10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 6, 2020
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the quarterly period ended March 31, 2020
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
(Exact name of registrant as specified in its charter)
2851 |
||||
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(State or other jurisdiction of
incorporation or organization)
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(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer
Identification No.)
|
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(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:
(Title of class) |
(Trading symbol) |
(Exchange on which registered) |
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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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the Company is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer ☒ Non-accelerated filer ☐ Accelerated filer ☐
Smaller 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 ☒
As of April 30, 2020, there were 235,268,510 shares of the registrant’s common shares outstanding.
Table of Contents
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
AXALTA COATING SYSTEMS LTD.
Condensed Consolidated Statements of Operations (Unaudited)
(In millions, except per share data)
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Net sales |
$ |
$ |
||||||
Cost of goods sold |
||||||||
Selling, general and administrative expenses |
||||||||
Other operating charges |
||||||||
Research and development expenses |
||||||||
Amortization of acquired intangibles |
||||||||
Income from operations |
||||||||
Interest expense, net |
||||||||
Other expense (income), net |
( |
) |
||||||
Income before income taxes |
||||||||
(Benefit) provision for income taxes |
( |
) |
||||||
Net income |
||||||||
Less: Net income attributable to noncontrolling interests |
||||||||
Net income attributable to controlling interests |
$ |
$ |
||||||
Basic net income per share |
$ |
$ |
||||||
Diluted net income per share |
$ |
$ |
||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
AXALTA COATING SYSTEMS LTD.
Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited)
(In millions)
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Net income |
$ |
$ |
||||||
Other comprehensive loss, before tax: |
||||||||
Foreign currency translation adjustments |
( |
) |
||||||
Unrealized loss on derivatives |
( |
) |
( |
) |
||||
Unrealized (loss) gain on pension plan obligations |
( |
) |
||||||
Other comprehensive loss, before tax |
( |
) |
( |
) |
||||
Income tax benefit related to items of other comprehensive loss |
( |
) |
( |
) |
||||
Other comprehensive (loss) income, net of tax |
( |
) |
||||||
Comprehensive (loss) income |
( |
) |
||||||
Less: Comprehensive (loss) income attributable to noncontrolling interests |
( |
) |
||||||
Comprehensive (loss) income attributable to controlling interests |
$ |
( |
) |
$ |
||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
AXALTA COATING SYSTEMS LTD.
Condensed Consolidated Balance Sheets (Unaudited)
(In millions, except per share data)
March 31, 2020 |
December 31, 2019 |
|||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ |
$ |
||||||
Restricted cash |
||||||||
Accounts and notes receivable, net |
||||||||
Inventories |
||||||||
Prepaid expenses and other current assets |
||||||||
Total current assets |
||||||||
Property, plant and equipment, net |
||||||||
Goodwill |
||||||||
Identifiable intangibles, net |
||||||||
Other assets |
||||||||
Total assets |
$ |
$ |
||||||
Liabilities, Shareholders’ Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ |
$ |
||||||
Current portion of borrowings |
||||||||
Other accrued liabilities |
||||||||
Total current liabilities |
||||||||
Long-term borrowings |
||||||||
Accrued pensions |
||||||||
Deferred income taxes |
||||||||
Other liabilities |
||||||||
Total liabilities |
||||||||
Commitments and contingencies (Note 5) |
||||||||
Shareholders’ equity: |
||||||||
Common shares, $1.00 par, 1,000.0 shares authorized, 250.5 and 250.1 shares issued at March 31, 2020 and December 31, 2019, respectively |
||||||||
Capital in excess of par |
||||||||
Retained earnings |
||||||||
Treasury shares, at cost, 15.2 shares at March 31, 2020 and December 31, 2019 |
( |
) |
( |
) |
||||
Accumulated other comprehensive loss |
( |
) |
( |
) |
||||
Total Axalta shareholders’ equity |
||||||||
Noncontrolling interests |
||||||||
Total shareholders’ equity |
||||||||
Total liabilities and shareholders’ equity |
$ |
$ |
||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
AXALTA COATING SYSTEMS LTD.
