10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 2, 2023
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, 2023
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 | ||||||||||||||
(State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification No.) |
(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) |
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 registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the 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 check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 25, 2023, there were 221,532,692 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, | ||||||||||||||
2023 | 2022 | |||||||||||||
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, net | ||||||||||||||
Income before income taxes | ||||||||||||||
Provision for income taxes | ||||||||||||||
Net income | ||||||||||||||
Less: Net income (loss) 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 Income (Unaudited)
(In millions)
Three Months Ended March 31, | ||||||||||||||
2023 | 2022 | |||||||||||||
Net income | $ | $ | ||||||||||||
Other comprehensive income, before tax: | ||||||||||||||
Foreign currency translation adjustments | ( |
|||||||||||||
Unrealized (loss) gain on derivatives | ( |
|||||||||||||
Unrealized gain on pension and other benefit plan obligations | ||||||||||||||
Other comprehensive income, before tax | ||||||||||||||
Income tax (benefit) provision related to items of other comprehensive income | ( |
|||||||||||||
Other comprehensive income, net of tax | ||||||||||||||
Comprehensive income | ||||||||||||||
Less: Comprehensive loss attributable to noncontrolling interests | ( |
( |
||||||||||||
Comprehensive 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, 2023 | December 31, 2022 | |||||||||||||
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 contingent liabilities (Note 5) | ||||||||||||||
Shareholders’ equity: | ||||||||||||||
Common shares, $ |
||||||||||||||
Capital in excess of par | ||||||||||||||
Retained earnings | ||||||||||||||
Treasury shares, at cost, |
( |
( |
||||||||||||
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, 2022 | $ | $ | $ | $ | ( |
$ | ( |
$ | $ | ||||||||||||||||||||||||||||||||||||||
Comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Net realized and unrealized gain on derivatives, net of tax of $ |
— | — | — | — | — | ( |
— | ( |
|||||||||||||||||||||||||||||||||||||||
Long-term employee benefit plans, net of tax of $ |
— | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Foreign currency translation, net of tax benefit of $ |
— | — | — | — | — | ( |
|||||||||||||||||||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | ( |
||||||||||||||||||||||||||||||||||||||||||
Recognition of stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Shares issued under compensation plans | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2023 | $ | $ | $ | $ | ( |
$ | ( |
$ | $ | ||||||||||||||||||||||||||||||||||||||
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, 2021 | $ | $ | $ | $ | ( |
$ | ( |
$ | $ | ||||||||||||||||||||||||||||||||||||||
Comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | ( |
|||||||||||||||||||||||||||||||||||||||||
Net realized and unrealized gain on derivatives, net of tax of $ |
— | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Long-term employee benefit plans, net of tax of $ |
— | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Foreign currency translation, net of tax of $ |
— | — | — | — | — | ( |
( |
||||||||||||||||||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | ( |
||||||||||||||||||||||||||||||||||||||||||
Recognition of stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Shares issued under compensation plans | ( |
— | — | — | — | ( |
|||||||||||||||||||||||||||||||||||||||||
Changes in ownership of noncontrolling interests | — | — | ( |
— | — | — | ( |
||||||||||||||||||||||||||||||||||||||||
Common stock purchases | ( |
— | — | — | ( |
— | — | ( |
|||||||||||||||||||||||||||||||||||||||
Dividends declared to noncontrolling interests | — | — | — | — | — | — | ( |
( |
|||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2022 | $ | $ | $ | $ | ( |
$ | ( |
$ | $ | ||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
AXALTA COATING SYSTEMS LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
Three Months Ended March 31, | ||||||||||||||
2023 | 2022 | |||||||||||||
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 | ||||||||||||||
Divestiture 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: | ||||||||||||||
Purchase of property, plant and equipment | ( |
( |
||||||||||||
Interest proceeds on swaps designated as net investment hedges | ||||||||||||||
Settlement proceeds on swaps designated as net investment hedges | ||||||||||||||
Other investing activities, net | ||||||||||||||
Cash used for investing activities | ( |
( |
||||||||||||
Financing activities: | ||||||||||||||
Proceeds from short-term borrowings | ||||||||||||||
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 | ( |
|||||||||||||
Deferred acquisition-related consideration | ( |
|||||||||||||
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 at end of period | $ | $ |
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)
Index
Note | Page | |||||||
8
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 and shareholders' equity 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, 2023, the results of operations, comprehensive income, changes in shareholders' equity and cash flows for the three months ended March 31, 2023 and 2022. 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, 2022. 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 ("GAAP").
