or pay dividends on our common shares for the foreseeable future; however, to the extent that we determine in the future to pay dividends on our common shares, the credit agreement governing our Senior Secured Credit Facilities and the indentures governing the Senior Notes significantly restrict the ability of our subsidiaries to pay dividends or otherwise transfer assets to us. In addition, Bermuda law imposes requirements that may restrict our ability to pay dividends to holders of our common shares. In addition, there may be significant tax and other legal restrictions on the ability of foreign subsidiaries or joint ventures to remit money to us.

The price of our common shares may fluctuate significantly, and you could lose all or part of your investment.

Volatility in the market price of our common shares may prevent you from being able to sell your common shares at or above the price you paid for your common shares. The market price of our common shares could fluctuate significantly for various reasons, including:

 

  •   our operating and financial performance and prospects;

 

  •   our quarterly or annual earnings or those of other companies in our industry;

 

  •   the public’s reaction to our press releases, our other public announcements and our filings with the SEC;

 

  •   changes in, or failure to meet, earnings estimates or recommendations by research analysts who track our common shares or the stock of other companies in our industry;

 

  •   the failure of research analysts to cover our common shares;

 

  •   strategic actions by us, our customers or our competitors, such as acquisitions or restructurings;

 

  •   new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

 

  •   changes in accounting standards, policies, guidance, interpretations or principles;

 

  •   the impact on our profitability temporarily caused by the time lag between when we experience cost increases until these increases flow through cost of sales because of our method of accounting for inventory, or the impact from our inability to pass on such price increases to our customers;

 

  •   material litigations or government investigations;

 

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  •   changes in general conditions in the United States and global economies or financial markets, including those resulting from war, incidents of terrorism or responses to such events;

 

  •   changes in key personnel;

 

  •   sales of common shares by us, Carlyle, Berkshire or members of our management team;

 

  •   termination or expiration of lock-up agreements with our management team and principal shareholders;

 

  •   the granting of restricted common shares, stock options and other equity awards;

 

  •   volume of trading in our common shares; and

 

  •   the realization of any risks described under this “Risk Factors” section.

In addition, over the past several years, the stock markets have experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our common shares could fluctuate based upon factors that have little or nothing to do with our company, and these fluctuations could materially reduce our share price and cause you to lose all or part of your investment. Further, in the past, market fluctuations and price declines in a company’s stock have led to securities class action litigations. If such a suit were to arise, it could have a substantial cost and divert our resources regardless of the outcome.

If we fail to maintain proper and effective internal controls over financial reporting, our ability to produce accurate and timely financial statements could be impaired and investors’ views of us could be harmed.

The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. One key aspect of the Sarbanes-Oxley Act is that we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, with auditor attestation of the effectiveness of our internal controls, beginning with our annual report on Form 10-K for the fiscal year ending December 31, 2015. If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our common shares could decline and we could be subject to sanctions or investigations by the NYSE, the SEC or other regulatory authorities, which would require additional financial and management resources.

Our ability to successfully implement our business plan and comply with the Sarbanes-Oxley Act requires us to be able to prepare timely and accurate financial statements, among other requirements. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, may cause our operations to suffer and we may be unable to conclude that our internal control over financial reporting is effective and to obtain an unqualified report on internal controls from our auditors. Moreover, we cannot be certain that these measures would ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Even if we were to conclude, and our independent registered public accounting firm were to concur, that our internal control over financial reporting provided reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. This, in turn, could have an adverse impact on the market price for our common shares, and could adversely affect our ability to access the capital markets.

 

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We have incurred and will continue to incur increased costs as a result of operating as a publicly traded company, and our management will be required to devote substantial time to new compliance initiatives.

As a publicly traded company, we have incurred and will continue to incur additional legal, accounting and other expenses that we did not previously incur. In addition, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules of the SEC and the NYSE impose various requirements on public companies. Our management and other personnel devote a substantial amount of time to these compliance initiatives as well as investor relations. Moreover, these rules and regulations have increased our legal and financial compliance costs and have made some activities more time-consuming and costly. For example, these rules and regulations make it more difficult and more expensive for us to obtain director and officer liability insurance, and we have incurred additional costs to maintain such coverage. Furthermore, if we are not able to comply with these requirements in a timely manner, the market price of our common shares could decline and we could be subject to potential delisting by the NYSE and review by the NYSE, the SEC, or other regulatory authorities, which would require the expenditure by us of additional financial and management resources and could harm our business and the market price of our common shares.

We are no longer a controlled company, and we may have difficulties complying with NYSE rules relating to the composition of our Board of Directors.

Our common shares are listed on the NYSE. Prior to April 2015, we were a controlled company under NYSE rules, meaning that we were not subject to a number of corporate governance rules relating to composition of our Board of Directors and certain committees. Following the sales of common shares by Carlyle in April 2015, we are no longer a controlled company. Under NYSE rules, we are required to phase into compliance with certain requirements from which we were previously exempt, including:

 

  •   the requirement that a majority of the Board of Directors consist of independent directors;

 

  •   the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

  •   the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

  •   the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.

We intend to comply with these NYSE rules. However, we may not be able to attract and retain the number of independent directors needed to comply with NYSE rules during the phase-in period for compliance.

Carlyle will continue to have the ability to significantly influence our decisions, and their interests in our business may be different from yours.

As of June 1, 2015, Carlyle owned 44.3% of our common shares. Following this offering, Carlyle will own 29.5% of our common shares (or 27.2% of our common shares if the underwriters exercise their option to purchase additional shares in full) and will continue to exercise significant influence over our affairs. Pursuant to a principal stockholders agreement, a majority of our Board of Directors has been designated by Carlyle. See “Certain Relationships and Related Person Transactions.” As a result, Carlyle and its designees to our Board of Directors currently have the ability to control the appointment of our management, any determination to enter into a merger, sales of substantially all or all of our assets and other extraordinary transactions and any amendments to our memorandum of association or bye-laws. Pursuant to our principal stockholders agreement, following this offering, Carlyle will continue to have the ability to designate a majority of our directors until it owns less than 25% of our outstanding common shares and, as a result, until such time, they will exercise significant influence over the vote in any election of directors and will have the ability to prevent any transaction

 

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that requires shareholder approval regardless of whether other shareholders believe the transaction is in our best interests. In any of these matters, the interests of Carlyle may differ from or conflict with your interests. Moreover, this concentration of share ownership may also adversely affect the trading price for our common shares to the extent investors perceive disadvantages in owning shares of a company with a controlling shareholder.

In addition, Carlyle is in the business of making investments in companies and may, from time to time, acquire interests in businesses that directly or indirectly compete with our business, as well as businesses that are our significant existing or potential suppliers or customers. Carlyle may acquire or seek to acquire assets that we seek to acquire and, as a result, those acquisition opportunities may not be available to us or may be more expensive for us to pursue.

We do not intend to pay dividends on our common shares and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common shares.

We do not intend to declare and pay dividends on our common shares for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth and potentially reduce our indebtedness. Therefore, you are not likely to receive any dividends on your common shares for the foreseeable future and the success of an investment in our common shares will depend upon any future appreciation in their value. There is no guarantee that our common shares will appreciate in value or even maintain the price at which our shareholders have purchased their shares. The payment of future dividends, however, will be at the discretion of our Board of Directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our Board of Directors deems relevant. The credit agreement governing our Senior Secured Credit Facilities and the indentures governing the Senior Notes also effectively limit our ability to pay dividends. As a consequence of these limitations and restrictions, we may not be able to make, or may have to reduce or eliminate, the payment of dividends on our common shares.

Future sales of our common shares in the public market could lower our share price, and any additional capital raised by us through the sale of equity or convertible debt securities may dilute your ownership in us and may adversely affect the market price of our common shares.

We and our shareholders may sell additional common shares in subsequent offerings. We may also issue additional common shares or convertible debt securities. As of June 1, 2015, we had 1,000,000,000 common shares authorized and 235,258,147 common shares outstanding. This number includes 35,000,000 common shares that the selling shareholders are selling in this offering (or 40,250,000 common shares if the underwriters exercise their option to purchase additional shares in full), which may be resold immediately in the public market. Of the remaining common shares, 70,983,699, or 30.2% of our total outstanding common shares (or 65,733,699 shares, or 27.9% of our total outstanding common shares, if the underwriters exercise their option to purchase additional shares in full), are restricted from immediate resale under the lock-up agreements between our executive officers, directors and certain of our current shareholders, on the one hand, and the underwriters, on the other hand, as described in “Underwriting,” but may be sold into the market in the near future. These shares will become available for sale following the expiration of the lock-up agreements entered into in connection with this offering, which, without the prior consent of the representatives of the underwriters, expire 45 days after the date of this prospectus (subject to certain exceptions and automatic extensions in certain circumstances), subject to compliance with the applicable requirements under Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”).

We cannot predict the size of future issuances or sales of our common shares or the effect, if any, that future issuances and sales of our common shares will have on the market price of our common shares. Sales of substantial amounts of our common shares (including sales that may occur pursuant to the registration rights of Carlyle and/or Berkshire, sales by members of management and shares that may be issued in connection with an

 

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acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our common shares. See “Certain Relationships and Related Person Transactions” and “Shares Eligible for Future Sale.”

We are a Bermuda company and it may be difficult for you to enforce judgments against us or our directors and executive officers.

We are a Bermuda exempted company. As a result, the rights of our shareholders are governed by Bermuda law and our memorandum of association and bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in another jurisdiction, and a substantial portion of our assets are located outside the United States. As a result, it may be difficult for investors to effect service of process on those persons in the United States or to enforce in the United States judgments obtained in U.S. courts against us or those persons based on the civil liability provisions of the U.S. securities laws. It is doubtful whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the United States, against us or our directors or officers under the securities laws of those jurisdictions or entertain actions in Bermuda against us or our directors or officers under the securities laws of other jurisdictions.

Bermuda law differs from the laws in effect in the United States and may afford less protection to our shareholders.

We are organized under the laws of Bermuda. As a result, our corporate affairs are governed by the Companies Act 1981 (the “Companies Act”), which differs in some material respects from laws typically applicable to U.S. corporations and shareholders, including the provisions relating to interested directors, amalgamations, mergers and acquisitions, takeovers, shareholder lawsuits and indemnification of directors. Generally, the duties of directors and officers of a Bermuda company are owed to the company only. Shareholders of Bermuda companies typically do not have rights to take action against directors or officers of the company and may only do so in limited circumstances. Shareholder class actions are not available under Bermuda law. The circumstances in which shareholder derivative actions may be available under Bermuda law are substantially more proscribed and less clear than they would be to shareholders of U.S. corporations. The Bermuda courts, however, would ordinarily be expected to permit a shareholder to commence an action in the name of a company to remedy a wrong to the company where the act complained of is alleged to be beyond the corporate power of the company or illegal, or would result in the violation of the company’s memorandum of association or bye-laws. Furthermore, consideration would be given by a Bermuda court to acts that are alleged to constitute a fraud against the minority shareholders or, for instance, where an act requires the approval of a greater percentage of the company’s shareholders than those who actually approved it.

When the affairs of a company are being conducted in a manner that is oppressive or prejudicial to the interests of some shareholders, one or more shareholders may apply to the Supreme Court of Bermuda, which may make such order as it sees fit, including an order regulating the conduct of the company’s affairs in the future or ordering the purchase of the shares of any shareholders by other shareholders or by the company. Additionally, under our bye-laws and as permitted by Bermuda law, each shareholder has waived any claim or right of action against our directors or officers for any action taken by directors or officers in the performance of their duties, except for actions involving fraud or dishonesty. In addition, the rights of our shareholders and the fiduciary responsibilities of our directors under Bermuda law are not as clearly established as under statutes or judicial precedent in existence in jurisdictions in the United States, particularly the State of Delaware. Therefore, our shareholders may have more difficulty protecting their interests than would shareholders of a corporation incorporated in a jurisdiction within the United States.

 

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We have anti-takeover provisions in our bye-laws that may discourage a change of control.

Our bye-laws contain provisions that could make it more difficult for a third party to acquire us without the consent of our Board of Directors. These provisions provide for:

 

  •   a classified Board of Directors with staggered three-year terms;

 

  •   directors only to be removed for cause once the number of common shares owned by Carlyle ceases to be more than 50%;

 

  •   restrictions on the time period in which directors may be nominated; and

 

  •   our Board of Directors to determine the powers, preferences and rights of our preference shares and to issue the preference shares without shareholder approval.

These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company and may prevent our shareholders from receiving the benefit from any premium to the market price of our common shares offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common shares if the provisions are viewed as discouraging takeover attempts in the future. These provisions could also discourage proxy contests, make it more difficult for you and other shareholders to elect directors of your choosing and cause us to take corporate actions other than those you desire. See “Description of Share Capital.”

 

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FORWARD LOOKING STATEMENTS

Many statements made in this prospectus that are not statements of historical fact, including statements about our beliefs and expectations, are “forward-looking statements” within the meaning of Section 27A of the Securities Act 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 and strategies. These statements often include words such as “anticipate,” “expect,” “suggests,” “plan,” “believe,” “intend,” “estimates,” “targets,” “projects,” “should,” “could,” “would,” “may,” “will,” “forecast,” and other similar expressions. These forward-looking statements are contained throughout this prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” 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 prospectus, 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 and you should not place undue reliance on these forward-looking statements or projections. Although we believe that these forward-looking statements and projections are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements and projections. Factors that may materially affect such forward-looking statements and projections include:

 

  •   adverse developments in economic conditions and, particularly, in conditions in the automotive and transportation industries;

 

  •   our inability to successfully execute on our growth strategy;

 

  •   risks associated with our non-U.S. operations;

 

  •   currency-related risks;

 

  •   increased competition;

 

  •   risks of the loss of any of our significant customers or the consolidation of MSOs, distributors and/or body shops;

 

  •   price increases or interruptions in our supply of raw materials;

 

  •   failure to develop and market new products and manage product life cycles;

 

  •   litigation and other commitments and contingencies;

 

  •   significant environmental liabilities and costs as a result of our current and past operations or products, including operations or products related to our business prior to the Acquisition;

 

  •   unexpected liabilities under any pension plans applicable to our employees;

 

  •   risk that the insurance we maintain may not fully cover all potential exposures;

 

  •   failure to comply with the anti-corruption laws of the United States and various international jurisdictions;

 

  •   failure to comply with anti-terrorism laws and regulations and applicable trade embargoes;

 

  •   business disruptions, security threats and security breaches;

 

  •   our ability to protect and enforce intellectual property rights;

 

  •   intellectual property infringement suits against us by third parties;

 

  •   our substantial indebtedness;

 

  •   our ability to obtain additional capital on commercially reasonable terms may be limited;

 

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  •   our ability to realize the anticipated benefits of any acquisitions and divestitures;

 

  •   our joint ventures’ ability to operate according to our business strategy should our joint venture partners fail to fulfill their obligations;

 

  •   ability to recruit and retain the experienced and skilled personnel we need to compete;

 

  •   work stoppages, union negotiations, labor disputes and other matters associated with our labor force;

 

  •   terrorist acts, conflicts, wars and natural disasters that may materially adversely affect our business, financial condition and results of operations;

 

  •   transporting certain materials that are inherently hazardous due to their toxic nature;

 

  •   weather conditions that may temporarily reduce the demand for some of our products;

 

  •   reduced demand for some of our products as a result of improved safety features on vehicles and insurance company influence;

 

  •   the amount of the costs, fees, expenses and charges related to this offering and the costs of being a public company;

 

  •   any statements of belief and any statements of assumptions underlying any of the foregoing;

 

  •   Carlyle’s ability to significantly influence our decisions;

 

  •   other factors disclosed in this prospectus; and

 

  •   other factors beyond our control.

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

 

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MARKET PRICE OF OUR COMMON SHARES

Our common shares have been listed on the NYSE under the symbol “AXTA” since November 12, 2014. Prior to that time, there was no public market for our common shares. The following table sets forth for the periods indicated the high and low sale prices of our common shares on the NYSE.

 

     High      Low  

2014

     

Fourth Quarter (beginning November 12, 2014)

   $ 27.50       $ 19.50   

2015

     

First Quarter

   $ 29.64       $ 24.74   

Second Quarter

   $ 36.50       $ 27.20   

Third Quarter (through July 13, 2015)

   $ 33.63       $ 32.04   

A recent reported closing price for our common shares is set forth on the cover page of this prospectus. American Stock Transfer & Trust Company, LLC is the transfer agent and registrar for our common shares. On June 1, 2015, we had approximately 30 holders of record of our common shares. The actual number of holders of common shares is greater than this number of record holders and includes shareholders who are beneficial owners, but whose shares are held in street name by brokers and nominees. The number of holders of record also does not include shareholders whose shares may be held in trust by other entities.

 

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USE OF PROCEEDS

All of the common shares offered by this prospectus are being sold by the selling shareholders. We will not receive any of the proceeds from the sale of shares by the selling shareholders in this offering, including from any exercise by the underwriters of their option to purchase additional shares. For more information about the selling shareholders, see “Principal and Selling Shareholders.”

 

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DIVIDEND POLICY

We have not paid dividends in the past and we do not intend to pay any cash dividends for the foreseeable future. We intend to retain earnings, if any, for the future operation and expansion of our business and the repayment of debt. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, cash requirements, financial condition, contractual restrictions, restrictions imposed by applicable laws and other factors that our Board of Directors may deem relevant. Specifically, we are subject to Bermuda legal constraints that may affect our ability to pay dividends on our common shares and make other payments. Under Bermuda law, a company may not declare or pay dividends if there are reasonable grounds for believing that: (i) the company is, or would after the payment be, unable to pay its liabilities as they become due or (ii) the realizable value of its assets would thereby be less than its liabilities. Our ability to pay dividends to holders of our common shares is also dependent upon our subsidiaries’ ability to make distributions to us, which is limited by the terms of the agreements governing the terms of their indebtedness. Additionally, the negative covenants in the agreements governing our indebtedness limit our ability to pay dividends and make distributions to our shareholders. For additional information on these limitations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.”

 

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CAPITALIZATION

The following table sets forth our consolidated cash and cash equivalents and capitalization as of March 31, 2015.

The information in this table should be read in conjunction with “Selected Historical Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes thereto included elsewhere in this prospectus.

 

     As of
March 31, 2015
 
(in millions, except per share data)       

Cash and cash equivalents

   $ 222.9   
  

 

 

 

Debt:

Senior Secured Credit Facilities, consisting of the following(1):

Revolving Credit Facility

  —    

Dollar Term Loan, net of discount

  2,144.0   

Euro Term Loan, net of discount

  423.5   

Dollar Senior Notes(2)

  750.0   

Euro Senior Notes(3)

  270.4   

Other indebtedness(4)

  20.4   
  

 

 

 

Total debt

  3,608.3   
  

 

 

 

Total stockholders’ equity:

Common Shares, $1.00 par value per share: 1,000,000,000 shares authorized; 229,819,738 shares issued and outstanding at March 31, 2015

  229.8   

Capital in excess of par

  1,145.9   

Accumulated deficit

  (181.4

Accumulated other comprehensive loss

  (215.4
  

 

 

 

Total shareholders’ equity

  978.9   

Noncontrolling interests

  69.3   
  

 

 

 

Total shareholders’ equity and noncontrolling interests

$ 1,048.2   
  

 

 

 

Total capitalization

$ 4,656.5   
  

 

 

 

 

(1) The senior secured credit facilities consist of (a) a $400.0 million revolving credit facility that matures in 2018 (the “Revolving Credit Facility”), (b) a $2,300.0 million term loan facility that matures in 2020 (the “Dollar Term Loan Facility”) and (c) a €400.0 million term loan facility that matures in 2020 (our “Euro Term Loan Facility” and, together with the Revolving Credit Facility and the Dollar Term Loan Facility, the “Senior Secured Credit Facilities”). As of March 31, 2015, we had $2,159.8 million of outstanding borrowings under the Dollar Term Loan Facility, $425.0 million of outstanding borrowings under the Euro Term Loan Facility and no outstanding borrowings under the Revolving Credit Facility. As of March 31, 2015, we had approximately $378.7 million in additional borrowing capacity available under our Revolving Credit Facility, after giving effect to $21.3 million of outstanding letters of credit. See Note 15 to our Unaudited Condensed Consolidated Financial Statements included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.”
(2) Consists of $750.0 million in aggregate principal amount of 7.375% senior unsecured notes due 2021 (the “Dollar Senior Notes”).
(3) Consists of €250.0 million in aggregate principal amount of 5.750% senior secured notes due 2021 (the “Euro Senior Notes” and, together with the Dollar Senior Notes, the “Senior Notes”).
(4) Includes indebtedness to fund short-term operational requirements.

 

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SELECTED HISTORICAL FINANCIAL INFORMATION

The following table sets forth selected historical consolidated and combined financial data and other information of Axalta. As a result of the Acquisition, we applied acquisition accounting whereby the purchase price paid was allocated to the acquired assets and liabilities at fair value. The financial reporting periods presented are as follows:

 

  •   The period from January 1, 2013 through January 31, 2013 and the years ended December 31, 2012, 2011 and 2010 (“Predecessor” periods) reflect the combined results of operations of the DPC business.

