Form: 10-K

Annual report pursuant to Section 13 and 15(d)

February 22, 2018


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission File Number: 001-36733
 
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)
 
Securities registered pursuant to Section 12(b) of the Act:
Common Shares, $1.00 par value
 
 
 
New York Stock Exchange
(title of class)
 
 
 
(Exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the Company is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth 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 ý Non-accelerated filer ¨ Accelerated filer ¨ Small reporting company ¨ Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of June 30, 2017, the last day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was approximately $7,729.3 million (based on the closing sale price of the common stock on that date on the New York Stock Exchange).
As of February 15, 2018, there were 245,076,781 shares of the registrant’s common shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the registrant's Proxy Statement for the 2018 Annual Meeting of the Shareholders. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the close of the registrant's fiscal year ended December 31, 2017.
 
 
 
 
 


Table of Contents

Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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PART I
ITEM 1. BUSINESS
Axalta Coating Systems Ltd. ("Axalta," the "Company," "we," "our" and "us"), a Bermuda exempted company formed at the direction of an affiliate of The Carlyle Group L.P. ("Carlyle"), was incorporated on August 24, 2012 for the purpose of consummating the acquisition of DuPont Performance Coatings ("DPC"), a business formerly owned by E. I. du Pont de Nemours and Company ("DuPont"), including certain assets of DPC and all of the capital stock and other equity interests of certain entities engaged in the DPC business (the "Acquisition"). Axalta, through its wholly-owned indirect subsidiaries, acquired DPC on February 1, 2013.
We are a leading global manufacturer, marketer and distributor of high performance coatings systems. We have over a 150-year heritage in the coatings industry and are known for manufacturing high-quality products with well-recognized brands supported by market-leading technology and customer service. 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 49 manufacturing facilities, four technology centers, 47 customer training centers and more than 13,300 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 approximately 4,000 independent, locally-based distributors. Our scale and strong local presence are critical to our success, allowing us to leverage our technology portfolio and customer relationships globally while meeting customer demands locally.
We operate our business in two operating segments, Performance Coatings and Transportation Coatings, serving four end-markets globally as highlighted below. See the reconciliation and further discussion of Adjusted EBITDA to the closest U.S. GAAP numbers in Item 7 and Note 23 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
businesschart2017a03.jpg
Table above reflects numbers for the year ended December 31, 2017. Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by Net Sales.

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Net sales for our four end-markets and four regions for the year ended December 31, 2017 are highlighted below:
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Note: Latin America includes Mexico. EMEA represents Europe, Middle East and Africa.
SEGMENT OVERVIEW
Performance Coatings
Through our Performance Coatings segment, we provide high-quality liquid and powder coatings solutions to a fragmented and local customer base. 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.
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Performance Coatings End-Markets
Refinish
Sales in the refinish end-market are driven by the number of vehicle collisions, owners’ propensity to repair their vehicles, the number of miles vehicle owners drive and the size of the car parc. Although refinish coatings typically represent only a small portion of the overall vehicle repair cost, they are critical to the vehicle owner’s satisfaction given their impact on appearance. As a result, body shop operators are most focused on coatings brands with a strong track record of performance and reliability. Body shops look for suppliers and brands with productivity enhancements, regulatory compliance, consistent quality, the presence of ongoing technical support and exact color match technologies. Color matching is a critical component of coatings supplier selection, since inexact matching adversely impacts vehicle appearance and, if repainting is required due to a poor match, can significantly impact the speed and volume of repairs at a given shop.
We develop, market and supply a complete portfolio of innovative coatings systems and color matching technologies to facilitate faster automotive collision repairs relative to competing technologies. Our color matching technology provides Axalta-specific formulations that enable body shops to accurately match thousands of vehicle colors, regardless of vehicle brand, color, age or supplier of the original paint during production. It would be time consuming and costly for a new entrant to create such an extensive color inventory.

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Industrial
The industrial end-market is comprised of liquid and powder coatings used in a broad array of end-market applications. Within the industrial end-market, we focus on the following:
General Industrial: coatings for a wide and diverse array of applications, including HVAC, shelving, appliances and electrical storage components, metal furniture, and playground equipment as well as ACE, fencing, valves and specialized coatings used for coating the interior of metal drums and packaging.
Electrical Insulation Systems: coatings to insulate copper wire used in motors and transformers and coatings to insulate sheets forming magnetic circuits of motors and transformers, computer elements and other electrical components.
Architectural: exterior powder coatings typically used in the construction of commercial structures, residential windows, doors and cladding.
Transportation: liquid and powder coatings for vehicle components, chassis and wheels to protect against corrosion, provide increased durability and impart appropriate aesthetics.
Oil & Gas: liquid and powder products to coat tanks, pipelines, valves and fittings protecting against chemicals, corrosion and extreme temperatures in the oil & gas industry.
Coil: coatings utilized in various applications such as metal building roof and wall panels, residential and commercial steel roofing, gutters, appliances, lighting, garage and entry doors, HVAC, office furniture and truck trailers.
Wood: coatings utilized in original equipment manufacturers ("OEM") and aftermarket industrial wood markets, including building products, cabinets, flooring and furniture.
Demand in this end-market is driven by a wide variety of macroeconomic factors, such as growth in GDP and industrial production. There has also been an increase in demand for products that enhance environmental sustainability, corrosion resistance and productivity. These global trends are bolstered by regional and industry specific trends. Customers select industrial coatings based on protection, durability and appearance.
Performance Coatings Products and Brands
We offer a comprehensive range of specially-formulated waterborne and solventborne products and systems used by the global automotive repair industry to refinish damaged vehicles. Our refinish products and systems include a range of coatings layers required to match the vehicle’s color and appearance, producing a repair surface indistinguishable from the adjacent surface.
We provide systems that enable body shops to match more than 190,000 color variations, using a database with more than four million formulations, in the global market. Our color technology is manifested in the pigment technology that goes into our tints, one of the most technologically advanced parts of the refinish coatings system, which makes up the majority of our products in a body shop. We have a large color library and a number of well-known, long-standing premium brands, including Cromax®, Standox®, Spies Hecker®, and our newest mainstream product, Syrox™, which was introduced in EMEA in 2016, as well as other regional and local brands.
Our color matching and retrieval systems allow customers to quickly match any color, preventing body shop technicians from having to repeat the color matching process, saving time and materials. The color matching process begins with a technician scanning a damaged vehicle with one of our advanced color matching tools, such as our Acquire Plus EFX™ hand-held spectrophotometer. The Acquire Plus EFX lens reads the color, evaluating both the unique flake and color characteristics of the specific vehicle. These characteristics may vary significantly, even for vehicles of the same make, model and original color, due to a variety of factors, including a vehicle’s age, plant at which it was assembled, weather conditions and operating history. The Acquire Plus EFX electronically connects with our ColorNet® database and generates for the paint technician the precise mix of tints and colors needed to recreate that specific color needed for the part being repaired. In addition to the Acquire Plus EFX, we offer customers several other color matching tools, including our VINdicator® database, which identifies vehicle color based on its vehicle identification number, and traditional color matching wheels and fan decks.

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We are also a leading global developer, manufacturer and supplier of functional and decorative liquid and powder coatings for a large number of diversified applications in the industrial end-market. We provide a full portfolio of products for applications including architectural cladding and fittings, automotive coatings, general industrial, job coaters, electrical insulation coatings, HVAC, appliances, aluminum extrusions, rebar and oil & gas pipelines. Through an acquisition completed in 2017, we have also become a leading manufacturer and supplier of wood coatings sold into the building product, cabinet, flooring and furniture end-markets in North America. Our liquid systems are used to provide insulation and corrosion protection for electrical conductors and components, provide chemical resistance for the interiors of metal packaging drums, protect automotive parts and serve as basecoats for alloy and steel wheels. Powder coatings products are often an environmentally responsible, lower cost alternative to liquid coatings. These coatings are typically electrostatically sprayed using a specialized spray gun and cured to create a uniform, high-quality finish. In the oil & gas industry our powder products are used to protect components from corrosion and severe conditions such as extreme temperatures.
Our major industrial brands include Voltatex®, AquaEC™, ZENITH™, Durapon™, Hydropon™ and Ceranamel™ for liquid coatings and Alesta®, Nap-Gard®, Abcite® and Plascoat® for powder.
Performance Coatings Sales, Marketing and Distribution
We leverage a large global refinish sales and technical support team to effectively serve our broad refinish customer base of approximately 80,000 body shops. The majority of our products are supplied by our network of approximately 4,000 independent local distributors. In select regions, such as in parts of Europe, we also sell directly to customers. Distributors maintain an inventory of our products to fill orders from body shops in their market and assume credit risk and responsibility for logistics, delivery and billing. In certain countries, we utilize importers that buy directly from us and actively market our products to body shops. Our relationships with our top ten distributors are longstanding and continue to contribute to our success in the global refinish market.
Our large sales force manages relationships directly with our customers to drive demand for our products, which in turn are purchased through our distributor network. Due to the local nature of the refinish industry, our sales force operates on a regional/country basis to provide clients with responsive customer service and local insight. As part of their coverage efforts, salespeople introduce new products to body shops and provide technical support and ongoing training. We have 47 customer training centers established globally, which helps to deepen our customer relationships.
bodyshopsa06.jpg
Our sales force also helps to drive shop productivity improvements and to install or upgrade body shop color matching and mixing equipment to improve shop profitability. Once a coating and color system is installed, a body shop almost exclusively uses its specific supplier’s products. The proprietary nature of a coatings supplier’s color systems, the substantial inventory needed to support a body shop and the body shop’s familiarity with an established brand lead to high levels of customer retention. Our customer retention rate levels have been and continue to be strong.
To effectively reach our customers in the industrial end-market we generally ship directly and leverage a dedicated sales force and technical service team that operates on a regional basis. We are one of only three truly global powder coatings producers that can satisfy the needs and specifications of a customer in multiple regions of the world, while maximizing productivity from the broad scale and scope of our operations.
Performance Coatings Customers
Within our Performance Coatings segment, we sell coatings to customers in more than 130 countries. Our top ten customers accounted for approximately 18% of our Performance Coatings net sales during the year ended December 31, 2017.

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In our industrial and refinish end-markets we serve a broad, fragmented customer base. Our industrial end-market is comprised of a wide variety of industrial manufacturers, while our refinish end-market is comprised of approximately 80,000 body shops, including:
Independent Body Shops: Single location body shops that utilize premium, mainstream or economy brands based on the local market.
Multi-Shop Operators ("MSOs"): Body shops with more than one location focused on providing premium paint jobs with industry leading efficiency. MSOs use premium/mainstream coatings and state-of-the-art painting technology to increase shop productivity, allowing them to repair more vehicles faster.
Original Equipment Manufacturer ("OEM") Dealership Body Shops: High-productivity body shops, located in OEM car dealerships, that operate like MSOs and provide premium services to customers using premium/mainstream coatings.
Performance Coatings Competition
Our primary competitors in the refinish end-market include PPG, BASF and Akzo Nobel, but we also compete against regional players in local markets. Similarly, in the industrial end-market, we compete against multi-national suppliers, such as Akzo Nobel, PPG, Sherwin-Williams and BASF, and regional players in local markets. We are one of the few performance coatings companies that can provide the customer service, technology, color design capability and product performance necessary to deliver exceptional value to our customers.
Transportation Coatings
Through our Transportation Coatings segment, we provide advanced 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.
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Transportation Coatings End-Markets
Light Vehicle
Demand for light vehicle products is driven by the production of light vehicles in a particular region. Light vehicle OEMs select coatings providers on the basis of their global ability to deliver advanced technological solutions that improve exterior appearance and durability and provide long-term corrosion protection. 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 obtaining engineering approvals are also key criteria used by global light vehicle OEMs when selecting coatings providers. Globally integrated suppliers are important because they offer products with consistent standards across regions and are able to deliver high-quality products in sufficient quantity while meeting OEM service requirements. Our global scale, differentiated technology platform and customer focus, including on-site support, position us to be a global partner and solutions provider to the most discerning and demanding light vehicle OEMs. We are one of the few coatings producers that can provide OEMs with global product specifications, standardized color development, compatibility with an ever-increasing number of substrates, increasingly complex colors and environmentally responsible coatings while continuing to simplify and reduce steps in the coatings application process.

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Commercial Vehicle
Sales in the commercial vehicle end-market are generated from a variety of applications, including non-automotive transportation (e.g., HDT, bus and rail) 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. Particularly for HDT applications, truck owners demand a greater variety of custom colors and advanced product technologies to enable custom designs. Our strong market position and growth are driven by our ability to provide customers with our market-leading brand, Imron®, as well as leveraging our global product lines, regional knowledge and service. Additionally, to capture further growth we are launching a new suite of products to meet our customers’ evolving needs.
Transportation Coatings Products and Brands
We develop and supply a complete coatings product line for light vehicle OEMs for the original coating of new vehicles. Products are designed to enhance the styling and appearance of a vehicle’s exterior while providing protection from the elements, extending the life of the vehicle. Widely recognized in the industry for our advanced and patented technologies, our products not only increase productivity and profitability for OEMs but also produce attractive and durable finishes. Our light vehicle coatings portfolio is one of the broadest in the industry.
The coatings operation is a critical component of the vehicle assembly process, requiring a high degree of precision and speed. The paint shop process typically includes a dip process, three application zones and three high-temperature ovens that cure each coating layer at temperatures ranging from 320°F to 400°F (i.e., "high bake"). Our key products consist of the four main coatings layers: electrocoat (AquaEC™), primer (HyperDur™), basecoat (ChromaDyne™) and clearcoat (Lumeera™).
The coatings process accounts for a majority of the total energy consumed during the vehicle manufacturing process. As a result, we have developed Harmonized Coating TechnologiesTM, including 3-Wet, Eco-Concept and 2-Wet Monocoat, that help our OEM customers lower costs by reducing energy consumption while increasing productivity.
OEMs are also increasingly looking to reduce the weight of vehicles in response to increasing vehicle emissions and fuel consumption regulations. As a result, OEMs are constructing vehicle platforms using a variety of new materials in addition to steel and plastic, including aluminum, carbon fiber and other substrates, each of which requires specialized coatings formulations to create a uniform color and finish. We continue to innovate with our OEM customers in driving this trend, as evidenced by use of our coatings on their flagship vehicle platforms.
We also develop and supply a wide array of coatings systems for a broad range of commercial applications including HDT, bus, rail and ACE. These products simultaneously enhance aesthetic appearance and provide protection from the elements. We meet the demands of commercial vehicle customers with our extensive offering of over 73,000 different colors. In the HDT market, because the metal and composite components are painted simultaneously in an automatic process, most truck OEMs use low bake coatings to ensure that the plastic composite parts on a truck’s exterior do not deform during the process. Truck owners demand a wide variety of custom colors that are formulated using a combination of on-site mixing machines at the OEM or direct shipments of premixed high volume colors from us. Our commercial vehicle brands include Imron, Imron ExcelPro, Imron Elite, Centari®, Rival®, Corlar® epoxy undercoats and AquaEC.
Transportation Coatings Sales, Marketing and Distribution
We have full-time technical representatives stationed at OEM facilities around the world. These on-site representatives provide customer support, monitor the painting process and track paint demand at each assembly plant. Monitoring OEM line performance in real-time allows our technical support teams to help improve paint department operating efficiency and provide performance feedback to our formulating chemists and paint manufacturing teams. Our customer technical support representatives also help OEMs manage their physical inventory by forecasting facility coatings demand based on the customer’s build schedule.
We sell and ship products directly to light vehicle OEM customers in each of our four regions coordinated via a global point of contact for each customer and assist OEMs with on-site customer support. Located in 13 countries, our manufacturing facilities provide a local presence that enables us to cultivate strong relationships, gain intimate customer knowledge, provide superior technical support to our key customers and maintain "just-in-time" product delivery capabilities critical to OEMs. Our local presence also allows us to quickly react to changing local dynamics, offer high-quality products and provide excellent customer service.

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In the commercial vehicle end-market, we employ a dedicated sales and technical service team to support our diverse customer base, including a direct sales force supporting the HDT market. We ship our coatings directly to commercial vehicle OEMs and provide on-site technical service representatives that play an important role by helping optimize the painting process and by providing responsive customer support.
Transportation Coatings Customers
We provide our products to light and commercial vehicle customers at over 200 assembly plants worldwide, including nine of the top ten global automotive manufacturers. We have a stable customer base with several relationships dating back approximately 90 years and believe we are well positioned with the fastest growing OEMs in both the developed and emerging markets. Our top ten customers accounted for approximately 73% of our Transportation Coatings net sales during the year ended December 31, 2017.
Transportation Coatings Competition
We primarily compete against large multi-national suppliers such as PPG and BASF in the light and commercial vehicle end-markets. Additionally, we compete against certain regional players in Asia Pacific. With our state-of-the-art coatings solutions and local presence in key OEM markets, we are one of the few competitors in the industry that offers global manufacturers the combination of high-quality products, personalized, top-rate technical service and short lead-times for product delivery.
KEY RAW MATERIALS
We use thousands of different raw materials, which fall into seven broad categories: liquid resins, powder resins, pigments, solvents, monomers, isocyanates and additives. On average, our total raw material spend represents between 45% and 55% of our cost of sales. We purchase raw materials from a diverse group of suppliers, with our top ten suppliers representing approximately 37% of our 2017 spending on raw materials.
Approximately 67% of the raw materials we procure are derived from crude oil and natural gas. While prices for these raw materials fluctuate with energy prices, such fluctuations are somewhat mitigated by the fact that the majority of our raw materials are fourth to sixth generation derivatives of crude oil and natural gas. The dynamics of supply and demand play a much more critical role in our cost of raw materials than just the price of crude oil. Non-petrochemical based inputs such as minerals that are used to manufacture coating pigments are not significantly affected by volatility in crude oil prices but tend to be impacted by the supply-demand dynamics of their industry.
Historically, to manage raw material volatility, we have used a combination of price increases to customers and, in limited circumstances, contractual raw material recovery mechanisms. Since 2001, our company's variable cost of sales has remained stable between 36% and 42% of net sales.
RESEARCH AND DEVELOPMENT
Our focus on technology has allowed us to proactively provide customers with next-generation offerings that enhance product performance, improve productivity and satisfy increasingly strict environmental regulations. Since our entry into the coatings industry over 150 years ago, we believe we have consistently been at the forefront of coatings technology innovation. These innovations have played a fundamental role in our ability to maintain and grow our global market share as well as deliver substantial financial returns.
We believe that we are a technology leader well positioned to benefit from continued industry shifts in customer needs. Our markets are amongst the most demanding in the coatings industry with high levels of product performance that continuously evolves, with increasing expectations for productivity on customer lines and with environmentally responsible products. Our technology development is led by a highly experienced and educated workforce that is focused on new product development, color development, technical customer support and improving our manufacturing processes. As such, our technology development covers two critical interrelated aspects for us, research and development as well as technical support and manufacturing. In total, as of December 31, 2017, we have approximately 1,400 employees dedicated to technology development. For the years ended December 31, 2017, 2016 and 2015, our total technology costs incurred were $180.5 million, $179.8 million and $169.0 million, respectively, of which research and development expenses were $65.3 million, $57.7 million and $51.6 million, respectively, with the balances recorded within selling, general and administrative expenses. We operate four major technology centers throughout the world where we develop and align our technology investments with regional business needs complemented by over 30 regional laboratories which provide local connection to our global customer base.