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
(In millions)
Common Stock |
||||||||||||||||||||||||||||||
Number of Shares |
Par/Stated Value |
Capital In Excess Of Par |
Retained Earnings |
Treasury Shares, at cost |
Accumulated Other Comprehensive Loss |
Non controlling Interests |
Total |
|||||||||||||||||||||||
Balance at December 31, 2019 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||||||||||||
Net income |
— |
— |
— |
— |
— |
|||||||||||||||||||||||||
Net realized and unrealized loss on derivatives, net of tax benefit of $6.0 million |
— |
— |
— |
— |
— |
( |
) |
— |
( |
) |
||||||||||||||||||||
Long-term employee benefit plans, net of tax of $0.2 million |
— |
— |
— |
— |
— |
( |
) |
— |
( |
) |
||||||||||||||||||||
Foreign currency translation, net of tax of $0.0 million |
— |
— |
— |
— |
— |
( |
) |
( |
) |
( |
) |
|||||||||||||||||||
Total comprehensive income (loss) |
— |
— |
— |
— |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||
Cumulative effect of an accounting change |
— |
— |
— |
( |
) |
— |
( |
) |
||||||||||||||||||||||
Recognition of stock-based compensation |
— |
— |
— |
— |
— |
— |
||||||||||||||||||||||||
Shares issued under compensation plans |
( |
) |
— |
— |
— |
— |
( |
) |
||||||||||||||||||||||
Noncontrolling interests of acquired subsidiaries |
— |
— |
— |
— |
— |
( |
) |
( |
) |
|||||||||||||||||||||
Dividends declared to noncontrolling interests |
— |
— |
— |
— |
— |
— |
( |
) |
( |
) |
||||||||||||||||||||
Balance at March 31, 2020 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
AXALTA COATING SYSTEMS LTD.
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
(In millions)
Common Stock |
||||||||||||||||||||||||||||||
Number of Shares |
Par/Stated Value |
Capital In Excess Of Par |
Retained earnings |
Treasury Shares, at cost |
Accumulated Other Comprehensive Loss |
Non controlling Interests |
Total |
|||||||||||||||||||||||
Balance at December 31, 2018 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||
Net income |
— |
— |
— |
— |
— |
|||||||||||||||||||||||||
Net realized and unrealized loss on derivatives, net of tax benefit of $2.2 million |
— |
— |
— |
— |
— |
( |
) |
— |
( |
) |
||||||||||||||||||||
Long-term employee benefit plans, net of tax of $0.5 million |
— |
— |
— |
— |
— |
— |
||||||||||||||||||||||||
Foreign currency translation, net of tax of $0.0 million |
— |
— |
— |
— |
— |
|||||||||||||||||||||||||
Total comprehensive income |
— |
— |
— |
— |
||||||||||||||||||||||||||
Cumulative effect of an accounting change |
— |
— |
— |
( |
) |
— |
( |
) |
||||||||||||||||||||||
Recognition of stock-based compensation |
— |
— |
— |
— |
— |
— |
||||||||||||||||||||||||
Shares issued under compensation plans |
— |
— |
— |
— |
||||||||||||||||||||||||||
Noncontrolling interests of acquired subsidiaries |
— |
— |
— |
— |
— |
( |
) |
( |
) |
|||||||||||||||||||||
Common stock purchases |
( |
) |
— |
— |
— |
( |
) |
— |
— |
( |
) |
|||||||||||||||||||
Dividends declared to noncontrolling interests |
— |
— |
— |
— |
— |
— |
( |
) |
( |
) |
||||||||||||||||||||
Balance at March 31, 2019 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
AXALTA COATING SYSTEMS LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Operating activities: |
||||||||
Net income |
$ |
$ |
||||||
Adjustment to reconcile net income to cash used for operating activities: |
||||||||
Depreciation and amortization |
||||||||
Amortization of deferred financing costs and original issue discount |
||||||||
Debt extinguishment and refinancing related costs |
||||||||
Deferred income taxes |
( |
) |
||||||
Realized and unrealized foreign exchange losses, net |
||||||||
Stock-based compensation |
||||||||
Divestitures and impairment charges |
||||||||
Interest income on swaps designated as net investment hedges |
( |
) |
( |
) |
||||
Other non-cash, net |
( |
) |
( |
) |
||||
Changes in operating assets and liabilities: |
||||||||
Trade accounts and notes receivable |