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 entities 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, 2023 are not necessarily indicative of the results to be expected for the full year ended December 31, 2023 or any future period(s).
Summary of Significant Accounting Policies Updates
Recently Adopted Accounting Guidance
In January 2023, we adopted Accounting Standards Update ("ASU") 2022-04, Liabilities – Supplier Finance Programs, which codifies disclosure requirements for supplier financing programs. This ASU does not affect the recognition, measurement or financial statement presentation of obligations covered by supplier finance programs. Upon adoption of this ASU, we incorporated the required disclosures in Note 14. In addition to the disclosures included in Note 14, ASU 2022-04 requires a rollforward of activity for each supplier financing program beginning with reporting for the year ended December 31, 2024, at which time we will incorporate the required rollforward disclosure.
(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 condensed consolidated balance sheets. The contract asset balances at March 31, 2023 and December 31, 2022 were $42.3 million and $40.6 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. We do not receive a distinct service or good in return for these BIPs, but rather receive volume commitments and/or sole supplier status from our customers over the life of the contractual arrangements. The termination clauses in these contractual arrangements include standard clawback provisions that enable us to collect monetary damages in the event of a customer's failure to meet its commitments under the relevant contract. At March 31, 2023 and December 31, 2022, the total carrying value of BIPs were $150.9 million and $152.3 million, respectively, and are presented within other assets in the condensed consolidated balance sheets. For the three months ended March 31, 2023 and 2022, $16.0 million and $14.5 million, respectively, was amortized and reflected as reductions of net sales in the condensed consolidated statements of operations. The total carrying value of BIPs excludes other up-front incentives with repayment features made in conjunction with long-term customer commitments of $40.2 million and $42.1 million at March 31, 2023 and December 31, 2022, respectively, of which $5.2 million and $4.9 million is included in prepaid expenses and other current assets in the condensed consolidated balance sheets at March 31, 2023 and December 31, 2022, respectively, with the remainder included in other assets. These up-front incentives with repayment features are subject to the credit risk of our customers and, depending on the financial condition of our customers, it is possible that some or all of the amounts may become uncollectible.
See Note 17 for disaggregated net sales by end-market.
9
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)
(3) GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Goodwill
The following table shows changes in the carrying amount of goodwill from December 31, 2022 to March 31, 2023 by reportable segment:
Performance Coatings |
Mobility Coatings |
Total | ||||||||||||||||||
Balance at December 31, 2022 | $ | $ | $ | |||||||||||||||||
Purchase accounting adjustments | ( |
( |
||||||||||||||||||
Foreign currency translation | ||||||||||||||||||||
Balance at March 31, 2023 | $ | $ | $ |
Identifiable Intangible Assets
The following tables summarize the gross carrying amounts and accumulated amortization of identifiable intangible assets by major class:
March 31, 2023 | Gross Carrying Amount |
Accumulated Amortization |
Net Book Value |
Weighted average amortization periods (years) |
||||||||||||||||||||||
Technology | $ | $ | ( |
$ | ||||||||||||||||||||||
Trademarks—indefinite-lived | — | Indefinite | ||||||||||||||||||||||||
Trademarks—definite-lived | ( |
|||||||||||||||||||||||||
Customer relationships | ( |
|||||||||||||||||||||||||
Total | $ | $ | ( |
$ |
During the three months ended March 31, 2023, we retired fully amortized assets totaling $393.4 million consisting of technology, trademarks, and other intangible assets.
December 31, 2022 | 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 | $ | $ | ( |
$ |
The estimated amortization expense related to the fair value of acquired intangible assets for the remainder of 2023 and each of the succeeding five years is:
Remainder of 2023 | $ | |||||||
2024 | ||||||||
2025 | ||||||||
2026 | ||||||||
2027 | ||||||||
2028 |
(4) RESTRUCTURING
10
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)
During the three months ended March 31, 2023 and 2022, we incurred costs for termination benefits, net of changes in estimates, of $0.4 million and $2.4 million, respectively. The majority of our termination benefits are recorded within other operating charges in the condensed consolidated statements of operations. The remaining payments associated with these actions are expected to be substantially completed within 12 months.
The following table summarizes the activity related to the termination benefit reserves and expenses from December 31, 2022 to March 31, 2023:
2023 Activity | ||||||||
Balance at December 31, 2022 | $ | |||||||
Expenses, net of changes to estimates | ||||||||
Payments made | ( |
|||||||
Foreign currency translation | ||||||||
Balance at March 31, 2023 | $ |
(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 ("Customer Obligation Guarantees"). At March 31, 2023 and December 31, 2022, we had outstanding Customer Obligation Guarantees of $5.8 million and $7.1 million, respectively. Approximately one-fifth of our Customer Obligation Guarantees expire between 2023 and 2036, while the remainder do not have specified expiration dates. We monitor the Customer Obligation Guarantees to evaluate whether we have a liability at the balance sheet date. We did no t have any liabilities related to our outstanding Customer Obligation Guarantees recorded at either March 31, 2023 or December 31, 2022.
Operational Matter
In January 2021, we became aware of an operational matter affecting certain North America Mobility Coatings customer manufacturing sites. The matter involves the use and application of certain of our products in combination with and incorporated within third-party products. The matter occurred over a discrete period during the fourth quarter of 2020. We concluded that losses from this matter were probable and that a majority of losses would be covered under our insurance policies, subject to deductible and policy limits as defined in our policies.
For the three months ended March 31, 2022, we recorded expenses of $0.1 million within other operating charges in the condensed consolidated statements of operations. No expenses were recorded for the three months ended March 31, 2023. At each of March 31, 2023 and December 31, 2022, we had $38.7 million recorded for estimated insurance receivables within accounts and notes receivable, net in the condensed consolidated balance sheets. Liabilities of $40.5 million and $42.3 million are recorded as other accrued liabilities in the condensed consolidated balance sheets at March 31, 2023 and December 31, 2022, respectively. The recorded probable losses remain an estimate, and actual costs arising from this matter could be materially lower or higher depending on the actual costs incurred to repair the impacted products as well as the availability of additional insurance coverage.
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 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. Except as set forth in the "Operational Matter" section above, 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 could have a material adverse impact in a particular quarterly reporting period.
11
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)
(6) LONG-TERM EMPLOYEE BENEFITS
Components of Net Periodic Benefit Cost
The following table sets forth the pre-tax components of net periodic benefit costs for our defined benefit plans for the three months ended March 31, 2023 and 2022:
Three Months Ended March 31, | ||||||||||||||
2023 | 2022 | |||||||||||||
Components of net periodic benefit cost: |
||||||||||||||
Net periodic benefit cost: | ||||||||||||||
Service cost | $ | $ | ||||||||||||
Interest cost | ||||||||||||||
Expected return on plan assets | ( |
( |
||||||||||||
Amortization of actuarial losses, net | ||||||||||||||
Net periodic benefit cost | $ | $ |
All non-service components of net periodic benefit cost are recorded in other expense, net within the accompanying condensed consolidated statements of operations.