 

  •   The years ended December 31, 2014 and 2013 and the three-month periods ended March 31, 2015 and 2014 (“Successor” periods) reflect the consolidated results of operations of Axalta, which include the effects of acquisition accounting commencing on the acquisition date of February 1, 2013 and the effects of the Financing.

The historical results of operations and cash flow data for the three months ended March 31, 2015 and 2014 and the historical balance sheet data as of March 31, 2015 presented below were derived from our Successor unaudited financial statements and the related notes thereto included elsewhere in this prospectus.

The historical results of operations and cash flow data for the years ended December 31, 2014 and 2013 and the historical balance sheet data as of December 31, 2014 and 2013 presented below were derived from our Successor audited financial statements and the related notes thereto included elsewhere in this prospectus. As of and for the Successor period of August 24, 2012 (inception date) through December 31, 2012, the Successor had no operations or activity prior to the Acquisition, other than merger and acquisition costs of $29.0 million, which consisted primarily of investment banking, legal and other professional advisory services costs. The historical combined financial data for the years ended December 31, 2012, 2011 and 2010 as well as the period January 1, 2013 through January 31, 2013 have been derived from the Predecessor audited combined financial statements and the related notes thereto for the DPC business.

 

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Our historical financial data and that of the DPC business are not necessarily indicative of our future performance, nor does such data reflect what our financial position and results of operations would have been had we operated as an independent company during the periods shown.

 

    Successor      Predecessor  
    Three Months
Ended March 31,
    Year Ended
December 31,
     Period from
January 1
through
January 31,
    Year Ended December 31,  

(in millions, except per share data)

  2015     2014     2014     2013      2013     2012     2011     2010  

Statement of Operations Data:

                  

Net sales

  $ 989.2      $ 1,047.4      $ 4,361.7      $ 3,951.1       $ 326.2      $ 4,219.4      $ 4,281.5      $ 3,802.0   

Other revenue

    8.3        7.0        29.8        35.7         1.1        37.4        34.3        27.8   
 

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  997.5      1,054.4      4,391.5      3,986.8      327.3      4,256.8      4,315.8      3,829.8   

Cost of goods sold(1)

  649.8      703.5      2,897.2      2,772.8      232.2      2,932.6      3,074.5      2,676.0   

Selling, general and administrative expenses(2)

  213.0      246.7      991.5      1,040.6      70.8      873.4      869.1      827.6   

Research and development expenses

  12.9      11.3      49.5      40.5      3.7      41.5      49.6      52.4   

Amortization of acquired intangibles

  20.0      21.1      83.8      79.9      —       —       —       —     

Merger and acquisition related expenses

  —        —        —        28.1      —       —       —       —     
 

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

  101.8      71.8      369.5      24.9      20.6      409.3      322.6      273.8   

Interest expense, net

  50.0      59.0      217.7      215.1      —        —        0.2      1.1   

Bridge financing commitment fees

  —        —        —        25.0      —        —        —        —     

Other expense, net

  3.9      4.5      115.0      48.5      5.0      16.3      20.2      0.6   
 

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

  47.9      8.3      36.8      (263.7   15.6      393.0      302.2      272.1   

Provision (benefit) for income taxes

  1.2      12.0      2.1      (44.8   7.1      145.2      120.7      99.1   
 

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  46.7      (3.7   34.7      (218.9   8.5      247.8      181.5      173.0   

Less: Net income attributable to noncontrolling interests

  1.6      0.6      7.3      6.0      0.6      4.5      2.1      4.9   
 

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to controlling interests

$ 45.1    $ (4.3 $ 27.4    $ (224.9 $ 7.9    $ 243.3    $ 179.4    $ 168.1   

Per share data:

 

Net Income (loss) per share:

 

Basic

$ 0.20    $ (0.02 $ 0.12    $ (0.97

Diluted

$ 0.19    $ (0.02 $ 0.12    $ (0.97

Basic weighted average shares outstanding

  229.8      229.1      229.3      228.3   

Diluted weighted average shares outstanding

  237.0      229.1      230.3      228.3   
 

Other Financial Data:

 

Cash flows from:

 

Operating activities

$ (98.7 $ (67.2 $ 251.4    $ 376.8    $ (37.7 $ 388.8    $ 236.2    $ 203.2   

Investing activities

  (30.2   (52.4   (178.5   (5,011.2   (8.3   (88.2   (116.6   (77.3

Financing activities

  (19.7   3.2      (123.2   5,098.1      43.0      (290.6   (125.1   (125.0

Depreciation and amortization

  72.6      81.1      308.7      300.7      9.9      110.7      108.7      111.2   

Capital expenditures

  (31.5   (50.2   (188.4   (107.3   (2.4   (73.2   (82.7   (80.2

 

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    Successor     Predecessor  
    Three
Months
Ended
March 31,

2015
    Year Ended
December 31,
    Year Ended December 31,  

(in millions)

    2014     2013     2012     2011     2010  

Balance sheet data (at end of period):

             

Cash and cash equivalents

  $ 222.9      $ 382.1      $ 459.3      $ 28.7      $ 18.8      $ 21.9   

Working capital(3)

    952.8        926.2        952.2        605.2        640.0        604.4   

Total assets

    5,898.4        6,252.8        6,737.1        2,878.6        2,833.6        2,823.8   

Debt, net of discount

    3,608.3        3,696.4        3,920.9        0.2        0.9        0.8   

Total liabilities

    4,850.2        5,140.8        5,525.3        1,181.6        1,028.5        1,059.1   

Total shareholders’ equity/combined equity

    1,048.2        1,112.0        1,211.8        1,697.0        1,805.1        1,764.7   

 

(1) In the Successor year ended December 31, 2013, cost of goods sold included the impact of $103.7 million attributable to the increase in inventory value resulting from the fair value adjustment associated with our acquisition accounting for inventories.
(2) Selling, general and administrative expense included costs related to transition-related and cost savings initiatives of $8.2 million, $30.1 million, $127.1 million and $231.5 million for the Successor three months ended March 31, 2015 and 2014 and the Successor years ended December 31, 2014 and 2013, respectively. Additionally, during the Predecessor period ended December 31, 2012, $0.7 million in employee separation and asset related costs were recorded.
(3) Working capital is defined as current assets less current liabilities.

 

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UNAUDITED PRO FORMA CONSOLIDATED AND COMBINED FINANCIAL INFORMATION

The unaudited pro forma consolidated and combined financial information for the year ended December 31, 2013 presented below was derived from our audited financial statements for the year ended December 31, 2013 and the related notes thereto and the audited financial statements for the DPC business for the period from January 1, 2013 through January 31, 2013 and the related notes thereto, each of which are included elsewhere in this prospectus.

On February 1, 2013, we consummated the Acquisition and acquired the DPC business from DuPont for $4,907.3 million plus transaction expenses. The purchase price paid was allocated to the acquired assets and liabilities at fair value. The purchase price for the Acquisition was funded by (i) an equity contribution of $1,350.0 million, (ii) proceeds from a $2,300.0 million Dollar Term Loan facility and a €400.0 million Euro Term Loan facility and (iii) proceeds from the issuance of $750.0 million in senior unsecured notes and €250.0 million in senior secured notes.

The financing to fund the purchase price for the Acquisition is referred to herein as the “Financing.”

The pro forma results for the year ended December 31, 2013 represent the addition of the Predecessor period January 1, 2013 through January 31, 2013 and the Successor year ended December 31, 2013 as well as the pro forma adjustments to reflect the Acquisition and the related financing as if they had occurred on January 1, 2013. This pro forma information has been prepared in a form consistent with Article 11 of Regulation S-X.

As the Acquisition and the Financing transactions are reflected in the Company’s historical consolidated balance sheet at December 31, 2013 included elsewhere in this prospectus, our unaudited pro forma consolidated and combined statements of operations only reflect the Acquisition and Financing transactions in the pro forma consolidated and combined statements of operations for the year ended December 31, 2013. Historically, the DPC businesses were managed and operated in the normal course of business with other affiliates of DuPont. Accordingly, certain shared costs were allocated to DPC and reflected as expenses in the standalone Predecessor combined financial statements. DuPont had historically provided various services to the DPC business, including cash management, utilities and facilities management, information technology, finance/accounting, tax, legal, human resources, site services, data processing, security, payroll, employee benefit administration, insurance administration and telecommunications. The cost of these services were allocated to the Predecessor in the combined financial statements using various allocation methods. See Note 8 to our Audited Consolidated and Combined Financial Statements included elsewhere in this prospectus for information regarding the historical allocations for the period from January 1, 2013 through January 31, 2013.

The unaudited pro forma information set forth below is based upon available information and assumptions that we believe are reasonable. The unaudited pro forma information is for illustrative and informational purposes only and is not intended to represent or be indicative of what our financial condition or results of operations would have been had the above transactions occurred on the dates indicated. The unaudited pro forma information also should not be considered representative of our future financial condition or results of operations. We believe that the unaudited pro forma information provides investors with meaningful information to understand our operating results and ability to analyze financial and business trends on a period-to-period basis. This unaudited pro forma information should be read in conjunction with, and not as an alternative to, our financial information prepared in accordance with U.S. GAAP.

You should read the information contained in this table in conjunction with “Selected Historical Financial Information,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical audited financial statements and the related notes thereto included elsewhere in this prospectus.

 

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Unaudited Pro Forma Consolidated and Combined Statement Of Operations

For the Year Ended December 31, 2013

(In millions, except per share data)

 

    Successor          Predecessor                                
    Year Ended
December 31,
2013
         Period from
January 1
through
January 31,
2013
    Adjustments
for
Acquisition
          Adjustments
for
Financing
          Pro forma  

Net sales

  $ 3,951.1          $ 326.2      $ —          $ —          $ 4,277.3   

Other revenue

    35.7            1.1        —            —            36.8   
 

 

 

       

 

 

   

 

 

     

 

 

     

 

 

 

Total revenue

  3,986.8        327.3      —        —        4,314.1   

Cost of goods sold

  2,772.8        232.2      (96.0   (a   —        2,909.0   

Selling, general and administrative expenses

  1,040.6        70.8      2.2      (a   —        1,113.6   

Research and development expenses

  40.5        3.7      —        —        44.2   

Amortization of acquired intangibles

  79.9        —        6.6      (b   —        86.5   

Merger and acquisition related expenses

  28.1        —        (28.1   (c   —        —     
 

 

 

       

 

 

   

 

 

     

 

 

     

 

 

 

Income from operations

  24.9        20.6      115.3      —        160.8   

Interest expense, net

  215.1        —        —        19.7      (e   234.8   

Bridge financing commitment fees

  25.0        —        —        (25.0   (f   —     

Other expense, net(h)

  48.5        5.0      (19.4   (d   —        34.1   
 

 

 

       

 

 

   

 

 

     

 

 

     

 

 

 

Income (loss) before income taxes

  (263.7     15.6      134.7      5.3      (108.1

Provision (benefit) for income taxes

  (44.8     7.1      36.3      (g   0.1      (g   (1.3
 

 

 

       

 

 

   

 

 

     

 

 

     

 

 

 

Net income (loss)

  (218.9     8.5      98.4      5.2      (106.8

Less: Net income attributable to noncontrolling interests

  6.0        0.6      —        —        6.6   
 

 

 

       

 

 

   

 

 

     

 

 

     

 

 

 

Net income (loss) attributable to controlling interests

$ (224.9   $ 7.9    $ 98.4    $ 5.2    $ (113.4
 

 

 

       

 

 

   

 

 

     

 

 

     

 

 

 

Per share data:

 

Earnings (loss) per share:

 

Basic and diluted

$ (0.97   $ (0.50
 

Weighted average shares outstanding:

 

Basic and diluted

  228.3        228.3   

 

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Notes to Unaudited Pro Forma Consolidated and Combined Statement of Operations

The Acquisition

 

(a) Represents the net pro forma adjustment to cost of sales resulting from the application of acquisition accounting (in millions):

 

     Year ended
December 31,
2013
 

Total increase in depreciation(1)

   $ 7.9   

Impact to cost of sales for conforming Predecessor periods to weighted average cost flow assumption(2)

     (0.2

Impact to cost of sales for inventory step-up related to the Acquisition(3)

     (103.7
  

 

 

 

Decrease applicable to cost of goods sold

$ (96.0
  

 

 

 

 

  (1) Represents incremental depreciation applicable to purchase price allocation to tangible assets. The allocation of incremental depreciation expense is based on Axalta’s historical classification.

Assumed allocation of purchase price to fair value of property, plant and equipment (in millions):

 

                   Estimated annual
depreciation and
amortization
 
     Acquisition
Date Fair
Value
     Estimated
useful life
     Year ended
December 31,
2013
 

Description:

        

Property, plant and equipment

   $ 1,705.9         Various       $ 208.2   

Less: Aggregated historical depreciation

           (198.1
        

 

 

 
$ 10.1   
        

 

 

 

Reflected in:

Cost of goods sold

$ 7.9   

Selling, general and administrative expenses

  2.2   
        

 

 

 
$ 10.1   
        

 

 

 

 

  (2) Represents the effect of reversing the impact of the LIFO cost flow assumption on the Predecessor periods to conform with Successor’s weighted average cost flow assumption
  (3) Represents the effect of the increase in inventory stepped-up to fair value as a result of the application of acquisition accounting.

 

(b) Represents incremental amortization applicable to purchase price allocation to intangible assets. The allocation of incremental amortization expense is based on Axalta’s historical classification.

 

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Assumed allocation of purchase price to fair value of amortizable intangibles (in millions):

 

     DuPont
Performance
Coatings
Acquisition
     Weighted
average
estimated
useful life(years)
     Estimated
annual
depreciation
and
amortization
Year ended
December 31,
2013
 

Description:

        

Technology

   $ 403.0         10       $ 40.3   

Trademarks

     41.7         14.8         2.8   

Customer relationships

     764.3         19.4         39.8   

Non-compete

     1.5         4         0.4   

Less: Aggregated historical amortization(1)

           (76.7
        

 

 

 
$ 6.6   
        

 

 

 

 

  (1) Exclusive of the $3.2 million associated with abandoned acquired in process research and development projects.

 

(c) Represents the net adjustment to remove one-time non-recurring expenses related to the Acquisition (in millions):

 

     Year ended
December 31,
2013
 

Decrease in acquisition-related transaction expenses

   $ (28.1
  

 

 

 

 

(d) Represents the adjustment to remove the non-recurring loss on foreign currency contract directly related to the Acquisition (in millions):

 

     Year ended
December 31,
2013
 

Acquisition related loss on foreign currency contract to hedge Euro denominated financing

   $ (19.4
  

 

 

 

The Financing

 

(e) Represents the pro forma adjustments to interest expense applicable to the Financing, as follows (in millions):

 

     Year ended
December 31,
2013
 

Borrowings under Term Loans(1)

   $ 11.4   

Borrowings under Senior Notes(2)

     6.3   

Revolver unused availability fee(3)

     0.2   

Amortization of deferred financing fees and original issue discount(4)

     1.8   
  

 

 

 

Total pro forma interest expense(5)

$ 19.7   
  

 

 

 

Less: Aggregated historical interest expense

  —    
  

 

 

 
$ 19.7   
  

 

 

 

 

  (1)

Based on the terms of the Financing at the Acquisition date, reflects pro forma interest expense based on $2.3 billion of borrowings under Dollar Term Loans at an assumed minimal base rate of

 

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  1.25% plus an applicable margin of 3.50% and €400 million of borrowings under Euro Term Loans at an assumed minimal base rate of 1.25% plus an applicable margin of 4.00%. A 0.125% increase or decrease in the interest rate on the Term Loan facility would increase or decrease our annual interest expense by $0.3 million.
  (2) Reflects pro forma interest expense based on $750 million Dollar Senior Notes at 7.375% and €250 million Euro Senior Notes (approximately $331.9 million) at 5.75%.
  (3) Based on unused availability of $400.0 million under the Revolving Credit Facility with an unused facility charge of 0.5% per annum.
  (4) Reflects the non-cash amortization of deferred financing fees and original issue discount related to the Financing over the term of the related facility.
  (5) In February 2014, the Company refinanced the borrowings under the Term Loans. If the refinancing was reflected in the pro forma result for the year ended December 31, 2013, the pro forma interest expense would have been reduced by $24.0 million, or $210.8 million.

 

(f) Represents pro forma adjustment to remove bridge loan commitment fees.

 

     Year ended
December 31, 2013
 

Removal of bridge loan commitment fee

   $ (25.0

The Transactions

 

(g) Represents pro forma adjustments to the tax provision as a result of the Acquisition and the Financing (in millions)

 

Year ended December 31, 2013

   Pro forma
adjustment
     Weighted
average
statutory income
tax rate
    Year ended
December 31,
2013
 

The Acquisition

       

Pro forma adjustment (a), depreciation

   $ 10.1         33.0 %(3)    $ (3.3

Pro forma adjustment (a), LIFO to weighted average

     (0.2      33.2 %(3)      0.1   

Pro forma adjustment (a), inventory step-up

     (103.7      33.2 %(3)      34.5   

Pro forma adjustment (b), amortization of intangibles

     6.6         23.4 %(1)      (1.5

Pro forma adjustment (c), acquisition related expenses

     (28.1      23.1 %(1)      6.5   

Pro forma adjustment (d), foreign currency contract

     (19.4      — %(4)      —    
       

 

 

 

Pro forma adjustment to income tax provision

$ 36.3   
       

 

 

 

The Financing

Pro forma adjustment (e), interest expense

$ 19.7      15.3 %(2)  $ (3.0

Pro forma adjustment (f), bridge loan commitment fees

  (25.0   12.4 %(2)    3.1   
       

 

 

 

Pro forma adjustment to income tax provision

$ 0.1   
       

 

 

 

 

  (1) Reflects our weighted average statutory tax rate consisting primarily of the following jurisdictions and related rates:

 

Jurisdiction

   Statutory Rate  

United States

     38.5

Luxembourg(a)

     —   

Germany

     32.5

 

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  (a) Represents our effective tax rate due to prior and expected continued net operating losses.

 

  (2) Reflects our weighted average statutory tax rate consisting primarily of the following jurisdictions and related rates:

 

Jurisdiction

   Statutory Rate  

United States

     38.5

Netherlands(a)

     —   

 

  (a) Represents our effective tax rate due to prior and expected continued net operating losses.

 

  (3) Reflects our weighted average statutory tax rate consisting primarily of the following jurisdictions and related rates:

 

Jurisdiction

   Statutory Rate  

United States

     38.5

Brazil

     34.0

Germany

     32.5

 

  (4) Reflects our Netherlands effective tax rate due to prior and expected continued net operating losses.

 

(h) As a result of the IPO, the Carlyle Group Consulting Services Agreement was terminated in exchange for a one-time fee. Had these amounts been adjusted to remove the historical management fees to the pro forma results, Other expense, net would have benefited by $3.1 million.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion summarizes the significant factors affecting the operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with “Prospectus Summary—Summary Historical and Pro Forma Financial Information,” “Selected Historical Financial Information” and the financial statements and the related notes thereto included elsewhere in this prospectus. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and all other non-historical statements in this discussion are forward-looking statements and are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly in the section entitled “Risk Factors.”

Overview

We are a leading global manufacturer, marketer and distributor of high performance coatings systems. We have a nearly 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 35 manufacturing facilities, 7 technology centers, 45 customer training centers and approximately 12,600 employees allows us to meet the needs of customers in over 130 countries. We serve our customer base through an extensive sales force and technical support organization, as well as through over 4,000 independent, locally based distributors.

We operate our business in two operating segments, Performance Coatings and Transportation Coatings. Our segments are based on the type and concentration of customers served, service requirements, methods of distribution and major product lines.

Through our Performance Coatings segment, we provide high-quality liquid and powder coatings solutions to a fragmented and local customer base. We are one of only a few suppliers with the technology to provide precise color matching and highly durable coatings systems. The end-markets within this segment are refinish and industrial.

Through our Transportation Coatings segment, we provide advanced coating technologies to OEMs of light and commercial vehicles. These increasingly global customers require a high level of technical support coupled with cost-effective, environmentally responsible coatings systems that can be applied with a high degree of precision, consistency and speed. The end-markets within this segment are light vehicle and commercial vehicle.

On November 11, 2014, we priced our IPO, in which certain selling shareholders affiliated with Carlyle sold 57,500,000 common shares at a price of $19.50 per share. We received no proceeds from the IPO.

Recent Developments

On April 8, 2015, we completed the Secondary Offering pursuant to which Carlyle sold an aggregate of 46,000,000 common shares at a public offering price of $28.00 per share.

On April 8, 2015, Carlyle also sold 20,000,000 common shares in the Private Placement to Berkshire at $28.00 per share.

We did not receive any proceeds from the sale of common shares in the Secondary Offering or the Private Placement.