( |
) |
||||||
Inventories |
( |
) |
( |
) |
||||
Prepaid expenses and other assets |
( |
) |
( |
) |
||||
Accounts payable |
||||||||
Other accrued liabilities |
( |
) |
( |
) |
||||
Other liabilities |
||||||||
Cash used for operating activities |
( |
) |
( |
) |
||||
Investing activities: |
||||||||
Acquisitions, net of cash acquired |
( |
) |
||||||
Purchase of property, plant and equipment |
( |
) |
( |
) |
||||
Interest proceeds on swaps designated as net investment hedges |
||||||||
Other investing activities, net |
( |
) |
||||||
Cash used for investing activities |
( |
) |
( |
) |
||||
Financing activities: |
||||||||
Payments on short-term borrowings |
( |
) |
( |
) |
||||
Payments on long-term borrowings |
( |
) |
( |
) |
||||
Financing-related costs |
( |
) |
||||||
Purchases of common stock |
( |
) |
||||||
Net cash flows associated with stock-based awards |
( |
) |
||||||
Purchase of noncontrolling interests |
( |
) |
( |
) |
||||
Other financing activities, net |
( |
) |
( |
) |
||||
Cash used for financing activities |
( |
) |
( |
) |
||||
Decrease in cash |
( |
) |
( |
) |
||||
Effect of exchange rate changes on cash |
( |
) |
||||||
Cash at beginning of period |
||||||||
Cash at end of period |
$ |
$ |
||||||
Cash at end of period reconciliation: |
||||||||
Cash and cash equivalents |
$ |
$ |
||||||
Restricted cash |
||||||||
Cash and restricted cash held for sale |
||||||||
Cash at end of period |
$ |
$ |
||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)
Index
Note |
Page |
|
9
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim condensed consolidated financial statements included herein are unaudited. In the opinion of management, these statements include all adjustments, consisting only of normal, recurring adjustments, necessary for a fair statement of the financial position of Axalta Coating Systems Ltd., a Bermuda exempted company limited by shares, and its consolidated subsidiaries ("Axalta," the "Company," "we," "our" and "us") at March 31, 2020 and December 31, 2019, the results of operations, comprehensive income (loss), changes in shareholders' equity and cash flows for the three months ended March 31, 2020 and 2019. All intercompany balances and transactions have been eliminated.
These interim unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
The interim unaudited condensed consolidated financial statements include the accounts of Axalta and its subsidiaries, and entities in which a controlling interest is maintained. Certain of our joint ventures are accounted for on a one-month lag basis, the effect of which is not material.
The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for a full year.
Summary of Significant Accounting Policies Updates
Reclassifications
The condensed consolidated statements of operations for the three months ended March 31, 2019 have been updated for comparability with the current year presentation to separately present other operating charges as detailed in our annual report on Form 10-K for the year ended December 31, 2019.
Recently Adopted Accounting Guidance
On January 1, 2020, we adopted Accounting Standards Update ("ASU") 2016-13, “Financial Instruments - Credit Losses” under a modified retrospective approach for all financial assets. ASU 2016-13 replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires considerations of a broader range of reasonable and supportable information to inform credit loss estimates. The provisions of this standard primarily impact the allowance for doubtful accounts on our trade receivables, in which we have applied historical loss percentages, combined with reasonable and supportable forecasts of future losses to the respective aging categories. Adoption of ASU 2016-13 at January 1, 2020 resulted in a one-time loss to retained earnings of $1.5 million on our condensed consolidated balance sheets and statements of shareholders' equity for the three months ended March 31, 2020.
