Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

August 4, 2015


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
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 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 whether the Company is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ¨ Non-accelerated filer ý Accelerated filer ¨ Small reporting company ¨

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 July 31, 2015, there were 236,337,999 shares of the registrant’s common shares outstanding.

 
 
 
 
 


Table of Contents

Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

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 June 30,
Six Months Ended June 30,
 
2015
2014
2015
2014
Net sales
$
1,094.1

$
1,126.6

$
2,083.3

$
2,174.0

Other revenue
7.0

7.7

15.3

14.7

Total revenue
1,101.1

1,134.3

2,098.6

2,188.7

Cost of goods sold
679.7

742.5

1,329.5

1,446.0

Selling, general and administrative expenses
245.5

250.6

458.5

497.3

Research and development expenses
12.8

12.1

25.7

23.4

Amortization of acquired intangibles
20.1

21.3

40.1

42.4

Income from operations
143.0

107.8

244.8

179.6

Interest expense, net
49.2

54.9

99.2

113.9

Other (income) expense, net
88.6

(1.6
)
92.5

2.9

Income before income taxes
5.2

54.5

53.1

62.8

Provision (benefit) for income taxes
29.5

(1.3
)
30.7

10.7

Net income (loss)
(24.3
)
55.8

22.4

52.1

Less: Net income attributable to noncontrolling interests
0.8

2.0

2.4

2.6

Net income (loss) attributable to controlling interests
$
(25.1
)
$
53.8

$
20.0

$
49.5

Basic net income (loss) per share
$
(0.11
)
$
0.23

$
0.09

$
0.22

Diluted net income (loss) per share
$
(0.11
)
$
0.23

$
0.08

$
0.22

Basic weighted average shares outstanding
232.3

229.1

231.1

229.1

Diluted weighted average shares outstanding
232.3

229.3

238.1

229.1


The accompanying notes are an integral part of these financial statements.


3

Table of Contents

AXALTA COATING SYSTEMS LTD.
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(In millions)
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2015
2014
2015
2014
Net income (loss)
$
(24.3
)
$
55.8

$
22.4

$
52.1

Other comprehensive income (loss), before tax:
 
 
 
 
Foreign currency translation adjustments
27.3

(3.5
)
(82.3
)
(11.0
)
Unrealized gain (loss) on securities
(0.1
)
1.0

0.4

0.8

Unrealized gain (loss) on derivatives
0.3

(5.5
)
(4.5
)
(5.0
)
Unrealized gain (loss) on pension and other benefit plan obligations
(2.8
)
(0.7
)
(4.0
)
4.8

Other comprehensive income (loss), before tax
24.7

(8.7
)
(90.4
)
(10.4
)
Income tax benefit related to items of other comprehensive income
0.8

2.3

3.4

1.0

Other comprehensive income (loss), net of tax
25.5

(6.4
)
(87.0
)
(9.4
)
Comprehensive income (loss)
1.2

49.4

(64.6
)
42.7

Less: Comprehensive income attributable to noncontrolling interests
1.0

2.0

2.2

1.5

Comprehensive income (loss) attributable to controlling interests
$
0.2

$
47.4

$
(66.8
)
$
41.2


The accompanying notes are an integral part of these financial statements.

4

Table of Contents

AXALTA COATING SYSTEMS LTD.
Condensed Consolidated Balance Sheets (Unaudited)
(In millions, except per share data)
 
June 30, 2015
December 31, 2014
Assets
 
 
Current assets:
 
 
Cash and cash equivalents
$
307.8

$
382.1

Restricted cash
2.8

4.7

Accounts and notes receivable, net
869.5

820.4

Inventories
555.0

538.3

Prepaid expenses and other
78.0

62.9

Deferred income taxes
50.7

64.5

Total current assets
1,863.8

1,872.9

Property, plant and equipment, net
1,425.1

1,514.1

Goodwill
944.0

1,001.1

Identifiable intangibles, net
1,233.2

1,300.0

Other assets
464.7

482.6

Total assets
$
5,930.8

$
6,170.7

Liabilities, Shareholders’ Equity
 
 
Current liabilities:
 
 
Accounts payable
$
445.5

$
494.5

Current portion of borrowings
50.7

40.1

Deferred income taxes
6.3

7.3

Other accrued liabilities
334.6

404.8

Total current liabilities
837.1

946.7

Long-term borrowings
3,508.6

3,574.2

Accrued pensions and other long-term employee benefits
272.1

306.4

Deferred income taxes
179.4

208.2

Other liabilities
21.4

23.2

Total liabilities
4,818.6

5,058.7

Commitments and contingencies (Note 5)


Shareholders’ equity
 
 
Common shares, $1.00 par, 1,000.0 shares authorized, 235.6 and 229.8 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively
234.6

229.8

Capital in excess of par
1,204.5

1,144.7

Accumulated deficit
(206.5
)
(226.5
)
Accumulated other comprehensive loss
(190.1
)
(103.3
)
Total Axalta shareholders’ equity
1,042.5

1,044.7

Noncontrolling interests
69.7

67.3

Total shareholders’ equity
1,112.2

1,112.0

Total liabilities and shareholders’ equity
$
5,930.8

$
6,170.7


The accompanying notes are an integral part of these financial statements.

5

Table of Contents

AXALTA COATING SYSTEMS LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
 
Six Months Ended June 30,
 
2015
2014
Operating activities:
 
 
Net income
$
22.4

$
52.1

Adjustment to reconcile net income to cash provided by operating activities:
 
 
Depreciation and amortization
150.1

152.9

Amortization of financing costs and original issue discount
10.2

10.3

Debt modification costs

3.1

Deferred income taxes
(7.1
)
(14.1
)
Unrealized loss on derivatives
1.3

3.8

Realized and unrealized foreign exchange (gains)/losses, net
66.5

(19.2
)
Stock-based compensation
14.2

3.8

Asset impairment
30.6


Other non-cash, net
2.3

(7.5
)
Decrease (increase) in operating assets and liabilities:
 
 
Trade accounts and notes receivable
(124.9
)
(112.3
)
Inventories
(41.1
)
(24.3
)
Prepaid expenses and other assets
(46.0
)
(41.4
)
Accounts payable
(16.2
)
59.5

Other accrued liabilities
(42.0
)
(47.6
)
Other liabilities
(15.3
)
(5.4
)
Cash provided by operating activities
5.0

13.7

Investing activities:
 
 
Acquisition of controlling interest in investment affiliate (net of cash acquired)
(3.1
)

Purchase of property, plant and equipment
(56.6
)
(100.8
)
Restricted cash
1.9

(1.9
)
Proceeds from sale of affiliate
2.3


Investment in equity affiliate
(1.6
)

Other investing activities
0.2

(0.1
)
Cash used for investing activities
(56.9
)
(102.8
)
Financing activities:
 
 
Proceeds from short-term borrowings
3.1

16.7

Payments on short-term borrowings
(13.7
)
(17.2
)
Payments on long-term debt
(13.6
)
(7.1
)
Dividends paid to noncontrolling interests
(4.1
)
(1.6
)
Debt modification fees

(3.0
)
Proceeds from option exercises
45.2


Tax windfall due to option exercises
6.7


Other financing activities
(0.2
)

Cash provided by (used for) financing activities
23.4

(12.2
)
Decrease in cash and cash equivalents
(28.5
)
(101.3
)
Effect of exchange rate changes on cash
(45.8
)
(7.7
)
Cash and cash equivalents at beginning of period
382.1

459.3

Cash and cash equivalents at end of period
$
307.8

$
350.3

The accompanying notes are an integral part of these financial statements.

6

Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)



(1)     BASIS OF PRESENTATION OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 June 30, 2015 and December 31, 2014, the results of operations and comprehensive income (loss) for the three and six months ended June 30, 2015 and 2014, and their cash flows for the six months then ended. All intercompany balances and transactions have been eliminated. These interim unaudited condensed consolidated financial statements should be read in conjunction with the consolidated and combined financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. 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 accompanying financial statements include the interim unaudited condensed consolidated balance sheets of Axalta at June 30, 2015 and December 31, 2014, the related interim unaudited condensed consolidated statements of operations and statements of comprehensive income (loss) for the three and six months ended June 30, 2015 and 2014 and of cash flows for the six months ended June 30, 2015 and 2014. The interim unaudited condensed consolidated financial statements include the accounts of Axalta and its subsidiaries, and entities in which a controlling interest is maintained.
The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results to be expected for a full year.
The acquisition ("Acquisition") by Axalta and certain of its indirect subsidiaries of all the capital stock, other equity interests and assets of certain entities which, together with their subsidiaries, comprised the assets and legal entities, which together with their subsidiaries, comprised the DuPont Performance Coatings business ("DPC"), which was formerly owned by E. I. du Pont de Nemours and Company ("DuPont"), closed on February 1, 2013.
On November 11, 2014, we priced our initial public offering (the "Offering", or the "IPO"), in which certain selling shareholders affiliated with Carlyle sold 57,500,000 common shares at a price of $19.50 per share. We received no proceeds from the Offering.
On April 8, 2015, we completed a secondary offering (the "Secondary Offering") in which Carlyle sold an aggregate of 40,000,000 common shares at a price of $28.00 per share. The underwriters also exercised their over-allotment option and purchased an additional 6,000,000 common shares. We did not receive any proceeds from the sale of common shares in the Secondary Offering.
On April 8, 2015, Carlyle also sold 20,000,000 common shares in a private placement to an affiliate of Berkshire Hathaway Inc. for $28.00 per share. We did not receive any proceeds from the sale of common shares in the private placement.
Certain of our joint ventures are accounted for on a one-month lag basis, the effect of which is not material.
Reclassification and revisions
During 2014, the Company identified errors in the determination of the effective interest rate amortization for the Deferred Financing Costs and Original Issue Discounts that were incurred in 2013. The correction of these items impacted the interim unaudited condensed consolidated statements of operations and statements of comprehensive income (loss) for the three and six months ended June 30, 2014. Refer to Note 15 for further details.

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Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)


(2)    RECENT ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-03, "Simplifying the Presentation of Debt Issuance Costs", which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, and should be applied on a retrospective basis. Further clarifying this standard, as discussed at the June 18, 2015 Emerging Issues Task Force ("EITF") meeting, the Securities and Exchange Commission ("SEC") stated that the SEC staff would not object to an entity deferring and presenting costs related to revolving debt arrangements as an asset. We elected to early adopt this standard during the current period, resulting in impacts to the balance sheets at June 30, 2015 and December 31, 2014 of decreases to total assets and total liabilities of $75.0 million and $82.1 million, respectively.
Accounting Guidance Issued But Not Yet Adopted
In February 2015, the FASB issued ASU 2015-02 (Accounting Standard Codification 810), "Consolidation", which sets forth guidance on accounting for consolidation of certain legal entities. This ASU is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Although early adoption is permitted, we are still in the process of assessing the impact the adoption of this ASU will have on our financial position, results of operations and cash flows.
In May 2014, the FASB issued ASU 2014-09 (Accounting Standard Codification 606), "Revenue from Contracts with Customers", which sets forth the guidance that an entity should use related to revenue recognition. This ASU was originally effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is not permitted. In July 2015 the FASB delayed the effective date of the new revenue accounting standard to fiscal years beginning after December 15, 2017. Companies will be allowed to early adopt the guidance as of the original effective date. We are in the process of assessing the impact the adoption of this ASU will have on our financial position, results of operations and cash flows.
(3)    GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Goodwill
The following table shows changes in the carrying amount of goodwill from December 31, 2014 to June 30, 2015 by reportable segment:
 
Performance
Coatings
Transportation
Coatings
Total
December 31, 2014
$
933.6

$
67.5

$
1,001.1

Goodwill from acquisition
12.5


12.5

Foreign currency translation
(64.8
)
(4.8
)
(69.6
)
June 30, 2015
$
881.3

$
62.7

$
944.0

In March 2015, we purchased an additional 25% interest in a previously held equity method investment. See Note 9 for additional information.