 

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Business Highlights and Trends

From 2012 to 2014, we managed the transition of ownership and operational separation resulting from the planned divestiture of our business by DuPont and ultimately the Acquisition, including significant changes to our senior leadership team. During this time period, our Adjusted EBITDA grew at a 21% CAGR primarily as the result of several strategic initiatives focused on margin improvement. In addition to regular price increases in our refinish end-market, these initiatives included selective price increases in other end-markets, reducing sales with lower margin customers and productivity improvements, which collectively drove Adjusted EBITDA growth in both of our segments.

From 2012 to 2014, our net sales grew at a 2% CAGR with net sales growth in both our Transportation Coatings segment and our Performance Coatings segment. Net sales in our Transportation Coatings segment grew at a 1% CAGR, driven by consistent net sales in our light vehicle end-market and increasing sales in our commercial vehicle end-market, primarily as a result of increased vehicle production in North America and Asia Pacific and improvements in average selling price, driven by new product and color introductions. Net sales in our Performance Coatings segment increased at a 2% CAGR over the same period as a result of higher average selling prices, partially offset by lower volumes in both our refinish and industrial end-markets in developed markets as well as unfavorable impacts of currency exchange. In EMEA, volumes declined as a result of a difficult economic environment. In North America, our lack of participation in the MSO market prior to the Acquisition had a negative impact on our volumes as MSO body shops increased the number of vehicles serviced at the expense of independent body shop customers. These factors in developed markets were partially offset by continued refinish net sales growth in the emerging markets.

Our net sales decreased approximately 6% for the three months ended March 31, 2015 compared to the three months ended March 31, 2014, driven primarily by a decline of approximately 11% from unfavorable currency translation. Excluding the impact of currency translation, our net sales increased approximately 5% primarily as a result of an increase in sales volumes. The following trends have impacted our segment and end-market sales performance in 2015:

 

  •   Performance Coatings: Net sales excluding currency translation increased approximately 3% driven primarily by strong volume growth in both our refinish and industrial end markets, particularly in North America and Asia Pacific, which was partially offset by weaker refinish volumes in EMEA.

 

  •   Transportation Coatings: Net sales excluding currency translation increased approximately 9% driven primarily by volume growth in both our light vehicle and commercial vehicle end markets from new business wins and increased vehicle builds in North America, Latin America, and Asia Pacific.

Since the Acquisition, we have implemented numerous initiatives to reduce our fixed and variable costs that have improved our Adjusted EBITDA margin. Examples include transitioning our IT systems to more cost-effective solutions that better meet our needs as an independent company, developing a global procurement organization to reduce procurement costs and investing in a European manufacturing re-alignment to position the region for profitable growth. Additionally in 2015, we commenced a new “Axalta Way” initiative which focuses on commercial alignment and cost reduction. These initiatives are contributing to our financial results and we believe they will continue to drive profitability improvements over the next several years.

 

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Our business serves four end-markets globally as follows:

 

(in millions)

   Successor      Pro Forma      Predecessor               
   Year Ended December 31,      2014 vs 2013     2013 vs 2012  
   2014      2013      2012      % change     % change  

Performance Coatings

             

Refinish

   $ 1,850.8       $ 1,799.4       $ 1,759.3         2.9     2.3

Industrial

     734.2         712.7         720.2         3.0     (1.0 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Net sales Performance Coatings

  2,585.0      2,512.1      2,479.5      2.9   1.3
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Transportation Coatings

Light Vehicle

  1,384.5      1,403.1      1,390.6      (1.3 )%    0.9

Commercial Vehicle

  392.2      362.1      349.3      8.3   3.7
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Net sales Transportation Coatings

  1,776.7      1,765.2      1,739.9      0.7   1.5
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Net sales

$ 4,361.7    $ 4,277.3    $ 4,219.4      2.0   1.4
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Basis of Presentation

Axalta Coating Systems Ltd. (formerly known as Flash Bermuda Co., Ltd. or Axalta Coating Systems Bermuda Co., Ltd.) (“Axalta” or the “Company”), a Bermuda exempted company limited by shares formed at the direction of affiliates of Carlyle, was incorporated on August 24, 2012 for the purpose of consummating the Acquisition.

The purchase price for the Acquisition was funded by (i) an equity contribution of $1,350.0 million into the Company by affiliates of Carlyle (the “Equity Contribution”), (ii) proceeds from borrowings under our Senior Secured Credit Facilities, consisting of a $2,300.0 million Dollar Term Loan facility and a €400.0 million Euro Term Loan facility, both of which mature on February 1, 2020 and (iii) proceeds from the issuance of $750.0 million aggregate principal amount of 7.375% Dollar Senior Notes and the issuance of €250.0 million aggregate principal amount of 5.750% Euro Senior Notes. The Senior Secured Credit Facilities and the Senior Notes are more fully described in Note 22 to the annual audited financial statements for the year ended December 31, 2014 included elsewhere in this prospectus. Subsequent to the closing, we received approximately $18.6 million in closing date working capital and pension adjustments resulting in a final purchase price of $4,907.3 million. In February 2014, we entered into an amendment to the credit agreement governing the Senior Secured Credit Facilities to reprice our existing first lien term loan facilities (the “Refinancing”).

Axalta’s consolidated financial statements as of March 31, 2015 and 2014 and December 31, 2014 and 2013, and for the three months ended March 31, 2015 and 2014, the years ended December 31, 2014 and 2013 and the period from August 24, 2012 through December 31, 2012, included elsewhere in this prospectus, represent those of the Successor. The consolidated financial statements of Axalta were prepared using the acquisition method of accounting. Under the acquisition method of accounting, tangible and identifiable intangible assets acquired and liabilities assumed are recorded at their respective fair market values as of the date of the acquisition, with any purchase price in excess of the net assets acquired recorded as goodwill. Because Axalta was formed on August 24, 2012 for the purpose of consummating the Acquisition, it has no financial statements as of or for periods ended prior to that date. Prior to the Acquisition, Axalta generated no revenue and only incurred merger and acquisition related costs and debt financing costs in anticipation of the Acquisition.

The combined financial statements of DPC for the period from January 1, 2013 through January 31, 2013 and for the year ended December 31, 2012, included elsewhere in this prospectus, represent those of the Predecessor. As a result of the application of acquisition accounting as of the date of the Acquisition, the financial statements for the Successor periods and the Predecessor periods are presented on a different basis and, therefore, may not be comparable.

 

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During the Predecessor periods, DPC operated either as a reportable segment or part of a reportable segment within DuPont, consequently, standalone financial statements were not historically prepared for DPC. The accompanying combined financial statements of DPC have been prepared from DuPont’s historical accounting records and are presented on a standalone basis as if the operations had been conducted independently from DuPont. In this context, prior to pre-acquisition structuring that occurred in 2012, no direct ownership relationship existed among all of the various legal entities comprising DPC.

Accordingly, DuPont and its subsidiaries’ net investment in these operations is shown in lieu of shareholders’ equity in the Predecessor combined financial statements. The Predecessor combined financial statements include the historical operations and assets and liabilities of the legal entities that are considered to comprise the DPC business. For more information on the financial statements for our Successor period and Predecessor period, see Note 5 to our Audited Consolidated and Combined Financial Statements included elsewhere in this prospectus for further discussion on the Acquisition.

In addition to the historical analysis of results of operations, we have prepared unaudited supplemental pro forma results of operations for the year ended December 31, 2013 as if the Acquisition and related financing had occurred on January 1, 2013. The pro forma analysis is prepared and presented to aid in explaining the results of operations. The pro forma discussion follows the historical analysis of results of operations.

The pro forma results for the year ended December 31, 2013 represent the addition of the Predecessor period January 1, 2013 through January 31, 2013 and the Successor year ended December 31, 2013 as well as the pro forma adjustments to reflect the Acquisition and the related financing as if they had occurred on January 1, 2013. This pro forma information has been prepared in a form consistent with Article 11 of Regulation S-X and is included in “Unaudited Pro Forma Consolidated and Combined Financial Information.” The pro forma results do not reflect the actual results we would have achieved had the Acquisition been completed as of January 1, 2013 and are not indicative of our future results of operations.

Acquisition Accounting

We allocated the purchase price paid to acquire DPC to the acquired assets and liabilities assumed based on their respective estimated fair value as of the acquisition date. The application of acquisition accounting resulted in an increase in amortization and depreciation expense relating to our acquired intangible assets and property, plant and equipment. In addition to the increase in the net carrying value of property, plant and equipment, we revised the remaining depreciable lives of property, plant and equipment to reflect the estimated remaining useful lives for purposes of calculating periodic depreciation expense. We adjusted the carrying values of the joint ventures to reflect their estimated fair values at the date of purchase. We adjusted the value of inventory to its estimated fair value, which increased the costs recognized upon the sale of this acquired inventory. We also provided for deferred income taxes for the future tax consequences of acquisition date basis differences between the carrying amounts of assets and liabilities utilized for financial reporting purposes and the respective amounts used for income tax purposes. The excess of the purchase price over the estimated fair value of assets and liabilities was assigned to goodwill, which is not amortized for accounting purposes but is subject to testing for impairment at least annually. See Note 5 to our Audited Consolidated and Combined Financial Statements included elsewhere in this prospectus for further discussion on the Acquisition.

 

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Factors Affecting Our Operating Results

The following discussion sets forth certain components of our statements of operations as well as factors that impact those items.

Net sales

We generate revenue from the sale of our products across all major geographic areas. Our net sales include total sales less estimates for returns and price allowances. Price allowances include discounts for prompt payment as well as volume-based incentives. Our overall net sales are generally impacted by the following factors:

 

  •   fluctuations in overall economic activity within the geographic markets in which we operate;

 

  •   underlying growth in one or more of our end-markets, either worldwide or in particular geographies in which we operate;

 

  •   the type of products used within existing customer applications, or the development of new applications requiring products similar to ours;

 

  •   changes in product sales prices (including volume discounts and cash discounts for prompt payment);

 

  •   changes in the level of competition faced by our products, including price competition and the launch of new products by competitors;

 

  •   our ability to successfully develop and launch new products and applications; and

 

  •   fluctuations in foreign exchange rates.

While the factors described above impact net sales in each of our operating segments, the impact of these factors on our operating segments can differ, as described below. For more information about risks relating to our business, see “Risk Factors—Risks Related to our Business.”

Other revenue

Other revenue consists primarily of consulting and other service revenue and royalty income.

Cost of goods sold (“cost of sales”)

Our cost of sales consists principally of the following:

 

  •   Production Materials Costs. We purchase a significant amount of the materials used in production on a global lowest-cost basis.

 

  •   Employee Costs. These include the compensation and benefit costs for employees involved in our manufacturing operations. These costs generally increase on an aggregate basis as production volumes increase and may decline as a percent of net sales as a result of economies of scale associated with higher production volumes.

 

  •   Depreciation Expense. Property, plant and equipment are stated at cost and depreciated or amortized on a straight-line basis over their estimated useful lives. Property, plant and equipment acquired through the Acquisition were recorded at their estimated fair value on the acquisition date resulting in a new cost basis for accounting purposes.

 

  •   Other. Our remaining cost of sales consists of freight costs, warehousing expenses, purchasing costs, costs associated with closing or idling of production facilities, functional costs supporting manufacturing, product claims and other general manufacturing expenses, such as expenses for utilities and energy consumption.

 

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The main factors that influence our cost of sales as a percentage of net sales include:

 

  •   changes in the price of raw materials;

 

  •   production volumes;

 

  •   the implementation of cost control measures aimed at improving productivity, including reduction of fixed production costs, refinements in inventory management and the coordination of purchasing within each subsidiary and at the business level; and

 

  •   fluctuations in foreign exchange rates.

Selling, general and administrative expenses

Our selling, general and administrative expense consists of all expenditures incurred in connection with the sales and marketing of our products, as well as administrative overhead costs, including:

 

  •   compensation and benefit costs for management, sales personnel and administrative staff, including share-based compensation expense. Expenses relating to our sales personnel increase or decrease principally with changes in sales volume due to the need to increase or decrease sales personnel to meet changes in demand. Expenses relating to administrative personnel generally do not increase or decrease directly with changes in sales volume; and

 

  •   depreciation, advertising and other selling expenses, such as expenses incurred in connection with travel and communications.

Changes in selling, general and administrative expense as a percentage of net sales have historically been impacted by a number of factors, including:

 

  •   changes in sales volume, as higher volumes enable us to spread the fixed portion of our administrative expense over higher sales;

 

  •   changes in our customer base, as new customers may require different levels of sales and marketing attention;

 

  •   new product launches in existing and new markets, as these launches typically involve a more intense sales activity before they are integrated into customer applications;

 

  •   customer credit issues requiring increases to the allowance for doubtful accounts; and

 

  •   fluctuations in foreign exchange rates.

Research and development expenses

Research and development expense represents costs incurred to develop new products, services, processes and technologies or to generate improvements to existing products or processes.

Interest expense, net

Interest expense, net consists primarily of interest expense on institutional borrowings and other financing obligations and changes in fair value of interest rate derivative instruments, net of capitalized interest expense. Interest expense, net also includes the amortization of debt issuance costs and debt discounts associated with our Senior Secured Credit Facilities and Senior Notes. See Note 22 to our Audited Consolidated and Combined Financial Statements included elsewhere in this prospectus.

Other expense, net

Other expense, net represents costs incurred, net of income, on various non-operational items including historical management expenses to Carlyle as well as foreign exchange gains and losses.

 

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Provision (benefit) for income taxes

We and our subsidiaries are subject to income tax in the various jurisdictions in which we operate. While the extent of our future tax liability is uncertain, the impact of acquisition accounting for the Acquisition and for future acquisitions, changes to the debt and equity capitalization of our subsidiaries, and the realignment of the functions performed and risks assumed by the various subsidiaries are among the factors that will determine the future book and taxable income of the respective subsidiary and the Company as a whole. For the Predecessor periods, DPC did not file separate tax returns in the majority of its jurisdictions as it was included in the tax returns of DuPont entities within the respective tax jurisdictions. The income tax provision for the Predecessor periods was calculated using a separate return basis as if DPC was a separate taxpayer.

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 prospectus. Our historical results of operations set forth below may not necessarily reflect what would have occurred if we had been a separate standalone entity prior to the Acquisition or what will occur in the future.

Successor three months ended March 31, 2015 compared to Successor three months ended March 31, 2014

The following table was derived from the Successor’s condensed consolidated statements of operations for the three months ended March 31, 2015 and 2014 included elsewhere in this prospectus.

 

     Successor  
     Three Months Ended
March 31,
 

(in millions)

   2015      2014  

Net sales

   $ 989.2       $ 1,047.4   

Other revenue

     8.3         7.0   
  

 

 

    

 

 

 

Total revenue

  997.5      1,054.4   

Cost of goods sold

  649.8      703.5   

Selling, general and administrative expenses

  213.0      246.7   

Research and development expenses

  12.9      11.3   

Amortization of acquired intangibles

  20.0      21.1   
  

 

 

    

 

 

 

Income from operations

  101.8      71.8   
  

 

 

    

 

 

 

Interest expense, net

  50.0      59.0   

Other expense, net

  3.9      4.5   
  

 

 

    

 

 

 

Income before income taxes

  47.9      8.3   

Provision for income taxes

  1.2      12.0   
  

 

 

    

 

 

 

Net income (loss)

  46.7      (3.7

Less: Net income attributable to noncontrolling interests

  1.6      0.6   
  

 

 

    

 

 

 

Net income (loss) attributable to controlling interests

$ 45.1    $ (4.3
  

 

 

    

 

 

 

Net sales

Net sales decreased $58.2 million, or 5.6%, to $989.2 million for the three months ended March 31, 2015, as compared to net sales of $1,047.4 million for the three months ended March 31, 2014. Our net sales decrease in the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was primarily attributable to unfavorable impacts of currency exchange, which reduced net sales by 10.8% due to the impact of

 

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the weakening Euro and certain currencies within Latin America compared to the U.S. dollar. This net sales decline was partially offset by increases in volumes primarily in North America, Asia and Latin America, which contributed to net sales growth of 4.8%. Higher average selling prices also contributed to an increase of 0.4% compared to the three months ended March 31, 2014.

Other revenue

Other revenue increased $1.3 million, or 18.6%, to $8.3 million for the three months ended March 31, 2015, as compared to $7.0 million for the three months ended March 31, 2014. The increase primarily related to an increase in royalty revenues within North America. This increase in other revenue was partially offset by the impacts of weakening currencies against the U.S. dollar, which caused a 10.0% decrease in other revenue primarily due to the weakening Euro.

Cost of sales

Cost of sales decreased $53.7 million, or 7.6%, to $649.8 million for the three months ended March 31, 2015 compared to $703.5 million for the three months ended March 31, 2014. Cost of sales was lower during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 primarily as a result of the benefit of currency exchange due to the impact of the weakening Euro and certain currencies within Latin America, which contributed to a 6.4% decrease in cost of sales as a percentage of net sales. The decrease from currency translation was slightly offset by higher volumes, which increased cost of sales. Cost of sales as a percentage of net sales decreased from 67.2% for the three months ended March 31, 2014 to 65.7% for the three months ended March 31, 2015 as a result of reductions in costs resulting from our cost savings initiatives as well as lower raw material prices.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased $33.7 million, or 13.7%, to $213.0 million for the three months ended March 31, 2015 compared to $246.7 million for the three months ended March 31, 2014. Selling, general and administrative expenses for the three months ended March 31, 2015 included $8.2 million of costs related to our 2015 cost savings initiatives as well as costs associated with the Secondary Offering as compared to $30.1 million of nonrecurring costs for the three months ended March 31, 2014 associated with our transition related activities, resulting in a decrease of $21.9 million over the comparable period. In addition, favorable impacts of currency exchange during the three months ended March 31, 2015 contributed to a 9.7% reduction in selling, general and administrative expenses due to the impact of the weakening Euro and certain currencies within Latin America compared to the U.S. dollar. Selling, general and administrative expenses decreased as a percentage of net sales from 23.6% for the three months ended March 31, 2014 to 21.5% for the three months ended March 31, 2015.

Research and development expenses

Research and development expenses increased $1.6 million, or 14.2%, to $12.9 million for the three months ended March 31, 2015 compared to $11.3 million for the three months ended March 31, 2014. This increase was driven by additional spend as we focus on developing new and existing products in the market. These increases in spend were partially offset by the impacts of currency exchange, which contributed to a 7.1% decrease in research and development expenses primarily as a result of the weakening Euro compared to the U.S. dollar.

Amortization of acquired intangibles

Amortization of acquired intangibles decreased $1.1 million, or 5.2%, to $20.0 million for the three months ended March 31, 2015 compared to $21.1 million for the three months ended March 31, 2014. This decrease was a result of the benefit of currency exchange primarily as a result of the weakening Euro compared to the U.S. dollar.

 

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Interest expense, net

Interest expense, net decreased $9.0 million, or 15.3%, to $50.0 million for the three months ended March 31, 2015 compared to $59.0 million for the three months ended March 31, 2014. Interest expense, net for the three months ended March 31, 2015 reflects a full three months of interest costs after the refinancing of our Term Loans in February of 2014. Interest expense, net for the three months ended March 31, 2014 reflects one month of interest expense associated with our original debt financing for the Acquisition and two months of interest expense based on the refinancing of our Term Loans. Additionally, the three months ended March 31, 2015 included the benefit of the 25 basis point step-down in interest rates on our Term Loans resulting from a reduction in our leverage ratio, as well as reductions in principal balances throughout 2014, including the $100.0 million prepayment on our New Dollar Term Loan made on September 30, 2014. Further contributing to the net decrease for the three months ended March 31, 2015 was the impact of the weakening Euro against the U.S. dollar.

Other expense, net

Other expense, net decreased $0.6 million, or 13.3%, to $3.9 million for the three months ended March 31, 2015 compared to $4.5 million for the three months ended March 31, 2014. Exchange losses, net, were $8.7 million during the three months ended March 31, 2015 as compared to exchange losses of $0.1 million for the three months ended March 31, 2014. Net exchange losses for the three months ended March 31, 2015 primarily consisted of $98.7 million in remeasurement losses primarily related to intercompany transactions denominated in currencies different from the functional currency of the relevant subsidiary, partially offset by $89.8 million in gains on our Euro borrowings.

During the three months ended March 31, 2015, we entered into an agreement with one of our joint venture partners to acquire a controlling interest in an investment previously accounted for as an equity method investment. As a result of the acquisition of a controlling interest in the investment, we recognized a gain of $5.4 million on the remeasurement of our previously held equity interest as of the acquisition date, resulting in a net decrease in other expense compared to the three months ended March 31, 2014.

Contributing to the decrease in other expense over the comparable periods were debt modification fees incurred during three months ended March 31, 2014 for $3.1 million, resulting from the refinancing of our Term Loans in February of 2014.

Provision for income taxes

We recorded an income tax provision of $1.2 million for the three months ended March 31, 2015, which represents a 2.5% effective tax rate in relation to the income before income taxes of $47.9 million. The effective tax rate for the three months ended March 31, 2015 differs from the U.S. Federal statutory rate by 32.5%, which is the result of various items that impacted the effective rate both favorably and unfavorably. We recorded favorable adjustments for earnings in jurisdictions where the statutory rate is lower than the U.S. Federal statutory rate of $12.1 million and we recognized a benefit of $16.6 million associated with currency exchange losses which had no impact on income before income taxes. These adjustments were partially offset by the impact of pre-tax losses attributable to jurisdictions where a tax benefit is not expected to be realized of $3.6 million and non-deductible expenses and interest of $6.9 million.