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PATENTS, LICENSES AND TRADEMARKS
As of December 31, 2017, we had a portfolio of 774 issued patents and more than 400 trademarks. We actively apply for and obtain U.S. and foreign patents and trademarks on new products and process innovations and as of December 31, 2017, 194 patent applications were pending throughout the world.
Our primary purpose in obtaining patents is to protect the results of our research for use in operations and licensing. We are also party to a substantial number of patent licenses and other technology agreements. We have a significant number of trademarks and trademark registrations in the United States and in other countries, as described below.
We own or otherwise have rights to the trademarks, service marks, copyrights and trade names used in conjunction with the marketing and sale of our products and services. These trademarks include Abcite®, Alesta®, AquaEC®, AudurraTM, Centari®, Ceranamel®, ChallengerTM, ChemophanTM, ColorNet®, Corlar®, Cromax®, Cromax Mosaic®, Durapon 70®, DuxoneTM, Harmonized Coating Technologies®, HydroponTM, Imron®, Imron EliteTM, Imron ExcelProTM, LutophenTM, Nap-Gard®, Nason®, Rival®, Spies Hecker®, Standox®, StollaquidTM, SyntopalTM, SyroxTM, Vermeera® and Voltatex®, which are protected under applicable intellectual property laws and are the property of us and our subsidiaries.
Although we consider that our patents, licenses and trademarks in the aggregate constitute a valuable asset, we do not regard our business as being materially dependent on any single or group of related patents, licenses or trademarks.
JOINT VENTURES
We are party to 11 joint ventures, five of which are focused on the industrial end-market. We are the majority shareholder, exercise control and consolidate all but three of our joint ventures. Our fully consolidated joint venture-related net sales were $296.0 million, $231.7 million and $204.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. See Part I, Item 1A, "Risk Factors—Risks Related to our Business—Risks Related to Other Aspects of our Business—Our joint ventures may not operate according to our business strategy if our joint venture partners fail to fulfill their obligations."
EMPLOYEES
As of December 31, 2017, we had approximately 13,300 employees located throughout the world consisting of sales, technical, manufacturing operations, supply chain and customer service personnel.
As of December 31, 2017, approximately 41% of our employees globally were covered by organized labor agreements, including works councils, with fewer than 50 employees in the United States covered by organized labor agreements. We consider our employee relations to be good overall.
ENVIRONMENTAL, HEALTH AND SAFETY
We are committed to environmental stewardship and to health, safety and sustainability excellence in our global operations. We understand that industrial manufacturing processes can pose impacts to the environment and safety risks to our employees and others when not managed properly. We operate in compliance with applicable laws and regulations around the world which govern the protection of the environment and health and safety of our employees and neighboring communities, including the discharge of pollutants to air and water and the management and disposal of hazardous substances.
Safety is integrated into the way we do business. Our safety program is structured on the foundation that every employee is engaged in and committed to improving operating practices. One of Axalta’s key objectives is the continued progress toward reducing employee injuries and illnesses worldwide. When health and safety incidents do occur, we strive to determine the causes and eliminate the potential for future similar incidents. In 2017, Axalta’s injury and illness performance resulted in a 0.45 OSHA Recordable Incident Rate, compared to the 1.2 OSHA Recordable Incident Rate for the General Chemical Industry (according to the US Bureau of Labor Statistics 2016 data).
Our Environment, Health, Safety (EHS) and Sustainability policies are a key element of the foundation upon which we develop, market, manufacture, and distribute products and services to our global customers. In 2017 we established a Board-level committee responsible for our policies, performance, strategy and compliance matters related to EHS and sustainability. We operate our manufacturing facilities using a common set of internal standards applicable to our business. These standards support the advancement of each site’s performance, while building capability and consistency across all levels of the organization. We believe that all our manufacturing and distribution facilities are operated in compliance in all known material respects to existing environmental requirements, including the operating permits required thereunder at our facilities.
Many of our manufacturing sites have a long history of industrial operations and cleanup is or may be required at a number of these locations. Although we are indemnified by DuPont for certain environmental liabilities and we do not expect outstanding cleanup obligations to have a material impact on our financial position, the ultimate cost of cleanup is subject to a number of variables and difficult to accurately predict. We may also incur significant additional costs as a result of contamination that is discovered and/or cleanup obligations that are imposed at these or other properties in the future.

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During 2016, Axalta achieved a global, multi-site certification for RC14001. This certification incorporates the elements of the American Chemistry Council’s Responsible Care Program including product safety and compliance, process safety and security, as well as the ISO 14001 certification specifically related to our environmental stewardship program.
WHERE YOU CAN FIND MORE INFORMATION
Our website address is www.axaltacs.com. We post, and shareholders may access without charge, our recent filings and any amendments thereto of our annual reports on Form 10-K, quarterly reports on Form 10-Q and proxy statements as soon as reasonably practicable after such reports are filed with the Securities and Exchange Commission ("SEC"). We also post all financial press releases, including earnings releases, to our website. All other reports filed or furnished to the SEC on the SEC’s website, www.sec.gov, including current reports on Form 8-K, are available via direct link on our website. Reference to our and the SEC’s websites herein do not incorporate by reference any information contained on those websites and such information should not be considered part of this Form 10-K.

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ITEM 1A. RISK FACTORS
As a global manufacturer, marketer and distributor of high performance coatings systems, we operate in a business environment that includes risks. These risks are not unlike the risks we have faced in the recent past nor are they unlike risks faced by our competitors. If any of the events contemplated by the following discussion of risks should occur, our business, results of operations, financial condition and cash flows could suffer significantly. While the factors listed here are considered to be the more significant factors, they should not be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles which may adversely affect our businesses and our results of operations.
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 vehicle and commercial vehicle end-markets. Adverse developments in the global economy, in regional economies or in the light vehicle 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, the light vehicle 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. For example, 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 propensity of car owners to pay for cosmetic repairs generally decreases. Also, during difficult economic times, car owners may refrain from seeking repairs for their damaged vehicles. Similarly, periods of reduced global economic activity could hinder global industrial output, which could decrease demand for our industrial and commercial coating products.
Our global business is adversely affected by decreases in the general level of economic activity, such as decreases in business and consumer spending, construction activity and industrial manufacturing. Disruptions in the United States, Europe or other economies, or weakening of emerging markets, such as Brazil or China, could adversely affect our sales, profitability and/or liquidity.
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 multiple regions. In 2017, we began our realignment by shutting down two facilities and adding two facilities which are smaller and more agile to meet our customers’ requirements. We will continue this realignment in the coming years. We are also growing our sales force in emerging markets and end-markets where we are underrepresented. The anticipated benefits from these efforts are based on several assumptions that may prove to be inaccurate. A variety of risks could cause us not to realize some or all of the expected benefits. These risks include, among others, delays in the anticipated timing of activities related to such growth initiatives, strategies and operating plans; increased difficulty and cost in implementing these efforts; and the incurrence of other unexpected costs associated with operating the business. Further, our continued implementation of these programs may disrupt our operations and performance. As a result, we cannot assure you that we will realize these benefits. If, for any reason, the benefits we realize are less than our estimates or the implementation of these growth initiatives, strategies and operating plans adversely affect our operations or cost more or take longer to effectuate than we expect, or if our assumptions prove inaccurate, our results of operations may be materially adversely affected.

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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 or severe storms 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 or reduced purchases by any of our largest customers, or the consolidation of MSOs, distributors and/or body shops, could adversely affect our business, financial condition and results of operations.
We have some customers that purchase a large amount of products from us and we are also reliant on distributors to assist us in selling our products. Our largest single customer accounted for approximately 6.7% of our 2017 net sales and our largest distributor accounted for approximately 4.4% of our 2017 net sales. Consolidation of any of our customers, including MSOs, distributors and body shops, could decrease our customer base and impact our results of operations if the resulting business chooses to use one of our competitors for the consolidated business. The loss of any of our large customers or significant changes in their level of purchases, as a result of changes in business conditions, working capital levels, product requirements, consolidation or otherwise, could have a material adverse effect on our business, financial condition and results of operations.
We rely on our distributor network and third-party delivery services for the distribution and export of certain of our products. A significant disruption in these services or significant increases in prices for those services may disrupt our ability to export material or increase our costs.
We ship a significant portion of our products to our customers through our distributor network as well as independent third-party delivery companies. If any of our key distributors or third-party delivery providers experiences a significant disruption 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.

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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. In rising raw material price environments, we may be unable to pass along these increased costs to our customers. In declining raw material price environments, customers may seek price concessions from us greater than any raw material cost savings we realize. If we are not able to fully offset the effects of higher raw materials costs, or if customers demand greater raw material price concessions than we obtain in low raw material cost environments, our financial results could deteriorate. In addition to the risks associated with raw materials prices, supplier capacity constraints, supplier production disruptions 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 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 and security threats.
Business disruptions, including supply disruptions, increasing costs for energy, temporary plant and/or power outages 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. Although it is impossible to predict the occurrence or consequences of business disruptions or security threats, 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.
Our information technology systems are subject to security risks.
We rely on information technology systems to conduct business. Information security risks have generally increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of cyber attackers. In addition, by utilizing third parties to perform certain business and administrative functions, we may be exposed to greater risk of data security breaches. Our information technology systems may be susceptible to damage, disruptions or shutdowns due to power outages, hardware failures, computer viruses, attacks by computer hackers, telecommunication failures, user errors, catastrophes or other unforeseen events. Any such event relating to our systems (or the systems of third parties that we rely on), could result in theft, misuse, modification or destruction of information, including trade secrets and confidential business information, and cause business disruptions, reputational damage and third-party claims, any of which could have a material adverse effect on our business, financial condition or results of operations. While we have designed and implemented controls to restrict access to our data and information technology infrastructure, it is still vulnerable to unauthorized access through cyber attacks, theft and other security breaches. These types of attacks have been attempted against our systems from time to time, and our protective measures may not be adequate to ensure that our operations will not be disrupted, should another such an event occur in the future.

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Our ability to conduct our business might be negatively impacted if we experience difficulties with outsourcing and similar third-party relationships.
We outsource certain business and administrative functions and rely on third parties to perform certain services on our behalf. We may do so increasingly in the future. If we fail to develop and implement our outsourcing strategies, such strategies prove to be ineffective or fail to provide expected cost savings, or our third party providers fail to perform as anticipated, we may experience operational difficulties, increased costs, reputational damage and a loss of business that may have a material adverse effect on our business, financial condition and results of operations.
Risks Related to our Global Operations
As a global business, we are subject to risks associated with our non-U.S. operations that are not present in the United States.
We conduct our business on a global basis, with approximately 67% of our 2017 net sales occurring outside the United States. We anticipate that international sales will continue to represent a substantial portion of our net sales and that our strategy for continued growth and profitability will entail further international expansion, particularly in emerging markets. Changes in local and regional economic conditions could affect product demand in our non-U.S. operations. Specifically, our financial results could be affected by changes in trade, monetary and fiscal policies, laws and regulations, or other activities of U.S. and non-U.S. governments, agencies and similar organizations. These conditions include, but are not limited to, changes in a country’s or region’s social, economic or political conditions, trade regulations affecting production, pricing and marketing of products, local labor conditions and regulations, reduced protection of intellectual property rights in some countries, changes in the regulatory or legal environment, restrictions on currency exchange activities, burdensome taxes and tariffs and other trade barriers, as well as the imposition of economic or other trade sanctions, each of which could impact our ability to do business in certain jurisdictions or with certain persons. For example, if the U.S. withdraws from or engages in renegotiation of trade agreements such as the North American Free Trade Agreement, or more aggressively prosecutes trade disputes with countries like China, our ability to do business and execute our growth strategies could be adversely affected. Our international operations also present risks associated with terrorism, political hostilities, war and other civil disturbances, the occurrence of which could lead to reduced net sales and profitability. Our international sales and operations are also sensitive to changes in foreign national priorities, including government budgets.
Our day-to-day operations outside the United States are subject to cultural and language barriers and the need to adopt different business practices in different geographic areas. In addition, we are required to create compensation programs, employment policies and other administrative programs that comply with the laws of multiple countries. We also must communicate and monitor standards and directives across our global operations. Our failure to successfully manage our geographically diverse operations could impair our ability to react quickly to changing business and market conditions and to enforce compliance with non-U.S. standards and procedures.
Any payment of distributions, loans or advances to and from our subsidiaries could be subject to restrictions on or taxation of, dividends or repatriation of earnings under applicable local law, monetary transfer restrictions, foreign currency exchange regulations in the jurisdictions in which our subsidiaries operate or other restrictions imposed by current or future agreements, including debt instruments, to which our non-U.S. subsidiaries may be a party. In particular, our operations in Brazil, China and India where we maintain local currency cash balances are subject to import authorization or pricing controls.
Currency risk may adversely affect our financial condition and cash flows.
We derive a significant portion of our net sales from outside the United States and conduct our business and incur costs in the local currency of most countries in which we operate. Because our financial statements are presented in U.S. dollars, we must translate our financial results as well as assets and liabilities into U.S. dollars for financial statement reporting purposes at exchange rates in effect during or at the end of each reporting period, as applicable. Therefore, increases or decreases in the value of the U.S. dollar against other currencies in countries where we operate will affect our results of operations and the value of balance sheet items denominated in foreign currencies. In particular, we are exposed to the Euro, the Brazilian real, the Chinese yuan, the British pound, the Mexican peso and the Russian ruble. For example, unfavorable movement in the Euro negatively impacted our results of operations in prior periods and a further decline of the Euro could affect future periods. Furthermore, many of our local businesses import or buy raw materials in a currency other than their functional currency, which can impact the operating results for these operations if we are unable to mitigate the impact of the currency exchange fluctuations. We cannot accurately predict the effects of exchange rate fluctuations upon our future operating results because of the number of currencies involved, the variability of currency exposures and the potential volatility of currency exchange rates. Accordingly, fluctuations in foreign exchange rates may have an adverse effect on our financial condition and cash flows.

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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.
The results of the United Kingdom’s referendum on withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.
In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union ("EU") in a national referendum. The referendum was advisory, and the terms of any withdrawal are subject to a negotiation period that could last at least two years after the government of the United Kingdom formally initiates a withdrawal process. Nevertheless, the referendum has created significant uncertainty about the future relationship between the United Kingdom and the European Union, including with respect to the laws and regulations that will apply as the United Kingdom determines which European Union laws to replace or replicate in the event of a withdrawal. The referendum has also given rise to calls for the governments of other European Union member states to consider withdrawal. We have substantial R&D and manufacturing operations in Europe and a significant portion of our business involves cross border transactions throughout the region. We cannot predict how the British referendum or similar votes by other European Union member states will impact our operations and business. In addition, these developments, or the perception that any of them could occur, have caused and may continue to cause significant volatility in the global financial markets as well as business conditions in Europe and beyond. This volatility may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Any of these factors could depress economic activity and restrict our access to capital, which could have a material adverse effect on our business, financial condition and results of operations and reduce the price of our common shares.

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Risks Related to Legal and Regulatory Compliance and Litigation
Our failure to comply with the anti-corruption laws of the United States and various international jurisdictions could negatively impact our reputation and results of operations.
Doing business on a global basis requires us to comply with the laws and regulations of the U.S. government and those of various international and sub-national jurisdictions, and our failure to successfully comply with these rules and regulations may expose us to liabilities. These laws and regulations apply to companies, individual directors, officers, employees and agents, and may restrict our operations, trade practices, investment decisions and partnering activities. In particular, our international operations are subject to U.S. and foreign anti-corruption laws and regulations, such as the U.S. Foreign Corrupt Practices Act (the "FCPA"), the United Kingdom Bribery Act 2010 (the "Bribery Act") as well as anti-corruption laws of the various jurisdictions in which we operate. The FCPA, the Bribery Act and other laws prohibit us and our officers, directors, employees and agents acting on our behalf from corruptly offering, promising, authorizing or providing anything of value to foreign officials for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining favorable treatment. As part of our business, we deal with state-owned business enterprises, the employees and representatives of which may be considered foreign officials for purposes of the FCPA or the Bribery Act. We are subject to the jurisdiction of various governments and regulatory agencies outside of the United States, which may bring our personnel into contact with foreign officials responsible for issuing or renewing permits, licenses or approvals or for enforcing other governmental regulations. In addition, some of the international locations in which we operate lack a developed legal system and have elevated levels of corruption. Our global operations expose us to the risk of violating, or being accused of violating, the foregoing or other anti-corruption laws. Such violations could be punishable by criminal fines, imprisonment, civil penalties, disgorgement of profits, injunctions and exclusion from government contracts, as well as other remedial measures. Investigations of alleged violations can be very expensive, disruptive and damaging to our reputation. Although we have implemented anti-corruption policies and procedures and introduced training since becoming an independent company, there can be no guarantee that these policies, procedures and training will effectively prevent violations by our employees or representatives in the future. Additionally, we face a risk that our distributors and other business partners may violate the FCPA, the Bribery Act or similar laws or regulations. Such violations could expose us to FCPA and Bribery Act liability and/or our reputation may potentially be harmed by their violations and resulting sanctions and fines.
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.