8

Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)


Identifiable Intangible Assets
The following table summarizes the gross carrying amounts and accumulated amortization of identifiable intangible assets by major class:
June 30, 2015
Gross Carrying
Amount
Accumulated
Amortization
Net Book
Value
Weighted average
amortization periods (years)
Technology
$
411.7

$
(96.8
)
$
314.9

10.0
Trademarks - indefinite-lived
284.4


284.4

Indefinite
Trademarks - definite-lived
41.9

(6.8
)
35.1

14.8
Customer relationships
684.1

(86.2
)
597.9

19.4
Non-compete agreements
1.9

(1.0
)
0.9

4.6
Total
$
1,424.0

$
(190.8
)
$
1,233.2

 
December 31, 2014
Gross Carrying
Amount
Accumulated
Amortization
Net Book
Value
Weighted average
amortization periods (years)
Technology
$
411.8

$
(76.3
)
$
335.5

10.0
Trademarks—indefinite-lived
284.4


284.4

 Indefinite
Trademarks—definite-lived
41.8

(5.5
)
36.3

14.8
Customer relationships
713.9

(71.3
)
642.6

19.4
Non-compete agreements
2.0

(0.8
)
1.2

4.6
Total
$
1,453.9

$
(153.9
)
$
1,300.0

 
For the three and six months ended June 30, 2015, amortization expense for acquired intangibles was $20.1 million and $40.1 million, respectively. For the three and six months ended June 30, 2014, amortization expense for acquired intangibles was $21.3 million and $42.4 million, respectively.
The estimated amortization expense related to the fair value of acquired intangible assets for the remainder of 2015 and each of the succeeding four years is:
Remainder of 2015
$
40.0

2016
$
79.9

2017
$
79.6

2018
$
79.6

2019
$
79.6

(4)    RESTRUCTURING
In accordance with the applicable guidance for 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 associated with involuntary termination benefits associated with our corporate-related initiatives, including our transition to a standalone entity and cost-saving opportunities associated with our Fit For Growth and Axalta Way initiatives. During the three and six months ended June 30, 2015, we incurred restructuring costs of $14.5 million and $16.7 million, respectively. During the three and six months ended June 30, 2014, we incurred restructuring costs of $1.3 million and $1.4 million, respectively. These amounts are recorded within selling, general and administrative expenses in the statements of operations. The payments associated with these actions are expected to be completed within 12 to 18 months from the balance sheet date.

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Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)


The following table summarizes the activities related to the restructuring reserves and expenses from December 31, 2014 to June 30, 2015:
Restructuring Rollforward
2015 Activity
Balance at December 31, 2014
$
48.5

Expense Recorded
16.7

Payments Made
(22.5
)
Foreign Currency Changes
(4.1
)
Balance at June 30, 2015
$
38.6

(5)
COMMITMENTS AND CONTINGENCIES
Guarantees
We directly guarantee certain obligations under agreements with third parties. At June 30, 2015 and December 31, 2014, we directly guaranteed $2.2 million of such obligations. These guarantees represent the maximum potential amount of future (undiscounted) payments that we could be required to make under the guarantees in the event of default by the guaranteed parties. No amounts were accrued at June 30, 2015 and December 31, 2014.
Other
We are subject to various pending lawsuits and other claims including civil, regulatory, and environmental matters. Certain of these lawsuits and other claims may have an impact on us. These litigation matters may involve indemnification obligations by third parties and/or insurance coverage covering all or part of any potential damage awards against DuPont and/or us. All of the above matters are subject to many uncertainties and, accordingly, we cannot determine the ultimate outcome of the lawsuits at this time.
The potential effects, if any, on the unaudited condensed consolidated financial statements of Axalta will be recorded in the period in which these matters are probable and estimable, and such effects could be material.
In addition to the aforementioned matters, we are party to various legal proceedings in the ordinary course of business. Although the ultimate resolution of these various proceedings cannot be determined at this time, management does not believe that such proceedings, individually or in the aggregate, will have a material adverse effect on the unaudited condensed consolidated financial statements of Axalta.
(6)    LONG-TERM EMPLOYEE BENEFITS
Components of Net Periodic Benefit Cost
The following table sets forth the components of net periodic benefit (gain) cost for the three and six months ended June 30, 2015 and 2014:
 
Pension Benefits
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2015
2014
2015
2014
Components of net periodic benefit cost:
 
 
 
 
Net periodic benefit cost:
 
 
 
 
Service cost
$
3.3

$
3.8

$
6.4

$
8.4

Interest cost
4.6

6.0

9.2

12.0

Expected return on plan assets
(3.6
)
(3.7
)
(7.3
)
(7.4
)
Amortization of actuarial (gain) loss, net
0.2

(0.1
)
0.5

(0.2
)
Amortization of prior service credit, net


(0.1
)

Net periodic benefit cost
$
4.5

$
6.0

$
8.7

$
12.8


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Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)


 
 
Other Long-Term Employee Benefits
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2015
2014
2015
2014
Components of net periodic benefit (gain) cost:
 
 
 
 
Net periodic benefit (gain) cost:
 
 
 
 
Service cost
$

$
0.1

$

$
0.1

Interest cost



0.1

Amortization of prior service credit
(1.0
)

(1.9
)

Net periodic benefit (gain) cost
$
(1.0
)
$
0.1

$
(1.9
)
$
0.2

Significant Events
During the six months ended June 30, 2014, we amended one of our Non-U.S. defined benefit pension plans. The amendment effectively eliminated the accrual of future benefits for all participants as of June 30, 2014, resulting in a curtailment gain of $5.6 million. As the plan had unrealized losses in excess of the reduction of the projected benefit obligation at the date of amendment, the gain was recorded as a reduction of the projected benefit obligation and a corresponding reduction of unrealized losses within accumulated other comprehensive loss.
(7)    STOCK-BASED COMPENSATION
During the three and six months ended June 30, 2015, we recognized $12.4 million and $14.2 million, respectively, in stock-based compensation expense which was allocated to costs of goods sold, selling, general and administrative expenses and research and development expenses. We recognized a tax benefit of $3.3 million and $3.8 million for the three and six months ended June 30, 2015, respectively.
During the three and six months ended June 30, 2014, we recognized $2.0 million and $3.8 million, respectively, in stock-based compensation expense which was allocated to cost of goods sold, selling, general and administrative expenses, and research and development expenses. We recognized a tax benefit of $0.7 million and $1.3 million for the three and six months ended June 30, 2014, respectively.
Included in the $12.4 million of stock compensation expense recorded during the three months ended June 30, 2015 was $8.2 million of stock-based compensation expense attributable to the accelerated vesting of all issued and outstanding stock options issued under the Axalta Coating Systems Bermuda Co., Ltd. 2013 Equity Incentive Plan (the "2013 Plan") as a result of a change in control (the "Change in Control") in April 2015 when Carlyle's interest in Axalta decreased below 50%, which triggered a liquidity event as defined in the 2013 Plan.
Description of Equity Incentive Plans
In 2013, Axalta’s Board of Directors approved the 2013 Plan which reserved an aggregate of 19,839,143 common shares of the Company for issuance to employees, directors and consultants. The 2013 Plan provided for the issuance of stock options, restricted stock or other stock-based awards. No further awards may be granted pursuant to the 2013 Plan.
In 2014, Axalta's Board of Directors approved the Axalta Coating Systems Ltd. 2014 Incentive Award Plan (the "2014 Plan") which reserved an aggregate 11,830,000 common shares of the Company for issuance to employees, directors and consultants. The 2014 Plan provides for the issuance of stock options, restricted stock and other stock-based awards. All awards granted pursuant to the 2014 Plan must be authorized by the Board of Directors of Axalta or a designated committee thereof. Our Board of Directors has generally delegated responsibility for administering the 2014 Plan to our Compensation Committee. Since the adoption of the 2014 Plan, no new awards may be made under the 2013 Plan.
The terms of the awards may vary with each grant and are determined by the Compensation Committee within the guidelines of the 2013 and 2014 Plans. Options granted under the 2013 Plan in 2013 and 2014 were assigned a 4.4 to 5 year vesting period; however, vesting was accelerated as a result of the Change in Control. In 2013, we granted approximately 16.3 million non-qualified, service-based stock options to certain employees and directors under the 2013 Plan, with strike prices of $5.92, $8.88 and $11.84 per share. During 2014, we granted approximately 1.6 million non-qualified, service-based stock options to certain employees and directors under the 2013 Plan with strike prices of $5.92, $7.21, $8.88 and $11.84 per share.

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Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)


In 2015, we granted 1.2 million non-qualified, service-based stock options to certain employees and directors under the 2014 Plan with strike prices between $25.49 and $34.80 per share. Options granted vest ratably over three years and have a life of no more than ten years. We also granted 1.0 million shares of restricted stock awards and 0.7 million restricted stock units at fair values between $25.49 and $34.80.
Stock Options
The Black-Scholes option pricing model is used to estimate fair values of the options as of the date of the grant. The weighted average fair value of options granted in 2015, 2014 and 2013 was $8.24, $1.92 and $1.38 per share, respectively. Principal weighted average assumptions used in applying the Black-Scholes model were as follows:
 
2015 Grants
2014 Grants
2013 Grants
Expected Term
6.00 years

7.81 years

7.81 years

Volatility
22.24
%
28.28
%
28.61
%
Dividend Yield



Discount Rate
1.79
%
2.21
%
2.13
%
For the 2015 grants, the market value of the stock is the closing price of the stock on the date of grant. The market value of the stock for the 2014 grants was estimated using a contemporaneous valuation consistent with the American Institute of Certified Public Accountants Practice Aid, “Valuation of Privately Held Company Equity Securities Issued as Compensation”. For the 2013 grants, the market value of the stock was based upon the Acquisition transaction since our common shares were not publicly traded at the time of grant and there had been no significant changes in operations since the closing date of the transaction.
To estimate the expected stock option term for the $5.92 per share and $7.21 per share tranches of stock options referred to above, we used the simplified method as the options were granted at fair value and we, as a privately held company at the grant dates, had no exercise history. Based upon this simplified method, the $5.92 per share and $7.21 per share stock options had an expected term of 6.5 years. The strike price for the $8.88 per share and $11.84 per share tranches of options exceeded fair value at the grant date which required the use of an estimate of an implicitly longer holding period, resulting in the term of 8.25 years.
The expected term for the 2015 grants was also determined using the simplified method and resulted in an expected term of 6.0 years.
We do not anticipate paying cash dividends in the foreseeable future and, therefore, use an expected dividend yield of zero. Volatility for option grants is based upon our peer group due to the limited trading history of our common shares in public markets. The discount rate was derived from the U.S. Treasury yield curve.
The exercise price and market value per share amounts presented above were as of the date the stock options were granted.
A summary of stock option award activity as of and for the six months ended June 30, 2015, is presented below:
 
Awards/Units (millions)
Weighted-
Average
Exercise
Price
Aggregate
Intrinsic
Value
 (millions)
Weighted
Average
Remaining
Contractual
Life (years)
Outstanding at January 1, 2015
17.1

$
9.38

 
 
Granted
1.2

$
31.91

 
 
Exercised
(5.0
)
$
9.45

 
 
Forfeited

$

 
 
Outstanding at June 30, 2015
13.3

$
11.34

 
 
Vested and expected to vest at June 30, 2015
13.3

$
11.34

$
289.5

8.26
Exercisable at June 30, 2015
12.1

$
9.35

$
288.1

8.11
Cash received by the company upon exercise of options in 2015 was $45.2 million. The expected tax benefits related to these exercises during the three and six months ended June 30, 2015 are $39.1 million and $39.8 million, respectively. The Company may settle option exercises by issuing new shares, treasury shares or shares purchased on the open market.

12

Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)


Compensation cost is recorded net of forfeitures. The forfeiture rate assumption is the estimated annual rate at which unvested awards are expected to be forfeited during the vesting period. Periodically, management will assess whether it is necessary to adjust the estimated rate to reflect changes in actual forfeitures or changes in expectations. At June 30, 2015, the Company has estimated its annual forfeiture rate at 0% due to its limited history and expectations of forfeitures.
At June 30, 2015, there was $8.8 million of unrecognized compensation cost relating to outstanding unvested stock options expected to be recognized over the weighted average period of 2.9 years. Compensation expense is recognized for the fair values of the stock options over the requisite service period of the awards using the graded-vesting attribution method.
Restricted Stock Awards and Restricted Stock Units
During the six months ended June 30, 2015, we issued 1.7 million shares of restricted stock awards and restricted stock units with an average grant price of $32.33 per share. A portion of these awards vest ratably over three years. Other awards granted to certain members of management cliff vest over two and three year periods.
A summary of restricted stock and restricted stock unit award activity as of June 30, 2015 is presented below:
 
Awards
(millions)
Weighted-Average
Fair Value
Outstanding at January 1, 2015

$

Granted
1.7

$
32.33

Vested

$

Forfeited

$

Outstanding at June 30, 2015
1.7

$
32.33

Compensation cost is recorded net of forfeitures. The forfeiture rate assumption is the estimated annual rate at which unvested awards are expected to be forfeited during the vesting period. Periodically, management will assess whether it is necessary to adjust the estimated rate to reflect changes in actual forfeitures or changes in expectations. At June 30, 2015, the Company has estimated its annual forfeiture rate at 0% due to its limited history and expectations of forfeitures.
At June 30, 2015, there was $49.9 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 2.9 years. Compensation expense is recognized for the fair values of the awards over the requisite service period of the awards using the graded-vesting attribution method.
(8)    RELATED PARTY TRANSACTIONS
Carlyle Group L.P. and its affiliates ("Carlyle")
We entered into a consulting agreement with Carlyle Investment Management L.L.C. ("Carlyle Investment"), an affiliate of Carlyle, pursuant to which Carlyle Investment provides certain consulting services to Axalta. Under this agreement, subject to certain conditions, we were required to pay an annual consulting fee to Carlyle Investment of $3.0 million payable in equal quarterly installments and reimburse Carlyle Investment for out-pocket expenses incurred in providing the consulting services. During the three and six months ended June 30, 2014, we recorded expense of $0.8 million and $1.6 million, respectively, related to this consulting agreement. During the three and six months ended June 30, 2015, we recorded no expense as a result of the termination of the consulting agreement upon completion of the IPO in November 2014.
Service King Collision Repair
Service King Collision Repair, a portfolio company of Carlyle, has purchased products from our distributors in the past and may continue to do so in the future. During the third quarter of 2014, Carlyle sold their majority interest in Service King Collision Repair, thus making the entity no longer a related party. Related party sales prior to this transaction were $2.0 million and $4.0 million for the three and six months ended June 30, 2014, respectively.