We recorded a provision for income taxes of $12.0 million for the three months ended March 31, 2014, which represents a 144.6% effective tax rate in relation to the income before income taxes of $8.3 million. The effective tax rate for the three months ended March 31, 2014 differs from the U.S. Federal statutory rate by 109.6%, which is the result of various items that impacted the effective rate both favorably and unfavorably. We recorded unfavorable adjustments due to pre-tax losses attributable to jurisdictions where a tax benefit is not expected to be realized of $5.5 million and nondeductible expenses and withholding tax expense totaling $9.7 million. These adjustments were partially offset by the favorable impact of earnings in jurisdictions where the statutory rate is lower than the U.S. Federal statutory rate of $8.3 million.

 

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Successor year ended December 31, 2014 compared to Successor year ended December 31, 2013, Predecessor period January 1, 2013 through January 31, 2013, and the Pro Forma year ended December 31, 2013

The following table was derived from the Successor’s consolidated statements of operations for the years ended December 31, 2014 and 2013 and from the Predecessor’s combined statement of operations for the period from January 1, 2013 through January 31, 2013 included elsewhere in this prospectus. It should be noted that the results of operations for the Successor year ended December 31, 2013 only include the results of DPC from the date of the Acquisition. Prior to the Acquisition, Axalta generated no revenue and only incurred merger and acquisition related costs and debt financing costs in anticipation of the Acquisition. We have also presented pro forma financial results for the year ended December 31, 2013 as if the Acquisition and the related Financing had occurred on January 1, 2013. We believe this information, and the related comparisons, provide a more meaningful comparison for the years presented.

 

     Successor          Predecessor      Pro Forma  
     Year Ended
December 31,
         Period from
January 1,
2013 through
January 31,
     Year Ended
December 31,
 

(in millions)

   2014      2013          2013      2013  

Net sales

   $ 4,361.7       $ 3,951.1          $ 326.2       $ 4,277.3   

Other revenue

     29.8         35.7            1.1         36.8   
  

 

 

    

 

 

       

 

 

    

 

 

 

Total revenue

  4,391.5      3,986.8        327.3      4,314.1   

Cost of goods sold

  2,897.2      2,772.8        232.2      2,909.0   

Selling, general and administrative expenses

  991.5      1,040.6        70.8      1,113.6   

Research and development expenses

  49.5      40.5        3.7      44.2   

Amortization of acquired intangibles

  83.8      79.9        —        86.5   

Merger and acquisition related expenses

  —        28.1        —        —     
  

 

 

    

 

 

       

 

 

    

 

 

 

Income from operations

  369.5      24.9        20.6      160.8   
  

 

 

    

 

 

       

 

 

    

 

 

 

Interest expense, net

  217.7      215.1        —        234.8   

Bridge financing commitment fees

  —        25.0        —        —     

Other expense, net

  115.0      48.5        5.0      34.1   
  

 

 

    

 

 

       

 

 

    

 

 

 

Income (loss) before income taxes

  36.8      (263.7     15.6      (108.1

Provision (benefit) for income taxes

  2.1      (44.8     7.1      (1.3
  

 

 

    

 

 

       

 

 

    

 

 

 

Net income (loss)

  34.7      (218.9     8.5      (106.8

Less: Net income attributable to noncontrolling interests

  7.3      6.0        0.6      6.6   
  

 

 

    

 

 

       

 

 

    

 

 

 

Net income (loss) attributable to controlling interests

$ 27.4    $ (224.9   $ 7.9    $ (113.4
  

 

 

    

 

 

       

 

 

    

 

 

 

Net sales

Historical: Net sales were $4,361.7 million for the Successor year ended December 31, 2014 compared to net sales of $3,951.1 million for the Successor year ended December 31, 2013 and $326.2 million for the Predecessor period January 1, 2013 through January 31, 2013. Our net sales growth in the Successor year ended December 31, 2014 compared to the Successor year ended December 31, 2013 and Predecessor period January 1, 2013 through January 31, 2013 was primarily driven by higher average selling prices in all regions, which contributed to net sales growth of 2.8%. In addition, volumes contributed 1.2% to net sales growth on stronger performance within North America and Asia, offset slightly by continued weakness in Latin America. This net sales growth was partially offset by the unfavorable impacts of currency exchange, which contributed to an approximately 2.0% reduction in net sales due to the impact of weakening currencies in certain jurisdictions within Latin America, Asia, and North America.

 

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Pro Forma: Net sales increased $84.4 million, or 2.0%, to $4,361.7 million for the Successor year ended December 31, 2014, as compared to net sales of $4,277.3 million for the Pro Forma year ended December 31, 2013. Our net sales growth in the Successor year ended December 31, 2014 was primarily driven by higher average selling prices in all regions, which contributed to net sales growth of 2.8%. In addition, volumes contributed 1.2% to net sales growth on stronger performance within North America and Asia, offset slightly by continued weakness in Latin America. This net sales growth was partially offset by the unfavorable impacts of currency exchange, which contributed to an approximately 2.0% reduction in net sales due to the impact of weakening currencies in certain jurisdictions within Latin America, Asia, and North America.

Other revenue

Historical: Other revenue was $29.8 million for the Successor year ended December 31, 2014 as compared to $35.7 million for the Successor year ended December 31, 2013 and $1.1 million for the Predecessor period January 1, 2013 through January 31, 2013. The decrease primarily related to a decrease in service revenue within our light vehicle end-market. The impacts of currency exchange did not have a material impact on the comparable periods.

Pro Forma: Other revenue was $29.8 million for the Successor year ended December 31, 2014 as compared to $36.8 million for the Pro Forma year ended December 31, 2013. The decrease primarily related to a decrease in service revenue within our light vehicle end-market. The impacts of currency exchange did not have a material impact on the comparable periods.

Cost of sales

Historical: Cost of sales was $2,897.2 million for the Successor year ended December 31, 2014 compared to $2,772.8 million for the Successor year ended December 31, 2013 and $232.2 million for the Predecessor period January 1, 2013 through January 31, 2013. Cost of sales was lower during the Successor year ended December 31, 2013 compared to the Successor year ended December 31, 2014 but higher when combined with the Predecessor period January 1, 2013 through January 31, 2013, primarily as a result of increased costs of goods of $103.7 million related to fair value adjustments to inventory in conjunction with the Acquisition. Offsetting the increased costs in 2013 related to fair value adjustments to inventory is the absence of $7.9 million of incremental depreciation resulting from the fair value adjustments to property, plant and equipment in conjunction with the Acquisition, which did not impact historical depreciation for the Predecessor period from January 1, 2013 through January 31, 2013. The remaining change in cost of sales in 2014 was driven by lower raw material costs offset by higher volumes. The favorable impact of raw material prices across both our Performance Coatings and Transportation Coatings segments contributed to an approximately 2.0% impact on cost of sales as a percentage of net sales. Favorable impacts of currency exchange contributed to an additional 1.0% decrease in cost of sales as a percentage of net sales, primarily due to the impact of weakening currencies in certain jurisdictions within Latin America, Asia, and North America compared to the U.S. dollar.

Pro Forma: Cost of sales decreased $11.8 million, or 0.4%, to $2,897.2 million for the Successor year ended December 31, 2014 as compared to $2,909.0 million for the Pro Forma year ended December 31, 2013. The Pro Forma year ended December 31, 2013 is adjusted to reflect increased depreciation and the exclusion of increased costs of goods, each related to the Acquisition. As a percentage of net sales, cost of sales decreased from 68.0% to 66.4%. This decrease was driven by lower raw material costs, partially resulting from our purchasing initiatives, as well as product mix. The favorable impact of raw material prices impacted both our Performance Coatings and Transportation Coatings segments. Favorable impacts of currency exchange contributed to an additional 1.0% decrease in cost of sales as a percentage of net sales, primarily due to the impact of weakening currencies in certain jurisdictions within Latin America, Asia and North America compared to the U.S. dollar.

Selling, general and administrative expenses

Historical: Selling, general and administrative expenses were $991.5 million for the Successor year ended December 31, 2014 compared to $1,040.6 million for the Successor year ended December 31, 2013 and $70.8

 

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million for the Predecessor period January 1, 2013 through January 31, 2013. During the Successor year ended December 31, 2014, we incurred $127.1 million of transition-related expenses, primarily related to our transition to a standalone company, compared to $231.5 million of transition-related expenses for the Successor year ended December 31, 2013. This resulted in a $104.4 million decrease over the comparable periods. These decreases were offset slightly by increased selling and administrative costs, as we focused on opportunities to expand our market presence. In addition, the favorable impacts of currency exchange during the Successor year ended December 31, 2014 contributed to a 1.1% decrease in selling, general and administrative expenses, primarily due to the impact of weakening currencies in certain jurisdictions within Latin America, Asia, and North America compared to the U.S. dollar.

Pro Forma: Selling, general and administrative expenses decreased $122.1 million, or 11.0%, to $991.5 million for the Successor year ended December 31, 2014, as compared to $1,113.6 million for the Pro Forma year ended December 31, 2013. During the Successor year ended December 31, 2014, we incurred $127.1 million of transition-related expenses, primarily related to our transition to a standalone company, compared to $231.8 million of transition-related expenses for the Pro Forma year ended December 31, 2013. This resulted in a $104.7 million decrease over the comparable period. Contributing to the decrease in comparable periods was a reduction in U.S. pension expense and lower actual costs for our operating structure as a standalone entity during the Successor year ended December 31, 2014. These decreases were offset slightly by increased selling and administrative costs, as we focused on opportunities to expand our market presence. In addition, the favorable impacts of currency exchange during the Successor year ended December 31, 2014 contributed to a 1.1% decrease in selling, general and administrative expenses, primarily due to the impact of weakening currencies in certain jurisdictions within Latin America, Asia, and North America compared to the U.S. dollar.

Research and development expenses

Historical: Research and development expenses were $49.5 million for the Successor year ended December 31, 2014 compared to $40.5 million for the Successor year ended December 31, 2013 and $3.7 million for the Predecessor period January 1, 2013 through January 31, 2013. These increases were driven by additional spend as we focus on developing new and existing products in the market. The impacts of currency exchange did not have a material impact on the comparable periods.

Pro Forma: Research and development expenses increased by $5.3 million, or 12.0%, to $49.5 million for the Successor year ended December 31, 2014 compared to $44.2 million for the Pro Forma year ended December 31, 2013. These increases were driven by additional spend as we focus on developing new and existing products in the market. The impacts of currency exchange did not have a material impact on the comparable periods.

Amortization of acquired intangibles

Historical: Amortization of acquired intangibles was $83.8 million for the Successor year ended December 31, 2014 compared to $79.9 million for the Successor year ended December 31, 2013 and $0.0 million for the Predecessor period January 1, 2013 through January 31, 2013. Amortization of acquired intangibles for the Successor year ended December 31, 2013 included a loss of $3.2 million associated with abandoned in-process research and development projects, all of which were recorded at fair value as part of the Acquisition. There was $0.1 million of comparable costs recorded during the year ended December 31, 2014. Excluding the impact of the $3.2 million loss, the increase during the Successor year ended December 31, 2014 included the impact of twelve months of amortization expense associated with purchase accounting while the Successor year ended December 31, 2013 included eleven months due to the timing of the Acquisition. The impacts of currency exchange did not have a material impact on the comparable periods.

Pro Forma: Amortization of acquired intangibles for the Successor year ended December 31, 2014 was $83.8 million and $86.5 million for the Pro Forma year ended December 31, 2013. Amortization of acquired intangibles for the Pro Forma year ended December 31, 2013 included a loss of $3.2 million associated with

 

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abandoned in-process research and development projects, all of which were recorded at fair value as part of the Acquisition. There was $0.1 million of comparable costs recorded during the year ended December 31, 2014. The impacts of currency exchange did not have a material impact on the comparable periods.

Merger and acquisition related expenses

Historical: In connection with the Acquisition, we incurred $28.1 million of merger and acquisition costs during the Successor year ended December 31, 2013. These costs consisted primarily of investment banking, legal and other professional advisory services costs. There were no comparable costs for the Successor year ended December 31, 2014.

Pro Forma: The Pro Forma year ended December 31, 2013 has been adjusted to remove the impact of these Acquisition related costs. There were no costs for the Successor year ended December 31, 2014.

Interest expense, net

Historical: Interest expense, net for the Successor year ended December 31, 2014 of $217.7 million represented a full twelve months of interest costs, including the Refinancing of our Term Loans in February of 2014. Interest expense, net for the Successor year ended December 31, 2013 of $215.1 million represented interest expense incurred during the period associated with our original debt financing for the Acquisition. The increase in 2014 primarily relates to the Successor year ended December 31, 2014 including twelve months of interest expense while the comparable 2013 periods included eleven months due to the timing of the Acquisition. Further contributing to the increase in interest expense were losses incurred on interest rate derivatives for $10.2 million during the Successor year ended December 31, 2014, compared to gains of $0.2 million during the comparable period. These increases were offset by the reduction in interest rates due to the Refinancing in February 2014 of our Senior Credit Facility combined with an additional step-down in interest rates on our term loans in August 2014. Further offsetting the increases were slight increases in capitalized interest during the Successor year ended December 31, 2014. The impacts of currency exchange did not have a material impact on the comparable periods.

Pro Forma: Interest expense, net was $217.7 million for the Successor year ended December 31, 2014 and $234.8 million for the Pro Forma year ended December 31, 2013. The Pro Forma amounts reflect the effects of the Financing as if the transaction had occurred on January 1, 2013, which resulted in an additional $19.7 million in interest for the Pro Forma year ended December 31, 2013. The decrease in the Successor year ended December 31, 2014 compared to the Pro Forma year ended December 31, 2013 primarily relates to the reduction in interest rates due to the Refinancing in February 2014 of our Senior Credit Facility combined with an additional step-down in interest rates on our term loans in August 2014. Further contributing to the decrease in comparable periods was an increase in capitalized interest during the Successor year ended December 31, 2014. Offsetting these decreases were losses incurred on interest rate derivative instruments of $10.2 million for the Successor year ended December 31, 2014 compared with gains of $0.2 million during the Pro Forma year ended December 31, 2013. The impacts of currency exchange did not have a material impact on the comparable periods.

Bridge financing commitment fees

Historical: On August 30, 2012, we signed a debt commitment letter, which was subsequently amended and restated, that included a bridge facility comprised of $1,100.0 million of unsecured U.S. bridge loans and the Euro equivalent of $300.0 million of secured Euro bridge loans (the “Bridge Facility”), which was to be utilized to partially fund the Acquisition in the event that permanent financing was not obtained. Upon the issuance of the Senior Notes and the entry into the Senior Secured Credit Facilities, the commitments under the Bridge Facility terminated. Commitment fees related to the Bridge Facility of $21.0 million and associated legal and other professional advisory services costs of $4.0 million were expensed upon the termination during the Successor year ended December 31, 2013. There were no such costs incurred for the Successor year ended December 31, 2014.

 

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Pro Forma: The Pro Forma year ended December 31, 2013 has been adjusted to remove the impact of these fees. There were no costs for the Successor year ended December 31, 2014.

Other expense, net

Historical: Other expense, net was $115.0 million for the Successor year ended December 31, 2014 compared to $48.5 million for the Successor year ended December 31, 2013 and $5.0 million of expense for the Predecessor period January 1, 2013 through January 31, 2013. Foreign exchange losses, net, were $81.2 million during the Successor year ended December 31, 2014 as compared to foreign exchange losses of $48.9 million and $4.5 million for the year ended December 31, 2013 and the predecessor period ended January 31, 2013, respectively. Net foreign exchange losses for the year ended December 31, 2014 consisted of $202.1 million in remeasurement losses primarily related to intercompany transactions denominated in currencies different from the functional currency of the relevant subsidiary, partially offset by $103.9 million in gains on our Euro borrowings and $17.0 million in gains related to our Venezuelan operations.

During 2014, we changed the exchange rate we use for remeasuring our Venezuelan subsidiaries’ non-U.S. Dollar denominated monetary assets and liabilities to the rate determined by an auction process conducted by Venezuela’s SICAD I, which increased to 12.0 to 1 compared to the historical indexed rate of 6.3 to 1 at December 31, 2013. The devaluation resulted in net gains of $17.0 million for the Successor year ended December 31, 2014 due to our Venezuelan operations being in a net monetary liability position.

Contributing to expense in the Successor year ended December 31, 2013 was the adverse impact of $19.4 million of expense incurred related to the Acquisition date settlement of a foreign currency hedge contract used to hedge the variability of the U.S. dollar equivalent of the original borrowings under the Euro Term Loan and Euro Senior Notes.

Excluding the impact of the $19.4 million expense at the Acquisition date, foreign exchange losses of $29.5 million for the Successor year ended December 31, 2013 were attributable to $9.4 million in remeasurement losses primarily related to intercompany transactions denominated in currencies different from the functional currency of the relevant subsidiary and $14.6 million in remeasurement losses from the remeasurement of the Euro Senior Notes and Euro Term Loan into U.S. Dollars.

Further contributing to the increase in other expense for the Successor year ended December 31, 2014 were $16.6 million in management fees, which included a $13.4 million fee associated with the Carlyle management agreement which terminated with the effectiveness of the IPO. Additionally, during the Successor year ended December 31, 2014, we incurred debt modification fees and losses on extinguishment of debt of $3.1 million and $3.0 million, respectively. Lastly, the Successor year ended December 31, 2014 was impacted by the release of an indemnity receivable that had been recorded in conjunction with our tax indemnities from the Acquisition. This resulted in $17.8 million of expense during the Successor year ended December 31, 2014, relating to an uncertain tax position that was reversed during the Successor year ended December 31, 2014.

Pro Forma: Other expense, net was $115.0 million for the Successor year ended December 31, 2014 as compared to $34.1 million for the Pro Forma year ended December 31, 2013, representing a change of $80.9 million, or 237.2%. The Pro Forma year ended December 31, 2013 excludes the impact of $19.4 million of costs incurred related to the Acquisition date settlement of a foreign currency hedge contract used to hedge the variability of the U.S. dollar equivalent of the original borrowings under the Euro Term Loan and Euro Senior Notes. Net foreign exchange losses of $81.2 million were recorded for the Successor year ended December 31, 2014, as compared to exchange losses of $34.0 million for the Pro Forma year ended December 31, 2013. Net foreign exchange losses for the year ended December 31, 2014 consisted of $202.1 million in translation losses primarily related to intercompany transactions denominated in currencies different from the functional currency of the relevant subsidiary, partially offset by $103.9 million in gains on our Euro borrowings and $17.0 million in gains related to our Venezuelan operations.

 

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During 2014, we changed the exchange rate we use for remeasuring our Venezuelan subsidiaries’ non-U.S. Dollar denominated monetary assets and liabilities to the rate determined by an auction process conducted by Venezuela’s Complementary System of Foreign Currency Administration (SICAD I), which increased to 12.0 to 1 compared to the historical indexed rate of 6.3 to 1 at December 31, 2013. The devaluation resulted in net gains of $17.0 million for the Successor year ended December 31, 2014 due to our Venezuelan operations being in a net monetary liability position.

Further contributing to the increase in other expense for the Successor year ended December 31, 2014 were $16.6 million in management fees, which included a $13.4 million fee associated with the Carlyle management agreement which terminated with the effectiveness of the IPO. Additionally, during the Successor year ended December 31, 2014 we incurred debt modification fees and losses on extinguishment of debt of $3.1 million and $3.0 million, respectively. Lastly, the Successor year ended December 31, 2014 was impacted by the release of an indemnity receivable that had been recorded in conjunction with our tax indemnities from the Acquisition. This resulted in $17.8 million of expense during the Successor year ended December 31, 2014, relating to an uncertain tax position that was reversed during the Successor year ended December 31, 2014.

Provision (benefit) for income taxes

Historical: We recorded a provision for income taxes of $2.1 million for the Successor year ended December 31, 2014, which represents a 5.7% effective tax rate in relation to the income before income taxes of $36.8 million. The effective tax rate for the Successor year ended December 31, 2014 differs from the U.S. Federal statutory rate by 29.3%, which is the result of various items that impacted the rate both favorably and unfavorably. We recorded favorable adjustments for earnings in jurisdictions where the statutory rate is lower than the U.S. Federal rate of $46.7 million and unrecognized tax benefit adjustments primarily related to acquisition tax matters of $44.0 million. These adjustments were partially offset by the impact of pre-tax losses attributable to jurisdictions where a tax benefit is not expected to be realized of $44.4 million and non-deductible expenses and interest of $29.6 million.

