Axalta Coating Systems Ltd

Previous wording

Many statements made in the following discussion and analysis of our financial condition and results of operations and elsewhere 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 federal securities laws 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, strategies and capital structure. These statements often include words such as "anticipated," "expect," "believe," "intend," "estimates," "projections," "could," "should," "would," "may," "will," "future," "committing," "can,""assumptions," "potential" and "forecasts" and the negative of these words or other comparable or similar terminology. 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 and uncertainties, including, but not limited to, economic, competitive, governmental, geopolitical and technological factors outside of our control, as well as risks related to the execution of the 2024 Transformation Initiative, that may cause our business, industry, strategy, financing activities or actual results to differ materially. More information on potential factors that could affect our financial results is available in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023 as well as "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023 and in other documents that we have filed with, or furnished to, the Securities and Exchange Commission ("SEC"), 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, including, but not limited to, those described in "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023, 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.

Current wording

Many statements made in the following discussion and analysis of our financial condition and results of operations and elsewhere 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 federal securities laws 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, strategies and capital structure. These statements often include words such as "anticipated," "expect," "believe," "intended," "estimated," "projections," "could," "would," "may," "will," "future," "can," "assumptions," "potential," "possible," and "forecasts" and the negative of these words or other comparable or similar terminology. 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 and uncertainties, including, but not limited to, economic, competitive, governmental, geopolitical and technological factors outside of our control, as well as risks related to the execution of the 2024 Transformation Initiative, our acquisition of The CoverFlexx Group, and our previously-announced three-year 2024-2026 strategy, that may cause our business, industry, strategy, financing activities or actual results to differ materially. More information on potential factors that could affect our financial results is available in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023 as well as "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023 and in other documents that we have filed with, or furnished to, the SEC, 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, including, but not limited to, those described in "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023, 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.

Previous wording

Our net sales increased 0.8%, including a 0.7% benefit from foreign currency translation, for the three months ended March 31, 2024 compared with the three months ended March 31, 2023. The increased net sales were driven by higher average selling price and product mix of 0.4%, partially offset by lower volumes of 0.3%. The following trends impacted our segment net sales performance for the three months ended March 31, 2024:

Current wording

Our net sales increased 2.6% for the six months ended June 30, 2024 compared with the six months ended June 30, 2023. The increased net sales were driven by higher volumes of 2.4%, including the contribution from the André Koch acquisition completed in October 2023, and higher average selling price and product mix of 0.2%. There was an immaterial impact from foreign currency translation as favorable fluctuations from currencies such as the Mexican Peso offset unfavorable fluctuations from currencies such as the Chinese Yuan compared to the U.S. Dollar. The following trends impacted our segment net sales performance for the six months ended June 30, 2024:

Previous wording

Our business serves four end-markets globally with net sales for the three months ended March 31, 2024 and 2023, as follows:

Current wording

Our business serves four end-markets globally with net sales for the three and six months ended June 30, 2024 and 2023, as follows:

Previous wording

During February 2024, we announced the 2024 Transformation Initiative intended to simplify the Company’s organizational structure and enable us to be more proactive, responsive, and agile and to better serve our customers and to lower our cost base, improve financial performance and cash flow generation. The 2024 Transformation Initiative actions, certain of which are subject to the satisfaction of local law requirements in various jurisdictions, commenced in the first quarter of 2024 and the Company expects them to be completed by 2026. See Liquidity and Capital Resources included elsewhere in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 4 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.

Current wording

During February 2024, we announced the 2024 Transformation Initiative intended to simplify the Company’s organizational structure and enable us to be more proactive, responsive, and agile and to better serve our customers and to lower our cost base, improve financial performance and cash flow generation. See Liquidity and Capital Resources included elsewhere in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 4 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.

Previous wording

During the three months ended March 31, 2024, we prepaid $75 million of the outstanding principal amount of the 2029 Dollar Term Loans. See Note 15 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.

Current wording

During the six months ended June 30, 2024, we prepaid $75 million of the outstanding principal amount of the 2029 Dollar Term Loans. See Note 15 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.