On March 12, 2020, we adopted ASU 2020-04, "Reference Rate Reform" which provides optional expedients exercisable from March 12, 2020 to December 31, 2022 to ease the potential burden in accounting for the effects of reference rate reform on financial reporting. As of March 31, 2020, the expedients provided in this standard do not impact the Company. We will continue to monitor for potential impacts on our financial statements.
Accounting Guidance Issued But Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes" as part of its initiative to reduce complexity in accounting standards. The ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The new standard is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of ASU 2019-12 on our financial statements.
Risks and Uncertainties
10
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)
(2) REVENUE
Consideration for products in which control has transferred to our customers that is conditional on something other than the passage of time is recorded as a contract asset within prepaid expenses and other current assets on the balance sheet. The contract asset balances at March 31, 2020 and December 31, 2019 were $36.7 million and $37.5 million, respectively.
We provide certain customers with incremental up-front consideration, subject to clawback provisions, including Business Incentive Plan assets ("BIPs"), which is capitalized as a component of other assets and amortized over the estimated life of the contractual arrangement as a reduction of net sales. At March 31, 2020 and December 31, 2019, the total carrying value of BIPs were $191.4 million and $191.2 million, respectively, and are presented within other assets on the condensed consolidated balance sheets. For the three months ended March 31, 2020 and 2019, $16.9 million and $17.1 million, respectively, were amortized and reflected as reductions of net sales in the condensed consolidated statements of operations. The total carrying value of BIPs exclude other upfront incentives made in conjunction with long-term customer commitments of $96.4 million and $79.0 million at March 31, 2020 and December 31, 2019, respectively, which will be repaid in future periods.
See Note 16 for disaggregated net sales by end-market.
(3) GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Goodwill
The following table shows changes in the carrying amount of goodwill from December 31, 2019 to March 31, 2020 by reportable segment:
|
Performance
Coatings
|
Transportation
Coatings
|
Total |
||||||||||
Balance at December 31, 2019 |
$ |
$ |
$ |
|||||||||
Foreign currency translation |
( |
) |
( |
) |
( |
) |
||||||
Balance at March 31, 2020 |
$ |
$ |
$ |
|||||||||
Identifiable Intangible Assets
The following tables summarize the gross carrying amounts and accumulated amortization of identifiable intangible assets by major class:
March 31, 2020 |
Gross Carrying
Amount
|
Accumulated
Amortization
|
Net Book
Value
|
Weighted Average
Amortization Periods (years)
|
||||||||||
Technology |
$ |
$ |
( |
) |
$ |
|||||||||
Trademarks - indefinite-lived |
— |
Indefinite |
||||||||||||
Trademarks - definite-lived |
( |
) |
||||||||||||
Customer relationships |
( |
) |
||||||||||||
Other |
( |
) |
||||||||||||
Total |
$ |
$ |
( |
) |
$ |
|||||||||
December 31, 2019 |
Gross Carrying
Amount
|
Accumulated
Amortization
|
Net Book
Value
|
Weighted Average
Amortization Periods (years)
|
||||||||||
Technology |
$ |
$ |
( |
) |
$ |
|||||||||
Trademarks—indefinite-lived |
— |
Indefinite |
||||||||||||
Trademarks—definite-lived |
( |
) |
||||||||||||
Customer relationships |
( |
) |
||||||||||||
Other |
( |
) |
||||||||||||
Total |
$ |
$ |
( |
) |
$ |
|||||||||
11
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)
The estimated amortization expense related to the fair value of acquired intangible assets for the remainder of 2020 and each of the succeeding five years is:
Remainder of 2020 |
$ |
|||
2021 |
||||
2022 |
||||
2023 |
||||
2024 |
||||
2025 |
||||
(4) RESTRUCTURING
In accordance with the applicable guidance for ASC 712, Nonretirement Postemployment Benefits, we accounted for termination benefits and recognized liabilities when the loss was considered probable that employees were entitled to benefits and the amounts could be reasonably estimated.