13

Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)


(9)    OTHER (INCOME) EXPENSE, NET
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2015
2014
2015
2014
Exchange (gains) losses, net
$
57.8

$
(14.6
)
$
66.5

$
(14.5
)
Management fees and expenses

0.8


1.6

Impairment of real estate investment
30.6


30.6


Other miscellaneous
0.2

12.2

(4.6
)
15.8

Total
$
88.6

$
(1.6
)
$
92.5

$
2.9

Our net exchange (gains) losses for the three and six months ended June 30, 2015 and 2014 consist of remeasurement losses primarily related to the remeasurement of the net monetary assets of our Venezuelan subsidiary, as discussed in further detail below, as well as exchange remeasurement gains and losses primarily related to intercompany transactions denominated in currencies different from the functional currency of the relevant subsidiary. These remeasurements of the intercompany transactions were partially offset by the remeasurement of our Euro borrowings. Other miscellaneous included a gain for the six months ended June 30, 2015 resulting from the acquisition of an additional 25% interest in an equity method investee for a purchase price of $4.3 million. As a result of the acquisition, we obtained a controlling interest and recognized a gain of $5.4 million on the remeasurement of our previously held equity interest as of the acquisition date. Other miscellaneous also included a loss of $12.3 million for the three and six months ended June 30, 2014 resulting from the release of an indemnity receivable, which had been recorded in conjunction with our indemnity provisions from the Acquisition.
Venezuela Devaluation
Based on our participation in Venezuela’s Complementary System of Foreign Currency Administration (SICAD I) auction process during the year ended December 31, 2014, we changed the exchange rate we used to remeasure our Venezuelan subsidiary’s bolivar denominated monetary assets and liabilities into U.S. dollars to an exchange rate of 12.0 Venezuelan bolivars to 1.0 U.S. dollar at December 31, 2014 from the Official Rate of 6.3 Venezuelan bolivars to 1.0 U.S. dollar. We determined that the exchange rate of 12.0 Venezuelan bolivars to 1.0 U.S. dollar remained the most appropriate rate at March 31, 2015 given that we believed the monetary assets of our Venezuelan subsidiary would be realized through a dividend utilizing the SICAD I auction process.
In February 2015, the Venezuelan government enacted additional changes to its foreign exchange regime. The changes maintain a three-tiered system, including the Official Rate determined by CENCOEX, which remains at 6.3 Venezuelan bolivars to 1.0 U.S. dollar, and the SICAD I rate which remained at 12.0 Venezuelan bolivars to 1.0 U.S. dollar. There was a third market, SICAD II, which has since been eliminated and replaced by a new, alternative currency market, the Marginal Foreign Exchange System ("SIMADI").
SIMADI is intended to provide limited access to a free market rate of exchange. The only way to obtain U.S. dollars through SIMADI is through the supply and demand available within the subsidiary’s financial institutions. We believe that significant uncertainty still exists regarding the exchange mechanisms in Venezuela, including how any such mechanisms will operate in the future and the availability of U.S. dollars under each mechanism, including SIMADI. At June 30, 2015, we expect to maintain liquidity through participation in future SIMADI exchanges, if available. Further, although there are uncertainties related to the liquidity available through SIMADI at June 30, 2015, we believe it was appropriate to move from using the SICAD I rate to using the SIMADI floating rate based on the culmination of relevant facts and circumstances, including our expectation that future dividend remittances would be made at this rate.
As a result, at June 30, 2015, we utilized an exchange rate of 197.7 Venezuelan bolivars to 1.0 U.S. dollar to remeasure the monetary assets and liabilities of our Venezuelan subsidiary.
In applying the June 30, 2015 SIMADI exchange rate to the bolivar denominated monetary assets and liabilities of our Venezuelan subsidiary, we recorded an exchange loss of $53.2 million for the three and six months ended June 30, 2015, which was included in other (income) expense, net.

14

Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)


Venezuela Financial Results
As a result of moving from SICAD I to SIMADI and the associated devaluation of our translation rates, we concluded an impairment indicator existed as of June 30, 2015. With the devaluation we evaluated the carrying value of the long-lived assets of our Venezuelan subsidiary for impairment, including $19.7 million of our property plant and equipment, $58.7 million of definite-lived intangibles and $52.6 million of a real estate investment. Based on an analysis of estimated undiscounted future cash flows expected to result from the use of our productive long-lived assets with finite lives, we determined that their carrying values were recoverable at June 30, 2015 based on continued demand and price assumptions of our local operations. The price assumptions include anticipated increases in prices to recover increases in our cost of goods sold as a result of our change to the SIMADI exchange rate at June 30, 2015. These price increases are expected to continue and are intended to allow us to keep pace with the changes in exchange rates and inflation. We believe these price increases are feasible given our market share, customer base and historical success of implementing price increases in similar situations in the past. If our assumptions regarding continued demand and our ability to successfully implement and sustain price increases are inaccurate, there is risk that our productive long-lived assets may be impaired and there would be an unfavorable impact to our results of operations.
We separately evaluated the carrying value of our real estate investment as it is not part of our core operational activities. Based on this evaluation, we concluded that the carrying value of the real estate investment of $52.6 million was no longer recoverable as a result of the current real estate market prices and movement of our translation rate from 12.0 Venezuelan bolivars to 1.0 U.S. dollar to 197.7 Venezuelan bolivars to 1.0 U.S. dollar. We recorded an impairment to write down the carrying value of the asset to its fair value of $22.0 million, which is recorded within other assets. The impairment of $30.6 million was recorded within other (income) expense, net for the three and six months ended June 30, 2015. The method used to determine fair value of the real estate investment included using Level 2 inputs in the form of observable market quotes from local real estate broker service firms.
At June 30, 2015 and December 31, 2014, our Venezuelan subsidiary had total assets of $139.3 million and $197.8 million, respectively, and total liabilities of $28.2 million and $57.0 million, respectively. At June 30, 2015 and December 31, 2014, total non-monetary assets, net, were $126.3 million and $149.6 million. For the six months ended June 30, 2015, our Venezuelan operations represented $95.1 million in net sales.
(10)    INCOME TAXES
Our effective income tax rates for the six months ended June 30, 2015 and 2014 are as follows:
 
Six Months Ended June 30,
 
2015
2014
Effective Tax Rate
57.8
%
17.0
%
The higher effective tax rate for the six months ended June 30, 2015 was primarily due to the pre-tax impact of currency exchange losses, as well as the impact of an impairment charge, which were not deductible for tax.

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Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)


(11)    EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) 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 (loss) per common share includes the effect of potential dilution from the exercise of outstanding stock options and restricted shares. Potentially dilutive securities have been excluded in the weighted average number of common shares used for the calculation of earnings (loss) per share in periods of net loss because the effect of such securities would be anti-dilutive. A reconciliation of our basic and diluted earnings (loss) per common share is as follows:
 
Three Months Ended June 30,
Six Months Ended June 30,
(In millions, except per share data)
2015
2014
2015
2014
Net income (loss) to common shareholders
$
(25.1
)
$
53.8

$
20.0

$
49.5

Basic weighted average shares outstanding
232.3

229.1

231.1

229.1

Diluted weighted average shares outstanding
232.3

229.3

238.1

229.1

Earnings (loss) per Common Share:
 
 


Basic net income (loss) per share
$
(0.11
)
$
0.23

$
0.09

$
0.22

Diluted net income (loss) per share
$
(0.11
)
$
0.23

$
0.08

$
0.22

The number of anti-dilutive shares that have been excluded in the computation of diluted earnings (loss) per share for the three and six months ended June 30, 2015 were 16.1 million and 0.8 million, respectively. The number of anti-dilutive shares that have been excluded in the computation of diluted earnings (loss) per share for the three and six months ended June 30, 2014 were 12.6 million.
(12)    ACCOUNTS AND NOTES RECEIVABLE, NET
 
June 30, 2015
December 31, 2014
Accounts receivable—trade, net
$
702.7

$
638.3

Notes receivable
47.2

45.5

Other
119.6

136.6

Total
$
869.5

$
820.4

Accounts and notes receivable are carried at amounts that approximate fair value. Accounts receivable—trade, net are net of allowances of $12.1 million and $9.9 million at June 30, 2015 and December 31, 2014, respectively. Bad debt expense, within selling, general, and administration expenses for the three and six months ended June 30, 2015, was $2.8 million and $3.5 million, respectively, and $1.0 million and $2.2 million for the three and six months ended June 30, 2014, respectively.
(13)    INVENTORIES
 
June 30, 2015
December 31, 2014
Finished products
$
312.3

$
323.7

Semi-finished products
91.9

81.3

Raw materials and supplies
150.8

133.3

Total
$
555.0

$
538.3

Stores and supplies inventories of $23.7 million and $20.9 million at June 30, 2015 and December 31, 2014, respectively, were valued under the weighted average cost method.

16

Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)


(14) PROPERTY, PLANT AND EQUIPMENT, NET
Depreciation expense amounted to $44.4 million and $85.7 million for the three and six months ended June 30, 2015, respectively, and $39.1 million and $87.5 million for the three and six months ended June 30, 2014, respectively.
 
June 30, 2015
December 31, 2014
Property, plant and equipment
$
1,835.0

$
1,858.2

Accumulated depreciation
(409.9
)
(344.1
)
Property, plant, and equipment, net
$
1,425.1

$
1,514.1

(15)    BORROWINGS
Borrowings are summarized as follows:
 
June 30, 2015
December 31, 2014
Dollar Term Loan
$
2,154.0

$
2,165.5

Euro Term Loan
439.2

481.0

Dollar Senior Notes
750.0

750.0

Euro Senior Notes
280.1

305.3

Short-term and other borrowings
27.4

12.9

Unamortized original issue discount
(16.4
)
(18.3
)
Unamortized deferred financing costs, net
(75.0
)
(82.1
)
 
$
3,559.3

$
3,614.3

Less:
 
 
Short term borrowings
$
23.2

$
12.2

Current portion of long-term borrowings
27.5

27.9

Long-term debt
$
3,508.6

$
3,574.2

Senior Secured Credit Facilities, as amended
On February 3, 2014, Axalta Coating Systems Dutch B B.V. ("Dutch B B.V."), as "Dutch Borrower", and its indirect wholly-owned subsidiary, Axalta Coating Systems U.S. Holdings Inc. ("Axalta US Holdings"), as "US Borrower", executed the second amendment to the Senior Secured Credit Facilities (the "Amendment" or the "Refinancing"). The Amendment (i) converted all of the outstanding Dollar Term Loans ($2,282.8 million) into a new class of term loans (the "New Dollar Term Loans"), and (ii) converted all of the outstanding Euro Term Loans (€397.0 million) into a new class of term loans (the "New Euro Term Loans" and, together with the New Dollar Term Loans and the Revolving Credit Facility (as defined herein), the "Senior Secured Credit Facilities"). The New Dollar Term Loans are subject to a floor of 1.00%, plus an applicable rate after the Amendment Effective Date. The applicable rate for such New Dollar Term Loans is 3.00% per annum for Eurocurrency Rate Loans as defined in the credit agreement governing the Senior Secured Credit Facilities (the "Credit Agreement") and 2.00% per annum for Base Rate Loans as defined in the Credit Agreement. The applicable rate for both Eurocurrency Rate Loans as well as Base Rate Loans is subject to a further 25 basis point reduction if the Total Net Leverage Ratio as defined in the credit agreement governing the Senior Secured Credit Facilities is less than or equal to 4.50:1.00. The New Euro Term Loans are also subject to a floor of 1.00%, plus an applicable rate after the Amendment Effective Date. The applicable rate for such New Euro Term Loans is 3.25% per annum for Eurocurrency Rate Loans. New Euro Term Loans may not be Base Rate Loans. The applicable rate is subject to a further 25 basis point reduction if the Total Net Leverage Ratio is less than or equal to 4.50:1.00. During the third quarter of 2014, our Total Net Leverage Ratio was and has continued to be less than 4.50:1.00. Consequently, the applicable rates were changed to 2.75% for the New Dollar Term Loans and 3.00% for the New Euro Term Loans through June 30, 2015. 