Previous wording

n Higher average selling prices and product mix driven by Performance Coatings

Current wording

n Higher average selling prices and product mix driven by Performance Coatings, partially offset by Mobility Coatings

Previous wording

n Unfavorable impacts of currency translation of 0.7% due primarily to the fluctuations of the Mexican Peso, Euro, Brazilian Real and British Pound, partially offset by the Chinese Yuan, compared to the U.S. Dollar

Current wording

n Favorable impacts of currency translation of 0.7% due primarily to the fluctuations of the Chinese Yuan, Euro and Brazilian Real, partially offset by the Mexican Peso, compared to the U.S. Dollar

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n Decrease of $3 million in bad debt expense

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n Increase of $3 million in bad debt expense

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n Decrease of $5 million in commissions resulting from changes to contractual arrangements

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n Decrease of $6 million in commissions resulting from changes to contractual arrangements

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Selling, general and administrative expenses remained consistent primarily due to the following:

Current wording

Other operating charges remained consistent primarily due to the following:

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n Increase of $1 million in acquisition-related costs in the current year period

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n Increase of $3 million in acquisition-related costs

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n Increase of $55 million in termination benefits and other employee-related costs associated with the 2024 Transformation Initiative

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n Increase of $54 million in termination benefits and other employee-related costs associated with the 2024 Transformation Initiative

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n Increased amortization of $1 million associated with assets acquired in the prior year

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n Increased amortization of $2 million associated with assets acquired in the prior year

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n Reduced amortization of $4 million from intangibles reaching the end of their useful lives, primarily relating to intangibles from the 2013 DuPont Performance Coatings acquisition

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n Reduced amortization of $4 million from certain intangible assets reaching the end of their useful lives during February 2023, primarily relating to intangibles from the 2013 DuPont Performance Coatings acquisition

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n Favorable impact of $2 million attributable to lower principal on our 2029 Dollar Term Loans, primarily as a result of $200 million of prepayments during the twelve months ended March 31, 2024, partially offset by the increased variable interest rate

Current wording

n Favorable impact of $7 million attributable to lower principal on our 2029 Dollar Term Loans, primarily as a result of $125 million of prepayments during the twelve months ended June 30, 2024, partially offset by the increased variable interest rate

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•Favorable impact of $5 million attributable to the redemption of our Euro-denominated Senior Notes previously due in 2025 in November 2023

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•Favorable impact of $5 million attributable to the redemption in November 2023 of our Euro-denominated Senior Notes due in 2025

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n Decreased benefit of $3 million from derivative instruments used to hedge the variable interest rate exposure on certain debt arrangements

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n Increased benefit of $3 million from derivative instruments used to hedge the variable interest rate exposure on certain debt arrangements

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•Unfavorable impact of $9 million attributable to our 2031 Dollar Senior Notes which were issued in November 2023

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•Unfavorable impact of $10 million attributable to our 2031 Dollar Senior Notes which were issued in November 2023

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n Increased debt extinguishment and refinancing-related costs of $1 million primarily driven by the repricing of our 2029 Dollar Term Loans in March 2024 and write-offs related to $75 million of prepayments on our 2029 Dollar Term Loans

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n $1 million debt extinguishment and refinancing-related costs recognized in the prior year period as part of the write-offs related to $75 million of prepayments on our 2029 Dollar Term Loans

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n Decreased miscellaneous income, net of $3 million

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n Increased miscellaneous income, net of $2 million

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(2) Changes in valuation allowance primarily relates to operations in Luxembourg, the Netherlands, and the United Kingdom.

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(2) Changes in valuation allowance primarily relates to operations in Luxembourg, the Netherlands, and the United Kingdom, including tax impacts of foreign exchange losses.

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n Unfavorable impact of foreign exchange losses of $3 million when compared with the prior year period, primarily driven by fluctuations of the Euro compared to the U.S. Dollar

Current wording

n Unfavorable impacts of currency translation due primarily to fluctuations of the Euro compared to the U.S. Dollar

Previous wording

At March 31, 2024, availability under the Revolving Credit Facility was $528 million, net of $22 million of letters of credit outstanding. All such availability may be utilized without violating any covenants under the Credit Agreement or the indentures governing our senior notes (the "Senior Notes"). At March 31, 2024, we had an immaterial amount of outstanding borrowings under other lines of credit. Our remaining available borrowing capacity under other lines of credit in certain non-U.S. jurisdictions totaled $58 million.

Current wording

At June 30, 2024, availability under the Revolving Credit Facility was $593 million, net of $22 million of letters of credit outstanding and $185 million of loans outstanding. All such availability may be utilized without violating any covenants under the Credit Agreement or the indentures governing our senior notes (the "Senior Notes"). At June 30, 2024, we had no outstanding borrowings under other lines of credit. Our remaining available borrowing capacity under other lines of credit in certain non-U.S. jurisdictions totaled $58 million.

Previous wording

Net cash provided by operating activities for the three months ended March 31, 2024 was $34 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $132 million. This was partially offset by net uses of working capital of $98 million, for which the most significant drivers were decreases in other accrued liabilities of $75 million as well as increases in prepaid expenses and other assets and inventories of $40 million and $20 million, respectively. These outflows were driven primarily by seasonal cash payments for employee-related benefits, timing of payments to vendors, payments of BIPs and increased production. These outflows were partially offset by increases in other liabilities of $22 million largely driven by accruals related to the 2024 Transformation Initiative and timing of payments and accounts payable of $11 million.

Current wording

Net cash provided by operating activities for the six months ended June 30, 2024 was $148 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $327 million. This was partially offset by net uses of working capital of $179 million, for which the most significant drivers were increases in prepaid expenses and other assets, accounts and notes receivable and inventories of $91 million, $35 million and $22 million, respectively, as well as decreases in other accrued liabilities of $62 million. These outflows were driven primarily by payments of BIPs, timing of collections from and payments to customers and vendors, increased production and seasonal cash payments for employee-related benefits. These outflows were partially offset by increases in other liabilities of $24 million largely driven by accruals related to the 2024 Transformation Initiative and timing of payments and accounts payable of $7 million.

Previous wording

Net cash used for investing activities for the three months ended March 31, 2024 was $19 million. The primary use was for purchases of property, plant and equipment of $22 million, partially offset by proceeds of $3 million from interest proceeds from swaps designated as net investment hedges, which are discussed further in Note 16 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Current wording

Net cash used for investing activities for the six months ended June 30, 2024 was $36 million. The primary use was for purchases of property, plant and equipment of $45 million, partially offset by proceeds of $7 million from interest proceeds from swaps designated as net investment hedges, which are discussed further in Note 16 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Previous wording

Net cash used for financing activities for the three months ended March 31, 2024 was $82 million. The primary uses were prepayments of $75 million of the outstanding principal amount of the 2029 Dollar Term Loans, contractual repayments of $6 million on borrowings and payments of $2 million for fees associated with repricing our 2029 Dollar Term Loans in March 2024. The 2029 Dollar Term Loans repricing resulted in $107 million of constructive financing cash inflows and corresponding constructive financing cash outflows.

Current wording

Net cash provided by financing activities for the six months ended June 30, 2024 was $48 million. The primary financing inflow was from borrowing $185 million against our Revolving Credit Facility in connection with the acquisition discussed in Note 19 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. The primary uses were prepayments of $75 million of the outstanding principal amount of the 2029 Dollar Term Loans, purchases of our common stock of $50 million, contractual debt repayments of $11 million and payments of $4 million for fees associated with repricing our 2029 Dollar Term Loans in March 2024 and increasing borrowing capacity and extending the maturity date of our Revolving Credit Facility in June 2024. The 2029 Dollar Term Loans repricing resulted in $107 million of constructive financing cash inflows and corresponding constructive financing cash outflows.

Previous wording

Currency exchange impacts on cash for the three months ended March 31, 2023 were favorable by $6 million, which was driven primarily by the fluctuations of the Mexican Peso and Euro compared to the U.S. Dollar.

Current wording

Currency exchange impacts on cash for the six months ended June 30, 2024 were unfavorable by $20 million, which was driven primarily by the fluctuations of the Euro, Mexican Peso and Brazilian Real compared to the U.S. Dollar.

Previous wording

Net cash used for operating activities for the three months ended March 31, 2023 was $52 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $152 million. This was offset by net uses of working capital of $204 million, for which the most significant drivers were increases in accounts and notes receivable and prepaid expenses and other assets of $92 million and $30 million, respectively, as well as decreases in other accrued liabilities and accounts payable of $96 million and $22 million, respectively. These outflows were driven primarily by timing of collections and payments, payments of BIPs and largely seasonal cash payments for employee-related benefits and were partially offset by decreases in inventories of $39 million as a result of lower production levels as we intentionally managed inventory levels.

Current wording

Net cash provided by operating activities for the six months ended June 30, 2023 was $79 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $308 million. This was partially offset by net uses of working capital of $229 million, for which the most significant drivers were increases in accounts and notes receivable and prepaid expenses and other assets of $194 million and $52 million, respectively, as well as decreases in other accrued liabilities and accounts payable of $40 million and $12 million, respectively. These outflows were driven primarily by timing of collections and payments, payments of BIPs and largely seasonal cash payments for employee-related benefits and were partially offset by decreases in inventories driving $70 million of inflows as a result of lower production levels as we intentionally managed inventory levels.

Previous wording

Net cash used for investing activities for the three months ended March 31, 2023 was $6 million. The primary use was for purchases of property, plant and equipment of $42 million, partially offset by proceeds of $35 million from settlements and interest from swaps designated as net investment hedges.

Current wording

Net cash used for investing activities for the six months ended June 30, 2023 was $37 million. The primary use was for purchases of property, plant and equipment of $74 million, partially offset by proceeds of $35 million from settlements and interest from swaps designated as net investment hedges.

Previous wording

Net cash used for financing activities for the three months ended March 31, 2023 was $88 million. The change was primarily driven by prepayments of $75 million of outstanding principal of the 2029 Dollar Term Loans, routine repayments of $15 million on borrowings, payments totaling $7 million for acquisition-related consideration and payments of $6 million for fees associated with refinancing our term loan due 2024, partially offset by proceeds of $9 million from a short-term borrowing and $5 million net cash received from our stock-based compensation program.

Current wording

Net cash used for financing activities for the six months ended June 30, 2023 was $179 million. The primary uses were voluntary prepayments of $150 million of the outstanding principal amount of the 2029 Dollar Term Loans, contractual repayments of $33 million on borrowings, payments totaling $8 million for acquisition-related consideration and payments of $6 million for fees associated with refinancing our 2024 Dollar Term Loans, partially offset by proceeds of $9 million from a short-term borrowing and $9 million net cash received from our stock-based compensation program.

Previous wording

Currency exchange impacts on cash for the three months ended March 31, 2024 were unfavorable by $9 million, which was driven primarily by the fluctuations of the Euro compared to the U.S. Dollar.

Current wording

Currency exchange impacts on cash for the six months ended June 30, 2023 were favorable by $2 million, which was driven primarily by the fluctuations of the Mexican Peso compared to the U.S. Dollar, partially offset by fluctuations of the Euro compared to the U.S. Dollar.

Previous wording

We had cash and cash equivalents at March 31, 2024 and December 31, 2023 of $624 million and $700 million, respectively. Of these balances, $481 million and $462 million were maintained in non-U.S. jurisdictions at March 31, 2024 and December 31, 2023, respectively. We believe at this time our organizational structure allows us the necessary flexibility to move funds throughout our subsidiaries to meet our operational and working capital needs.

Current wording

We had cash and cash equivalents at June 30, 2024 and December 31, 2023 of $840 million and $700 million, respectively. The June 30, 2024 cash balance includes $185 million borrowed against Axalta’s revolving credit facility in connection with the acquisition discussed in Note 19 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Of these balances, $472 million and $462 million were maintained in non-U.S. jurisdictions at June 30, 2024 and December 31, 2023, respectively. We believe at this time our organizational structure allows us the necessary flexibility to move funds throughout our subsidiaries to meet our operational and working capital needs.

Previous wording

We believe that we continue to maintain sufficient liquidity to meet our cash requirements, including our leverage and associated interest payments as well as our working capital needs. Availability under the Revolving Credit Facility was $528 million at both March 31, 2024 and December 31, 2023, all of which may be borrowed by us without violating any covenants under the Credit Agreement or the indentures governing the Senior Notes.

Current wording

We believe that we continue to maintain sufficient liquidity to meet our cash requirements, including our debt service obligations as well as our working capital needs. Availability under the Revolving Credit Facility was $593 million and $528 million at June 30, 2024 and December 31, 2023, respectively, all of which may be borrowed by us without violating any covenants under the Credit Agreement or the indentures governing the Senior Notes.

Previous wording

During March 2024, we entered into the Fourteenth Amendment to the Credit Agreement to lower the interest rate spread applicable to the 2029 Dollar Term Loans, which continues to be based on SOFR, from 2.50% to 2.00% and to make related changes to effect such repricing. The other material terms of the Credit Agreement, including the outstanding principal amount and maturity date of the 2029 Dollar Term Loans, remained unchanged. As a result of the repricing, we recorded a $2 million loss on financing-related costs during the three months ended March 31, 2024 related to the write-off of unamortized deferred financing costs and original issue discount and fees incurred to complete the repricing.

Current wording

During March 2024, we entered into the Fourteenth Amendment to the Credit Agreement to lower the interest rate spread applicable to the 2029 Dollar Term Loans, which continues to be based on SOFR, from 2.50% to 2.00% and to make related changes to affect such repricing. The other material terms of the Credit Agreement, including the outstanding principal amount and maturity date of the 2029 Dollar Term Loans, remained unchanged. See Note 15 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.

Previous wording

Information related to our material contractual obligations and cash requirements can be found in Note 6 and Note 18 to the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023. As noted above and within Note 15 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, we have made prepayments during the three months ended March 31, 2024 of $75 million of the outstanding principal amount of the 2029 Dollar Term Loans. There have been no other material changes in the Company's contractual obligations and cash requirements as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.

Current wording

Information related to our material contractual obligations and cash requirements can be found in Note 6 and Note 18 to the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023. As noted above and within Note 15 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, we have made prepayments during the six months ended June 30, 2024 of $75 million of the outstanding principal amount of the 2029 Dollar Term Loans. During June 2024, we borrowed $185 million against the Revolving Credit Facility. There have been no other material changes in the Company's contractual obligations and cash requirements as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.