We have incurred costs in connection with involuntary termination benefits associated with our corporate-related initiatives and cost-saving opportunities associated with our Axalta Way initiatives. During the three months ended March 31, 2020 and 2019, we incurred restructuring costs, net of changes to estimates, of $18.5 million and $1.3 million, respectively. These amounts are recorded within other operating charges in the condensed consolidated statements of operations. The remaining payments associated with these actions are expected to be completed within 12 to 24 months from the balance sheet date.
The following table summarizes the activities related to the restructuring reserves and expenses from December 31, 2019 to March 31, 2020:
2020 Activity |
||||
Balance at December 31, 2019 |
$ |
|||
Expenses, net of changes to estimates |
||||
Payments made |
( |
) |
||
Foreign currency translation |
( |
) |
||
Balance at March 31, 2020 |
$ |
|||
(5) COMMITMENTS AND CONTINGENCIES
Guarantees
We guarantee certain of our customers’ obligations to third parties, whereby any default by our customers on their obligations could force us to make payments to the applicable creditors. At March 31, 2020 and December 31, 2019, we had outstanding bank guarantees of $11.0 million and $11.6 million, respectively. Most of our bank guarantees expire between 2020 and 2026, while others do not have specified expiration dates. We monitor the obligations to evaluate whether we have a liability at the balance sheet date. At March 31, 2020, we recorded a liability related to our outstanding bank guarantees of $1.0 million. We did no t have any liabilities related to our outstanding bank guarantees recorded at December 31, 2019.
Other
We are subject to various pending lawsuits, legal proceedings and other claims in the ordinary course of business, including civil, regulatory and environmental matters. These litigation matters may involve third-party indemnification obligations and/or insurance covering all or part of any potential damage incurred by us. All of these matters are subject to many uncertainties and, accordingly, we cannot determine the ultimate outcome of the proceedings and other claims at this time. The potential effects, if any, on our condensed consolidated financial statements will be recorded in the period in which these matters are probable and estimable. We believe that any sum we may be required to pay in connection with proceedings or claims in excess of the amounts recorded would likely not have a material adverse effect upon our results of operations, financial condition or cash flows on a consolidated annual basis but, however, could have a material adverse impact in a particular quarterly reporting period.
12
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)
We are involved in environmental remediation and ongoing compliance activities at several sites. The timing and duration of remediation and ongoing compliance activities are determined on a site by site basis depending on local regulations. The amounts recorded represent our estimable future remediation costs and other anticipated environmental liabilities. We have not recorded liabilities at sites where a liability is probable, but that a range of loss is not reasonably estimable. We believe that any sum we may be required to pay in connection with environmental remediation matters in excess of the amounts recorded would likely occur over a period of time and would likely not have a material adverse effect upon our results of operations, financial condition or cash flows on a consolidated annual basis but, however, could have a material adverse impact in a particular quarterly reporting period.
(6) LONG-TERM EMPLOYEE BENEFITS
Components of Net Periodic Benefit Cost
The following table sets forth the components of net periodic benefit cost for the three months ended March 31, 2020 and 2019:
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Components of net periodic benefit cost: |
||||||||
Net periodic benefit cost: |
||||||||
Service cost |
$ |
$ |
||||||
Interest cost |
||||||||
Expected return on plan assets |
( |
) |
( |
) |
||||
Amortization of actuarial loss, net |
||||||||
Plan curtailments |
( |
) |
||||||
Net periodic benefit cost |
$ |
$ |
||||||
All non-service components of net periodic benefit cost are recorded in other expense (income), net within the accompanying condensed consolidated statements of operations.
(7) STOCK-BASED COMPENSATION
During the three months ended March 31, 2020 and 2019, we recognized expenses of $5.1 million and $6.7 million, respectively, for stock-based compensation, which was allocated between costs of goods sold and selling, general and administrative expenses on the condensed consolidated statements of operations. We recognized tax benefits of $0.2 million and $1.3 million for the three months ended March 31, 2020 and 2019, respectively.
2020 Activity
In February 2020, we granted restricted stock units and performance share units to certain employees and directors. All awards were granted under the Company's Amended and Restated 2014 Incentive Award Plan. During 2020, the Company withheld shares and used cash to settle the employee's tax portion of certain vestings in the amount of $1.4 million.
A summary of award activity by type for the three months ended March 31, 2020 is presented below.
Stock Options |
Awards
(in millions)
|
Weighted-
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
(in millions)
|
Weighted
Average
Remaining
Contractual
Life (years)
|
|||||||||
Outstanding at January 1, 2020 |
$ |
||||||||||||
Granted |
$ |
||||||||||||
Exercised (1)
|
$ |
||||||||||||
Forfeited (1)
|
$ |
||||||||||||
Outstanding at March 31, 2020 |
$ |
||||||||||||
Vested and expected to vest at March 31, 2020 |
$ |
$ |
|||||||||||
Exercisable at March 31, 2020 |
$ |
$ |
|||||||||||
(1) |
Activity during the three months ended March 31, 2020 rounds to zero. |
13
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)
Cash received by the Company upon exercise of options for the three months ended March 31, 2020 was $0.3 million. No excess tax benefits or shortfall expenses were recorded related to these exercises.
At March 31, 2020, there is $2.0 million of unrecognized expense relating to unvested stock options that is expected to be amortized over a weighted average period of 1.4 years.
Restricted Stock Awards and Restricted Stock Units |
Awards/Units
(millions)
|
Weighted-Average
Fair Value
|
|||||
Outstanding at January 1, 2020 |
$ |
||||||
Granted |
$ |
||||||
Vested |
( |
) |
$ |
||||
Forfeited (1)
|
$ |
||||||
Outstanding at March 31, 2020 |
$ |
||||||
(1) |
Activity during the three months ended March 31, 2020 rounds to zero. |
Tax shortfall expenses on the vesting of restricted stock and restricted stock units during the three months ended March 31, 2020 was $0.2 million.
At March 31, 2020, there is $20.6 million of unamortized expense relating to unvested restricted stock and restricted stock units that is expected to be amortized over a weighted average period of 1.6 years.
Performance Stock Awards and Performance Share Units |
Awards/Units
(millions)
|
Weighted-Average
Fair Value
|
|||||
Outstanding at January 1, 2020 |
$ |
||||||
Granted |
$ |
||||||
Vested |
( |
) |
$ |
||||
Forfeited |
( |
) |
$ |
||||
Outstanding at March 31, 2020 |
$ |
||||||
(8) OTHER EXPENSE (INCOME), NET
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Foreign exchange losses, net |
$ |
$ |
||||||
Debt extinguishment and refinancing related costs |
||||||||
Other miscellaneous income, net |
( |
) |
( |
) |
||||
Total |
$ |
$ |
( |
) |
||||
(9) INCOME TAXES
Our effective income tax rates for the three months ended March 31, 2020 and 2019 are as follows:
Three Months Ended March 31, |
||||||
2020 |
2019 |
|||||
Effective Tax Rate |
( |
)% |
% |
|||
The Company's effective tax rate for the periods reflected in the condensed consolidated financial statements are not directly comparable primarily due to the intra-entity asset transfers of certain of its intellectual property and the impacts of certain ongoing tax audits, which occurred during the three months ended March 31, 2020 and are discussed in further detail below.
14
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)
On January 1, 2020, we completed an intra-entity transfer of certain intellectual property rights (the “IP”) to our Swiss subsidiary, where our EMEA regional headquarters is located. The transfer of the IP did not result in a taxable gain; however, it did result in step-up of the Swiss tax-deductible basis in the transferred assets, and accordingly, created a temporary difference between the book basis and the tax basis of the IP, which was transferred at fair value. We applied significant judgment when determining the fair value of the IP, which serves as the tax basis of the deferred tax asset. Consequently, this transaction resulted in the recognition of a deferred tax asset at the applicable Swiss tax rate, resulting in a one-time tax benefit of $50.5 million during the three months ended March 31, 2020. The Company expects to be able to realize the deferred tax assets resulting from these intra-entity asset transfers.