17

Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)


The Senior Secured Credit Facilities are secured by substantially all assets of Axalta Coating Systems Dutch A B. V. ("Dutch A B.V.") and the guarantors. The Dollar Term Loan and Euro Term Loan mature on February 1, 2020 and the Revolving Credit Facility matures on February 1, 2018. Principal is paid quarterly on both the Dollar Term Loan and the Euro Term Loan based on 1% per annum of the original principal amount with the unpaid balance due at maturity.
Interest is payable quarterly on both the New Dollar Term Loan and the New Euro Term Loan. Prior to the Amendment, interest on the Dollar Term Loan was subject to a floor of 1.25% for Eurocurrency Rate Loans plus an applicable rate of 3.50%. For Base Rate Loans, the interest was subject to a floor of the greater of the federal funds rate plus 0.50%, the Prime Lending Rate, an Adjusted Eurocurrency Rate, or 2.25% plus an applicable rate of 2.50%. Interest on the Euro Term Loan, a Eurocurrency Loan, was subject to a floor of 1.25% plus an applicable rate of 4.00%.
Under the Senior Secured Credit Facilities, interest on any outstanding borrowings under the Revolving Credit Facility is subject to a floor of 1.00% for Eurocurrency Rate Loans plus an applicable rate of 3.50% (subject to an additional step-down to 3.25%). For Base Rate Loans, the interest is subject to a floor of the greater of the federal funds rate plus 0.50%, the Prime Lending Rate, an Adjusted Eurocurrency Rate, or 2.00% plus an applicable rate of 2.50% (subject to an additional step-down to 2.25%).
Under circumstances described in the Credit Agreement, we may increase available revolving or term facility borrowings by up to $400.0 million plus an additional amount subject to the Company not exceeding a maximum first lien leverage ratio described in the Credit Agreement.
Any indebtedness under the Senior Secured Credit Facilities may be voluntarily prepaid in whole or in part, in minimum amounts, subject to the make-whole provisions set forth in the Credit Agreement. Such indebtedness is subject to mandatory prepayments amounting to the proceeds of asset sales over $25.0 million annually, proceeds from certain debt issuances not otherwise permitted under the Credit Agreement and 50% (subject to a step-down to 25.0% or 0% if the First Lien Leverage Ratio falls below 4.25:1.00 or 3.50:1.00, respectively) of Excess Cash Flow.
We are subject to customary negative covenants as well as a financial covenant which is a maximum First Lien Leverage Ratio. This financial covenant is applicable only when greater than 25% of the Revolving Credit Facility (including letters of credit not cash collateralized to at least 103%) is outstanding at the end of the fiscal quarter.
Deferred financing costs of $92.9 million and original issue discounts of $25.7 million were incurred at the inception of the Senior Secured Credit Facilities. These amounts are recorded as direct deductions of the associated debt obligations, with the exception of deferred financing costs related to the Revolving Credit Facility, which are classified within Other assets on the condensed consolidated balance sheets as the associated debt has been undrawn since inception, and are amortized as interest expense over the life of the Senior Secured Credit Facilities.
Amortization expense related to deferred financing costs, net for the three and six months ended June 30, 2015 were $3.4 million and $6.6 million, respectively. Amortization expense related to deferred financing costs, net for the three and six months ended June 30, 2014 were $3.4 million and $6.7 million, respectively.
Amortization expense related to original issue discounts for the three and six months ended June 30, 2015 were $0.8 million and $1.6 million, respectively. Amortization expense related to original issue discounts for the three and six months ended June 30, 2014 were $0.8 million and $1.7 million, respectively.
At June 30, 2015 and December 31, 2014 there were no borrowings under the Revolving Credit Facility. At June 30, 2015 and December 31, 2014, letters of credit issued under the Revolving Credit Facility totaled $21.0 million and $15.5 million, respectively, which reduced the availability under the Revolving Credit Facility. Availability under the Revolving Credit Facility was $379.0 million and $384.5 million at June 30, 2015 and December 31, 2014, respectively.

18

Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)


Senior Notes
On February 1, 2013, Dutch B B.V., as "Dutch Issuer", and Axalta US Holdings, as "US Issuer" (collectively the "Issuers") issued $750.0 million aggregate principal amount of 7.375% senior unsecured notes due 2021 (the "Dollar Senior Notes") and related guarantees thereof. Additionally, the Issuers issued €250.0 million aggregate principal amount of 5.750% senior secured notes due 2021 (the "Euro Senior Notes" and, together with the Dollar Senior Notes, the "Senior Notes") and related guarantees thereof. Cash fees related to the issuance of the Senior Notes were $33.1 million are recorded as direct deductions of the associated debt obligations, and are amortized as interest expense over the life of the Senior Notes. At June 30, 2015 and December 31, 2014, the remaining unamortized balances were $23.3 million and $25.3 million, respectively. The expense related to the amortization of the deferred financing costs, net was $1.0 million and $2.0 million for both of the three and six months ended June 30, 2015 and 2014.
The Senior Notes are unconditionally guaranteed on a senior basis by Dutch A B.V. and certain of the Issuers’ subsidiaries.
The indentures governing the Senior Notes contain covenants that restrict the ability of the Issuers and their subsidiaries to, among other things, incur additional debt, make certain payments including payment of dividends or repurchase equity interest of the Issuers, make loans or acquisitions or capital contributions and certain investments, incur certain liens, sell assets, merge or consolidate or liquidate other entities, and enter into transactions with affiliates.
(i) Euro Senior Notes
The Euro Senior Notes were sold at par and are due February 1, 2021. The Euro Senior Notes bear interest at 5.750% and are payable semi-annually on February 1 and August 1. Cash fees related to the issuance of the Euro Senior Notes were $10.2 million are recorded as direct deductions of the associated debt obligations and are amortized into interest expense over the life of the Euro Senior Notes. At June 30, 2015 and December 31, 2014, the remaining unamortized balances was $7.1 million and $7.7 million, respectively.
On or after February 1, 2016, we have the option to redeem all or part of the Euro Senior Notes at the following redemption prices (expressed as percentages of principal amount):
Period
Euro Notes Percentage
2016
104.313
%
2017
102.875
%
2018
101.438
%
2019 and thereafter
100.000
%
Notwithstanding the foregoing, at any time and from time to time prior to February 1, 2016, we may at our option redeem in the aggregate up to 40% of the original aggregate principal amount of the Euro Senior Notes with the net cash proceeds of one or more Equity Offerings (as defined in the indenture governing the Euro Senior Notes), at a redemption price of 105.750% plus accrued and unpaid interest, if any, to the redemption date.
In addition, we have the option to redeem up to 10% of the Euro Senior Notes during any 12-month period from issue date until February 1, 2016 at a redemption price of 103.0%, plus accrued and unpaid interest, if any, to the redemption date.
Upon the occurrence of certain events constituting a change of control, holders of the Euro Senior Notes have the right to require us to repurchase all or any part of the Euro Senior Notes at a purchase price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the repurchase date.
The indebtedness evidenced by the Euro Senior Notes and related guarantees is secured on a first-lien basis by the same assets that secure the obligations under the Senior Secured Credit Facilities, subject to permitted liens and applicable local law limitations, is senior in right of payment to all future subordinated indebtedness of the Issuers, is equal in right of payment to all existing and future senior indebtedness of the Issuers and is effectively senior to any unsecured indebtedness of the Issuers, including the Dollar Senior Notes, to the extent of the value securing the Euro Senior Notes.

19

Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)


(ii) Dollar Senior Notes
The Dollar Senior Notes were sold at par and are due May 1, 2021. The Dollar Senior Notes bear interest at 7.375% and are payable semi-annually on February 1 and August 1. Cash fees related to the issuance of the Dollar Senior Notes were $22.9 million. At June 30, 2015 and December 31, 2014, the remaining unamortized balances were $16.2 million and $17.6 million, respectively.
On or after February 1, 2016, we have the option to redeem all or part of the Dollar Senior Notes at the following redemption prices (expressed as percentages of principal amount)
Period
Dollar Notes Percentage
2016
105.531
%
2017
103.688
%
2018
101.844
%
2019 and thereafter
100.000
%
Notwithstanding the foregoing, at any time and from time to time prior to February 1, 2016, we may at our option redeem in the aggregate up to 40% of the original aggregate principal amount of the Dollar Senior Notes with the net cash proceeds of one or more Equity Offerings (as defined in the indenture governing the Dollar Senior Notes), at a redemption price of 107.375% plus accrued and unpaid interest, if any, to the redemption date.
Upon the occurrence of certain events constituting a change of control, holders of the Dollar Senior Notes have the right to require us to repurchase all or any part of the Dollar Senior Notes at a purchase price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the repurchase date.
The indebtedness evidenced by the Dollar Senior Notes is senior unsecured indebtedness of the Issuers, is senior in right of payment to all future subordinated indebtedness of the Issuers and is equal in right of payment to all existing and future senior indebtedness of the Issuers. The Dollar Senior Notes are effectively subordinated to any secured indebtedness of the Issuers (including indebtedness of the Issuers outstanding under the Senior Secured Credit Facilities and the Euro Senior Notes) to the extent of the value of the assets securing such indebtedness.
Future repayments
Below is a schedule of required future repayments of all borrowings outstanding at June 30, 2015.
Remainder of 2015
$
19.6

2016
36.7

2017
29.6

2018
28.4

2019
27.7

Thereafter
3,500.2

 
$
3,642.2


20

Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)


Reclassifications and revisions
During 2014, the Company identified errors in the determination of the effective interest rate amortization for the Deferred Financing Costs and Original Issue Discounts that were incurred in 2013. The correction of these items impacted the condensed consolidated statement of operations and statements of comprehensive income (loss) for the three and six months ended June 30, 2014. The Company assessed the applicable guidance and concluded that these errors were not material to the Company’s consolidated financial statements for the aforementioned prior periods; however, the Company did conclude that correcting these prior misstatements would be significant to the three and nine months ended September 30, 2014 condensed consolidated statements of operations. As a result of this analysis, the unaudited condensed consolidated financial statements at June 30, 2014 presented herein have been revised to reflect the correction of the aforementioned errors. The correction had an impact of $2.5 million on net income (loss) and net income (loss) attributable to controlling interests for the three months ended June 30, 2014 through a reduction in interest expense of $2.9 million (net of a tax provision of $0.4 million). The correction had an impact of $5.3 million on net income (loss) and Net income (loss) attributable to controlling interests for the six months ended June 30, 2014, respectively through a reduction in interest expense of $6.0 million (net of a tax provision of $0.7 million). 
(16)    FAIR VALUE ACCOUNTING
Fair value of financial instruments
Available for sale securities - The fair value of available for sale securities was $4.5 million at June 30, 2015 and December 31, 2014. The fair value was based upon either Level 1 inputs when the securities are actively traded with quoted market prices or Level 2 when the securities are not frequently traded.
Long-term borrowings - The fair values of the Dollar Senior Notes and Euro Senior Notes at June 30, 2015 were $801.6 million and $294.1 million, respectively. The fair values at December 31, 2014 were $795.0 million and $320.5 million, respectively. The estimated fair values of these notes are based on recent trades, as reported by a third party pricing service. Due to the infrequency of trades of the Dollar Senior Notes and the Euro Senior Notes, these inputs are considered to be Level 2 inputs.
The fair values of the New Dollar Term Loan and the New Euro Term Loan at June 30, 2015 were $2,151.3 million and $439.7 million, respectively. The fair values at December 31, 2014 were $2,100.5 million and $478.0 million, respectively. The estimated fair values of the Dollar Term Loan and the Euro Term Loan are based on recent trades, as reported by a third party pricing service. Due to the infrequency of trades of the Dollar Term Loan and the Euro Term Loan, these inputs are considered to be Level 2 inputs.
(17)    DERIVATIVE FINANCIAL INSTRUMENTS
We selectively use derivative instruments to reduce market risk associated with changes in foreign currency exchange rates and interest rates. The use of derivatives is intended for hedging purposes only and we do not enter into derivative instruments for speculative purposes. A description of each type of derivative used to manage risk is included in the following paragraphs.
During the year ended December 31, 2013, we entered into five interest rate swaps with notional amounts totaling $1,173.0 million to hedge interest rate exposures related to variable rate borrowings under the Senior Secured Credit Facilities. The interest rate swaps are in place until September 29, 2017. The interest rate swaps qualify and are designated as effective cash flow hedges.

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Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)


The following table presents the location and fair values using Level 2 inputs of derivative instruments that qualify and have been designated as cash flow hedges included in our condensed consolidated balance sheet:
 
June 30, 2015
December 31, 2014
Other assets:
 
 
Interest rate swaps
$
0.8

$
5.9

Total assets
$
0.8

$
5.9

Other liabilities:
 
 
Interest rate swaps
$
2.2

$
1.5

Total liabilities
$
2.2

$
1.5

The following table presents the location and fair values using Level 2 inputs of derivative instruments that have not been designated as hedges included in our condensed consolidated balance sheet:
 
June 30, 2015
December 31, 2014
Other assets:
 
 
Interest rate cap
$
0.1

$
0.1

Foreign currency contracts
0.7


Total assets
$
0.8

$
0.1

For derivative instruments that qualify and are designated as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of Accumulated other comprehensive loss and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
The following tables set forth the locations and amounts recognized during the three and six months ended June 30, 2015 and 2014 for these cash flow hedges.
 