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As a result of our current and past operations and/or products, including operations and/or products related to our businesses prior to the Acquisition, we could incur significant environmental liabilities and costs.
We are subject to various laws and regulations around the world governing the protection of the environment and health and safety, including the discharge of pollutants to air and water and the management and disposal of hazardous substances. These laws and regulations not only govern our current operations and products, but also impose potential liability on us for our or our predecessors’ past operations. We could incur fines, penalties and other sanctions as a result of violations of such laws and regulations. In addition, as a result of our operations and/or products, including our past operations and/or products related to our businesses prior to the Acquisition, we could incur substantial costs, including costs relating to remediation and restoration activities and third-party claims for property damage or personal injury. The ultimate costs under environmental laws and the timing of these costs are difficult to accurately predict. Our accruals for costs and liabilities at sites where contamination is being investigated or remediated may not be adequate because the estimates on which the accruals are based depend on a number of factors including the nature of the matter, the complexity of the site, site geology, the nature and extent of contamination, the type of remedy, the outcome of discussions with regulatory agencies and, at multi-party sites, other Potentially Responsible Parties ("PRPs") and the number and financial viability of other PRPs. Additional contamination may also be identified, and/or additional cleanup obligations may be incurred, at these or other sites in the future. For example, periodic monitoring or investigation activities are ongoing at a number of our sites where contaminants have been detected or are suspected, and we may incur additional costs if more active or extensive remediation is required. In addition, in connection with the Acquisition, DuPont has, subject to certain exceptions and exclusions, agreed to indemnify us for certain liabilities relating to environmental remediation obligations and certain claims relating to the exposure to hazardous substances and products manufactured prior to our separation from DuPont. We could incur material additional costs if DuPont fails to meet its obligations, if the indemnification proves insufficient or if we otherwise are unable to recover costs associated with such liabilities. The costs of our current operations complying with complex environmental laws and regulations, as well as internal voluntary programs, are significant and will continue to be so for the foreseeable future as environmental regulations become more stringent. These laws and regulations also change frequently, and we may incur additional costs complying with stricter environmental requirements that are promulgated in the future. Concerns over global climate change as well as more frequent and severe weather events have also promoted a number of legal and regulatory measures as well as social initiatives intended to reduce greenhouse gas and other carbon emissions. We cannot predict the impact that changing climate conditions or more frequent and severe weather events, if any, will have on our business, results of operations or financial condition. Moreover, we cannot predict how legal, regulatory and social responses to concerns about global climate change will impact our business.
As a producer of coatings, we transport certain materials that are inherently hazardous due to their toxic nature.
In our business, we handle and transport hazardous materials. If mishandled or released into the environment, these materials could cause substantial property damage or personal injuries resulting in significant legal claims against us. In addition, evolving regulations concerning the handling and transportation of certain materials could result in increased future capital or operating costs.
Our results of operations could be adversely affected by litigation.
We face risks arising from various litigation matters that have been asserted against us or that may be asserted against us in the future, including, but not limited to, claims for product liability, patent and trademark infringement, antitrust, warranty, contract and third party property damage or personal injury. For instance, we have noted a nationwide trend in purported class actions against chemical manufacturers generally seeking relief such as medical monitoring, property damages, off-site remediation and punitive damages arising from alleged environmental torts without claiming present personal injuries. We have also noted a trend in public and private nuisance suits being filed on behalf of states, counties, cities and utilities alleging harm to the general public. In addition, various factors or developments can lead to changes in current estimates of liabilities such as a final adverse judgment, significant settlement or changes in applicable law. A future adverse ruling or unfavorable development could result in future charges that could have a material adverse effect on us. An adverse outcome in any one or more of these matters could be material to our business, financial condition and results of operations. In particular, product liability claims, regardless of their merits, could be costly, divert management’s attention and adversely affect our reputation and demand for our products.
Risks Related to Human Resources
We may not be able to recruit and retain the experienced and skilled personnel we need to compete.
Our future success depends on our ability to attract, retain, develop and motivate highly skilled personnel. We must have talented personnel to succeed and competition for senior management in our industry is intense. Our ability to meet our performance goals depends upon the personal efforts and abilities of the principal members of our senior management who provide strategic direction, develop our business, manage our operations and maintain a cohesive and stable work environment. We cannot assure you that we will retain or successfully recruit senior executives, or that their services will remain available to us.

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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 December 31, 2017, approximately 0.1% of our U.S. workforce was unionized and approximately 55% of our workforce outside the United States was unionized or otherwise covered by labor agreements. Consequently, we may be subject to potential union campaigns, work stoppages, union negotiations and other potential labor disputes. Additionally, negotiations with unions or works councils in connection with existing labor agreements may result in significant increases in our cost of labor, divert management’s attention away from operating our business or break down and result in the disruption of our operations. The occurrence of any of the preceding outcomes could impair our ability to manufacture our products and result in increased costs and/or decreased operating results. Further, we may be impacted by work stoppages at our suppliers or customers that are beyond our control.
Risks Related to Intellectual Property
Our inability to protect and enforce our intellectual property rights could adversely affect our financial results.
Intellectual property rights both in the United States and in foreign countries, including patents, trade secrets, confidential information, trademarks and trade names, are important to our business and will be critical to our ability to grow and succeed in the future. We make strategic decisions on whether to apply for intellectual property protection and what kind of protection to pursue based on a cost benefit analysis. While we endeavor to protect our intellectual property rights in certain jurisdictions in which our products are produced or used and in jurisdictions into which our products are imported, the decision to file for intellectual property protection is made on a case-by-case basis. Because of the differences in foreign trademark, patent and other laws concerning proprietary rights, our intellectual property rights may not receive the same degree of protection in foreign countries as they would in the United States. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, financial condition and results of operations.
We have applied for patent protection relating to certain existing and proposed products, processes and services in certain jurisdictions. While we generally consider applying for patents in those countries where we intend to make, have made, use or sell patented products, we may not accurately assess all of the countries where patent protection will ultimately be desirable. If we fail to timely file a patent application in any such country, we may be precluded from doing so at a later date. Furthermore, we cannot assure you that our pending patent applications will not be challenged by third parties or that such applications will eventually be issued by the applicable patent offices as patents. We also cannot assure you that the patents issued as a result of our foreign patent applications will have the same scope of coverage as our U.S. patents. It is possible that only a limited number of the pending patent applications will result in issued patents, which may have a materially adverse effect on our business and results of operations.

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The patents we own could be challenged, invalidated or circumvented by others and may not be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage. Furthermore, our existing patents are subject to challenges from third parties that may result in invalidations and will all eventually expire, after which we will not be able to prevent our competitors from using our previously patented technologies, which could materially adversely affect our competitive advantage stemming from those products and technologies. We also cannot assure you that competitors will not infringe our patents, or that we will have adequate resources to enforce our patents.
We also rely on unpatented proprietary technology. It is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology. To protect our trade secrets and other proprietary information, we require certain employees, consultants, advisors and collaborators to enter into confidentiality agreements as we deem appropriate. We cannot assure you that we will be able to enter into these confidentiality agreements or that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. If we are unable to maintain the proprietary nature of our technologies, we could be materially adversely affected.
We rely on our trademarks, trade names and brand names to distinguish our products from the products of our competitors, and have registered or applied to register many of these trademarks. We cannot assure you that our trademark applications will be approved. Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition, and could require us to devote resources to advertising and marketing new brands. Further, we cannot assure you that competitors will not infringe our trademarks, or that we will have adequate resources to enforce our trademarks. We also license third parties to use our trademarks. In an effort to preserve our trademark rights, we enter into license agreements with these third parties that govern the use of our trademarks and contain limitations on their use. Although we make efforts to police the use of our trademarks by our licensees, we cannot assure you that these efforts will be sufficient to ensure that our licensees abide by the terms of their licenses. In the event that our licensees fail to do so, our trademark rights could be diluted.
If we are sued for infringing intellectual property rights of third parties, it may be costly and time consuming, and an unfavorable outcome in any litigation could harm our business.
We cannot assure you that our activities will not, unintentionally or otherwise, infringe on the patents, trademarks or other intellectual property rights owned by others. We may spend significant time and effort and incur significant litigation costs if we are required to defend ourselves against intellectual property rights claims brought against us, regardless of whether the claims have merit. If we are found to have infringed on the patents, trademarks or other intellectual property rights of others, we may be subject to substantial claims for damages, which could materially impact our cash flow, business, financial condition and results of operations. We may also be required to cease development, use or sale of the relevant products or processes, or we may be required to obtain a license on the disputed rights, which may not be available on commercially reasonable terms, if at all.
Risks Related to Other Aspects of our Business
We may continue to engage in acquisitions and divestitures, and may encounter difficulties integrating acquired businesses with, or disposing of divested businesses from, our current operations and, as a result, we may not realize the anticipated benefits of these acquisitions and divestitures.
We may continue to seek to grow through strategic acquisitions, joint ventures or other arrangements. Our due diligence reviews in these transactions may not identify all of the material issues necessary to accurately estimate the cost or potential loss contingencies with respect to a particular transaction, including potential exposure to regulatory sanctions resulting from a counterparty’s previous activities. We may incur unanticipated costs or expenses, including post-closing asset impairment charges, expenses associated with eliminating duplicate facilities, litigation and other liabilities. We may also face regulatory scrutiny as a result of perceived concentration in certain markets, which could cause additional delay or prevent us from completing certain acquisitions that would be beneficial to our business. We may also encounter difficulties in integrating acquisitions with our operations, applying our internal controls processes to these acquisitions or in managing strategic investments. Additionally, we may not achieve the benefits we anticipate when we first enter into a transaction in the amount or on the timeframe anticipated. Any of the foregoing could adversely affect our business and results of operations. In addition, accounting requirements relating to business combinations, including the requirement to expense certain acquisition costs as incurred, may cause us to experience greater earnings volatility and generally lower earnings during periods in which we acquire new businesses. Furthermore, we may make strategic divestitures from time to time. These divestitures may result in continued financial involvement in the divested businesses, such as through indemnities, guarantees or other financial arrangements. These arrangements could result in financial obligations imposed upon us and could affect our future financial condition and results of operations. Acquisitions and divestitures may also require us to devote significant internal resources and could divert management's attention away from operating our business.

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Our joint ventures may not operate according to our business strategy if our joint venture partners fail to fulfill their obligations.
As part of our business, we have entered into certain joint venture arrangements, and may enter into additional joint venture arrangements in the future. The nature of a joint venture requires us to share control over significant decisions with unaffiliated third parties. Since we may not exercise control over our current or future joint ventures, we may not be able to require our joint ventures to take actions that we believe are necessary to implement our business strategy. Additionally, differences in views among joint venture participants may result in delayed decisions or failures to agree on major issues. If these differences cause the joint ventures to deviate from our business strategy, our results of operations could be materially adversely affected.
The insurance we maintain may not fully cover all potential exposures.
Our product liability, property, business interruption and casualty insurance coverages may not cover all risks associated with the operation of our business and may not be sufficient to offset the costs of any losses, lost sales or increased costs experienced during business interruptions. For some risks, we may elect not to obtain insurance. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance policies may become unavailable or available only for reduced amounts of coverage. As a result, we may not be able to renew our insurance policies or procure other desirable insurance on commercially reasonable terms, if at all. Losses and liabilities from uninsured or underinsured events and delay in the payment of insurance proceeds could have a material adverse effect on our business, financial condition and results of operations.
We may need to recognize impairment charges related to goodwill, identifiable intangible assets and fixed assets.
Under the acquisition method of accounting, net assets acquired are recorded at fair value as of the acquisition date, with any excess purchase price allocated to goodwill. Our acquisitions have resulted in significant balances of goodwill and identifiable intangible assets. 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.
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.
DuPont’s potential breach of its obligations in connection with the Acquisition, including failure to comply with its indemnification obligations, may materially affect our business and operating results.
Although the Acquisition closed on February 1, 2013, DuPont still has performance obligations to us, including fulfilling indemnification requirements. We could incur material additional costs if DuPont fails to meet its obligations or if we otherwise are unable to recover costs associated with such liabilities.
We may be subject to changes in our tax rates and the adoption of tax legislation or exposure to additional tax liabilities that may adversely affect our results of operations.

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We are subject to taxes in the U.S. and non-U.S. jurisdictions where our subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. Our future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in available tax credits or tax deductions and changes in tax laws or their interpretation, such as interpretations as to the legality of tax advantages granted under the EU state aid rules. Our tax returns and other tax matters are subject to examination by local tax authorities and governmental bodies. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of our provision for taxes. There can be no assurance as to the outcome of these examinations. If our effective tax rates were to increase, or if the ultimate determination of the taxes owed by us is for an amount in excess of amounts previously accrued, our operating results, cash flows and financial condition could be adversely affected.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act ("U.S. TCJA") legislation was enacted into law, which significantly revises the U.S. Internal Revenue Code of 1986, as amended. While our current tax accounting and future expectations are provisional and based on our present understanding of the provisions under the U.S. TCJA, further interpretive guidance of the U.S TCJA's provisions could result in further adjustments that could have an impact on our future results of operations, cash flows or financial positions. In addition, it is uncertain if and to what extent various states and localities will conform to the newly enacted federal tax law.
If we are treated as a financial institution under FATCA, withholding tax may be imposed on payments on our common shares.
Sections 1471 through 1474 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), and applicable Treasury Regulations commonly referred to as “FATCA” may impose 30% withholding on “foreign passthru payments” made by a “foreign financial institution” (as defined in the Code) that has entered into an agreement with the U.S. Internal Revenue Service to perform certain diligence and reporting obligations with respect to the foreign financial institution’s U.S.-owned accounts. Such withholding on “foreign passthru payments” will apply from January 1, 2019 at the earliest. The applicable Treasury Regulations treat an entity as a “financial institution” if it is a holding company formed in connection with or availed of by a private equity fund or other similar investment vehicle established with an investment strategy of investing, reinvesting or trading in financial assets. The term “foreign passthru payment” is currently not defined. The United States has entered into an intergovernmental agreement (an “IGA”) with Bermuda, which modifies the FATCA withholding regime described above. It is not clear whether we would be treated as a financial institution subject to the diligence, reporting and withholding obligations under FATCA or the Bermuda IGA. Furthermore, it is not yet clear how the Bermuda IGA will address foreign passthru payments. Prospective investors should consult their tax advisors regarding the potential impact of FATCA, the Bermuda IGA and any non-U.S. legislation implementing FATCA, on their investment in our common shares.
We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. holders of our common shares.
Based on the market price of our common shares and the composition of our income, assets and operations, we do not expect to be treated as a passive foreign investment company ("PFIC") for U.S. federal income tax purposes for the current taxable year or in the foreseeable future. However, the application of the PFIC rules is subject to uncertainty in several respects, and we cannot assure you the U.S. Internal Revenue Service will not take a contrary position. Furthermore, this is a factual determination that must be made annually after the close of each taxable year. If we are a PFIC for any taxable year during which a U.S. person holds our common shares, certain adverse U.S. federal income tax consequences could apply to such U.S. person.
Risks Related to our Indebtedness
Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy and our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations with respect to our indebtedness.
As of December 31, 2017, we had approximately $3.9 billion of indebtedness on a consolidated basis, including $500.0 million of our 2024 Dollar Senior Notes (as defined herein), $399.7 million of our 2024 Euro Senior Notes (as defined herein), $536.9 million of our 2025 Euro Senior Notes (as defined herein), $1,960.0 million of the 2024 Dollar Term Loan facility (as defined herein) and $472.5 million of the 2023 Euro Term Loan facility (as defined herein). In addition, as of December 31, 2017, we had approximately $364.5 million in borrowing capacity available under our Revolving Credit Facility, after giving effect to $35.5 million of outstanding letters of credit. As of December 31, 2017, we were in compliance with all of the covenants under our outstanding debt instruments.

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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 may make it more difficult for us to borrow in the future. Similarly, our relatively greater leverage increases our vulnerability to, and limits our flexibility in planning for, adverse economic and industry conditions and creates other competitive disadvantages compared with other companies with relatively less leverage.
In addition, the indentures governing the New Senior Notes (as defined herein) and the agreements governing our Senior Secured Credit Facilities (as defined herein) contain affirmative and negative covenants that limit our and certain of our subsidiaries’ ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all of our debts.
To service all of our indebtedness, we will require a significant amount of cash and our ability to generate cash depends on many factors beyond our control.
Our operations are conducted through our subsidiaries and our ability to make cash payments on our indebtedness will depend on the earnings and the distribution of funds from our subsidiaries. None of our subsidiaries, however, 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, issuing additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances. Such actions, if necessary, may not be effected on commercially reasonable terms or at all. The instruments governing our indebtedness restrict our ability to sell assets and our use of the proceeds from such sales, and we may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due.
If we are unable to generate sufficient cash flow or are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under our Revolving Credit Facility could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to obtain waivers from the required lenders under the credit agreement governing our Senior Secured Credit Facilities or the indentures governing the New Senior Notes to avoid being in default. If we breach our covenants under our Senior Secured Credit Facilities or New Senior Notes or we are in default thereunder and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under the credit agreement governing our Senior Secured Credit Facilities and our New Senior Notes, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.

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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 New 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 December 31, 2017, we had $364.5 million of additional borrowing capacity under our Revolving Credit Facility, after giving effect to $35.5 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 Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financial Condition."
We are dependent upon our lenders for financing to execute our business strategy and meet our liquidity needs. If our lenders are unable or unwilling to fund borrowings under their credit commitments or we are unable to borrow, it could negatively impact our business.
We are dependent upon our lenders for financing to execute our business strategy and meet our liquidity needs. If our lenders are unable to fund borrowings under their credit commitments or we are unable to borrow from them for any reason, our business could be negatively impacted. During periods of volatile credit markets, there is risk that any lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their legal commitments and obligations under existing credit commitments, including, but not limited to, extending credit up to the maximum permitted by a credit facility, allowing access to additional credit features and otherwise accessing capital and/or honoring loan commitments. If our lenders are unable or unwilling to fund borrowings under their revolving credit commitments or we are unable to borrow from them, it could be difficult in such environments to obtain sufficient liquidity to meet our operational needs.
Our ability to obtain additional capital on commercially reasonable terms may be limited.
Although we believe our cash and cash equivalents, together with cash we expect to generate from operations and unused capacity available under our Revolving Credit Facility, provide adequate resources to fund ongoing operating requirements, we may need to seek additional financing to compete effectively.
If we are unable to obtain capital on commercially reasonable terms, it could:
reduce funds available to us for purposes such as working capital, capital expenditures, research and development, strategic acquisitions and other general corporate purposes;
restrict our ability to introduce new products or exploit business opportunities;
increase our vulnerability to economic downturns and competitive pressures in the markets in which we operate; and
place us at a competitive disadvantage.

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Difficult and volatile conditions in the capital, credit and commodities markets and in the overall economy could have a material adverse effect on our financial position, results of operations and cash flows.
Difficult global economic conditions, including concerns about sovereign debt and significant volatility in the capital, credit and commodities markets, could have a material adverse effect on our financial position, results of operations and cash flows. These global economic factors, combined with low levels of business and consumer confidence and high levels of unemployment in certain parts of the world, have precipitated a slow recovery from the global recession and concern about a return to recessionary conditions. The difficult conditions in these markets and the overall economy affect our business in a number of ways. For example:
as a result of the volatility in commodity prices, we may encounter difficulty in achieving sustained market acceptance of past or future price increases, which could have a material adverse effect on our financial position, results of operations and cash flows;
under difficult market conditions there can be no assurance that borrowings under our Revolving Credit Facility would be available or sufficient, and in such a case, we may not be able to successfully obtain additional financing on reasonable terms, or at all;
in order to respond to market conditions, we may need to seek waivers from various provisions in the credit agreement governing our Senior Secured Credit Facilities or the indentures governing the New Senior Notes, and in such case, there can be no assurance that we can obtain such waivers at a reasonable cost, if at all;
market conditions could cause the counterparties to the derivative financial instruments we may use to hedge our exposure to interest rate, commodity or currency fluctuations to experience financial difficulties and, as a result, our efforts to hedge these exposures could prove unsuccessful and, furthermore, our ability to engage in additional hedging activities may decrease or become more costly; and
market conditions could result in our key customers experiencing financial difficulties and/or electing to limit spending, which in turn could result in decreased sales and earnings for us.
In general, downturns in economic conditions can cause fluctuations in demand for our and our customers’ products, product prices, volumes and margins. Future economic conditions may not be favorable to our industry and future growth in demand for our products, if any, may not be sufficient to alleviate any existing or future conditions of excess industry capacity. A decline in the demand for our products or a shift to lower-margin products due to deteriorating economic conditions could have a material adverse effect on our financial condition and results of operations and could also result in impairments of certain of our assets. We do not know if market conditions or the state of the overall economy will continue to improve in the near future. We cannot provide assurance that a continuation of current economic conditions or a further economic downturn in one or more of the geographic regions in which we sell our products would not have a material adverse effect on our business, financial condition and results of operations.
Our debt obligations may limit our flexibility in managing our business.
The indentures governing our New Senior Notes and the credit agreement governing our Senior Secured Credit Facilities require us to comply with a number of customary financial and other covenants, such as maintaining leverage ratios in certain situations and maintaining insurance coverage. See Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financial Condition." These covenants may limit our flexibility in our operations, and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness even if we had satisfied our payment obligations. If we were to default on the indentures governing our New Senior Notes, the credit agreement governing our Senior Secured Credit Facilities or other debt instruments, our financial condition and liquidity would be adversely affected.