In connection with the income tax audit in Germany for the tax period 2010-2013, the Germany Tax Authority (“GTA”) indicated that it believed that certain positions taken on the 2010-2013 corporate income tax returns were not in compliance with German tax law. While the Company disagrees with the conclusions of the GTA based on the technical merits of our positions, after extensive discussions with the GTA and to avoid a potentially long and costly litigation process, in March 2020 the Company expressed a willingness to settle with the GTA on certain matters and expects to reach a formal agreement in the coming months. As a result of these changes, the Company recorded a charge to income tax expense of $14.3 million during the three months ended March 31, 2020. The Company is also currently under audit in Germany for tax years 2014-2017 and is prepared to vigorously defend itself on these matters.
In April 2020, we became aware of a potential new interpretation of a non-U.S. tax law and its application to certain transactions that was not previously reasonably knowable by us. We are evaluating this new information and the effect, if any, on our tax positions. The potential impact, if any, on our financial statements is not yet estimable at this time, but would be adverse and could be material.
(10) NET INCOME PER COMMON SHARE
Basic earnings per common share excludes the dilutive impact of potentially dilutive securities and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per common share includes the effect of potential dilution from the hypothetical exercise of outstanding stock options and vesting of restricted shares and performance shares. A reconciliation of our basic and diluted earnings per common share is as follows:
Three Months Ended March 31, |
||||||||
(In millions, except per share data) |
2020 |
2019 |
||||||
Net income to common shareholders |
$ |
$ |
||||||
Basic weighted average shares outstanding |
||||||||
Diluted weighted average shares outstanding |
||||||||
Net income per common share: |
||||||||
Basic net income per share |
$ |
$ |
||||||
Diluted net income per share |
$ |
$ |
||||||
(11) ACCOUNTS AND NOTES RECEIVABLE, NET
Trade accounts receivable are stated at the amount we expect to collect. We maintain allowances for doubtful accounts for estimated losses by applying historical loss percentages, combined with reasonable and supportable forecasts of future losses, to respective aging categories. Management considers the following factors in developing its current estimate of expected credit losses: customer credit-worthiness, past transaction history with the customer, current economic industry trends, changes in market or regulatory matters, and changes in customer payment terms, including the impacts from COVID-19.
March 31, 2020 |
December 31, 2019 |
|||||||
Accounts receivable - trade, net (1)
|
$ |
$ |
||||||
Notes receivable |
||||||||
Other |
||||||||
Total |
$ |
$ |
||||||
(1) |
Allowance for doubtful accounts was $ |
15
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)
Bad debt expense of $3.4 million and $1.0 million was included within selling, general and administrative expenses for the three months ended March 31, 2020 and 2019, respectively.
(12) INVENTORIES
March 31, 2020 |
December 31, 2019 |
|||||||
Finished products |
$ |
$ |
||||||
Semi-finished products |
||||||||
Raw materials |
||||||||
Stores and supplies |
||||||||
Total |
$ |
$ |
||||||
(13) PROPERTY, PLANT AND EQUIPMENT, NET
March 31, 2020 |
December 31, 2019 |
|||||||
Property, plant and equipment |
$ |
$ |
||||||
Accumulated depreciation |
( |
) |
( |
) |
||||
Property, plant, and equipment, net |
$ |
$ |
||||||
Depreciation expense amounted to $41.6 million and $45.4 million for the three months ended March 31, 2020 and 2019, respectively.
(14) BORROWINGS
Borrowings are summarized as follows:
March 31, 2020 |
December 31, 2019 |
|||||||
2024 Dollar Term Loans |
$ |
$ |
||||||
2024 Dollar Senior Notes |
||||||||
2024 Euro Senior Notes |
||||||||
2025 Euro Senior Notes |
||||||||
Short-term and other borrowings |
||||||||
Unamortized original issue discount |
( |
) |
( |
) |
||||
Unamortized deferred financing costs |
( |
) |
( |
) |
||||
Total borrowings |
||||||||
Less: |
||||||||
Short-term borrowings |
||||||||
Current portion of long-term borrowings |
||||||||
Long-term debt |
$ |
|||||||