Amount of (Gain) Loss
Recognized in OCI on
Derivatives (Effective
Portion)
Location of (Gain) Loss Reclassified from 
Accumulated OCI into Income (Effective Portion)
Amount of (Gain) Loss
Reclassified from
Accumulated OCI to Income (Effective
Portion)
Location of (Gains) Losses Recognized 
in Income on 
Derivatives (Ineffective Portion)
Amount of (Gain) Loss
Recognized in Income on
Derivatives (Ineffective
Portion)
Derivatives in Cash Flow Hedging
Relationships
Three Months Ended June 30, 2015
Three Months Ended June 30, 2014
Three Months Ended June 30, 2015
Three Months Ended June 30, 2014
Three Months Ended June 30, 2015
Three Months Ended June 30, 2014
Interest rate contracts
$
(0.3
)
$
5.5

Interest expense, net
$
1.6

$
1.6

Interest expense, net
$
0.2

$
(0.6
)
 
Amount of (Gain) Loss
Recognized in OCI on
Derivatives (Effective
Portion)
Location of (Gain) Loss Reclassified from 
Accumulated OCI into Income (Effective Portion)
Amount of (Gain) Loss
Reclassified from
Accumulated OCI to Income (Effective
Portion)
Location of (Gains) Losses Recognized 
in Income on 
Derivatives (Ineffective Portion)
Amount of (Gain) Loss
Recognized in Income on
Derivatives (Ineffective
Portion)
Derivatives in Cash Flow Hedging
Relationships
Six Months Ended June 30, 2015
Six Months Ended June 30, 2014
Six Months Ended June 30, 2015
Six Months Ended June 30, 2014
Six Months Ended June 30, 2015
Six Months Ended June 30, 2014
Interest rate contracts
$
4.5

$
5.0

Interest expense, net
$
3.2

$
3.2

Interest expense, net
$
1.4

$
0.7


22

Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)


Also during the year ended December 31, 2013, we purchased a €300.0 million 1.5% interest rate cap on our Euro Term Loan that is in place until September 29, 2017. We paid a premium of $3.1 million for the interest rate cap. The interest rate cap was not designated as a hedge and the changes in the fair value of the derivative instrument are recorded in current period earnings and are included in interest expense.
Fair value gains and losses of derivative contracts, as determined using Level 2 inputs, that do not qualify for hedge accounting treatment are recorded in income as follows:
 
 
Three Months Ended June 30,
Six Months Ended June 30,
Derivatives Not Designated as Hedging
Instruments under ASC 815
Location of (Gain) Loss Recognized in
Income on Derivatives
2015
2014
2015
2014
Foreign currency forward contract
Other (income) expense, net
$
(0.1
)
$
0.7

$
(1.9
)
$
1.9

Interest rate cap
Interest expense, net
(0.1
)
1.3

(0.1
)
3.1

 
 
$
(0.2
)
$
2.0

$
(2.0
)
$
5.0

(18)    SEGMENTS
The Company identifies an operating segment as a component: (i) that engages in business activities from which it may earn revenues and incur expenses; (ii) whose operating results are regularly reviewed by the Chief Operating Decision Maker ("CODM") to make decisions about resources to be allocated to the segment and assess its performance; and (iii) that has available discrete financial information.
We have two operating segments, which are also our reportable segments: Performance Coatings and Transportation Coatings. The CODM reviews financial information at the operating segment level to allocate resources and to assess the operating results and financial performance for each operating segment. Our CODM is identified as the Chief Executive Officer because he has final authority over performance assessment and resource allocation decisions. 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.
Our business serves four end-markets globally as follows: 
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2015
2014
2015
2014
Performance Coatings
 
 
 
 
Refinish
$
460.1

$
471.1

$
853.3

$
906.3

Industrial
178.7

193.9

342.7

374.8

Total Net sales Performance Coatings
638.8

665.0

1,196.0

1,281.1

Transportation Coatings
 
 
 
 
Light Vehicle
347.2

363.4

680.4

703.0

Commercial Vehicle
108.1

98.2

206.9

189.9

Total Net sales Transportation Coatings
455.3

461.6

887.3

892.9

Total Net sales
$
1,094.1

$
1,126.6

$
2,083.3

$
2,174.0


23

Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)


Asset information is not reviewed or included with our internal management reporting. Therefore, the Company has not disclosed asset information for each reportable segment.
 
Three Months Ended June 30,
 
2015
2014
 
Performance
Coatings
Transportation
Coatings
Total
Performance
Coatings
Transportation
Coatings
Total
Net sales (1)
$
638.8

$
455.3

$
1,094.1

$
665.0

$
461.6

$
1,126.6

Equity in earnings in unconsolidated affiliates
0.2

0.2

0.4

0.2


0.2

Adjusted EBITDA (2)
162.1

93.4

255.5

136.7

84.4

221.1

Investment in unconsolidated affiliates
5.7

6.8

12.5

8.3

8.0

16.3

 
Six Months Ended June 30,
 
2015
2014
 
Performance
Coatings
Transportation
Coatings
Total
Performance
Coatings
Transportation
Coatings
Total
Net sales (1)
$
1,196.0

$
887.3

$
2,083.3

$
1,281.1

$
892.9

$
2,174.0

Equity in earnings in unconsolidated affiliates
0.3

0.5

0.8

0.5

0.3

0.8

Adjusted EBITDA (2)
269.2

168.3

437.5

261.2

146.6

407.8

Investment in unconsolidated affiliates
5.7

6.8

12.5

8.3

8.0

16.3

(1)
The Company has no intercompany sales between segments.
(2)
The primary measure of segment operating performance is Adjusted EBITDA, which is defined as net income (loss) before interest, taxes, depreciation and amortization and other unusual items impacting operating results. Adjusted EBITDA is a key metric that is used by management to evaluate business performance in comparison to budgets, forecasts, and prior year financial results, providing a measure that management believes reflects the Company’s core operating performance. Reconciliation of Adjusted EBITDA to income (loss) before income taxes follows:

24

Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)


 
Three Months Ended June 30,
Six Months Ended June 30,
 
2015
2014
2015
2014
Income before income taxes
$
5.2

$
54.5

$
53.1

$
62.8

Interest expense, net
49.2

54.9

99.2

113.9

Depreciation and amortization
77.5

71.8

150.1

152.9

EBITDA
131.9

181.2

302.4

329.6

Inventory step-up (a)
0.5


0.5


Financing costs (b)



3.1

Foreign exchange remeasurement losses (gains) (c)
57.8

(14.6
)
66.5

(14.5
)
Long-term employee benefit plan adjustments (d)
0.2

2.2

0.4

4.5

Termination benefits and other employee related costs (e)
14.8

2.7

18.5

5.9

Consulting and advisory fees (f)
6.8

7.7

9.9

20.7

Transition-related costs (g)

33.6


47.5

Secondary offering costs (h)
0.3


1.7


Other adjustments (i)
13.2

8.2

11.1

11.0

Dividends in respect of noncontrolling interest (j)
(0.6
)
(0.7
)
(4.1
)
(1.6
)
Management fee expense (k)

0.8


1.6

Asset impairment (l)
30.6


30.6


Adjusted EBITDA
$
255.5

$
221.1

$
437.5

$
407.8

(a)
During the three and six months ended June 30, 2015, we recorded a non-cash fair value inventory adjustment associated with an acquisition. These amounts increased cost of goods sold by $0.5 million.
(b)
In connection with an amendment to the Senior Secured Credit Facilities in February 2014, we recognized $3.1 million of costs during the six months ended June 30, 2014.
(c)
Eliminates foreign exchange gains and losses resulting from the remeasurement of assets and liabilities denominated in foreign currencies.
(d)
Eliminates the non-service cost components of long-term employee benefit costs.
(e)
Represents expenses primarily related to employee termination benefits and other employee-related costs. Termination benefits include the costs associated with our headcount initiatives associated with cost saving opportunities that were related to our transition to a standalone entity and our Axalta Way cost savings initiatives in 2015.
(f)
Represents fees paid to consultants, advisors, and other third-party professional organizations for professional services. Amounts incurred for the three and six months ended June 30, 2015 primarily relate to our Axalta Way cost savings initiatives. Amounts incurred for the three and six months ended June 30, 2014 relate to our transition from DuPont to a standalone entity.
(g)
Represents charges associated with the transition from DuPont to a standalone entity, including branding and marketing, information technology related costs, and facility transition costs.
(h)
Represents costs associated with the offerings of our common shares by Carlyle that closed in April 2015.
(i)
Represents costs for certain unusual or non-operational (gains) and losses, including a $5.4 million gain recognized during the six months ended June 30, 2015 resulting from the remeasurement of our previously held interest in an equity method investee upon the acquisition of a controlling interest, stock-based compensation, equity investee dividends, indemnity losses associated with the Acquisition, and loss (gain) on sale and disposal of property, plant and equipment.
(j)
Represents the payment of dividends to our joint venture partners by our consolidated entities that are not wholly owned.
(k)
Pursuant to Axalta’s management agreement with Carlyle Investment for management and financial advisory services and oversight provided to Axalta and its subsidiaries, Axalta was required to pay an annual management fee of $3.0 million and out-of-pocket expenses. This agreement terminated upon completion of the IPO in November 2014.
(l)
As a result of the currency devaluation in Venezuela, we evaluated the carrying values of our long-lived assets for impairment and recorded an impairment charge relating to a real estate investment of $30.6 million. See Note 9 for more information.

25

Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)


(19)    SHAREHOLDERS' EQUITY
The following tables present the change in total shareholders’ equity for the six months ended June 30, 2015 and 2014, respectively.
 
Total Axalta
Noncontrolling
Interests
Total
Balance January 1, 2015
$
1,044.7

$
67.3

$
1,112.0

Net income
20.0

2.4

22.4

Other comprehensive (loss), net of tax
(86.8
)
(0.2
)
(87.0
)
Exercise of stock options
50.4


50.4

Recognition of stock-based compensation
14.2


14.2

Noncontrolling interests of acquired subsidiaries

4.3

4.3

Dividends declared to noncontrolling interests

(4.1
)
(4.1
)
Balance June 30, 2015
$
1,042.5

$
69.7

$
1,112.2

 
Total Axalta
Noncontrolling
Interests
Total
Balance January 1, 2014
$
1,142.9

$
68.9

$
1,211.8

Net income
49.5

2.6

52.1

Other comprehensive (loss), net of tax
(8.3
)
(1.1
)
(9.4
)
Recognition of stock-based compensation
3.8


3.8

Dividends declared to noncontrolling interests

(1.6
)
(1.6
)
Balance June 30, 2014
$
1,187.9

$
68.8

$
1,256.7

(20)    ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
Unrealized
Currency
Translation
Adjustments
Pension and
Other
Long-term
Employee
Benefit
Adjustments
Unrealized
Gain (Loss) on
Securities
Unrealized
Gain (Losses) on
Derivatives
Accumulated
Other
Comprehensive
Income (loss)
December 31, 2014
$
(72.1
)
$
(31.2
)
$
(0.2
)
$
0.2

$
(103.3
)
Current year deferrals to AOCI
(82.1
)
(3.1
)
0.4

0.4

(84.4
)
Reclassifications from AOCI to Net income

0.8


(3.2
)
(2.4
)
Net Change
(82.1
)
(2.3
)
0.4

(2.8
)
(86.8
)
June 30, 2015
$
(154.2
)
$
(33.5
)
$
0.2

$
(2.6
)
$
(190.1
)

26

Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In millions, unless otherwise noted)


The income tax benefit related to the changes in pension and other long-term employee benefits for the six months ended June 30, 2015 was $1.7 million. The cumulative income tax benefit related to the adjustments for pension and other long-term employee benefits at June 30, 2015 was $15.1 million. The income tax benefit related to the change in the unrealized loss on derivatives for the six months ended June 30, 2015 was $1.7 million. The cumulative income tax benefit related to the adjustments for unrealized loss on derivatives at June 30, 2015 was $1.5 million.
 
Unrealized
Currency
Translation
Adjustments
Pension and
Other
Long-term
Employee
Benefit
Adjustments
Unrealized
Loss on
Securities
Unrealized
Gain (Loss) on
Derivatives
Accumulated
Other
Comprehensive
Income
December 31, 2013
$
24.3

$
7.5

$
(0.9
)
$
3.1

$
34.0

Current year deferrals to AOCI
(9.9
)
4.7

0.8

0.1

(4.3
)
Reclassifications from AOCI to Net income

(0.8
)

(3.2
)
(4.0
)
Net Change
(9.9
)
3.9

0.8

(3.1
)
(8.3
)
June 30, 2014
$
14.4

$
11.4

$
(0.1
)
$

$
25.7

Included within current year deferrals to accumulated other comprehensive income for the six months ended June 30, 2014 was $5.6 million of curtailment gains related to an amendment to one of our pension plans.
The income tax impact related to the changes in pension and other long-term employee benefits for the six months ended June 30, 2014 was expense of $0.9 million. The cumulative income tax expense related to the adjustment for pension and other long-term employee benefits at June 30, 2014 was $4.4 million. The income tax expense related to the change in the unrealized gain on derivatives for the six months ended June 30, 2014 was $1.9 million. The cumulative income tax expense related to the adjustment for unrealized gain on derivatives at June 30, 2014 was $0.0 million.