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Risks Related to Ownership of our Common Shares
Axalta Coating Systems Ltd. is a holding company with no operations of its own. Because our operations are conducted almost entirely through our subsidiaries and joint ventures, we are largely dependent on our receipt of distributions and dividends or other payments from our subsidiaries and joint ventures for cash to fund all of our operations and expenses, including to make future dividend payments, if any.
Our operations are conducted almost entirely through our subsidiaries and our ability to generate cash to meet our debt service obligations or to make future dividend payments, if any, is highly dependent on the earnings and the receipt of funds from our subsidiaries in the form of dividends, loans or advances and through repayment of loans or advances from us. Payments to us by our subsidiaries and joint ventures will be contingent upon our subsidiaries’ or joint ventures’ earnings and other business considerations and may be subject to statutory or contractual restrictions. 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 New Senior Notes have certain restrictions over 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, or market rumors regarding such actions;
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
changes in accounting standards, policies, guidance, interpretations or principles;
the impact on our profitability temporarily caused by the time lag between when we experience cost increases until these increases flow through cost of sales because of our method of accounting for inventory, or the impact from our inability to pass on such price increases to our customers;
material litigations or government investigations;
changes in general conditions in the United States and global economies or financial markets, including those resulting from war, incidents of terrorism or responses to such events;
changes in key personnel;
sales of common shares by us, Berkshire Hathaway Inc.'s affiliate ("Berkshire") or members of our management team;
the granting of restricted common shares, stock options and other equity awards;
volume of trading in our common shares; and
the realization of any risks described under this “Risk Factors” section.
In addition, over the past several years, the stock markets have experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our common shares could fluctuate based upon factors that have little or nothing to do with our company, and these fluctuations could materially reduce our share price and cause you to lose all or part of your investment. Further, in the past, market fluctuations and price declines in a company’s stock have led to securities class action litigations. If such a suit were to arise, it could have a substantial cost and divert our resources regardless of the outcome.

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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. 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 New York Stock Exchange ("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 accounting principles generally accepted in the United States of America ("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.
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. Therefore, you are not likely to receive any dividends on your common shares for the foreseeable future and the success of an investment in our common shares will depend upon any future appreciation in their value. There is no guarantee that our common shares will appreciate in value or even maintain the price at which our shareholders have purchased their shares. The payment of future dividends, however, will be at the discretion of our Board of Directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our Board of Directors deems relevant. The credit agreement governing our Senior Secured Credit Facilities and the indentures governing the New Senior Notes also 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 February 15, 2018, we had 1,000,000,000 common shares authorized and 245,076,781 common shares outstanding.
We cannot predict the size of future issuances or sales of our common shares or the effect, if any, that future issuances and sales of our common shares will have on the market price of our common shares. Sales of substantial amounts of our common shares (including sales that may occur pursuant to the registration rights of Berkshire, sales by members of management and shares that may be issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our common shares. See Part III, Item 13, “Certain Relationships and Related Transactions and Director Independence.”

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We are a Bermuda company and it may be difficult for you to enforce judgments against us or our directors and executive officers.
We are a Bermuda exempted company. As a result, the rights of our shareholders are governed by Bermuda law and our memorandum of association and bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in another jurisdiction, and a substantial portion of our assets are located outside the United States. As a result, it may be difficult for investors to effect service of process on those persons in the United States or to enforce in the United States judgments obtained in U.S. courts against us or those persons based on the civil liability provisions of the U.S. securities laws. It is doubtful whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the United States, against us or our directors or officers under the securities laws of those jurisdictions or entertain actions in Bermuda against us or our directors or officers under the securities laws of other jurisdictions.
Bermuda law differs from the laws in effect in the United States and may afford less protection to our shareholders.
We are organized under the laws of Bermuda. As a result, our corporate affairs are governed by the Companies Act 1981 (the "Companies Act"), which differs in some material respects from laws typically applicable to U.S. corporations and shareholders, including the provisions relating to interested directors, amalgamations, mergers and acquisitions, takeovers, shareholder lawsuits and indemnification of directors. Generally, the duties of directors and officers of a Bermuda company are owed to the company only. Shareholders of Bermuda companies typically do not have rights to take action against directors or officers of the company and may only do so in limited circumstances. Shareholder class actions are not available under Bermuda law. The circumstances in which shareholder derivative actions may be available under Bermuda law are substantially more proscribed and less clear than they would be to shareholders of U.S. corporations. The Bermuda courts, however, would ordinarily be expected to permit a shareholder to commence an action in the name of a company to remedy a wrong to the company where the act complained of is alleged to be beyond the corporate power of the company or illegal, or would result in the violation of the company’s memorandum of association or bye-laws. Furthermore, consideration would be given by a Bermuda court to acts that are alleged to constitute a fraud against the minority shareholders or, for instance, where an act requires the approval of a greater percentage of the company’s shareholders than those who actually approved it.
When the affairs of a company are being conducted in a manner that is oppressive or prejudicial to the interests of some shareholders, one or more shareholders may apply to the Supreme Court of Bermuda, which may make such order as it sees fit, including an order regulating the conduct of the company’s affairs in the future or ordering the purchase of the shares of any shareholders by other shareholders or by the company. Additionally, under our bye-laws and as permitted by Bermuda law, each shareholder has waived any claim or right of action against our directors or officers for any action taken by directors or officers in the performance of their duties, except for actions involving fraud or dishonesty. In addition, the rights of our shareholders and the fiduciary responsibilities of our directors under Bermuda law are not as clearly established as under statutes or judicial precedent in existence in jurisdictions in the United States, particularly the State of Delaware. Therefore, our shareholders may have more difficulty protecting their interests than would shareholders of a corporation incorporated in a jurisdiction within the United States.
We have anti-takeover provisions in our bye-laws that may discourage a change of control.
Our bye-laws contain provisions that could make it more difficult for a third party to acquire us without the consent of our Board of Directors. These provisions provide for:
a classified Board of Directors with staggered three-year terms;
directors only to be removed for cause;
restrictions on the time period in which directors may be nominated; and
our Board of Directors to determine the powers, preferences and rights of our preference shares and to issue the preference shares without shareholder approval.
These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company and may prevent our shareholders from receiving the benefit from any premium to the market price of our common shares offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common shares if the provisions are viewed as discouraging takeover attempts in the future. These provisions could also discourage proxy contests, make it more difficult for you and other shareholders to elect directors of your choosing and cause us to take corporate actions other than those you desire.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters is located in Philadelphia, PA. Our extensive geographic footprint is comprised of 49 manufacturing facilities (including 13 manufacturing sites operated by our joint ventures), four major technology centers and 47 customer training centers supporting our global operations. The table below presents summary information regarding our facilities as of December 31, 2017.
Type of Facility/Country
  
Location
  
Segment
Manufacturing Facilities
  
 
  
 
North America
  
 
  
 
Canada
  
Ajax
  
Transportation
 
 
Cornwall
 
Performance
United States of America
  
Front Royal, VA
  
Performance; Transportation
 
  
Ft. Madison, IA
  
Performance; Transportation
 
  
Houston, TX
  
Performance
 
 
High Point, NC
 
Performance
 
  
Hilliard, OH
  
Performance; Transportation
 
 
Jacksonville, TX
 
Performance
 
  
Mt. Clemens, MI
  
Performance; Transportation
 
 
Orrville, OH
 
Performance
 
 
 
 
 
Latin America
  
 
  
 
Argentina
 
Buenos Aires
 
Performance; Transportation
Brazil
  
Guarulhos
  
Performance; Transportation
Mexico
  
Monterrey
  
Performance
 
  
Ocoyoacac
  
Performance; Transportation
 
  
Tlalnepantla
  
Performance; Transportation
 
 
 
 
 
EMEA
  
 
  
 
Austria
  
Guntramsdorf
  
Performance; Transportation
Belgium
  
Mechelen
  
Performance; Transportation
France
  
Montbrison
  
Performance
Germany
  
Wuppertal
  
Performance; Transportation
 
  
Landshut
  
Performance
Netherlands
 
Zuidland
 
Performance
Sweden
  
Vastervik
  
Performance
Switzerland
  
Bulle
  
Performance
Turkey
  
Gebze
  
Performance; Transportation
United Kingdom
  
Darlington
  
Performance
 
 
Farnham
 
Performance
 
 
Huthwaite
 
Performance
 
 
Tewksbury
 
Performance
 
 
West Bromwich
 
Performance
Asia Pacific
  
 
  
 
Australia
  
Riverstone
  
Performance; Transportation
China
  
Changchun
  
Performance; Transportation
 
  
Jiading
  
Performance; Transportation
India
  
Savli
  
Performance; Transportation
Malaysia
  
Kuala Lumpur
  
Performance
 
 
Shah Alam
 
Performance
Thailand
 
Bangplee
 
Performance
 
 
 

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Type of Facility/Country
  
Location
  
Segment
Joint Venture Manufacturing
Facilities
  
 
  
 
China
  
Chengdu
  
Performance
 
  
Dongguan
  
Performance
 
  
Huangshan
  
Performance
 
  
Qingpu
  
Performance
 
  
Shangdong
  
Performance
Colombia
  
Cartagena de Indias
  
Performance
Indonesia
  
Cikarang
  
Performance
Taiwan
  
Taipei
  
Transportation
Guatemala
  
Amatitlan
  
Performance
United States of America
 
Madison, AL
 
Performance
 
 
Riverside, CA
 
Performance
 
 
 
 
 
Joint Venture Partner Manufacturing Facilities
  
 
  
 
South Africa
  
Port Elizabeth
  
Transportation
Russia
  
Moscow
  
Transportation
 
 
 
Technology Centers
  
 
  
 
China
  
Shanghai
  
Performance; Transportation
Germany
  
Wuppertal
  
Performance; Transportation
United States of America
  
Mt. Clemens, MI
  
Performance; Transportation
 
  
Wilmington, DE
  
Performance; Transportation
 
 
 
Customer Training Centers
  
Location by Region
  
Number of Facilities
 
  
North America
  
8
 
  
Latin America
  
7
 
  
EMEA
  
18
 
  
Asia Pacific
  
14
ITEM 3. LEGAL PROCEEDINGS
We are from time to time party to legal proceedings that arise in the ordinary course of business. We are not involved in any litigation other than that which has arisen in the ordinary course of business. We do not expect that any currently pending lawsuits will have a material effect on us as discussed in Note 8 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. See Part I, Item 1A, "Risk Factors—Risks Related to our Business—Risks Related to Legal and Regulatory Compliance and Litigation—Our results of operations could be adversely affected by litigation" and Part I, Item 1A, "Risk Factors—Risks Related to our Business—Risks Related to Other Aspects of our Business—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."
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.


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PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Share Price and Dividends
Our common shares are traded on the NYSE under the symbol "AXTA." The high and low sales prices for our common shares for the two most recent fiscal years were as follows:
 
2017
2016
Quarter Ended
High
Low
High
Low
First Quarter (March 31)
$
33.06

$
27.20

$
29.66

$
20.67

Second Quarter (June 30)
34.10

30.67

30.45

24.80

Third Quarter (September 30)
33.60

27.77

29.59

25.79

Fourth Quarter (December 31)
38.20

28.04

28.37

24.27

As of February 15, 2018, there were 8 registered holders of record of Axalta’s common stock as shown on the records of the Company’s transfer agent. A substantially greater number of holders of Axalta common stock are “street name” or beneficial holders, whose shares of record are held by banks, brokers and other financial institutions. Since our incorporation in August 2012, we have not paid dividends on our common shares, and we do not currently intend to pay dividends in the foreseeable future. The declaration and payment of any dividends in the future will be determined by our Board of Directors, in its discretion, and will depend on a number of factors, including our earnings, capital requirements, overall financial condition and contractual restrictions, including covenants in the agreements governing our New Senior Notes and Senior Secured Credit Facilities, which may limit our ability to pay dividends.
Recent Sales of Unregistered Securities
None.

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Stock Performance
The line graph illustrated below compares the cumulative total shareholder value return of our common shares since our initial public offering with the cumulative total returns of an overall stock market index, the Standard & Poor's (Composite 500 Index ("S&P 500"), and our peer group index, Standard & Poor's 500 Chemicals Index ("S&P 500 Chemicals"). This graph assumes an investment of $100 in our common shares and each index (with all dividends reinvested) on November 12, 2014, the date on which our common shares began trading on the NYSE.
stockperformance2017.jpg

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ITEM 6. SELECTED FINANCIAL DATA
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 ("Predecessor" periods) reflect the combined results of operations of the DPC business.
The years ended December 31, 2013 through 2017 ("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.
The historical results of operations and cash flow data for the years ended December 31, 2013 through 2017 and the historical balance sheet data as of December 31, 2013 through 2017 presented below were derived from our audited financial statements and the related notes thereto and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related notes included elsewhere in this Annual Report on Form 10-K.
The historical combined financial data for 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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Successor
Predecessor
 
Year Ended December 31,
Period from January 1
through
January 31,
(In millions, except per share data)
2017
2016
2015
2014
2013
2013
Statements of Operations Data:
 
 
 
 
 
 
Net sales
$
4,352.9

$
4,068.8

$
4,083.9

$
4,356.6

$
3,946.9

$
326.2

Other revenue
24.1

23.9

26.1

29.8

35.7

1.1

Total revenue
4,377.0

4,092.7

4,110.0

4,386.4

3,982.6

327.3

Cost of goods sold (1)
2,779.6

2,527.6

2,597.3

2,897.2

2,772.8

232.2

Selling, general and administrative expenses (2)
997.7

962.5

914.8

991.5

1,040.6

70.8

Venezuela asset impairment and deconsolidation charge
70.9

57.9





Research and development expenses
65.3

57.7

51.6

49.5

40.5

3.7

Amortization of acquired intangibles
101.2

83.4

80.7

83.8

79.9


Merger and acquisition related expenses




28.1


Income from operations
362.3

403.6

465.6

364.4

20.7

20.6

Interest expense, net
147.0

178.2

196.5

217.7

215.1


Bridge financing commitment fees




25.0


Other expense, net
25.7

142.7

111.2

115.0

48.5

5.0

Income (loss) before income taxes
189.6

82.7

157.9

31.7

(267.9
)
15.6

Provision (benefit) for income taxes
141.9

38.1

62.1

0.1

(46.2
)
7.1

Net income (loss)
47.7

44.6

95.8

31.6

(221.7
)
8.5

Less: Net income attributable to noncontrolling interests
11.0

5.8

4.2

7.3

6.0

0.6

Net income (loss) attributable to controlling interests
$
36.7

$
38.8

$
91.6

$
24.3

$
(227.7
)
$
7.9

Per share data:
 
 
 
 
 
 
Net income (loss) per share:
 
 
 
 
 
 
Basic net income (loss) per share
$
0.15

$
0.16

$
0.39

$
0.11

$
(1.00
)
 
Diluted net income (loss) per share
$
0.15

$
0.16

$
0.38

$
0.11

$
(1.00
)
 
Basic weighted average shares outstanding
240.4

238.1

233.8

229.3

228.3

 
Diluted weighted average shares outstanding
246.1

244.4

239.7

230.3

228.3

 
 
 
 
 
 
 
 
Other Financial Data:
 
 
 
 
 
 
Cash flows from:
 
 
 
 
 
 
Operating activities
$
540.0

$
559.3

$
409.8

$
251.4

$
376.8

$
(37.7
)
Investing activities
(689.6
)
(257.0
)
(166.2
)
(173.8
)
(5,011.2
)
(8.3
)
Financing activities
367.3

(232.6
)
(84.7
)
(123.2
)
5,098.1

43.0

Depreciation and amortization
347.5

322.1

307.7

308.7

300.7

9.9

Purchases of property, plant and equipment
(125.0
)
(136.2
)
(138.1
)
(188.4
)
(107.3
)
(2.4
)




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Successor
 
December 31,
(In millions)
2017
2016
2015
2014
2013
Balance sheet data:
 
 
 
 
 
Cash and cash equivalents
$
769.8

$
535.4

$
485.0

$
382.1

$
459.3

Working capital (3)
1,233.4

977.9

955.2

854.7

918.5

Total assets
6,832.2

5,866.2

5,839.8

6,152.4

6,631.9

Indebtedness
3,915.6

3,263.9

3,441.5

3,614.3

3,822.1

Total liabilities
5,424.4

4,619.6

4,706.5

5,046.3

5,422.9

Total shareholders’ equity
1,407.8

1,246.6

1,133.3

1,106.1

1,209.0

Cash dividends declared per common share





The above financial information has been adjusted to reflect the correction of immaterial prior period errors described further in Note 2 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K, inclusive of $5.1 million ($3.1 million after tax) and $4.2 million ($2.8 million after tax) for the Successor years ended December 31, 2014 and 2013, respectively.
(1)
Cost of goods sold includes the impacts to the Successor year ended December 31, 2013 attributable to the increases in inventory value resulting from the fair value adjustments associated with our acquisition accounting for inventories of $103.7 million.
(2)
Selling, general and administrative expense for the Successor years ended December 31, 2017, 2016 and 2015 include costs primarily associated with our Axalta Way cost-savings initiatives of $63.8 million, $77.6 million and $64.4 million, respectively. Selling, general and administrative expense for the Successor years ended December 31, 2014 and 2013 include costs primarily associated with transition-related and cost-savings initiatives of $127.1 million and $231.5 million, respectively.
(3)
Working capital is defined as current assets less current liabilities.


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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K, as well as the information presented under Part II, Item 6, "Selected Financial Data" of this Annual Report on Form 10-K.
FORWARD-LOOKING STATEMENTS
Many statements made in the following discussion and analysis of our financial condition and results of operations and elsewhere in this Annual Report on Form 10-K that are not statements of historical fact, including statements about our beliefs and expectations, are "forward-looking statements" within the meaning of federal securities laws and should be evaluated as such. Forward-looking statements include information regarding industry outlook as well as possible or assumed future results of operations, including descriptions of our business plan, strategies and capital structure. These statements often include words such as "anticipate," "expect," "suggests," "plan," "believe," "intend," "estimates," "targets," "projects," "should," "could," "would," "may," "will," "forecast" and other similar expressions. We base these forward-looking statements or projections on our current expectations, plans and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances and at such time. As you read and consider this Annual Report on Form 10-K, you should understand that these statements are not guarantees of performance or results. The forward-looking statements and projections are subject to and involve risks, uncertainties and assumptions, including, but not limited to, the risks and uncertainties described in "Non-GAAP Financial Measures" and "Forward-Looking Statements," as well as "Risk Factors" and you should not place undue reliance on these forward-looking statements or projections. Although we believe that these forward-looking statements and projections are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements and projections. Factors that may materially affect such forward-looking statements and projections include:
adverse developments in economic conditions and, particularly, in conditions in the automotive and transportation industries;
volatility in the capital, credit and commodities markets;
our inability to successfully execute on our growth strategy;
increased competition;
weather conditions or severe storms 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;
risks of the loss or change in purchasing levels of any of our significant customers or the consolidation of MSOs, distributors and/or body shops;
our reliance on our distributor network and third-party delivery services for the distribution and export of certain of our products;
credit risk exposure from our customers;
price increases or interruptions in our supply of raw materials;
failure to develop and market new products and manage product life cycles;
business disruptions, security threats and security breaches, including security risks to our information technology systems;
risks associated with our outsourcing strategies;
risks associated with our non-U.S. operations;
currency-related risks;
terrorist acts, conflicts, wars and natural disasters that may materially adversely affect our business, financial condition and results of operations;
failure to comply with the anti-corruption laws of the United States and various international jurisdictions;

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failure to comply with anti-terrorism laws and regulations and applicable trade embargoes;
risks associated with protecting data privacy;
significant environmental liabilities and costs as a result of our current and past operations or products, including operations or products related to our business prior to the Acquisition;
transporting certain materials that are inherently hazardous due to their toxic nature;
litigation and other commitments and contingencies;
ability to recruit and retain the experienced and skilled personnel we need to compete;
unexpected liabilities under any pension plans applicable to our employees;
work stoppages, union negotiations, labor disputes and other matters associated with our labor force;
our ability to protect and enforce intellectual property rights;
intellectual property infringement suits against us by third parties;
our ability to realize the anticipated benefits of any acquisitions and divestitures;
our joint ventures’ ability to operate according to our business strategy should our joint venture partners fail to fulfill their obligations;
risk that the insurance we maintain may not fully cover all potential exposures;
the risk of impairment charges related to goodwill, identifiable intangible assets and fixed assets;
risks associated with changes in tax rates or regulations, including unexpected impacts of the new U.S. Tax Cuts and Jobs Act legislation, which may differ with further regulatory guidance and changes in our current interpretations and assumptions;
our substantial indebtedness;
our ability to obtain additional capital on commercially reasonable terms may be limited;
any statements of belief and any statements of assumptions underlying any of the foregoing;
other factors disclosed in this Annual Report on Form 10-K and our other filings with the Securities and Exchange Commission; and
other factors beyond our control.
These cautionary statements should not be construed by you to be exhaustive and are made only as of the date of this Annual Report on Form 10-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
OVERVIEW
We are a leading global manufacturer, marketer and distributor of high performance coatings systems. We have over a 150-year heritage in the coatings industry and are known for manufacturing high-quality products with well-recognized brands supported by market-leading technologies and customer service. Our diverse global footprint of 49 manufacturing facilities, four technology centers, 47 customer training centers and approximately 13,300 employees allows us to meet the needs of customers in over 130 countries. We serve our customers through an extensive sales force and technical support organization, as well as through approximately 4,000 independent, locally based distributors.
We operate our business in two operating segments, Performance Coatings and Transportation Coatings. Our segments are based on the type and concentration of customers served, service requirements, methods of distribution and major product lines.
Through our Performance Coatings segment, we provide high-quality liquid and powder coatings solutions to a fragmented and local customer base. We are one of only a few suppliers with the technology to provide precise color matching and highly durable coatings systems. The end-markets within this segment are refinish and industrial.
Through our Transportation Coatings segment we provide advanced coating technologies to OEMs of light and commercial vehicles. These increasingly global customers require a high level of technical support coupled with cost-effective, environmentally responsible, coatings systems that can be applied with a high degree of precision, consistency and speed. The end-markets within this segment are light vehicle and commercial vehicle.

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BUSINESS HIGHLIGHTS
General Business Highlights
Our net sales increased 7.0% for the year ended December 31, 2017 compared to the year ended December 31, 2016, driven primarily by impacts of acquisitions within our Performance Coatings segment. Organic volume growth in our Transportation Coatings segment was largely offset by decreases in our Performance Coatings segment, resulting in an overall increase of 0.2%, excluding acquisitions. Declines in average selling prices in our Transportation Coatings segment resulting primarily from pricing across all regions within our light vehicle end-market were offset partially by price increases in our refinish end-market, contributing to a net decrease of 1.0%. Currency translation contributed to an increase of net sales of 0.4%. The following trends have impacted our segment and end-market sales performance:
Performance Coatings: Net sales increased 11.5% driven by stronger volumes in our industrial end-market, including the impacts of acquisitions, combined with organic volume growth in EMEA and Asia and increases in average selling price in our refinish end-market. Performance Coatings volumes were impacted in 2017 due partially to the absence of our now deconsolidated Venezuelan operations and impacts from distributor working capital adjustments in North America.
Transportation Coatings: Net sales increased modestly by 0.4% compared to 2016 with offsetting impacts from stronger volumes in both our light vehicle and commercial vehicle end-markets and lower average selling prices in our light vehicle end-market, primarily in North America and Asia.
Our business serves four end-markets globally as follows:
 (In millions)
Year Ended December 31,
2017 vs 2016
2016 vs 2015
 
2017
2016
2015
% change
% change
Performance Coatings
 
 
 
 
 
Refinish
$
1,645.2

$
1,679.7

$
1,698.7

(2.1
)%
(1.1
)%
Industrial
1,029.9

718.8

683.1

43.3
 %
5.2
 %
Total Net sales Performance Coatings
2,675.1

2,398.5

2,381.8

11.5
 %
0.7
 %
Transportation Coatings
 
 
 
 
 
Light Vehicle
1,322.8

1,337.7

1,310.6

(1.1
)%
2.1
 %
Commercial Vehicle
355.0

332.6

391.5

6.7
 %
(15.0
)%
Total Net sales Transportation Coatings
1,677.8

1,670.3

1,702.1

0.4
 %
(1.9
)%
Total Net sales
$
4,352.9

$
4,068.8

$
4,083.9

7.0
 %
(0.4
)%
Acquisitions Highlights
During the year ended December 31, 2017, we successfully completed eight strategic business acquisitions ("2017 Acquisitions") within our Performance Coatings segment. Included in these acquisitions was the purchase of the Industrial Wood business in North America, which is discussed in further detail at Note 5 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Our 2017 aggregate spending for these 2017 Acquisitions was $564.4 million. The impact of acquisitions contributed $299.3 million to net sales in 2017 compared to 2016.
Capital and Liquidity Highlights
During the year ended December 31, 2017, we entered into the Fifth Amendment of our Senior Secured Credit Facilities, which increased the aggregate principal balance of our Dollar Term Loans to $2.0 billion of which the net proceeds were used to fund the Industrial Wood Acquisition and certain other 2017 Acquisitions. In addition, this amendment extended the maturity date on our Dollar Term Loans and lowered interest rates. The benefits of this refinancing transaction are anticipated to save approximately $7.7 million in annual cash interest compared to the previous principal balances. For additional information, refer to Note 20 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K and our Liquidity and Capital Resource discussion within this Item 7.
Other Highlights
In March 2017, we announced that our Board of Directors authorized a common share repurchase program of up to $675.0 million. We expect the share repurchases to be made from time to time in the open market or through privately-negotiated transactions, or otherwise, subject to applicable laws, regulations and approvals. The pace of repurchase activity will be subject to our discretion, and will be based upon market conditions and other capital allocation decisions, while incorporating key factors including cash balances and needs of the business, cash flow from operations, stock price and acquisition opportunities. There is no expiration date on the share repurchase program. During the year ended December 31, 2017, repurchases totaled $58.4 million.

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On December 22, 2017, the U.S. TCJA legislation was enacted into law, which significantly revises the Internal Revenue Code of 1986, as amended. We have assessed the impacts of the changes from the U.S. TCJA, in accordance with Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), and recorded a provisional net tax charge of $107.8 million. The provisionally estimated net tax charge reflects our current estimate of the new legislation's impact, which may differ with further regulatory guidance, changes in our current interpretations and assumptions and actions we may take as a result of the tax legislation. For more information refer to Note 12 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
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;
changes in buying habits of our customers (including our distributors); and
fluctuations in foreign exchange rates.
While the factors described above impact net sales in each of our operating segments, the impact of these factors on our operating segments can differ, as described below. For more information about risks relating to our business, see Part I, Item 1A, "Risk Factors—Risks Related to our Business."
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, including share-based compensation expense, 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.
The main factors that influence our cost of goods sold as a percentage of net sales include:
changes in the price of raw materials;
production volumes;

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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 technical support for our customers and administrative overhead costs, including:
compensation and benefit costs for management, sales personnel and administrative staff, including share-based compensation expense. Expenses relating to our sales personnel increase or decrease principally with changes in sales volume due to the need to increase or decrease sales personnel to meet changes in demand. Expenses relating to administrative personnel generally do not increase or decrease directly with changes in sales volume; and
depreciation, advertising and other selling expenses, such as expenses incurred in connection with travel and communications.
Changes in selling, general and administrative expense as a percentage of net sales have historically been impacted by a number of factors, including:
changes in sales volume, as higher volumes enable us to spread the fixed portion of our administrative expense over higher sales;
changes in our customer base, as new customers may require different levels of sales and marketing attention;
new product launches in existing and new markets, as these launches typically involve a more intense sales activity before they are integrated into customer applications;
customer credit issues requiring increases to the allowance for doubtful accounts; and
fluctuations in foreign exchange rates.
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 other indebtedness.
Other expense, net
Other expense, net represents costs incurred, net of income, on various non-operational items including costs incurred in conjunction with our debt refinancing and extinguishment transactions, historical management expenses to Carlyle (prior to the Change in Control as defined herein), indemnity gains and losses associated with the Acquisition, as well as foreign exchange gains and losses and impairment losses on assets that are not part of our core operational activities.
Provision for income taxes
We and our subsidiaries are subject to income tax in the various jurisdictions in which we operate. While the extent of our future tax liability is uncertain, changes to the debt and equity capitalization of our subsidiaries, and the realignment of the functions performed and risks assumed by the various subsidiaries are among the factors that will determine the future book and taxable income of the respective subsidiary and the Company as a whole.


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NON-GAAP FINANCIAL MEASURES
Reconciliation of Net Income to EBITDA and Adjusted EBITDA
To supplement our financial information presented in accordance with U.S. GAAP, we use the following 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 define our core business as those operations relating to the Company's ongoing performance and the concept is used to make resource allocation and performance evaluation decisions. 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 before interest, taxes, depreciation and amortization. Adjusted EBITDA consists of EBITDA adjusted for (i) non-cash items included within net income, (ii) items the Company does not believe are indicative of ongoing operating performance or (iii) nonrecurring, unusual or infrequent items that have not occurred within the last two years or we believe are not reasonably likely to recur within the next two years. 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 before income taxes, net income, 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 New Senior Notes (as defined herein); and
eliminate the impact of income taxes on our results of operations;
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.
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 income before income taxes, net income, 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 the excluded items noted above.

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The following table reconciles net income to the EBITDA and Adjusted EBITDA measures discussed above for the periods presented:
 
Year Ended December 31,
 
2017
2016
2015
Net income
$
47.7

$
44.6

$
95.8

Interest expense, net
147.0

178.2

196.5

Provision for income taxes
141.9

38.1

62.1

Depreciation and amortization
347.5

322.1

307.7

EBITDA
684.1

583.0

662.1

Debt extinguishment and refinancing related costs (a)
13.4

97.6

2.5

Foreign exchange remeasurement losses (b)
7.4

30.6

93.7

Long-term employee benefit plan adjustments (c)
1.4

1.5

(0.3
)
Termination benefits and other employee related costs (d)
35.3

61.8

36.6

Consulting and advisory fees (e)
(0.1
)
10.4

23.9

Transition-related costs (f)
7.7


(3.4
)
Offering and transactional costs (g)
18.4

6.0

(1.5
)
Stock-based compensation (h)
38.5

41.1

30.2

Other adjustments (i)
3.6

5.0

(5.8
)
Dividends in respect of noncontrolling interest (j)
(3.0
)
(3.0
)
(4.7
)
Deconsolidation impacts and impairments (k)
78.5

68.4

30.6

Adjusted EBITDA
$
885.2

$
902.4

$
863.9

(a)
During the years ended December 31, 2017 and 2016 we refinanced our indebtedness, resulting in losses of $13.0 million and $88.0 million, respectively. In addition, during the years ended December 31, 2017, 2016 and 2015 we prepaid outstanding principal on our term loans, resulting in non-cash losses on extinguishment of $0.4 million, $9.6 million and $2.5 million, respectively. We do not consider these items to be indicative of our ongoing operating performance.
(b)
Eliminates foreign exchange gains and losses resulting from the remeasurement of assets and liabilities denominated in foreign currencies, net of the impacts of our foreign currency instruments used to hedge our balance sheet exposures. Exchange effects attributable to the remeasurement of our Venezuelan subsidiary represented losses of $1.8 million, $23.5 million, $51.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.
(c)
Eliminates the non-cash, non-service components of long-term employee benefit costs.
(d)
Represents expenses primarily related to employee termination benefits and other employee-related costs associated with our Axalta Way initiatives, which are not considered indicative of our ongoing operating performance.
(e)
Represents fees paid to consultants, and associated true-ups to estimates, for professional services primarily related to our Axalta Way initiatives, which are not considered indicative of our ongoing operating performance.
(f)
Represents integration costs related to the 2017 acquisition of the Industrial Wood business that was a carve-out business from Valspar and changes in estimates associated with the transition from DuPont to a standalone entity, including certain Acquisition indemnities. We do not consider these items to be indicative of our ongoing operating performance.
(g)
Represents acquisition-related expenses, including changes in the fair value of contingent consideration, as well as $10.0 million of costs associated with contemplated merger activities during the three months ended December 31, 2017 and costs associated with the 2016 secondary offerings of our common shares by Carlyle, all of which are not considered indicative of our ongoing operating performance.
(h)
Represents non-cash costs associated with stock-based compensation, including $8.2 million of expense during the year ended December 31, 2015 attributable to the accelerated vesting of all issued and outstanding stock options issued under the 2013 Plan. This acceleration was the result of a change in control that occurred in conjunction with Carlyle's ownership interest falling below 50% and triggering a liquidity event ("Change in Control").
(i)
Represents costs for certain non-operational or non-cash (gains) and losses unrelated to our core business and which we do not consider indicative of our ongoing operations, including equity investee dividends, indemnity losses (gains) associated with the Acquisition, losses (gains) on sale and disposal of property, plant and equipment, losses (gains) on the remaining foreign currency derivative instruments, Carlyle management fees incurred prior to the Change in Control and non-cash fair value inventory adjustments associated with our business combinations.
(j)
Represents the payment of dividends to our joint venture partners by our consolidated entities that are not 100% owned, which are reflected to show the cash operating performance of these entities on Axalta's financial statements.

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(k)
During the year ended December 31, 2017, we recorded a loss in conjunction with the deconsolidation of our Venezuelan subsidiary of $70.9 million. During the year ended December 31, 2016 and 2015, we recorded non-cash impairments at our Venezuelan subsidiary of $68.4 million and $30.6 million, respectively, associated with our operational long-lived assets and a real estate investment (See Note 25 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K). Additionally, during the year ended December 31, 2017, we recorded non-cash impairment charges related to certain manufacturing facilities previously announced for closure of $7.6 million. We do not consider these to be indicative of our ongoing operating performance.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information contained in the accompanying financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Our historical results of operations set forth below may not necessarily reflect what will occur in the future.
Year ended December 31, 2017 compared to year ended December 31, 2016
The following table was derived from the consolidated statements of operations for the years ended December 31, 2017 and 2016 included elsewhere in this Annual Report on Form 10-K.
 
Year Ended December 31,
(In millions)
2017
2016
Net sales
$
4,352.9

$
4,068.8

Other revenue
24.1

23.9

Total revenue
4,377.0

4,092.7

Cost of goods sold
2,779.6

2,527.6

Selling, general and administrative expenses
997.7

962.5

Venezuela asset impairment and deconsolidation charge
70.9

57.9

Research and development expenses
65.3

57.7

Amortization of acquired intangibles
101.2

83.4

Income from operations
362.3

403.6

Interest expense, net
147.0

178.2

Other expense, net
25.7

142.7

Income before income taxes
189.6

82.7

Provision for income taxes
141.9

38.1

Net income
47.7

44.6

Less: Net income attributable to noncontrolling interests
11.0

5.8

Net income attributable to controlling interests
$
36.7

$
38.8

Net sales
Net sales increased $284.1 million, or 7.0%, to $4,352.9 million for the year ended December 31, 2017 compared to net sales of $4,068.8 million for the year ended December 31, 2016. The net sales increase for the year ended December 31, 2017 compared to the year ended December 31, 2016 included the benefits of acquisitions which contributed to an increase in net sales of 7.4%. Further contributing to this sales growth was an increase in organic sales volumes in our commercial vehicle and industrial end-markets, which was largely offset by declines in our refinish end-market, particularly within Latin America and North America, resulting in a net increase of 0.2%. Lower average sales prices contributed to a 1.0% decrease driven primarily by declines in our Transportation Coatings segment. Net sales were also impacted by favorable impacts of currency translation, which increased net sales by 0.4%, due primarily to the impacts of the strengthening Euro compared to the U.S. dollar which were slightly offset by the weakening of certain currencies within Latin America and Asia against the U.S. dollar.
Other revenue
Other revenue increased by $0.2 million, or 0.8%, to $24.1 million for the year ended December 31, 2017 as compared to $23.9 million for the year ended December 31, 2016 resulting from the favorable impacts of the strengthening Euro compared to the U.S. dollar.