(7) STOCK-BASED COMPENSATION
During the three months ended March 31, 2023 and 2022, we recognized $6.3 million and $5.3 million, respectively, in stock-based compensation expense, which was allocated between costs of goods sold and selling, general and administrative expenses in the condensed consolidated statements of operations. We recognized tax benefits on stock-based compensation of $0.9 million and $0.6 million for the three months ended March 31, 2023 and 2022, respectively.
2023 Activity
A summary of stock option award activity as of and for the three months ended March 31, 2023 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, 2023 | $ | |||||||||||||||||||||||||
Granted | $ | |||||||||||||||||||||||||
Exercised | ( |
$ | ||||||||||||||||||||||||
Forfeited / Expired | ( |
$ | ||||||||||||||||||||||||
Outstanding at March 31, 2023 | $ | |||||||||||||||||||||||||
Vested and expected to vest at March 31, 2023 | $ | $ | ||||||||||||||||||||||||
Exercisable at March 31, 2023 | $ | $ |
Cash received by the Company upon exercise of options for the three months ended March 31, 2023 was $8.1 million. No excess tax benefits or shortfall expenses were recorded related to these exercises.
At March 31, 2023, there was no unrecognized expense relating to unvested stock options.
12
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)
Restricted Stock Units | Units (in millions) |
Weighted Average Fair Value |
||||||||||||
Outstanding at January 1, 2023 | $ | |||||||||||||
Granted | $ | |||||||||||||
Vested | ( |
$ | ||||||||||||
Forfeited (1)
|
$ | |||||||||||||
Outstanding at March 31, 2023 | $ |
(1) Activity during the three months ended March 31, 2023 rounds to zero.
Tax windfall benefits on the vesting of restricted stock units during the three months ended March 31, 2023 were $0.1 million.
At March 31, 2023, there was $30.0 million of unamortized expense relating to unvested restricted stock units that is expected to be amortized over a weighted average period of 1.6 years.
Performance Share Units | Units (millions) |
Weighted Average Fair Value |
||||||||||||
Outstanding at January 1, 2023 | $ | |||||||||||||
Granted | $ | |||||||||||||
Vested | $ | |||||||||||||
Forfeited | ( |
$ | ||||||||||||
Outstanding at March 31, 2023 | $ |
Our performance share units allow for participants to vest in more or fewer than the targeted number of shares granted. At March 31, 2023, there is $15.9 million of unamortized expense relating to unvested performance share units that is expected to be amortized over a weighted average period of 2.8 years. The forfeitures include portions of performance share unit grants that were determined to not have vested during the period as a result of not meeting established financial performance thresholds.
(8) OTHER EXPENSE, NET
Three Months Ended March 31, | ||||||||||||||
2023 | 2022 | |||||||||||||
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, 2023 and 2022 are as follows:
Three Months Ended March 31, | ||||||||||||||
2023 | 2022 | |||||||||||||
Effective Tax Rate | % | % |
The lower effective tax rate for the three months ended March 31, 2023 was primarily due to the favorable impact of changes in unrecognized tax benefits in 2023.
The effective tax rate for the three months ended March 31, 2023 differs from the U.S. Federal statutory rate due to various items that impacted the effective rate both favorably and unfavorably. We recorded the favorable adjustments for earnings in jurisdictions where the statutory rate is lower than the U.S. Federal statutory rate and a decrease in unrecognized tax benefits. These adjustments were primarily offset by the unfavorable impacts for the changes in valuation allowance.
13
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)
(10) NET INCOME PER COMMON SHARE
Basic net income 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 net income per common share includes the effect of potential dilution from the hypothetical exercise of outstanding stock options and vesting of restricted stock units and performance share units. A reconciliation of our basic and diluted net income per common share is as follows:
Three Months Ended March 31, | ||||||||||||||
(In millions, except per share data) | 2023 | 2022 | ||||||||||||
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 | $ | $ |
The number of anti-dilutive shares that have been excluded in the computation of diluted net income per share for the three months ended March 31, 2023 and 2022 were 0.8 million and 1.0 million, respectively.
(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, changes in geopolitical matters, and changes in customer payment terms, as well as other macroeconomic factors.
March 31, 2023 | December 31, 2022 | |||||||||||||
Accounts receivable - trade, net (1)
|
$ | $ | ||||||||||||
Notes receivable | ||||||||||||||
Other (2)
|
||||||||||||||
Total | $ | $ |
(1) Allowance for doubtful accounts was $24.0 million and $22.6 million at March 31, 2023 and December 31, 2022, respectively.
(2) Includes $38.7 million at each of March 31, 2023 and December 31, 2022 of insurance recoveries related to an operational matter discussed further in Note 5.
Bad debt expense of $4.1 million and $(0.5 ) million was included within selling, general and administrative expenses for the three months ended March 31, 2023 and 2022, respectively, and benefits of $1.3 million and expense of $4.1 million related to sanctions imposed on Russia in response to the conflict with Ukraine was included in other operating charges for the three months ended March 31, 2023 and 2022, respectively.
(12) INVENTORIES
March 31, 2023 | December 31, 2022 | |||||||||||||
Finished products | $ | $ | ||||||||||||
Semi-finished products | ||||||||||||||
Raw materials | ||||||||||||||
Stores and supplies | ||||||||||||||
Total | $ | $ |
Inventory reserves were $19.2 million and $16.6 million at March 31, 2023 and December 31, 2022, respectively.
14
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)
(13) PROPERTY, PLANT AND EQUIPMENT, NET
March 31, 2023 | December 31, 2022 | |||||||||||||
Property, plant and equipment | $ | $ | ||||||||||||
Accumulated depreciation | ( |
( |
||||||||||||
Property, plant, and equipment, net | $ | $ |
Depreciation expense amounted to $29.0 million and $30.1 million for the three months ended March 31, 2023 and 2022, respectively.
(14) SUPPLIER FINANCE PROGRAMS
We have a supplier financing program in China which is utilized to finance the purchases of goods and services from our suppliers through local banking institutions. The payment terms under the program vary, but the program has a weighted average maturity date that is approximately 90 days from each respective financing inception. These financing arrangements are included in the current portion of borrowings within the condensed consolidated balance sheets and at the time of issuance each transaction is treated as a non-cash financing activity within the condensed consolidated statements of cash flows. Upon settlement of the financing, the cash outflow is classified as a financing activity within the condensed consolidated statements of cash flows. Amounts outstanding under this program were $10.1 million and $21.2 million at March 31, 2023 and 2022, respectively, including $2.3 million and $4.2 million, respectively, related to purchases of property, plant and equipment. Cash outflows under this program were $13.6 million and $24.1 million for the three months ended March 31, 2023 and 2022, respectively.
We maintain a voluntary supply chain financing ("SCF") program with a global financial institution that allows a select group of suppliers to sell their receivables to the participating financial institution at the discretion of both parties on terms that are negotiated between the supplier and the financial institution. The supplier invoices that have been confirmed as valid under the program are paid by us to the financial institution according to the terms we have with the supplier. Amounts outstanding under the SCF program were $28.7 million and $29.8 million at March 31, 2023 and December 31, 2022, respectively.
We also participate in a virtual card program with a global financial institution, in which we pay supplier invoices on the due date using a Virtual Card Account ("VCA") and subsequently pay the balance in full 25 days after the billing statement date of the VCA. The program allows for suppliers to receive accelerated payment for a fee at each supplier's discretion. Fees paid by our suppliers are negotiated directly with the financial institution without our involvement. Amounts outstanding under the VCA program were $8.1 million and $6.8 million at March 31, 2023 and December 31, 2022, respectively.
The payment terms we have with our suppliers who participate in the SCF and VCA programs are consistent with the typical terms we have with our suppliers who do not participate. These financing arrangements are included in accounts payable within the condensed consolidated balance sheets and the associated payments are included in operating activities within the condensed consolidated statements of cash flows.