27

Table of Contents

ITEM 2. 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 includes statements regarding industry outlook, our expectations regarding the performance of our business and other forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in "Non-GAAP Financial Measures," and "Forward-Looking Statements" as well as "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2014. These statements include those that related to estimates reflected in our financial results as well as management’s plan and outlook. Our actual results may differ materially from those contained in or implied by any forward-looking statements. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the interim unaudited condensed consolidated financial statements and the condensed notes thereto included elsewhere in this quarterly report, as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
FORWARD-LOOKING STATEMENTS
Many statements made in this Quarterly Report on Form 10-Q that are not statements of historical fact, including statements about our beliefs and expectations, are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and should be evaluated as such. Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plan and strategies. These statements often include words such as "anticipate," "expect," "suggests," "plan," "believe," "intend," "estimates," "targets," "projects," "should," "could," "would," "may," "will," "forecast," and other similar expressions. We base these forward-looking statements or projections on our current expectations, plans and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances and at such time. As you read and consider this Quarterly Report on Form 10-Q, you should understand that these statements are not guarantees of performance or results. The forward-looking statements and projections are subject to and involve risks, uncertainties and assumptions and you should not place undue reliance on these forward-looking statements or projections. Although we believe that these forward-looking statements and projections are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements and projections. Factors that may materially affect such forward-looking statements and projections include:
adverse developments in economic conditions and, particularly, in conditions in the automotive and transportation industries;
our inability to successfully execute on our growth strategy;
risks associated with our non-U.S. operations;
currency-related risks;
increased competition;
risks of the loss of any of our significant customers or the consolidation of MSOs, distributors and/or body shops;
price increases or interruptions in our supply of raw materials;
failure to develop and market new products and manage product life cycles;
litigation and other commitments and contingencies;
significant environmental liabilities and costs as a result of our current and past operations or products, including operations or products related to our business prior to the Acquisition;
unexpected liabilities under any pension plans applicable to our employees;
risk that the insurance we maintain may not fully cover all potential exposures;
failure to comply with the anti-corruption laws of the United States and various international jurisdictions;
failure to comply with anti-terrorism laws and regulations and applicable trade embargoes;
business disruptions, security threats and security breaches;
our ability to protect and enforce intellectual property rights;
intellectual property infringement suits against us by third parties;
our substantial indebtedness;

28

Table of Contents

our ability to obtain additional capital on commercially reasonable terms may be limited;
our ability to realize the anticipated benefits of any acquisitions and divestitures;
our joint ventures’ ability to operate according to our business strategy should our joint venture partners fail to fulfill their obligations;
ability to recruit and retain the experienced and skilled personnel we need to compete;
work stoppages, union negotiations, labor disputes and other matters associated with our labor force;
terrorist acts, conflicts, wars and natural disasters that may materially adversely affect our business, financial condition and results of operations;
transporting certain materials that are inherently hazardous due to their toxic nature;
weather conditions that may temporarily reduce the demand for some of our products;
reduced demand for some of our products as a result of improved safety features on vehicles and insurance company influence;
the amount of the costs, fees, expenses and charges related to being a public company;
any statements of belief and any statements of assumptions underlying any of the foregoing;
Carlyle’s ability to significantly influence our decisions;
other factors disclosed in this Quarterly Report on Form 10-Q; 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 Quarterly Report on Form 10-Q. 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 a nearly 150-year heritage in the coatings industry and are known for manufacturing high-quality products with well-recognized brands supported by market-leading technology and customer service. Our diverse global footprint of 35 manufacturing facilities, 7 technology centers, 45 customer training centers and approximately 12,600 employees allows us to meet the needs of customers in over 130 countries. We serve our customer base through an extensive sales force and technical support organization, as well as through over 4,000 independent, locally based distributors.
We operate our business in two operating segments, Performance Coatings and Transportation Coatings. Our segments are based on the type and concentration of customers served, service requirements, methods of distribution and major product lines.
Through our Performance Coatings segment we provide high-quality liquid and powder coatings solutions to a fragmented and local customer base. We are one of only a few suppliers with the technology to provide precise color matching and highly durable coatings systems. The end-markets within this segment are refinish and industrial.
Through our Transportation Coatings segment we provide advanced coating technologies to OEMs of light and commercial vehicles. These increasingly global customers require a high level of technical support coupled with cost-effective, environmentally responsible coatings systems that can be applied with a high degree of precision, consistency and speed. The end-markets within this segment are light vehicle and commercial vehicle.
On November 11, 2014, we priced our initial public offering (the "Offering", or the "IPO"), in which certain selling shareholders affiliated with Carlyle sold 57,500,000 common shares at a price of $19.50 per share. We received no proceeds from the Offering.
On April 8, 2015, we completed a Secondary Offering in which our then-majority shareholder, Carlyle, sold an aggregate of 40,000,000 common shares at a public offering price of $28.00 per share. The underwriters also exercised their over-allotment option and purchased an additional 6,000,000 common shares.
On April 8, 2015, Carlyle also sold 20,000,000 common shares in a private placement to an affiliate of Berkshire Hathaway Inc. at $28.00 per share.
We did not receive any proceeds from the sale of common shares in the Secondary Offering or the private placement.

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BUSINESS HIGHLIGHTS AND TRENDS
From 2012 to 2014, we managed the transition of ownership and operational separation resulting from the planned divestiture of our business by DuPont and ultimately the Acquisition, including significant changes to our senior leadership team. During this time period, our Adjusted EBITDA grew at a 21% CAGR primarily as the result of several strategic initiatives focused on margin improvement. In addition to regular price increases in our refinish end-market, these initiatives included selective price increases in other end-markets, reducing sales with lower margin customers and productivity improvements, which collectively drove Adjusted EBITDA growth in both of our segments.
From 2012 to 2014, our net sales grew at a 2% CAGR with net sales growth in both our Transportation Coatings segment and our Performance Coatings segment. Net sales in our Transportation Coatings segment grew at a 1% CAGR, driven by consistent net sales in our light vehicle end-market and increasing sales in our commercial vehicle end-market, primarily as a result of increased vehicle production in North America and Asia Pacific and improvements in average selling price, driven by new product and color introductions. Net sales in our Performance Coatings segment increased at a 2% CAGR over the same period as a result of higher average selling prices, partially offset by lower volumes in both our refinish and industrial end-markets in developed markets as well as unfavorable impacts of currency exchange. In EMEA, volumes declined as a result of a difficult economic environment. In North America, our lack of participation in the MSO market prior to the Acquisition had a negative impact on our volumes as MSO body shops increased the number of vehicles serviced at the expense of independent body shop customers. These factors in developed markets were partially offset by continued refinish net sales growth in the emerging markets.
Our net sales decreased approximately 4% for the six months ended June 30, 2015 compared to the six months ended June 30, 2014, primarily due to a decline of approximately 11% from unfavorable currency translation. Excluding the impact of currency translation, our net sales increased approximately 7% as a result of an increase in average selling prices primarily within Latin America and an increase in sales volumes in North America, Latin America and Asia Pacific. The following trends have impacted our segment and end-market sales performance for the six months ended June 30, 2015:
Performance Coatings: Net sales excluding currency translation increased approximately 6% driven by increases in average selling price within our refinish end-market, particularly in Latin America, and increased volumes in both our refinish and industrial end-markets.
Transportation Coatings: Net sales excluding currency translation increased approximately 9% driven primarily by volume growth in both our light vehicle and commercial vehicle end-markets from new business wins and increased vehicle builds in North America, Latin America and Asia Pacific.
Since the Acquisition, we have implemented numerous initiatives to reduce our fixed and variable costs that have improved our Adjusted EBITDA margin. Examples include transitioning our IT systems to more cost-effective solutions that better meet our needs as an independent company, developing a global procurement organization to reduce procurement costs and investing in a European manufacturing re-alignment to position the region for profitable growth. Additionally in 2015, we commenced a new "Axalta Way" initiative which focuses on commercial alignment and cost reduction. These initiatives are contributing to our financial results and we believe they will continue to drive profitability improvements over the next several years.
Our business serves four end-markets globally as follows:
 (In millions)
Three Months Ended June 30,
2015 vs 2014
Six Months Ended June 30,
2015 vs 2014
 
2015
2014
% change
2015
2014
% change
Performance Coatings
 
 
 
 
 
 
Refinish
$
460.1

$
471.1

(2.3
)%
$
853.3

$
906.3

(5.8
)%
Industrial
178.7

193.9

(7.8
)%
342.7

374.8

(8.6
)%
Total Net sales Performance Coatings
638.8

665.0

(3.9
)%
1,196.0

1,281.1

(6.6
)%
Transportation Coatings
 
 
 
 
 
 
Light Vehicle
347.2

363.4

(4.5
)%
680.4

703.0

(3.2
)%
Commercial Vehicle
108.1

98.2

10.1
 %
206.9

189.9

9.0
 %
Total Net sales Transportation Coatings
455.3

461.6

(1.4
)%
887.3

892.9

(0.6
)%
Total Net sales
$
1,094.1

$
1,126.6

(2.9
)%
$
2,083.3

$
2,174.0

(4.2
)%

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FACTORS AFFECTING OUR OPERATING RESULTS
The following discussion sets forth certain components of our statements of operations as well as factors that impact those items.
Net sales
We generate revenue from the sale of our products across all major geographic areas. Our net sales include total sales less estimates for returns and price allowances. Price allowances include discounts for prompt payment as well as volume-based incentives. Our overall net sales are generally impacted by the following factors:
fluctuations in overall economic activity within the geographic markets in which we operate;
underlying growth in one or more of our end-markets, either worldwide or in particular geographies in which we operate;
the type of products used within existing customer applications, or the development of new applications requiring products similar to ours;
changes in product sales prices (including volume discounts and cash discounts for prompt payment);
changes in the level of competition faced by our products, including price competition and the launch of new products by competitors;
our ability to successfully develop and launch new products and applications; and
fluctuations in foreign exchange rates.
While the factors described above impact net sales in each of our operating segments, the impact of these factors on our operating segments can differ, as described below. For more information about risks relating to our business, see "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2014.
Other revenue
Other revenue consists primarily of consulting and other service revenue and royalty income.
Cost of goods sold ("cost of sales")
Our cost of sales consists principally of the following:
Production Materials Costs. We purchase a significant amount of the materials used in production on a global lowest-cost basis.
Employee Costs. These include the compensation and benefit costs for employees involved in our manufacturing operations. These costs generally increase on an aggregate basis as production volumes increase and may decline as a percent of net sales as a result of economies of scale associated with higher production volumes.
Depreciation Expense. Property, plant and equipment are stated at cost and depreciated or amortized on a straight-line basis over their estimated useful lives. Property, plant and equipment acquired through the Acquisition were recorded at their estimated fair value on the acquisition date resulting in a new cost basis for accounting purposes.
Other. Our remaining cost of sales consists of freight costs, warehousing expenses, purchasing costs, costs associated with closing or idling of production facilities, functional costs supporting manufacturing, product claims and other general manufacturing expenses, such as expenses for utilities and energy consumption.
The main factors that influence our cost of sales as a percentage of net sales include:
changes in the price of raw materials;
production volumes;
the implementation of cost control measures aimed at improving productivity, including reduction of fixed production costs, refinements in inventory management and the coordination of purchasing within each subsidiary and at the business level; and
fluctuations in foreign exchange rates.

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Selling, general and administrative expenses
Our selling, general and administrative expense consists of all expenditures incurred in connection with the sales and marketing of our products, as well as administrative overhead costs, including:
compensation and benefit costs for management, sales personnel and administrative staff, including share-based compensation expense. Expenses relating to our sales personnel increase or decrease principally with changes in sales volume due to the need to increase or decrease sales personnel to meet changes in demand. Expenses relating to administrative personnel generally do not increase or decrease directly with changes in sales volume; and
depreciation, advertising and other selling expenses, such as expenses incurred in connection with travel and communications.
Changes in selling, general and administrative expense as a percentage of net sales have historically been impacted by a number of factors, including:
changes in sales volume, as higher volumes enable us to spread the fixed portion of our administrative expense over higher sales;
changes in our customer base, as new customers may require different levels of sales and marketing attention;
new product launches in existing and new markets, as these launches typically involve a more intense sales activity before they are integrated into customer applications;
customer credit issues requiring increases to the allowance for doubtful accounts; and
fluctuations in foreign exchange rates.
Research and development expenses
Research and development expense represents costs incurred to develop new products, services, processes and technologies or to generate improvements to existing products or processes.
Interest expense, net
Interest expense, net consists primarily of interest expense on institutional borrowings and other financing obligations and changes in fair value of interest rate derivative instruments, net of capitalized interest expense. Interest expense, net also includes the amortization of debt issuance costs and debt discounts associated with our Senior Secured Credit Facilities and Senior Notes.
Other (income) expense, net
Other (income) expense, net represents costs incurred, net of income, on various non-operational items including historical management expenses to Carlyle as well as foreign exchange gains and losses and impairment losses on assets that are not part of our core operational activities.
Provision (benefit) for income taxes
We and our subsidiaries are subject to income tax in the various jurisdictions in which we operate. While the extent of our future tax liability is uncertain, the impact of acquisition accounting for the Acquisition and for future acquisitions, changes to the debt and equity capitalization of our subsidiaries, and the realignment of the functions performed and risks assumed by the various subsidiaries are among the factors that will determine the future book and taxable income of the respective subsidiary and the Company as a whole.