We recorded a benefit for income taxes of $44.8 million for the Successor year ended December 31, 2013, which represents a 17.0% effective tax rate in relation to the loss before income taxes of $263.7 million. The effective tax rate for the Successor year ended December 31, 2013 differs from the U.S. Federal statutory rate by 18.0%. This difference is primarily due to unfavorable adjustments for the impact of pre-tax losses attributable to jurisdictions where a tax benefit is not expected to be realized of $55.0 million, unrecognized tax benefits primarily related to acquisition tax matters of $35.1 million and non-deductible expenses of $25.8 million. These adjustments were partially offset by the benefit of earnings in jurisdictions where the statutory tax rate was lower than the U.S. Federal statutory rate of $36.6 million and capital losses of $46.7 million.

We recorded a provision for income taxes of $7.1 million for the Predecessor period ended January 31, 2013 which represents a 45.6% effective tax rate in relation to the income before taxes of $15.6 million.

Pro Forma: We recorded a benefit for income taxes of $1.3 million for the Pro Forma year ended December 31, 2013, which represents a 1.2% effective tax rate in relation to the pro forma loss before income taxes of $108.1 million. The variance in the pro forma effective tax rate from the historical effective tax rate, described in the corresponding historical discussion above, was primarily due to the application of statutory income tax rates to the cumulative pro forma adjustments.

 

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Successor year ended December 31, 2013, Pro Forma year ended December 31, 2013 and Predecessor period January 1, 2013 through January 31, 2013 compared to Successor period August 24, 2012 through December 31, 2012 and the Predecessor year ended December 31, 2012

 

     Successor           Predecessor      Pro Forma  
     Year Ended
December 31,
    Period from
August 24
through
December 31,
          Period from
January 1
through
January 31,
     Year Ended
December 31,
     Year Ended
December 31,
 

(in millions)

   2013     2012           2013      2012      2013  

Net sales

   $ 3,951.1      $ —            $ 326.2       $ 4,219.4       $ 4,277.3   

Other revenue

     35.7        —              1.1         37.4         36.8   
  

 

 

   

 

 

        

 

 

    

 

 

    

 

 

 

Total revenue

  3,986.8      —         327.3      4,256.8      4,314.1   

Cost of goods sold

  2,772.8      —         232.2      2,932.6      2,909.0   

Selling, general and administrative expenses

  1,040.6      —         70.8      873.4      1,113.6   

Research and development expenses

  40.5      —         3.7      41.5      44.2   

Amortization of acquired intangibles

  79.9      —         —       —       86.5   

Merger and acquisition related expenses

  28.1      29.0        —       —       —    
  

 

 

   

 

 

        

 

 

    

 

 

    

 

 

 

Income (loss) from operations

  24.9      (29.0     20.6      409.3      160.8   
  

 

 

   

 

 

        

 

 

    

 

 

    

 

 

 

Interest expense, net

  215.1      —         —       —       234.8   

Bridge financing commitment fees

  25.0      —         —       —       —    

Other expense, net

  48.5      —         5.0      16.3      34.1   
  

 

 

   

 

 

        

 

 

    

 

 

    

 

 

 

Income (loss) before income taxes

  (263.7   (29.0     15.6      393.0      (108.1

Provision (benefit) for income taxes

  (44.8   —         7.1      145.2      (1.3
  

 

 

   

 

 

        

 

 

    

 

 

    

 

 

 

Net income (loss)

  (218.9   (29.0     8.5      247.8      (106.8

Less: Net income attributable to noncontrolling interests

  6.0      —         0.6      4.5      6.6   
  

 

 

   

 

 

        

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to controlling interests

$ (224.9 $ (29.0   $ 7.9    $ 243.3    $ (113.4
  

 

 

   

 

 

        

 

 

    

 

 

    

 

 

 

Net sales

Historical: Net sales were $3,951.1 million and $326.2 million for the Successor year ended December 31, 2013 and the Predecessor period January 1, 2013 through January 31, 2013, respectively, as compared to net sales of $4,219.4 million for the Predecessor year ended December 31, 2012. Higher average selling prices across all regions contributed to net sales growth of 6.3% in the Successor year ended December 31, 2013. This growth was partially offset by volume declines during the period, which reduced net sales by 3.5%, primarily as a result of a weak economic environment in Latin America. Additionally, the unfavorable impacts of currency exchange contributed to a 1.4% reduction in net sales, primarily due to the weakening of foreign currency exchange rates within the Latin America region compared to the U.S. dollar.

Pro Forma: Net sales increased $57.9 million, or 1.4%, to $4,277.3 million for the Pro Forma year ended December 31, 2013, as compared to net sales of $4,219.4 million for the Predecessor year ended December 31, 2012. Higher average selling prices contributed to net sales growth of 6.3%. This growth was partially offset by volume declines during the period, which reduced net sales by 3.5%, primarily as a result of a weak economic environment in Latin America. Additionally, the unfavorable impacts of currency exchange contributed to a 1.4% reduction in net sales, primarily due to the weakening of foreign currency exchange rates within the Latin America region compared to the U.S. dollar.

 

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Other revenue

Historical: Other revenue was $35.7 million and $1.1 million for the Successor year ended December 31, 2013 and the Predecessor period January 1, 2013 through January 31, 2013, respectively, as compared to other revenue of $37.4 million for the Predecessor year ended December 31, 2012. The impacts of currency exchange did not have a material impact on the comparable periods.

Pro Forma: Other revenue remained largely consistent at $36.8 million for the Pro Forma year ended December 31, 2013, as compared to other revenue of $37.4 million for the Predecessor year ended December 31, 2012. The impacts of currency exchange did not have a material impact on the comparable periods.

Cost of sales

Historical: Cost of sales was $2,772.8 million and $232.2 million for the Successor year ended December 31, 2013 and the Predecessor period January 1, 2013 through January 31, 2013, respectively, as compared to cost of sales of $2,932.6 million for the Predecessor year ended December 31, 2012. Cost of sales for the Successor year ended December 31, 2013 reflected increased depreciation expense of $73.4 million resulting from the fair value adjustments to property, plant and equipment in conjunction with the Acquisition. Cost of sales was also negatively impacted in 2013 by increased costs of goods of $103.7 million resulting from the fair value adjustments to inventory in conjunction with the Acquisition. Included in the Predecessor year ended December 31, 2012 was a $19.1 million benefit due to the last-in-first-out “LIFO” method of inventory accounting. In addition to the impacts from purchase accounting, cost of sales was also favorably impacted by the reduction in costs incurred in the Successor period operating structure versus those previously allocated by DuPont during the Predecessor year ended December 31, 2012. This includes the impacts of the defined benefit pension obligations for U.S. employees in connection with the Acquisition, which resulted in a net reduction in U.S. employee fringe costs compared to the Predecessor year ended December 31, 2012. The remaining decrease was primarily due to lower raw material costs across most regions and product lines as well as impacts from foreign currency exchange rates. The favorable impact of raw material prices across both our Performance Coatings and Transportation Coatings segments contributed to an approximately 0.3% impact on cost of sales as a percentage of net sales. Favorable impacts of currency exchange contributed to a 0.4% decrease in cost of goods sold, primarily due to the weakening of foreign currency exchange rates within the Latin America region compared to the U.S. dollar.

Pro Forma: Cost of sales decreased $23.6 million, or 0.8%, to $2,909.0 million for the Pro Forma year ended December 31, 2013 as compared to $2,932.6 million for the Predecessor year ended December 31, 2012. The Pro Forma year ended December 31, 2013 was adjusted to include the impact of $7.9 million of increased depreciation for the Predecessor period January 1, 2013 through January 31, 2013 and to exclude $103.7 million of increased costs of goods related to the Acquisition. As a percentage of net sales, cost of sales decreased from 69.5% to 68.0%. This decrease was primarily due to lower raw material costs across most regions and product lines. The favorable impact of raw material prices across both our Performance Coatings and Transportation Coatings segments contributed to an approximately 0.3% impact on cost of sales as a percentage of net sales. Cost of sales was also favorably impacted by the reduction in costs incurred in our current operating structure versus those previously allocated by DuPont during the Predecessor year ended December 31, 2012. Further, we did not assume defined benefit pension obligations for U.S. employees in connection with the Acquisition, which resulted in a net reduction in U.S. employee fringe costs compared to the Predecessor year ended December 31, 2012. These decreases were slightly offset by the $19.1 million benefit included in the Predecessor year ended December 31, 2012 due to the LIFO method of inventory accounting, as well as the impact in the Successor year ended December 31, 2013 of increased depreciation expense of $81.3 million resulting from the fair value adjustments to property, plant and equipment in conjunction with the Acquisition. Favorable impacts of currency exchange contributed to a 0.4% decrease in cost of goods sold, primarily due to the weakening of foreign currency exchange rates within the Latin America region compared to the U.S. dollar.

 

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Selling, general and administrative expenses

Historical: Selling, general and administrative expenses were $1,040.6 million and $70.8 million for the Successor year ended December 31, 2013 and the Predecessor period January 1, 2013 through January 31, 2013, respectively, as compared to selling, general and administrative expenses of $873.4 million for the Predecessor year ended December 31, 2012. The increase in 2013 was primarily the result of $231.5 million of transition-related expenses we incurred during the Successor year ended December 31, 2013, primarily due to 2013 termination benefits and other employee related costs of $147.5 million and consulting and advisory costs of $54.7 million related to our initial separation and transition to a standalone company. Selling, general and administrative expenses were also adversely impacted by increased depreciation expense of approximately $23.1 million resulting from the fair value adjustments to non-manufacturing assets in conjunction with the Acquisition. Favorable impacts of currency exchange, primarily due to the weakening of foreign currency exchange rates within the Latin America region compared to the U.S. dollar, contributed to an approximately 1.0% decrease in selling, general and administrative expenses. These increases were offset slightly by a reduction in U.S. pension expense and lower actual costs for our operating structure as a standalone entity.

Pro Forma: Selling, general and administrative expenses increased $240.2 million, or 27.5%, to $1,113.6 million for the Pro Forma year ended December 31, 2013, as compared to $873.4 million for the Predecessor year ended December 31, 2012. The Pro Forma year ended December 31, 2013 is adjusted to reflect the increased depreciation expense resulting from the fair value adjustments to non-manufacturing assets in conjunction with the Acquisition. This increase was primarily driven by the $231.8 million of transition-related costs incurred during the Pro Forma year ended December 31, 2013, primarily due to 2013 termination benefits and other employee related costs of $147.8 million, and consulting and advisory costs of $54.7 million related to our transition to a standalone company. Additionally, we incurred $25.3 million in additional depreciation expense associated with fair value adjustments to non-manufacturing assets in conjunction with the Acquisition. Favorable impacts of currency exchange, primarily due to the weakening of foreign currency exchange rates within the Latin America region compared to the U.S. dollar, contributed to an approximately 1.0% decrease in selling, general and administrative expenses. These increases were offset slightly by approximately $16.9 million reduction in U.S. pension expense and lower actual costs for our operating structure as a standalone entity.

Research and development expenses

Historical: Research and development expense was $40.5 million and $3.7 million for the Successor year ended December 31, 2013 and the Predecessor period January 1, 2013 through January 31, 2013, respectively, as compared to research and development expense of $41.5 million for the Predecessor year ended December 31, 2012. Research and development expense compared to the Predecessor year ended December 31, 2012 increased due to focused spending on growth projects. This increase was partially offset by a decrease in allocations of costs of $2.1 million for the Successor year ended December 31, 2013 compared to the Predecessor year ended December 31, 2012, representing costs associated with the DuPont Corporate research and development activities in 2012. In addition, favorable impacts of currency exchange contributed to a 0.7% decrease in research and development expense, primarily due to the weakening of foreign currency exchange rates within the Latin America region compared to the U.S. dollar.

Pro Forma: Research and development expense increased $2.7 million, or 6.5%, for the Pro Forma year ended December 31, 2013 to $44.2 million compared to $41.5 million for the Predecessor year ended December 31, 2012. Research and development expense for the Pro Forma year ended December 31, 2013 increased due to focused spending on growth projects. This increase was partially offset by a decrease in allocations of costs of $2.1 million for the Pro Forma year ended December 31, 2013 compared to the Predecessor year ended December 31, 2012 representing costs associated with the DuPont Corporate research and development activities in 2012. Favorable impacts of currency exchange contributed to a 0.7% decrease in research and development expense, primarily due to the weakening of foreign currency exchange rates within the Latin America region compared to the U.S. dollar.

 

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Amortization of acquired intangibles

Historical: Amortization of acquired intangibles was $79.9 million for the Successor year ended December 31, 2013. Amortization of acquired intangibles in the Successor year ended December 31, 2013 includes a loss of $3.2 million associated with abandoned acquired in-process research and development projects, all of which was related to the Acquisition. There were no comparable costs recorded in the Predecessor period January 1, 2013 through January 31, 2013 and the Predecessor year ended December 31, 2012.

Pro Forma: Amortization of acquired intangibles was $86.5 million for the Pro Forma year ended December 31, 2013. Amortization expense for the Pro Forma year ended December 31, 2013 has been adjusted to reflect amortization expense for January 2013. There were no comparable costs recorded in the Predecessor year ended December 31, 2012. The impacts of currency exchange did not have a material impact on the comparable periods.

Merger and acquisition related costs

Historical: In connection with the Acquisition, we incurred $28.1 million and $29.0 million of merger and acquisition costs during the Successor year ended December 31, 2013 and the Successor period August 24, 2012 through December 31, 2012, respectively. These costs consisted primarily of investment banking, legal and other professional advisory services costs. There were no such costs associated with the Predecessor period January 1, 2013 through January 31, 2013 or the Predecessor year ended December 31, 2012. The impacts of currency exchange did not have a material impact on the comparable periods.

Pro Forma: The Pro Forma year ended December 31, 2013 has been adjusted to remove the impact of these Acquisition related costs. There were no comparable costs recorded in the Predecessor year ended December 31, 2012.

Interest expense, net

Historical: Interest expense, net was $215.1 million for the Successor year ended December 31, 2013. There was no interest expense for the Predecessor year ended December 31, 2012 or the Predecessor period January 1, 2013 through January 31, 2013. The increase in interest expense, net was due to interest costs associated with the debt financing for the Acquisition and the liquidity requirements of a standalone entity.

Pro Forma: Interest expense, net for the Pro Forma year ended December 31, 2013 of $234.8 million has been adjusted to reflect interest expense for January 2013, which resulted in an additional $19.7 million in interest for the Pro Forma year ended December 31, 2013. There was no interest expense for the Predecessor year ended December 31, 2012.

Bridge financing commitment fees

Historical: Commitment fees related to the Bridge Facility of $21.0 million and associated legal and other professional advisory services costs of $4.0 million were expensed upon termination of the Bridge Facility during the Successor period ended December 31, 2013. There were no such costs associated with the Predecessor period January 1, 2013 through January 31, 2013 and the Predecessor year ended December 31, 2012.

Pro Forma: The Pro Forma year ended December 31, 2013 has been adjusted to remove the impact of these fees. There were no comparable costs recorded in the Predecessor year ended December 31, 2012.

Other expense, net

Historical: Other expense, net was $48.5 million and $5.0 million for the Successor year ended December 31, 2013 and for the Predecessor period January 1, 2013 through January 31, 2013, respectively, as compared to

 

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$16.3 million for the Predecessor year ended December 31, 2012. Other expense, net during the Successor year ended December 31, 2013 primarily consists of net foreign exchange losses from intercompany transactions denominated in currencies different from the functional currency of the subsidiary involved in the transaction. In addition, the increase partially resulted from a $19.4 million loss related to the Acquisition date settlement of a foreign currency hedge contract used to hedge the variability of the U.S. dollar equivalent of the original borrowings under the Euro Term Loan and Euro Senior Notes, and the impact of the strengthening Euro against our Euro Borrowings.

Pro Forma: Other expense, net increased $17.8 million, or 109.2%, for the Pro Forma year ended December 31, 2013 to $34.1 million compared to $16.3 million for the Predecessor year ended December 31, 2012. The Pro Forma year ended December 31, 2013 excludes the impact of $19.4 million of a loss related to the Acquisition date settlement of a foreign currency hedge contract used to hedge the variability of the U.S. dollar equivalent of the original borrowings under the Euro Term Loan and Euro Senior Notes. Net foreign exchange losses of $34.0 million were recorded for the Pro Forma year ended December 31, 2013, as compared to a loss of $17.7 million for the Predecessor year ended December 31, 2012.

During the Pro Forma year ended December 31, 2013, we incurred net unrealized foreign exchange losses of $9.4 million on the remeasurement of intercompany loans. In addition, we incurred unrealized foreign exchange losses of $14.6 million related to the remeasurement of the Euro Senior Notes and Euro Term Loan into U.S. dollars. The remaining foreign exchange losses primarily related to the remeasurement of other assets and liabilities denominated in currencies other than the functional currency of the affected subsidiaries.

Provision (benefit) for income taxes

Historical: We recorded a benefit for income taxes of $44.8 million for the Successor year ended December 31, 2013, which represents a 17.0% effective tax rate in relation to the loss before income taxes of $263.7 million. The effective tax rate for the Successor year ended December 31, 2013 differs from the U.S. Federal statutory rate by 18.0%. This difference is primarily due to unfavorable adjustments for the impact of pre-tax losses attributable to jurisdictions where a tax benefit is not expected to be realized of $55.0 million, unrecognized tax benefits primarily related to acquisition tax matters of $35.1 million and non-deductible expenses of $25.8 million. These adjustments were partially offset by the benefit of earnings in jurisdictions where the statutory tax rate was lower than the U.S. Federal statutory rate of $36.6 million and capital losses of $46.7 million.

We recorded a provision for income taxes of $145.2 million for the Predecessor year ended December 31, 2012 which represents a 37.0% effective tax rate in relation to the income before taxes of $393.0 million. The effective tax rate for the Predecessor year ended December 31, 2012 differs from the U.S. federal statutory rate by 2.0%. This difference is primarily due to the unfavorable impact of pre-tax losses attributable to jurisdictions where a tax benefit is not expected to be realized of $9.8 million, as well as a $4.7 million impact related to non-deductible net foreign exchange losses. This is offset by the benefit of earnings in jurisdictions where the statutory tax rate was lower than the U.S. Federal statutory rate of $10.9 million.

Pro Forma: We recorded a benefit for income taxes of $1.3 million for the Pro Forma year ended December 31, 2013, which represents a 1.2% effective tax rate in relation to the pro forma loss before income taxes of $108.1 million. The variance in the pro forma effective tax rate from the historical effective tax rate, described in the corresponding historical discussion above, was primarily due to the application of statutory income tax rates to the cumulative pro forma adjustments.

 

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Selected Segment Information

Successor three months ended March 31, 2015 compared to Successor three months ended March 31, 2014

The following table presents net sales by segment and segment Adjusted EBITDA for the following periods:

 

     Successor  
     Three Months Ended
March 31,
 

(in millions)

   2015      2014  

Net Sales

     

Performance Coatings

   $ 557.2       $ 616.1   

Transportation Coatings

     432.0         431.3   
  

 

 

    

 

 

 

Total

$ 989.2    $ 1,047.4   
  

 

 

    

 

 

 

Segment Adjusted EBITDA(1)(2)

Performance Coatings

$ 107.1    $ 124.5   

Transportation Coatings

  74.9      62.2   
  

 

 

    

 

 

 

Total

$ 182.0    $ 186.7   
  

 

 

    

 

 

 

 

(1) For additional information regarding Segment Adjusted EBITDA, see Note 18 to our Unaudited Condensed Consolidated Financial Statements appearing elsewhere in this prospectus.
(2) For information about Adjusted EBITDA, including the manner in which it is calculated and a reconciliation from our net income (loss) to Adjusted EBITDA see “Prospectus Summary—Summary Historical and Pro Forma Financial Information.”

Performance Coatings Segment

Net sales decreased $58.9 million, or 9.6%, to $557.2 million for the three months ended March 31, 2015 compared to net sales of $616.1 million for the three months ended March 31, 2014. The decrease in net sales in the three months ended March 31, 2015 was primarily driven by unfavorable impacts of currency exchange, which contributed to an approximately 12.1% reduction in net sales resulting primarily from the impacts of the weakening Euro and certain currencies within Latin America compared to the U.S. dollar. The decrease in net sales was partially offset by volume growth primarily within North America, Latin America and Asia, which contributed to a net sales increase of 1.9%.

Adjusted EBITDA decreased $17.4 million, or 14.0%, to $107.1 million for the three months ended March 31, 2015 compared to Adjusted EBITDA of $124.5 million for the three months ended March 31, 2014. The decrease in Adjusted EBITDA in the three months ended March 31, 2015 was primarily driven by unfavorable impacts of the weakening Euro and certain currencies within Latin America compared to the U.S. dollar, which were slightly offset by increases resulting from higher volumes, average selling prices, and lower variable costs. Additionally, dividends from our consolidated joint ventures to our noncontrolling partners negatively impacted Adjusted EBITDA by $3.1 million for the three months ended March 31, 2015 as compared to $0.0 million for the three months ended March 31, 2014.

Transportation Coatings Segment

Net sales increased $0.7 million, or 0.2%, to $432.0 million for the three months ended March 31, 2015 compared to net sales of $431.3 million for the three months ended March 31, 2014. The increase in net sales for the three months ended March 31, 2015 was primarily driven by increases in volume in North America, Latin America and Asia, as well as higher average selling prices in Europe and Latin America, which contributed to net sales increases of 9.0% and 0.1%, respectively. These increases were partially offset by decreases from the unfavorable impacts of currency exchange, which contributed to an approximately 8.9% reduction in net sales resulting primarily from the impacts of the weakening Euro and certain currencies within Latin America compared to the U.S. dollar.

 

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Adjusted EBITDA increased $12.7 million, or 20.4%, to $74.9 million for the three months ended March 31, 2015 compared to Adjusted EBITDA of $62.2 million for the three months ended March 31, 2014. The increase in Adjusted EBITDA in the three months ended March 31, 2015 was driven by higher volumes and lower variable costs, which were offset by higher fixed costs associated with support of our volume growth within the Light Vehicle and Commercial Vehicle end markets, and unfavorable impacts of the weakening Euro and certain currencies within Latin America compared to the U.S. dollar.

Successor year ended December 31, 2014 compared to the Successor year ended December 31, 2013 and Predecessor period January 1, 2013 through January 31, 2013, and Successor year ended December 31, 2014 compared to the Pro Forma year ended December 31, 2013

The following table presents net sales by segment and segment Adjusted EBITDA for the following periods:

 

     Successor           Predecessor      Pro Forma  
     Year Ended
December 31,
          Period from
January 1
through
January 31,
     Year Ended
December 31,
 

(in millions)

   2014      2013           2013      2013  

Net Sales

               

Performance Coatings

   $ 2,585.0       $ 2,325.3           $ 186.8       $ 2,512.1   

Transportation Coatings

     1,776.7         1,625.8             139.4         1,765.2   
  

 

 

    

 

 

        

 

 

    

 

 

 

Total

$ 4,361.7    $ 3,951.1      $ 326.2    $ 4,277.3   
  

 

 

    

 

 

        

 

 

    

 

 

 

Segment Adjusted EBITDA(1)(2)

 

Performance Coatings

$ 547.6    $ 500.2      $ 15.0    $ 518.7   

Transportation Coatings

  292.9      198.8        17.7      218.9   
  

 

 

    

 

 

        

 

 

    

 

 

 

Total

$ 840.5    $ 699.0      $ 32.7    $ 737.6   
  

 

 

    

 

 

        

 

 

    

 

 

 

 

(1) For additional information regarding Segment Adjusted EBITDA, see Note 25 to our Audited Consolidated and Combined Financial Statements appearing elsewhere in this prospectus.
(2) For information about Adjusted EBITDA, including the manner in which it is calculated and a reconciliation from our net income (loss) to Adjusted EBITDA see “Prospectus Summary—Summary Historical and Pro Forma Financial Information.” The Segment Adjusted EBITDA information for the Pro Forma year ended December 31, 2013 includes (a) the add-back of corporate allocations from DuPont to DPC for the usage of DuPont’s facilities, functions and services; costs for administrative functions and services performed on behalf of DPC by centralized staff groups within DuPont; a portion of DuPont’s general corporate expenses; and certain pension and other long-term employee benefit costs net of (b) estimated standalone costs based on a corporate function resource analysis that included a standalone executive office, the costs associated with supporting a standalone information technology infrastructure, corporate functions such as legal, finance, treasury, procurement and human resources and certain costs related to facilities management. This resource analysis included anticipated headcount and the associated overhead costs of running these functions effectively as a standalone company of our size and complexity. This resulted in a net benefit of $5.7 million for the Predecessor period January 1, 2013 through January 31, 2013.

Performance Coatings Segment

Historical: Net sales were $2,585.0 million for the Successor year ended December 31, 2014 compared to net sales of $2,325.3 million for the Successor year ended December 31, 2013 and $186.8 million for the Predecessor period January 1, 2013 through January 31, 2013. The increase in net sales in the Successor year ended December 31, 2014 was primarily driven by volume growth, which contributed to a net sales increase of 3.1%, as well as higher average selling prices, which contributed to a net sales increase of 1.9%. Net sales growth was

 

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partially offset by the unfavorable impacts of currency exchange, which contributed to an approximately 2.1% reduction in net sales resulting primarily from the impacts of weakening currencies in certain jurisdictions within Latin America and Asia.

Adjusted EBITDA was $547.6 million for the Successor year ended December 31, 2014 compared to Adjusted EBITDA of $500.2 million for the Successor year ended December 31, 2013 and $15.0 million for the Predecessor period January 1, 2013 through January 31, 2013. The increase in Adjusted EBITDA in the Successor year ended December 31, 2014 was driven by higher volumes and higher average selling price as well as lower raw material input costs slightly offset by higher operating costs. In addition, the absence of the Predecessor corporate allocated costs in January 2013 contributed an approximate $3.4 million benefit.

Pro Forma: Net sales increased $72.9 million, or 2.9%, to $2,585.0 million for the Successor year ended December 31, 2014, as compared to net sales of $2,512.1 million for the Pro Forma year ended December 31, 2013. The increase in net sales in the Successor year ended December 31, 2014 was primarily driven by volume growth, which contributed to a net sales increase of 3.1%, as well as higher average selling prices, which contributed to a net sales increase of 1.9%. Net sales growth was partially offset by the unfavorable impacts of currency exchange, which contributed to an approximately 2.1% reduction in net sales resulting primarily from the impacts of weakening currencies in certain jurisdictions within Latin America and Asia.

Adjusted EBITDA increased $28.9 million, or 5.6%, to $547.6 million for the Successor year ended December 31, 2014 as compared to $518.7 million for the Pro Forma year ended December 31, 2013. As a percentage of net sales, Adjusted EBITDA increased to 21.2% from 20.6%. The increase was driven by higher volumes and higher average selling price as well as lower raw material input costs offset slightly by higher operating costs.

Transportation Coatings Segment

Historical: Net sales were $1,776.7 million for the Successor year ended December 31, 2014 compared to net sales of $1,625.8 million for the Successor year ended December 31, 2013 and $139.4 million for the Predecessor period January 1, 2013 through January 31, 2013. The increase in net sales in the Successor year ended December 31, 2014 was primarily driven by higher average selling prices, which contributed to net sales growth of 4.0%. This increase was partially offset by volume declines, primarily concentrated in the Latin America region, which contributed to a net sales decline of 1.4%. Unfavorable currency exchange rates also contributed to a reduction to net sales of 1.9% resulting primarily from the impacts of weakening currencies in certain jurisdictions primarily within Latin America.

Adjusted EBITDA was $292.9 million for the Successor year ended December 31, 2014 compared to Adjusted EBITDA of $198.8 million for the Successor year ended December 31, 2013 and $17.7 million for the Predecessor period January 1, 2013 through January 31, 2013. The increase in Adjusted EBITDA in the Successor year ended December 31, 2014 was driven by higher average selling prices as well as lower fixed manufacturing costs, partially resulting from our operational improvement initiatives. In addition, the absence of the Predecessor corporate allocated costs contributed an approximate $2.3 million benefit.

Pro Forma: Net sales increased $11.5 million, or 0.7%, to $1,776.7 million for the year ended December 31, 2014, as compared to net sales of $1,765.2 million for the Pro Forma year ended December 31, 2013. The increase in net sales for the year ended December 31, 2014 as compared to the Pro Forma year ended December 31, 2013 was primarily driven by higher average selling prices, which contributed to net sales growth of 4.0%. This increase was partially offset by declining volumes primarily concentrated in the Latin America region, which contributed to a net sales decline of 1.4%. Unfavorable currency exchange rates also contributed to a reduction to net sales of 1.9% resulting primarily from the impacts of weakening currencies in certain jurisdictions primarily within Latin America.

 

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Adjusted EBITDA increased $74.0 million, or 33.8%, to $292.9 million for the year ended December 31, 2014 as compared to $218.9 million for the Pro Forma year ended December 31, 2013. As a percentage of net sales, Adjusted EBITDA increased to 16.5% from 12.4%. This increase was driven by higher average selling prices as well as lower fixed manufacturing costs, partially resulting from our operational improvement initiatives.

Successor year ended December 31, 2013, Pro Forma year ended December 31, 2013 and Predecessor period January 1, 2013 through January 31, 2013 compared to the Predecessor year ended December 31, 2012

The following table presents net sales by segment and segment Adjusted EBITDA for the following periods:

 

     Successor           Predecessor      Pro Forma  
     Year Ended
December 31,
          Period from
January 1
through
January 31,
     Year Ended
December 31,
     Year Ended
December 31,
 

(in millions)

   2013           2013      2012      2013  

Net Sales

               

Performance Coatings

   $ 2,325.3           $ 186.8       $ 2,479.5       $ 2,512.1   

Transportation Coatings

     1,625.8             139.4         1,739.9         1,765.2   
  

 

 

        

 

 

    

 

 

    

 

 

 

Total

$ 3,951.1      $ 326.2    $ 4,219.4    $ 4,277.3   
  

 

 

        

 

 

    

 

 

    

 

 

 

Segment Adjusted EBITDA(1)(2)

 

Performance Coatings

$ 500.2      $ 15.0    $ 426.0    $ 518.7   

Transportation Coatings

  198.8        17.7      151.6      218.9   
  

 

 

        

 

 

    

 

 

    

 

 

 

Total

$ 699.0      $ 32.7    $ 577.6    $ 737.6   
  

 

 

        

 

 

    

 

 

    

 

 

 

 

(1) For additional information regarding Segment Adjusted EBITDA, see Note 25 to our Audited Consolidated and Combined Financial Statements appearing elsewhere in this prospectus.
(2) For information about Adjusted EBITDA, including the manner in which it is calculated and a reconciliation from our net income (loss) to Adjusted EBITDA see “Prospectus Summary—Summary Historical and Pro Forma Financial Information.” The Segment Adjusted EBITDA information for the Pro Forma year ended December 31, 2013 includes (a) the add-back of corporate allocations from DuPont to DPC for the usage of DuPont’s facilities, functions and services; costs for administrative functions and services performed on behalf of DPC by centralized staff groups within DuPont; a portion of DuPont’s general corporate expenses; and certain pension and other long-term employee benefit costs net of (b) estimated standalone costs based on a corporate function resource analysis that included a standalone executive office, the costs associated with supporting a standalone information technology infrastructure, corporate functions such as legal, finance, treasury, procurement and human resources and certain costs related to facilities management. This resource analysis included anticipated headcount and the associated overhead costs of running these functions effectively as a standalone company of our size and complexity. This resulted in a net benefit of $5.7 million for the Pro Forma year ended December 31, 2013. The Predecessor year ended December 31, 2012 and the Predecessor period January 1, 2013 through January 31, 2013 do not include $84.2 million and $5.7 million, respectively, in net benefits related to these costs.

Performance Coatings Segment

Historical: Net sales were $2,325.3 million and $186.8 million for the Successor year ended December 31, 2013 and the Predecessor period January 1, 2013 through January 31, 2013, respectively, as compared to net sales of $2,479.5 million for the Predecessor year ended December 31, 2012. Net sales growth for the Predecessor period January 1, 2013 through January 31, 2013 and the Successor year ended December 31, 2013 was primarily driven by higher average selling prices, which contributed to net sales growth of 5.9%. These increases were offset by lower volumes, which decreased net sales by 3.4%. Weakening foreign currency exchange rates compared to the U.S. dollar primarily related to certain currencies within the Latin America region also had a negative impact on sales of 1.2%.

 

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Adjusted EBITDA was $500.2 million and $15.0 million for the Successor year ended December 31, 2013 and the Predecessor period January 1, 2013 through January 31, 2013, respectively, compared to Adjusted EBITDA of $426.0 million for the Predecessor year ended December 31, 2012. This increase was driven primarily by the absence of $77.6 million in the Predecessor year ended December 31, 2012 related to the add-back of corporate allocations from DuPont to DPC for estimated standalone entity benefits. The remaining increase was driven by lower raw material input costs and fixed manufacturing costs, partially resulting from our purchasing and operational improvement initiatives and price increases. These factors were slightly offset by the negative impact of weakening foreign currency exchange rates compared to the U.S. dollar, which were primarily related to certain currencies within the Latin America region, and contributed to a reduction in Adjusted EBITDA.

Pro Forma: Net sales increased $32.6 million, or 1.3%, to $2,512.1 million for the Pro Forma year ended December 31, 2013, as compared to net sales of $2,479.5 million for the Predecessor year ended December 31, 2012. Net sales growth was primarily driven by higher average selling prices, which contributed to net sales growth of 5.9%. These increases were offset by lower volumes, which decreased net sales by 3.4%. Weakening foreign currency exchange rates compared to the U.S. dollar primarily related to certain currencies within the Latin America region also had a negative impact on sales of 1.2%.

Adjusted EBITDA increased $92.7 million, or 21.8%, to $518.7 million for the Pro Forma year ended December 31, 2013 as compared to $426.0 million for the Predecessor year ended December 31, 2012. As a percentage of net sales, Adjusted EBITDA increased to 20.6% from 17.2%. This increase was driven by lower raw material input costs and fixed manufacturing costs, partially resulting from our purchasing and operational improvement initiatives and price increases. These factors were slightly offset by the negative impact of weakening foreign currency exchange rates compared to the U.S. dollar, which were primarily related to certain currencies within the Latin America region, and contributed to a reduction in Adjusted EBITDA.

Transportation Coatings Segment

Historical: Net sales were $1,625.8 million and $139.4 million for the Successor year ended December 31, 2013 and the Predecessor period January 1, 2013 through January 31, 2013, respectively, as compared to net sales of $1,739.9 million for the Predecessor year ended December 31, 2012. Net sales growth for the Predecessor period January 1, 2013 through January 31, 2013 and the Successor year ended December 31, 2013 was primarily driven by higher average selling prices, which contributed to a 6.8% net sales growth. Lower sales volumes contributed to a net sales decline of 3.7%, and the negative currency impact from weakening foreign currency exchange rates compared to the U.S. dollar primarily related to certain currencies within the Latin America region contributed to a net sales decline of 1.6%.

Adjusted EBITDA was $198.8 million and $17.7 million for the Successor year ended December 31, 2013 and the Predecessor period January 1, 2013 through January 31, 2013, respectively, compared to Adjusted EBITDA of $151.6 million for the Predecessor year ended December 31, 2012. The increase in Adjusted EBITDA from the Predecessor year ended December 31, 2012 was primarily driven by selective price increases as well as the absence of $6.6 million related to the add-back of corporate allocations from DuPont to DPC for estimated standalone entity benefits. Additionally, unfavorable currency exchange rates, which were primarily concentrated in the Latin America region, slightly offset these increases, and contributed to a reduction in Adjusted EBITDA.

Pro Forma: Net sales increased $25.3 million, or 1.5%, to $1,765.2 million for the Pro Forma year ended December 31, 2013, as compared to net sales of $1,739.9 million for the Predecessor year ended December 31, 2012. Net sales growth was primarily driven by higher average selling prices, which contributed to a 6.8% net sales growth. Lower sales volumes contributed to a net sales decline of 3.7%, and the negative currency impact from weakening foreign currency exchange rates compared to the U.S. dollar primarily related to certain currencies within the Latin America region contributed to a net sales decline of 1.6%.

Pro Forma: Adjusted EBITDA increased $67.3 million, or 44.4%, to $218.9 million for the Pro Forma year ended December 31, 2013 as compared to $151.6 million for the Predecessor year ended December 31, 2012. As

 

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a percentage of net sales, Adjusted EBITDA increased to 12.4% from 8.7%, driven primarily by selective price increases. Unfavorable currency exchange rates, which were primarily concentrated in the Latin America region, slightly offset these increases, and contributed to a reduction in Adjusted EBITDA.

Liquidity and Capital Resources

February 2013 DPC Acquisition and Related Financing

On August 30, 2012, Axalta Bermuda entered into a purchase agreement (the “Acquisition Agreement”) with DuPont pursuant to which Axalta Bermuda and certain of its indirect subsidiaries acquired DPC, including certain assets of DPC and all of the capital stock and other equity interests of certain entities engaged in the DPC business, from DuPont for a purchase price of $4,925.9 million plus or minus a working capital and pension adjustment. On February 1, 2013, Axalta Bermuda completed the acquisition of DPC. The Company and DuPont finalized the working capital and pension adjustments to the purchase price during the year ended December 31, 2013, which resulted in a reduction to the purchase price of $18.6 million to $4,907.3 million.

The purchase price was funded by (i) the Equity Contribution, (ii) proceeds from Senior Secured Credit Facilities consisting of a $2,300.0 million Dollar Term Loan facility and a €400.0 million Euro Term Loan facility and (iii) proceeds from the issuance of $750.0 million aggregate principal amount of Dollar Senior Notes and the issuance of €250.0 million Euro Senior Notes.

Cash Flows

Successor three months ended March 31, 2015 and 2014

 

     Successor  
     Three Months Ended
March 31,
 

(in millions)

   2015     2014  

Net cash provided by (used in):

    

Operating activities:

    

Net income (loss)

   $ 46.7      $ (3.7

Depreciation and amortization

     72.6        81.1   

Deferred income taxes

     (17.2     (15.1

Unrealized (gain)/loss on derivatives

     1.2        3.1   

Amortization of financing costs and original issue discount

     5.0        5.2   

Foreign exchange losses

     4.8        3.4   

Other non-cash items

     0.7        —     
  

 

 

   

 

 

 

Net income (loss) adjusted for non-cash items

  113.8      74.0   

Changes in operating assets and liabilities

  (212.5   (141.2
  

 

 

   

 

 

 

Operating activities

  (98.7   (67.2

Investing activities

  (30.2   (52.4

Financing activities

  (19.7   3.2   

Effect of exchange rate changes on cash

  (10.6   (3.3
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

$ (159.2 $ (119.7
  

 

 

   

 

 

 

Three Months Ended March 31, 2015 (Successor)

Net Cash Used for Operating Activities

Net cash used for operating activities for the three months ended March 31, 2015 was $98.7 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $113.8 million. This was

 

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partially offset by net increases in working capital of $212.5 million. The most significant drivers in working capital were increases in receivables, inventory and other assets of $115.7 million due to the timing of sales during the three months ended March 31, 2015 and increased inventory builds to support ongoing operational demands, reductions of other accrued liabilities of $91.1 million related to payments of normal operating activities, timing of cash payments for annual employee performance related benefits, as well as restructuring costs and transition-related costs incurred during 2014.

Net Cash Used for Investing Activities

Net cash used for investing activities for the three months ended March 31, 2015 was $30.2 million, This use was driven primarily by purchases of property, plant and equipment of $31.5 million and the acquisition of a controlling interest in an investment affiliate of $3.2 million (net of cash received) partially offset by a decrease of $1.8 million in restricted cash.

Net Cash Used for Financing Activities

Net cash used for financing activities for the three months ended March 31, 2015 was $19.7 million. The change was primarily driven by repayments of short-term borrowings and Term Loans of $10.7 million and $6.8 million, respectively, partially offset by proceeds received from short-term borrowings during the period of $1.5 million.

Dividends paid to noncontrolling interests totaled $3.5 million for the three months ended March 31, 2015.

Three Months Ended March 31, 2014 (Successor)

Net Cash Used for Operating Activities

Cash used for operating activities was $67.2 million for the three months ended March 31, 2014. The cash used for operations was the result of increases in net working capital partially offset by cash flows generated by operating earnings. An increase in trade and notes receivable due largely to higher sales levels during the three months ended March 31, 2014 resulted in an outflow of cash of $65.3 million. An increase in inventories resulted in a cash outflow of $28.3 million, while an increase in accounts payable favorably impacted cash flow from operations by $29.3 million. The increase in accounts payable and inventory was in support of higher sales. Further contributing to the cash flows used for operating activities was a decrease in accrued liabilities of $76.9 million primarily related to the timing of cash payments for annual employee performance related benefits, one-time transition costs and interest payments.

Net Cash Used for Investing Activities

Purchases of property, plant and equipment during the three months ending March 31, 2014, were $50.2 million, which included transition costs related to our transition to a standalone entity, which included costs to transition off of the DuPont information technology systems.

During the three months ended March 31, 2014, we also had a $2.0 million increase in restricted cash.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2014 was $3.2 million. The change was primarily driven by proceeds received from short-term borrowings during the period of $16.7 million partially offset by $9.6 million of payments on short-term borrowings. During the three months ended March 31, 2014, we paid $3.0 million in fees related to the amendment of the Senior Secured Credit Facilities.

 

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Dividends paid to noncontrolling interests totaled $0.9 million for the three months ended March 31, 2014.

Successor years ended December 31, 2014 and 2013 as well as the Successor period from August 24 through December 31, 2012 and Predecessor year ended December 31, 2012 and Predecessor period from January 1 through January 31, 2013

 

     Successor     Predecessor  

(in millions)

   Year Ended
December 31,
    Period from
August 24
through
December 31,
    Period from
January 1
through
January 31,
    Year Ended
December 31,
 
     2014     2013     2012     2013     2012  

Net cash provided by (used in):

            

Operating activities:

            

Net income (loss)

   $ 34.7      $ (218.9   $ (29.0   $ 8.5      $ 247.8   

Depreciation and amortization

     308.7        300.7        —          9.9        110.7   

Deferred income taxes

     (38.2     (120.8     —          9.1        9.1   

Amortization of financing costs and original issue discount

     21.0        18.4        —          —          —     

Fair value of acquired inventory sold

     —          103.7        —          —          —     

Foreign exchange losses

     75.1        48.9        —          4.5        —     

Bridge financing commitment fees

     —          25.0        —          —          —     

Other non-cash items

     (11.2     20.6          (3.9     7.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) adjusted for non-cash items

  390.1      177.6      (29.0   28.1      375.2   

Changes in operating assets and liabilities

  (138.7   199.2      29.0      (65.8   13.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating activities

  251.4      376.8      —        (37.7   388.8   

Investing activities

  (178.5   (5,011.2   —        (8.3   (88.2

Financing activities

  (123.2   5,098.1      —        43.0      (290.6

Effect of exchange rate changes on cash

  (26.9   (4.4   —        —        (0.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

$ (77.2 $ 459.3    $ —      $ (3.0 $ 9.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Year ended December 31, 2014 (Successor)

Net Cash Provided by Operating Activities

Net cash provided by operating activities for the year ended December 31, 2014 was $251.4 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $390.1 million. This was partially offset by net increases in working capital of $138.7 million. The most significant drivers in working capital were increases in receivables, inventory and other assets of $119.0 million due primarily to increased net sales and inventory builds to support ongoing operational demands compared to the year ended December 31, 2013, as well as, reductions of other accrued liabilities of $54.8 million primarily related to the payment of nonrecurring transition-related costs, including restructuring costs, partially offset by a $53.6 million increase in accounts payable.

Net Cash Used for Investing Activities

Net cash used for investing activities for the year ended December 31, 2014 was $178.5 million. This use was driven primarily by purchases of property, plant and equipment of $188.4 million, the purchase of increased ownership in a majority owned joint venture of $6.5 million and an increase of $4.7 million in restricted cash, partially offset by $21.3 million of proceeds from sales of assets. Purchases of property, plant and equipment includes approximately $74.8 million associated with our transition-related capital projects including our information technology systems and finalization of our transition of our global office relocations.

 

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Net Cash Used for Financing Activities

Net cash used for financing activities for the year ended December 31, 2014 was $123.2 million. The change was primarily driven by repayments of term loans of $121.1 million. These payments were comprised of a $100.0 million prepayment on our Dollar Term Loan made during the year ended December 31, 2014, along with $21.1 million of quarterly principal repayments as required under the Credit Agreement. In addition, we repaid short-term borrowings of $33.8 million partially offset by proceeds received from short-term borrowing during the period of $30.7 million. During the year ended December 31, 2014, we paid $3.0 million in fees related to the amendment of the Senior Secured Credit Facilities.

We received $2.5 million through the sale of common shares during the year ended December 31, 2014. We also received $3.0 million related to the exercise of stock options.

Dividends paid to noncontrolling interests totaled $2.2 million for the year ended December 31, 2014.

Year ended December 31, 2013 (Successor)

Net Cash Provided by Operating Activities

Cash provided by operating activities was $376.8 million for the Successor year ended December 31, 2013. The cash flow from operations was the result of cash flows generated by operating earnings and reductions in net working capital, partially offset by merger and acquisition related costs and transition costs associated with our separation from DuPont. An increase in trade and notes receivable was due largely to higher sales levels during the Successor year ended December 31, 2013 resulted in an outflow of cash of $6.4 million. A decrease in inventories resulted in a generation of cash of $33.9 million. The decrease in inventories was primarily the result of the continued focus on working capital levels relative to demand and lower raw material costs. An increase in accounts payable favorably impacted cash flow from operations by $67.1 million. The increase in accounts payable was due in part to the separation from DuPont in February 2013, which resulted in the establishment of new credit terms with our new vendors as a standalone company, including certain raw materials contracts with DuPont, which were historically related party purchases in the Predecessor period. Prior to the Acquisition, transactions between DuPont and DPC were deemed to be settled immediately through the parent company net investment. Further contributing to the cash flows provided by operating activities was an increase in accrued liabilities of $193.1 million related to the timing of cash payments for annual employee performance related benefits, which were paid by DuPont for the 2012 performance period. The remaining increases in accrued liabilities had no impact on cash flows from operations, including severance-related liabilities and transition-related expenses, which had been accrued as of December 31, 2013 and had an offsetting impact within Net income (loss). Offsetting this operating activity was cash used in operating activities related to the restructuring activities during the year ended December 31, 2013, for which $23.7 million of payments were made.

Net Cash Used for Investing Activities

During the Successor year ended December 31, 2013, we acquired DPC for a purchase price of $4,907.3 million. Cash acquired was $79.7 million, which resulted in a net cash outflow of $4,827.6 million to acquire DPC.

During the Successor year ended December 31, 2013, we entered into a foreign currency contract to hedge the variability of the U.S. dollar equivalent of the original borrowings under the Euro Term Loan and the proceeds from the issuance of Euro Senior Notes. Net cash used to settle the derivative instrument was $19.4 million. Additionally, we purchased a €300.0 million 1.5% interest rate cap on our Euro Term Loan for a premium of $3.1 million.

Purchases of property, plant and equipment during the Successor year ending December 31, 2013, were $107.3 million, which included transition costs related to our transition to a standalone entity, which included costs to transition off of the DuPont information technology systems. In addition to the transition costs, we incurred costs for several growth and improvement initiatives including the waterborne projects in Jiading, China and Front Royal, Virginia.

 

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During the Successor year ended December 31, 2013, we also invested $54.5 million for a real estate property.

Net Cash Provided by Financing Activities

As part of the Acquisition, on February 1, 2013 Carlyle made the Equity Contribution of $1,350.0 million. Further, there were additional equity contributions of $5.4 million during the Successor year ended December 31, 2013.

Borrowings during the Successor year ended December 31, 2013 included $2,817.3 million of proceeds from borrowings under our Senior Secured Credit Facilities, net of original issue discount of $25.7 million, and the issuance of our Senior Notes in the amount of $1,089.4 million. We paid $126.0 million of deferred financing costs associated with issuing the Dollar Senior Notes and Euro Senior Notes and entering into the Senior Secured Credit Facilities and $25.0 million of commitment fees related to the Bridge Facility. Other borrowings during the Successor year ended December 31, 2013 also included short-term borrowings of $38.8 million.

During the Successor year ended December 31, 2013, we made our required quarterly amortization payments on the Dollar Term Loan and Euro Term Loan totaling $21.3 million, as well as payments of $25.3 million on short-term borrowings.

During the Successor year ended December 31, 2013, dividends paid to noncontrolling interests totaled $5.2 million.

January 1, 2013 through January 31, 2013 (Predecessor)

Net Cash Used for Operating Activities

Net cash used for operating activities for the Predecessor period from January 1, 2013 through January 31, 2013 was $37.7 million. Net income, before deducting depreciation and amortization and other non-cash items, generated cash of $28.1 million.

An increase in inventories resulted in a use of cash of $19.3 million. Decreases in other accrued liabilities and accounts payable resulted in a use of cash of $43.8 million and $29.9 million, respectively. The decrease in other current liabilities was primarily due to reductions in compensation and other employee-related cost liabilities related to payment of annual incentive compensation, a reduction in the liabilities for discounts, rebates and warranties related to payments under annual rebate programs and a reduction in our foreign currency contracts derivatives liability. The reduction in accounts payable was primarily related to timing of vendor payments. Partially offsetting these items was a decrease in trade accounts and notes receivable which provided cash of $25.8 million. All other operating assets and liabilities netted to a $1.4 million generation of cash.

Net Cash Used for Investing Activities

During the Predecessor period from January 1, 2013 through January 31, 2013, net cash used for investing activities was $8.3 million. Purchases of property, plant and equipment and intangible assets were $2.4 million and $6.3 million, respectively, during the Predecessor period January 1, 2013 through January 31, 2013.

Net Cash Provided by Financing Activities

During the Predecessor period from January 1, 2013 through January 31, 2013, net cash provided by financing activities was $43.0 million which mainly represents the net cash used by operating activities and net cash used in investing activities discussed above as a result of DuPont’s centralized cash management system.

 

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Year ended December 31, 2012 (Predecessor)

Net Cash Provided by Operating Activities

Cash provided by operating activities was $388.8 million for the Predecessor year ended December 31, 2012. Cash provided by net income adjusted for other non-cash income statement items totaled $375.2 million for the Predecessor year ended December 31, 2012. Cash provided by operating assets and liabilities totaled $13.6 million for the year ended December 31, 2012. Increases in accounts payable and other current liabilities, of $54.9 million and $36.4 million, respectively, primarily related to increased employee incentive compensation and transition related liabilities, were partially offset by increases in trade accounts and notes receivable of $58.9 million and decreases in other liabilities of $25.9 million.

Net Cash Used for Investing Activities

Cash used for investing activities for the Predecessor year ended December 31, 2012 was $88.2 million. This was primarily driven by $73.2 million in purchases of property, plant and equipment and $21.6 million in purchases of intangibles.

Net Cash Used for Financing Activities

Cash used for financing activities for the Predecessor year ended December 31, 2012 was $290.6 million which mainly represents the net cash provided by operating activities less net cash used in investing activities discussed above as a result of DuPont’s centralized cash management system, as well as DuPont incurring costs on behalf of DPC.

Indebtedness

Our liquidity requirements are significant due to the highly leveraged nature of our company as well as our working capital requirements. At March 31, 2015, there were no borrowings under the Revolving Credit Facility with total availability under the Revolving Credit Facility of $378.7 million, all of which may be borrowed by us without violating any covenants under the credit agreement governing such facility or the indentures governing the Dollar Senior Notes and the Euro Senior Notes. Our available borrowing capacity under other lines of credit in certain non-U.S. jurisdictions totaled $5.0 million. As of March 31, 2015, we had $3,608.3 million in outstanding indebtedness and $952.8 million in working capital including $222.9 million in cash and cash equivalents.

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

 

(in millions)

   March 31, 2015      December 31, 2014  

Dollar Term Loan

   $ 2,159.8       $ 2,165.5   

Euro Term Loan

     425.0         481.0   

Dollar Senior Notes

     750.0         750.0   

Euro Senior Notes

     270.4         305.3   

Short-term borrowings

     14.3         12.2   

Other

     6.1         0.7   

Unamortized original issue discount

     (17.3      (18.3
  

 

 

    

 

 

 
  3,608.3      3,696.4   

Less:

Short term borrowings

  14.3      12.2   

Current portion of long-term borrowings

  27.3      27.9   
  

 

 

    

 

 

 

Long-term debt

$ 3,566.7    $ 3,656.3   
  

 

 

    

 

 

 

 

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The following table details our borrowings outstanding and the associated interest expense, including amortization of debt issuance costs and debt discounts, and average effective interest rates for such borrowings for the years ended December 31, 2014 and 2013:

 

     Year Ended December 31, 2014  

(in millions)

   Principal      Average Effective
Interest Rate
    Interest
Expense
 

Term Loans

   $ 2,628.2         4.7   $ 127.6   

Revolving Credit Facility

     —           N/A        4.7   

Senior Notes

     1,055.3         7.3     78.6   

Short-term and Other borrowings

     12.9         Various        1.4   
  

 

 

      

 

 

 

Total

$ 3,696.4    $ 212.3   
  

 

 

      

 

 

 

 

     Year Ended December 31, 2013  

(in millions)

   Principal      Average Effective
Interest Rate
    Interest
Expense
 

Term Loans

   $ 2,807.8         5.6   $ 139.0   

Revolving Credit Facility

     —           N/A        4.5   

Senior Notes

     1,094.9         7.5     71.8   

Short-term borrowings

     18.2         Various        1.4   
  

 

 

      

 

 

 

Total

$ 3,920.9    $ 216.7   
  

 

 

      

 

 

 

Senior Secured Credit Facilities

On February 1, 2013, we entered into the Senior Secured Credit Facilities. Costs of $92.9 million related to the issuance of the Senior Secured Credit Facilities are recorded within “Deferred financing costs, net” and are being amortized as interest expense over the life of the Senior Secured Credit Facilities. At December 31, 2014, the remaining unamortized balance of such costs was $65.7 million. Original issue discount of $25.7 million related to the Senior Secured Credit Facilities is recorded as a reduction of the principal amount of the borrowings and is amortized as interest expense over the life of the Senior Secured Credit Facilities. At December 31, 2014, the remaining unamortized original issue discount was $19.1 million. At March 31, 2015 and December 31, 2014, there were no borrowings under the Revolving Credit Facility. At March 31, 2015 and December 31, 2014, letters of credit issued under the Revolving Credit Facility totaled $21.3 million and $15.5 million, respectively, which reduced the availability under the Revolving Credit Facility. Availability under the Revolving Credit Facility was $378.7 million and $384.5 million at March 31, 2015 and December 31, 2014, respectively.

On February 3, 2014, we executed the second amendment to the Senior Secured Credit Facilities. The amendment (i) converted all of the outstanding Dollar Term Loans ($2,282.8 million) into a new class of term loans (the “New Dollar Term Loans”) and (ii) converted all of the outstanding Euro Term Loans (€397.0 million) into a new class of term loans (the “New Euro Term Loans”). The New Dollar Term Loans are subject to an Adjusted Eurocurrency Rate or Base Rate (each as defined in the credit agreement governing the Senior Secured Credit Facilities) floor of 1.00% and 2.00%, respectively (the “Interest Rate Floor”), plus an applicable rate. The applicable rate for such New Dollar Term Loans is 3.00% per annum for Eurocurrency Rate Loans (as defined in the credit agreement governing the Senior Secured Credit Facilities) and 2.00% per annum for Base Rate Loans (as defined in the credit agreement governing the Senior Secured Credit Facilities). The applicable rate for both Eurocurrency Rate Loans as well as Base Rate Loans is subject to a further 25 basis point reduction if the Total Net Leverage Ratio (as defined in the credit agreement governing the Senior Secured Credit Facilities) is less than or equal to 4.50:1.00. The New Euro Term Loans are also subject to the Interest Rate Floor, plus an applicable rate. The applicable rate for such New Euro Term Loans is 3.25% per annum for Eurocurrency Rate Loans. The New Euro Term Loans may not be Base Rate Loans. The applicable rate is subject to a further 25 basis point reduction if the Total Net Leverage Ratio is less than or equal to 4.50:1.00.

 

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The credit agreement governing the Senior Secured Credit Facilities requires us to comply with certain affirmative and negative covenants. As of March 31, 2015 and December 31, 2014, we were in compliance with all such covenants. All obligations under the Term Loans and Revolving Facility are guaranteed and collateralized by substantially all the tangible and intangible assets of the Company and its subsidiaries.

Senior Notes

On February 1, 2013, Axalta Coating Systems U.S. Holdings, Inc. (f/k/a U.S. Coatings Acquisition Inc.) and Axalta Coating Systems Dutch Holding B B.V. (f/k/a Flash Dutch 2 B.V.), our indirect wholly owned subsidiaries (the “Issuers”), offered and sold $750.0 million aggregate principal amount of 7.375% senior unsecured notes due 2021 (the “Dollar Senior Notes”) and related guarantees thereof. Additionally, the Issuers offered and sold €250.0 million aggregate principal amount of 5.750% senior secured notes due 2021 (the “Euro Senior Notes”) and related guarantees thereof. Cash fees related to the issuance of the Senior Notes were $33.1 million, are recorded as “Deferred financing costs” and are amortized as interest expense over the life of the Notes. At March 31, 2015 and December 31, 2014, the remaining unamortized balance of such costs was $24.3 million and $25.3 million, respectively. The Senior Notes are unconditionally guaranteed on a senior basis by certain of the Issuers’ subsidiaries. The indentures governing the Senior Notes contain covenants that restrict the ability of the Issuers and their subsidiaries to, among other things, incur additional debt, make certain payments including payment of dividends or repurchases of equity interest of the Issuers, make loans or acquisitions or capital contributions and certain investments, incur certain liens, sell assets, merge or consolidate or liquidate other entities and enter into transactions with affiliates.

The Euro Senior Notes were sold at par and are due February 1, 2021. The Euro Senior Notes bear interest at 5.750% payable semi-annually on February 1 and August 1. Cash fees related to the issuance of the Euro Senior Notes were $10.2 million, are recorded within “Deferred financing costs, net” and are amortized as interest expense over the life of the Senior Notes. At March 31, 2015 and December 31, 2014, the remaining unamortized balance was $7.4 million and $7.7 million, respectively.

On or after February 1, 2016, we have the option to redeem all or part of the Euro Senior Notes at the following redemption prices (expressed as percentages of principal amount):

 

Period

   Euro Senior Notes Percentage  

2016

     104.313

2017

     102.875

2018

     101.438

2019 and thereafter

     100.000

Notwithstanding the foregoing, at any time and from time to time prior to February 1, 2016, we may at our option redeem in the aggregate up to 40% of the original aggregate principal amount of the Euro Senior Notes with the net cash proceeds of one or more Equity Offerings (as defined in the indenture governing the Euro Senior Notes), at a redemption price of 105.750% plus accrued and unpaid interest, if any, to the redemption date. In addition, we have the option to redeem up to 10% of the Euro Senior Notes during any 12-month period from their issue date until February 1, 2016 at a redemption price of 103.0%, plus accrued and unpaid interest, if any, to the redemption date. Upon the occurrence of certain events constituting a change of control, holders of the Euro Senior Notes have the right to require us to repurchase all or any part of the Euro Senior Notes at a purchase price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the repurchase date.

The indebtedness evidenced by the Euro Senior Notes and related guarantees is secured on a first-lien basis by the same assets that secure the obligations under the Senior Secured Credit Facilities, subject to permitted liens and applicable local law limitations, is senior in right of payment to all future subordinated indebtedness of the Issuers, is equal in right of payment to all existing and future senior indebtedness of the Issuers and is effectively senior to any unsecured indebtedness of the Issuers, including the Dollar Senior Notes, to the extent of the value securing the Euro Senior Notes.

 

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The Dollar Senior Notes were sold at par and are due May 1, 2021. The Dollar Senior Notes bear interest at 7.375% payable semi-annually on February 1 and August 1. Cash fees related to the issuance of the Dollar Senior Notes were $22.9 million, are recorded within “Deferred financing costs, net” and are amortized as interest expense over the life of the Senior Notes. At March 31, 2015 and December 31, 2014, the remaining unamortized balance of such fees was $16.9 million and $17.6 million, respectively.

On or after February 1, 2016, we have the option to redeem all or part of the Dollar Senior Notes at the following redemption prices (expressed as percentages of principal amount)

 

Period

   Dollar Senior Notes Percentage  

2016

     105.531

2017

     103.688

2018

     101.844

2019 and thereafter

     100.000

Notwithstanding the foregoing, at any time and from time to time prior to February 1, 2016, we may at our option redeem in the aggregate up to 40% of the original aggregate principal amount of the Dollar Senior Notes with the net cash proceeds of one or more Equity Offerings (as defined in the indenture governing the Dollar Senior Notes), at a redemption price of 107.375% plus accrued and unpaid interest, if any, to the redemption date. Upon the occurrence of certain events constituting a change of control, holders of the Dollar Senior Notes have the right to require us to repurchase all or any part of the Dollar Senior Notes at a purchase price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the repurchase date.

The indebtedness evidenced by the Dollar Senior Notes is senior unsecured indebtedness of the Issuers, is senior in right of payment to all future subordinated indebtedness of the Issuers and is equal in right of payment to all existing and future senior indebtedness of the Issuers. The Dollar Senior Notes are effectively subordinated to any secured indebtedness of the Issuers (including indebtedness of the Issuers outstanding under the Senior Secured Credit Facilities and the Euro Senior Notes) to the extent of the value of the assets securing such indebtedness.

Other short-term borrowings had an outstanding balance of $14.3 million and $12.2 million at March 31, 2015 and December 31, 2014, respectively.

Capital Resources

We had cash and cash equivalents at March 31, 2015 and December 31, 2014 of $222.9 million and $382.1 million, respectively. Of these balances, $199.0 million and $264.6 million were maintained in non-U.S. jurisdictions as of March 31, 2015 and December 31, 2014, respectively. We believe our organizational structure allows us the necessary flexibility to move funds throughout our subsidiaries to meet our operational working capital needs.

Our primary sources of liquidity are cash on hand, cash flow from operations and available borrowing capacity under our Revolving Credit Facility. 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 the transition-related costs and cost-savings 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.

 

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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.

Capital expenditures for 2015 are expected to be approximately $150 million, of which approximately $60 million will be related to maintenance capital expenditures and the remainder consists of growth-related capital expenditures. The key growth projects include the following:

 

  •   In May 2013, we announced that we will expand our existing facility in Jiading, China to manufacture and supply paint to automobile manufacturers that are expanding into south and central China. We began expansion of the facility with production having begun earlier this year.

 

  •   In February 2014, we began the next phase of construction to significantly expand our waterborne production capacity in Guarulhos, Brazil. The additional facility will more than double capacity, which will help meet the growing demands of the OEMs in South America where increases in the car parcs are forecast to continue. The additional production is expected to come on line in 2015.

 

  •   In February 2014, we announced a commitment to build a next-generation facility that will expand capacity to provide waterborne industrial coatings within Wuppertal, Germany. Production at the new operations center is expected to begin in the third quarter of 2015.

For years ending December 31, 2014, 2013 and 2012, our maintenance capital expenditures were approximately $60 million and our growth-related capital expenditures have ranged from approximately $10 million to $55 million. Capital expenditures during the 2014 fiscal year totaled approximately $188 million, which included approximately $75 million of transition-related capital expenditures.

Recent Accounting Guidance

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. We intend to early adopt this new guidance beginning in the second quarter of 2015. The impact on the balance sheets at March 31, 2015 and December 31, 2014 would have been corresponding decreases to both total assets and total liabilities of $78.6 million and $82.1 million, respectively.

In February 2015, the FASB issued ASU 2015-02 (Accounting Standard Codification 810), “Consolidation,” which sets forth guidance on accounting for consolidation of certain legal entities. This ASU is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Although early adoption is permitted, we are still in the process of assessing the impact the adoption of this ASU will have on our financial position, results of operations and cash flows.

In May 2014, the FASB issued ASU 2014-09 (Accounting Standard Codification 606), “Revenue from Contracts with Customers,” which sets forth the guidance that an entity should use related to revenue recognition. This ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is not permitted. In April 2015 the FASB proposed a one-year delay in the effective date of the new revenue accounting standard to fiscal years beginning after December 15, 2017, and proposed that companies would be allowed to early adopt the guidance as of the original effective date. We are in the process of assessing the impact the adoption of this ASU will have on our financial position, results of operations and cash flows.

 

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In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” which amended the guidance for reporting discontinued operations and disposals of components of an entity. The amended guidance requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity classified as held for sale should be reported as discontinued operations. The amendments also expand the disclosure requirements for discontinued operations and add new disclosures for individually significant dispositions that do not qualify as discontinued operations. The amendments are effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014 and early adoption is permitted. We have adopted this guidance as of December 31, 2014.

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” issuing changes to the reporting of amounts reclassified out of accumulated other comprehensive income. These changes require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about those amounts. These requirements are to be applied to each component of accumulated other comprehensive income. This guidance is effective prospectively for annual reporting periods beginning on or after January 1, 2014, and the interim periods within those annual periods.

Quantitative And Qualitative Disclosures About Market Risk

We are exposed to changes in interest rates and foreign currency exchange rates because we finance certain operations through fixed and variable rate debt instruments and denominate our transactions in a variety of foreign currencies. We are also exposed to changes in the prices of certain commodities that we use in production. Changes in these rates and commodity prices may have an impact on future cash flow and earnings.

We manage these risks through normal operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. We do not enter into derivative financial instruments for trading or speculative purposes.

By using derivative instruments, we are subject to credit and market risk. The fair market value of the derivative instruments is determined by using valuation models whose inputs are derived using market observable inputs, including interest rate yield curves, as well as foreign exchange and commodity spot and forward rates, and reflects the asset or liability position as of the end of each reporting period. When the fair value of a derivative contract is positive, the counterparty owes us, thus creating a receivable risk for us. We are exposed to counterparty credit risk in the event of non-performance by counterparties to our derivative agreements. We minimize counterparty credit (or repayment) risk by entering into transactions with major financial institutions of investment grade credit rating.

Our exposure to market risk is not hedged in a manner that completely eliminates the effects of changing market conditions on earnings or cash flow.

Interest rate risk

We are subject to interest rate market risk in connection with our borrowings. A one-eighth percent change in the applicable interest rate for borrowings under the Senior Secured Credit Facilities (assuming the Revolving Credit Facility is undrawn and to the extent that the Eurocurrency Rate (as defined in the credit agreement governing the Senior Secured Credit Facilities) is in excess of the floor rate of the Senior Secured Credit Facilities) would have an annual impact of a benefit of approximately $3.0 million on cash interest expense considering the impact of our hedging positions currently in place.

 

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We selectively use derivative instruments to reduce market risk associated with changes in interest rates. The use of derivatives is intended for hedging purposes only and we do not enter into derivative instruments for speculative purposes.

During the Successor year ended December 31, 2013, we entered into five interest rate swaps with notional amounts totaling $1,173.0 million to hedge interest rate exposures related to our variable rate borrowings under the Senior Secured Credit Facilities. The interest rate swaps qualified and were designated as cash flow hedges. The interest rate swaps are in place through September 2017. In addition to interest rate swaps, we purchased a €300.0 million 1.5% interest rate cap on our Euro Term Loan that matures on September 29, 2017. The interest rate cap is not designated as a hedging instrument. As such, the changes in fair value of the interest rate cap are recorded in interest expense in the current period.

As discussed in Note 22 to our Audited Consolidated and Combined Financial Statements included elsewhere in this prospectus, we took additional measures to reduce our cost of borrowing by entering into an amendment to the Senior Secured Credit Facilities as of February 3, 2014. The re-pricing enacted pursuant to the amendment reduces the margin applicable to our cost of borrowing on our Dollar Term Loan from 3.5% to 3.0% for Eurocurrency Rate Loans and from 2.5% to 2.0% for Base Rate Loans and our cost of borrowing under the Euro Term Loan facility from 4.0% to 3.25%. The amendment provides for an additional reduction of these rates by 25 basis points if the Total Net Leverage Ratio is less than or equal to 4.50:1.00. In addition, the LIBOR floor on each term loan was reduced from 1.25% to 1.00% and the base rate floor on the Dollar Term Loan facility was reduced from 2.25% to 2.0%.

Foreign exchange rates risk

We are exposed to foreign currency risk by virtue of our international operations. The majority of our net sales for the Successor years ended December 31, 2014 and 2013, the Predecessor year ended December 31, 2012 and the Predecessor period from January 1, 2013 to January 31, 2013 were from operations/sales outside the United States.

In the majority of our jurisdictions, we earn revenue and incur costs in the local currency of such jurisdiction. We earn significant revenues and incur significant costs in foreign currencies including the Euro, Mexican Peso, Brazilian Real, the Chinese Yuan/Renminbi, the Venezuelan Bolívar and the Russian Ruble. As a result, movements in exchange rates could cause our revenues and expenses to materially fluctuate, impacting our future profitability and cash flows. Our purchases of raw materials in Latin America, EMEA and Asia Pacific and future business operations and opportunities, including the continued expansion of our business outside North America, may further increase the risk that cash flows resulting from these activities may be adversely affected by changes in currency exchange rates. If and when appropriate, we intend to manage these risks through foreign currency hedges and/or by utilizing local currency funding of these expansions. We do not intend to hold financial instruments for trading or speculative purposes.

Our Euro Senior Notes and the Euro Term Loan are denominated in Euro. As a result, movements in the Euro exchange rate in relation to the U.S. dollar could cause the amount of Euro Senior Notes and Euro Term Loan borrowings to fluctuate, impacting our future profitability and cash flows.

Additionally, in order to fund the purchase price for certain assets of DPC and the capital stock and other equity interests of certain non-U.S. entities, a combination of equity contributions and intercompany loans were utilized to capitalize certain non-U.S. subsidiaries. In certain instances, the intercompany loans are denominated in currencies other than the functional currency of the affected subsidiaries. Where intercompany loans are not a component of permanently invested capital of the affected subsidiaries, increases or decreases in the value of the subsidiaries’ functional currency against other currencies will affect our results of operations.

 

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Commodity price risk

We are subject to changes in our cost of sales caused by movements in underlying commodity prices (primarily oil and natural gas). Approximately 50% of our cost of sales is represented by raw materials. A substantial portion of the purchased raw materials include monomers, pigments, resins and solvents. Our price fluctuations generally follow industry indices. We historically have not entered into long-term purchase contracts related to the purchase of raw materials. If and when appropriate, we intend to manage these risks using purchase contracts with our suppliers.

Treasury policy

Our treasury policy seeks to ensure that adequate financial resources are available for the development of our businesses while managing our currency and interest rate risks. Our policy is to not engage in speculative transactions. Our policies with respect to the major areas of our treasury activity are set forth above.

Contractual Obligations

The following table summarizes our contractual obligations at December 31, 2014:

 

     Contractual Obligations Due In:  
(in millions)    Total      2015      2016-2017      2018-2019      Thereafter  

Debt, including current portion(1)

              

Senior Secured Credit Facilities, consisting of the following:

              

Term Loan Facilities:

              

Dollar Term Loan

   $ 2,165.5       $ 23.0       $ 46.0       $ 46.0       $ 2,050.5   

Euro Term Loan

     481.0         4.9         9.8         9.8         456.5   

Senior Notes, consisting of the following:

              

Dollar Senior Notes

     750.0         —          —          —          750.0   

Euro Senior Notes

     305.3         —          —          —          305.3   

Other borrowings

     12.9         12.2         —          0.7         —    

Interest payments(1)

     998.6         176.3         349.7         341.3         131.3   

Operating Leases

     208.6         50.6         63.1         47.2         47.7   

Pension contributions(2)

     16.5         16.5         —          —          —    

Purchase obligations

     36.9         11.7         18.5         6.7         —    

Uncertain tax positions, including interest and penalties(3)

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 4,975.3    $ 295.2    $ 487.1    $ 451.7    $ 3,741.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Amounts assume that the Senior Secured Credit Facilities and Senior Notes are repaid upon maturity, and the Revolving Credit Facility remains undrawn, which may or may not reflect future events. Future interest payments include commitment fees on the unused portion of the Revolving Credit Facility, and reflect the interest payments on our Dollar Term Loan, Euro Term Loan and the Senior Notes. Future interest payments assume December 31, 2014 interest rates will prevail throughout all future periods. Actual interest payments and repayment amounts may change.
(2) We expect to make contributions to our defined benefit pension plans beyond 2015; however, the amount of any contributions is dependent on the future economic environment and investment returns, and we are unable to reasonably estimate the pension contributions beyond 2015.
(3) As of December 31, 2014, we had approximately $5.6 million of uncertain tax positions, including interest and penalties, that could result in potential payments. Due to the high degree of uncertainty regarding future timing of cash flows associated with these liabilities, we are unable to estimate the years in which settlement will occur with the respective taxing authorities.

 

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Scheduled Maturities

Below is a schedule of required future repayments of all borrowings outstanding at December 31, 2014 (Successor).

 

(in millions)       

2015

   $ 40.1   

2016

     27.9   

2017

     27.9   

2018

     28.6   

2019

     27.9   

Thereafter

     3,562.3   
  

 

 

 

Total

$ 3,714.7   
  

 

 

 

Off Balance Sheet Arrangements

In connection with the Acquisition, we assumed certain obligations under which we directly guarantee various debt obligations under agreements with third parties related to equity affiliates, customers and suppliers. At March 31, 2015 and December 31, 2014 (Successor) we had directly guaranteed $2.1 million and $2.2 million of such obligations, respectively. These represent the maximum potential amount of future (undiscounted) payments that we could be required to make under the guarantees in the event of default by the guaranteed parties. No amounts were accrued at March 31, 2015 and December 31, 2014.

No other off balance sheet arrangements existed as of March 31, 2015 or December 31, 2014.

Critical Accounting Policies and Estimates

Our discussion and analysis of results of operations and financial condition are based upon our financial statements. These financial statements have been prepared in accordance with U.S. GAAP unless otherwise noted. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts reported in the financial statements. We base our estimates and judgments on historical experiences and assumptions believed to be reasonable under the circumstances and re-evaluate them on an ongoing basis. Actual results could differ from our estimates under different assumptions or conditions. Our significant accounting policies, which may be affected by our estimates and assumptions, are more fully described in Note 3 to our audited financial statements that appear elsewhere in this prospectus.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes the following critical accounting policies reflect its most significant estimates and assumptions used in the preparation of the financial statements.

Accounting for Business Combinations

We account for business combinations under the acquisition method of accounting. This method requires the recording of acquired assets, including separately identifiable intangible assets, and assumed liabilities at their acquisition date fair values. The excess of the purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, royalty rates, asset lives and market multiples, among other items.

 

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The fair values of intangible assets were estimated using an income approach, either the excess earnings method (customer relationships) or the relief from royalty method (technology and trademarks). Under the excess earnings method, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows attributable solely to the intangible asset over its remaining useful life. Under the relief from royalty method, fair value is measured by estimating future revenue associated with the intangible asset over its useful life and applying a royalty rate to the revenue estimate. These intangible assets enable us to secure markets for our products, develop new products to meet the evolving business needs and competitively produce our existing products.

The fair value of real properties acquired was based on the consideration of their highest and best use in the market. The fair values of property, plant, and equipment, other than real properties, were based on the consideration that unless otherwise identified, they will continue to be used “as is” and as part of the ongoing business. In contemplation of the in-use premise and the nature of the assets, the fair value was developed primarily using a cost approach. The determination of the fair value of assets acquired and liabilities assumed involves assessing factors such as the expected future cash flows associated with individual assets and liabilities and appropriate discount rates at the date of the acquisition.

The fair value of the noncontrolling interests, related to acquired joint ventures, were estimated by applying an income approach. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a fair value measurement categorized within Level 3 of the fair value hierarchy. Key assumptions included a discount rate, a terminal value based on a range of long-term sustainable growth rates and adjustments because of the lack of control that market participants would consider when measuring the fair value of the noncontrolling interests.

The results of operations for businesses acquired are included in the financial statements from the date of the acquisition.

See Note 5 to our Audited Consolidated and Combined Financial Statements for further detail on the Acquisition and related accounting.

Asset Impairments

Factors that could result in future impairment charges, among others, include changes in worldwide economic conditions, changes in technology, changes in competitive conditions and customer preferences, and fluctuations in foreign currency exchange rates. These risk factors are discussed in “Risk Factors,” included elsewhere in this prospectus.

Goodwill

We test goodwill and identifiable intangible assets with indefinite lives for impairment at least annually. Intangibles are tested for impairment using a quantitative impairment model. We test goodwill for impairment by either performing a qualitative evaluation or a two-step quantitative test. The qualitative evaluation is an assessment of factors, including reporting unit specific operating results and cost factors, as well as industry, market and general economic conditions, to determine whether it is more likely than not that the fair values of a reporting unit is less than its carrying amount, including goodwill. We may elect to bypass this qualitative assessment for some or all of our reporting units and perform a two-step quantitative test. Fair values under the quantitative test are estimated using a combination of discounted projected future earnings or cash flow methods and multiples of earnings in estimating a reporting unit’s fair value.

For the 2014 impairment tests, we utilized both the qualitative and quantitative methods to assess impairment. None of our goodwill was impaired based on the results of the testing.

 

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The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, Fair Value Measurement. The process of evaluating the potential impairment of goodwill is subjective because it requires the use of estimates and assumptions as to our future cash flows, discount rates commensurate with the risks involved in the assets, future economic and market conditions, as well as other key assumptions. We believe that the amounts recorded in the financial statements related to goodwill are based on the best estimates and judgments of the appropriate Axalta management, although actual outcomes could differ from our estimates.

Goodwill is allocated to, and evaluated for impairment at, the reporting unit level, which is defined as an operating segment or one level below an operating segment. We have two operating segments—Performance Coatings and Transportation Coatings—that also serve as our reportable segments. We have goodwill allocated to eight reporting units. At December 31, 2014, our $1,001.1 million in total goodwill is allocated to reportable segments as follows: $933.6 million in Performance Coatings and $67.5 million in Transportation Coatings.

Other intangible assets

We conducted our 2014 annual indefinite-lived intangible assets impairment assessment as of October 1, 2014 and plan to update this assessment annually each October, unless conditions arise that would require a more frequent evaluation. In assessing the recoverability of indefinite-lived intangible assets, projections regarding estimated discounted future cash flows and other factors are made to determine if impairment has occurred. If we conclude that there has been impairment, we will write down the carrying value of the asset to its fair value. Each year, we evaluate those intangible assets with indefinite lives to determine whether events and circumstances continue to support the indefinite useful lives. When testing indefinite-lived intangible assets for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the fair value of an indefinite-lived intangible asset is less than its carrying amount. Such qualitative factors may include the following:

 

  •   macroeconomic conditions;

 

  •   industry and market considerations;

 

  •   cost factors;

 

  •   overall financial performance; and

 

  •   other relevant entity-specific events.

Based on the results of our annual impairment review conducted in October 2014, management concluded that the fair value exceeded carrying value and no impairments existed.

Definite-lived intangible assets, such as technology, trademarks, customer relationships and non-compete agreements are amortized over their estimated useful lives, generally for periods ranging from 4 to 20 years. The reasonableness of the useful lives of these assets is continually evaluated. Once these assets are fully amortized, they are removed from the balance sheet.

The in-process research and development projects we acquired are considered indefinite-lived intangible assets until the abandonment or completion of the associated research and development efforts. Upon completion of the research and development process, the carrying values of acquired in process research and development projects are reclassified as definite-lived assets and are amortized over their useful lives. If the project is abandoned, we record the write-off as a loss in the statement of operations. During the years ended December 31, 2014 and 2013, we abandoned certain projects with carrying amounts of $0.1 million and $3.2 million, respectively, and recorded losses associated with these projects, which are included as components of amortization of acquired intangibles in the consolidated statements of operations.

 

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Long-Lived Assets

Long-lived assets, which includes property, plant and equipment, and definite-lived intangible assets, are assessed for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. The impairment testing involves comparing the carrying amount of the asset to the forecasted undiscounted future cash flows generated by that asset. In the event the carrying amount of the asset exceeds the undiscounted future cash flows generated by that asset and the carrying amount is not considered recoverable, an impairment exists. An impairment loss is measured as the excess of the asset’s carrying amount over its fair value. An impairment loss is recognized in the statement of operations in the period that the impairment occurs.

Stock-Based Compensation

Successor periods

During 2013, we granted approximately 4.1 million, 5.7 million and 6.4 million non-qualified service-based stock options to certain employees with strike prices of $5.92, $8.88 and $11.84 (per share), respectively.

During 2014, we granted 1.6 million non-qualified service-based stock options to certain employees with strike prices of $5.92, $7.21, $8.88 and $11.84 per share. Options generally vest over a 5-year period, and vesting of a portion of the options could accelerate in the event of a change in control or certain other events. Option life cannot exceed ten years.

During the three-month period ended March 31, 2015 and for the year ended December 31, 2014, we recorded compensation expense of $1.8 million and $8.0 million, respectively. Compensation expense related to service-based non-qualified stock options is equivalent to the grant-date fair value of the awards determined under the Black-Scholes option pricing model and is being recognized as compensation expense over the service period utilizing graded vesting. At the grant date, we estimated a forfeiture rate of zero due to the limited history and expectations of forfeitures.

The fair value of options granted in 2013 ranged from $0.95 per share to $2.01 per share. The fair value of options granted in 2014 ranged from $1.51 per share to $3.01 per share. Principal weighted average assumptions used in applying the Black-Scholes model were as follows:

 

Key Assumptions

   2014 Grants     2013 Grants  

Expected Term

     7.81 years        7.81 years   

Volatility

     28.28     28.61

Dividend Yield

     —       —  

Discount Rate

     2.21     2.13

To estimate the expected stock option term for the $5.92 and $7.21 stock options referred to above, we used the simplified method, as the options were granted at fair value and we were a privately-held company at the grant date and had no exercise history. Based upon this simplified method, the $5.92 and $7.21 per share stock options have an expected term of 6.5 years. The strike price for the $8.88 and $11.84 per share tranches of options exceeded the fair value at the grant date, which required the use of an estimate of an implicitly longer holding period, resulting in the term of 8.25 years.

Because we were a privately-held company with no trading history at the time of these grants, expected volatility was estimated using trading data derived from publicly held peer group companies over the expected term of the options. We do not anticipate paying cash dividends in the foreseeable future and, therefore, use an expected dividend yield of zero. The discount rate was derived from the U.S. Treasury yield curve.

During 2013, we sold 1.3 million common shares to certain employees at fair value for $7.4 million in proceeds. Because we were not publicly traded on the grant date, the market value of the shares for the 2013 share awards

 

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was estimated based upon the Acquisition price as there were no significant changes in operations since the closing date of February 1, 2013. During 2014, we sold 0.3 million common shares to certain officers and directors at fair value for $2.5 million in proceeds.

For the 2014 share awards, we estimated the per share fair value of our common shares using a contemporaneous valuation consistent with the American Institute of Certified Public Accountants Practice Aid, “Valuation of Privately-Held Company Equity Securities Issued as Compensation” (the “Practice Aid”). In conducting this valuation, we considered all objective and subjective factors that we believed to be relevant, including our best estimate of our business condition, prospects and operating performance. Within this contemporaneous valuation, a range of factors, assumptions and methodologies were used. The significant factors included:

 

  •   the fact that we were a private company with illiquid securities;

 

  •   our historical operating results;

 

  •   our discounted future cash flows, based on our projected operating results;