(15) BORROWINGS
Borrowings are summarized as follows:
March 31, 2023 | December 31, 2022 | |||||||||||||
2029 Dollar Term Loans | $ | $ | ||||||||||||
2025 Euro Senior Notes | ||||||||||||||
2027 Dollar Senior Notes | ||||||||||||||
2029 Dollar Senior Notes | ||||||||||||||
Short-term and other borrowings | ||||||||||||||
Unamortized original issue discount | ( |
( |
||||||||||||
Unamortized deferred financing costs | ( |
( |
||||||||||||
Total borrowings, net | ||||||||||||||
Less: | ||||||||||||||
Short-term borrowings | ||||||||||||||
Current portion of long-term borrowings | ||||||||||||||
Long-term debt | $ | $ |
15
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)
Our senior secured credit facilities (the "Senior Secured Credit Facilities") consist of a term loan due 2029 (the "2029 Dollar Term Loans"), formerly a term loan due 2024 (the "2024 Dollar Term Loans"), and a revolving credit facility (the "Revolving Credit Facility") that is governed by a credit agreement (the "Credit Agreement").
Revolving Credit Facility
At March 31, 2023 and December 31, 2022, letters of credit issued under the Revolving Credit Facility totaled $20.4 million and $20.7 million, respectively, which reduced the availability under the Revolving Credit Facility. Availability under the Revolving Credit Facility was $529.6 million and $529.3 million at March 31, 2023 and December 31, 2022, respectively.
Significant Transactions
During March 2023, we voluntarily prepaid $75.0 million of the outstanding principal amount of the 2029 Dollar Term Loans. As a result of the prepayment, we recorded a loss on extinguishment of debt of $1.2 million, which comprised the proportionate write off of unamortized deferred financing costs and original issue discounts. During April 2023, we voluntarily prepaid an additional $25.0 million of outstanding principal amount of the 2029 Dollar Term Loans.
Future repayments
Below is a schedule of required future repayments of all borrowings outstanding at March 31, 2023.
Remainder of 2023 | $ | |||||||
2024 | ||||||||
2025 | ||||||||
2026 | ||||||||
2027 | ||||||||
Thereafter | ||||||||
Total borrowings | ||||||||
Unamortized original issue discount | ( |
|||||||
Unamortized deferred financing costs | ( |
|||||||
Total borrowings, net | $ |
(16) FINANCIAL INSTRUMENTS, HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENTS
Fair value of financial instruments
Equity securities with readily determinable fair values - Balances of equity securities are recorded within other assets, with any changes in fair value recorded within other expense, net. The fair values of equity securities are based upon quoted market prices, which are considered Level 1 inputs.
Long-term borrowings - The estimated fair values of these borrowings are based on recent trades, as reported by a third-party pricing service. Due to the infrequency of trades, these inputs are considered to be Level 2 inputs.
Derivative instruments - The Company’s interest rate swaps, cross-currency swaps and foreign currency forward contracts are valued using broker quotations, or market transactions in either the listed or over-the-counter markets. As such, these derivative instruments are included in the Level 2 hierarchy.
Fair value of contingent consideration
During April 2021, in conjunction with an acquisition in China, we recorded the fair value of contingent consideration of $7.3 million. The contingent consideration was valued using a probability-weighted expected payment method that considered the timing of expected future cash flows and the probability of whether key elements of the contingent event are completed. The fair value of contingent consideration is valued at each balance sheet date, until amounts become payable, with adjustments recorded within other expense, net in the condensed consolidated statements of operations. Due to the significant unobservable inputs used in the valuations, these liabilities were categorized within Level 3 of the fair value hierarchy. During the three months ended March 31, 2023, the contingent consideration was settled for $6.9 million.
16
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)
The table below presents the fair values of our financial instruments measured on a recurring basis by level within the fair value hierarchy at March 31, 2023 and December 31, 2022.
March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||||||||||||||