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NON-GAAP FINANCIAL MEASURES
Reconciliation of Net Income (Loss) 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 use certain of these financial measures for business planning purposes and in measuring our performance relative to that of our competitors. We utilize Adjusted EBITDA as the primary measure of segment performance.
EBITDA consists of net income (loss) before interest, taxes, depreciation and amortization. Adjusted EBITDA consists of EBITDA adjusted for (i) non-operating income or expense, (ii) the impact of certain non-cash, nonrecurring or other items that are included in net income and EBITDA that we do not consider indicative of our ongoing operating performance and (iii) certain unusual or nonrecurring items impacting results in a particular period. 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 (loss), earnings (loss) per share or any other performance measures derived in accordance with U.S. GAAP as measures of operating performance.
EBITDA and Adjusted EBITDA have important limitations as analytical tools and you should not consider them in isolation or as substitutes for analysis of our results as reported under U.S. GAAP. Some of these limitations are:
EBITDA and Adjusted EBITDA:
do not reflect the significant interest expense on our debt, including the Senior Secured Credit Facilities and the Senior Notes;
eliminate the impact of income taxes on our results of operations; and
contain certain estimates for periods prior to the Acquisition of standalone costs;
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any expenditures for such replacements; and
other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures.
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 (loss), earnings (loss) per share and other performance measures.
In evaluating these financial measures, you should be aware that in the future we may incur expenses similar to those eliminated in this presentation. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.

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The following table reconciles the net income (loss) to EBITDA and Adjusted EBITDA calculations discussed above for the periods presented:
 
Three Months Ended June 30,
Six Months Ended June 30,
(In millions)
2015
2014
2015
2014
Net income (loss)
$
(24.3
)
$
55.8

$
22.4

$
52.1

Interest expense, net
49.2

54.9

99.2

113.9

Provision (benefit) for income taxes
29.5

(1.3
)
30.7

10.7

Depreciation and amortization
77.5

71.8

150.1

152.9

EBITDA
131.9

181.2

302.4

329.6

Inventory step-up (a)
0.5


0.5


Financing costs (b)



3.1

Foreign exchange remeasurement losses (gains) (c)
57.8

(14.6
)
66.5

(14.5
)
Long-term employee benefit plan adjustments (d)
0.2

2.2

0.4

4.5

Termination benefits and other employee related costs (e)
14.8

2.7

18.5

5.9

Consulting and advisory fees (f)
6.8

7.7

9.9

20.7

Transition-related costs (g)

33.6


47.5

Secondary offering costs (h)
0.3


1.7


Other adjustments (i)
13.2

8.2

11.1

11.0

Dividends in respect of noncontrolling interest (j)
(0.6
)
(0.7
)
(4.1
)
(1.6
)
Management fee expense (k)

0.8


1.6

Asset impairment (l)
30.6


30.6


Adjusted EBITDA
$
255.5

$
221.1

$
437.5

$
407.8

(a)
During the three and six months ended June 30, 2015, we recorded a non-cash fair value inventory adjustment associated with an acquisition. These amounts increased cost of goods sold by $0.5 million.
(b)
In connection with an amendment to the Senior Secured Credit Facilities in February 2014, we recognized $3.1 million of costs during the six months ended June 30, 2014.
(c)
Eliminates foreign exchange gains and losses resulting from the remeasurement of assets and liabilities denominated in foreign currencies.
(d)
Eliminates the non-service cost components of long-term employee benefit costs.
(e)
Represents expenses primarily related to employee termination benefits and other employee-related costs. Termination benefits include the costs associated with our headcount initiatives associated with cost saving opportunities that were related to our transition to a standalone entity and our Axalta Way cost savings initiatives in 2015.
(f)
Represents fees paid to consultants, advisors, and other third-party professional organizations for professional services. Amounts incurred for the three and six months ended June 30, 2015 primarily relate to our Axalta Way cost savings initiatives. Amounts incurred for the three and six months ended June 30, 2014 relate to our transition from DuPont to a standalone entity.
(g)
Represents charges associated with the transition from DuPont to a standalone entity, including branding and marketing, information technology related costs, and facility transition costs.
(h)
Represents costs associated with the offerings of our common shares by Carlyle that closed in April 2015.
(i)
Represents costs for certain unusual or non-operational (gains) and losses, including a $5.4 million gain recognized during the six months ended June 30, 2015 resulting from the remeasurement of our previously held interest in an equity method investee upon the acquisition of a controlling interest, stock-based compensation, equity investee dividends, indemnity losses associated with the Acquisition, and loss (gain) on sale and disposal of property, plant and equipment.
(j)
Represents the payment of dividends to our joint venture partners by our consolidated entities that are not wholly owned.
(k)
Pursuant to Axalta’s management agreement with Carlyle Investment for management and financial advisory services and oversight provided to Axalta and its subsidiaries, Axalta was required to pay an annual management fee of $3.0 million and out-of-pocket expenses. This agreement terminated upon completion of the IPO in November 2014.
(l)
As a result of the currency devaluation in Venezuela, we evaluated the carrying values of our long-lived assets for impairment and recorded an impairment charge relating to a real estate investment of $30.6 million. See Note 9 to our Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for more information.

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RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information contained in the accompanying unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. Our historical results of operations set forth below may not necessarily reflect what will occur in the future.
Three months ended June 30, 2015 compared to the three months ended June 30, 2014
The following table was derived from the unaudited condensed consolidated statements of operations for the three months ended June 30, 2015 and 2014 included elsewhere in this Quarterly Report on Form 10-Q.
 
Three Months Ended June 30,
(In millions)
2015
2014
Net sales
$
1,094.1

$
1,126.6

Other revenue
7.0

7.7

Total revenue
1,101.1

1,134.3

Cost of goods sold
679.7

742.5

Selling, general and administrative expenses
245.5

250.6

Research and development expenses
12.8

12.1

Amortization of acquired intangibles
20.1

21.3

Income from operations
143.0

107.8

Interest expense, net
49.2

54.9

Other (income) expense, net
88.6

(1.6
)
Income before income taxes
5.2

54.5

Provision for (benefit) income taxes
29.5

(1.3
)
Net income (loss)
(24.3
)
55.8

Less: Net income attributable to noncontrolling interests
0.8

2.0

Net income (loss) attributable to controlling interests
$
(25.1
)
$
53.8

Net sales
Net sales decreased $32.5 million, or 2.9%, to $1,094.1 million for the three months ended June 30, 2015, as compared to net sales of $1,126.6 million for the three months ended June 30, 2014. Our net sales decrease in the three months ended June 30, 2015 compared to the three months ended June 30, 2014 was primarily attributable to unfavorable impacts of currency exchange, which reduced net sales by 11.1% due to the impact of the weakening Euro and certain currencies within Latin America compared to the U.S. dollar. This net sales decline was partially offset by increases in volumes across all regions and segments, which contributed to net sales growth of 4.8%. Higher average selling prices, primarily in Latin America, also contributed to an increase of 3.4% compared to the three months ended June 30, 2014.
Other revenue
Other revenue decreased $0.7 million, or 9.1%, to $7.0 million for the three months ended June 30, 2015, as compared to $7.7 million for the three months ended June 30, 2014. This decrease in other revenue was primarily related to the impacts of weakening currencies against the U.S. dollar, which caused a $1.4 million, or 18.2%, decrease in other revenue primarily due to the weakening Euro. These decreases were slightly offset from higher service revenues during the period.
Cost of sales
Cost of sales decreased $62.8 million, or 8.5%, to $679.7 million for the three months ended June 30, 2015 compared to $742.5 million for the three months ended June 30, 2014. The decrease for the three months ended June 30, 2015 compared to the three months ended June 30, 2014 resulted primarily from the 10% decrease associated with the benefits of currency exchange due to the impact of the weakening Euro and certain currencies within Latin America. The decrease from currency translation was slightly offset by higher volumes of 4.8% as well as the impacts of stock-based compensation resulting primarily from the accelerated vesting of all issued and outstanding stock options issued under the 2013 Plan. Cost of sales as a percentage of net sales decreased from 65.9% for the three months ended June 30, 2014 to 62.1% for the three months ended June 30, 2015 as a result of reductions in costs resulting from our cost savings initiatives as well as lower raw material prices and higher average selling prices.

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Selling, general and administrative expenses
Selling, general and administrative expenses decreased $5.1 million, or 2.0%, to $245.5 million for the three months ended June 30, 2015 compared to $250.6 million for the three months ended June 30, 2014. Selling, general and administrative expenses for the three months ended June 30, 2015 included $21.9 million of costs related to our 2015 cost savings initiatives as compared to $26.7 million of costs for the three months ended June 30, 2014 associated with our transition related activities and cost saving initiatives, resulting in a decrease of $4.8 million over the comparable period.  In addition, favorable impacts of currency exchange during the three months ended June 30, 2015 contributed to an 11.0% reduction in selling, general and administrative expenses due to the impact of the weakening Euro and certain currencies within Latin America compared to the U.S. dollar. Offsetting the decrease over comparable periods was an increase of $6.6 million in stock-based compensation for the three months ended June 30, 2015, resulting primarily from the impact of the accelerated vesting of all outstanding stock options issued under the 2013 Plan. Further offsetting the decrease was the absence of a $7.7 million gain for the amendment of benefit plan awards during the three months ended June 30, 2014, as well as an increase in selling and administrative costs in 2015 as we focused on opportunities to expand our market presence.
Research and development expenses
Research and development expenses increased $0.7 million, or 5.8%, to $12.8 million for the three months ended June 30, 2015 compared to $12.1 million for the three months ended June 30, 2014. This increase was a result of additional spend as we focus on developing new and existing products in the market. These increases in spend were partially offset by the impacts of currency exchange, which contributed to a 5.8% decrease in research and development expenses primarily as a result of the weakening Euro compared to the U.S. dollar.
Amortization of acquired intangibles
Amortization of acquired intangibles decreased $1.2 million, or 5.6%, to $20.1 million for the three months ended June 30, 2015 compared to $21.3 million for the three months ended June 30, 2014. This decrease was a result of the benefit of currency exchange primarily as a result of the weakening Euro compared to the U.S. dollar.
Interest expense, net
Interest expense, net decreased $5.7 million, or 10.4%, to $49.2 million for the three months ended June 30, 2015 compared to $54.9 million for the three months ended June 30, 2014. The decrease was primarily driven by the impact of the 25 basis point step-down in interest rates in August 2014 on our Term Loans resulting from a reduction in our leverage ratio, as well as reductions in principal balances throughout 2014, including the $100.0 million prepayment on our New Dollar Term Loan made on September 30, 2014. Further contributing to the net decrease for the three months ended June 30, 2015 was the impact of the weakening Euro against the U.S. dollar.
Other (income) expense, net
Other expense, net increased $90.2 million from income of $1.6 million for the three months ended June 30, 2014 to expense of $88.6 million for the three months ended June 30, 2015. Within other (income) expense, net, exchange losses were $57.8 million during the three months ended June 30, 2015 as compared to exchange gains of $14.6 million for the three months ended June 30, 2014, resulting in an increase in expense of $72.4 million.
The primary driver of the exchange losses for the three months ended June 30, 2015 was a $53.2 million loss resulting from the revaluation of our Venezuelan subsidiary's net monetary assets at the June 30, 2015 SIMADI currency exchange rate of 197.7 Venezuelan bolivars to 1.0 U.S. dollar. At June 30, 2015, we determined that that using the SIMADI exchange rate of 197.7 Venezuelan bolivars to 1.0 U.S. dollar, rather than the previously used SICAD I rate of 12.0 Venezuelan bolivars to 1.0 U.S. dollar, was the appropriate method of valuation based on the culmination of the relevant facts and circumstances, including our expectation that future dividend remittances would be made at this rate. This exchange loss for the three months ended June 30, 2015 is compared to the $12.2 million gain recognized for the three months ended June 30, 2014 resulting from the revaluation of the Venezuelan subsidiary's net monetary liabilities resulting from the change in exchange rate from the official CENCOEX rate of 6.3 Venezuelan bolivars to 1.0 U.S. dollar to the SICAD I rate of 10.0 Venezuelan bolivars to 1.0 U.S. dollar in June 2014. The change over comparable periods resulting from the revaluations was an increase in exchange losses, net of $65.4 million.
In addition to the Venezuelan net exchange losses, we incurred $25.0 million in losses on our Euro borrowings during the three months ended June 30, 2015 as compared to $6.4 million in losses on our Euro borrowings during the three months ended June 30, 2014. These losses were partially offset by a $20.4 million gain primarily related to the remeasurement of intercompany transactions denominated in currencies different from the functional currency of the relevant subsidiary during the three months ended June 30, 2015, compared to an $8.8 million gain during the three months ended June 30, 2014.