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Cost of sales
Cost of sales increased $252.0 million, or 10.0%, to $2,779.6 million for the year ended December 31, 2017 compared to $2,527.6 million for the year ended December 31, 2016. The increase for the year ended December 31, 2017 compared to the year ended December 31, 2016 resulted primarily from higher sales volumes of 7.6%, inclusive of impacts of acquisitions. Furthering this increase were unfavorable effects of currency translation resulting from the impacts of the strengthening Euro against the U.S. dollar offset partially by the weakening of certain currencies within Latin America and Asia against the U.S. dollar, which contributed to a 0.5% increase. Cost of sales as a percentage of net sales increased from 62.1% for the year ended December 31, 2016 to 63.9% for the year ended December 31, 2017 as a result of lower average selling prices and raw material inflation.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $35.2 million, or 3.7%, to $997.7 million for the year ended December 31, 2017 compared to $962.5 million for the year ended December 31, 2016. The increase resulted primarily from the impacts of acquisitions of $48.6 million as well as our focus on opportunities to expand our market presence and invest in commercial capabilities.
Furthering this increase was unfavorable impacts of currency exchange during the year ended December 31, 2017, which contributed to an approximate 0.6% increase in selling, general and administrative expenses due primarily to the strengthening of the Euro against the U.S. dollar.
These increases were partially offset by a decrease in costs associated with our Axalta Way cost savings initiatives and acquisition-related costs which were $63.8 million for the year ended December 31, 2017 as compared to $77.6 million of costs for the year ended December 31, 2016, resulting in an $13.8 million decrease over the comparable period.
Venezuela asset impairment and deconsolidation charges
During the year ended December 31, 2017, we recorded a loss of $70.9 million in conjunction with the deconsolidation of our Venezuelan subsidiary. During the year ended December 31, 2016, we recorded an asset impairment charge for $57.9 million relating to our long-lived assets within our Venezuelan subsidiary. See further discussion in Note 25 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Research and development expenses
Research and development expenses increased $7.6 million, or 13.2%, to $65.3 million for the year ended December 31, 2017 compared to $57.7 million for the year ended December 31, 2016. This increase was a result of additional spend as we focus on developing new and existing coatings products, as well as the impacts from acquisitions of $9.1 million. Furthering this increase were unfavorable effects of currency translation resulting from the impacts of the strengthening Euro and certain currencies in Latin America against the U.S. dollar. Partially offsetting this increase was a decrease resulting from the impacts of our cost savings initiatives.
Amortization of acquired intangibles
Amortization of acquired intangibles increased $17.8 million, or 21.3%, to $101.2 million for the year ended December 31, 2017 compared to $83.4 million for the year ended December 31, 2016. This increase was attributable to the amortization of the definite-lived intangible assets from our acquisitions, as well as a $1.7 million of impairment related to abandoned in-process research and development intangible assets. The impacts of currency exchange did not have a material impact on the comparable periods.
Interest expense, net
Interest expense, net decreased $31.2 million, or 17.5%, to $147.0 million for the year ended December 31, 2017 compared to $178.2 million for the year ended December 31, 2016. The decrease was driven by the refinancing of our indebtedness during 2016 and 2017 which reduced the overall interest rates of our debt portfolio, partially offset by increases resulting from the incremental indebtedness used to finance the Industrial Wood Acquisition.
Other expense, net
Other expense, net decreased $117.0 million, or 82.0%, to $25.7 million for the year ended December 31, 2017 compared to $142.7 million for the year ended December 31, 2016. This decrease relates primarily to the decrease in losses on debt extinguishment and refinancing related costs incurred during the year ended December 31, 2016 which resulted in an $84.2 million decrease over the comparable period.
In addition, there was a reduction in foreign exchange losses, net from $30.6 million during the year ended December 31, 2016 to $7.4 million for the year ended December 31, 2017, resulting in a $23.2 million decrease over the comparable period. Prior to deconsolidation, our Venezuela subsidiary contributed $1.8 million and $23.5 million in foreign exchange losses for the years ended December 31, 2017 and 2016.

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Furthering this decrease was a $2.9 million decrease in impairments to $7.6 million during the year ended December 31, 2017 associated with impairments related to the manufacturing facilities closures, compared to the impairment of $10.5 million related to our real estate investment in Venezuela incurred during the year ended December 31, 2016.
Provision for income taxes
We recorded a provision for income taxes of $141.9 million for the year ended December 31, 2017, which represents a 74.8% effective tax rate in relation to the income before income taxes of $189.6 million. The effective tax rate for the year ended December 31, 2017 differs from the U.S. Federal statutory rate by 39.8%, which is the result of various items that impacted the rate both favorably and unfavorably. We generated earnings in jurisdictions where the statutory rate is lower than the U.S. Federal rate, primarily related to Bermuda, China, Germany, Luxembourg, Netherlands and Switzerland, which had a net favorable impact of $56.2 million. Additionally, current year excess tax benefits related to share-based compensation of $13.1 million and $17.7 million associated with currency exchange losses favorably impacted the effective rate. Furthermore, we recorded a deferred tax asset of $26.8 million related to the tax basis in our deconsolidated Venezuelan subsidiary, which was fully offset by a valuation allowance as we do not expect to realize the benefits. In addition, a pre-tax charge related to the deconsolidation of our Venezuelan subsidiary of $70.9 million had an unfavorable impact of $24.8 million as it was nondeductible. The impact of the U.S. TCJA (See Note 12 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K) resulted in a tax charge of $107.8 million primarily as a result of the revaluation of our deferred tax assets and impact on certain tax attributes. Lastly, the unfavorable impact of pre-tax losses attributable to jurisdictions where a tax benefit is not expected to be realized of $45.3 million, the impact of non-deductible expenses and interest of $14.4 million and the increase in unrecognized tax benefits of $3.1 million negatively impacted the effective rate.
We recorded a provision for income taxes of $38.1 million for the year ended December 31, 2016, which represents a 46.1% effective tax rate in relation to the income before income taxes of $82.7 million. The effective tax rate for the year ended December 31, 2016 differs from the U.S. Federal statutory rate by 11.1%, which is the result of various items that impacted the rate both favorably and unfavorably. We generated earnings in jurisdictions where the statutory rate is lower than the U.S. Federal rate, primarily related to Bermuda, China, Germany, Luxembourg, Netherlands and Switzerland, which had a net favorable impact of $45.6 million. Additionally, current year excess tax benefits related to share-based compensation of $13.4 million favorably impacted the effective rate. These adjustments were offset by the pre-tax impairment charges in Venezuela of $68.4 million related to the impairment of operational assets as well as a non-operating real estate investment which had an unfavorable impact of $23.8 million on the effective rate as it was nondeductible. Lastly, the unfavorable impact of pre-tax losses attributable to jurisdictions where a tax benefit is not expected to be realized of $9.6 million, the impact of non-deductible expenses and interest of $11.4 million, the increase in unrecognized tax benefits of $7.1 million and $3.1 million associated with currency exchange losses negatively impacted the effective rate.

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Year ended December 31, 2016 compared to year ended December 31, 2015
The following table was derived from the consolidated statements of operations for the years ended December 31, 2016 and 2015 included elsewhere in this Annual Report on Form 10-K.
 
Year Ended December 31,
(In millions)
2016
2015
Net sales
$
4,068.8

$
4,083.9

Other revenue
23.9

26.1

Total revenue
4,092.7

4,110.0

Cost of goods sold
2,527.6

2,597.3

Selling, general and administrative expenses
962.5

914.8

Venezuela asset impairment
57.9


Research and development expenses
57.7

51.6

Amortization of acquired intangibles
83.4

80.7

Income from operations
403.6

465.6

Interest expense, net
178.2

196.5

Other expense, net
142.7

111.2

Income before income taxes
82.7

157.9

Provision for income taxes
38.1

62.1

Net income
44.6

95.8

Less: Net income attributable to noncontrolling interests
5.8

4.2

Net income attributable to controlling interests
$
38.8

$
91.6

Net sales
Net sales decreased $15.1 million, or 0.4%, to $4,068.8 million for the year ended December 31, 2016 compared to net sales of $4,083.9 million for the year ended December 31, 2015. The net sales decrease for the year ended December 31, 2016 compared to the year ended December 31, 2015 was attributable to unfavorable impacts of currency translation, which reduced net sales by 4.6% due primarily to the weakening of certain currencies within Latin America and Asia compared to the U.S. dollar. This net sales decline was partially offset by higher average selling prices across both our segments, primarily in Latin America, which contributed to an increase of 2.5% compared to the year ended December 31, 2015. Increases in volumes across both our segments, in Europe, Asia and North America, attributable mainly to a 2.2% increase from our acquisitions, also contributed to net sales growth of 1.7%.
Other revenue
Other revenue decreased $2.2 million, or 8.4%, to $23.9 million for the year ended December 31, 2016 as compared to $26.1 million for the year ended December 31, 2015. This decrease was primarily related to declines in service revenue combined with the impacts of weakening currencies against the U.S. dollar, which caused a decrease of $0.8 million, or 3.1%.
Cost of sales
Cost of sales decreased $69.7 million, or 2.7%, to $2,527.6 million for the year ended December 31, 2016 compared to $2,597.3 million for the year ended December 31, 2015. The decrease for the year ended December 31, 2016 compared to the year ended December 31, 2015 resulted primarily from a 2.1% decrease associated with currency translation due to the impact of the weakening of certain currencies within Latin America, Asia and Europe. The decrease from currency translation was slightly offset by the contribution of higher volumes of 1.7% which includes impacts of our acquisitions completed during 2016. Cost of sales as a percentage of net sales decreased from 63.6% for the year ended December 31, 2015 to 62.1% for the year ended December 31, 2016 primarily as a result of reductions associated with lower raw material prices, favorable pricing on our product mix and impacts of our cost savings initiatives.

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Selling, general and administrative expenses
Selling, general and administrative expenses increased $47.7 million, or 5.2%, to $962.5 million for the year ended December 31, 2016 compared to $914.8 million for the year ended December 31, 2015. Selling, general and administrative expenses for the year ended December 31, 2016 included $77.6 million of costs related to our cost-savings initiatives as compared to $64.4 million of costs for the year ended December 31, 2015 associated with our transition-related activities and cost-savings initiatives, resulting in an increase of $13.2 million over the comparable period. In addition, there was an increase of $8.0 million in stock-based compensation for the year ended December 31, 2016. Further contributing to the increase during the year ended December 31, 2016 over the comparable period were increases in selling expense associated with increased sales volumes and $17.5 million in costs related to our recent acquisitions. Offsetting these increases were favorable impacts of currency exchange during the year ended December 31, 2016, which contributed to an approximately 1.7% reduction in selling, general and administrative expenses due primarily to the weakening of certain currencies within Latin America compared to the U.S. dollar.
Venezuela asset impairment
Venezuela asset impairment relates to the impairment charge of $57.9 million recognized during the year ended December 31, 2016 relating to our long-lived assets within our Venezuelan subsidiary. There was no comparative impairment recorded during the year ended December 31, 2015.
Research and development expenses
Research and development expenses increased $6.1 million, or 11.8%, to $57.7 million for the year ended December 31, 2016 compared to $51.6 million for the year ended December 31, 2015. This increase was driven by additional spending as we focus on developing new and existing coatings products. The impacts of currency exchange did not have a material impact on the comparable periods.
Amortization of acquired intangibles
Amortization of acquired intangibles increased $2.7 million, or 3.3%, to $83.4 million for the year ended December 31, 2016 compared to $80.7 million for the year ended December 31, 2015. This increase was a result of our recent acquisitions, which contributed $3.5 million, offset slightly by the impacts of weakening currencies in all regions against the U.S. dollar.
Interest expense, net
Interest expense, net decreased $18.3 million, or 9.3%, to $178.2 million for the year ended December 31, 2016 compared to $196.5 million for the year ended December 31, 2015. The decrease was driven by the prepayment of principal balances associated with our 2020 Dollar Term Loans made in 2015 and 2016 and the prepayment on the principal balance of our 2020 Euro Term Loans made in 2016. Additionally, refinancing of our senior indebtedness during the year ended December 31, 2016, reduced the overall interest rates of our debt portfolio and further contributed to the decrease.
Other expense, net
Other expense, net increased $31.5 million, or 28.3%, to $142.7 million for the year ended December 31, 2016 compared to $111.2 million for the year ended December 31, 2015. The amendment to our Credit Agreement, refinancing of our indebtedness and prepayments of our Term Loans during the year ended December 31, 2016 resulted in an increase in other expense over the comparable period of $95.1 million.
During the year ended December 31, 2016 there were $4.3 million in losses on derivative instruments associated with our foreign currency contracts compared to $5.6 million in gains during the year ended December 31, 2015, resulting in a $9.9 million increase. In addition, we recognized a gain of $5.4 million for the year ended December 31, 2015 resulting from the remeasurement of our previously held interest in an equity method investee upon the acquisition of a controlling interest whereas no similar gain was recognized during the year ended December 31, 2016, thereby resulting in an increase in other expense, net for the comparable periods.
During the year ended December 31, 2016 our Venezuelan subsidiary continued to be impacted by a significant devaluation of its currency translation rates. This devaluation resulted in impairment charges of $10.5 million and $30.6 million for the years ended December 31, 2016 and 2015, respectively, based on our evaluation of the carrying value associated with our real estate investment, resulting in a decrease of $20.1 million over the comparable period.
Offsetting the year over year loss, foreign exchange losses, net, decreased from $93.7 million for the year ended December 31, 2015 to $30.6 million for the year ended December 31, 2016. This decrease was primarily driven by the revaluation of our Venezuela subsidiary which resulted in $51.5 million for the year ended December 31, 2015 compared to $23.5 million for the year ended December 31, 2016. The remaining decrease primarily related to the remeasurement of intercompany transactional exposures denominated in currencies different from the functional currency of the relevant subsidiary.

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Provision for income taxes
We recorded a provision for income taxes of $38.1 million for the year ended December 31, 2016, which represents a 46.1% effective tax rate in relation to the income before income taxes of $82.7 million. The effective tax rate for the year ended December 31, 2016 differs from the U.S. Federal statutory rate by 11.1%, which is the result of various items that impacted the rate both favorably and unfavorably. We generated earnings in jurisdictions where the statutory rate is lower than the U.S. Federal rate, primarily related to Bermuda, China, Germany, Luxembourg, Netherlands and Switzerland which had a net favorable impact of $45.6 million. Additionally, current year excess tax benefits related to share-based compensation of $13.4 million favorably impacted the effective rate. These adjustments were offset by the pre-tax impairment charges in Venezuela of $68.4 million related to the impairment of operational assets as well as a non-operating real estate investment which had an unfavorable impact of $23.8 million on the effective rate as it was nondeductible. Lastly, the unfavorable impact of pre-tax losses attributable to jurisdictions where a tax benefit is not expected to be realized of $9.6 million, the impact of non-deductible expenses and interest of $11.4 million, the increase in unrecognized tax benefits of $7.1 million and $3.1 million associated with currency exchange losses negatively impacted the effective rate.
We recorded a provision for income taxes of $62.1 million for the year ended December 31, 2015, which represents a 39.3% effective tax rate in relation to the income before income taxes of $157.9 million. The effective tax rate for the year ended December 31, 2015 differs from the U.S. Federal statutory rate by 4.3%, which is the result of various items that impacted the rate both favorably and unfavorably. We generated earnings in jurisdictions where the statutory rate is lower than the U.S. Federal rate, primarily related to China, Germany, Luxembourg and Netherlands, which had a net favorable impact of $41.4 million. Additionally, $10.5 million associated with currency exchange losses favorably impacted the effective rate. These adjustments were offset by the pre-tax impairment charge in Venezuela of $30.6 million which had an unfavorable $10.7 million impact on the effective rate as it was nondeductible, the unfavorable impact of pre-tax losses attributable to jurisdictions where a tax benefit is not expected to be realized of $34.4 million, and the impact of non-deductible expenses and interest of $10.4 million.

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SEGMENT RESULTS
Year ended December 31, 2017 compared to the year ended December 31, 2016
The following table presents net sales by segment and segment Adjusted EBITDA for the following periods:
 
Year Ended December 31,
(In millions)
2017
2016
Net Sales
 
 
Performance Coatings
$
2,675.1

$
2,398.5

Transportation Coatings
1,677.8

1,670.3

Total
$
4,352.9

$
4,068.8

Segment Adjusted EBITDA
 
 
Performance Coatings
$
564.2

$
549.7

Transportation Coatings
321.0

352.7

Total
$
885.2

$
902.4

Performance Coatings Segment
Net sales increased $276.6 million, or 11.5%, to $2,675.1 million for the year ended December 31, 2017 compared to net sales of $2,398.5 million for the year ended December 31, 2016. The increase in net sales for the year ended December 31, 2017 was driven by increased volumes of 10.7%. This included a 12.0% benefit from acquisitions and organic volume decreases, which were comprised of industrial end-market increases more than offset by decreases in our refinish end-market driven by distributor working capital adjustments in North America, as well as the absence of our now deconsolidated Venezuelan operations. Higher average selling prices contributed to an increase of 0.5%, and favorable impacts of currency exchange primarily related to the strengthening of the Euro compared to the U.S. dollar contributed to a 0.3% increase.
Adjusted EBITDA increased $14.5 million, or 2.6%, to $564.2 million for the year ended December 31, 2017 compared to $549.7 million for the year ended December 31, 2016. The increase in Adjusted EBITDA for the year ended December 31, 2017 was driven by impacts of acquisitions and higher average selling prices. These increases were partially offset by the unfavorable impacts of higher variable costs across all regions and end-markets.
Transportation Coatings Segment
Net sales increased $7.5 million, or 0.4%, to $1,677.8 million for the year ended December 31, 2017 compared to net sales of $1,670.3 million for the year ended December 31, 2016. The increase in net sales for the year ended December 31, 2017 was driven by an increase in sales volumes which contributed to growth of 3.0%. This included organic volume increases in both end-markets as well as a 0.7% benefit from acquisitions. Further contributing to the increase was the favorable impacts of currency exchange related to strengthening of the Euro and certain currencies in Latin America compared to the U.S. dollar which contributed to a 0.5% increase in net sales. Partially offsetting these increases were lower average selling prices across both end-markets contributing to a 3.1% decrease.
Adjusted EBITDA decreased $31.7 million, or 9.0%, to $321.0 million for the year ended December 31, 2017 compared to Adjusted EBITDA of $352.7 million for the year ended December 31, 2016. The decrease in Adjusted EBITDA for the year ended December 31, 2017 was primarily driven by lower average selling prices and higher variable costs in our light vehicle end-market, partially offset by volume growth across both end-markets.


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SEGMENT RESULTS
Year ended December 31, 2016 compared to the year ended December 31, 2015
The following table presents net sales by segment and segment Adjusted EBITDA for the following periods:
 
Year Ended December 31,
(In millions)
2016
2015
Net Sales
 
 
Performance Coatings
$
2,398.5

$
2,381.8

Transportation Coatings
1,670.3

1,702.1

Total
$
4,068.8

$
4,083.9

Segment Adjusted EBITDA
 
 
Performance Coatings
$
549.7

$
535.8

Transportation Coatings
352.7

328.1

Total
$
902.4

$
863.9

Performance Coatings Segment
Net sales increase$16.7 million, or 0.7%, to $2,398.5 million for the year ended December 31, 2016 compared to net sales of $2,381.8 million for the year ended December 31, 2015. The increase in net sales for the year ended December 31, 2016 was a result of higher average selling prices and volumes which contributed 3.7% and 2.8%, respectively. Contributions from price included a stronger product mix which was driven by our North America and Latin America regions. Volume growth in both our refinish and industrial end-markets included a 3.2% benefit from our acquisitions, slightly offset by the negative volume contribution from Latin America. These increases were partially offset by the unfavorable impacts of weakening currencies across all regions, which contributed to a 5.8% reduction in net sales.
Adjusted EBITDA increase$13.9 million, or 2.6%, to $549.7 million for the year ended December 31, 2016 compared to Adjusted EBITDA of $535.8 million for the year ended December 31, 2015. The increase in Adjusted EBITDA for the year ended December 31, 2016 was primarily driven by higher average selling prices, primarily in our refinish end-market, increases in sales volumes in both end-markets combined with lower variable costs across all regions and the impacts related to our recent acquisitions. Offsetting this increase were unfavorable impacts of currency exchange across all regions, due mainly to the weakening of certain currencies within Latin America compared to the U.S. dollar.
Transportation Coatings Segment
Net sales decrease$31.8 million, or 1.9%, to 1,670.3 million for the year ended December 31, 2016 compared to net sales of $1,702.1 million for the year ended December 31, 2015. The decrease in net sales for the year ended December 31, 2016 was primarily driven by unfavorable impacts of weakening currencies across all regions, which contributed to a 3.0% reduction in net sales. Offsetting the decline in net sales was a 1.0% increase in average selling prices primarily driven by Latin America. Volume of 0.1% was driven by strong performances in North America and Asia, including a 0.7% impact from acquisitions, which was largely offset by weaker volumes in Latin America.
Adjusted EBITDA increased $24.6 million, or 7.5%, to $352.7 million for the year ended December 31, 2016 compared to Adjusted EBITDA of $328.1 million for the year ended December 31, 2015. The increase in Adjusted EBITDA for the year ended December 31, 2016 was primarily driven by higher average selling prices and lower variable costs. This increase was partially offset by higher operating costs combined with the unfavorable impacts of the weakening of certain currencies within Latin America compared to the U.S. dollar.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash on hand, cash flow from operations and available borrowing capacity under our Senior Secured Credit Facilities.
At December 31, 2017, availability under the Revolving Credit Facility was $364.5 million, net of $35.5 million of letters of credit outstanding. All such availability may be utilized without violating any covenants under the credit agreement governing such facility or the indentures governing the New Senior Notes. At December 31, 2017, we had $13.1 million of outstanding borrowings under other lines of credit. Our remaining available borrowing capacity under other lines of credit in certain non-U.S. jurisdictions totaled $5.1 million.

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We or our affiliates, at any time and from time to time, may purchase shares of our common stock, the New Senior Notes or other indebtedness. Any such purchases may be made through the open market or privately negotiated transactions with third parties or pursuant to one or more redemption, tender or exchange offers or otherwise, upon such terms and at such prices, as well as with such consideration, as we, or any of our affiliates, may determine.
Cash Flows
Years ended December 31, 2017, 2016 and 2015
 
Year Ended December 31,
(In millions)
2017
2016
2015
Net cash provided by (used for):
 
 
 
Operating activities:
 
 
 
Net income
$
47.7

$
44.6

$
95.8

Depreciation and amortization
347.5

322.1

307.7

Amortization of deferred financing costs and original issue discount
8.0

17.8

20.6

Debt extinguishment and refinancing related costs
13.4

97.6

2.5

Deferred income taxes
91.7

(15.9
)
(6.2
)
Realized and unrealized foreign exchange (gains) losses, net
(3.6
)
35.5

93.7

Stock-based compensation
38.5

41.1

30.2

Asset impairments
7.6

68.4

30.6

Venezuela deconsolidation charge

70.9



Other non-cash items
4.4

(1.9
)
12.5

Net income adjusted for non-cash items
626.1

609.3

587.4

Changes in operating assets and liabilities
(86.1
)
(50.0
)
(177.6
)
Operating activities
540.0

559.3

409.8

Investing activities
(689.6
)
(257.0
)
(166.2
)
Financing activities
367.3

(232.6
)
(84.7
)
Effect of exchange rate changes on cash
17.1

(19.3
)
(58.0
)
Net increase in cash
$
234.8

$
50.4

$
100.9

Year Ended December 31, 2017
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the year ended December 31, 2017 was $540.0 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $626.1 million. This was partially offset by uses of working capital of $86.1 million. The most significant drivers in working capital were increases in accounts receivables of $15.2 million, inventory of $19.9 million and other assets of $84.9 million. These were primarily caused by incremental net sales, increased inventory builds to support ongoing operational demands and upfront customer incentive payments during the year ended December 31, 2017. Other uses were due to a reduction in other liabilities of $12.6 million related to payments of normal operating activities, offset by increases in accounts payable of $39.8 million and other accrued liabilities of $6.7 million.
Net Cash Used in Investing Activities
Net cash used in investing activities for the year ended December 31, 2017 was $689.6 million. This use was driven by business acquisitions of $564.4 million (net of cash acquired), purchases of property, plant and equipment of $125.0 million, reduction of cash due to the deconsolidation of our Venezuelan operations of $4.3 million, and net cash provided for other investing activities of $4.1 million.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the year ended December 31, 2017 was $367.3 million. This inflow was driven by net proceeds from borrowings of $483.6 million primarily relating to the refinancing of our Dollar Term Loans, and proceeds of $24.8 million from cash received from stock option exercises. These proceeds were partially offset by purchases of treasury stock for $58.4 million and other payments of $82.7 million consisting of financing-related costs, pay-down of short-term and long-term borrowings, deferred acquisition-related consideration and dividends to noncontrolling interests.

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Other Impacts on Cash
Favorable currency exchange impacts on cash for the year ended December 31, 2017 were $17.1 million, which were driven primarily by the strengthening of the Euro compared to the U.S. dollar.
Year Ended December 31, 2016
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the year ended December 31, 2016 was $559.3 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $609.3 million. This was partially offset by net increases in operating assets and liabilities of $50.0 million. The most significant drivers in working capital were increases in accounts receivables and other assets of $132.3 million due primarily to incremental net sales and upfront customer payments, offset by net increases in current and non-current liabilities of $84.0 million primarily related to cost savings initiatives and timing of operating activities, which includes increases in accounts payable of $32.3 million.
Net Cash Used for Investing Activities
Net cash used for investing activities for the year ended December 31, 2016 was $257.0 million. This use was primarily driven by purchases of property, plant and equipment of $136.2 million and acquisitions of $114.8 million (net of cash acquired), and $6.0 million of other investing activities that includes $3.9 million of asset acquisitions.
Net Cash Used for Financing Activities
Net cash used for financing activities for the year ended December 31, 2016 was $232.6 million. This use was driven by payments of $1,755.7 million relating to the redemption of our 2021 Dollar and Euro Senior Notes, the net paydown and early repayments of our 2020 Term Loans, and quarterly principal payments as required under the Credit Agreement. These payments were offset by proceeds of $1,604.3 million relating to the issuance of our new 2024 Dollar and Euro Senior Notes and our new 2025 Euro Senior Notes, as well as the increase in principal on our 2023 Euro Term Loans as a part of the refinancing. The issuance and refinancing of our new indebtedness required us to pay financing costs of $86.3 million, which included a premium for early redemption of our 2021 Dollar and Euro Senior Notes of $56.6 million.
In addition, we had cash received from stock options exercised for $16.7 million, which is offset by repayments of short-term borrowings of $8.6 million, dividends paid to noncontrolling interests of $3.0 million, and $0.2 million of other financing activities.
Other Impacts on Cash
Unfavorable currency exchange impacts on cash for the year ended December 31, 2016 were $19.3 million primarily driven by the weakening of our translation rates compared to the U.S. dollar for our Venezuelan subsidiary which contributed $14.0 million.
Year ended December 31, 2015
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the year ended December 31, 2015 was $409.8 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $587.4 million. This was partially offset by net increases in operating assets and liabilities of $177.6 million. The most significant drivers in working capital were increases in accounts receivables and other assets of $126.7 million due primarily to the mix of credit terms which drove an increase in days sales outstanding and increased inventory builds of $35.2 million to support ongoing operational demands. Cash flows associated with accounts payable and other liabilities of $29.1 million related to payments of normal operating activities incurred in 2014 and paid during 2015.
Net Cash Used for Investing Activities
Net cash used for investing activities for the year ended December 31, 2015 was $166.2 million. This use was primarily driven by purchases of property, plant and equipment of $138.1 million and acquisitions of $29.6 million (net of cash received).
Net Cash Used for Financing Activities
Net cash used for financing activities for the year ended December 31, 2015 was $84.7 million. The change was primarily driven by repayment of term loans of $127.3 million. These payments were comprised of a $100.0 million prepayment on our 2020 Dollar Term Loans made during the year ended December 31, 2015, along with $27.3 million of quarterly principal repayments as required under the Credit Agreement. In addition to these payments, we also paid dividends to non-controlling interests of $4.7 million. Offsetting these payments were cash received from stock option exercises for $62.4 million, and proceeds received from short-term borrowings during the period of $2.0 million.

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Other Impacts on Cash
Unfavorable currency exchange impacts on cash for the year ended December 31, 2015 were $58.0 million primarily driven by the weakening of our translation rates compared to the U.S. dollar for our Venezuelan subsidiary which contributed $37.4 million.
Financial Condition
We had cash and cash equivalents at December 31, 2017 and 2016 of $769.8 million and $535.4 million, respectively. Of these balances, $398.9 million and $366.7 million were maintained in non-U.S. jurisdictions as of December 31, 2017 and 2016, respectively. We believe our organizational structure allows us the necessary flexibility to move funds throughout our subsidiaries to meet our operational working capital needs.
Our business may not generate sufficient cash flow from operations and future borrowings may not be available under our Senior Secured Credit Facilities in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs, including planned capital expenditures. In such circumstances, we may need to refinance all or a portion of our indebtedness on or before maturity. We may not be able to refinance any of our indebtedness on commercially reasonable terms or at all. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances. See Part I, Item 1A, “Risk Factors-Risks Related to our Indebtedness-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 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 our 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.
If required, our ability to raise additional financing and our borrowing costs may be impacted by short and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on our performance as measured by certain credit metrics such as interest coverage and leverage ratios. Our highly leveraged nature may limit our ability to procure additional financing in the future.
The following table details our borrowings outstanding at the periods indicated:
 
December 31,
(In millions)
2017
2016
2024 Dollar Term Loans
$
1,960.0

$

2023 Dollar Term Loans

1,545.0

2023 Euro Term Loans
472.5

417.6

2024 Dollar Senior Notes
500.0

500.0

2024 Euro Senior Notes
399.7

349.7

2025 Euro Senior Notes
536.9

469.8

Short-term and other borrowings
94.8

39.8

Unamortized original issue discount
(9.1
)
(10.0
)
Deferred financing costs, net
(39.2
)
(48.0
)
 
$
3,915.6

$
3,263.9

Less:
 
 
Short term borrowings
$
12.9

$
8.3

Current portion of long-term borrowings
24.8

19.6

Long-term debt
$
3,877.9

$
3,236.0

Our indebtedness, including the Senior Secured Credit Facilities and New Senior Notes, is more fully described in Note 20 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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Our liquidity requirements are significant due to the highly leveraged nature of our company as well as our working capital requirements. At December 31, 2017 and 2016, there were no borrowings under the Revolving Credit Facility with total availability under the Revolving Credit Facility of $364.5 million and $378.7 million, respectively, all of which may be borrowed by us without violating any covenants under the credit agreement governing such facility or the indentures governing the New Senior Notes.
The following tables detail 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, 2017 and 2016, respectively:
 
Year Ended December 31, 2017
(In millions)
Principal
Average Effective
Interest Rate
Interest
Expense
Term Loans
$
2,432.5

3.5
%
$
80.0

Revolving Credit Facility

N/A

1.9

Senior Notes
1,436.6

4.5
%
62.2

Short-term and other borrowings
94.8

Various

2.9

Total
$
3,963.9

 
$
147.0

 
Year Ended December 31, 2016
(In millions)
Principal
Average Effective
Interest Rate
Interest
Expense
Term Loans
$
1,962.6

4.4
%
$
100.3

Revolving Credit Facility

N/A

3.0

Senior Notes
1,319.5

6.1
%
69.9

Short-term and other borrowings
39.8

Various

5.0

Total
$
3,321.9

 
$
178.2


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Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2017:
 
Contractual Obligations Due In:
(In millions)
Total
2018
2019-2020
2021-2022
Thereafter
Debt, including current portion (1)
 
 
 
 
 
Senior Secured Credit Facilities, consisting of the following:
 
 
 
 
 
Term Loan Facilities:
 
 
 
 
 
2024 Dollar Term Loans
$
1,960.0

$
20.0

$
40.0

$
40.0

$
1,860.0

2023 Euro Term Loans
472.5

4.8

9.5

9.5

448.7

Senior Notes, consisting of the following:
 
 
 
 
 
2024 Dollar Senior Notes
500.0




500.0

2024 Euro Senior Notes
399.7




399.7

2025 Euro Senior Notes
536.9




536.9

Other borrowings (2)
41.8

13.1

1.7

27.0


Interest payments (3)
907.2

143.2

284.1

277.8

202.1

Sale-leaseback financing (4)
110.8

5.3

10.8

11.3

83.4

Operating leases
134.7

41.8

46.0

26.7

20.2

Pension contributions (5)
16.2

16.2




Purchase obligations (6)
175.2

93.9

63.3

6.6

11.4

Uncertain tax positions, including interest and penalties (7)





Total
$
5,255.0

$
338.3

$
455.4

$
398.9

$
4,062.4

(1)
During the year ended December 31, 2017, we refinanced our 2023 Dollar Term Loans with our 2024 Dollar Term Loans (see Note 20 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K). This resulted in a significant increase in our obligations for the years after 2022. Amounts assume that the Senior Secured Credit Facilities and New Senior Notes are repaid upon maturity, and the Revolving Credit Facility remains undrawn, which may or may not reflect future events.
(2)
Other borrowings exclude debt associated with two of our leases treated as indebtedness, discussed within end-note 4.
(3)
Future interest payments include commitment fees on the unused portion of the Revolving Credit Facility, and reflect the interest payments on our Current Term Loans and New Senior Notes. Future interest payments assume December 31, 2017 variable interest rates will prevail throughout all future periods. Amounts represent the timing of interest accruals. Actual interest payments and repayment amounts may change depending on impact of interest rates on variable rate indebtedness and changes in currency exchange rates.
(4)
During the year ended December 31, 2017, we began treating one of our leases as a sale-leaseback financing obligation, which was previously treated as a build-to-suit lease. During the year ended December 31, 2016, we also recognized one of our leases as a sale-leaseback financing. The cash rental costs to be paid over the terms of these leases are reflected within the table above.
(5)
We expect to make contributions to our defined benefit pension plans beyond 2018; 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 2018.
(6)
Purchase obligations include various commitments, including contractual commitments to acquire ownership interests in a joint venture and pay contingent consideration and deferred consideration, as a result of business acquisitions completed in 2016 and 2017. At December 31, 2017, we are committed to pay $53.9 million in two equal installments (2018 and 2019) related to the purchase of remaining joint venture interests, as well as $12.4 million of contingent and deferred consideration payable in 2018 related to previously closed acquisitions. In addition, we have $15.8 million in interest rate caps which will be paid from 2018 through 2021.
(7)
At December 31, 2017, we had approximately $18.4 million of gross uncertain tax positions, including interest and penalties that could result in potential payments. Due to the high degree of uncertainty regarding future timing of cash flows associated with these liabilities, we are unable to estimate the years in which settlement will occur with the respective taxing authorities.

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Scheduled Maturities
Below is a schedule of required future repayments of all borrowings outstanding at December 31, 2017.
(In millions)
 
2018
$
40.5

2019
26.5

2020
25.7

2021
25.7

2022
52.4

Thereafter
3,778.6

Total
$
3,949.4

The table above excludes $14.5 million of debt associated with our sale-leaseback financings that will not be settled with cash.
Off Balance Sheet Arrangements
See Note 8 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for disclosure of our guarantees of certain customers’ obligations to third parties.
Recent Accounting Guidance
See Note 4 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a summary of recent accounting guidance.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of results of operations and financial condition are based upon our consolidated financial statements. These financial statements have been prepared in accordance with U.S. GAAP unless otherwise noted. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts reported in the financial statements. We base our estimates and judgments on historical experiences and assumptions believed to be reasonable under the circumstances and re-evaluate them on an ongoing basis. Actual results could differ from our estimates under different assumptions or conditions. Our significant accounting policies, which may be affected by our estimates and assumptions, are more fully described in Note 3 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes the following critical accounting policies reflect its most significant estimates and assumptions used in the preparation of the financial statements.
Accounting for Business Combinations
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.
The fair values of intangible assets are estimated using an income approach, either the excess earnings method (customer relationships) or the relief from royalty method (technology and trademarks). Under the excess earnings method, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows attributable solely to the intangible asset over its remaining useful life. Under the relief from royalty method, fair value is measured by estimating future revenue associated with the intangible asset over its useful life and applying a royalty rate to the revenue estimate. These intangible assets enable us to secure markets for our products, develop new products to meet the evolving business needs and competitively produce our existing products.
The fair values of real properties acquired are based on the consideration of their highest and best use in the market. The fair values of property, plant and equipment, other than real properties, are based on the consideration that unless otherwise identified, they will continue to be used "as is" and as part of the ongoing business. In contemplation of the in-use premise and the nature of the assets, the fair value is developed primarily using a cost approach.

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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 noncontrolling interests, when applicable, are estimated by applying an income approach and is based on significant inputs that are not observable in the market and thus represents a fair value measurement categorized within Level 3 of the fair value hierarchy. Key assumptions in the valuation of noncontrolling interest included a discount rate, a terminal value based on a range of long-term sustainable growth rates and adjustments because of the lack of control that market participants would consider when measuring the fair value of the noncontrolling interests.
The fair value of the contingent consideration liabilities is estimated by applying an income approach using the Black-Scholes option pricing model. The fair value measurements are based on significant inputs that are not observable in the market and thus represents a fair value measurement categorized within Level 3 of the fair value hierarchy. Key assumptions in the valuation of contingent consideration liabilities included discount rates, expected terms, volatility rates and operating results as applicable based on the targets identified in the respective acquisition agreements.
The results of operations for businesses acquired are included in the financial statements from the date of the acquisition.
See Note 5 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further detail on the related accounting.
Asset Impairments
Factors that could result in future impairment charges or changes in useful lives, among others, include changes in worldwide economic conditions, changes in technology, changes in competitive conditions and customer preferences, and fluctuations in foreign currency exchange rates. These risk factors are discussed in Part I, Item 1A, "Risk Factors," included elsewhere in this Annual Report on Form 10-K.
Goodwill and indefinite-lived intangible assets
As discussed in Note 3 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K, the Company tests goodwill and identifiable intangible assets with indefinite lives for impairment at least annually as of October 1st. We initially test goodwill and indefinite-lived intangible assets for impairment by performing a qualitative evaluation. The qualitative evaluation is an assessment of factors, including reporting unit or asset specific operating results and cost factors, as well as industry, market and macroeconomic conditions, to determine whether it is more likely than not (more than 50%) that the fair values of a reporting unit or asset is less than the respective carrying amounts, including goodwill when testing goodwill for impairment. In the event the qualitative assessment indicates that an impairment is more likely than not, we would be required to perform a quantitative impairment test, otherwise no further analysis is required. We may elect to bypass this qualitative assessment for some or all of our reporting units and indefinite-lived intangible assets 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, that are based on projections of the amounts and timing of future revenue and cash flows, and multiples of earnings in estimating fair value. In conjunction with our impairment assessments of indefinite-lived intangible assets, we also review the reasonableness of the indefinite useful lives associated with these assets, in which we evaluate whether indicators exist that future cash flows associated with these assets could be realized over a finite period.
For the 2017 impairment tests of our goodwill and indefinite-lived intangible assets, management performed the two-step quantitative test. This test concluded that the carrying values exceeded the respective fair values and no impairments existed. In addition, during 2017 we changed certain indefinite-lived intangible assets to definite-lived intangible assets, as discussed further in Note 6 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
The inputs utilized in a quantitative analysis are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, Fair Value Measurement. The process of evaluating the potential impairment of goodwill and indefinite-lived intangible assets is subjective because it requires the use of estimates and assumptions as to our future cash flows, discount rates commensurate with the risks involved in the assets, future economic and market conditions, as well as other key assumptions. We believe that the amounts recorded in the financial statements related to goodwill and indefinite-lived intangible assets are based on the best estimates and judgments of the appropriate Axalta management, although actual outcomes could differ from our estimates.
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 each of our four reporting units. At December 31, 2017, our $1,271.2 million in total goodwill is allocated to reportable segments as follows: $1,189.2 million in Performance Coatings and $82.0 million in Transportation Coatings.

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Other intangible assets
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 2 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 in conjunction with the Acquisition 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.
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
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 the graded vesting attribution method.
Compensation expense related to the restricted stock awards and restricted stock units is equal to the grant-date fair value of the awards determined by the closing share price on the date of the grant. The related expense is being recognized as compensation expense over the service period utilizing the graded vesting attribution method.
Compensation expense related to performance stock awards and performance share units is equivalent to the grant-date fair value of the awards determined using a valuation methodology (Monte Carlo simulation model) to account for the market conditions linked to these awards. These awards are tied to the Company’s total shareholder return ("TSR") relative to the TSR of a selected industry peer group. Each award covers a three-year performance cycle with a three-year service period vesting requirement. Awards will cliff vest upon meeting the applicable TSR thresholds and the three-year service requirement. The actual number of shares awarded is adjusted to between zero and 200% of the target award amount based upon achievement of pre-determined objectives relative to a peer group. TSR relative to peers is considered a market condition under applicable authoritative guidance. The related expense is being recognized as compensation expense over the service period utilizing the graded vesting attribution method.
We recognize compensation expense net of forfeitures, which we have elected to record at the time of occurrence.
The fair value of non-qualified stock options granted from 2015 through 2017 and the respective principal weighted average assumptions used in applying the Black-Scholes model were as follows:
Key Assumptions
2017 Grants
2016 Grants
2015 Grants
Expected Term
6.00 years

6.00 years

6.00 years

Volatility
21.75
%
21.63
%
22.19
%
Dividend Yield
%
%
%
Discount Rate
2.03
%
1.45
%
1.79
%
Fair Value of Options Per Share
$7.20 - $8.56

$5.68 - $6.95

$6.27 - $8.88

See Note 10 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further detail on stock based compensation.

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Retirement Benefits
The amounts recognized in the audited financial statements related to pension and other long-term employee benefits are determined from actuarial valuations. Inherent in these valuations are assumptions including expected return on plan assets, discount rates at which liabilities could have been settled, rate of increase in future compensations levels, and mortality rates. These assumptions are updated annually and are disclosed in Note 9 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. In accordance with U.S. GAAP, actual results that differed from the assumptions are accumulated and amortized over future periods and therefore, affect expense recognized and obligations recorded in future periods.
For the majority of our defined benefit pension obligations, we utilize prevailing long-term high quality corporate bond indices applicable to the respective country at each measurement date. In countries where established corporate bond markets do not exist, we utilize other index movement and duration analysis to determine discount rates. The calculation separately discounts benefit payments using the spot rates from a long-term, high-quality corporate bond yield curve.
The estimated impact of either a 100 basis point increase or decrease of the discount rate to the net periodic benefit cost for 2018 would result in an increase of $0.3 million in both scenarios. The estimated impact of a 100 basis point increase or decrease of the expected return on asset assumption on the net periodic benefit cost for 2018 would result in a decrease or increase of approximately $3.1 million, respectively.
Income taxes
The provision for income taxes was determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the period. Deferred taxes result from differences between the financial and tax basis of our assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates applicable in the years in which they are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax law is recognized in income in the period that includes the enactment date.
At December 31, 2017, we had a net deferred tax asset balance of $45.5 million, after valuation allowances of $214.2 million. At December 31, 2016, we had a net deferred tax asset balance of $162.2 million, after valuation allowances of $135.4 million. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss, interest and tax credit carryforwards. The Company records a valuation allowance if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company must generate approximately $268.3 million of taxable income to fully realize its consolidated net deferred tax assets as of December 31, 2017.
We evaluate the recoverability of deferred tax assets on a jurisdictional basis by assessing the adequacy of future expected taxable income from all sources, including the reversal of taxable temporary differences, forecasted core business earnings and available tax planning strategies. Of our net deferred tax asset balance as of December 31, 2017, $137.1 million, net of valuation allowances of $26.1 million, relates to our operations within the U.S. As of December 31, 2017, our operations within the U.S. are in a three-year cumulative income position. In instances where we are in a three-year cumulative loss, we assess all positive and negative factors including any potential aberrational items which may be included within our taxable results. The aberrational items which have impacted our results include transition-related costs associated with the separation from our Predecessor coupled with significant taxable losses associated with the exercises of pre-IPO stock options that were deep in the money at the time they were exercised, as well as debt extinguishment, refinancing and acquisition related costs. We believe, and have assumed, these types of losses are not indicative of our core earnings for purposes of assessing the appropriateness of a valuation allowance. Assumptions around sources of taxable income inherently rely heavily on estimates. We use our historical experience and our short and long-range business forecasts to provide insight. While the Company believes that its judgments and estimations regarding deferred tax assets are appropriate, significant differences in actual experience may require the Company to adjust its valuation allowance and could materially affect the Company’s future financial results.

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On December 22, 2017, the U.S. TCJA legislation was enacted into law and contains several key tax provisions that affected us, including the reduction of the U.S. corporate income tax rate to 21% effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as remeasuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. The SEC staff issued SAB 118, which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the U.S. TCJA was passed late in December 2017, and ongoing guidance and accounting interpretation are expected over the coming months, we consider the accounting of the impacts of the U.S. TCJA, and other items to be provisional due to the forthcoming guidance and our ongoing analysis of our tax positions. We expect to complete our analysis within the one-year measurement period in accordance with SAB 118.
We provide for income and foreign withholding taxes, where applicable, on unremitted earnings of all subsidiaries and related companies to the extent that such earnings are not deemed to be permanently invested. At December 31, 2017 and 2016 deferred income taxes of approximately $7.4 million and $5.8 million have been provided on such subsidiary earnings, respectively. At December 31, 2017, and 2016, we have not recorded a deferred tax liability related to withholding taxes of approximately $4.2 million and $3.0 million, respectively, on unremitted earnings of subsidiaries that are permanently invested.
The breadth of our operations and the global complexity of tax regulations require assessments of uncertainties and judgments in estimating taxes we will ultimately pay. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of disputes arising from federal, state and international tax audits in the normal course of business. A liability for unrecognized tax benefits is recorded when management concludes that the likelihood of sustaining such positions upon examination by taxing authorities is less than "more likely than not." Interest and penalties accrued related to unrecognized tax benefits are included in the provision for income taxes. At December 31, 2017 and 2016, the Company had gross unrecognized tax benefits, excluding interest and penalties, for both domestic and foreign operations of $17.2 million and $12.3 million, respectively.
See Note 12 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further detail on our accounting for income taxes.
Derivatives and Hedging
For derivatives designated as cash flow hedges, we measure hedge effectiveness by formally assessing, at least quarterly, the probable high correlation of the expected future cash flows of the hedged item and the derivative hedging instrument. The ineffective portions of the hedges are recorded in the consolidated statement of operations in the current period. If the hedging relationship ceases to be highly effective or it becomes probable that an expected transaction will no longer occur, future gains or losses on the derivative instrument are recorded in the statement of operations.
We account for interest rate caps related to our existing long-term borrowings as cash flow hedges. The effective portions of the changes in the fair values of these derivatives are recorded in other comprehensive income and are reclassified to interest expense in the period in which earnings are impacted by the hedged items or in the period that the transaction no longer qualifies as a cash flow hedge. The ineffective portions of the changes in fair values of the derivatives are recorded in interest expense in the period ineffectiveness is determined.
If no hedging relationship is designated, derivatives are marked to market through the statement of operations. Cash flows from derivatives are recognized in the statement of cash flows in a manner consistent with the underlying transactions.
See Note 22 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further detail on our derivatives and hedging instruments.
Foreign Currency Translation
Our reporting currency is the U.S. dollar. Due primarily to our legal entity organization structure, global cash management and raw material sourcing strategies, we determined that the functional currency of certain subsidiaries operating outside of the United States is generally the local currency of the respective subsidiaries. Assets and liabilities of these operations are translated into U.S. dollars at end-of-period exchange rates; income and expenses are translated using the average exchange rates for the reporting period. Resulting cumulative translation adjustments are recorded as a component of shareholders’ equity in the consolidated balance sheet.
Gains and losses from transactions denominated in foreign currencies other than an entities’ functional currency are included in the consolidated statement of operations in other expense, net.

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Sales deductions
In certain of our end-markets, when we recognize revenue from the sale of our products to our distribution customers, we simultaneously record an adjustment to net sales for estimated rebates, sales incentives and other allowances. In our refinish end-market, risk of loss passes upon the sale to our distribution customers. Subsequent to the sale to distribution customers, when the distribution customers sell our products to collision repair body shops, additional rebates or further pricing concessions can be given to our distribution customers and certain collision repair body shops. These rebates or further pricing concessions are estimated upon the sale to the distribution customer.
These provisions are estimated based on historical experience, estimated future trends, estimated distribution inventory levels, current contract sales terms with our direct and indirect customers and other competitive factors. If the assumptions we used to calculate these adjustments do not appropriately reflect future activity, our financial position, results of operations and cash flows could be materially impacted.
Allowance for doubtful accounts
We maintain an allowance for doubtful accounts that reduces receivables to amounts that are expected to be collected. In estimating the allowance, management considers factors such as current overall geographic and industry-specific economic conditions, statutory requirements, accounts receivable turnover, historical and anticipated customer performance, historical experience with write-offs as a standalone company and the level of past-due amounts. Changes in these conditions may result in additional allowances. After all attempts to collect a receivable have failed and local legal requirements are met, the receivable is written off against the allowance.
Contingencies
Contingencies, by their nature, relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has been incurred as well as in estimating the amount of potential loss. The most important contingencies impacting our financial statements are those related to environmental remediation, pending or threatened litigation against the Company and the resolution of matters related to open tax years.
Environmental remediation costs are accrued when it is probable that a liability has been incurred and the amount can be reasonably estimated. Estimates of environmental reserves require evaluating government regulation, available technology, site-specific information and remediation alternatives. We accrue an amount equal to our best estimate of the costs to remediate based upon the available information. The extent of environmental impacts may not be fully known and the processes and costs of remediation may change as new information is obtained or technology for remediation is improved. Our process for estimating the expected cost for remediation considers the information available, technology that can be utilized and estimates of the extent of environmental damage. Adjustments to our estimates are made periodically as additional information received as remediation progresses.
We are subject to legal proceedings and claims arising out of our business operations. We routinely assess the likelihood of any adverse outcomes to these matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is made after analysis of each known claim. We have an active risk management program consisting of numerous insurance policies secured from many carriers. These policies often provide coverage that is intended to minimize the financial impact, if any, of the legal proceedings. The required reserves may change in the future due to new developments in each matter.
For more information on these matters, see Note 8 and Note 12 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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ITEM 7A. 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) would have an annual impact of approximately $1.4 million on cash interest expense considering the impact of our hedging positions currently in place.
We selectively use derivative instruments to reduce market risk associated with changes in interest rates. The use of derivatives is intended for hedging purposes only and we do not enter into derivative instruments for speculative purposes.
During the year ended December 31, 2017, we entered into four 1.5% interest rate caps with aggregate notional amounts totaling $850 million to hedge the variable interest rate exposures on our 2024 Dollar Term Loans. Three of these interest rate caps were effective beginning September 30, 2017 and expire December 31, 2019 and included an aggregate deferred premium of $8.6 million at inception. The fourth interest rate cap is in place starting from January 1, 2018 and expires December 31, 2021 and included a deferred premium of $8.1 million at inception. All deferred premiums will be paid quarterly over the term of the respective interest rate caps. The interest rate caps were designated as cash flow hedges.
In addition to these interest rate caps, during the year ended December 31, 2017, we purchased a 1.25% interest rate cap with a notional amount of €388.0 million to hedge the variable interest rate exposures on our 2023 Euro Term Loans. We paid a premium equal to $0.6 million at inception for the interest rate cap which is effective beginning September 30, 2017 through December 31, 2019. Changes in the fair value of the derivative instrument are recorded in current period earnings and are included in interest expense.
As discussed in Note 20 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we took additional measures to reduce our cost of borrowing by entering into amendments to the Senior Secured Credit Facilities during the two years ended December 31, 2016 through 2017. The re-pricing enacted pursuant to the amendments reduced the margin applicable to our cost of borrowing on our Dollar Term Loans from 3.0% to 2.0% for Eurocurrency Rate Loans and from 2.0% to 1.00% for Base Rate Loans and the margin applicable to our cost of borrowing under the Euro Term Loan facility from 3.25% to 2.25%. In addition, the LIBOR floor on the Dollar Term Loan was reduced from 1.00% to zero while the base rate floor was reduced from 2.25% to 1.00%, and the LIBOR floor on the Euro Term Loan was reduced from 1.00% to 0.75%.
Foreign exchange rates risk 
We are exposed to foreign currency exchange risk by virtue of the translation of our international operations from local currencies into the U.S. dollar. The majority of our net sales for the years ended December 31, 2017, 2016 and 2015 were from operations outside the United States. At December 31, 2017 and 2016, the accumulated other comprehensive loss account on the consolidated balance sheets included a cumulative translation loss of $208.8 million and $292.2 million, respectively. A hypothetical 10% increase in the value of the US dollar relative to all foreign currencies would have increased the cumulative translation loss by $68.6 million. This sensitivity analysis is inherently limited as it assumes that rates of multiple foreign currencies are moving in the same direction relative to the value of the U.S. dollar.
Uncertainty in the global market conditions has resulted in, and may continue to cause, significant volatility in foreign currency exchange rates which could increase these risks.

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In the majority of our jurisdictions, we earn revenue and incur costs in the local currency of such jurisdiction. We earn significant revenues and incur significant costs in foreign currencies including the Euro, Mexican peso, Brazilian real and the Chinese yuan/renminbi. As a result, movements in exchange rates could cause our revenues and expenses to materially fluctuate, impacting our future profitability and cash flows. Our purchases of raw materials in Latin America, EMEA and Asia Pacific and future business operations and opportunities, including the continued expansion of our business outside North America, may further increase the risk that cash flows resulting from these activities may be adversely affected by changes in currency exchange rates. If and when appropriate, we intend to manage these risks through foreign currency hedges and/or by utilizing local currency funding of these expansions. We do not intend to hold financial instruments for trading or speculative purposes.
Additionally, in order to fund the purchase price for certain assets of DPC and the capital stock and other equity interests of certain non-U.S. entities, a combination of equity contributions and intercompany loans were utilized to capitalize certain non-U.S. subsidiaries. In certain instances, the intercompany loans are denominated in currencies other than the functional currency of the affected subsidiaries. Where intercompany loans are not a component of permanently invested capital of the affected subsidiaries, increases or decreases in the value of the subsidiaries’ functional currency against other currencies will affect our results of operations. We use these intercompany loans to offset the exposure to profitability and cash flows created by external loans denominated in currencies that are different from the function currency of the issuing entities, including our 2024 and 2025 Euro Senior Notes and the Euro Term Loans, which are denominated in Euro.
Commodity price risk 
We are subject to changes in our cost of sales caused by movements in underlying commodity prices (primarily oil and natural gas). Between 45% and 55% of our cost of sales is represented by raw materials. A substantial portion of the purchased raw materials include monomers, pigments, resins and solvents. Our price fluctuations generally follow industry indices. We historically have not entered into long-term purchase contracts related to the purchase of raw materials. If and when appropriate, we intend to manage these risks using purchase contracts with our suppliers.
Treasury policy
Our treasury policy seeks to ensure that adequate financial resources are available for the development of our businesses while managing our currency and interest rate risks. Our policy is to not engage in speculative transactions. Our policies with respect to the major areas of our treasury activity are set forth above.


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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Axalta Coating Systems Ltd.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Axalta Coating Systems Ltd. and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2017 appearing under item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded 8 businesses from its assessment of internal control over financial reporting as of December 31, 2017 because they were acquired by the Company in purchase business combinations during 2017. We have also excluded these 8 businesses from our audit of internal control over financial reporting. The acquired businesses represented 2% and 5% of consolidated total assets and revenues, respectively, for the year ended December 31, 2017. The most significant acquisition, the North American Industrial Wood Coatings business from Valspar, represented 1% and 3% of consolidated total assets and revenues, respectively, for the year ended December 31, 2017.

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Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP 
Philadelphia, Pennsylvania
February 22, 2018

We have served as the Company’s auditor since 2011.

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AXALTA COATING SYSTEMS LTD.
Consolidated Statements of Operations
(In millions, except per share data)
    
 
Year Ended December 31,
 
2017
2016
2015
Net sales
$
4,352.9

$
4,068.8

$
4,083.9

Other revenue
24.1

23.9

26.1

Total revenue
4,377.0

4,092.7

4,110.0

Cost of goods sold
2,779.6

2,527.6

2,597.3

Selling, general and administrative expense