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Table of Contents

Further contributing to the loss during the current period was the impairment charge recorded during the three months ended June 30, 2015 of $30.6 million resulting from our evaluation of the carrying value associated with our real estate investment in Venezuela.
Offsetting the increase in losses over the comparable periods was the release of an indemnity receivable in June 2014 that had initially been recorded in conjunction with our tax indemnities from the Acquisition. This resulted in $12.3 million of expense relating to an uncertain tax position that was reversed during the three months ended June 30, 2014 compared to the $0.6 million loss for the three months ended June 30, 2015.
Provision (benefit) for income taxes
We recorded a provision for income taxes of $29.5 million for the three months ended June 30, 2015, which represents a 567.3% effective tax rate in relation to the income before income taxes of $5.2 million. The effective tax rate for the three months ended June 30, 2015 differs from the U.S. Federal statutory rate by 532.3%, which is primarily the result of non-deductible pre-tax expenses. Non-deductible expenses and interest, as well as currency exchange losses, resulted in a negative impact to our provision for income taxes of $5.0 million and $7.3 million, respectively. In addition, our pre-tax impairment charge in Venezuela of $30.6 million had an unfavorable $10.7 million impact on the effective rate as it was non-deductible.
We recorded a benefit for income taxes of $1.3 million for the three months ended June 30, 2014, which represents a 2.4% negative effective tax rate in relation to the income before income taxes of $54.5 million. The effective tax rate for the three months ended June 30, 2014 differs from the U.S. Federal statutory rate by 37.4%, which is the result of various items that impacted the effective rate both favorably and unfavorably. We recorded favorable adjustments related to prior year tax positions of $21.1 million, as well as $9.1 million related to earnings in jurisdictions where the rate is lower than the U.S. Federal statutory rate. These adjustments were partially offset by the unfavorable impact of pre-tax losses in jurisdictions where a tax benefit is not expected to be realized of $7.4 million and $8.7 million related to non-deductible expenses and withholding tax expense.

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Table of Contents

Six months ended June 30, 2015 compared to the six months ended June 30, 2014
The following table was derived from the interim unaudited condensed consolidated statements of operations for the six months ended June 30, 2015 and 2014 included elsewhere in this Quarterly Report on Form 10-Q.
 
Six Months Ended June 30,
(In millions)
2015
2014
Net sales
$
2,083.3

$
2,174.0

Other revenue
15.3

14.7

Total revenue
2,098.6

2,188.7

Cost of goods sold
1,329.5

1,446.0

Selling, general and administrative expenses
458.5

497.3

Research and development expenses
25.7

23.4

Amortization of acquired intangibles
40.1

42.4

Income from operations
244.8

179.6

Interest expense, net
99.2

113.9

Other expense, net
92.5

2.9

Income before income taxes
53.1

62.8

Provision for income taxes
30.7

10.7

Net income
22.4

52.1

Less: Net income attributable to noncontrolling interests
2.4

2.6

Net income attributable to controlling interests
$
20.0

$
49.5

Net sales
Net sales decreased $90.7 million, or 4.2%, to $2,083.3 million for the six months ended June 30, 2015, as compared to net sales of $2,174.0 million for the six months ended June 30, 2014. Our net sales decreased for the six months ended June 30, 2015 compared to the six months ended June 30, 2014 was primarily attributable to unfavorable impacts of currency exchange, which reduced net sales by 10.9% due to the impact of the weakening Euro and certain currencies within Latin America compared to the U.S. dollar. This net sales decline was partially offset by increases in volumes primarily in Asia Pacific, North America, and Latin America, which contributed to net sales growth of 4.8%. Higher average selling prices, primarily in Latin America, also contributed to an increase of 1.9% compared to the six months ended June 30, 2014.
Other revenue
Other revenue increased $0.6 million, or 4.1%, to $15.3 million for the six months ended June 30, 2015, as compared to $14.7 million for the six months ended June 30, 2014. The increase primarily related to an increase in royalty revenues within North America. This increase in other revenue was partially offset by the impacts of weakening currencies against the U.S. dollar, which caused a 14.3% decrease in other revenue primarily due to the weakening Euro.
Cost of sales
Cost of sales decreased $116.5 million, or 8.1%, to $1,329.5 million for the six months ended June 30, 2015 compared to $1,446.0 million for the six months ended June 30, 2014. The decrease for the six months ended June 30, 2015 compared to the six months ended June 30, 2014 resulted primarily from a 9.8% decrease associated with currency exchange due to the impact of the weakening Euro and certain currencies within Latin America. The decrease from currency translation was slightly offset by higher volumes of 4.8% as well as the impacts of stock-based compensation resulting primarily from the accelerated vesting of all issued and outstanding stock options issued under the 2013 Plan. Cost of sales as a percentage of net sales decreased from 66.5% for the six months ended June 30, 2014 to 63.8% for the six months ended June 30, 2015 as a result of reductions in costs resulting from our cost savings initiatives as well as lower raw material prices and higher average selling prices.

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Selling, general and administrative expenses
Selling, general and administrative expenses decreased $38.8 million, or 7.8%, to $458.5 million for the six months ended June 30, 2015 compared to $497.3 million for the six months ended June 30, 2014. Selling, general and administrative expenses for the six months ended June 30, 2015 included $30.1 million of costs related to our 2015 cost savings initiatives as compared to $56.8 million of costs for the six months ended June 30, 2014 associated with our transition related activities and cost saving initiatives, resulting in a decrease of $26.7 million over the comparable period. In addition, favorable impacts of currency exchange during the six months ended June 30, 2015 contributed to a 10.3% reduction in selling, general and administrative expenses due to the impact of the weakening Euro and certain currencies within Latin America compared to the U.S. dollar. Offsetting the decrease over comparable periods was an increase of $6.6 million in stock-based compensation for the six months ended June 30, 2015, resulting primarily from the impact of the accelerated vesting of all outstanding stock options issued under the 2013 Plan, as well as the impact of equity incentive awards issued in 2015. Further offsetting the decrease was the absence of a $7.7 million gain for the amendment of benefit plan awards during the six months ended June 30, 2014, as well as an increase in selling and administrative costs in 2015 as we focused on opportunities to expand our market presence.
Research and development expenses
Research and development expenses increased $2.3 million, or 9.8%, to $25.7 million for the six months ended June 30, 2015 compared to $23.4 million for the six months ended June 30, 2014. This increase was a result of additional spend as we focus on developing new and existing products in the market. These increases in spend were partially offset by the impacts of currency exchange, which contributed to a 6.4% decrease in research and development expenses primarily as a result of the weakening Euro compared to the U.S. dollar.
Amortization of acquired intangibles
Amortization of acquired intangibles decreased $2.3 million, or 5.4%, to $40.1 million for the six months ended June 30, 2015 compared to $42.4 million for the six months ended June 30, 2014. This decrease was a result of the benefit of currency exchange primarily as a result of the weakening Euro compared to the U.S. dollar.
Interest expense, net
Interest expense, net decreased $14.7 million, or 12.9%, to $99.2 million for the six months ended June 30, 2015 compared to $113.9 million for the six months ended June 30, 2014. Interest expense, net for the six months ended June 30, 2015 reflects a full six months of interest costs after the refinancing of our Term Loans in February of 2014. Interest expense, net for the six months ended June 30, 2014 reflects one month of interest expense associated with our original debt financing for the Acquisition and five months of interest expense based on the refinancing of our Term Loans. Additionally, the six months ended June 30, 2015 included the impact of the 25 basis point step-down in interest rates in August 2014 on our Term Loans resulting from a reduction in our leverage ratio, as well as reductions in principal balances throughout 2014 and 2015, including the $100.0 million prepayment on our New Dollar Term Loan made on September 30, 2014. Further contributing to the net decrease for the six months ended June 30, 2015 was the impact of the weakening Euro against the U.S. dollar.
Other expense, net
Other expense, net increased $89.6 million to $92.5 million for the six months ended June 30, 2015 compared to $2.9 million for the six months ended June 30, 2014. Within other expense, net, exchange losses were $66.5 million during the six months ended June 30, 2015 as compared to exchange gains of $14.5 million for the six months ended June 30, 2014, resulting in an increase in expense of $81.0 million.
The primary driver of the exchange losses for the six months ended June 30, 2015 was the $53.2 million loss resulting from the revaluation of our Venezuelan subsidiary's net monetary assets at the June 30, 2015 SIMADI currency exchange rate of 197.7 Venezuelan bolivars to 1.0 U.S. dollar. At June 30, 2015, we determined that that using the SIMADI exchange rate of 197.7 Venezuelan bolivars to 1.0 U.S. dollar, rather than the previously used SICAD I rate of 12.0 Venezuelan bolivars to 1.0 U.S. dollar, was the most appropriate exchange rate based on the culmination of the relevant facts and circumstances, including the expectation that future dividend remittances would be made at this rate. This exchange loss for the six months ended June 30, 2015 is compared to the $12.2 million gain recognized for the six months ended June 30, 2014 resulting from the revaluation of the Venezuelan subsidiary's net monetary liabilities resulting from the change in exchange rate from the official CENCOEX rate of 6.3 Venezuelan bolivars to 1.0 U.S. dollar to the SICAD I rate of 10.0 Venezuelan bolivars to 1.0 U.S. dollar in June 2014. The change over comparable periods resulting from the revaluations was an increase in exchange losses, net of $65.4 million.

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Offsetting the increase in the Venezuelan net exchange losses were net exchange gains of $64.8 million on our Euro borrowings during the six months ended June 30, 2015 as compared to $11.8 million in gains for the six months ended June 30, 2014. The remaining net exchange losses during the six months ended June 30, 2015 of $78.1 million primarily related to the remeasurement of intercompany transactions denominated in currencies different from the functional currency of the relevant subsidiary, compared to $9.5 million of exchange losses for the six months ended June 30, 2014.
Further contributing to the loss during the current period was the impairment charge recorded during the six months ended June 30, 2015 of $30.6 million resulting from our evaluation of the carrying value associated with our real estate investment in Venezuela.
Offsetting the increase in losses over the comparable periods was the release of an indemnity receivable in June 2014 that had initially been recorded in conjunction with our tax indemnities from the Acquisition. This resulted in $12.3 million of expense relating to an uncertain tax position that was reversed during the six months ended June 30, 2014 compared to the $4.3 million loss for the six months ended June 30, 2015. In addition, during the six months ended June 30, 2014 we recognized debt modification fees of $3.1 million relating to the refinancing of our Term Loans in February of 2014.
Further offsetting the increase, during the six months ended June 30, 2015, we entered into an agreement with one of our joint venture partners to acquire a controlling interest in an investment previously accounted for as an equity method investment. As a result of the acquisition of a controlling interest in the investment, we recognized a gain of $5.4 million on the remeasurement of our previously held equity interest as of the acquisition date, resulting in a net decrease in other expense compared to the six months ended June 30, 2014.
Provision for income taxes
We recorded a provision for income taxes of $30.7 million for the six months ended June 30, 2015, which represents a 57.8% effective tax rate in relation to the income before income taxes of $53.1 million. The effective tax rate for the six months ended June 30, 2015 differs from the U.S. Federal statutory rate by 22.8%, which is the result of various items that impacted the effective rate both favorably and unfavorably. We recorded favorable adjustments for earnings in jurisdictions where the statutory rate is lower than the U.S. Federal statutory rate of $7.5 million, as well as $9.3 million associated with currency exchange losses. These adjustments were offset by our 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 non-deductible, the unfavorable impact of pre-tax losses in jurisdictions where a tax benefit is not expected to be realized of $6.1 million, and non-deductible expenses and interest of $11.5 million.
We recorded a provision for income taxes of $10.7 million for the six months ended June 30, 2014, which represents a 17.0% effective tax rate in relation to the income before income taxes of $62.8 million. The effective tax rate for the six months ended June 30, 2014 differs from the U.S. Federal statutory rate by 18.0%, which is the result of various items that impacted the effective rate both favorably and unfavorably. We recorded favorable adjustments related to prior year tax positions of $21.1 million, as well as $17.4 million related to earnings in jurisdictions where the statutory tax rate was lower than the U.S. Federal statutory rate. These adjustments were partially offset by the unfavorable impact of pre-tax losses in jurisdictions where a tax benefit is not expected to be realized of $13.0 million $18.1 million related to nondeductible expenses and withholding tax expense.

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SEGMENT RESULTS
Three months ended June 30, 2015 compared to the three months ended June 30, 2014
The following table presents net sales by segment and segment Adjusted EBITDA for the periods presented: