AXALTA COATING SYSTEMS LTD. FORM S-1/A Filed 10/30/14

AXALTA COATING SYSTEMS LTD. FORM S-1/A Filed 10/30/14
AXALTA COATING SYSTEMS LTD.
FORM S-1/A
(Securities Registration Statement)
Filed 10/30/14
Address
Telephone
CIK
SIC Code
Fiscal Year
TWO COMMERCE SQUARE
2001 MARKET STREET, SUITE 3600
PHILADELPHIA, PA 19103
(855) 547-1461
0001616862
2851 - Paints, Varnishes, Lacquers, Enamels, and Allied Products
12/31
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As filed with the Securities and Exchange Commission on October 30, 2014
Registration No. 333-198271
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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)
Michael F. Finn
Senior Vice President and General Counsel
Axalta Coating Systems Ltd.
Two Commerce Square
2001 Market Street
Suite 3600
Philadelphia, Pennsylvania 19103
(855) 547-1461
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Patrick H. Shannon
Jason M. Licht
Latham & Watkins LLP
555 Eleventh Street, NW
Washington, D.C. 20004
(202) 637-2200
Craig F. Arcella
Cravath, Swaine & Moore LLP
825 Eighth Avenue
New York, NY 10019
(212) 474-1000
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the
following box. If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering. Indicate by check mark whether the registrant 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
Accelerated filer

Non-accelerated filer
Smaller reporting company
Title of
Securities to be registered
Amount
to be
registered(a)
Proposed
maximum
offering price
per share(b)
Proposed
maximum
aggregate
offering price(a)(b)
Amount of
registration fee(c)
Common shares, $1.00 par value per share
51,750,000
$21.00
$1,086,750,000
$127,540.35
(a) Includes 6,750,000 additional common shares that may be purchased by the underwriters.
(b) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) promulgated under the Securities Act of 1933, as amended.
(c) Of this amount, $12,880 was previously paid in connection with the initial filing of this Registration Statement on August 20, 2014.
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further
amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until
this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
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The information in this preliminary prospectus is not complete and may be changed. The selling shareholders may not sell these
securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is
not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not
permitted.
Subject to Completion
Preliminary Prospectus dated October 30, 2014
PROSPECTUS
45,000,000 Shares
Axalta Coating Systems Ltd.
Common Shares
This is Axalta Coating Systems Ltd.’s initial public offering. The selling shareholders named in this prospectus, including affiliates of The
Carlyle Group (“Carlyle”), are selling 45,000,000 common shares in this offering.
We expect the public offering price to be between $18.00 and $21.00 per share. Currently, no public market exists for our common shares. We
have applied for listing of our common shares on the New York Stock Exchange (the “NYSE”) under the symbol “AXTA”.
Investing in the common shares involves risks that are described in the “ Risk Factors ” section beginning on
page 24 of this prospectus.
Per Share
Public offering price
Underwriting discount(1)
Proceeds, before expenses, to the selling shareholders
(1)
$
$
$
Total
$
$
$
We have agreed to reimburse the underwriters for certain expenses in connection with this offering.
The underwriters may also purchase up to an additional 6,750,000 common shares from the selling shareholders, at the public offering price, less
the underwriting discount, within 30 days from the date of this prospectus. We will not receive any of the proceeds from the sale of common
shares by the selling shareholders in this offering, including from any exercise by the underwriters of their option to purchase additional common
shares.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The common shares will be ready for delivery on or about
Citigroup
Goldman, Sachs & Co.
BofA Merrill Lynch
Jefferies
, 2014.
UBS Investment Bank
Deutsche Bank Securities
Barclays
Baird
J.P. Morgan
Credit Suisse
BB&T Capital Markets
The date of this prospectus is
, 2014.
Morgan Stanley
Nomura
SMBC Nikko
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Table of Contents
TABLE OF CONTENTS
Page
Prospectus Summary
Risk Factors
Forward-Looking Statements
Use of Proceeds
Dividend Policy
Capitalization
Dilution
Selected Historical Financial Information
Unaudited Pro Forma Condensed Combined and Consolidated Financial Information
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Industry
Business
Management
Compensation Discussion and Analysis
Certain Relationships and Related Person Transactions
Principal And Selling Shareholders
Description of Share Capital
Shares Eligible For Future Sale
Bermuda Company Considerations
Taxation
Underwriting
Legal Matters
Experts
Where You Can Find More Information
Enforcement of Judgments
Index to Consolidated Financial Statements
1
24
46
48
49
50
52
53
56
67
114
116
135
142
158
161
163
170
172
178
182
188
188
188
188
F-1
We are responsible only for the information contained in this prospectus and in any related free-writing prospectus we prepare or
authorize. We and the selling shareholders have not, and the underwriters have not, authorized anyone to give you any other
information and take no responsibility for any other information that others may give you. The selling shareholders are offering to sell,
and seeking offers to buy, the common shares only in jurisdictions where offers and sales are permitted.
Consent under the Exchange Control Act 1972 (and its related regulations) has been obtained from the Bermuda Monetary Authority for the
issue and transfer of the common shares to and between residents and non-residents of Bermuda for exchange control purposes provided our
common shares remain listed on an appointed stock exchange, which includes the NYSE. In granting such consent, neither the Bermuda
Monetary Authority nor the Registrar of Companies in Bermuda accepts any responsibility for our financial soundness or the correctness of any
of the statements made or opinions expressed in this prospectus.
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MARKET, INDUSTRY AND OTHER DATA
This prospectus includes estimates regarding market and industry data and forecasts, which are based on publicly available information, industry
publications and surveys, reports from government agencies, reports by market research firms or other independent sources such as Orr & Boss,
Inc. (“Orr & Boss”) and LMC Automotive (“LMC Automotive”), and our own estimates based on our management’s knowledge of and
experience in the market sectors in which we compete. Although we believe them to be accurate, we have not independently verified market and
industry data from third-party sources. This information cannot always be verified with complete certainty due to the limits on the availability
and reliability of raw data, the voluntary nature of the data gathering process, and other limitations and uncertainties inherent in industry research
and surveys of market size.
References to market share are based on sales generated in the relevant market. Except as otherwise noted, market position data is derived from
Orr & Boss and/or management estimates.
References to EMEA refer to Europe, the Middle East and Africa. References to Latin America include Mexico and references to North America
exclude Mexico.
References to emerging markets refer collectively to Latin America (including Mexico) and Asia (excluding Japan).
Certain monetary amounts, percentages and other figures included in this prospectus have been subject to rounding adjustments. Accordingly,
figures shown as totals in certain tables or charts may not be the arithmetic aggregation of the figures that precede them, and figures expressed as
percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that
precede them.
TRADEMARKS
We own or otherwise have rights to the trademarks, service marks, copyrights and trade names, including those mentioned in this prospectus,
used in conjunction with the marketing and sale of our products and services. This prospectus includes trademarks, such as Alesta ® , Abcite ® ,
Aqua EC ® , Centari ® , Chemolit ® , Chemophan ® , Corlar ® , CorMax ® , Cromax ® , Cromax Mosaic ® , ExcelPro ® , Imron ® , Imron Elite ® ,
Lutopen ® , Nap-Gard ® , Nason ® , Rival ® , Standox ® , Spies Hecker ® , Stollaqua ® , Stollaquid ® , Syntopal ® , Voltatex ® , Voltron ® , EcoConcept, 3-Wet ™ and 2-Wet Monocoat ™ , which are protected under applicable intellectual property laws and are our property and the property
of our subsidiaries. This prospectus also contains trademarks, service marks, copyrights and trade names of other companies, which are the
property of their respective owners. We do not intend our use or display of other companies’ trademarks, service marks, copyrights or trade
names to imply a relationship with, or endorsement or sponsorship of us by, any other companies. Solely for convenience, our trademarks,
service marks and trade names referred to in this prospectus may appear without the ® or ™ symbols, but such references are not intended to
indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these
trademarks and trade names.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. Because this is only a summary, it does not contain all of the
information that may be important to you. You should read this entire prospectus and should consider, among other things, the matters set
forth under “Risk Factors,” “Selected Historical Financial Information” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and our financial statements and related notes thereto appearing elsewhere in this prospectus
before making your investment decision. On February 1, 2013, Axalta Coating Systems Ltd. (“ACS”) acquired from E. I. du Pont de
Nemours and Company (“DuPont”) all of the capital stock, other equity interests and assets of certain entities that, together with their
subsidiaries, comprised the DuPont Performance Coatings business (“DPC”), which is referred to herein as the “Acquisition.” Following
the Acquisition, we renamed our business Axalta Coating Systems (“Axalta”). References herein to the “Company,” “we,” “us,” “our”
and “our company” refer to ACS and its consolidated subsidiaries. References herein to “fiscal year” refer to our fiscal years, which end
on December 31. References herein to the “LTM Period” refer to the twelve months ended June 30, 2014. See “—Summary Historical and
Pro Forma Financial Information.” References herein to the financial measures “EBITDA” and “Adjusted EBITDA” refer to financial
measures that do not comply with generally accepted accounting principles in the United States (“U.S. GAAP”). For information about
how we calculate EBITDA and Adjusted EBITDA, see footnote 3 to the table under the heading “—Summary Historical and Pro Forma
Financial Information.”
Our Company
We are a leading global manufacturer, marketer and distributor of high performance coatings systems. We generate approximately 90% of
our revenue in markets where we hold the #1 or #2 global market position, including the #1 position in our core automotive refinish endmarket with approximately a 25% global market share. 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. Over the
course of our history we have remained at the forefront of our industry by continually developing innovative coatings technologies
designed to enhance product performance and appearance, while improving customer productivity and profitability.
Our diverse global footprint of 35 manufacturing facilities, 7 technology centers, 45 customer training centers and approximately 12,650
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. Our scale and strong local
presence are critical to our success, allowing us to leverage our technology portfolio and customer relationships globally while meeting
customer demands locally.
For the LTM Period, our net sales were $4,342 million, Adjusted EBITDA was $799 million, or 18.4% of net sales, and net income was
$12 million. We have renewed the organization’s focus on profitable growth, achieving year-over-year net sales and Adjusted EBITDA
growth for each of the five full quarters following the Acquisition. Additionally, we have undertaken several transformational initiatives
that we believe have laid the foundation for future growth, resulting in significant new business wins, many of which we expect to
contribute to sales beginning in 2015. We have also begun implementing several EBITDA enhancement initiatives that we believe will
drive meaningful earnings growth over the next several years. As of June 30, 2014, we had cash of $350 million and outstanding
indebtedness of $3,901 million, which may limit the availability of financial resources to pursue our growth initiatives.
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Our business is organized into two segments, Performance Coatings and Transportation Coatings, serving four end-markets globally as
highlighted below:
Performance Coatings
Through our Performance Coatings segment we provide high-quality liquid and powder coatings solutions to a fragmented and local
customer base. We are one of only a few suppliers with the technology to provide precise color matching and highly durable coatings
systems. The end-markets within this segment are refinish and industrial as described below.
Refinish End-Market (#1 global market position): We provide waterborne and solventborne coatings to approximately 80,000 independent
body shops, dealers and multi-shop operators (“MSOs”) to facilitate high-quality, efficient automotive collision repairs. Our advanced color
matching technology and library of over four million color variations comprise an advanced color system that enables body shops to
refinish vehicles regardless of vehicle brand, color, age, or original paint supplier.
Industrial End-Market : We provide a wide range of liquid and powder coatings to customers who use them in diverse applications,
including industrial machinery, electrical insulation, automotive components, architectural cladding and fittings, appliances, outdoor
furniture and oil & gas pipelines. Our coatings are often used under severe operating conditions and require high performance such as high
mechanical resistance, corrosion protection, elasticity and colorfastness.
Transportation Coatings
Through our Transportation Coatings segment, we provide advanced coatings technologies to original equipment manufacturers (“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.
Light Vehicle End-Market (#2 global market position): We provide light vehicle OEMs and Tier 1 component suppliers a full range of
waterborne and solventborne coatings systems that are a critical, integrated step in the vehicle assembly process. We compete and win new
business on the basis of our quality, service and proprietary products that generate significant energy and cost savings for our customers
while enhancing productivity and first pass quality. Our global capabilities and focus on technology enable us to provide our global
customers with next-generation offerings to enhance appearance, durability and corrosion protection and comply with increasingly strict
environmental regulations.
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Commercial Vehicle End-Market: We provide liquid coatings to commercial vehicle OEMs, including those in the heavy duty truck
(“HDT”), bus, rail and agricultural and construction equipment (“ACE”) markets, as well as related markets such as trailers, recreational
vehicles and personal sport vehicles. As the #1 global supplier in both the HDT and bus markets, we meet the demands of our customers
with an extensive offering of over 70,000 colors.
Transformational Initiatives
Since the Acquisition, we have migrated from a business segment of DuPont to an independent global company exclusively focused on
coatings. We have completed the separation from DuPont and implemented several initiatives designed to unlock our business’s full
potential, including:
•
Enhanced Senior Leadership Team: We have augmented our management team with world-class talent and significant endmarket expertise, with 12 of our 17 most senior managers joining since the Acquisition, including our CEO and CFO. We have
also recruited key regional and local managers with both operational and commercial leadership experience.
•
Implemented New Customer Strategies: We have realigned our resources to more effectively meet the varying demands of our
customers. In end-markets characterized by large global customers such as light and commercial vehicle OEMs, we transitioned
from a regional to a global management and sales model. In the refinish end-market, we have reorganized our sales force to
target and meet the needs of additional customers in high-growth areas of the market.
Aligned Incentives: We have implemented a performance-based compensation structure that closely aligns the interests of our
global leadership team with those of our shareholders. We have also transitioned to a more incentive-based compensation
structure for our global sales force designed to increase their focus on profitable growth.
Investing for Growth: As an independent company, we are able to focus our time and capital exclusively on coatings. As a
result, we are pursuing investments with attractive returns such as low-risk capacity expansion projects in China, Germany,
Mexico and Brazil that will position us to grow with our customers. We are also investing in operational improvement initiatives
such as the realignment of our European manufacturing operations as well as growing our sales force in emerging markets and
end-markets where we are currently underrepresented.
•
•
Our Industry
In 2013, we were the fourth largest supplier in the $127 billion global coatings industry as measured by sales, according to Orr & Boss. The
global coatings industry is characterized by multiple end-markets and applications. Market participants include a few global coatings
suppliers and many smaller, regionally focused suppliers that maintain a presence in select product categories and local markets.
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Within the broad global coatings market, we focus on the automotive refinish, light vehicle, commercial vehicle and industrial end-markets,
which Orr & Boss estimates to collectively represent $37 billion of annual sales. The chart below illustrates the composition of the global
coatings industry by application and indicates the end-markets in which we participate:
We operate in attractive end-markets, with the top four suppliers collectively holding an estimated 67% market share in the automotive
refinish end-market and 74% market share in the light vehicle end-market. This structure is a result of few suppliers having the
technological capabilities, global manufacturing footprint, efficient supply chain and overall scale to meet customer needs. These
characteristics allow global coatings providers to serve customers locally while continuing to leverage global innovation, product platforms,
relationships and best practices.
The refinish, industrial, light vehicle and commercial vehicle end-markets are collectively expected to grow at a compound annual growth
rate (“CAGR”) of 5.8%, or $12.2 billion, from 2013 to 2018, according to Orr & Boss. This growth is due to specific end-market drivers as
well as key industry trends, which favor large multi-national suppliers, including:
•
Increasingly stringent environmental regulations : Evolving regulations in all major geographies have placed limits on the
emission of volatile organic compounds (“VOCs”) and hazardous air pollutants (“HAPs”). As a result, customers are shifting
toward regulation-compliant, low-VOC solventborne and waterborne coatings. Few coatings suppliers have the technology and
products to meet these increasingly stringent requirements.
•
Global procurement model : Multi-national light vehicle OEMs are increasingly utilizing global procurement teams to stipulate
product specifications and color standardization requirements, which are implemented at the local level. These customers select
coatings providers on the basis of their ability to consistently deliver advanced technological solutions on a global basis.
•
Increased efficiency : Customers are encouraging coatings manufacturers to invest in new product offerings that require fewer
application steps, resulting in lower capital and energy costs.
•
Vehicle light-weighting : With more stringent vehicle emissions and fuel consumption regulations, light vehicle OEMs are
focused on reducing vehicle weight to improve fuel economy. This is driving the need for new, and frequently multiple,
substrates on the exterior of the vehicle. Historically, OEMs have manufactured vehicles primarily with steel components but
are now increasingly incorporating other materials, including aluminum, carbon fiber and plastics. These materials often require
specialized primers and low-temperature curing formulations to achieve uniform appearance, color and finish.
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•
Emerging market growth: Emerging market demand in our end-markets is expected to grow at a CAGR of approximately 8.4%
from 2013 to 2018, according to Orr & Boss. This is primarily due to increased government infrastructure spending and
increased middle class consumption, which will increase the car parc (the number of vehicles in use). As per-capita wealth
expands, consumers are also demanding higher-quality products, driving demand for more advanced coatings systems in these
markets.
Performance Coatings
Refinish
The refinish end-market represented an estimated $7.3 billion in 2013 global sales, according to Orr & Boss. Sales in this end-market are
driven by the number of vehicle collisions and owners’ propensity to repair their vehicles. The number of vehicle collisions in a given
market is primarily determined by the size of the car parc and the aggregate number of miles driven in that market. The global automotive
refinish end-market is expected to grow at a CAGR of approximately 4.3% from 2013 to 2018, with emerging markets expected to grow at
a CAGR of approximately 7.7% over the same period, according to Orr & Boss.
Refinish products are critical to vehicle appearance and customer satisfaction but typically represent a small percentage of the overall cost
of repair. As a result, body repair shop operators are most focused on coatings brands with a strong track record of performance and
reliability. Such brands offer exact color matching technologies, productivity enhancements, regulatory compliance, consistent quality and
ongoing technical support in order to facilitate timely repairs that restore a damaged vehicle’s appearance to its original condition.
Industrial
The industrial end-market represented an estimated $19.7 billion in 2013 global sales and is forecasted to grow at a CAGR of
approximately 6.8% from 2013 to 2018, according to Orr & Boss. This end-market is comprised of liquid and powder coatings with
demand driven by a wide variety of macroeconomic factors, such as growth in GDP and industrial production. Customers select industrial
coatings based on protection, durability and appearance.
Transportation Coatings
Light Vehicle
The light vehicle end-market represented an estimated $7.3 billion in 2013 global sales and is expected to grow at a CAGR of
approximately 4.9% from 2013 to 2018, according to Orr & Boss. Sales in this end-market are driven by new vehicle production, which is
expected to grow in both the developed markets and the emerging markets. Light vehicle production growth is expected to be highest in
emerging markets where OEMs plan to open 67 new assembly plants between 2014 and 2017.
Light vehicle OEMs select coatings providers on the basis of their global ability to deliver advanced technological solutions that improve
exterior appearance and durability and provide long-term corrosion protection. Customers also look for suppliers that can enhance process
efficiency to reduce overall manufacturing costs and provide on-site technical support. Rigorous environmental and durability testing as
well as engineering approvals are also key criteria used by global light vehicle OEMs when selecting coatings providers.
Commercial Vehicle
The commercial vehicle end-market represented an estimated $3.3 billion in 2013 global sales and is expected to grow at a CAGR of
approximately 4.8% from 2013 to 2018, according to Orr & Boss. Sales in this end-market
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are generated from a variety of applications including non-automotive transportation ( e.g. , HDT, bus and rail) and ACE. This end-market
is primarily driven by global commercial vehicle production, which is influenced by overall economic activity, government infrastructure
spending, equipment replacement cycles and evolving environmental standards.
Commercial vehicle OEMs select coatings providers on the basis of their ability to deliver extensive color libraries and advanced
technological solutions that improve exterior appearance, protection and durability while meeting stringent environmental requirements.
Our Competitive Strengths
Leading positions in attractive end-markets
We are a global leader in manufacturing, marketing and distributing advanced coatings systems with approximately 90% of our revenue
generated in markets where we hold the #1 or #2 global market position. We are one of only a small number of global coatings suppliers in
each of our end-markets, which positions us favorably in an industry where global scale is a competitive advantage.
Market-leading refinish business driven by recurring aftermarket sales: We are the leading coatings supplier to the global automotive
refinish end-market where we hold an estimated 25% share and the top four global suppliers hold an estimated 67% share. This end-market
has consistently grown across economic cycles as the overall rate of collisions and repairs are not highly cyclical. Our refinish products
offer quality, durability and superior color technology supported by a large color formula library that enables customers to precisely match
colors. We supply our fragmented customer base of approximately 80,000 body shops through a global network of over 4,000 independent
local distributors. Furthermore, body shops utilize our color matching system, inventory replacement process and training capabilities,
which foster brand loyalty and have historically resulted in a high customer retention rate.
Well positioned in light vehicle end-market poised for growth: We are the second largest coatings provider to the global light vehicle endmarket, which is expected to grow at a CAGR of approximately 4.9% from 2013 to 2018, according to Orr & Boss. In this end-market, the
top four suppliers hold an estimated 74% share. We have developed a full complement of unique consolidated coating systems. These
integrated solutions include our “Eco-Concept,” “3-Wet” and “2-Wet Monocoat” products that provide our customers with advanced,
environmentally responsible systems that eliminate either a coatings layer or steps in the coatings process, thereby increasing productivity
and reducing energy costs. In addition, we offer our customers on-site technical services as well as “just-in-time” product delivery. We are
an integrated part of our customers’ assembly lines,
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which allows our technical support teams to improve operating efficiency and provide real-time performance feedback to our formulating
chemists and manufacturing teams. We have been awarded new business in 26 OEM plants globally since the beginning of 2013,
demonstrating the strength of our competitive positioning. We expect to recognize sales from the majority of these new contracts in 2015,
although we cannot make any assurances regarding the amount of revenue or profit our new business awards will generate in the future.
Sustainable competitive advantages driven by global scale, established brands and technology
We believe we are one of only a few coatings providers that have the scale, manufacturing capabilities, brand reputation and technology to
meet the purchasing criteria that are most critical to our customers on a global basis.
Our extensive manufacturing and distribution networks as well as our high-caliber technical capabilities enable us to meet customers’
volume and service requirements without interruption. Our global footprint also enables us to react quickly to changing local dynamics
while leveraging our overall scale to cost-effectively develop and deliver leading edge technologies and solutions. In refinish, our scale
gives us the ability to convert a large number of body shops to our systems in a short period of time, which has been a key competitive
advantage in the growing North American MSO segment. Additionally, our scale and technical abilities enable us to meet the needs of our
multi-national light vehicle customers, who increasingly require dedicated global account teams and high-quality, advanced coatings
systems that can be applied consistently to global vehicle platforms.
Branding is another key factor that customers consider when choosing a coatings provider. Customers typically look to established brands
when making their purchase decisions in our refinish, industrial and commercial vehicle end-markets. We have an extensive portfolio of
established brands that leverage our advanced technology and a nearly 150-year heritage including our flagship global brand families of
Cromax, Standox, Spies Hecker and Imron liquid products, our Alesta and Nap-Gard powder products and our Voltatex electrical insulation
coatings.
Our technology is also a key competitive advantage. Our technology portfolio includes over 1,800 patents issued or pending and includes
key assets such as our extensive color database and color matching technology, advanced multi-substrate formulations, process technology
and VOC-compliant products. We also benefit from technology synergies across our end-markets. The colors, coatings properties and
multi-substrate formulations we develop as a light vehicle coatings manufacturer help us sustain our leading refinish market position as we
leverage insights from new light vehicle coatings to help develop innovative refinish coatings in the future.
Diverse revenue base
We generate our revenue from diverse end-markets, customers and geographies, which has historically reduced the financial impact of any
single end-market, customer or region and limited the impact of economic cycles. Net sales in our end-markets of refinish, light vehicle,
industrial and commercial vehicle represented 42%, 32%, 17% and 9% of net sales during the LTM Period, respectively. We also serve a
globally diverse and highly fragmented customer base, with no single customer representing more than 7.6% of our net sales and our top
ten customers representing approximately 31% of our net sales during the LTM Period. The percentage of our revenue generated by our top
customers, however, may increase as we grow our sales to the light vehicle end-market. Additionally, we generated approximately 39% of
our net sales in EMEA, 30% in North America, 16% in Asia Pacific and 15% in Latin America during the LTM Period.
Strong financial performance and cash flow characteristics
We have an attractive financial profile with gross margins of 34.3% and Adjusted EBITDA margins of 18.4% for the LTM Period.
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The refinish end-market serves as the foundation of our financial profile, representing 42% of our consolidated net sales for the LTM
Period. Our track record of consistent price increases driving strong Adjusted EBITDA performance and low levels of maintenance capital
expenditures has allowed us to consistently generate strong cash flows that we are re-investing in the business to position us for future
earnings growth.
We have generated year-over-year net sales and Adjusted EBITDA growth for each of the five full quarters since the Acquisition, driven in
part by the initial impact of our transformational growth initiatives. In addition, we have implemented numerous initiatives intended to
reduce our fixed and variable costs and improve working capital productivity. We believe that these initiatives will continue to generate
significant cost savings in the future, although we cannot make any assurances regarding the amount of cost savings these initiatives will
generate. Many are in their early stages of implementation and have only recently begun to contribute to our financial results.
Experienced management team
We have augmented our management team with world-class talent and meaningful end-market expertise, with 12 of our 17 most senior
managers joining since the Acquisition. This team has added new and diverse perspectives to the business from a range of industries. Our
management team is led by our CEO, Charlie Shaver, who has over 34 years of chemical and global operating experience, including most
recently President and CEO of TPC Group. He is supported by a senior management team comprised of global, regional and country
focused leaders with diverse backgrounds and skill sets. The management team has extensive international experience with a strong track
record of improving operations and executing strategic growth initiatives, including mergers and acquisitions.
Our Business Strategy
Pursue and execute new business wins in high-growth areas of our end-markets
We have aligned our resources to better serve the high-growth areas of our refinish and light vehicle end-markets. In the North American
refinish end-market, we have created dedicated sales, conversion and service teams to serve MSOs, which are gaining share in the North
American collision repair market by reducing insurance company costs and providing consistently high customer satisfaction. Through new
business wins with MSO customers, we have become a leading coatings provider to the North American MSO market, which we expect to
grow from 14% of the North American collision repair market in 2012 to 24% by 2017. We are
8
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targeting growth opportunities with both existing MSO and new MSO accounts and believe that we are well positioned to gain additional
market share as a result of our dedicated account teams, high productivity offerings and broad distribution network.
We have been awarded new business in 26 OEM plants globally since the beginning of 2013, with 16 of these plants located in China,
where OEMs are rapidly expanding production to meet increasing demand for new vehicles. We expect that many of these new contracts
will begin generating sales in 2015. Our success in this end-market has been driven by a new leadership team that has restructured our
organization to mirror the increasingly global focus of OEMs. We will continue to pursue new business by leveraging our proprietary
manufacturing processes, our broad range of VOC-compliant coatings and our substantial sales and technical support organizations.
Accelerate growth in emerging markets
We have a strong presence in emerging markets, which generated 30% of our sales during the LTM Period. These markets are
characterized by increasing levels of vehicle production, a growing car parc, an expanding middle class and GDP growth above the global
average, all of which drive greater demand for coatings. We believe that we are well positioned to capitalize on this increasing demand with
local manufacturing facilities and extensive sales and technical service teams dedicated to these markets. In China, where we have operated
a wholly owned business for 30 years, we are expanding our sales force and investing in new plant capacity, including a $50 million
waterborne capacity expansion at our Jiading facility, which we expect to come on line in early 2015. We are also in the process of
expanding our production capacity in Mexico and Brazil to drive future earnings growth.
Globalize existing product lines
Since the Acquisition, we have identified significant opportunities to leverage our existing products across geographies. For example, we
are the market leader in the North American HDT market, but only recently began serving the Chinese market, which produces nearly four
times the number of heavy duty trucks produced in the United States. This initiative has generated early positive results; for example, in
2014 we began serving Foton Daimler, one of the largest truck manufacturers in the region, with our high performance waterborne
coatings. In refinish, we are leveraging legacy formulations from developed markets to satisfy growing mainstream demand in emerging
markets. We also intend to pursue similar geographic opportunities with several of our other industrial and commercial vehicle product
offerings.
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Invest in high-return projects to drive earnings growth
We are in the early stages of implementing several initiatives that we believe will continue to generate significant earnings growth,
including establishing a global procurement organization, realigning our European manufacturing operations and investing capital in
growth projects with high expected returns. Since the Acquisition, we have built a global procurement organization, which is executing
several programs to reduce costs by streamlining inputs, reducing the number of sole-sourced raw materials and partnering with new, highquality suppliers to meet our purchasing needs. These programs are in their early stages and we believe they will continue to generate
significant earnings growth over the next several years. In Europe, we are investing to upgrade, automate and re-align disparate
manufacturing operations to bring the region’s cost structure in line with the rest of the world and better position us to meet increasing local
demand. We believe that these European investments, which we began in 2014, will generate approximately $100 million of incremental
Adjusted EBITDA by 2017. Finally, we believe we have significant opportunities to pursue high return projects identified since the
Acquisition. These include capacity expansion projects in China, Germany, Mexico and Brazil and productivity initiatives from which we
expect to benefit over the next several years.
Maintain and further develop technology leadership
We will continue to build on our nearly 150-year heritage of developing market-leading technology. We leverage our intimate customer
relationship and network of customer training centers to align product innovation with customer needs. For example, in the North American
refinish end-market we have recently launched Cromax Mosaic, a new VOC-compliant solventborne coatings line, to complement our
broad waterborne coatings portfolio. Body shops have embraced this product, which enables them to meet environmental regulations while
using existing application equipment and techniques. We have a robust pipeline of over 80 new product innovations, the majority of which
we intend to launch over the next two years, including several products focused on emerging markets. Similarly in the light vehicle endmarket, our proprietary 3-Wet, Eco-Concept, 2-Wet monocoat systems and high throw electrocoat products have generated new customer
wins as OEMs seek to increase efficiency and reduce costs. We believe this commitment to new product development will help us maintain
our technology leadership and strong market position.
Recent Developments
Our financial results for the three months ended September 30, 2014 are not yet finalized; however, the following information reflects our
preliminary expectations with respect to such results based on information currently available to management:
•
We expect to report net sales between $1,106.4 million and $1,111.4 million for the three months ended September 30, 2014,
compared to net sales of $1,074.6 million for the three months ended September 30, 2013, representing an increase between
3.0% and 3.4%. The increase in our expected net sales was primarily driven by increased sales in our Performance Coatings
segment, for which we expect to report net sales between $662.3 million and $664.8 million for the three months ended
September 30, 2014, compared to $643.7 million for the three months ended September 30, 2013, representing an increase
between 2.9% and 3.3%. Performance Coatings net sales growth was driven by sales increases in both our Refinish and
Industrial end-markets globally. We expect to report net sales in the Transportation Coatings segment between $444.1 million
and $446.6 million for the three months ended September 30, 2014, compared to $430.9 million for the three months ended
September 30, 2013, representing an increase between 3.1% and 3.6%. Transportation Coatings net sales were primarily driven
by an increase in our Commercial vehicle end-market compared to the prior-year period, partially offset by flat sales in our
Light Vehicle end-market, in which increased
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sales in North America and Asia Pacific were offset by declining sales in Latin America compared to the prior-year period. The
following table highlights our expected net sales and actual net sales by segment for the three months ended September 30,
2014, and 2013, respectively.
(preliminary and unaudited, in millions)
Three Months Ended
September 30, 2014
Three Months
Ended
September 30,
Low
Net Sales
Refinish
Industrial
Performance Coatings
Light vehicle
Commercial vehicle
Transportation Coatings
Total net sales
Year-over-year % change
$ 477.5
184.8
662.3
341.8
102.3
444.1
$1,106.4
3.0%
MidPoint
$ 478.1
185.4
663.5
342.5
102.9
445.4
$1,108.9
3.2%
High
$ 478.8
186.0
664.8
343.1
103.5
446.6
$1,111.4
3.4%
2013
$
$
462.4
181.3
643.7
339.8
91.1
430.9
1,074.6
•
We expect to report a net loss of $20.8 million to $15.8 million for the three months ended September 30, 2014, compared to our
net income of $6.4 million for the three months ended September 30, 2013. The expected decrease resulted primarily from
unfavorable impacts related to foreign currency translation losses and income tax expense. We expect to report translation losses
of approximately $59.3 million for the three months ended September 30, 2014 compared to translation gains of approximately
$9.7 million in the 2013 comparable period. These losses were primarily driven by intercompany transactions denominated in
currencies different than the currency of our subsidiaries. Due to the weakening of the Euro relative to the U.S. Dollar during the
third quarter of 2014, this resulted in translation losses on these intercompany transactions. These losses were slightly offset by
translation gains on our Euro borrowings. In addition, our net loss was favorably impacted by increased net sales, lower raw
material costs and decreases in transition-related expenses.
•
We expect to report Adjusted EBITDA between $225.5 million and $230.5 million for the three months ended September 30,
2014, compared to Adjusted EBITDA of $194.1 million for the three months ended September 30, 2013, representing an
increase between 16.2% and 18.8%. The expected improvement in our Adjusted EBITDA resulted primarily from increased net
sales, lower raw material costs and margin improvement initiatives. We expect Adjusted EBITDA in the Performance Coatings
segment for the three months ended September 30, 2014 to be between $147.2 million and $149.7 million compared to $147.3
million for the three months ended September 30, 2013. We expect Adjusted EBITDA in the Transportation Coatings segment
for the three months ended September 30, 2014 to be between $78.3 million and $80.8 million compared to $46.8 million for the
three months ended September 30, 2013.
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Adjusted EBITDA is a financial measure that is not calculated in accordance with U.S. GAAP. For a discussion of our presentation of
Adjusted EBITDA, see footnote 3 under “—Summary Historical and Pro Forma Financial Information” beginning on page 20 of this
prospectus. We encourage you to review our financial information in its entirety and not rely on a single financial measure. The following
table presents a reconciliation of net income (loss), the most directly comparable U.S. GAAP financial measure, to Adjusted EBITDA for
the quarters ended September 30, 2014 and September 30, 2013 (mid-point is shown for illustrative purposes only).
(preliminary and unaudited, in millions)
Three Months
Three Months Ended
September 30, 2014
Adjusted EBITDA
Performance Coatings
Transportation Coatings
Total Adjusted EBITDA
Interest expense, net
Provision (benefit) for income taxes
Depreciation and amortization
Foreign exchange remeasurement losses (gains)
Long-term employee benefit plan adjustments
Termination benefits and other employee related costs (a)
Consulting and advisory fees (b)
Transition-related costs (c)
Other adjustments (d)
Management fee expense
Net Income (loss)
(a)
(b)
(c)
(d)
Ended
September 30,
Low
MidPoint
High
$147.2
78.3
225.5
52.6
7.5
76.2
59.6
(4.7)
3.2
8.8
36.7
5.6
0.8
$ (20.8)
$148.5
79.5
228.0
52.6
7.5
76.2
59.6
(4.7)
3.2
8.8
36.7
5.6
0.8
$ (18.3)
$149.7
80.8
230.5
52.6
7.5
76.2
59.6
(4.7)
3.2
8.8
36.7
5.6
0.8
$ (15.8)
2013
$
$
147.3
46.8
194.1
62.7
(26.3)
87.5
(9.7)
1.8
47.9
11.3
8.1
3.5
0.9
6.4
Represents expenses primarily related to employee termination benefits, including our initiative to improve our overall cost
structure within the European region, and other employee-related costs. Termination benefits include the costs associated with our
headcount initiatives for establishment of new roles and elimination of old roles and other costs associated with cost-saving
opportunities that were related to our transition to a standalone entity.
Represents fees paid to consultants, advisors and other third-party professional organizations for professional services rendered in
conjunction with the transition from DuPont to a standalone entity.
Represents charges associated with the transition from DuPont to a standalone entity, including branding and marketing,
information technology related costs and facility transition costs.
Represents costs for certain unusual or non-operational losses and the non-cash impact of natural gas and currency hedge losses
allocated to DPC by DuPont, stock-based compensation, asset impairments, equity investee dividends, indemnity income and
losses associated with the Acquisition, and loss (gain) on sale and disposal of property, plant and equipment.
As of September 30, 2014, cash and cash equivalents and total indebtedness are expected to be approximately $233 million and $3,732
million, respectively, with total expected availability under the Revolving Credit Facility of approximately $384 million, all of which may
be borrowed by us without violating any covenants under the agreement governing such credit facility or the indentures governing the
Dollar Senior Notes and the Euro Senior Notes. In addition, we expect our capital expenditures for the twelve months ended September 30,
2014 to total between $211 million and $216 million, which includes approximately $106 million of capital expenditures associated with
transition-related activities.
We have provided ranges for the preliminary estimated financial results described above because our financial closing procedures for
the three months ended September 30, 2014 are not complete. The preliminary estimated financial results presented above are subject to the
completion of our quarter-end financial closing
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procedures. Our closing procedures for the three months ended September 30, 2014 will not be complete, and our financial results for the
three months ended September 30, 2014 will not be publicly available, until after the expected completion of this Offering. The information
presented above should not be considered a substitute for such full unaudited quarterly financial statements.
The preliminary information presented in this “Recent Developments” section has been prepared by and is the responsibility of
management, reflects management’s estimates based solely upon information available to us as of the date of this prospectus and is not a
comprehensive statement of our financial results for the three months ended September 30, 2014. Our actual results may differ materially
from these estimated ranges. For example, during the course of the preparation of the respective financial statements and related notes,
additional items that would require material adjustments to be made to the preliminary estimated financial information presented above may
be identified. Our independent registered public accounting firm, PricewaterhouseCoopers LLP, has not audited, reviewed, compiled or
performed any procedures on this preliminary information. Accordingly, PricewaterhouseCoopers, LLP does not express an opinion or any
other form of assurance with respect thereto. Accordingly, you should not place undue reliance upon these preliminary estimates. These
preliminary results should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” in particular “—Results of Operations” and “—Selected Segment Information” and the consolidated financial statements and
related notes contained in this prospectus. For additional information, please see “Risk Factors.”
Risks Related to Our Business
Investing in our common shares involves substantial risk. You should carefully consider all of the information in this prospectus prior to
investing in our common shares. There are several risks related to our business and our ability to leverage our strengths described elsewhere
in this prospectus that are described under “Risk Factors” elsewhere in this prospectus. Among these important risks are the following:
•
adverse developments in economic conditions and, particularly, in conditions in the automotive and transportation industries and
our other end-markets;
•
risks of losing any of our significant customers or the consolidation of MSOs, distributors and/or body shops;
•
our ability to successfully execute our growth strategy and leverage our strengths;
•
risks associated with our non-U.S. operations and global scale;
•
currency-related risks;
•
increased competition;
•
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;
•
our substantial indebtedness;
•
Carlyle’s ability to control our common shares; and
•
other risks and uncertainties, including those listed under the caption “Risk Factors.”
13
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Our Principal Shareholders
Our principal shareholders are certain investment funds affiliated with Carlyle.
Founded in 1987, Carlyle is a global alternative asset manager and one of the world’s largest global private equity firms with approximately
$203 billion of assets under management across 126 funds and 139 fund of funds vehicles as of June 30, 2014. Carlyle invests across four
segments—Corporate Private Equity, Real Assets, Global Market Strategies and Fund of Funds Solutions—in Africa, Asia, Australia,
Europe, the Middle East, North America and South America. In addition to the industrials & transportation industry, Carlyle has expertise
in various industries, including aerospace, defense & government services, consumer & retail, energy, financial services, healthcare,
technology & business services and telecommunications & media. Carlyle employs more than 1,600 employees, including more than 750
investment professionals, in 40 offices across six continents.
Company Information
Axalta Coating Systems Ltd. was incorporated pursuant to the laws of Bermuda on August 24, 2012. Our principal executive offices are
located at Two Commerce Square, 2001 Market Street, Suite 3600, Philadelphia, Pennsylvania 19103, and our telephone number is
(855) 547-1461. Our website address is www.axaltacoatingsystems.com. Information on, or accessible through, our website is not part of
this prospectus, nor is such content incorporated by reference herein.
We maintain a registered office in Bermuda at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda. The telephone number of
our registered office is (441) 295-5950.
14
Table of Contents
The Offering
Common shares offered by the selling shareholders 45,000,000 common shares.
Selling shareholders
The selling shareholders identified in “Principal and Selling Shareholders.”
Common shares outstanding after this offering
229,069,356 common shares.
Option to purchase additional shares
The selling shareholders have granted the underwriters a 30-day option from the date
of this prospectus to purchase up to 6,750,000 additional common shares at the initial
public offering price, less underwriting discounts and commissions.
Use of proceeds
We will not receive any net proceeds from the sale of common shares by the selling
shareholders, including from any exercise by the underwriters of their option to
purchase additional common shares. See “Use of Proceeds” for additional information.
Dividend policy
We do not currently pay and do not currently anticipate paying dividends on our
common shares following this offering. Any declaration and payment of future
dividends to holders of our common shares may be limited by restrictive covenants in
our debt agreements, and will be at the sole discretion of the board of directors of ACS
(our “Board of Directors”), and will depend on many factors, including our financial
condition, earnings, capital requirements, level of indebtedness, statutory and
contractual restrictions applying to the payment of dividends and other considerations
that our Board of Directors deems relevant. See “Dividend Policy,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Liquidity
and Capital Resources—Indebtedness” and “Description of Share Capital.”
Proposed NYSE symbol
“AXTA”.
Risk factors
See “Risk Factors” beginning on page 24 of this prospectus for a discussion of factors
you should carefully consider before deciding to invest in our common shares.
Unless we specifically state otherwise, throughout this prospectus the number of our common shares to be outstanding after completion of
this offering is based on common shares outstanding as of June 30, 2014, which includes 45,000,000 common shares to be sold by the
selling shareholders and excludes:
•
710,270 common shares sold or issued pursuant to the exercise of options subsequent to June 30, 2014;
•
17,098,022 common shares issuable upon the exercise of options outstanding at a weighted average exercise price of $9.34 per
share; and
•
11,830,000 common shares reserved for issuance under our 2014 Incentive Plan (the “2014 Plan”), which we plan to adopt in
connection with this offering.
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Table of Contents
Unless we specifically state otherwise, all information in this prospectus assumes:
•
no exercise of the option to purchase additional common shares by the underwriters;
•
an initial offering price of $19.50 per share, which is the midpoint of the range set forth on the cover page of this prospectus;
•
the adoption of our amended and restated bye-laws immediately prior to the closing of this offering; and
•
the completion of a bonus issue of 0.69 of a share for every common share in issue as at October 28, 2014, rounded down to the
nearest whole share, which was effectuated on October 28, 2014 (the “1.69-for-1 stock split”).
16
Table of Contents
Summary Historical and Pro Forma Financial Information
The following table sets forth summary historical and pro forma financial information of Axalta. As a result of the Acquisition, we applied
acquisition accounting whereby the purchase price paid was allocated to the acquired assets and liabilities at fair value. The financial
reporting periods presented are as follows:
•
The years ended December 31, 2011 and 2012 and the period from January 1, 2013 through January 31, 2013 (“Predecessor”
periods) reflect the combined results of operations of the DPC business.
•
The year ended December 31, 2013 and the six-month periods ended June 30, 2013 and 2014 (“Successor” periods) reflect the
consolidated results of operations of Axalta, which includes the effects of acquisition accounting commencing on the acquisition
date of February 1, 2013 and the effects of the financing of the Acquisition commencing on February 1, 2013 and the
refinancing of our Senior Secured Credit Facilities (as defined under “Capitalization”) that was consummated and commenced
on February 3, 2014 (collectively referred to herein as the “Financing”).
•
The pro forma year ended December 31, 2013 and the pro forma six months ended June 30, 2013 reflect the combined historical
results of operations of the DPC business for the period from January 1, 2013 through January 31, 2013 and Axalta for the year
ended December 31, 2013 and for the six months ended June 30, 2013, as adjusted for the pro forma effects of certain
transactions as described in “Unaudited Pro Forma Condensed Combined and Consolidated Financial Information.”
•
The pro forma six month period ended June 30, 2014 reflects consolidated results of operations of Axalta for the six month
period ended June 30, 2014, adjusted to give pro forma effect to certain transactions as described in “Unaudited Pro Forma
Condensed Combined and Consolidated Financial Information.”
The historical results of operations and cash flow data for the six months ended June 30, 2013 and 2014 and the historical balance sheet
data as of June 30, 2014 presented below were derived from our Successor unaudited financial statements and the related notes thereto
included elsewhere in this prospectus. As of and for the Successor period of August 24, 2012 (inception) through December 31, 2012, the
Successor had no operations or activity, other than merger and acquisition costs of $29.0 million, which consisted primarily of investment
banking, legal and other professional advisory services costs. The historical financial data for the period January 1, 2013 through
January 31, 2013 for the DPC business is included elsewhere in this prospectus.
The historical results of operations data and cash flow data for the year ended December 31, 2013 and the historical balance sheet data as of
December 31, 2013 presented below were derived from our Successor audited financial statements and the related notes thereto included
elsewhere in this prospectus. The historical combined financial data for the years ended December 31, 2011 and 2012 and the historical
balance sheet data as of December 31, 2012 presented below have been derived from the Predecessor audited combined financial
statements and the related notes thereto for the DPC business included elsewhere in this prospectus.
Our historical financial data and that of the DPC business are not necessarily indicative of our future performance, nor does such data
reflect what our financial position and results of operations would have been had we operated as an independent publicly traded company
during the periods shown. The unaudited pro forma financial data presented below was derived from our unaudited financial statements for
the six months ended June 30, 2013 and 2014 and related notes thereto, our audited financial statements for the year ended December 31,
2013 and the related notes thereto and the audited financial statements of the DPC business for the period from January 1, 2013 through
January 31, 2013 and the related notes thereto, each of which are included elsewhere in this prospectus.
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Table of Contents
Our unaudited pro forma statements of operations data are presented for the six months ended June 30, 2014 and 2013 and the year ended
December 31, 2013 assuming:
•
the Acquisition was completed on January 1, 2013;
•
the Financing was completed on January 1, 2013; and
•
this initial public offering (the “Offering”) was completed on January 1, 2013.
The unaudited pro forma balance sheet data is presented assuming this offering was completed on June 30, 2014.
We have also presented summary unaudited pro forma consolidated financial data for the twelve-month period ended June 30, 2014, which
does not comply with U.S. GAAP (this period is referred to elsewhere in this prospectus as the LTM Period). This data has been calculated
by subtracting the pro forma unaudited statements of operations and cash flow data for the six-month period ended June 30, 2013 from the
pro forma statements of operations and cash flow data for the year ended December 31, 2013 and then adding the pro forma statements of
operations and cash flow data for the six-month period ended June 30, 2014 included elsewhere in this prospectus. We have presented this
financial data because we believe it provides our investors with useful information to assess our recent performance.
The unaudited pro forma information set forth below is based upon available information and assumptions that we believe are reasonable.
The unaudited pro forma information is for illustrative and informational purposes only and is not intended to represent or be indicative of
what our financial condition or results of operations would have been had the above transactions occurred on the dates indicated. The
unaudited pro forma information also should not be considered representative of our future financial condition or results of operations. You
should read the information contained in this table in conjunction with “Selected Historical Financial Information,” “Unaudited Pro Forma
Condensed Combined and Consolidated Financial Information,” “Capitalization,” “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the historical audited and unaudited financial statements and the related notes thereto included
elsewhere in this prospectus.
18
Table of Contents
Predecessor
Year
January 1
through
Ended
January 31,
December 31,
(dollars and shares in
millions, except per share
data)
Statement of operations data:
Net sales
Other revenue
Total revenue
Cost of goods sold (1)
Selling, general and administrative
expenses (2)
Research and development
expenses
Amortization of acquired
intangibles
Merger and acquisition related
expenses
Operating income (loss)
Interest expense, net
Bridge financing commitment fees
Other expense (income), net
2013
$4,281.5
34.3
4,315.8
3,074.5
$4,219.4
37.4
4,256.8
2,932.6
869.1
873.4
70.8
1,040.6
397.0
497.3
1,113.6
470.0
497.3
1,140.9
49.6
41.5
3.7
40.5
18.5
23.4
44.2
22.2
23.4
45.4
—
—
—
79.9
38.0
42.4
86.5
44.9
42.4
84.0
—
322.6
0.2
—
20.2
—
409.3
—
—
16.3
—
20.6
—
—
5.0
28.1
24.9
215.1
25.0
48.5
28.1
(11.9)
90.4
25.0
59.1
—
179.6
113.9
—
2.9
—
160.8
210.8
—
31.0
—
123.7
99.1
—
43.4
—
179.6
110.9
—
(1.8)
—
216.7
222.6
—
(14.2)
302.2
393.0
15.6
(263.7)
(186.4)
62.8
(81.0)
(18.8)
70.5
8.3
120.7
181.5
145.2
247.8
7.1
8.5
(44.8)
(218.9)
(8.1)
(178.3)
10.7
52.1
1.9
(82.9)
36.7
(55.5)
11.7
58.8
(23.1)
31.4
2.1
4.5
0.6
2.6
6.6
2.9
2.6
6.3
179.4
$ 243.3
$
326.2
1.1
327.3
232.2
7.9
$
2013
3,951.1
35.7
3,986.8
2,772.8
$
$ 388.8
(88.2)
(290.6)
110.7
73.2
661.8
$
(37.7)
(8.3)
43.0
9.9
2.4
38.4
1,783.6
13.7
1,797.3
1,327.6
6.0
$
2.3
2013
2,174.0
14.7
2,188.7
1,446.0
$
2013
4,277.3
36.8
4,314.1
2,909.0
$
2014
2,109.8
14.8
2,124.6
1,463.8
$
2014
2,174.0
14.7
2,188.7
1,446.0
$
4,341.5
36.7
4,378.2
2,891.2
$
(224.9)
$
(180.6)
$
49.5
$
(89.5)
$
(58.4)
$
56.2
$
25.1
$
(0.97)
$
(0.77)
$
0.22
$
(0.39)
$
(0.26)
$
0.25
$
0.11
228,280,574
$ 236.2
(116.6)
(125.1)
108.7
82.7
570.1
2014
12 Months
Ended
June 30,
2012
$
2013
Pro forma
Six Months
Ended
June 30,
Year
Ended
December 31,
2011
Income (loss) before
income taxes
Provision (benefit) for income
taxes
Net income (loss)
Less: Net income
attributable to
noncontrolling interests
Net income (loss)
attributable to controlling
interests
$
Per share data:
Earnings (loss) per share:
Basic and diluted
Weighted average shares
outstanding, basic and diluted
Other financial data:
Cash flows from:
Operating activities
Investing activities
Financing activities
Depreciation and amortization
Capital expenditures
Adjusted EBITDA (3)
Successor
Six Months
Ended
June 30,
Year
Ended
December 31,
$
376.8
(5,011.2)
5,098.1
300.7
107.3
699.0
228,149,996
$
161.6
(4,872.2)
5,095.8
140.6
23.4
307.5
19
229,069,356
$
13.7
(102.8)
(12.2)
152.9
100.8
407.8
228,269,484
228,149,996
229,069,356
228,725,385
327.3
109.7
737.6
167.5
25.8
346.1
152.9
100.8
407.8
312.7
184.7
799.3
Table of Contents
Predecessor
Year Ended
December 31,
2011
2012
(dollars in millions)
Selected annual financial data:
Net sales
Net income (loss)
Adjusted EBITDA (3)
(dollars in millions)
Balance sheet data (at end of period) :
Cash and cash equivalents
Working capital (4)
Total assets
$4,281.5
$ 181.5
$ 570.1
(2)
(3)
Year Ended
December 31,
2013
$4,219.4
$ 247.8
$ 661.8
Predecessor
December 31,
2012
December 31,
2013
$
$
28.7
605.2
2,878.6
0.2
(28.5)
1,181.6
1,697.0
Debt, net of discount
Net debt (5)
Total liabilities
Total stockholders’ equity/combined equity
(1)
Pro Forma Successor
12 Months
459.3
952.2
6,737.1
3,920.9
3,461.6
5,525.3
1,211.8
$
$
$
4,277.3
(82.9)
737.6
Ended
June 30,
2014
$ 4,341.5
$ 31.4
$ 799.3
Successor
June 30, 2014
Actual
Pro Forma
$ 350.3
971.5
6,704.6
3,900.9
3,550.6
5,447.9
1,256.7
$
333.1
954.3
6,690.4
3,900.9
3,567.8
5,447.9
1,242.5
In the Successor six-month period ended June 30, 2013 and year ended December 31, 2013, cost of goods sold included the impact of
$103.7 million attributable to the increase in inventory value resulting from the fair value adjustment associated with our acquisition
accounting for inventories.
Selling, general and administrative expense included transition-related expenses of $46.5 million, $56.8 million and $231.5 million
for the Successor six-month periods ended June 30, 2013 and 2014, and the Successor year ended December 31, 2013, respectively.
Additionally, during the Predecessor periods ended December 31, 2011 and 2012, $(2.5) million and $0.7 million in employee
separation and asset related costs (income) were recorded, respectively.
To supplement our financial information presented in accordance with U.S. GAAP, we use the following additional 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. In addition, for the Predecessor periods, Adjusted EBITDA gives pro
forma effect to the difference between the Predecessor allocated costs and the estimated standalone costs. 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 operating income (loss), net income (loss), earnings per share or any other
performance measures derived in accordance with U.S. GAAP as measures of operating performance.
20
Table of Contents
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 (as defined under “Capitalization”);
•
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.
In particular, Adjusted EBITDA for Predecessor periods contains an adjustment to our net income (loss) for estimates of our
standalone costs versus the allocated corporate costs from DuPont reflected in our historical financial statements. These estimates may
not be reflective of our actual standalone costs during such period had we been a standalone business.
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 operating income
(loss), net income (loss), earnings per share and other performance measures.
In evaluating these financial measures, you should be aware that in the future we may incur expenses similar to those eliminated in
this presentation. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results
will be unaffected by unusual or nonrecurring items.
21
Table of Contents
The following table reconciles net income (loss) to EBITDA and Adjusted EBITDA for the periods presented:
Predecessor
Successor
Pro forma
12 Months
Year
Ended
December 31,
(dollars in millions)
Net income (loss)
Interest expense, net
Provision (benefit) for income taxes
Depreciation and amortization
EBITDA
Inventory step-up(a)
Merger and acquisition related costs(b)
Financing fees(c)
Foreign exchange remeasurement losses
(gains)(d)
Long-term employee benefit plan
adjustments(e)
Termination benefits and other employee
related costs(f)
Consulting and advisory fees(g)
Transition-related costs(h)
Other adjustments(i)
Dividends in respect of noncontrolling
interest(j)
Management fee expense(k)
Allocated corporate and standalone costs,
net(l)
Adjusted EBITDA
(a)
(b)
(c)
(d)
(e)
(f)
January 1
through
January 31,
Year
Ended
December 31,
2012
23.4
17.7
4.5
48.9
59.6
(14.5)
34.0
44.7
(14.5)
(25.2)
32.8
36.9
2.3
9.5
3.0
4.5
11.8
5.3
4.5
11.0
(2.6)
—
—
14.7
8.6
—
—
12.6
0.3
—
—
0.1
147.5
54.7
29.3
2.3
17.2
21.9
7.4
(0.2)
5.9
20.7
47.5
11.0
147.8
54.7
29.3
2.4
17.5
21.9
7.4
(0.1)
5.9
20.7
47.5
11.0
136.2
53.5
69.4
13.5
(1.0)
—
(1.9)
—
—
—
(4.1)
1.3
(1.6)
1.6
(4.1)
—
(1.6)
—
84.2
$661.8
$
5.7
38.4
$
(218.9)
215.1
(44.8)
300.7
252.1
103.7
28.1
25.0
(5.2)
3.1
—
699.0
$
2013
2014
$ 52.1
113.9
10.7
152.9
329.6
—
—
3.1
—
$ 307.5
—
$407.8
2013
Ended
June 30,
$247.8
—
145.2
110.7
503.7
—
—
—
8.5
—
7.1
9.9
25.5
—
—
—
$(178.3)
90.4
(8.1)
140.6
44.6
103.7
28.1
25.0
Six Months
Ended
June 30,
2011
$
2013
Year
Ended
December 31,
$181.5
0.2
120.7
108.7
411.1
—
—
—
91.7
$570.1
2013
Six Months
Ended
June 30,
$
(82.9)
210.8
1.9
327.3
457.1
—
—
—
(5.2)
—
$
5.7
737.6
2013
2014
$ (55.5)
99.1
36.7
167.5
247.8
—
—
—
$ 58.8
110.9
11.7
152.9
334.3
—
—
—
5.7
$346.1
—
$407.8
2014
$
31.4
222.6
(23.1)
312.7
543.6
—
—
—
(2.7)
—
$
—
799.3
During the Successor six months ended June 30, 2013 and year ended December 31, 2013, we recorded a non-cash fair value adjustment associated with our
acquisition accounting for inventories. These amounts increased cost of goods sold by $103.7 million.
In connection with the Acquisition, we incurred $28.1 million of merger and acquisition costs during the Successor six months ended June 30, 2013 and year
ended December 31, 2013. These costs consisted primarily of investment banking, legal and other professional advisory services costs.
On August 30, 2012, we signed a debt commitment letter, which included an interim credit facility (the “Bridge Facility”). Upon the issuance of the Senior Notes
and the entry into the Senior Secured Credit Facilities, the commitments under the Bridge Facility terminated. Commitment fees related to the Bridge Facility of
$21.0 million and associated fees of $4.0 million were expensed upon payment and the termination of the Bridge Facility. In connection with the refinancing of
the Senior Secured Credit Facilities in February 2014 (discussed further in Note 22 to the audited consolidated and combined financial statements included
elsewhere in this prospectus), we recognized $3.1 million of costs.
Eliminates foreign exchange gains and losses resulting from the remeasurement of assets and liabilities denominated in foreign currencies, including a $19.4
million loss related to the Acquisition date settlement of a foreign currency contract used to hedge the variability of Euro-based financing.
For the Successor six months ended June 30, 2013 and 2014 and year ended December 31, 2013, eliminates the non-service cost components of employee benefits
costs. For the Predecessor period January 1, 2013 through January 31, 2013, eliminates (1) all U.S. pension and other long-term employee benefit costs that were
not assumed as part of the Acquisition and (2) the non-service cost component of the pension and other long-term employee benefit costs for the foreign pension
plans that were assumed as part of the Acquisition.
Represents expenses primarily related to employee termination benefits, including our initiative to improve our overall cost structure within the European region,
and other employee-related costs. Termination benefits include the costs associated with our headcount initiatives for establishment of new roles and elimination
of old roles and other costs associated with cost-saving opportunities that were related to our transition to a standalone entity.
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(g)
(h)
(i)
(j)
(k)
(l)
Represents fees paid to consultants, advisors and other third-party professional organizations for professional services rendered in conjunction with the transition
from DuPont to a standalone entity.
Represents charges associated with the transition from DuPont to a standalone entity, including branding and marketing, information technology related costs and
facility transition costs.
Represents costs for certain unusual or non-operational losses and the non-cash impact of natural gas and currency hedge losses allocated to DPC by DuPont,
stock-based compensation, asset impairments, equity investee dividends, indemnity income and losses associated with the Acquisition, and loss (gain) on sale and
disposal of property, plant and equipment.
Represents the payment of dividends to our joint venture partners by our consolidated entities that are not wholly owned.
Pursuant to Axalta’s consulting agreement with Carlyle Investment Management, L.L.C., an affiliate of Carlyle, for management and financial advisory services
and oversight provided to Axalta and its subsidiaries, Axalta is required to pay an annual consulting fee of $3.0 million and reimburse Carlyle Investment
Management, L.L.C. for its out-of-pocket expenses. We expect that this agreement will terminate upon the completion of this offering.
Represents (1) the add-back of corporate allocations from DuPont to DPC for the usage of DuPont’s facilities, functions and services; costs for administrative
functions and services performed on behalf of DPC by centralized staff groups within DuPont; a portion of DuPont’s general corporate expenses; and certain
pension and other long-term employee benefit costs, in each case because we believe these costs are not indicative of costs we would have incurred as a
standalone company net, of (2) estimated standalone costs based on a corporate function resource analysis that included a standalone executive office, the costs
associated with supporting a standalone information technology infrastructure, corporate functions such as legal, finance, treasury, procurement and human
resources and certain costs related to facilities management. This resource analysis included anticipated headcount and the associated overhead costs of running
these functions effectively as a standalone company of our size and complexity. This estimate is provided for additional information and analysis only, as we
believe that it facilitates enhanced comparability between Predecessor and Successor periods. It represents the difference between the costs that were allocated to
our predecessor by its parent and the costs that we believe would be incurred if it operated as a standalone entity. This estimate is not intended to represent a pro
forma adjustment presented within the guidance of Article 11 of Regulation S-X. Although we believe this estimate is reasonable, actual results may have differed
from this estimate, and any difference may be material. See “Forward-Looking Statements” and “Risk Factors—Risks Related to our Business.”
Predecessor Period
from January 1, 2013
Allocated corporate costs
Standalone costs
Total
(4)
(5)
Predecessor Year Ended
Predecessor Year Ended
December 31, 2011
December 31, 2012
$
$
333.5
(241.8)
91.7
$
$
Working capital is defined as current assets less current liabilities.
Net debt is defined as debt, net of discount, less cash and cash equivalents.
23
333.3
(249.1)
84.2
through
January 31, 2013
$
$
25.4
(19.7)
5.7
Table of Contents
RISK FACTORS
An investment in our common shares involves a high degree of risk. You should consider carefully the following risks, together with the other
information contained in this prospectus, before you decide whether to buy our common shares. If any of the events contemplated by the
following discussion of risks should occur, our business, results of operations, financial condition and cash flows could suffer significantly. As a
result, the market price of our common shares could decline, and you may lose all or part of the money you paid to buy our common shares. The
following is a summary of all the material risks known to us.
Risks Related to our Business
Risks Related to Execution of our Strategic and Operating Plans
Our business performance is impacted by economic conditions and, particularly, by conditions in the light and commercial vehicle endmarkets. Adverse developments in the global economy, in regional economies or in the light and commercial vehicle end-markets could
adversely affect our business, financial condition and results of operations.
The growth of our business and demand for our products is affected by changes in the health of the overall global economy, regional economies
and, in particular, of the light and commercial vehicle end-markets. Our business is adversely affected by decreases in the general level of global
economic activity, such as decreases in business and consumer spending, construction activity and industrial manufacturing. Economic
developments affect businesses such as ours in a number of ways. A tightening of credit in financial markets could adversely affect the ability of
our customers and suppliers to obtain financing for significant purchases and operations, could result in a decrease in or cancellation of orders
for our products and services and could impact the ability of our customers to make payments owed to us. Similarly, a tightening of credit in
financial markets could adversely affect our supplier base and increase the potential for one or more of our suppliers to experience financial
distress or bankruptcy.
Our financial position, results of operations and cash flows could be materially adversely affected by difficult economic conditions and/or
significant volatility in the capital, credit and commodities markets.
Several of the end-markets we serve are cyclical, and macroeconomic and other factors beyond our control could reduce demand from these endmarkets for our products, materially adversely affecting our business, financial condition and results of operations. Weak economic conditions
could depress new car sales and/or production, reducing demand for our light vehicle OEM coatings and limit the growth of the car parc. These
factors could, in turn, cause a related decline in demand for our automotive refinish coatings because, as the age of a vehicle increases, the
general propensity of car owners to pay for cosmetic repairs decreases. Also, during difficult economic times, car owners may refrain from
seeking repairs for their damaged vehicles. Similarly, periods of reduced global economic activity could hinder global industrial output, which
could decrease demand for our industrial and commercial coating products.
Our global business is adversely affected by decreases in the general level of economic activity, such as decreases in business and consumer
spending, construction activity and industrial manufacturing. Disruptions in the United States, Europe or in other economies, or weakening of
emerging markets, such as Brazil, could adversely affect our sales, profitability and/or liquidity.
We may be unable to successfully execute on our growth initiatives, business strategies or operating plans.
We are executing on a number of growth initiatives, strategies and operating plans designed to enhance our business. For example, we are
undertaking certain operational improvement initiatives with respect to realigning our manufacturing facilities in Europe and are growing our
sales force in emerging markets and end-markets where we are underrepresented. The anticipated benefits from these efforts are based on several
assumptions that
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may prove to be inaccurate. Moreover, we may not be able to successfully complete these growth initiatives, strategies and operating plans and
realize all of the benefits, including growth targets and cost savings, we expect to achieve or it may be more costly to do so than we anticipate. A
variety of risks could cause us not to realize some or all of the expected benefits. These risks include, among others, delays in the anticipated
timing of activities related to such growth initiatives, strategies and operating plans; increased difficulty and cost in implementing these efforts;
and the incurrence of other unexpected costs associated with operating the business. Moreover, our continued implementation of these programs
may disrupt our operations and performance. As a result, we cannot assure you that we will realize these benefits. If, for any reason, the benefits
we realize are less than our estimates or the implementation of these growth initiatives, strategies and operating plans adversely affect our
operations or cost more or take longer to effectuate than we expect, or if our assumptions prove inaccurate, our results of operations may be
materially adversely affected.
Increased competition may adversely affect our business, financial condition and results of operations.
We face substantial competition from many international, national, regional and local competitors of various sizes in the manufacturing,
distribution and sale of our coatings and related products. Some of our competitors are larger than us and have greater financial resources than
we do. Other competitors are smaller and may be able to offer more specialized products. We believe that technology, product quality, product
innovation, breadth of product line, technical expertise, distribution, service, local presence and price are the key competitive factors for our
business. Competition in any of these areas may reduce our net sales and adversely affect our earnings or cash flow by resulting in decreased
sales volumes, reduced prices and increased costs of manufacturing, distributing and selling our products.
Weather conditions may reduce the demand for some of our products and could have a negative effect on our business, financial condition
and results of operations.
From time to time, weather conditions have an adverse effect on our sales of coatings and related products. For example, unusually mild weather
during winter months may lead to fewer vehicle collisions, reducing market demand for our refinish coatings. Conversely, harsh weather
conditions can force our customers to reduce or suspend operations, thereby reducing the amount of products they purchase from us. Any such
reductions in customer purchases could have a material adverse effect on our business, financial condition and results of operations.
Improved safety features on vehicles and insurance company influence may reduce the demand for some of our products and could have a
negative effect on our business, financial condition and results of operations.
Vehicle manufacturers continue to develop new safety features such as collision avoidance technology that may reduce vehicle collisions in the
future, potentially negatively impacting demand for our refinish coatings. In addition, insurance companies may influence vehicle owners to use
certain body shops that do not use our products, which could also potentially negatively impact demand for our refinish coatings. Any resulting
reduction in demand for our refinish coatings could have a material adverse effect on our business, financial condition and results of operations.
The loss of any of our largest customers or the consolidation of MSOs, distributors and/or body shops could adversely affect our business,
financial condition and results of operations.
We have some customers that purchase a large amount of products from us and we are also reliant on distributors to assist us in selling our
products. Our largest single customer accounted for approximately 7.6% of our LTM Period net sales, and our largest distributor accounted for
approximately 2.1% of our LTM Period net sales. Consolidation of any of our customers, including MSOs, distributors and body shops, could
decrease our customer base and impact our results of operations if the resulting business chooses to use one of our competitors for the
consolidated business. The loss of any of our large customers or distributors, as a result of consolidation or otherwise, could have a material
adverse effect on our business, financial condition and results of operations.
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We rely on our distributor network and third-party delivery services for the distribution and export of certain of our products. A significant
disruption in these services or significant increases in prices for those services may disrupt our ability to export material or increase our
costs.
We ship a significant portion of our products to our customers through our distributor network as well as independent third-party delivery
companies. If any of our key distributors or third-party delivery providers experiences a significant disruption such that any of our products
cannot be delivered in a timely fashion or such that we incur additional shipping costs that we could not pass on to our customers, our costs may
increase and our relationships with certain of our customers may be adversely affected. In addition, if our distributors or third-party delivery
providers increase prices and we are not able to find comparable alternatives or adjust our delivery network, our business, financial condition and
results of operations could be adversely affected.
We take on credit risk exposure from our customers in the ordinary course of our business.
We routinely offer customers pre-bates, loans and other financial incentives to purchase our products. These arrangements generally obligate the
customer to purchase products from us and/or repay us for products over time. In the event that a customer is unwilling or unable to fulfill its
obligations under these arrangements, we may incur a financial loss. In addition, in the ordinary course of our business, we guarantee certain of
our customers’ obligations to third parties. Any default by our customers on their obligations could force us to make payments to the applicable
creditor. It is possible that customer defaults on obligations owed to us and on third-party obligations that we have guaranteed could be
significant, which could have a material adverse effect on our business, financial condition and results of operations.
Price increases or interruptions in the supply of raw materials could have a significant impact on our ability to grow or sustain earnings.
Our manufacturing processes consume significant amounts of raw materials, the costs of which are subject to worldwide supply and demand as
well as other factors beyond our control. We use a significant amount of raw materials derived from crude oil and natural gas. As a result,
volatile oil and gas prices can cause significant variations in our raw materials costs, affecting our operating results. Depending on our
contractual arrangements and economic conditions, we may be unable to pass increased raw materials costs to our customers. If we are not able
to fully offset the effects of higher raw materials costs, our financial results could deteriorate. In addition to the risks associated with raw
materials price increases, supplier capacity constraints, supplier production disruptions or the unavailability of certain raw materials could result
in supply imbalances that may have a material adverse effect on our business, financial condition and results of operations.
Failure to develop and market new products and manage product life cycles could impact our competitive position and have a material
adverse effect on our business, financial condition and results of operations.
Our operating results are largely dependent on our development and management of our portfolio of current, new and developing products and
services and our ability to bring those products and services to market. We plan to grow our business by focusing on developing and marketing
our solutions to meet increasing demand for productivity. Our ability to execute this strategy and our other growth plans successfully could be
adversely affected by difficulties or delays in product development, such as the inability to identify viable new products, successfully complete
research and development, obtain relevant regulatory approvals, effectively manage our manufacturing process or costs, obtain intellectual
property protection, or gain market acceptance of new products and services. Because of the lengthy and costly development process,
technological challenges and intense competition, we cannot assure you that any of the products we are currently developing, or that we may
develop in the future, will achieve substantial commercial success. For example, in addition to developing technologically advanced products,
commercial success of those products will depend on customer acceptance and implementation of those products. A failure to develop
commercially successful products or to develop additional uses for existing products could materially adversely affect our business, financial
results or results of operations. Further, sales of our new products could replace sales of some of our current products, offsetting the benefit of
even a successful product introduction.
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Our business, financial condition and results of operations could be adversely impacted by business disruptions, security threats and security
breaches.
Business disruptions, including supply disruptions, increasing costs for energy, temporary plant and/or power outages and information
technology system and network disruptions, could harm our operations as well as the operations of our customers, distributors or suppliers. We
face security threats and risks of security breaches to our facilities, data and information technology infrastructure. Although it is impossible to
predict the occurrence or consequences of business disruptions, security threats or security breaches, they could harm our reputation, subject us
to material liabilities, result in reduced demand for our products, make it difficult or impossible for us to deliver products to our customers or
distributors or to receive raw materials from suppliers, and create delays and inefficiencies in our supply chain. Further, while we have designed
and implemented controls to restrict access to our data and information technology infrastructure, it is still vulnerable to unauthorized access
through cyber-attacks, theft and other security breaches.
Our efforts to minimize business disruptions and security breaches may fail. Such business disruptions and security breaches could significantly
increase our cost of doing business and have a material adverse effect on our business, financial condition and results of operations.
Our ability to conduct our business might be negatively impacted if we experience difficulties with outsourcing and similar third-party
relationships.
We outsource certain business and administrative functions and rely on third parties to perform certain services on our behalf. We may do so
increasingly in the future. If we fail to develop and implement our outsourcing strategies, such strategies prove to be ineffective or fail to provide
expected cost savings, or our third party providers fail to perform as anticipated, we may experience operational difficulties, increased costs,
reputational damage and a loss of business that may have a material adverse effect on our business, financial condition and results of operations.
By utilizing third parties to perform certain business and administrative functions, we may be exposed to greater risk of data security breaches.
Any breach of data security could damage our reputation and/or result in monetary damages, which, in turn could have a material adverse effect
on our business, financial condition and results of operations.
Risks Related to our Global Operations
As a global business, we are subject to risks associated with our non-U.S. operations that are not present in the United States.
We conduct our business on a global basis, with approximately 74% of our net sales for the LTM Period occurring outside the United States. We
anticipate that international sales will continue to represent a substantial portion of our net sales and that our strategy for continued growth and
profitability will entail further international expansion, particularly in emerging markets. Changes in local and regional economic conditions
could affect product demand in our non-U.S. operations. Specifically, our financial results could be affected by changes in trade, monetary and
fiscal policies, laws and regulations, or other activities of U.S. and non-U.S. governments, agencies and similar organizations. These conditions
include, but are not limited to, changes in a country’s or region’s social, economic or political conditions, trade regulations affecting production,
pricing and marketing of products, local labor conditions and regulations, reduced protection of intellectual property rights in some countries,
changes in the regulatory or legal environment, restrictions on currency exchange activities, burdensome taxes and tariffs and other trade
barriers, as well as the imposition of economic or other trade sanctions, each of which could impact our ability to do business in certain
jurisdictions or with certain persons. Our international operations also present risks associated with terrorism, political hostilities, war and other
civil disturbances, the occurrence of which could lead to reduced net sales and profitability. Our international sales and operations are also
sensitive to changes in foreign national priorities, including government budgets.
Our day-to-day operations outside the United States are subject to cultural and language barriers and the need to adopt different business
practices in different geographic areas. In addition, we are required to create
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compensation programs, employment policies and other administrative programs that comply with the laws of multiple countries. We also must
communicate and monitor standards and directives across our global operations. Our failure to successfully manage our geographically diverse
operations could impair our ability to react quickly to changing business and market conditions and to enforce compliance with non-U.S.
standards and procedures.
Any payment of distributions, loans or advances to and from our subsidiaries could be subject to restrictions on or taxation of, dividends or
repatriation of earnings under applicable local law, monetary transfer restrictions, foreign currency exchange regulations in the jurisdictions in
which our subsidiaries operate or other restrictions imposed by current or future agreements, including debt instruments, to which our non-U.S.
subsidiaries may be a party. In particular, our operations in Brazil, China, India and Venezuela where we maintain local currency cash balances
are subject to import authorization or pricing controls. Our results of operations and/or financial condition could be adversely impacted, possibly
materially, if we are unable to successfully manage these and other risks of international operations in a volatile environment.
Currency risk may adversely affect our financial condition and cash flows.
We derive a significant portion of our net sales from outside the United States and conduct our business and incur costs in the local currency of
most countries in which we operate. Because our financial statements are presented in U.S. dollars, we must translate our financial results as well
as assets and liabilities into U.S. dollars for financial statement reporting purposes at exchange rates in effect during or at the end of each
reporting period, as applicable. Therefore, increases or decreases in the value of the U.S. dollar against other currencies in countries where we
operate will affect our results of operations and the value of balance sheet items denominated in foreign currencies. In particular, we are exposed
to the Euro, the Brazilian real, the Chinese yuan and the Venezuelan bolívar. Furthermore, many of our local businesses import or buy raw
materials in a currency other than their functional currency, which can impact the operating results for these operations if we are unable to
mitigate the impact of the currency exchange fluctuations. We cannot accurately predict the effects of exchange rate fluctuations upon our future
operating results because of the number of currencies involved, the variability of currency exposures and the potential volatility of currency
exchange rates. Accordingly, fluctuations in foreign exchange rates may have an adverse effect on our financial condition and cash flows.
Terrorist acts, conflicts, wars and natural disasters may materially adversely affect our business, financial condition and results of
operations.
As a multinational company with a large international footprint, we are subject to increased risk of damage or disruption to us, our employees,
facilities, partners, suppliers, distributors, resellers or customers due to terrorist acts, conflicts, wars, adverse weather conditions, natural
disasters, power outages, pandemics or other public health crises and environmental incidents, wherever located around the world. The potential
for future attacks and natural disasters, the national and international responses to attacks and natural disasters or perceived threats to national
security and other actual or potential conflicts or wars may create economic and political uncertainties. In addition, as a multinational company
with headquarters and significant operations located in the United States, actions against or by the United States could result in a decrease in
demand for our products, make it difficult or impossible to deliver products to our customers or to receive components from our suppliers, create
delays and inefficiencies in our supply chain and pose risks to our employees, resulting in the need to impose travel restrictions. A catastrophic
loss of the use of all or a portion of one of our key manufacturing facilities due to accident, labor issues, weather conditions, acts of war, political
unrest, geopolitical risk, terrorist activity, natural disaster or otherwise, whether short- or long-term, and any interruption in production capability
could require us to make substantial capital expenditures to remedy the situation, which could negatively affect our business, financial condition
and results of operations.
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Risks Related to Legal and Regulatory Compliance and Litigation
Our failure to comply with the anti-corruption laws of the United States and various international jurisdictions could negatively impact our
reputation and results of operations.
Doing business on a global basis requires us to comply with the laws and regulations of the U.S. government and those of various international
and sub-national jurisdictions, and our failure to successfully comply with these rules and regulations may expose us to liabilities. These laws
and regulations apply to companies, individual directors, officers, employees and agents, and may restrict our operations, trade practices,
investment decisions and partnering activities. In particular, our international operations are subject to U.S. and foreign anti-corruption laws and
regulations, such as the U.S. Foreign Corrupt Practices Act (the “FCPA”), the United Kingdom Bribery Act 2010 (the “Bribery Act”) as well as
anti-corruption laws of the various jurisdictions in which we operate. The FCPA, the Bribery Act and other laws prohibit us and our officers,
directors, employees and agents acting on our behalf from corruptly offering, promising, authorizing or providing anything of value to foreign
officials for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining favorable treatment. As part
of our business, we deal with state-owned business enterprises, the employees and representatives of which may be considered foreign officials
for purposes of the FCPA or the Bribery Act. We are subject to the jurisdiction of various governments and regulatory agencies outside of the
United States, which may bring our personnel into contact with foreign officials responsible for issuing or renewing permits, licenses or
approvals or for enforcing other governmental regulations. In addition, some of the international locations in which we operate lack a developed
legal system and have elevated levels of corruption. Our global operations expose us to the risk of violating, or being accused of violating, the
foregoing or other anti-corruption laws. Such violations could be punishable by criminal fines, imprisonment, civil penalties, disgorgement of
profits, injunctions and exclusion from government contracts, as well as other remedial measures. Investigations of alleged violations can be
very expensive and disruptive. Historically, DuPont maintained policies and procedures designed to comply with anti-corruption law and we
have implemented anti-corruption policies and procedures for us as an independent company. There can be no guarantee that these policies and
procedures will effectively prevent violations by our employees or representatives in the future. Additionally, we face a risk that our distributors
and other business partners may violate the FCPA, the Bribery Act or similar laws or regulations. Such violations could expose us to FCPA and
Bribery Act liability and/or our reputation may potentially be harmed by their violations and resulting sanctions and fines.
Our international operations require us to comply with anti-terrorism laws and regulations and applicable trade embargoes.
We are subject to trade and economic sanctions laws and other restrictions on international trade. The U.S. and other governments and their
agencies impose sanctions and embargoes on certain countries, their governments and designated parties. In the United States, the economic and
trade sanctions programs are principally administered and enforced by the U.S. Treasury Department’s Office of Foreign Assets Control. If we
fail to comply with these laws, we could be subject to civil or criminal penalties, other remedial measures and legal expenses, which could
adversely affect our business, financial condition and results of operations. Historically, DuPont maintained policies and procedures relating to
trade with potentially sensitive countries. We are in the process of developing and implementing similar policies as a standalone company. We
cannot assure you that such policies will effectively prevent violations in the future, particularly as the scope of certain laws may be unclear and
may be subject to changing interpretations.
We cannot predict the nature, scope or effect of future regulatory requirements to which our international sales and manufacturing operations
might be subject or the manner in which existing laws might be administered or interpreted. Future regulations could limit the countries in which
some of our products may be manufactured or sold, or could restrict our access to, or increase the cost of obtaining, products from foreign
sources. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of
operations.
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We are subject to complex and evolving data privacy laws.
Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection and other matters. We
could be liable for loss or misuse of our customers’ personal information and/or our employee’s personally-identifiable information if we fail to
prevent or mitigate such misuse or breach. Although we have developed systems and processes that are designed to protect customer and
employee information and prevent misuse of such information and other security breaches, failure to prevent or mitigate such misuse or breaches
may affect our reputation and operating results negatively and may require significant management time and attention.
As a result of our current and past operations and/or products, including operations and/or products related to our businesses prior to the
Acquisition, we could incur significant environmental liabilities and costs.
We are subject to various laws and regulations around the world governing the protection of environment and health and safety, including the
discharge of pollutants to air and water and the management and disposal of hazardous substances. These laws and regulations not only govern
our current operations and products, but also impose potential liability on us for our or our predecessors’ past operations. We could incur fines,
penalties and other sanctions as a result of violations of such laws and regulations. In addition, as a result of our operations and/or products,
including our past operations and/or products related to our businesses prior to the Acquisition, we could incur substantial costs, including costs
relating to remediation and restoration activities and third-party claims for property damage or personal injury. The ultimate costs under
environmental laws and the timing of these costs are difficult to accurately predict. Our accruals for costs and liabilities at sites where
contamination is being investigated or remediated may not be adequate because the estimates on which the accruals are based depend on a
number of factors including the nature of the matter, the complexity of the site, site geology, the nature and extent of contamination, the type of
remedy, the outcome of discussions with regulatory agencies and, at multi-party sites, other Potentially Responsible Parties (“PRPs”) and the
number and financial viability of other PRPs. Additional contamination also may be identified, and/or additional cleanup obligations may be
incurred, at these or other sites in the future. For example, periodic monitoring or investigation activities are ongoing at a number of our sites
where contaminants have been detected or are suspected, and we may incur additional costs if more active or extensive remediation is required.
In addition, in connection with the Acquisition, DuPont has, subject to certain exceptions and exclusions, agreed to indemnify us for certain
liabilities relating to environmental remediation obligations and certain claims relating to the exposure to hazardous substances and products
manufactured prior to our separation from DuPont. We could incur material additional costs if DuPont fails to meet its obligations, if the
indemnification proves insufficient or if we otherwise are unable to recover costs associated with such liabilities. The costs of our current
operations complying with complex environmental laws and regulations, as well as internal voluntary programs, are significant and will continue
to be so for the foreseeable future as environmental regulations become more stringent. These laws and regulations also change frequently, and
we may incur additional costs complying with stricter environmental requirements that are promulgated in the future. Concerns over global
climate change as well as more frequent and severe weather events have also promoted a number of legal and regulatory measures as well as
social initiatives intended to reduce greenhouse gas and other carbon emissions. We cannot predict the impact that changing climate conditions
or more frequent and severe weather events, if any, will have on our business, results of operations or financial condition. Moreover, we cannot
predict how legal, regulatory and social responses to concerns about global climate change will impact our business.
As a producer of coatings, we transport certain materials that are inherently hazardous due to their toxic nature.
In our business, we handle and transport hazardous materials. If mishandled or released into the environment, these materials could cause
substantial property damage or personal injuries resulting in significant legal claims against us. In addition, evolving regulations concerning the
handling and transportation of certain materials could result in increased future capital or operating costs.
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Our results of operations could be adversely affected by litigation.
We face risks arising from various litigation matters that have been asserted against us or that may be asserted against us in the future, including,
but not limited to, claims for product liability, patent and trademark infringement, antitrust, warranty, contract and claims for third party property
damage or personal injury. For instance, we have noted a nationwide trend in purported class actions against chemical manufacturers generally
seeking relief such as medical monitoring, property damages, off-site remediation and punitive damages arising from alleged environmental torts
without claiming present personal injuries. We have also noted a trend in public and private nuisance suits being filed on behalf of states,
counties, cities and utilities alleging harm to the general public. In addition, various factors or developments can lead to changes in current
estimates of liabilities such as a final adverse judgment, significant settlement or changes in applicable law. A future adverse ruling or
unfavorable development could result in future charges that could have a material adverse effect on us. An adverse outcome in any one or more
of these matters could be material to our business, financial condition and results of operations. In particular, product liability claims, regardless
of their merits, could be costly, divert management’s attention and adversely affect our reputation and demand for our products.
Risks Related to Human Resources
We may not be able to recruit and retain the experienced and skilled personnel we need to compete.
Our future success depends on our ability to attract, retain, develop and motivate highly skilled personnel. We must have talented personnel to
succeed and competition for senior management in our industry is intense. Our ability to meet our performance goals depends upon the personal
efforts and abilities of the principal members of our senior management who provide strategic direction, develop our business, manage our
operations and maintain a cohesive and stable work environment. We cannot assure you that we will retain or successfully recruit senior
executives, or that their services will remain available to us.
We rely on qualified managers and skilled employees, such as scientists, with technical and manufacturing industry experience in order to
operate our business successfully. From time to time, there may be a shortage of skilled labor, which may make it more difficult and expensive
for us to attract and retain qualified employees. If we are unable to attract and retain sufficient numbers of qualified individuals or our costs to do
so increase significantly, our operations could be materially adversely affected.
If we are required to make unexpected payments to any pension plans applicable to our employees, our financial condition may be adversely
affected.
We have defined benefit pension plans in which many of our current and former employees outside the United States participate or have
participated. Many of these plans are underfunded or unfunded and the liabilities in relation to these plans will need to be satisfied as they mature
from our operating reserves. In jurisdictions where the defined benefit pension plans are intended to be funded with assets in a trust or other
funding vehicle, the liabilities exceed the corresponding assets in many of the plans. Various factors, such as changes in actuarial estimates and
assumptions (including as to life expectancy, discount rates and rate of return on assets) as well as actual return on assets, can increase the
expenses and liabilities of the defined benefit pension plans. The assets and liabilities of the plans must be valued from time to time under
applicable funding rules and as a result we may be required to increase the cash payments we make in relation to these defined benefit pension
plans.
Our financial condition and results of operations may be adversely affected to the extent that we are required to make any additional payments to
any relevant defined benefit pension plans in excess of the amounts assumed in our current projections and assumptions or report higher pension
plan expenses under relevant accounting rules.
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We are subject to work stoppages, union negotiations, labor disputes and other matters associated with our labor force, which may adversely
impact our operations and cause us to incur incremental costs.
Many of our employees globally are in unions or otherwise covered by labor agreements, including works councils. As of June 30, 2014,
approximately 0.5% of our U.S. workforce was unionized and approximately 64% of our workforce outside the United States was unionized or
otherwise covered by labor agreements. Consequently, we may be subject to potential union campaigns, work stoppages, union negotiations and
other potential labor disputes. Additionally, negotiations with unions or works councils in connection with existing labor agreements may result
in significant increases in our cost of labor, divert management’s attention away from operating our business or break down and result in the
disruption of our operations. The occurrence of any of the preceding outcomes could impair our ability to manufacture our products and result in
increased costs and/or decreased operating results. Further, we may be impacted by work stoppages at our suppliers or customers that are beyond
our control.
Risks Related to Intellectual Property
Our inability to protect and enforce our intellectual property rights could adversely affect our financial results.
Intellectual property rights both in the United States and in foreign countries, including patents, trade secrets, confidential information,
trademarks and trade names are important to our business and will be critical to our ability to grow and succeed in the future. We make strategic
decisions on whether to apply for intellectual property protection and what kind of protection to pursue based on a cost benefit analysis. While
we endeavor to protect our intellectual property rights in certain jurisdictions in which our products are produced or used and in jurisdictions into
which our products are imported, the decision to file for intellectual property protection is made on a case-by-case basis. Because of the
differences in foreign trademark, patent and other laws concerning proprietary rights, our intellectual property rights may not receive the same
degree of protection in foreign countries as they would in the United States. Our failure to obtain or maintain adequate protection of our
intellectual property rights for any reason could have a material adverse effect on our business, financial condition and results of operations.
We have applied for patent protection relating to certain existing and proposed products, processes and services in certain jurisdictions. While
we generally consider applying for patents in those countries where we intend to make, have made, use, or sell patented products, we may not
accurately assess all of the countries where patent protection will ultimately be desirable. If we fail to timely file a patent application in any such
country, we may be precluded from doing so at a later date. Furthermore, we cannot assure you that our pending patent applications will not be
challenged by third parties or that such applications will eventually be issued by the applicable patent offices as patents. We also cannot assure
that the patents issued as a result of our foreign patent applications will have the same scope of coverage as our U.S. patents. It is possible that
only a limited number of the pending patent applications will result in issued patents, which may have a materially adverse effect on our business
and results of operations.
The patents we own could be challenged, invalidated or circumvented by others and may not be of sufficient scope or strength to provide us with
any meaningful protection or commercial advantage. Furthermore, our existing patents are subject to challenges from third parties that may
result in invalidations and will all eventually expire, after which we will not be able to prevent our competitors from using our previously
patented technologies, which could materially adversely affect our competitive advantage stemming from those products and technologies. We
also cannot assure that competitors will not infringe our patents, or that we will have adequate resources to enforce our patents.
We also rely on unpatented proprietary technology. It is possible that others will independently develop the same or similar technology or
otherwise obtain access to our unpatented technology. To protect our trade secrets and other proprietary information, we require certain
employees, consultants, advisors and collaborators to enter into confidentiality agreements as we deem appropriate. We cannot assure you that
we will be able to enter into these
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confidentiality agreements or that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary
information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary
information. If we are unable to maintain the proprietary nature of our technologies, we could be materially adversely affected.
We rely on our trademarks, trade names and brand names to distinguish our products from the products of our competitors, and have registered
or applied to register many of these trademarks. We cannot assure you that our trademark applications will be approved. Third parties may also
oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully
challenged, we could be forced to rebrand our products, which could result in loss of brand recognition, and could require us to devote resources
advertising and marketing new brands. Further, we cannot assure you that competitors will not infringe our trademarks, or that we will have
adequate resources to enforce our trademarks. We also license third parties to use our trademarks. In an effort to preserve our trademark rights,
we enter into license agreements with these third parties that govern the use of our trademarks and contain limitations on their use. Although we
make efforts to police the use of our trademarks by our licensees, we cannot assure you that these efforts will be sufficient to ensure that our
licensees abide by the terms of their licenses. In the event that our licensees fail to do so, our trademark rights could be diluted.
If we are sued for infringing intellectual property rights of third parties, it may be costly and time consuming, and an unfavorable outcome
in any litigation could harm our business.
We cannot assure you that our activities will not, unintentionally or otherwise, infringe on the patents or other intellectual property rights owned
by others. We may spend significant time and effort and incur significant litigation costs if we are required to defend ourselves against
intellectual property rights claims brought against us, regardless of whether the claims have merit. If we are found to have infringed on the
patents or other intellectual property rights of others, we may be subject to substantial claims for damages, which could materially impact our
cash flow, business, financial condition and results of operations. We may also be required to cease development, use or sale of the relevant
products or processes, or we may be required to obtain a license on the disputed rights, which may not be available on commercially reasonable
terms, if at all.
Risks Related to Other Aspects of our Business
We may engage in acquisitions and divestitures, and may encounter difficulties integrating acquired businesses with, or disposing of divested
businesses from, our current operations and, as a result, we may not realize the anticipated benefits of these acquisitions and divestitures.
We may seek to grow through strategic acquisitions, joint ventures or other arrangements. Our due diligence reviews in these transactions may
not identify all of the material issues necessary to accurately estimate the cost or potential loss contingencies with respect to a particular
transaction, including potential exposure to regulatory sanctions resulting from a counterparty’s previous activities. We may incur unanticipated
costs or expenses, including post-closing asset impairment charges, expenses associated with eliminating duplicate facilities, litigation and other
liabilities. We may also face regulatory scrutiny as a result of perceived concentration in certain markets, which could cause additional delay or
prevent us from completing certain acquisitions that would be beneficial to our business. We also may encounter difficulties in integrating
acquisitions with our operations, applying our internal controls processes to these acquisitions or in managing strategic investments.
Additionally, we may not achieve the benefits we anticipate when we first enter into a transaction in the amount or timeframe anticipated. Any of
the foregoing could adversely affect our business and results of operations. In addition, accounting requirements relating to business
combinations, including the requirement to expense certain acquisition costs as incurred, may cause us to experience greater earnings volatility
and generally lower earnings during periods in which we acquire new businesses. Furthermore, we may make strategic divestitures from time to
time. These divestitures may result in continued financial involvement in the divested businesses, such as through indemnities, guarantees or
other financial arrangements. These arrangements could result in financial obligations imposed upon us and could affect our future financial
condition and results of operations.
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Our joint ventures may not operate according to our business strategy if our joint venture partners fail to fulfill their obligations.
As part of our business, we have entered into certain joint venture arrangements, and may enter into additional joint venture arrangements in the
future. The nature of a joint venture requires us to share control over significant decisions with unaffiliated third parties. Since we may not
exercise control over our current or future joint ventures, we may not be able to require our joint ventures to take actions that we believe are
necessary to implement our business strategy. Additionally, differences in views among joint venture participants may result in delayed
decisions or failures to agree on major issues. If these differences cause the joint ventures to deviate from our business strategy, our results of
operations could be materially adversely affected.
The insurance we maintain may not fully cover all potential exposures.
Our product liability, property, business interruption and casualty insurance coverages may not cover all risks associated with the operation of
our business and may not be sufficient to offset the costs of any losses, lost sales or increased costs experienced during business interruptions.
For some risks, we elect not to obtain insurance. As a result of market conditions, premiums and deductibles for certain insurance policies can
increase substantially and, in some instances, certain insurance policies may become unavailable or available only for reduced amounts of
coverage. As a result, we may not be able to renew our insurance policies or procure other desirable insurance on commercially reasonable
terms, if at all. Losses and liabilities from uninsured or underinsured events and delay in the payment of insurance proceeds could have a
material adverse effect on our business, financial condition and results of operations.
We may need to recognize impairment charges related to goodwill, identifiable intangible assets and fixed assets.
Under the acquisition method of accounting, the net assets acquired were recorded at fair value as of the date of the Acquisition, with any excess
purchase price allocated to goodwill. The Acquisition resulted in significant balances of goodwill and identifiable intangible assets. We are
required to test goodwill and any other intangible asset with an indefinite life for possible impairment on the same date each year, unless
conditions exist that would require a more frequent evaluation. We are also required to evaluate amortizable intangible assets and fixed assets for
impairment if there are indicators of a possible impairment.
There is significant judgment required in the analysis of a potential impairment of goodwill, identified intangible assets and fixed assets. If, as a
result of a general economic slowdown, deterioration in one or more of the markets in which we operate or impairment in our financial
performance and/or future outlook, the estimated fair value of our long-lived assets decreases, we may determine that one or more of our longlived assets is impaired. An impairment charge would be determined based on the estimated fair value of the assets and any such impairment
charge could have a material adverse effect on our results of operations and financial position.
We recently completed the transition of our IT systems. If we experience any issues related to the recent transition, it may have a material
adverse effect on our results of operations.
We recently completed the transition of IT systems from DuPont to our own platform, including the establishment of a global IT support team.
There are inherent risks associated with transitioning and changing these types of systems, and while we completed the transition in October
2014, if there are any issues surrounding this recent transition, it could result in a potential disruption of our business and substantial unplanned
costs, which could have a material adverse effect on our business, financial condition or results of operations.
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Our Predecessor financial information may not be comparable to the Successor financial information.
Our Predecessor financial information may not reflect what our results of operations and cash flows would have been had we been a separate,
standalone entity during those periods and may not be indicative of what our results of operations and cash flows will be in the future. As a
result, you have limited information on which to evaluate our business. This is primarily because:
•
Our Predecessor combined financial information has been derived from the financial statements and accounting records of DuPont
and reflects assumptions made by DuPont. Those assumptions and allocations may be different from the comparable expenses we
would have incurred as a standalone company;
•
Certain general corporate expenses were historically allocated to the Predecessor period by DuPont that, while reasonable, may not
be indicative of the actual expenses that would have been incurred had we been operating as a standalone company, nor are they
indicative of the costs that will be incurred in the future as a standalone company;
•
Our working capital requirements historically were satisfied as part of DuPont’s corporate-wide cash management policies. Since
becoming a standalone company, we no longer rely on DuPont for working capital. In connection with the Acquisition, we incurred a
large amount of indebtedness and will therefore assume significant debt service costs. As a result, our cost of debt and capitalization
is significantly different from that reflected in the Predecessor financial information; and
•
Following the Acquisition, we have experienced increases in our costs, including the cost to establish an appropriate accounting and
reporting system, debt service obligations, providing healthcare and other costs of being a standalone company.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 7 to our Audited Consolidated
Financial Statements contained elsewhere in this prospectus.
DuPont’s potential breach of its obligations in connection with the Acquisition, including failure to comply with its indemnification
obligations, may materially affect our business and operating results.
Although the Acquisition closed on February 1, 2013, DuPont still has performance obligations to us, such as transferring delayed assets,
providing IT-related transition services and fulfilling indemnification requirements. We could incur material additional costs if DuPont fails to
meet its obligations or if we otherwise are unable to recover costs associated with such liabilities.
If we are treated as a financial institution under FATCA, withholding tax may be imposed on payments on our common shares.
Sections 1471 through 1474 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), and applicable Treasury Regulations
commonly referred to as “FATCA” generally impose 30% withholding on certain “withholdable payments” and, in the future, may impose such
withholding on “foreign passthru payments” made by a “foreign financial institution” (each as defined in the Code) that has entered into an
agreement with the U.S. Internal Revenue Service to perform certain diligence and reporting obligations with respect to the foreign financial
institution’s U.S.-owned accounts. The applicable Treasury Regulations treat an entity as a “financial institution” if it is a holding company
formed in connection with or availed of by a private equity fund or other similar investment vehicle established with an investment strategy of
investing, reinvesting, or trading in financial assets. The United States has entered into an intergovernmental agreement (an “IGA”) with
Bermuda, which modifies the FATCA withholding regime described above, although the U.S. Internal Revenue Service and Bermuda tax
authorities have not yet provided final guidance regarding compliance with the Bermuda IGA. It is not clear whether we would be treated as a
financial institution subject to the diligence, reporting and withholding obligations under FATCA or the Bermuda IGA. Furthermore, it is not yet
clear how the Bermuda IGA will address foreign passthru payments. Prospective investors should consult their tax advisors regarding the
potential impact of FATCA, the Bermudan IGA and any non-U.S. legislation implementing FATCA, on their investment in our common shares.
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We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S.
Holders of our common shares.
Based on the anticipated market price of our common shares in this offering and expected price of our common shares following this offering,
and the composition of our income, assets and operations, we do not expect to be treated as a passive foreign investment company (“PFIC”) for
U.S. federal income tax purposes for the current taxable year or in the foreseeable future. However, the application of the PFIC rules is subject to
uncertainty in several respects, and we cannot assure you the U.S. Internal Revenue Service will not take a contrary position. Furthermore, this is
a factual determination that must be made annually after the close of each taxable year. If we are a PFIC for any taxable year during which a
U.S. person holds our common shares, certain adverse U.S. federal income tax consequences could apply to such U.S. person. See “Taxation—
U.S. Federal Income Tax Considerations—Passive Foreign Investment Company.”
Risks Related to our Indebtedness
Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to
changes in the economy and our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting
our obligations with respect to our indebtedness.
As of June 30, 2014, we had approximately $3.9 billion of indebtedness on a consolidated basis, including $750.0 million of our Dollar Senior
Notes, $340.4 million of our Euro Senior Notes, $2,277.0 million of the Dollar Term Loan Facility (as defined herein) and $539.3 million of the
Euro Term Loan Facility (as defined herein). In addition, we had no outstanding borrowings under our Revolving Credit Facility (as defined
herein) and approximately $378.5 million in borrowing capacity available under our Revolving Credit Facility, after giving effect to $21.5
million of outstanding letters of credit. As of June 30, 2014, we were in compliance with all of the covenants under our outstanding debt
instruments.
Our substantial indebtedness could have important consequences to you. For example, it could:
•
limit our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions, general corporate
purposes or other purposes;
•
require us to devote a substantial portion of our annual cash flow to the payment of interest on our indebtedness;
•
expose us to the risk of increased interest rates as, over the term of our debt, the interest cost on a significant portion of our
indebtedness is subject to changes in interest rates;
•
hinder our ability to adjust rapidly to changing market conditions;
•
limit our ability to secure adequate bank financing in the future with reasonable terms and conditions or at all; and
•
increase our vulnerability to and limit our flexibility in planning for, or reacting to, a potential downturn in general economic
conditions or in one or more of our businesses.
We are more leveraged than some of our competitors, which could adversely affect our business plans. A relatively greater portion of our cash
flow is used to service debt and other financial obligations. This reduces the funds we have available for working capital, capital expenditures,
acquisitions and other purposes and, given current credit constriction, may make it more difficult for us to make borrowings in the future.
Similarly, our relatively greater leverage increases our vulnerability to, and limits our flexibility in planning for, adverse economic and industry
conditions and creates other competitive disadvantages compared with other companies with relatively less leverage.
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In addition, the indentures governing the Senior Notes and the agreements governing our Senior Secured Credit Facilities contain affirmative and
negative covenants that limit our and certain of our subsidiaries’ ability to engage in activities that may be in our long-term best interests. Our
failure to comply with those covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all of our
debts.
To service all of our indebtedness, we will require a significant amount of cash and our ability to generate cash depends on many factors
beyond our control.
Our operations are conducted through our subsidiaries and our ability to make cash payments on our indebtedness will depend on the earnings
and the distribution of funds from our subsidiaries. None of our subsidiaries, however, is obligated to make funds available to us for payment on
our indebtedness. Further, the terms of the instruments governing our indebtedness significantly restrict our subsidiaries from paying dividends
and otherwise transferring assets to us. Our ability to make cash payments on and refinance our debt obligations, to fund planned capital
expenditures and to meet other cash requirements will depend on our financial condition and operating performance, which are subject to
prevailing economic and competitive conditions and to financial, business, legislative, regulatory and other factors beyond our control. We might
not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on
our indebtedness.
Our business may not generate sufficient cash flow from operations and future borrowings may not be available under our Senior Secured Credit
Facilities in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs, including planned capital
expenditures. In such circumstances, we may need to refinance all or a portion of our indebtedness on or before maturity. We may not be able to
refinance any of our indebtedness on commercially reasonable terms or at all. If we cannot service our indebtedness, we may have to take actions
such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances.
Such actions, if necessary, may not be effected on commercially reasonable terms or at all. The instruments governing our indebtedness restrict
our ability to sell assets and our use of the proceeds from such sales, and we may not be able to consummate those dispositions or to obtain
proceeds in an amount sufficient to meet any debt service obligations then due.
If we are unable to generate sufficient cash flow or are otherwise unable to obtain funds necessary to meet required payments of principal,
premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants in the instruments governing our
indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of
such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the
lenders under our Revolving Credit Facility could elect to terminate their commitments thereunder, cease making further loans and institute
foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may
in the future need to obtain waivers from the required lenders under the credit agreement governing our Senior Secured Credit Facilities to avoid
being in default. If we breach our covenants under our Senior Secured Credit Facilities or we are in default thereunder and seek a waiver, we
may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under the credit agreement governing our
Senior Secured Credit Facilities, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or
liquidation.
Despite our current level of indebtedness and restrictive covenants, we and our subsidiaries may incur additional indebtedness or we may pay
dividends in the future. This could further exacerbate the risks associated with our substantial financial leverage.
We and our subsidiaries may incur significant additional indebtedness under the agreements governing our indebtedness. Although the
indentures governing the Senior Notes and the credit agreement governing our Senior Secured Credit Facilities contain restrictions on the
incurrence of additional indebtedness, these restrictions are subject to a number of thresholds, qualifications and exceptions, and the additional
indebtedness incurred in
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compliance with these restrictions could be substantial. Additionally, these restrictions also will not prevent us from incurring obligations that,
although preferential to our common shares in terms of payment, do not constitute indebtedness. As of June 30, 2014, we had $378.5 million of
additional borrowing capacity under our Revolving Credit Facility, after giving effect to $21.5 million of outstanding letters of credit.
In addition, if new debt is added to our and/or our subsidiaries’ debt levels, the related risks that we now face as a result of our leverage would
intensify. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—
Indebtedness.”
We are dependent upon our lenders for financing to execute our business strategy and meet our liquidity needs. If our lenders are unable or
unwilling to fund borrowings under their credit commitments or we are unable to borrow, it could negatively impact our business.
We are dependent upon our lenders for financing to execute our business strategy and meet our liquidity needs. If our lenders are unable to fund
borrowings under their credit commitments or we are unable to borrow from them for any reason, our business could be negatively impacted.
During periods of volatile credit markets, there is risk that any lenders, even those with strong balance sheets and sound lending practices, could
fail or refuse to honor their legal commitments and obligations under existing credit commitments, including, but not limited to, extending credit
up to the maximum permitted by a credit facility, allowing access to additional credit features and otherwise accessing capital and/or honoring
loan commitments. If our lenders are unable or unwilling to fund borrowings under their revolving credit commitments or we are unable to
borrow from them, it could be difficult in such environments to obtain sufficient liquidity to meet our operational needs.
Our ability to obtain additional capital on commercially reasonable terms may be limited.
Although we believe our cash and cash equivalents, together with cash we expect to generate from operations and unused capacity available
under our Revolving Credit Facility, provide adequate resources to fund ongoing operating requirements, we may need to seek additional
financing to compete effectively.
If we are unable to obtain capital on commercially reasonable terms, it could:
•
reduce funds available to us for purposes such as working capital, capital expenditures, research and development, strategic
acquisitions and other general corporate purposes;
•
restrict our ability to introduce new products or exploit business opportunities;
•
increase our vulnerability to economic downturns and competitive pressures in the markets in which we operate; and
•
place us at a competitive disadvantage.
Difficult and volatile conditions in the capital, credit and commodities markets and in the overall economy could have a material adverse
effect on our financial position, results of operations and cash flows.
Difficult global economic conditions, including concerns about sovereign debt and significant volatility in the capital, credit and commodities
markets, could have a material adverse effect on our financial position, results of operations and cash flows. These global economic factors,
combined with low levels of business and consumer confidence and high levels of unemployment, have precipitated a slow recovery from the
global recession and concern about a return to recessionary conditions. The difficult conditions in these markets and the overall economy affect
our business in a number of ways. For example:
•
as a result of the volatility in commodity prices, we may encounter difficulty in achieving sustained market acceptance of past or
future price increases, which could have a material adverse effect on our financial position, results of operations and cash flows;
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•
under difficult market conditions there can be no assurance that borrowings under our Revolving Credit Facility would be available
or sufficient, and in such a case, we may not be able to successfully obtain additional financing on reasonable terms, or at all;
•
in order to respond to market conditions, we may need to seek waivers from various provisions in the credit agreement governing our
Senior Secured Credit Facilities, and in such case, there can be no assurance that we can obtain such waivers at a reasonable cost, if
at all;
•
market conditions could cause the counterparties to the derivative financial instruments we may use to hedge our exposure to interest
rate, commodity or currency fluctuations to experience financial difficulties and, as a result, our efforts to hedge these exposures
could prove unsuccessful and, furthermore, our ability to engage in additional hedging activities may decrease or become more
costly; and
•
market conditions could result in our key customers experiencing financial difficulties and/or electing to limit spending, which in
turn could result in decreased sales and earnings for us.
In general, downturns in economic conditions can cause fluctuations in demand for our and our customers’ products, product prices, volumes
and margins. Future economic conditions may not be favorable to our industry and future growth in demand for our products, if any, may not be
sufficient to alleviate any existing or future conditions of excess industry capacity. A decline in the demand for our products or a shift to lowermargin products due to deteriorating economic conditions could have a material adverse effect on our financial condition and results of
operations and could also result in impairments of certain of our assets. We do not know if market conditions or the state of the overall economy
will continue to improve in the near future. We cannot provide assurance that a continuation of current economic conditions or a further
economic downturn in one or more of the geographic regions in which we sell our products would not have a material adverse effect on our
business, financial condition and results of operations.
Our debt obligations may limit our flexibility in managing our business.
The indentures governing our Senior Notes and the credit agreement governing our Senior Secured Credit Facilities require us to comply with a
number of customary financial and other covenants, such as maintaining leverage ratios in certain situations and maintaining insurance coverage.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—
Indebtedness.” These covenants may limit our flexibility in our operations, and breaches of these covenants could result in defaults under the
instruments governing the applicable indebtedness even if we had satisfied our payment obligations. If we were to default on the indentures
governing our Senior Notes, the credit agreement governing our Senior Secured Credit Facilities or other debt instruments, our financial
condition and liquidity would be adversely affected.
Risks Related to this Offering and Ownership of our Common Shares
Because a significant portion of our operations is conducted through our subsidiaries and joint ventures, we are largely dependent on our
receipt of distributions and dividends or other payments from our subsidiaries and joint ventures for cash to fund all of our operations and
expenses, including to make future dividend payments, if any.
A significant portion of our operations is conducted through our subsidiaries and joint ventures. As a result, our ability to service our debt or to
make future dividend payments, if any, is largely dependent on the earnings of our subsidiaries and joint ventures and the payment of those
earnings to us in the form of dividends, loans or advances and through repayment of loans or advances from us. Payments to us by our
subsidiaries and joint ventures will be contingent upon our subsidiaries’ or joint ventures’ earnings and other business considerations and may be
subject to statutory or contractual restrictions. We do not currently expect to declare or pay dividends
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on our common shares for the foreseeable future; however, to the extent that we determine in the future to pay dividends on our common shares,
the credit agreement governing our Senior Secured Credit Facilities and the indentures governing the Senior Notes significantly restrict the
ability of our subsidiaries to pay dividends or otherwise transfer assets to us. In addition, Bermuda law imposes requirements that may restrict
our ability to pay dividends to holders of our common shares. In addition, there may be significant tax and other legal restrictions on the ability
of foreign subsidiaries or joint ventures to remit money to us.
There is no existing market for our common shares, and we do not know if one will develop to provide you with adequate liquidity to sell our
common shares at prices equal to or greater than the price you paid in this offering.
Prior to this offering, there has not been a public market for our common shares. We cannot predict the extent to which investor interest in our
company will lead to the development of an active trading market on the NYSE or otherwise or how liquid that market might become. If an
active trading market does not develop, you may have difficulty selling any of our common shares that you buy. The initial public offering price
for the common shares will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of
prices that will prevail in the open market following this offering. Consequently, you may not be able to sell our common shares at prices equal
to or greater than the price you paid in this offering, or at all.
The price of our common shares may fluctuate significantly, and you could lose all or part of your investment.
Volatility in the market price of our common shares may prevent you from being able to sell your common shares at or above the price you paid
for your common shares. The market price of our common shares could fluctuate significantly for various reasons, including:
•
our operating and financial performance and prospects;
•
our quarterly or annual earnings or those of other companies in our industry;
•
the public’s reaction to our press releases, our other public announcements and our filings with the SEC;
•
changes in, or failure to meet, earnings estimates or recommendations by research analysts who track our common shares or the stock
of other companies in our industry;
•
the failure of research analysts to cover our common shares;
•
strategic actions by us, our customers or our competitors, such as acquisitions or restructurings;
•
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
•
changes in accounting standards, policies, guidance, interpretations or principles;
•
the impact on our profitability temporarily caused by the time lag between when we experience cost increases until these increases
flow through cost of sales because of our method of accounting for inventory, or the impact from our inability to pass on such price
increases to our customers;
•
material litigations or government investigations;
•
changes in general conditions in the United States and global economies or financial markets, including those resulting from war,
incidents of terrorism or responses to such events;
•
changes in key personnel;
•
sales of common shares by us, Carlyle or members of our management team;
•
termination or expiration of lock-up agreements with our management team and principal shareholders;
•
the granting of restricted common shares, stock options and other equity awards;
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•
volume of trading in our common shares; and
•
the realization of any risks described under this “Risk Factors” section.
In addition, over the past several years, the stock markets have experienced significant price and volume fluctuations. This volatility has had a
significant impact on the market price of securities issued by many companies, including companies in our industry. The changes frequently
appear to occur without regard to the operating performance of the affected companies. Hence, the price of our common shares could fluctuate
based upon factors that have little or nothing to do with our company, and these fluctuations could materially reduce our share price and cause
you to lose all or part of your investment. Further, in the past, market fluctuations and price declines in a company’s stock have led to securities
class action litigations. If such a suit were to arise, it could have a substantial cost and divert our resources regardless of the outcome.
If we fail to maintain proper and effective internal controls over financial reporting, our ability to produce accurate and timely financial
statements could be impaired and investors’ views of us could be harmed.
The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requires, among other things, that we maintain effective internal control over
financial reporting and disclosure controls and procedures. One key aspect of the Sarbanes-Oxley Act is that we must perform system and
process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public
accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley
Act, with auditor attestation of the effectiveness of our internal controls, beginning with our annual report on Form 10-K for the fiscal year
ending December 31, 2015. If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent
registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses,
the market price of our common shares could decline and we could be subject to sanctions or investigations by the NYSE, the SEC or other
regulatory authorities, which would require additional financial and management resources.
Our ability to successfully implement our business plan and comply with the Sarbanes-Oxley Act requires us to be able to prepare timely and
accurate financial statements, among other requirements. Any delay in the implementation of, or disruption in the transition to, new or enhanced
systems, procedures or controls, may cause our operations to suffer and we may be unable to conclude that our internal control over financial
reporting is effective and to obtain an unqualified report on internal controls from our auditors. Moreover, we cannot be certain that these
measures would ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Even if we
were to conclude, and our auditors were to concur, that our internal control over financial reporting provided reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP, because of its
inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. This, in turn, could have an
adverse impact on trading prices for our common shares, and could adversely affect our ability to access the capital markets.
We will incur increased costs as a result of operating as a publicly traded company, and our management will be required to devote
substantial time to new compliance initiatives.
As a publicly traded company, we will incur additional legal, accounting and other expenses that we did not previously incur. Although we are
currently unable to estimate these costs with any degree of certainty, they may be material in amount. In addition, the Sarbanes-Oxley Act, the
Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules of the SEC and the NYSE, have imposed various requirements on
public companies. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives as well
as investor relations. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities
more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to
obtain director and officer liability insurance, and we may be required to incur additional costs to maintain the same or similar coverage.
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Furthermore, if we are not able to comply with these requirements in a timely manner, the market price of our common shares could decline and
we could be subject to potential delisting by the NYSE and review by the NYSE, the SEC, or other regulatory authorities, which would require
the expenditure by us of additional financial and management resources and could harm our business and the market price of our common
shares.
We are controlled by Carlyle, whose interests in our business may be different than yours.
As of June 30, 2014, Carlyle owned 99.5% of our common shares on a fully diluted basis and is able to control our affairs in all cases. Following
this offering, Carlyle will continue to own approximately 79.6% of our common shares (or 76.6% if the underwriters exercise their option to
purchase additional shares in full). Pursuant to a principal stockholders agreement, a majority of our Board of Directors will be designated by
Carlyle. See “Certain Relationships and Related Person Transactions.” As a result, Carlyle or its respective designees to our Board of Directors
will have the ability to control the appointment of our management, the entering into of mergers, sales of substantially all or all of our assets and
other extraordinary transactions and influence amendments to our memorandum of association and bye-laws. So long as Carlyle continues to
own a majority of our common shares, they will have the ability to control the vote in any election of directors and will have the ability to
prevent any transaction that requires shareholder approval regardless of whether other shareholders believe the transaction is in our best interests.
Additionally, pursuant to our principal stockholders agreement, Carlyle will continue to have the ability to designate a majority of our directors
until it owns less than 25% of the outstanding common shares. In any of these matters, the interests of Carlyle may differ from or conflict with
your interests. Moreover, this concentration of stock ownership may also adversely affect the trading price for our common shares to the extent
investors perceive disadvantages in owning stock of a company with a controlling shareholder. In addition, we have historically paid Carlyle an
annual fee for certain advisory and consulting services pursuant to consulting agreements. See “Certain Relationships and Related Person
Transactions.” We will pay Carlyle a fee to terminate the consulting agreement in connection with the consummation of this offering. In
addition, Carlyle is in the business of making investments in companies and may, from time to time, acquire interests in businesses that directly
or indirectly compete with our business, as well as businesses that are our significant existing or potential suppliers or customers. Carlyle may
acquire or seek to acquire assets that we seek to acquire and, as a result, those acquisition opportunities may not be available to us or may be
more expensive for us to pursue.
We do not intend to pay dividends on our common shares and, consequently, your ability to achieve a return on your investment will depend
on appreciation in the price of our common shares.
We do not intend to declare and pay dividends on our common shares for the foreseeable future. We currently intend to invest our future
earnings, if any, to fund our growth and potentially reduce our indebtedness. Therefore, you are not likely to receive any dividends on your
common shares for the foreseeable future and the success of an investment in our common shares will depend upon any future appreciation in
their value. There is no guarantee that our common shares will appreciate in value or even maintain the price at which our shareholders have
purchased their shares. The payment of future dividends, however, will be at the discretion of our Board of Directors and will depend on, among
other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the
payment of dividends and other considerations that our Board of Directors deems relevant. The credit agreement governing our Senior Secured
Credit Facilities and the indentures governing the Senior Notes also effectively limit our ability to pay dividends. As a consequence of these
limitations and restrictions, we may not be able to make, or may have to reduce or eliminate, the payment of dividends on our common shares.
You may suffer immediate and substantial dilution.
The initial public offering price per share of our common shares is substantially higher than our net tangible book value per common share
immediately after the offering. As a result, you may pay a price per share that substantially exceeds the tangible book value of our assets after
subtracting our liabilities. At an offering price of
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$19.50 per share, which is the midpoint of the range set forth on the cover page of this prospectus, you may incur immediate and substantial
dilution in the amount of $14.37 per share. You will experience additional dilution upon the exercise of currently outstanding options to
purchase our common shares as well as if any options or warrants are granted in the future, and the issuance and vesting of restricted stock or
other equity awards under our existing or future stock incentive plans.
Future sales of our common shares in the public market could lower our share price, and any additional capital raised by us through the sale
of equity or convertible debt securities may dilute your ownership in us and may adversely affect the market price of our common shares.
We and our shareholders may sell additional common shares in subsequent public offerings. We may also issue additional common shares or
convertible debt securities to finance future acquisitions. After the consummation of this offering, we will have 1,000,000,000 common shares
authorized and 229,069,356 common shares outstanding. This number includes 45,000,000 common shares that the selling shareholders are
selling in this offering, which may be resold immediately in the public market. Of the remaining common shares, 183,242,110, or 79.99% of our
total outstanding common shares, are restricted from immediate resale under the lock-up agreements between certain of our current shareholders
and the underwriters described in “Underwriting,” but may be sold into the market in the near future. These shares will become available for sale
following the expiration of the lock-up agreements, which, without the prior consent of the representatives of the underwriters, is 180 days after
the date of this prospectus, subject to compliance with the applicable requirements under Rule 144 of the Securities Act of 1933, as amended (the
“Securities Act”).
We cannot predict the size of future issuances of our common shares or the effect, if any, that future issuances and sales of our common shares
will have on the market price of our common shares. Sales of substantial amounts of our common shares (including sales pursuant to Carlyle’s
registration rights, sales by members of management and shares issued in connection with an acquisition), or the perception that such sales could
occur, may adversely affect prevailing market prices for our common shares. See “Certain Relationships and Related Person Transactions” and
“Shares Eligible for Future Sale.”
We are a “controlled company” within the meaning of the rules of the NYSE and, as a result, expect to qualify for, and intend to rely on,
exemptions from certain corporate governance requirements. You will not have the same protections afforded to shareholders of companies
that are subject to such requirements.
Following the consummation of this offering, we expect Carlyle will collectively continue to own a majority in voting power of our outstanding
common shares. As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of the NYSE.
Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled
company” and may elect not to comply with certain corporate governance requirements, including:
•
the requirement that a majority of such company’s board of directors consist of independent directors;
•
the requirement that such company have a nominating and corporate governance committee that is composed entirely of independent
directors with a written charter addressing the committee’s purpose and responsibilities;
•
the requirement that such company have a compensation committee that is composed entirely of independent directors with a written
charter addressing the committee’s purpose and responsibilities; and
•
the requirement for an annual performance evaluation of such company’s nominating and corporate governance committee and
compensation committee.
Following this offering, we intend to utilize these exemptions if we continue to qualify as a “controlled company.” If we do utilize the
exemption, we will not have a majority of independent directors and our
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nominating and corporate governance and compensation committees will not consist entirely of independent directors and such committees will
not be subject to annual performance evaluations. Accordingly, you will not have the same protections afforded to shareholders of companies
that are subject to all of the corporate governance requirements of the NYSE.
We are a Bermuda company and it may be difficult for you to enforce judgments against us or our directors and executive officers.
We are a Bermuda exempted company. As a result, the rights of our shareholders will be governed by Bermuda law and our memorandum of
association and bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in
another jurisdiction, and a substantial portion of our assets are located outside the United States. As a result, it may be difficult for investors to
effect service of process on those persons in the United States or to enforce in the United States judgments obtained in U.S. courts against us or
those persons based on the civil liability provisions of the U.S. securities laws. It is doubtful whether courts in Bermuda will enforce judgments
obtained in other jurisdictions, including the United States, against us or our directors or officers under the securities laws of those jurisdictions
or entertain actions in Bermuda against us or our directors or officers under the securities laws of other jurisdictions.
Bermuda law differs from the laws in effect in the United States and may afford less protection to our shareholders.
We are organized under the laws of Bermuda. As a result, our corporate affairs are governed by the Companies Act 1981 (the “Companies Act”),
which differs in some material respects from laws typically applicable to U.S. corporations and shareholders, including the provisions relating to
interested directors, amalgamations, mergers and acquisitions, takeovers, shareholder lawsuits and indemnification of directors. Generally, the
duties of directors and officers of a Bermuda company are owed to the company only. Shareholders of Bermuda companies typically do not have
rights to take action against directors or officers of the company and may only do so in limited circumstances. Shareholder class actions are not
available under Bermuda law. The circumstances in which shareholder derivative actions may be available under Bermuda law are substantially
more proscribed and less clear than they would be to shareholders of U.S. corporations. The Bermuda courts, however, would ordinarily be
expected to permit a shareholder to commence an action in the name of a company to remedy a wrong to the company where the act complained
of is alleged to be beyond the corporate power of the company or illegal, or would result in the violation of the company’s memorandum of
association or bye-laws. Furthermore, consideration would be given by a Bermuda court to acts that are alleged to constitute a fraud against the
minority shareholders or, for instance, where an act requires the approval of a greater percentage of the company’s shareholders than those who
actually approved it.
When the affairs of a company are being conducted in a manner that is oppressive or prejudicial to the interests of some shareholders, one or
more shareholders may apply to the Supreme Court of Bermuda, which may make such order as it sees fit, including an order regulating the
conduct of the company’s affairs in the future or ordering the purchase of the shares of any shareholders by other shareholders or by the
company. Additionally, under our bye-laws and as permitted by Bermuda law, each shareholder has waived any claim or right of action against
our directors or officers for any action taken by directors or officers in the performance of their duties, except for actions involving fraud or
dishonesty. In addition, the rights of our shareholders and the fiduciary responsibilities of our directors under Bermuda law are not as clearly
established as under statutes or judicial precedent in existence in jurisdictions in the United States, particularly the State of Delaware. Therefore,
our shareholders may have more difficulty protecting their interests than would shareholders of a corporation incorporated in a jurisdiction
within the United States.
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We have anti-takeover provisions in our bye-laws that may discourage a change of control.
Our bye-laws contain provisions that could make it more difficult for a third party to acquire us without the consent of our Board of Directors.
These provisions provide for:
•
a classified Board of Directors with staggered three-year terms;
•
directors only to be removed for cause once the number of common shares owned by Carlyle ceases to be more than 50%;
•
restrictions on the time period in which directors may be nominated; and
•
our Board of Directors to determine the powers, preferences and rights of our preference shares and to issue the preference shares
without shareholder approval.
These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company and may prevent our
shareholders from receiving the benefit from any premium to the market price of our common shares offered by a bidder in a takeover context.
Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common
shares if the provisions are viewed as discouraging takeover attempts in the future. These provisions could also discourage proxy contests, make
it more difficult for you and other shareholders to elect directors of your choosing and cause us to take corporate actions other than those you
desire. See “Description of Share Capital.”
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FORWARD-LOOKING STATEMENTS
Many statements made in this prospectus that are not statements of historical fact, including statements about our beliefs and expectations, are
forward-looking statements 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. These forward-looking statements are contained throughout this prospectus, including the sections entitled “Prospectus
Summary,” “Risk Factors,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
“Business.” 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 prospectus, 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;
•
our ability to obtain additional capital on commercially reasonable terms may be limited;
46
Table of Contents
•
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 this initial public offering and the related costs of being a public
company;
•
any statements of belief and any statements of assumptions underlying any of the foregoing;
•
Carlyle’s ability to control our common shares;
•
other factors disclosed in this prospectus; 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 prospectus. We undertake
no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
47
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USE OF PROCEEDS
All of the common shares offered by this prospectus are being sold by the selling shareholders. We will not receive any of the proceeds from the
sale of shares by the selling shareholders in this offering, including from any exercise by the underwriters of their overallotment option. For
more information about the selling shareholders, see “Principal and Selling Shareholders.”
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DIVIDEND POLICY
We have not paid dividends in the past and we do not intend to pay any cash dividends for the foreseeable future. We intend to retain earnings, if
any, for the future operation and expansion of our business and the repayment of debt. Any determination to pay dividends in the future will be
at the discretion of our Board of Directors and will depend upon our results of operations, cash requirements, financial condition, contractual
restrictions, restrictions imposed by applicable laws and other factors that our Board of Directors may deem relevant. Specifically, we are subject
to Bermuda legal constraints that may affect our ability to pay dividends on our common shares and make other payments. Under Bermuda law,
a company may not declare or pay dividends if there are reasonable grounds for believing that: (i) the company is, or would after the payment be,
unable to pay its liabilities as they become due or (ii) the realizable value of its assets would thereby be less than its liabilities. Our ability to pay
dividends to holders of our common shares is also dependent upon our subsidiaries’ ability to make distributions to us, which is limited by the
terms of the agreements governing the terms of their indebtedness. Additionally, the negative covenants in the agreements governing our
indebtedness limit our ability to pay dividends and make distributions to our shareholders. For additional information on these limitations, see
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.”
49
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CAPITALIZATION
The following table sets forth our consolidated cash and cash equivalents and capitalization as of June 30, 2014.
The information in this table should be read in conjunction with “Selected Historical Financial Information,” “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and our financial statements and related notes thereto included elsewhere in this
prospectus.
As of
June 30, 2014
(Unaudited)
(dollars in millions, except per share data)
Cash and cash equivalents
Debt:
Senior Secured Credit Facilities, consisting of the following (1) :
Revolving Credit Facility
Dollar Term Loan, net of discount
Euro Term Loan, net of discount
Dollar Senior Notes (2)
Euro Senior Notes (3)
Other indebtedness (4)
Total debt
Total stockholders’ equity:
Common Shares, $1.00 par value per share: 1,000,000,000 shares authorized; 229,069,356 shares issued and outstanding
Capital in excess of par
Accumulated deficit
Accumulated other comprehensive income
Total stockholders’ equity
Noncontrolling interests
Total stockholders’ equity and noncontrolling interests
Total capitalization
(1)
(2)
(3)
(4)
$
350.3
—
2,258.3
537.0
750.0
340.4
15.2
3,900.9
$
$
229.1
1,137.5
(204.4)
25.7
1,187.9
68.8
1,256.7
5,157.6
The senior secured credit facilities consist of (a) a $400.0 million revolving credit facility that matures in 2018 (the “Revolving Credit
Facility”), (b) a $2,300.0 million term loan facility that matures in 2020 (the “Dollar Term Loan Facility”) and (c) a €400.0 million term
loan facility that matures in 2020 (our “Euro Term Loan Facility” and, together with the Revolving Credit Facility and the Dollar Term
Loan Facility, the “Senior Secured Credit Facilities”). As of June 30, 2014, we had $2,277.0 million of outstanding borrowings under the
Dollar Term Loan Facility, $539.3 million of outstanding borrowings under the Euro Term Loan Facility and no outstanding borrowings
under the Revolving Credit Facility. As of June 30, 2014, we had approximately $378.5 million in additional borrowing capacity available
under our Revolving Credit Facility, after giving effect to $21.5 million of outstanding letters of credit. See Note 22 to our Audited
Consolidated Financial Statements included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.”
Consists of $750.0 million in aggregate principal amount of 7.375% senior unsecured notes due 2021 (the “Dollar Senior Notes”).
Consists of €250.0 million in 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”).
Includes indebtedness to fund short-term operational requirements primarily in our Latin American jurisdictions.
50
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The table set forth above is based on the number of common shares outstanding as of June 30, 2014. The table does not reflect:
•
710,270 common shares sold or issued pursuant to the exercise of options subsequent to June 30, 2014;
•
17,098,022 common shares issuable upon the exercise of options outstanding at a weighted average exercise price of $9.34 per share;
•
11,830,000 common shares reserved for issuance under our 2014 Plan, which we plan to adopt in connection with this offering; and
•
exercise of the option to purchase additional common shares by the underwriters.
Additionally, the information presented above assumes:
•
an initial public offering price of $19.50 per share, which is the midpoint of the range set forth on the cover page of this prospectus;
•
the adoption of our amended and restated bye-laws immediately prior to the closing of this offering; and
•
the completion of the 1.69-for-1 stock split.
51
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DILUTION
If you invest in our common shares, your interest will be diluted to the extent of the difference between the initial public offering price per share
and the net tangible book value per share after this offering.
As of June 30, 2014, we had net tangible book value of approximately $1,187.9 million, or $5.19 per share. Our net tangible book value per
share represents total tangible assets less total liabilities divided by the number of common shares outstanding. After giving effect to (i) the sale
of 45,000,000 common shares by the selling shareholders in this offering, based upon an assumed initial public offering price of $19.50 per
share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated offering expenses payable by
us and (ii) $13.4 million of fees to terminate our consulting services agreement with Carlyle, as if each had occurred on June 30, 2014, our as
adjusted net tangible book value as of June 30, 2014 would have been approximately $1,173.7 million, or $5.13 per share. This represents an
immediate decrease in net tangible book value of $0.06 per share to existing shareholders and an immediate dilution of $14.37 per share to new
investors purchasing common shares in this offering. The following table illustrates this dilution on a per share basis:
Per Share
Assumed initial public offering price per share
Net tangible book value per share as of June 30, 2014
Decrease in net tangible book value per share attributable to this offering
As adjusted net tangible book value per share after this offering
Dilution per share to new investors
$19.50
$ 5.19
(0.06)
5.13
$14.37
The following table sets forth, as of June 30, 2014, the total number of common shares owned by existing shareholders, including the selling
shareholders, and to be owned by new investors, the total consideration paid, and the average price per share paid by our existing shareholders
and to be paid by new investors purchasing common shares in this offering. The calculation below is based on an assumed initial public offering
price of $19.50 per share, which is the midpoint of the range set forth on the cover page of this prospectus, before deducting the assumed
underwriting discounts and commissions and other estimated offering expenses payable by us.
Shares Purchased
Number
Existing shareholders
New investors
Total
184,069
45,000
229,069
Total Consideration
Average Price
Per Share
Percent
Amount
Percent
(in thousands, other than percentages and per share amounts)
80.4%
19.6
100%
$1,355,440
877,500
$2,232,940
60.7%
39.3
100%
$
$
7.36
19.50
9.75
A $1.00 increase (decrease) in the assumed initial offering price would increase (decrease) total consideration paid by new investors, total
consideration paid by all shareholders and average price per share paid by all shareholders by $45 million, $45 million and $0.20 per share,
respectively. An increase (decrease) of 1.0 million in the number of shares offered by the selling shareholders would increase (decrease) total
consideration paid by new investors, total consideration paid by all shareholders and average price per share paid by all shareholders by
$19.5 million, $19.5 million and $0.04 per share, respectively.
The tables and calculations above assume no exercise of outstanding options. As of June 30, 2014, there were 17,098,022 common shares
issuable upon exercise of outstanding options at a weighted average exercise price of $9.34 per share. To the extent that the outstanding options
are exercised, there will be further dilution to new investors purchasing common shares in the offering. See “Description of Share Capital.”
52
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SELECTED HISTORICAL FINANCIAL INFORMATION
The following table sets forth selected historical combined and consolidated and unaudited financial data and other information of Axalta. As a
result of the Acquisition, we applied acquisition accounting whereby the purchase price paid was allocated to the acquired assets and liabilities at
fair value. The financial reporting periods presented are as follows:
•
The years ended December 31, 2009, 2010, 2011 and 2012 and the period from January 1, 2013 through January 31, 2013
(“Predecessor” periods) reflect the combined results of operations of the DPC business.
•
The year ended December 31, 2013 and the six-month periods ended June 30, 2013 and 2014 (“Successor” periods) reflect the
consolidated results of operations of Axalta, which includes the effects of acquisition accounting commencing on the acquisition date
of February 1, 2013 and the effects of the Financing.
The historical results of operations and cash flow data for the six months ended June 30, 2013 and 2014 and the historical balance sheet data as
of June 30, 2014 presented below were derived from our Successor unaudited financial statements and the related notes thereto included
elsewhere in this prospectus.
The historical results of operations data and cash flow data for the year ended December 31, 2013 and the historical balance sheet data as of
December 31, 2013 presented below were derived from our Successor audited financial statements and the related notes thereto included
elsewhere in this prospectus. As of and for the Successor period of August 24, 2012 (inception) through December 31, 2012, the Successor had
no operations or activity prior to the Acquisition, other than merger and acquisition costs of $29.0 million, which consisted primarily of
investment banking, legal and other professional advisory services costs. The historical financial data for the period January 1, 2013 through
January 31, 2013 has been derived from the Predecessor audited combined financial statements and the related notes thereto for the DPC
business included elsewhere in this prospectus. The historical combined financial data for the years ended December 31, 2009, 2010, 2011 and
2012 have been derived from the Predecessor audited combined financial statements and the related notes thereto for the DPC business.
Our historical financial data and that of the DPC business are not necessarily indicative of our future performance, nor does such data reflect
what our financial position and results of operations would have been had we operated as an independent company during the periods shown.
53
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Predecessor
(dollars in millions)
Statement of Operations Data:
Net sales
Other revenue
Total revenue
Cost of goods sold (1)
Selling, general and administrative expenses
2009
$3,431.4
17.3
3,448.7
2,445.8
(2)
Research and development expenses
Amortization of acquired intangibles
Merger and acquisition related expenses
Operating income (loss)
Interest expense, net
Bridge financing commitment fees
Other expense (income), net
Income (loss) before taxes
Provision (benefit) for income taxes
Net income (loss)
Less: Net income attributable to
noncontrolling interests
Net income (loss) attributable to
controlling interests
$3,802.0
27.8
3,829.8
2,676.0
$4,281.5
34.3
4,315.8
3,074.5
827.6
52.4
—
—
273.8
1.1
—
0.6
272.1
99.1
173.0
3.8
74.2
867.9
59.2
—
—
75.8
0.4
—
(31.3)
106.7
28.7
78.0
$
Year Ended December 31,
2010
2011
Successor
2012
January 1
through
January 31,
2013
$4,219.4 $
37.4
4,256.8
2,932.6
326.2
1.1
327.3
232.2
869.1
49.6
—
—
322.6
0.2
—
20.2
302.2
120.7
181.5
873.4
41.5
—
—
409.3
—
—
16.3
393.0
145.2
247.8
70.8
3.7
—
—
20.6
—
—
5.0
15.6
7.1
8.5
4.9
2.1
4.5
0.6
$ 168.1
$ 179.4
$ 243.3 $
7.9
Per share data:
Earnings (loss) per share:
Basic and diluted
Weighted average shares outstanding, basic
and diluted
(dollars in millions)
Other Financial Data:
Cash flows from:
Operating activities
Investing activities
Financing activities
Depreciation and amortization
Capital expenditures
Year Ended
December 31,
2013
$
3,951.1
35.7
3,986.8
2,772.8
Six Months
Ended June 30,
2013
2014
$
1,040.6
40.5
79.9
28.1
24.9
215.1
25.0
48.5
(263.7)
(44.8)
(218.9)
$ 203.2
(77.3)
(125.0)
111.2
80.2
$ 236.2
(116.6)
(125.1)
108.7
82.7
54
$ 388.8 $
(88.2)
(290.6)
110.7
73.2
(37.7)
(8.3)
43.0
9.9
2.4
$
397.0
18.5
38.0
28.1
(11.9)
90.4
25.0
59.1
(186.4)
(8.1)
(178.3)
6.0
2,174.0
14.7
2,188.7
1,446.0
497.3
23.4
42.4
—
179.6
113.9
—
2.9
62.8
10.7
52.1
2.3
2.6
$
(224.9)
$
(180.6)
$
49.5
$
(0.97)
$
(0.77)
$
0.22
228,280,574
$ 320.6
(77.6)
(238.2)
126.7
55.4
1,783.6
13.7
1,797.3
1,327.6
$
376.8
(5,011.2)
5,098.1
300.7
107.3
228,149,996
$
161.6
(4,872.2)
5,095.8
140.6
23.4
229,069,356
$
13.7
(102.8)
(12.2)
152.9
100.8
Table of Contents
Predecessor
(dollars in millions)
Balance sheet data:
Cash and cash equivalents
Working capital (3)
Total assets
Debt, net of discount
Total liabilities
Total stockholders’ equity/combined equity
(1)
(2)
(3)
As of December 31,
2010
2011
2009
$
17.3
488.9
2,851.5
4.5
1,155.6
1,695.9
$
21.9
604.4
2,823.8
0.8
1,059.1
1,764.7
$
18.8
640.0
2,833.6
0.9
1,028.4
1,805.1
2012
$
28.7
605.2
2,878.6
0.2
1,181.6
1,697.0
Successor
As of
As of
December 31,
June 30,
2013
2014
$
459.3
952.2
6,737.1
3,920.9
5,525.3
1,211.8
$ 350.3
971.5
6,704.6
3,900.9
5,447.9
1,256.7
In the Successor six-month period ended June 30, 2013 and year ended December 31, 2013, cost of goods sold included the impact of
$103.7 million attributable to the increase in inventory value resulting from the fair value adjustment associated with our acquisition
accounting for inventories.
Selling, general and administrative expense included transition-related expenses of $46.5 million, $56.8 million and $231.5 million for the
Successor six-month periods ended June, 30, 2013 and 2014, and the Successor year ended December 31, 2013, respectively. Additionally,
during the Predecessor periods ended December 31, 2011 and 2012, $(2.5) million and $0.7 million in employee separation and asset
related costs (income) were recorded, respectively.
Working capital is defined as current assets less current liabilities.
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UNAUDITED PRO FORMA CONDENSED COMBINED AND CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma condensed combined and consolidated financial information for the six months ended June 30, 2014 and 2013 and for
the year ended December 31, 2013 presented below were derived from our unaudited financial statements for the six month periods ended
June 30, 2014 and 2013, our audited financial statements for the year ended December 31, 2013 and the related notes thereto and the audited
financial statements for the DPC business for the period from January 1, 2013 through January 31, 2013 and the related notes thereto, each of
which are included elsewhere in this prospectus.
On February 1, 2013, we consummated the Acquisition and acquired the DPC business from DuPont for $4,907.3 million plus transaction
expenses. The purchase price paid was allocated to the acquired assets and liabilities at fair value. The purchase price for the Acquisition was
funded by (i) an equity contribution of $1,350.0 million, (ii) proceeds from a $2,300.0 million Dollar Term Loan facility and a €400.0 million
Euro Term Loan facility and (iii) proceeds from the issuance of $750.0 million in senior unsecured notes and €250.0 million in senior secured
notes.
On February 3, 2014, we refinanced our Dollar Term Loan and Euro Term Loan Facilities. The Acquisition financing and refinancing are
collectively referred to herein as the “Financing.”
Our unaudited pro forma condensed combined and consolidated statements of operations are presented for the six months ended June 30, 2014
and 2013 and for the year ended December 31, 2013, assuming:
•
the Acquisition was completed on January 1, 2013;
•
the Financing was completed on January 1, 2013; and
•
the Offering was completed on January 1, 2013.
As the Acquisition and the Financing are reflected in the Company’s historical balance sheet at June 30, 2014, pro forma adjustments related to
the Acquisition and Financing transactions are only reflected in the pro forma condensed combined and consolidated statements of operations for
such period. The unaudited pro forma condensed consolidated balance sheet assumes that the Offering was completed on June 30, 2014.
Historically, the DPC businesses were managed and operated in the normal course of business with other affiliates of DuPont. Accordingly,
certain shared costs were allocated to DPC and reflected as expenses in the standalone Predecessor combined financial statements. DuPont had
historically provided various services to the DPC business, including cash management, utilities and facilities management, information
technology, finance/accounting, tax, legal, human resources, site services, data processing, security, payroll, employee benefit administration,
insurance administration and telecommunications. The cost of these services were allocated to the Predecessor in the combined financial
statements using various allocation methods. See Note 7 to our Audited Consolidated Financial Statements included elsewhere in this prospectus
for information regarding the historical allocations for the period from January 1, 2013 through January 31, 2013.
The unaudited pro forma information set forth below is based upon available information and assumptions that we believe are reasonable. The
unaudited pro forma information is for illustrative and informational purposes only and is not intended to represent or be indicative of what our
financial condition or results of operations would have been had the above transactions occurred on the dates indicated. The unaudited pro forma
information also should not be considered representative of our future financial condition or results of operations.
You should read the information contained in this table in conjunction with “Selected Historical Financial Information,” “Capitalization,”
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical audited financial statements and
the related notes thereto included elsewhere in this prospectus.
56
Table of Contents
Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of June 30, 2014
(in millions)
Adjustments
for
Offering
Historical
Assets
Current assets:
Cash and cash equivalents
Restricted cash
Accounts and notes receivable, net
Inventories
Prepaid expenses and other
Deferred income taxes
Total current assets
Net property, plant and equipment
Goodwill
Identifiable intangibles, net
Deferred financing costs, net
Deferred income taxes
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Current portion of borrowings
Deferred income taxes
Other accrued liabilities
Total current liabilities
Long-term borrowings
Deferred income taxes
Other liabilities
Total liabilities
Commitments and contingent liabilities
Stockholders’ equity
Common stock
Capital in excess of par
Accumulated deficit
Accumulated other comprehensive income
Total stockholders’ equity
Noncontrolling interests
Total stockholders’ equity and noncontrolling interests
Total liabilities, stockholders’ equity and noncontrolling interests
57
$ 350.3
1.9
953.8
576.4
63.4
18.1
1,963.9
1,621.3
1,110.1
1,394.4
102.0
285.4
227.5
$6,704.6
$
$
(17.2)
—
—
—
—
—
(17.2)
—
—
—
—
3.0
—
(14.2)
Pro forma
(a)
(b)
$ 333.1
1.9
953.8
576.4
63.4
18.1
1,946.7
1,621.3
1,110.1
1,394.4
102.0
288.4
227.5
$ 6,690.4
$ 527.1
43.7
6.3
415.3
992.4
3,857.2
270.4
327.9
5,447.9
—
—
—
—
—
—
—
—
—
$ 527.1
43.7
6.3
415.3
992.4
3,857.2
270.4
327.9
5,447.9
229.1
1,137.5
(204.4)
25.7
1,187.9
68.8
1,256.7
$6,704.6
—
—
(14.2)
—
(14.2)
—
(14.2)
(14.2)
229.1
1,137.5
(218.6)
25.7
1,173.7
68.8
1,242.5
$ 6,690.4
$
(c)
Table of Contents
Unaudited Pro Forma Condensed Consolidated Statement Of Operations
For the Six Months Ended June 30, 2014
(In millions, except per share data)
Successor
Adjustments
Adjustments
for
Financing
for
Offering
Six Months
Ended June 30,
2014
Net sales
Other revenue
Total revenue
Cost of goods sold
Selling, general and administrative expenses
Research and development expenses
Amortization of acquired intangibles
Income from operations
Interest expense, net
Other expense (income), net
Income before income taxes
Provision for income taxes
Net income
Less: Net income attributable to noncontrolling
interests
Net income attributable to controlling interests
Per share data:
Earnings per share:
Basic and diluted
Weighted average shares outstanding:
Basic and diluted
$
2,174.0
14.7
2,188.7
1,446.0
497.3
23.4
42.4
179.6
113.9
2.9
62.8
10.7
52.1
$
2.6
49.5
$
0.22
$
$
229,069,356
—
—
—
—
—
—
—
—
(3.0)
(3.1)
6.1
0.6
5.5
—
5.5
$
(e)
(g)
(i)
$
—
—
—
—
—
—
—
—
—
(1.6)
1.6
0.4
1.2
—
1.2
Pro forma
$
(h)
(i)
2,174.0
14.7
2,188.7
1,446.0
497.3
23.4
42.4
179.6
110.9
(1.8)
70.5
11.7
58.8
$
2.6
56.2
$
0.25
229,069,356
58
Table of Contents
Unaudited Pro Forma Condensed Combined and Consolidated Statement Of Operations
For the Six Months Ended June 30, 2013
(In millions, except per share data)
Predecessor
January 1
through
January 31,
2013
Net sales
$
Other revenue
Total revenue
Cost of goods sold
Selling, general and administrative
expenses
Research and development
expenses
Amortization of acquired
intangibles
Merger and acquisition related
expenses
Income (loss) from operations
Interest expense, net
Bridge financing commitment fees
Other expense, net
Income (loss) before income
taxes
Provision (benefit) for income
taxes
Net income (loss)
Less: Net income attributable to
noncontrolling interests
Net income (loss) attributable to
controlling interests
$
Per share data:
Earnings (loss) per share:
Basic and diluted
Weighted average shares
outstanding:
Basic and diluted
326.2
1.1
327.3
232.2
Successor
Six Months
Ended
June 30, 2013
$
1,783.6
13.7
1,797.3
1,327.6
Adjustments
Adjustments
Adjustments
for
Acquisition
for
Financing
for
Offering
$
(a)
—
—
—
—
2.2
(a)
—
—
470.0
—
—
22.2
(b)
—
—
44.9
(c)
—
—
8.7
(25.0)
—
70.8
397.0
3.7
18.5
—
—
38.0
6.9
—
20.6
—
—
5.0
28.1
(11.9)
90.4
25.0
59.1
(28.1)
115.0
—
—
(19.4)
15.6
(186.4)
134.4
7.1
8.5
(8.1)
(178.3)
36.2
98.2
0.6
7.9
$
$
2.3
—
(180.6) $
98.2
(0.77)
228,149,996
$
(d)
$
Pro forma
—
—
—
(96.0)
—
—
—
—
(1.3)
(e)
(f)
16.3
(i)
1.1
15.2
15.2
$
(i)
0.4
0.9
(h)
(18.8)
(i)
36.7
(55.5)
—
$
0.9
2,109.8
14.8
2,124.6
1,463.8
—
123.7
99.1
—
43.4
1.3
—
$
—
—
—
—
2.9
$
(58.4)
$
(0.26)
228,149,996
59
Table of Contents
Unaudited Pro Forma Condensed Combined and Consolidated Statement Of Operations
For the Year Ended December 31, 2013
(In millions, except per share data)
Predecessor
January 1
through
January 31,
2013
Net sales
$
Other revenue
Total revenue
Cost of goods sold
Selling, general and administrative
expenses
Research and development expenses
Amortization of acquired intangibles
Merger and acquisition related expenses
Income from operations
Interest expense, net
Bridge financing commitment fees
Other expense, net
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Less: Net income attributable to
noncontrolling interests
Net income (loss) attributable to controlling
interests
$
Per share data:
Earnings (loss) per share:
Basic and diluted
Weighted average shares outstanding:
Basic and diluted
326.2
1.1
327.3
232.2
Successor
Year Ended
December 31,
2013
Adjustments
for
Acquisition
Adjustments
for
Financing
Adjustments
for
Offering
$
$
$
$
70.8
3.7
—
—
20.6
—
—
5.0
15.6
7.1
8.5
1,040.6
40.5
79.9
28.1
24.9
215.1
25.0
48.5
(263.7)
(44.8)
(218.9)
0.6
7.9
3,951.1
35.7
3,986.8
2,772.8
2.2
—
6.6
(28.1)
115.3
—
—
(19.4)
134.7
36.3
98.4
6.0
$
(224.9)
$
(0.97)
—
—
—
(96.0)
(a)
(a)
—
—
—
—
—
(4.3)
(25.0)
—
29.3
2.4
26.9
(b)
(c)
(d)
(i)
—
$
228,280,574
98.4
—
—
—
—
—
—
—
—
—
—
—
(3.1)
3.1
0.9
2.2
(e)
(f)
(i)
—
$
26.9
Pro forma
—
—
—
—
$
1,113.6
44.2
86.5
—
160.8
210.8
—
31.0
(81.0)
1.9
(82.9)
(h)
(i)
—
$
2.2
4,277.3
36.8
4,314.1
2,909.0
6.6
$
(89.5)
$
(0.39)
228,269,484
60
Table of Contents
Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet
The Offering
(a)
The Company will receive no proceeds from this offering but will incur certain one-time charges as follows (in millions):
As of
June 30, 2014
Payment to terminate the Consulting Services Agreement (1)
Legal, accounting and associated fees
$
$
(1)
(b)
(13.4)
(3.8)
(17.2)
Upon the consummation of the Offering, we expect The Carlyle Group L.P.’s Consulting Services Agreement to terminate in
exchange for a one-time payment of approximately $13.4 million. As a result of the termination, Carlyle and its affiliates will
have no further obligation to provide services to us, and we will have no further obligation to make annual payments of $3.0
million plus out of pocket expenses under this agreement. See “Certain Relationships and Related Person Transactions—
Consulting Agreement.”
Represents the tax effect of the adjustments in note (a) above (in millions):
Weighted
average
statutory
income tax
Pro forma
Adjustment
Pro forma adjustment (a), termination payment to
Carlyle (1)
Pro forma adjustment (a), legal, accounting and
associated fees (2)
(1)
(2)
(c)
$
rate (1)
(13.4)
22.7%
(3.8)
0.0%
As of
June 30, 2014
$
3.0
$
—
3.0
Reflects our United States statutory tax rate of 38.5% net of the impact of permanent differences.
Reflects our effective tax rate due to certain transaction costs in our parent company not being deductible.
Represents the cumulative impact to accumulated deficit related to the adjustments in notes (a) and (b) (in millions):
As of
June 30, 2014
Pro forma adjustment (a)
Pro forma adjustment (b)
$
$
61
(17.2)
3.0
(14.2)
Table of Contents
Notes To Unaudited Pro Forma Condensed Combined and Consolidated Statement Of Operations
The Acquisition
(a)
Represents the net pro forma adjustment to cost of sales resulting from the application of acquisition accounting (in millions):
Total increase in depreciation (1)
Impact to cost of sales for conforming Predecessor periods to weighted average
cost flow assumption (2)
Impact to cost of sales for inventory step-up related to the
Acquisition (3)
Decrease applicable to cost of goods sold
(1)
Year ended
December 31,
2013
Six months
ended June 30,
2013
$
$
7.9
7.9
(0.2)
$
(0.2)
(103.7)
(96.0)
$
(103.7)
(96.0)
Represents incremental depreciation applicable to purchase price allocation to tangible assets. The allocation of incremental
depreciation expense is based on Axalta’s historical classification.
Assumed allocation of purchase price to fair value of property, plant and equipment (in millions):
Acquisition
Estimated
Description:
Property, plant and equipment
Less: Aggregated historical
depreciation
Date Fair
Value
useful life
$ 1,705.9
Various
Reflected in:
Cost of goods sold
Selling, general and administrative
expenses
(2)
(3)
(b)
Estimated annual depreciation and
amortization
Six months
Year ended
ended June 30,
December 31,
2013
2013
$
208.2
$
(198.1)
10.1
$
7.9
$
2.2
10.1
$
104.1
$
(94.0)
10.1
$
7.9
$
2.2
10.1
Represents the effect of reversing the impact of the LIFO cost flow assumption on the Predecessor periods to conform with
Successor’s weighted average cost flow assumption
Represents the effect of the increase in inventory stepped-up to fair value as a result of the application of acquisition accounting.
Represents incremental amortization applicable to purchase price allocation to intangible assets. The allocation of incremental amortization
expense is based on Axalta’s historical classification.
62
Table of Contents
Assumed allocation of purchase price to fair value of amortizable intangibles (in millions):
Weighted
average
estimated
DuPont
Performance
Coatings
Acquisition
Description:
Technology
Trademarks
Customer relationships
Non-compete
Less: Aggregated historical
amortization (1)
$
Estimated annual
depreciation and amortization
useful life
Year ended
December 31,
(years)
2013
403.0
41.7
764.3
1.5
10
14.8
19.4
4
$
40.3
2.8
39.8
0.4
(76.7)
6.6
$
(1)
(c)
Six months ended
June 30,
2013
$
20.2
1.4
19.9
0.2
(34.8)
6.9
$
Exclusive of the $3.2 million associated with abandoned acquired in process research and development projects.
Represents the net adjustment to remove one-time non-recurring expenses related to the Acquisition (in millions):
Year ended
December 31,
Six months ended
June 30,
2013
2013
Decrease in acquisition-related transaction expenses
(d)
$
(28.1)
$
(28.1)
Represents the adjustment to remove the non-recurring loss on foreign currency contract directly related to the Acquisition (in millions):
Year ended
December 31,
Six months ended
June 30,
2013
2013
Acquisition related loss on foreign currency contract to hedge Euro
denominated financing
Decrease in other expense, net
$
$
(19.4)
(19.4)
$
$
(19.4)
(19.4)
The Financing
(e)
Represents the pro forma adjustments to interest expense applicable to the Financing, as follows (in millions):
Year ended
December 31,
Six Months
Ended June 30,
2013
Borrowings under Term Loans (1)
Borrowings under Senior Notes (2)
Revolver unused availability fee (3)
Amortization of deferred financing fees and original
issue discount (4)
Total pro forma interest expense
Less: Aggregated historical interest expense
$
$
63
114.3
74.4
2.0
20.3
211.0
(215.3)
(4.3)
Six months
ended June 30,
2014
$
$
2013
56.7
37.2
1.0
10.3
105.2
(108.2)
(3.0)
$
$
57.3
37.2
1.0
10.1
105.6
(96.9)
8.7
Table of Contents
(1)
(2)
(3)
(4)
As a result of the February 2014 refinancing, reflects pro forma interest expense based on $2.3 billion of borrowings under
Dollar Term Loans at an assumed minimal base rate of 1.00% plus an applicable margin of 3.00% and €400 million
(approximately $531.1 million) of borrowings under Euro Term Loans at an assumed minimal base rate of 1.00% plus an
applicable margin of 3.25%. A 0.125% increase or decrease in the interest rate on the Term Loan facility would increase or
decrease our annual interest expense by $3.5 million.
Reflects pro forma interest expense based on $750 million Dollar Senior Notes at 7.375% and €250 million Euro Senior Notes
(approximately $331.9 million) at 5.75%.
Based on unused availability of $400.0 million under the Revolving Credit Facility with an unused facility charge of 0.5% per
annum.
Reflects the non-cash amortization of deferred financing fees and original issue discount related to the Financing over the
term of the related facility.
Six months
ended June 30,
Year ended
December 31,
2013
(f)
Represents pro forma adjustment to remove bridge loan commitment fees
$
2013
(25.0)
$
(25.0)
Six Months
Ended June 30,
2014
(g)
Represents pro forma adjustment to remove debt modification fees and charges
$
(3.1)
The Offering
(h)
Represents the adjustment to remove Carlyle management fees, which will terminate on the consummation of the Offering (in millions):
Adjustment to remove historical Carlyle management
fees
Year ended
December 31,
Six Months
Ended June 30,
Six months
ended June 30,
2013
2014
2013
$
(3.1)
$
(1.6)
$
(1.3)
The Transactions
(i)
Represents pro forma adjustments to the tax provision as a result of the Acquisition, the Financing and the Offering (in millions)
Six months ended June 30, 2014
Pro forma
Adjustment
The Financing Transactions
Pro forma adjustment (e), interest expense
Pro forma adjustment (g), debt modification fees
$
$
The Offering
Pro forma adjustment (h), management fee
$
(3.0)
(3.1)
(1.6)
64
Weighted
average
statutory income
Six Months Ended
tax rate
June 30, 2014
10.0% (2)
9.4% (2)
27.8% (3)
$
$
0.3
0.3
0.6
$
0.4
Table of Contents
Weighted
average
statutory
Pro forma
adjustment
Six months ended June 30, 2013
The Acquisition
Pro forma adjustment (a), depreciation
Pro forma adjustment (a), LIFO to weighted average
Pro forma adjustment (a), inventory step-up
Pro forma adjustment (b), amortization of intangibles
Pro forma adjustment (c), acquisition related expenses
Pro forma adjustment (d), foreign currency contract
Pro forma adjustment to income tax provision
The Financing
Pro forma adjustment (e), interest expense
Pro forma adjustment (f), bridge loan commitment fees
Pro forma adjustment to income tax provision
The Offering
Pro forma adjustment (h), management fee
Pro forma adjustment to income tax provision
$
10.1
$
(0.2)
$ (103.7)
$
6.9
$ (28.1)
$ (19.4)
Six Months
Ended June 30,
income
tax rate
33.0% (4)
33.2% (5)
33.2% (5)
23.4% (1)
23.1% (6)
0.0% (7)
2013
$
(3.3)
0.1
34.5
(1.6)
6.5
—
36.2
$
$
$
$
8.7
(25.0)
(1.3)
23.0% (2)
12.4% (8)
27.8% (3)
$
$
(2.0)
3.1
1.1
$
$
0.4
0.4
Weighted
average
statutory
Pro forma
adjustment
Year ended December 31, 2013
The Acquisition
Pro forma adjustment (a), depreciation
Pro forma adjustment (a), LIFO to weighted average
Pro forma adjustment (a), inventory step-up
Pro forma adjustment (b), amortization of intangibles
Pro forma adjustment (c), acquisition related expenses
Pro forma adjustment (d), foreign currency contract
Pro forma adjustment to income tax provision
The Financing
Pro forma adjustment (e), interest expense
Pro forma adjustment (f), bridge loan commitment fees
Pro forma adjustment to income tax provision
The Offering
Pro forma adjustment (h), management fee
Pro forma adjustment to income tax provision
(1)
$
10.1
$
(0.2)
$ (103.7)
$
6.6
$ (28.1)
$ (19.4)
$
$
$
(4.3)
(25.0)
(3.1)
Year ended
December 31,
income
tax rate
2013
33.0% (4)
33.2% (5)
33.2% (5)
23.4% (1)
23.1% (6)
0.0% (7)
$
(3.3)
0.1
34.5
(1.5)
6.5
—
36.3
$
(0.7)
3.1
2.4
$
0.9
0.9
(16.3)% (2)
12.4% (8)
27.8% (3)
Reflects our weighted average statutory tax rate consisting primarily of the following jurisdictions and related rates:
Jurisdiction
Statutory Rate
United States
Luxembourg (a)
Germany
(a)
38.5%
0.0%
32.5%
Represents our effective tax rate due to prior and expected continued net operating losses.
65
Table of Contents
(2)
Reflects our weighted average statutory tax rate consisting primarily of the following jurisdictions and related rates:
Jurisdiction
Statutory Rate
United States
Netherlands (a)
(a)
38.5%
0.0%
Represents our effective tax rate due to prior and expected continued net operating losses
(3)
Reflects our United States statutory tax rate of 38.5% net of impact of permanent differences.
(4)
Reflects our weighted average statutory tax rate consisting primarily of the following jurisdictions and related rates:
Jurisdiction
Statutory Rate
United States
Brazil
Germany
(5)
38.5%
34.0%
32.5%
Reflects our weighted average statutory tax rate consisting primarily of the following jurisdictions and related rates:
Jurisdiction
Statutory Rate
United States
Belgium
Germany
(6)
38.5%
34.0%
32.5%
Reflects our weighted average statutory tax rate consisting primarily of the following jurisdictions and related rates:
Jurisdiction
Statutory Rate
United States
Germany
Luxembourg (a)
(a)
38.5%
32.5%
0.0%
Represents our effective tax rate due to prior and expected continued net operating losses
(7)
Reflects our Netherlands effective tax rate due to prior and expected continued net operating losses
(8)
Reflects our weighted average statutory tax rate consisting primarily of the following jurisdictions and related rates:
Jurisdiction
Statutory Rate
United States
Netherlands (a)
(a)
38.5%
0.0%
Represents our effective tax rate due to prior and expected continued net operating losses
66
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion summarizes the significant factors affecting the operating results, financial condition, liquidity and cash flows of our
company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with “Prospectus
Summary—Summary Historical and Pro Forma Financial Information,” “Selected Historical Financial Information” and the financial
statements and the related notes thereto included elsewhere in this prospectus. The statements in this discussion regarding industry outlook, our
expectations regarding our future performance, liquidity and capital resources and all other non-historical statements in this discussion are
forward-looking statements and are based on the beliefs of our management, as well as assumptions made by, and information currently
available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result
of various factors, including those discussed below and elsewhere in this prospectus, particularly in the section entitled “Risk Factors.”
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 12,650 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 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 endmarkets 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.
Business Highlights and Trends
From 2011 to 2013, 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 14% 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 2011 to 2013, our net sales remained flat with net sales growth in our Transportation Coatings segment offset by net sales declines in our
Performance Coatings segment. Net sales in our Transportation Coatings segment grew at a 3% CAGR, driven by increases in both our light and
commercial vehicle end-markets,
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Table of Contents
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 decreased at a 2% CAGR as a result of lower volumes in both
our refinish and industrial end-markets in developed markets. In EMEA, volumes declined as a result of a difficult economic environment while
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.
With 12 of our 17 most senior managers joining our company since the Acquisition, 2014 will be the first full fiscal year of results under our
current senior management team. Our net sales increased 3% for the six-month period ended June 30, 2014 compared to the corresponding pro
forma period in the prior year, driven by 5% growth in our Performance Coatings segment and 1% growth in our Transportation Coatings
segment, with growth in both segments across all regions except Latin America. Excluding Latin America, where difficult economic conditions
contributed to weak demand, our net sales grew 6% in the first six months of 2014 compared to the same pro forma period last year. The
following trends have impacted our sales performance in 2014:
•
Performance Coatings : Improving economic conditions in Europe, our recent wins with growing MSO customers in North America
and continued growth in Asia Pacific drove higher volumes.
•
Transportation Coatings : Significant growth in Asia Pacific driven by increases in light vehicle production combined with increased
North American commercial truck volumes were largely offset by significantly lower light vehicle volumes in Latin America.
Since the Acquisition, we have implemented numerous initiatives to reduce our fixed and variable costs that have improved our Adjusted
EBITDA margin during the first six months of 2014 compared to the prior year. Examples include transitioning our IT systems to more costeffective 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. These initiatives are just beginning to
contribute to our financial results and we believe they will continue to drive profitability improvements over the next several years.
Basis of Presentation
Axalta Coating Systems Ltd. (formerly known as Flash Bermuda Co., Ltd. or Axalta Coating Systems Bermuda Co., Ltd.) (“Axalta” or the
“Company”), a Bermuda exempted company limited by shares formed at the direction of affiliates of Carlyle, was incorporated on August 24,
2012 for the purpose of consummating the Acquisition.
The purchase price for the Acquisition was funded by (i) an equity contribution of $1,350.0 million into the Company by affiliates of Carlyle
(the “Equity Contribution”), (ii) proceeds from borrowings under our Senior Secured Credit Facilities, consisting of a $2,300.0 million Dollar
Term Loan facility and a €400.0 million Euro Term Loan facility, both of which mature on February 1, 2020 and (iii) proceeds from the issuance
of $750.0 million aggregate principal amount of 7.375% Dollar Senior Notes and the issuance of €250.0 million aggregate principal amount of
5.750% Euro Senior Notes. The Senior Secured Credit Facilities and the Senior Notes are more fully described in Note 22 to the annual audited
financial statements for the year ended December 31, 2013 included elsewhere in this prospectus. Subsequent to the closing, we received
approximately $18.6 million in closing date working capital and pension adjustments resulting in a final purchase price of $4,907.3 million. In
February 2014, we entered into an amendment to the credit agreement governing the Senior Secured Credit Facilities to reprice our existing first
lien term loan facilities (the “Refinancing”).
The combined financial statements for the Predecessor one-month period ended January 31, 2013 and the years ended December 31, 2012 and
2011 have been prepared on a carve-out basis and are derived from the consolidated financial statements of DuPont and may not be comparable
to the consolidated financial statements for the Successor periods ended June 30, 2014 and 2013 and the year ended December 31, 2013.
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Table of Contents
In addition to the historical analysis of results of operations, we have prepared unaudited supplemental pro forma results of operations for the
six-month periods ended June 30, 2014 and 2013 and for the year ended December 31, 2013 as if the Acquisition, related financing and
Refinancing (collectively referred to herein as the “Financing”) and offering transactions had occurred on January 1, 2013. The pro forma
analysis is prepared and presented to aid in explaining the results of operations. The Pro Forma discussion follows the historical analysis of
results of operations.
The pro forma results for the six months ended June 30, 2013 and the year ended December 31, 2013 represent the addition of the Predecessor
period January 1, 2013 through January 31, 2013 and the Successor six months ended June 30, 2014 and June 30, 2013 as well as the pro forma
adjustments to reflect the Acquisition, the Financing and the offering transactions as if they had occurred on January 1, 2013, in accordance with
Article 11 of Regulation S-X and are included in “Unaudited Pro Forma Combined and Consolidated Financial Information.” The pro forma
results do not reflect the actual results we would have achieved had the Acquisition been completed as of January 1, 2013 and are not indicative
of our future results of operations.
Acquisition Accounting
We allocated the purchase price paid to acquire DPC to the acquired assets and liabilities assumed based on their respective estimated fair value
as of the acquisition date. The application of acquisition accounting resulted in an increase in amortization and depreciation expense relating to
our acquired intangible assets and property, plant and equipment. In addition to the increase in the net carrying value of property, plant and
equipment, we revised the remaining depreciable lives of property, plant and equipment to reflect the estimated remaining useful lives for
purposes of calculating periodic depreciation expense. We adjusted the carrying values of the joint ventures to reflect their estimated fair values
at the date of purchase. We adjusted the value of inventory to its estimated fair value, which increased the costs recognized upon the sale of this
acquired inventory. We also provided for deferred income taxes for the future tax consequences of acquisition date basis differences between the
carrying amounts of assets and liabilities utilized for financial reporting purposes and the respective amounts used for income tax purposes. The
excess of the purchase price over the estimated fair value of assets and liabilities was assigned to goodwill, which is not amortized for
accounting purposes but is subject to testing for impairment at least annually. See Note 4 to our Audited Consolidated Financial Statements
included elsewhere in this prospectus for further discussion on the Acquisition.
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);
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•
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—Risks Related to our Business.”
Other revenue
Other revenue consists primarily of consulting and other service revenue and royalty income.
Cost of goods sold (“cost of sales”)
Our cost of sales consists principally of the following:
•
Production Materials Costs . We purchase much 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 goods sold 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.
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
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Table of Contents
•
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. See Note 22 to our Audited Consolidated
Financial Statements included elsewhere in this prospectus.
Provision for income taxes
We and our subsidiaries are subject to income tax in the various jurisdictions in which we operate. While the extent of our future tax liability is
uncertain, 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. For the Predecessor periods, DPC did
not file separate tax returns in the majority of its jurisdictions as it was included in the tax returns of DuPont entities within the respective tax
jurisdictions. The income tax provision for the Predecessor periods was calculated using a separate return basis as if DPC was a separate
taxpayer.
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Table of Contents
Results of Operations
The following discussion should be read in conjunction with the information contained in the accompanying financial statements and related
footnotes included elsewhere in this prospectus. Our historical results of operations set forth below may not necessarily reflect what would have
occurred if we had been a separate standalone entity prior to the Acquisition or what will occur in the future.
Successor six months ended June 30, 2014 and Pro Forma six months ended June 30, 2014 compared to the Successor six months ended
June 30, 2013, Predecessor period January 1, 2013 through January 31, 2013 and the Pro Forma six months ended June 30, 2013
The following table was derived from the Successor’s condensed consolidated statements of operations for the six months ended June 30, 2014
and 2013 and from the Predecessor’s combined statements of operations for the period from January 1, 2013 through January 31, 2013 included
elsewhere in this prospectus. It should be noted that the results of operations for the Successor six-month period ended June 30, 2013 only
include the results of DPC from the date of the Acquisition. Prior to the Acquisition, Axalta generated no revenue and only incurred merger and
acquisition related costs and debt financing costs in anticipation of the Acquisition. We have also presented pro forma financial results for the
six-month periods ended June 30, 2014 and 2013 as if the Acquisition, related Financing and Offering transactions had occurred on January 1,
2013. We believe this information, and the related comparison to the Successor six months ended June 30, 2013, provides a more meaningful
comparison for the six-month period.
Predecessor
January 1
through
January 31,
2013
(dollars in millions)
Net sales
Other revenue
Total revenue
Cost of goods sold
Selling, general and administrative expenses
Research and development expenses
Amortization of acquired intangibles
Merger and acquisition related expenses
Income (loss) from operations
Interest expense, net
Bridge financing commitment fees
Other expense (income), net
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Less: Net income attributable to noncontrolling interests
Net income (loss) attributable to controlling interests
$
$
72
326.2
1.1
327.3
232.2
70.8
3.7
—
—
20.6
—
—
5.0
15.6
7.1
8.5
0.6
7.9
Successor
Pro Forma
Six months ended
June 30,
2013
2014
Six months ended
June 30,
2013
2014
$1,783.6
13.7
1,797.3
1,327.6
397.0
18.5
38.0
28.1
(11.9)
90.4
25.0
59.1
(186.4)
(8.1)
(178.3)
2.3
$ (180.6)
$2,174.0
14.7
2,188.7
1,446.0
497.3
23.4
42.4
—
179.6
113.9
—
2.9
62.8
10.7
52.1
2.6
$ 49.5
$2,109.8
14.8
2,124.6
1,463.8
470.0
22.2
44.9
—
123.7
99.1
—
43.4
(18.8)
36.7
(55.5)
2.9
$ (58.4)
$2,174.0
14.7
2,188.7
1,446.0
497.3
23.4
42.4
—
179.6
110.9
—
(1.8)
70.5
11.7
58.8
2.6
$ 56.2
Table of Contents
Net sales
Historical: Net sales were $2,174.0 million for the Successor six months ended June 30, 2014 compared to net sales of $1,783.6 million for the
Successor six months ended June 30, 2013 and $326.2 million for the Predecessor period January 1, 2013 through January 31, 2013. Our net
sales growth in the Successor six months ended June 30, 2014 was primarily driven by higher average selling prices across all regions, which
contributed to net sales growth of 3.7%. This net sales growth was partially offset by volume decreases, primarily resulting from a weak
economic environment in Latin America, which contributed to a decline in net sales of 0.5% during the period. Net sales growth was also
partially offset by the unfavorable impacts of currency exchange, which contributed to an approximately 0.2% reduction in net sales as the
benefits of the strengthening Euro were more than offset by the impact of weakening currencies in certain jurisdictions within Latin America and
Asia, as well as Canada.
Pro Forma: Net sales increased $64.2 million, or 3.0%, to $2,174.0 million for the Pro Forma six months ended June 30, 2014, as compared to
net sales of $2,109.8 million for the Pro Forma six months ended June 30, 2013. Our net sales growth was primarily driven by higher average
selling prices across all regions, which contributed to net sales growth of 3.7%. This net sales growth was partially offset by volume decreases,
primarily resulting from a weak economic environment in Latin America, which contributed to a decline in net sales of 0.5% during the period.
Net sales growth was also partially offset by the unfavorable impacts of currency exchange, which contributed to an approximately 0.2%
reduction in net sales as the benefits of the strengthening Euro were more than offset by the impact of weakening currencies in certain
jurisdictions within Latin America and Asia, as well as Canada.
Other revenue
Historical: Other revenue was $14.7 million for the Successor six months ended June 30, 2014 as compared to $13.7 million for the Successor
six months ended June 30, 2013 and $1.1 million for the Predecessor period January 1, 2013 through January 31, 2013. The impacts of currency
exchange did not have a material impact on the comparable periods.
Pro Forma: Other revenue remained flat at $14.7 million for the Pro Forma six months ended June 30, 2014, as compared to other revenue of
$14.8 million for the Pro Forma six months ended June 30, 2013. The impacts of currency exchange did not have a material impact on the
comparable periods.
Cost of sales
Historical: Cost of sales was $1,446.0 million for the Successor six-month period ended June 30, 2014 compared to $1,327.6 million for the
Successor six-month period ended June 30, 2013 and $232.2 million for the Predecessor period January 1, 2013 through January 31, 2013. Cost
of sales was lower during the Successor six months ended June 30, 2013 compared to the Successor period ended June 30, 2014 but higher when
combined with the Predecessor period January 1, 2013 through January 31, 2013 compared to the Successor period ended June 30, 2014,
primarily as a result of increased inventory costs of $103.7 million related to fair value adjustments to inventory in conjunction with the
Acquisition. In 2014, the absence of the increased inventory costs associated with the Acquisition were partially offset by $7.9 million of
increased depreciation in the six months ended June 30, 2014 resulting from the fair value adjustments to property, plant and equipment in
conjunction with the Acquisition compared to only five months of increased depreciation in the Predecessor six months ended June 30, 2013.
The remaining change in cost of sales in 2014 was driven by lower raw material costs, partially resulting from our purchasing initiatives. The
favorable impact of raw material prices across both our Performance Coatings and Transportation Coatings segments contributed to an
approximately 0.6% impact on cost of sales as a percentage of net sales. However, unfavorable impacts of currency exchange contributed to a
0.6% increase in cost of sales as a percentage of net sales, primarily due to the strengthening Euro compared to the U.S. dollar.
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Pro Forma: Cost of sales decreased $17.8 million, or 1.2%, to $1,446.0 million for the Pro Forma six months ended June 30, 2014 as compared
to $1,463.8 million for the Pro Forma six months ended June 30, 2013. The Pro Forma six months ended June 30, 2013 is adjusted to reflect
increased depreciation and the exclusion of increased inventory costs, each related to the Acquisition. As a percentage of net sales, cost of sales
decreased from 69.4% to 66.5%. This decrease was driven by lower raw material costs, partially resulting from our purchasing initiatives, as
well as higher average selling prices resulting from selective price increases across our two segments. The favorable impact of raw material
prices across both our Performance Coatings and Transportation Coatings segments contributed to an approximately 0.6% impact on cost of
sales as a percentage of net sales. However, unfavorable impacts of currency exchange contributed to a 0.6% increase in cost of sales as a
percentage of net sales, primarily due to the strengthening Euro compared to the U.S. dollar.
Selling, general and administrative expenses
Historical: Selling, general and administrative expenses were $497.3 million for the Successor six-month period ended June 30, 2014 compared
to $397.0 million for the Successor six-month period ended June 30, 2013 and $70.8 million for the Predecessor period January 1, 2013 through
January 31, 2013. During the Successor six months ended June 30, 2013 we incurred $46.5 million of transition-related costs, primarily related
to our transition to a standalone company, compared to $56.8 million of transition-related expenses for the Successor six months ended June 30,
2014. This resulted in a $10.3 million increase over the comparable periods. The remaining increase in selling, general and administrative
expenses was driven primarily by the unfavorable impact of the strengthening Euro, which contributed to an increase of approximately
$1.9 million. Additionally, we incurred increased advertising and administration costs, in particular within our Performance Coatings segment as
we focused on opportunities to expand our market presence. These increases were slightly offset as a result of our amendment to certain longterm benefit plans, which resulted in a gain of $7.7 million for the Successor six months ended June 30, 2014.
Pro Forma: Selling, general and administrative expenses increased $27.3 million, or 5.8%, to $497.3 million for the Pro Forma six months
ended June 30, 2014, as compared to $470.0 million for the Pro Forma six months ended June 30, 2013. The Pro Forma six months ended
June 30, 2013 is adjusted to reflect the increased depreciation expense of $2.2 million resulting from the fair value adjustments to nonmanufacturing assets in conjunction with the Acquisition. The increase is partially the result of additional transition-related expenses resulting in
$56.8 million during the Pro Forma six-month period ended June 30, 2014, related to our transition to a standalone company, compared to $46.8
million of transition-related expenses for the Pro Forma six months ended June 30, 2013. Excluding the impact of transition costs, selling,
general and administrative expenses increased $17.3 million driven primarily by the unfavorable impact of the strengthening Euro, which
contributed to an increase of approximately $1.9 million. Additionally, we incurred increased advertising and administration costs, in particular
within our Performance Coatings segment as we focused on opportunities to expand our market presence. These increases were slightly offset as
a result of our amendment to certain long-term benefit plans, which resulted in a gain of $7.7 million for the Pro Forma six months ended
June 30, 2014.
Research and development expenses
Historical: Research and development expenses were $23.4 million for the Successor six-month period ended June 30, 2014 compared to $18.5
million for the Successor six-month period ended June 30, 2013 and $3.7 million for the Predecessor period January 1, 2013 through January 31,
2013. The impacts of currency exchange did not have a material impact on the comparable periods.
Pro Forma: Research and development expenses for the Pro Forma six months ended June 30, 2014 were largely consistent, with $23.4 million
of costs compared to $22.2 million for the Pro Forma six months ended June 30, 2013. The impacts of currency exchange did not have a material
impact on the comparable periods.
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Amortization of acquired intangibles
Historical: Amortization of acquired intangibles was $42.4 million for the Successor six-month period ended June 30, 2014 compared to $38.0
million for the Successor six-month period ended June 30, 2013 and $0 for the Predecessor period January 1, 2013 through January 31, 2013.
Amortization of acquired intangibles for the Successor period ended June 30, 2013 included a loss of $3.2 million associated with abandoned inprocess research and development projects, all of which were recorded at fair value as part of the Acquisition. There was $0.1 million of
comparable costs recorded during the six months ended June 30, 2014. Excluding the impact of the $3.2 million loss, the increase during the
Successor six months ended June 30, 2014 included the impact of six months of amortization expense associated with purchase accounting while
the comparable 2013 periods included five months due to the timing of the Acquisition. The impacts of currency exchange did not have a
material impact on the comparable periods.
Pro Forma: Amortization of acquired intangibles for the Pro Forma six months ended June 30, 2014 was $42.4 million and $44.9 million for the
Pro Forma six months ended June 30, 2013. Amortization of acquired intangibles for the Pro Forma period ended June 30, 2013 included a loss
of $3.2 million associated with abandoned in-process research and development projects, all of which were recorded at fair value as part of the
Acquisition. There was $0.1 million of comparable costs recorded during the six months ended June 30, 2014. The impacts of currency exchange
did not have a material impact on the comparable periods.
Merger and acquisition related expenses
Historical: In connection with the Acquisition, we incurred $28.1 million of merger and acquisition costs during the Successor six months ended
June 30, 2013. These costs consisted primarily of investment banking, legal and other professional advisory services costs. There were no
comparable costs for the Successor six months ended June 30, 2014.
Pro Forma: The Pro Forma six months ended June 30, 2013 has been adjusted to remove the impact of these Acquisition related costs. There
were no costs for the Pro Forma six months ended June 30, 2014.
Interest expense, net
Historical: Interest expense, net for the Successor six months ended June 30, 2013 of $90.4 million represents interest expense incurred during
the period associated with our debt financing for the Acquisition and our liquidity requirements as a standalone entity. Interest expense, net for
the Successor six months ended June 30, 2014 of $113.9 million represented six months of interest costs including the Refinancing. The increase
from 2013 primarily relates to the Successor six months ended June 30, 2014 including six months of interest expense while the comparable
2013 periods included five months due to the timing of the Acquisition. The impacts of currency exchange did not have a material impact on the
comparable periods.
Pro Forma: Interest expense, net was $110.9 million and $99.1 million for the Pro Forma six months ended June 30, 2014 and 2013,
respectively, reflecting the effects of the Financing as if the transactions had occurred on January 1, 2013. Interest expense for the Successor six
months ended June 30, 2013 includes gains of $6.5 million on interest rate derivative instruments as compared to a $7.0 million loss for the six
months ended June 30, 2014. These amounts were offset slightly due to an increase in capitalized interest during the Successor six months ended
June 30, 2014.
Bridge financing commitment fees
Historical: On August 30, 2012, we signed a debt commitment letter, which was subsequently amended and restated, that included a bridge
facility comprised of $1,100.0 million of unsecured U.S. bridge loans and the Euro equivalent of $300.0 million of secured Euro bridge loans
(the “Bridge Facility”), which was to be utilized to partially fund the Acquisition in the event that permanent financing was not obtained. Upon
the issuance of the
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Table of Contents
Senior Notes and the entry into the Senior Secured Credit Facilities, the commitments under the Bridge Facility terminated. Commitment fees
related to the Bridge Facility of $21.0 million and associated legal and other professional advisory services costs of $4.0 million were expensed
upon the termination during the Successor six months ended June 30, 2013. There were no such costs incurred for the Successor six months
ended June 30, 2014.
Pro Forma: The Pro Forma six months ended June 30, 2013 has been adjusted to remove the impact of these fees. There were no costs for the
Pro Forma six months ended June 30, 2014.
Other expense (income), net
Historical: Other expense (income), net was $2.9 million of expense for the Successor six-month period ended June 30, 2014 compared to $59.1
million of expense for the Successor six months ended June 30, 2013 and $5.0 million of expense for the Predecessor period January 1, 2013
through January 31, 2013. Contributing to the decrease was the adverse impact of $19.4 million of expense incurred during the Successor six
months ended June 30, 2013 related to the Acquisition date settlement of a foreign currency hedge contract used to hedge the variability of the
U.S. dollar equivalent of the original borrowings under the Euro Term Loan and Euro Senior Notes. In addition, net foreign exchange gains were
$14.5 million during the Successor six months ended June 30, 2014 as compared to exchange losses of $40.2 million and $4.5 million for the six
months ended June 30, 2013 and the predecessor period ended January 31, 2013, respectively. Net foreign exchange gains for the six months
ended June 30, 2014 consisted of $11.8 million in gains on our Euro borrowings and $12.2 million in gains related to our Venezuelan operations
(discussed further below within Pro Forma ), which were slightly offset by translation losses on intercompany transactions denominated in
currencies different from the functional currency of the relevant subsidiary. Exchange losses of $40.2 million for the six months ended June 30,
2013 were attributable to $36.2 million in gains on our Euro borrowings, $74.6 million translation losses on intercompany transactions
denominated in currencies different from the functional currency of the relevant subsidiary, and $1.8 million of translation losses related to other
foreign currency contracts. The 2014 increases were slightly offset by the release of an indemnity receivable that had 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.
Pro Forma: Other expense (income), net was $1.8 million of income for the Pro Forma six months ended June 30, 2014 as compared to $43.4
million of expense for the Pro Forma six months ended June 30, 2013, representing a change of $45.2 million, or 104.1%. The Pro Forma six
months ended June 30, 2014 excludes the impact of $3.1 million in fees associated with Refinancing. The Pro Forma six months ended June 30,
2013 excludes the impact of $19.4 million of costs incurred related to the Acquisition date settlement of a foreign currency hedge contract used
to hedge the variability of the U.S. dollar equivalent of the original borrowings under the Euro Term Loan and Euro Senior Notes. The Pro
Forma six-month periods ended June 30, 2014 and 2013 also exclude the Carlyle management fee of $1.6 million and $1.3 million, respectively.
Net foreign exchange gains of $14.5 million were recorded for the Pro Forma six months ended June 30, 2014, as compared to exchange losses
of $44.7 million for the Pro Forma six months ended June 30, 2013. Net foreign exchange gains for the Pro Forma six months ended June 30,
2014 consisted of $11.8 million in gains on our Euro borrowings and $12.2 million in gains related to our Venezuelan operations, which were
slightly offset by translation on intercompany transactions denominated in currencies different from the functional currency of the relevant
subsidiary.
During 2014, we changed the exchange rate we use for remeasuring our Venezuelan subsidiaries’ non-U.S. Dollar denominated monetary assets
and liabilities to the rate determined by an auction process conducted by Venezuela’s Complementary System of Foreign Currency
Administration (SICAD I), which was 10.0 to 1 compared to the historical indexed rate of 6.3 to 1. The devaluation resulted in a gain of $12.2
million for the Pro Forma six months ended June 30, 2014 due to our Venezuelan operations being in a net monetary liability position. These
increases were slightly offset by the release of an indemnity receivable which had been recorded in conjunction with our tax indemnities from
the Acquisition. This resulted in a $12.3 million expense relating to an uncertain tax position that was reversed during the Pro Forma six months
ended June 30, 2014.
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Provision (benefit) for income taxes
Historical: We recorded a provision for income taxes of $10.7 million for the Successor 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%. This difference is primarily due to favorable adjustments related to prior year tax
positions of $21.1 million, earnings in jurisdictions where the statutory tax rate was lower than the U.S. federal statutory rate of $17.4 million,
and net foreign exchange gains that were not taxable of $3.9 million. These adjustments were partially offset by pre-tax losses attributable to
jurisdictions where a tax benefit is not expected to be realized of $13.0 million and the loss of tax benefits on nondeductible expenses and
withholding tax expense of $18.1 million.
We recorded a benefit for income taxes of $8.1 million for the Successor six months ended June 30, 2013, which represents a 4.3% effective tax
rate in relation to the loss before income taxes of $186.4 million. The effective tax rate for the Successor six months ended June 30, 2013 differs
from the U.S. federal statutory rate by 30.7%. This difference is primarily due to unfavorable adjustments for non-deductible merger and
acquisition-related expenses of $10.0 million, the impact of pre-tax losses attributable to jurisdictions where a tax benefit is not expected to be
realized of $33.0 million, and non-deductible expenses and withholding taxes of $15.0 million. These adjustments were partially offset by the
benefit of earnings in jurisdictions where the statutory tax rate was lower than the U.S. federal statutory rate of $14.8 million and the impact of
non-deductible net foreign exchange losses of $17.0 million.
Pro Forma: We recorded a provision for income taxes of $11.7 million for the Pro Forma six-month period ended June 30, 2014, which
represents a 16.6% effective tax rate in relation to the pro forma income before income taxes of $70.5 million. The variance in the pro forma
effective tax rate from the historical effective tax rate described in the corresponding historical discussion above was primarily due to the
application of statutory income tax rates to the cumulative pro forma adjustments.
We recorded a provision for income taxes of $36.7 million for the Pro Forma six-month period ended June 30, 2013, which represents a
(195.2)% effective tax rate in relation to pro forma loss before income taxes of $18.8 million. The variance in the pro forma effective tax rate
from the historical effective tax rate described in the corresponding historical discussion above was primarily due to the application of statutory
income tax rates to the cumulative pro forma adjustments.
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Successor year ended December 31, 2013, Pro Forma year ended December 31, 2013 and Predecessor period January 1, 2013 through
January 31, 2013 compared to Successor period August 24, 2012 through December 31, 2012 and the Predecessor years ended
December 31, 2012 and 2011
The following table was derived from the Successor’s consolidated statements of operations for the year ended December 31, 2013 and for the
period from August 24, 2012 through December 31, 2012 and from the Predecessor’s combined statements of operations for the period from
January 1, 2013 through January 31, 2013 and for the years ended December 31, 2012 and 2011 included elsewhere in this prospectus. It should
be noted that the results of operations for the Successor year ended December 31, 2013 only include the results of DPC from the date of the
Acquisition. Prior to the Acquisition, Axalta generated no revenue and only incurred merger and acquisition related costs and debt financing
costs in anticipation of the Acquisition. We have also presented pro forma financial results for the year ended December 31, 2013 as if the
Acquisition, the Financing and Offering transactions had occurred on January 1, 2013. This information and the related comparison to the
operating results for the Predecessor year ended December 31, 2012 is provided for a more meaningful comparison between years.
Predecessor
(dollars in millions)
Net sales
Other revenue
Total revenue
Cost of goods sold
Selling, general and administrative expenses
Research and development expenses
Amortization of acquired intangibles
Merger and acquisition related expenses
Income (loss) from operations
Interest expense, net
Bridge financing commitment fees
Other expense, net
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Less: Net income attributable to noncontrolling
interests
Net income (loss) attributable to controlling
interests
Year Ended
December 31,
2011
2012
January 1
through
January 31,
2013
$4,281.5
34.3
4,315.8
3,074.5
869.1
49.6
—
—
322.6
0.2
—
20.2
302.2
120.7
181.5
$4,219.4
37.4
4,256.8
2,932.6
873.4
41.5
—
—
409.3
—
—
16.3
393.0
145.2
247.8
$ 326.2
1.1
327.3
232.2
70.8
3.7
—
—
20.6
—
—
5.0
15.6
7.1
8.5
2.1
4.5
0.6
$ 179.4
$ 243.3
$
7.9
Successor
August 24
through
Year Ended
December 31,
December 31,
2012
2013
$
—
—
—
—
—
—
—
29.0
(29.0)
—
—
—
(29.0)
—
(29.0)
$ 3,951.1
35.7
3,986.8
2,772.8
1,040.6
40.5
79.9
28.1
24.9
215.1
25.0
48.5
(263.7)
(44.8)
(218.9)
—
$
(29.0)
Pro Forma
Year Ended
December 31,
2013
$ 4,277.3
36.8
4,314.1
2,909.0
1,113.6
44.2
86.5
—
160.8
210.8
—
31.0
(81.0)
1.9
(82.9)
6.0
$
(224.9)
6.6
$
(89.5)
Successor year ended December 31, 2013, Pro Forma year ended December 31, 2013 and Predecessor period January 1, 2013 through
January 31, 2013 compared to the Successor period August 24, 2012 through December 31, 2012 and the Predecessor year ended
December 31, 2012
Net sales
Historical: Net sales were $3,951.1 million and $326.2 million for the Successor year ended December 31, 2013 and the Predecessor period
January 1, 2013 through January 31, 2013, respectively, as compared to net sales of $4,219.4 million for the Predecessor year ended
December 31, 2012. Higher average selling prices across all
78
Table of Contents
regions contributed to net sales growth of 6.3% in the Successor year ended December 31, 2013. This growth was partially offset by volume
declines during the period, which reduced net sales by 3.5%, primarily as a result of a weak economic environment in Latin America.
Additionally, the unfavorable impacts of currency exchange contributed to a 1.4% reduction in net sales, primarily due to the weakening of
foreign currency exchange rates within the Latin America region compared to the U.S. dollar.
Pro Forma: Net sales increased $57.9 million, or 1.4%, to $4,277.3 million for the Pro Forma year ended December 31, 2013, as compared to
net sales of $4,219.4 million for the Predecessor year ended December 31, 2012. Higher average selling prices contributed to net sales growth of
6.3%. This growth was partially offset by volume declines during the period, which reduced net sales by 3.5%, primarily as a result of a weak
economic environment in Latin America. Additionally, the unfavorable impacts of currency exchange contributed to a 1.4% reduction in net
sales, primarily due to the weakening of foreign currency exchange rates within the Latin America region compared to the U.S. dollar.
Other revenue
Historical: Other revenue was $35.7 million and $1.1 million for the Successor year ended December 31, 2013 and the Predecessor period
January 1, 2013 through January 31, 2013, respectively, as compared to other revenue of $37.4 million for the Predecessor year ended
December 31, 2012. The impacts of currency exchange did not have a material impact on the comparable periods.
Pro Forma: Other revenue remained largely consistent at $36.8 million for the Pro Forma year ended December 31, 2013, as compared to other
revenue of $37.4 million for the Predecessor year ended December 31, 2012. The impacts of currency exchange did not have a material impact
on the comparable periods.
Cost of sales
Historical: Cost of sales was $2,772.8 million and $232.2 million for the Successor year ended December 31, 2013 and the Predecessor period
January 1, 2013 through January 31, 2013, respectively, as compared to cost of sales of $2,932.6 million for the Predecessor year ended
December 31, 2012. Cost of sales for the Successor year ended December 31, 2013 reflected increased depreciation expense of $73.4 million
resulting from the fair value adjustments to property, plant and equipment in conjunction with the Acquisition. Cost of sales was also negatively
impacted in 2013 by increased inventory costs of $103.7 million resulting from the fair value adjustments to inventory in conjunction with the
Acquisition. Included in the Predecessor year ended December 31, 2012 was a $19.1 million benefit due to the last-in-first-out “LIFO” method
of inventory accounting. In addition to the impacts from purchase accounting, cost of sales was also favorably impacted by the reduction in costs
incurred in the Successor period operating structure versus those previously allocated by DuPont during the Predecessor year ended December
31, 2012. This includes the impacts of the defined benefit pension obligations for U.S. employees in connection with the Acquisition, which
resulted in a net reduction in U.S. employee fringe costs compared to the Predecessor year ended December 31, 2012. The remaining decrease
was primarily due to lower raw material costs across most regions and product lines as well as impacts from foreign currency exchange rates.
The favorable impact of raw material prices across both our Performance Coatings and Transportation Coatings segments contributed to an
approximately 0.3% impact on cost of sales as a percentage of net sales. Favorable impacts of currency exchange contributed to a 0.4% decrease
in cost of goods sold, primarily due to the weakening of foreign currency exchange rates within the Latin America region compared to the U.S.
dollar.
Pro Forma: Cost of sales decreased $23.6 million, or 0.8%, to $2,909.0 million for the Pro Forma year ended December 31, 2013 as compared
to $2,932.6 million for the Predecessor year ended December 31, 2012. The Pro Forma year ended December 31, 2013 is adjusted to exclude the
impact of $7.9 million of increased depreciation for the Predecessor period January 1, 2013 through January 31, 2013 and to exclude $103.7
million of increased inventory costs related to the Acquisition. As a percentage of net sales, cost of sales decreased from 69.5% to
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68.0%. This decrease was primarily due to lower raw material costs across most regions and product lines. The favorable impact of raw material
prices across both our Performance Coatings and Transportation Coatings segments contributed to an approximately 0.3% impact on cost of
sales as a percentage of net sales. Cost of sales was also favorably impacted by the reduction in costs incurred in our current operating structure
versus those previously allocated by DuPont during the Predecessor year ended December 31, 2012. Further, we did not assume defined benefit
pension obligations for U.S. employees in connection with the Acquisition, which resulted in a net reduction in U.S. employee fringe costs
compared to the Predecessor year ended December 31, 2012. These decreases were slightly offset by the $19.1 million benefit included in the
Predecessor year ended December 31, 2012 due to the LIFO method of inventory accounting, as well as the impact in the Successor year ended
December 31, 2013 of increased depreciation expense of $81.3 million resulting from the fair value adjustments to property, plant and
equipment in conjunction with the Acquisition. Favorable impacts of currency exchange contributed to a 0.4% decrease in cost of goods sold,
primarily due to the weakening of foreign currency exchange rates within the Latin America region compared to the U.S. dollar.
Selling, general and administrative expenses
Historical: Selling, general and administrative expenses were $1,040.6 million and $70.8 million for the Successor year ended December 31,
2013 and the Predecessor period January 1, 2013 through January 31, 2013, respectively, as compared to selling, general and administrative
expenses of $873.4 million for the Predecessor year ended December 31, 2012. The increase in 2013 was primarily the result of $231.5 million
of transition-related expenses we incurred during the Successor year ended December 31, 2013, primarily due to 2013 termination benefits and
other employee related costs of $147.5 million, and consulting and advisory costs of $54.7 million related to our initial separation and transition
to a standalone company. Selling, general and administrative expenses were also adversely impacted by increased depreciation expense of
approximately $23.1 million resulting from the fair value adjustments to non-manufacturing assets in conjunction with the Acquisition.
Favorable impacts of currency exchange, primarily due to the weakening of foreign currency exchange rates within the Latin America region
compared to the U.S. dollar, contributed to an approximately 1.0% decrease in selling, general and administrative expenses. These increases
were offset slightly by a reduction in U.S. pension expense and lower actual costs for our operating structure as a standalone entity.
Pro Forma: Selling, general and administrative expenses increased $240.2 million, or 27.5%, to $1,113.6 million for the Pro Forma year ended
December 31, 2013, as compared to $873.4 million for the Predecessor year ended December 31, 2012. The Pro Forma year ended
December 31, 2013 is adjusted to reflect the increased depreciation expense resulting from the fair value adjustments to non-manufacturing
assets in conjunction with the Acquisition. The 27.5% increase was primarily driven by the $231.8 million of transition-related costs incurred
during the Pro Forma year ended December 31, 2013, primarily due to 2013 termination benefits and other employee related costs of
$147.8 million, and consulting and advisory costs of $54.7 million related to our transition to a standalone company. Additionally, we incurred
$25.3 million in additional depreciation expense associated with fair value adjustments to non-manufacturing assets in conjunction with the
Acquisition and due to the favorable impact of weakening currency exchange rates primarily within the Latin America region compared to the
U.S. dollar of approximately 1.0%. These increases were offset slightly by approximately $16.9 million reduction in U.S. pension expense and
lower actual costs for our operating structure as a standalone entity.
Research and development expenses
Historical: Research and development expense was $40.5 million and $3.7 million for the Successor year ended December 31, 2013 and the
Predecessor period January 1, 2013 through January 31, 2013, respectively, as compared to research and development expense of $41.5 million
for the Predecessor year ended December 31, 2012. Research and development expense compared to the Predecessor year ended December 31,
2012 increased due to focused spending on growth projects. This increase was partially offset by a decrease in allocations of costs of $2.1
million for the Successor year ended December 31, 2013 compared to the Predecessor year ended
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December 31, 2012, representing costs associated with the DuPont Corporate research and development activities in 2012. In addition, favorable
impacts of currency exchange contributed to a 0.7% decrease in research and development expense, primarily due to the weakening of foreign
currency exchange rates within the Latin America region compared to the U.S. dollar.
Pro Forma: Research and development expense increased $2.7 million, or 6.5%, for the Pro Forma year ended December 31, 2013 to $44.2
million compared to $41.5 million for the Predecessor year ended December 31, 2012. Research and development expense for the Pro Forma
year ended December 31, 2013 increased due to focused spending on growth projects. This increase was partially offset by a decrease in
allocations of costs of $2.1 million for the Pro Forma year ended December 31, 2013 compared to the Predecessor year ended December 31,
2012 representing costs associated with the DuPont Corporate research and development activities in 2012. Favorable impacts of currency
exchange contributed to a 0.7% decrease in research and development expense, primarily due to the weakening of foreign currency exchange
rates within the Latin America region compared to the U.S. dollar.
Amortization of acquired intangibles
Historical: Amortization of acquired intangibles was $79.9 million for the Successor year ended December 31, 2013. Amortization of acquired
intangibles in the Successor year ended December 31, 2013 includes a loss of $3.2 million associated with abandoned acquired in-process
research and development projects, all of which was related to the Acquisition. There were no comparable costs recorded in the Predecessor
period January 1, 2013 through January 31, 2013 and the Predecessor year ended December 31, 2012.
Pro Forma: Amortization of acquired intangibles was $86.5 million for the Pro Forma year ended December 31, 2013. Amortization expense for
the Pro Forma year ended December 31, 2013 has been adjusted to reflect amortization expense for January 2013. There were no comparable
costs recorded in the Predecessor year ended December 31, 2012. The impacts of currency exchange did not have a material impact on the
comparable periods.
Merger and acquisition costs
Historical: In connection with the Acquisition, we incurred $28.1 million and $29.0 million of merger and acquisition costs during the Successor
year ended December 31, 2013 and the Successor period August 24, 2012 through December 31, 2012, respectively. These costs consisted
primarily of investment banking, legal and other professional advisory services costs. There were no such costs associated with the Predecessor
period January 1, 2013 through January 31, 2013 or the Predecessor year ended December 31, 2012. The impacts of currency exchange did not
have a material impact on the comparable periods.
Pro Forma: The Pro Forma year ended December 31, 2013 has been adjusted to remove the impact of these Acquisition related costs. There
were no comparable costs recorded in the Predecessor year ended December 31, 2012.
Interest expense, net
Historical: Interest expense, net was $215.1 million for the Successor year ended December 31, 2013. There was no interest expense for the
Predecessor year ended December 31, 2012 or the Predecessor period January 1, 2013 through January 31, 2013. The increase in interest
expense, net was due to interest costs associated with the debt financing for the Acquisition and the liquidity requirements of a standalone entity.
Pro Forma: Interest expense, net for the Pro Forma year ended December 31, 2013 of $210.8 million has been adjusted to reflect interest
expense for January 2013, which was more than offset by the pro forma effects of the Company’s February 2014 refinancing of its Acquisition
term loans. There was no interest expense for the Predecessor year ended December 31, 2012.
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Bridge financing commitment fees
Historical: Commitment fees related to the Bridge Facility of $21.0 million and associated legal and other professional advisory services costs of
$4.0 million were expensed upon termination of the Bridge Facility during the Successor period ended December 31, 2013. There were no such
costs associated with the Predecessor period January 1, 2013 through January 31, 2013 and the Predecessor year ended December 31, 2012.
Pro Forma: The Pro Forma year ended December 31, 2013 has been adjusted to remove the impact of these fees. There were no comparable
costs recorded in the Predecessor year ended December 31, 2012.
Other expense, net
Historical: Other expense, net was $48.5 million and $5.0 million for the Successor year ended December 31, 2013 and for the Predecessor
period January 1, 2013 through January 31, 2013, respectively, as compared to $16.3 million for the Predecessor year ended December 31, 2012.
Other expense, net during the Successor year ended December 31, 2013 primarily consists of net foreign exchange losses from intercompany
transactions denominated in currencies different from the functional currency of the subsidiary involved in the transaction. In addition, the
increase partially resulted from a $19.4 million loss related to the Acquisition date settlement of a foreign currency hedge contract used to hedge
the variability of the U.S. dollar equivalent of the original borrowings under the Euro Term Loan and Euro Senior Notes, and the impact of the
strengthening Euro against our Euro Borrowings.
Pro Forma: Other expense, net increased $14.7 million, or 90.2%, for the Pro Forma year ended December 31, 2013 to $31.0 million compared
to $16.3 million for the Predecessor year ended December 31, 2012. The Pro Forma year ended December 31, 2013 excludes the impact of $19.4
million of a loss related to the Acquisition date settlement of a foreign currency hedge contract used to hedge the variability of the U.S. dollar
equivalent of the original borrowings under the Euro Term Loan and Euro Senior Notes. Net foreign exchange losses of $34.0 million were
recorded for the Pro Forma year ended December 31, 2013, as compared to a loss of $17.7 million for the Predecessor year ended December 31,
2012.
During the Pro Forma year ended December 31, 2013, we incurred net unrealized foreign exchange losses of $9.4 million on the remeasurement
of intercompany loans. In addition, we incurred unrealized foreign exchange losses of $14.6 million related to the remeasurement of the Euro
Senior Notes and Euro Term Loan into U.S. dollars. The remaining foreign exchange losses primarily related to the remeasurement of other
assets and liabilities denominated in currencies other than the functional currency of the affected subsidiaries.
Provision (benefit) for income taxes
Historical: We recorded a benefit for income taxes of $44.8 million for the Successor year ended December 31, 2013, which represents a 17.0%
effective tax rate in relation to the loss before income taxes of $263.7 million. The effective tax rate for the Successor year ended December 31,
2013 differs from the U.S. federal statutory rate by 18.0%. This difference is primarily due to unfavorable adjustments for the impact of pre-tax
losses attributable to jurisdictions where a tax benefit is not expected to be realized of $55.0 million, prior year tax positions of $35.1 million,
non-deductible expenses, unrecognized tax benefits and the impact of unremitted earnings assertions of $16.8 million. These adjustments were
partially offset by the benefit of earnings in jurisdictions where the statutory tax rate was lower than the U.S. Federal statutory rate of $33.1
million and capital losses of $46.7 million.
We recorded a provision for income taxes of $145.2 million for the Predecessor year ended December 31, 2012 which represents a 37.0%
effective tax rate in relation to the income before taxes of $393.0 million. The effective tax rate for the Predecessor year ended December 31,
2012 differs from the U.S. federal statutory rate by 2.0%. This difference is primarily due to the unfavorable impact of pre-tax losses attributable
to jurisdictions where a
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tax benefit is not expected to be realized of $9.8 million, as well as a $4.7 million impact related to non-deductible net foreign exchange losses.
This is offset by the benefit of earnings in jurisdictions where the statutory tax rate was lower than the U.S. Federal statutory rate of $10.9
million.
Pro Forma: We recorded a provision for income taxes of $1.9 million for the Pro Forma year ended December 31, 2013, which represents a
2.3% effective tax rate in relation to the pro forma loss before income taxes of $81.0 million. The variance in the pro forma effective tax rate
from the historical effective tax rate, described in the corresponding historical discussion above, was primarily due to the application of statutory
income tax rates to the cumulative pro forma adjustments.
Predecessor year ended December 31, 2012 Compared to Predecessor year ended December 31, 2011
Net sales
Historical: Net sales decreased $62.1 million, or 1.5%, to $4,219.4 million for the Predecessor year ended December 31, 2012, as compared to
net sales of $4,281.5 million for the Predecessor year ended December 31, 2011. The unfavorable impacts of currency exchange contributed to a
5.0% reduction in net sales, primarily due to the weakening of foreign currency exchange rates for the Euro and currencies within the Latin
America region compared to the U.S. dollar. This decrease was offset by higher average selling prices that contributed to net sales growth of
5.9%. Declining volumes during the period contributed to a 2.4% decrease in net sales, primarily resulting from difficult economic conditions in
Europe.
Other revenue
Historical: Other revenue increased to $3.1 million, or 9.0 %, to $37.4 million for Predecessor year ended December 31, 2012 compared to
$34.3 million for the Predecessor year ended December 31, 2011. The increase was primarily attributed to higher service revenue and royalty
income. The impacts of currency exchange did not have a material impact on the comparable periods.
Cost of sales
Historical: Cost of sales decreased $141.9 million, or 4.6%, to $2,932.6 million for Predecessor year ended December 31, 2012, as compared to
$3,074.5 million for the Predecessor year ended December 31, 2011. As a percentage of net sales, cost of sales decreased from 71.8% to 69.5%.
This decrease was primarily driven by the $22.0 million unfavorable impact of an increase to the LIFO reserve in the Predecessor year ended
December 31, 2011 that did not re-occur in 2012 and the favorable impact on costs due to the weakening of foreign currency exchange rates
compared to the U.S. dollar primarily related to the Euro and certain currencies within the Latin America region during the Predecessor year
ended December 31, 2012. These decreases were partially offset by higher raw material prices and overhead costs. The unfavorable impact of
raw material prices across both our Performance Coatings and Transportation Coatings segments contributed to an approximately 1.5% negative
impact on cost of sales as a percentage of net sales.
Selling, general and administrative expenses
Historical: Selling, general and administrative expenses increased $4.3 million, or 0.5%, to $873.4 million for Predecessor year ended
December 31, 2012, as compared to $869.1 million the Predecessor year ended December 31, 2011. This increase was primarily attributable to
increased marketing-related expenses and selling resources providing technical customer sales support and inflationary cost increases.
Additionally, in November 2012, DuPont concluded that consolidating the financial results of DPC’s joint venture investment in DPC Saudi was
no longer appropriate due to a lack of financial control in the operations of the business. Consequently, the Predecessor deconsolidated this joint
venture and accounted for the joint venture under the equity method of accounting since November 2012. This joint venture investment in DPC
Saudi was not an asset acquired in connection with the Acquisition. As part of the deconsolidation of DPC Saudi, a remeasurement of the
retained
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investment was performed based upon the estimated selling price of our related shares. The remeasurement resulted in a loss of $1.0 million for
the Predecessor year ended December 31, 2012, which was recorded as a component of selling, general and administrative expenses. Partially
offsetting this asset charge were reduced employee separation liabilities related to previous restructuring programs in the amount of $0.3 million
due to favorable changes in estimates of these remaining employee separation liabilities.
Termination benefits and other employee related costs were a credit of $2.6 million for the year ended December 31, 2011. In the year ended
December 31, 2011, we recorded a net reduction of $1.4 million in the estimated costs associated with our 2009 restructuring program. In
addition during the year ended December 31, 2011, we recorded a net reduction in the estimated employee costs associated with DPC’s 2008
restructuring program of $1.2 million. These net reductions were primarily due to lower-than-estimated individual severance costs and work
force reductions through non-severance programs. In addition, favorable impacts of currency exchange contributed to a 4.5% reduction in
selling, general and administrative expense, primarily due to the weakening of foreign currency exchange rates compared to the U.S. dollar
primarily related to the Euro and certain currencies within the Latin America region.
Research and development expenses
Historical: Research and development expense decreased $8.1 million, or 16.3%, from $49.6 million to $41.5 million for the Predecessor year
ended December 31, 2012, as compared to the Predecessor year ended December 31, 2011. Of the decrease, 5.6% was due to the impact of
weakening foreign currency exchange rates compared to the U.S. Dollar primarily related to the Euro and certain currencies within the Latin
America region during the Predecessor year ended December 31, 2012.
Other expense, net
Historical: Other expense, net decreased $3.9 million, or 19.3%, from $20.2 million to $16.3 million for the Predecessor year ended
December 31, 2012, as compared to the year ended December 31, 2011. This decrease was primarily due to the reduction in foreign exchange
losses to $17.7 million from $23.4 million during the Predecessor year ended December 31, 2012 as compared to the Predecessor year ended
December 31, 2011, respectively.
Provision for income taxes
Historical: We recorded a provision for income taxes of $145.2 million for the Predecessor year ended December 31, 2012 as compared to
$120.7 million for the Predecessor year ended December 31, 2011. Our effective income tax rate was 37.0% and 39.9% for the Predecessor years
ended December 31, 2012 and 2011, respectively. The decrease in our effective income tax rate in relation to the prior year was due to a larger
portion of earnings sourced in non-U.S. jurisdictions where the statutory tax rate was lower than the U.S. Federal statutory rate, which resulted in
a benefit of $1.8 million, $5.0 million benefit relating to a decrease in the valuation allowances for net operating losses that were not previously
expected to be realized, and a $2.3 million favorable impact related to an net foreign exchange gains that were not taxable. The favorable impact
of these factors on our effective income tax rate was partially offset by $1.9 million of higher state income taxes, net of U.S. federal income tax
benefit.
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Selected Segment Information
Successor six months ended June 30, 2014 compared to the Successor six months ended June 30, 2013, Predecessor period January 1,
2013 through January 31, 2013 and the Pro Forma six months ended June 30, 2013
The following table presents net sales by segment and segment Adjusted EBITDA for the following periods (in millions):
Predecessor
January 1
through
January 31,
2013
Net Sales
Performance Coatings
Transportation Coatings
Total
Segment Adjusted EBITDA (1) (2)
Performance Coatings
Transportation Coatings
Total
(1)
(2)
$
$
$
$
Successor
Pro Forma
Six Months Ended
Six Months Ended
June 30,
2013
2014
June 30,
2013
186.8
139.4
326.2
$1,036.4
747.2
$1,783.6
$1,281.1
892.9
$2,174.0
$
15.0
17.7
32.7
$ 212.9
94.6
$ 307.5
$ 261.2
146.6
$ 407.8
$
$
$
1,223.2
886.6
2,109.8
231.4
114.7
346.1
For additional information regarding Segment Adjusted EBITDA, see Note 21 to our Unaudited Condensed Consolidated Financial
Statements and Note 25 to our Audited Consolidated Financial Statements appearing elsewhere in this prospectus.
For information about Adjusted EBITDA, including the manner in which it is calculated and a reconciliation from our net income (loss) to
Adjusted EBITDA see “Prospectus Summary—Summary Historical and Pro Forma Financial Information.” The Segment Adjusted
EBITDA information for the Pro Forma six months ended June 30, 2013 includes (a) the add-back of corporate allocations from DuPont to
DPC for the usage of DuPont’s facilities, functions and services; costs for administrative functions and services performed on behalf of
DPC by centralized staff groups within DuPont; a portion of DuPont’s general corporate expenses; and certain pension and other long-term
employee benefit costs net of (b) estimated standalone costs based on a corporate function resource analysis that included a standalone
executive office, the costs associated with supporting a standalone information technology infrastructure, corporate functions such as legal,
finance, treasury, procurement and human resources and certain costs related to facilities management. This resource analysis included
anticipated headcount and the associated overhead costs of running these functions effectively as a standalone company of our size and
complexity. This resulted in a net benefit of $5.7 million for the Predecessor period January 1, 2013 through January 31, 2013.
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Performance Coatings Segment
Successor six months ended June 30, 2014 compared to Predecessor period January 1, 2013 through January 31, 2013, Successor six months
ended June 30, 2013 and Pro Forma six months ended June 30, 2013
Historical: Net sales were $1,281.1 million for the Successor six months ended June 30, 2014 compared to net sales of $1,036.4 million for the
Successor six months ended June 30, 2013 and $186.8 million for the Predecessor period January 1, 2013 through January 31, 2013. The
increase in net sales in the Successor six months ended June 30, 2014 was primarily driven by volume growth, which contributed to a net sales
increase of 2.1%, as well as higher average selling prices, which contributed to a net sales increase of 2.3%. Favorable currency exchange rates
contributed to net sales growth of 0.3%, primarily related to the benefits of the strengthening Euro.
Adjusted EBITDA was $261.2 million for the Successor six months ended June 30, 2014 compared to Adjusted EBITDA of $212.9 million for
the Successor six months ended June 30, 2013 and $15.0 million for the Predecessor period January 1, 2013 through January 31, 2013. The
14.6% increase in Adjusted EBITDA in the Successor six months ended June 30, 2014 was driven by lower raw material input costs and fixed
manufacturing costs, partially resulting from our purchasing and operational improvement initiatives and price increases. In addition, the absence
of the Predecessor corporate allocated costs contributed an approximate $3.4 million benefit. Unfavorable currency exchange rates, which were
primarily concentrated in the Latin America region, slightly offset these increases and contributed to a reduction in Adjusted EBITDA.
Pro Forma: Net sales increased $57.9 million, or 4.7%, to $1,281.1 million for the six months ended June 30, 2014, as compared to net sales of
$1,223.2 million for the Pro Forma six months ended June 30, 2013. The increase in net sales for the six months ended June 30, 2014 as
compared to the Pro Forma six months ended June 30, 2013 was primarily driven by volume growth, which contributed to a net sales increase of
2.1%, as well as higher average selling prices, which contributed to a net sales increase of 2.3%. Favorable currency exchange rates contributed
to net sales growth of 0.3%, primarily related to the benefits of the strengthening Euro.
Adjusted EBITDA increased $29.8 million, or 12.9%, to $261.2 million for the six months ended June 30, 2014 as compared to $231.4 million
for the Pro Forma six months ended June 30, 2013. As a percentage of net sales, Adjusted EBITDA increased to 20.4% from 18.9%. This
increase was driven by lower raw material input costs and fixed manufacturing costs, partially resulting from our purchasing and operational
improvement initiatives and price increases. Unfavorable currency exchange rates, which were primarily concentrated in the Latin America
region, slightly offset these increases and contributed to a reduction in Adjusted EBITDA.
Transportation Coatings Segment
Successor six months ended June 30, 2014 compared to Predecessor period January 1, 2013 through January 31, 2013, Successor six months
ended June 30, 2013 and Pro Forma six months ended June 30, 2013
Historical: Net sales were $892.9 million for the Successor six months ended June 30, 2014 compared to net sales of $747.2 million for the
Successor six months ended June 30, 2013 and $139.4 million for the Predecessor period January 1, 2013 through January 31, 2013. The
increase in net sales in the Successor six months ended June 30, 2014 was primarily driven by higher average selling prices, which contributed to
net sales growth of 5.7%. This increase was partially offset by declining volumes, which contributed to a net sales decline of 4.2%, and were
primarily concentrated in Latin America. Unfavorable currency exchange rates also contributed to a reduction to net sales of 0.8% as the benefits
of the strengthening Euro were more than offset by impacts of weakening currencies in certain jurisdictions primarily within Latin America.
Adjusted EBITDA was $146.6 million for the Successor six months ended June 30, 2014 compared to Adjusted EBITDA of $94.6 million for
the Successor six months ended June 30, 2013 and $17.7 million for the Predecessor period January 1, 2013 through January 31, 2013. The
30.5% increase in Adjusted EBITDA in the
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Successor six months ended June 30, 2014 was driven by lower raw material input costs and fixed manufacturing costs, partially resulting from
our purchasing and operational improvement initiatives and selective price increases. In addition, the absence of the Predecessor corporate
allocated costs contributed an approximate $2.3 million benefit. Unfavorable currency exchange rates, which were primarily concentrated in the
Latin America region, slightly offset these increases and contributed to a reduction in Adjusted EBITDA.
Pro Forma: Net sales increased $6.3 million, or 0.7%, to $892.9 million for the six months ended June 30, 2014, as compared to net sales of
$886.6 million for the Pro Forma six months ended June 30, 2013. The increase in net sales for the six months ended June 30, 2014 as compared
to the Pro Forma six months ended June 30, 2013 was primarily driven by higher average selling prices, which contributed to net sales growth of
5.7%. This increase was partially offset by declining volumes, which contributed to a net sales decline of 4.2%, and were primarily concentrated
in Latin America. Unfavorable currency exchange rates also contributed to a reduction to net sales of 0.8% as the benefits of the strengthening
Euro were more than offset by impacts of weakening currencies in certain jurisdictions primarily within Latin America.
Adjusted EBITDA increased $31.9 million, or 27.8%, to $146.6 million for the six months ended June 30, 2014 as compared to $114.7 million
for the Pro Forma six months ended June 30, 2013. As a percentage of net sales, Adjusted EBITDA increased to 16.4% from 12.9%. This
increase was driven by lower raw material input costs and fixed manufacturing costs, partially resulting from our purchasing and operational
improvement initiatives and selective price increases. Unfavorable currency exchange rates, which were primarily concentrated in the Latin
America region, slightly offset these increases, and contributed to a reduction in Adjusted EBITDA.
Successor year ended December 31, 2013, Pro Forma year ended December 31, 2013 and Predecessor period January 1, 2013 through
January 31, 2013 compared to the Predecessor years ended December 31, 2012 and 2011
The following table presents net sales by segment and segment Adjusted EBITDA for the following periods (in millions):
Predecessor
Year Ended
December 31,
2011
2012
Net Sales
Performance Coatings
Transportation Coatings
Total
Segment Adjusted EBITDA (1) (2)
Performance Coatings
Transportation Coatings
Total
(1)
(2)
Successor
Pro Forma
January 1
through
January 31,
2013
Year Ended
December 31,
2013
Year Ended
December 31,
2013
$2,623.7
1,657.8
$4,281.5
$2,479.5
1,739.9
$4,219.4
$ 186.8
139.4
$ 326.2
$ 2,325.3
1,625.8
$ 3,951.1
$ 2,512.1
1,765.2
$ 4,277.3
$ 415.9
62.5
$ 478.4
$ 426.0
151.6
$ 577.6
$
$
$
$
15.0
17.7
32.7
$
500.2
198.8
699.0
$
518.7
218.9
737.6
For additional information regarding Segment Adjusted EBITDA, see Note 21 to our Unaudited Condensed Consolidated Financial
Statements and Note 25 to our Audited Consolidated Financial Statements appearing elsewhere in this prospectus.
For information about Adjusted EBITDA, including the manner in which it is calculated and a reconciliation from our net income (loss) to
Adjusted EBITDA see “Prospectus Summary—Summary Historical and Pro Forma Financial Information.” The Segment Adjusted
EBITDA information for the Pro Forma year ended December 31, 2013 includes (a) the add-back of corporate allocations from DuPont to
DPC for the usage of DuPont’s facilities, functions and services; costs for administrative functions and services performed on behalf of
DPC by centralized staff groups within DuPont; a portion of DuPont’s general corporate expenses; and
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certain pension and other long-term employee benefit costs net of (b) estimated standalone costs based on a corporate function resource
analysis that included a standalone executive office, the costs associated with supporting a standalone information technology
infrastructure, corporate functions such as legal, finance, treasury, procurement and human resources and certain costs related to facilities
management. This resource analysis included anticipated headcount and the associated overhead costs of running these functions
effectively as a standalone company of our size and complexity. This resulted in a net benefit of $5.7 million for the Predecessor period
January 1, 2013 through January 31, 2013. The Predecessor years ended December 31, 2012 and 2011 do not include $91.7 million and
$84.2 million, respectively, in net benefits related to these costs.
Performance Coatings Segment
Successor year ended December 31, 2013, Pro Forma year ended December 31, 2013 and the Predecessor period January 1, 2013 through
January 31, 2013 compared to the Predecessor year ended December 31, 2012
Historical: Net sales were $2,325.3 million and $186.8 million for the Successor year ended December 31, 2013 and the Predecessor period
January 1, 2013 through January 31, 2013, respectively, as compared to net sales of $2,479.5 million for the Predecessor year ended
December 31, 2012. Net sales growth for the Predecessor period January 1, 2013 through January 31, 2013 and the Successor year ended
December 31, 2013 was primarily driven by higher average selling prices, which contributed to net sales growth of 5.9%. These increases were
offset by lower volumes, which decreased net sales by 3.4%. Weakening foreign currency exchange rates compared to the U.S. dollar primarily
related to certain currencies within the Latin America region also had a negative impact on sales of 1.2%.
Adjusted EBITDA was $500.2 million and $15.0 million for the Successor year ended December 31, 2013 and the Predecessor period January 1,
2013 through January 31, 2013, respectively, compared to Adjusted EBITDA of $426.0 million for the Predecessor year ended December 31,
2012. This increase was driven primarily by the absence of $77.6 million in the Predecessor year ended December 31, 2012 related to the addback of corporate allocations from DuPont to DPC for estimated standalone entity benefits. The remaining increase was driven by lower raw
material input costs and fixed manufacturing costs, partially resulting from our purchasing and operational improvement initiatives and price
increases. These factors were slightly offset by the negative impact of weakening foreign currency exchange rates compared to the U.S. dollar,
which were primarily related to certain currencies within the Latin America region, and contributed to a reduction in Adjusted EBITDA.
Pro Forma: Net sales increased $32.6 million, or 1.3%, to $2,512.1 million for the Pro Forma year ended December 31, 2013, as compared to
net sales of $2,479.5 million for the Predecessor year ended December 31, 2012. Net sales growth was primarily driven by higher average selling
prices, which contributed to net sales growth of 5.9%. These increases were offset by lower volumes, which decreased net sales by 3.4%.
Weakening foreign currency exchange rates compared to the U.S. dollar primarily related to certain currencies within the Latin America region
also had a negative impact on sales of 1.2%.
Adjusted EBITDA increased $15.1 million, or 3.0%, to $518.7 million for the Pro Forma year ended December 31, 2013 as compared to $503.6
million for the Predecessor year ended December 31, 2012. As a percentage of net sales, Adjusted EBITDA increased to 20.6% from 20.3%.
This increase was driven by lower raw material input costs and fixed manufacturing costs, partially resulting from our purchasing and
operational improvement initiatives and price increases. These factors were slightly offset by the negative impact of weakening foreign currency
exchange rates compared to the U.S. dollar, which were primarily related to certain currencies within the Latin America region, and contributed
to a reduction in Adjusted EBITDA.
Predecessor year ended December 31, 2012 compared to the Predecessor year ended December 31, 2011
Historical: Net sales decreased $144.2 million, or 5.5%, to $2,479.5 million for the Predecessor year ended December 31, 2012, as compared to
net sales of $2,623.7 million for the Predecessor year ended December 31, 2011. Our net sales decrease was primarily driven by overall lower
sales volumes, which contributed to a net
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sales decline of 5.5% and were primarily concentrated in Southern Europe, where difficult economic conditions resulted in fewer repairs in our
refinish end-market. The negative impact of weakening foreign currency exchange rates contributed to a net sales decline of 4.7%, primarily
from the weakening of the Euro and certain currencies within the Latin America region compared to the U.S. dollar. These factors were partially
offset by higher average selling prices, which contributed to net sales growth of 4.7%.
Adjusted EBITDA increased $10.1 million, or 2.4%, to $426.0 million for the Predecessor year ended December 31, 2012 compared to Adjusted
EBITDA of $415.9 million for the Predecessor year ended December 31, 2011. As a percentage of net sales, Adjusted EBITDA increased to
17.2% from 15.9%, primarily driven by price increases. Unfavorable currency exchange rates also contributed to a reduction in Adjusted
EBITDA which was primarily due to the weakening of the Euro and certain currencies concentrated in the Latin America region.
Transportation Coatings Segment
Successor year ended December 31, 2013, Pro Forma year ended December 31, 2013 and the Predecessor period January 1, 2013 through
January 31, 2013 compared to the Predecessor year ended December 31, 2012
Historical: Net sales were $1,625.8 million and $139.4 million for the Successor year ended December 31, 2013 and the Predecessor period
January 1, 2013 through January 31, 2013, respectively, as compared to net sales of $1,739.9 million for the Predecessor year ended
December 31, 2012. Net sales growth for the Predecessor period January 1, 2013 through January 31, 2013 and the Successor year ended
December 31, 2013 was primarily driven by higher average selling prices, which contributed to a 6.8% net sales growth. Lower sales volumes
contributed to a net sales decline of 3.7%, and the negative currency impact from weakening foreign currency exchange rates compared to the
U.S. dollar primarily related to certain currencies within the Latin America region contributed to a net sales decline of 1.6%.
Adjusted EBITDA was $198.8 million and $17.7 million for the Successor year ended December 31, 2013 and the Predecessor period January 1,
2013 through January 31, 2013, respectively, compared to Adjusted EBITDA of $151.6 million for the Predecessor year ended December 31,
2012. The increase in Adjusted EBITDA from the Predecessor year ended December 31, 2012 was primarily driven by selective price increases
as well as the absence of $6.6 million related to the add-back of corporate allocations from DuPont to DPC for estimated standalone entity
benefits. Additionally, unfavorable currency exchange rates, which were primarily concentrated in the Latin America region, slightly offset these
increases, and contributed to a reduction in Adjusted EBITDA.
Pro Forma: Net sales increased $25.3 million, or 1.5%, to $1,765.2 million for the Pro Forma year ended December 31, 2013, as compared to
net sales of $1,739.9 million for the Predecessor year ended December 31, 2012. Net sales growth was primarily driven by higher average selling
prices, which contributed to a 6.8% net sales growth. Lower sales volumes contributed to a net sales decline of 3.7%, and the negative currency
impact from weakening foreign currency exchange rates compared to the U.S. dollar primarily related to certain currencies within the Latin
America region contributed to a net sales decline of 1.6%.
Pro Forma: Adjusted EBITDA increased $67.3 million, or 44.4%, to $218.9 million for the Pro Forma year ended December 31, 2013 as
compared to $151.6 million for the Predecessor year ended December 31, 2012. As a percentage of net sales, Adjusted EBITDA increased to
12.4% from 8.7%, driven primarily by selective price increases. Unfavorable currency exchange rates, which were primarily concentrated in the
Latin America region, slightly offset these increases, and contributed to a reduction in Adjusted EBITDA.
Predecessor year ended December 31, 2012 compared to the Predecessor year ended December 31, 2011
Historical: Net sales increased $82.1 million, or 5.0%, to $1,739.9 million for the Predecessor year ended December 31, 2012, as compared to
net sales of $1,657.8 million for the Predecessor year ended December 31, 2011. Net sales growth was driven by increased volumes, which
contributed to net sales growth of 2.6%, and
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higher average selling prices, which contributed to net sales growth of 7.8%. These factors were partially offset by the negative currency impact
from weakening foreign currency exchange rates compared to the U.S. dollar primarily related to the Euro and certain currencies within the Latin
America region, which contributed to a net sales decline of 5.4%.
Adjusted EBITDA increased $89.1 million, or 142.6%, to $151.6 million for the Predecessor year ended December 31, 2012 compared to
Adjusted EBITDA of $62.5 million for the Pro Forma Predecessor year ended December 31, 2011. As a percentage of net sales, Adjusted
EBITDA increased to 8.7% from 3.8%, driven primarily by selective price increases. Unfavorable currency exchange rates also contributed to a
reduction in Adjusted EBITDA, which was primarily due to the weakening of the Euro and certain currencies concentrated in the Latin America
region.
Liquidity and Capital Resources
February 2013 DPC Acquisition and Related Financing
On August 30, 2012, Axalta Bermuda entered into a purchase agreement (the “Acquisition Agreement”) with DuPont pursuant to which Axalta
Bermuda and certain of its indirect subsidiaries acquired DPC, including certain assets of DPC and all of the capital stock and other equity
interests of certain entities engaged in the DPC business, from DuPont for a purchase price of $4,925.9 million plus or minus a working capital
and pension adjustment. On February 1, 2013, Axalta Bermuda completed the acquisition of DPC. The Company and DuPont finalized the
working capital and pension adjustments to the purchase price during the year ended December 31, 2013, which resulted in a reduction to the
purchase price of $18.6 million to $4,907.3 million.
The purchase price was funded by (i) the Equity Contribution, (ii) proceeds from Senior Secured Credit Facilities consisting of a $2,300.0
million Dollar Term Loan facility and a €400.0 million Euro Term Loan facility and (iii) proceeds from the issuance of $750.0 million aggregate
principal amount of Dollar Senior Notes and the issuance of €250.0 million Euro Senior Notes.
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Cash Flows
Successor six-month period ended June 30, 2014 compared to Successor six-month period ended June 30, 2013 and Predecessor period
January 1, 2013 through January 31, 2013
The table below summarizes our primary sources and uses of cash for the Successor six-month periods ended June 30, 2014 and 2013 and the
Predecessor period January 1, 2013 through January 31, 2013.
Predecessor
January 1
through
January 31,
2013
(dollars in millions)
Net cash provided by (used in):
Operating activities:
Net income (loss)
Depreciation and amortization
Deferred income taxes
Amortization of deferred financing fees and OID
Fair value of acquired inventory sold
Foreign exchange losses (gains)
Bridge financing commitment fees
Other non-cash items
Net income adjusted for non-cash items
$
Changes in operating assets and liabilities
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
$
Successor
Six Months Ended June 30,
2013
2014
8.5
9.9
9.1
—
—
4.5
—
(3.9)
28.1
$ (178.3)
140.6
(58.5)
8.3
103.7
35.2
25.0
(9.2)
66.8
$ 52.1
152.9
(14.1)
10.3
—
(19.2)
—
3.2
185.2
(65.8)
(37.7)
(8.3)
43.0
—
(3.0)
94.8
161.6
(4,872.2)
5,095.8
—
$ 385.2
(171.5)
13.7
(102.8)
(12.2)
(7.7)
$(109.0)
Six months ended June 30, 2014 (Successor)
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the six months ended June 30, 2014 was $13.7 million. Net income before deducting depreciation,
amortization and other non-cash items generated cash of $185.2 million. This was substantially offset by net increases in working capital of
$171.5 million. The most significant drivers in working capital were increases in receivables and inventory of $112.3 million and $24.3 million,
respectively, due primarily to increased sales compared to seasonally lower sales in the month of December and inventory builds in anticipation
of certain information technology transition projects and to support ongoing operational demands compared to December 2013, as well as
reductions of other accrued liabilities of $47.6 million primarily related to annual compensation payments, nonrecurring transition costs and
semi-annual interest payments associated with our Senior Notes.
Net Cash Used for Investing Activities
Net cash used for investing activities for the six months ended June 30, 2014 was $102.8 million. This use was driven primarily by purchases of
property, plant and equipment of $100.8 million and an increase of $1.9 million in restricted cash. Purchases of property, plant and equipment
includes approximately $57.0 million associated with our transition-related capital projects including our information technology systems and
finalization of our transition of our global office relocations.
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Net Cash Used for Financing Activities
Net cash used for financing activities for the six months ended June 30, 2014 was $12.2 million. The change was primarily driven by repayments
of short term borrowings and term loans of $17.2 million and $7.1 million, respectively, partially offset by proceeds received from short-term
borrowing during the period of $16.7 million. During the six months ended June 30, 2014, we paid $3.0 million in fees related to the
Refinancing (See Note 18 to our Unaudited Condensed Consolidated Financial Statements contained elsewhere in this prospectus).
Six months ended June 30, 2013 (Successor)
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the Successor six months ended June 30, 2013 was $161.6 million. Net loss, before deducting
depreciation and amortization and other non-cash items, provided cash of $66.8 million.
Increases in accounts payable and other accrued liabilities favorably impacted cash flow from operations by $47.6 million and $74.9 million,
respectively. The increase in accounts payable was due in part to the inclusion of amounts due DuPont for services rendered pursuant to
transition service agreements and for purchases of materials. Prior to the Acquisition, transactions between DuPont and DPC were deemed to be
settled immediately through the parent company net investment. Subsequent to the Acquisition, amounts due to DuPont are presented as a
component of trade accounts payable. Timing of disbursements also contributed to the increase in accounts payable. The increase in other
accrued liabilities was primarily related to accrued interest on the Senior Notes as well as accruals related to annual employee performance
related benefits. A decrease in inventories resulted in a generation of cash of $35.5 million. An increase in trade and notes receivable resulted in
a use of cash of $37.8 million. All other operating assets and liabilities netted to a $25.4 million use of cash including funding of our transaction
expenses of $29.0 million, which were incurred during the Successor period August 24, 2012 through December 31, 2012.
Net Cash Used for Investing Activities
During the Successor six months ended June 30, 2013, we acquired DPC for a preliminary purchase price of $4,906.7 million. Cash acquired
was $79.7 million, which resulted in a net cash outflow of $4,827.0 million to acquire DPC.
During the Successor six months ended June 30, 2013, we entered into a foreign currency contract to hedge the variability of the U.S. dollar
equivalent of the borrowings under the Euro Term Loan and the proceeds from the issuance of Euro Senior Notes. Net cash used to settle the
derivative instrument was $19.4 million.
Purchases of property, plant and equipment during the Successor six months ended June 30, 2013 were $23.4 million.
Net Cash Provided by Financing Activities
As part of the Transactions, Carlyle made the Equity Contribution of $1,350.0 million. Borrowings during the Successor six months ended
June 30, 2013 included $2,817.3 million of proceeds from borrowings under our Senior Secured Credit Facilities, net of original issue discount
of $25.7 million, and the issuance of our Senior Notes in the amount of $1,089.4 million. Borrowings during the Successor six months ended
June 30, 2013 also included short-term borrowings of $5.0 million payable to foreign credit institutions.
During the Successor six months ended June 30, 2013, we paid $126.0 million of deferred financing costs associated with entering into the
Dollar Senior Notes, Euro Senior Notes and Senior Secured Credit Facilities and $25.0 million of commitment fees related to the Bridge Facility.
During the Successor six months ended June 30, 2013, dividends paid to noncontrolling interests totaled $4.1 million.
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January 1, 2013 through January 31, 2013 (Predecessor)
Net Cash Used for Operating Activities
Net cash used for operating activities for the Predecessor period from January 1, 2013 through January 31, 2013 was $37.7 million. Net income,
before deducting depreciation and amortization and other non-cash items, generated cash of $28.1 million.
An increase in inventories resulted in a use of cash of $19.3 million. Decreases in other accrued liabilities and accounts payable resulted in a use
of cash of $43.8 million and $29.9 million, respectively. The decrease in other current liabilities was primarily due to reductions in compensation
and other employee-related cost liabilities related to payment of annual incentive compensation, a reduction in the liabilities for discounts,
rebates and warranties related to payments under annual rebate programs and a reduction in our foreign currency contracts derivatives liability.
The reduction in accounts payable was primarily related to timing of vendor payments. Partially offsetting these items was a decrease in trade
accounts and notes receivable, which provided cash of $25.8 million. All other operating assets and liabilities netted to a $1.4 million generation
of cash.
Net Cash Used for Investing Activities
During the Predecessor period January 1, 2013 through January 31, 2013, net cash used in investing activities was $8.3 million. Purchases of
property, plant and equipment and intangible assets during the Predecessor period January 1, 2013 through January 31, 2013 were $2.4 million
and $6.3 million, respectively.
Net Cash Provided by Financing Activities
During the Predecessor period January 1, 2013 through January 31, 2013, net cash provided by financing activities was $43.0 million, which
mainly represents the net cash used by operating activities and net cash used in investing activities discussed above as a result of DuPont’s
centralized cash management system.
Successor year ended December 31, 2013 and Predecessor year ended December 31, 2012 compared to 2011
Predecessor
Year Ended
December 31,
2011
2012
(dollars in millions)
January 1
through
January 31,
2013
Successor
August 24
through
Year Ended
December 31,
December 31,
2012
2013
$
Net cash provided by (used in):
Operating activities:
Net income (loss)
Depreciation and amortization
Deferred income taxes
Fair value of acquired inventory sold
Foreign exchange losses (gains)
Bridge financing commitment fees
Other non-cash items
Net income (loss) adjusted for non-cash items
$ 181.5
108.7
3.5
—
—
—
3.1
296.8
$ 247.8
110.7
9.1
—
—
—
7.6
375.2
$
8.5
9.9
9.1
—
4.5
—
(3.9)
28.1
Changes in operating assets and liabilities
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
(60.6)
236.2
(116.6)
(125.1)
2.4
$ (3.1)
13.6
388.8
(88.2)
(290.6)
(0.1)
$ 9.9 $
(65.8)
(37.7)
(8.3)
43.0
—
(3.0)
93
$
(29.0)
—
—
—
—
—
—
(29.0)
29.0
—
—
—
—
—
$
(218.9)
300.7
(120.8)
103.7
48.9
25.0
39.0
177.6
199.2
376.8
(5,011.2)
5,098.1
(4.4)
$
459.3
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Year ended December 31, 2013 (Successor)
Net Cash Provided by Operating Activities
Cash provided by operating activities was $376.8 million for the Successor year ended December 31, 2013. The cash flow from operations was
the result of cash flows generated by operating earnings and reductions in net working capital, partially offset by merger and acquisition related
costs and transition costs associated with our separation from DuPont. An increase in trade and notes receivable was due largely to higher sales
levels during the Successor year ended December 31, 2013 resulted in an outflow of cash of $6.4 million. A decrease in inventories resulted in a
generation of cash of $33.9 million. The decrease in inventories was primarily the result of the continued focus on working capital levels relative
to demand and lower raw material costs. An increase in accounts payable favorably impacted cash flow from operations by $67.1 million. The
increase in accounts payable was due in part to the separation from DuPont in February 2013, which resulted in the establishment of new credit
terms with our new vendors as a standalone company, including certain raw materials contracts with DuPont, which were historically related
party purchases in the Predecessor period. Prior to the Acquisition, transactions between DuPont and DPC were deemed to be settled
immediately through the parent company net investment. Further contributing to the cash flows provided by operating activities was an increase
in accrued liabilities of $193.1 million related to the timing of cash payments for annual employee performance related benefits, which were paid
by DuPont for the 2012 performance period. The remaining increases in accrued liabilities had no impact on cash flows from operations,
including severance-related liabilities and transition-related expenses, which had been accrued as of December 31, 2013 and had an offsetting
impact within Net income (loss). Offsetting this operating activity was cash used in operating activities related to the restructuring activities
during the year ended December 31, 2013, for which $23.7 million of payments were made.
Net Cash Used for Investing Activities
During the Successor year ended December 31, 2013, we acquired DPC for a purchase price of $4,907.3 million. Cash acquired was $79.7
million, which resulted in a net cash outflow of $4,827.6 million to acquire DPC.
During the Successor year ended December 31, 2013, we entered into a foreign currency contract to hedge the variability of the U.S. dollar
equivalent of the original borrowings under the Euro Term Loan and the proceeds from the issuance of Euro Senior Notes. Net cash used to
settle the derivative instrument was $19.4 million. Additionally, we purchased a €300.0 million 1.5% interest rate cap on our Euro Term Loan
for a premium of $3.1 million.
Purchases of property, plant and equipment during the Successor year ending December 31, 2013, were $107.3 million, which included
transition costs related to our transition to a standalone entity, which included costs to transition off of the DuPont information technology
systems. In addition to the transition costs, we incurred costs for several growth and improvement initiatives including the waterborne projects in
Jiading, China and Front Royal, Virginia.
During the Successor year ended December 31, 2013, we also invested $54.5 million for a real estate property.
Net Cash Provided by Financing Activities
As part of the Acquisition, on February 1, 2013 Carlyle made the Equity Contribution of $1,350.0 million. Further, there were additional equity
contributions of $5.4 million during the Successor year ended December 31, 2013.
Borrowings during the Successor year ended December 31, 2013 included $2,817.3 million of proceeds from borrowings under our Senior
Secured Credit Facilities, net of original issue discount of $25.7 million, and the issuance of our Senior Notes in the amount of $1,089.4 million.
We paid $126.0 million of deferred financing costs associated with issuing the Dollar Senior Notes and Euro Senior Notes and entering into the
Senior Secured
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Credit Facilities and $25.0 million of commitment fees related to the Bridge Facility. Other short-term borrowings during the Successor year
ended December 31, 2013 also included short-term borrowings of $38.8 million.
During the Successor year ended December 31, 2013, we made our required quarterly amortization payments on the Dollar Term Loan and Euro
Term Loan totaling $21.3 million, as well as payments of $25.3 million on short-term borrowings.
During the Successor year ended December 31, 2013, dividends paid to noncontrolling interests totaled $5.2 million.
Years ended December 31, 2012 and 2011 (Predecessor)
Net Cash Provided by Operating Activities
Cash provided by operating activities was $388.8 million for the Predecessor year ended December 31, 2012. This increase compared to the
Predecessor year ended December 31, 2011 was driven by higher net income of $66.3 million, and increases in cash generated by operating
assets and liabilities. Cash provided by net income adjusted for other non-cash income statement items totaled $375.2 million for the Predecessor
year ended December 31, 2012 compared to $296.8 million for the Predecessor year ended December 31, 2011. Cash provided by operating
assets and liabilities totaled $13.6 million for the year ended December 31, 2012. Increases in accounts payable and other current liabilities, of
$53.1 million and $36.4 million, respectively, primarily related to increased employee incentive compensation and transition related liabilities,
were partially offset by increases in trade accounts and notes receivable of $58.9 million and decreases in other liabilities of $25.9 million. Cash
used by operating assets and liabilities totaled $60.6 million for the Predecessor year ended December 31, 2011. Decreases in other accrued
liabilities and other liabilities resulted in a use of cash of $60.5 million. These decreases primarily related to payments related to our
restructuring programs.
Cash Used for Investing Activities
Cash used for investing activities decreased $28.4 million for the Predecessor year ended December 31, 2012 compared to the Predecessor year
ended December 31, 2011. The decrease was primarily driven by lower acquisitions of property, plant and equipment and intangibles.
Cash Used for Financing Activities
Cash used for financing activities increased $165.5 million for the Predecessor year ended December 31, 2012 compared to the Predecessor year
ended December 31, 2011, which mainly represents the net cash provided by operating activities less net cash used in investing activities
discussed above as a result of DuPont’s centralized cash management system, as well as DuPont incurring costs on behalf of DPC. The increase
in cash used for financing activities was the result of higher cash provided by operating activities for the year ended December 31, 2012 in
relation to the year ended December 31, 2011 as discussed above.
Indebtedness
Our liquidity requirements are significant due to the highly leveraged nature of our company as well as our working capital requirements. At
June 30, 2014, there were no borrowings under the Revolving Credit Facility with total availability under the Revolving Credit Facility of $378.5
million, all of which may be borrowed by us without violating any covenants under the credit agreement governing such facility or the
indentures governing the Dollar Senior Notes and the Euro Senior Notes. As of June 30, 2014, we had $3,900.9 million in outstanding
indebtedness and $971.4 million in working capital including $350.3 million in cash and cash equivalents.
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The following table details our borrowings outstanding as of June 30, 2014 and the associated interest expense, including amortization of debt
issuance costs and debt discounts, and average effective interest rates for such borrowings for the Successor six-month period ended June 30,
2014:
(dollars in millions)
Principal
balance as of
June 30, 2014
Term Loans
Revolving Credit Facility
Senior Notes
Short-term borrowings
Total
$ 2,795.3
—
1,090.4
15.2
$ 3,900.9
Average Effective
Interest
Expense, for
Interest Rate, for
Successor Period
Successor
Period
4.9%
$
N/A
7.5%
Various
$
66.5
2.4
39.6
0.8
109.3
The following table details our borrowings outstanding as of December 31, 2013 and the associated interest expense, including amortization of
debt issuance costs and debt discounts, and average effective interest rates for such borrowings for the Successor year ended December 31, 2013:
Principal
balance as of
December 31,
(dollars in millions)
Term Loans
Revolving Credit Facility
Senior Notes
Short-term borrowings
Total
2013
$ 2,807.8
—
1,094.9
18.2
$ 3,920.9
Average Effective
Interest
Expense, for
Interest Rate, for
Successor Period
Successor
Period
5.6%
$
N/A
7.5%
Various
$
139.0
4.5
71.8
1.4
216.7
As a result of the Refinancing, which is discussed below, we anticipate our annual cash interest expense to be approximately $193 million, which
reflects an additional 25 basis point reduction as our Total Net Leverage Ratio was less than 4.50:1.00 as of June 30, 2014.
Senior Secured Credit Facilities
On February 1, 2013, we entered into the Senior Secured Credit Facilities. Costs of $92.9 million related to the issuance of the Senior Secured
Credit Facilities are recorded within “Deferred financing costs, net” and are being amortized as interest expense over the life of the Senior
Secured Credit Facilities. At December 31, 2013, the remaining unamortized balance of such costs was $81.2 million. Original issue discount of
$25.7 million related to the Senior Secured Credit Facilities is recorded as a reduction of the principal amount of the borrowings and is amortized
as interest expense over the life of the Senior Secured Credit Facilities. At December 31, 2013, the remaining unamortized original issue
discount was $22.7 million. At December 31, 2013 and June 30, 2014, there were no borrowings under the Revolving Credit Facility. At
December 31, 2013 and June 30, 2014, letters of credit issued under the Revolving Credit Facility totaled $20.7 million and $21.5 million,
respectively, which reduced the availability under the Revolving Credit Facility. Availability under the Revolving Credit Facility was $379.3
million and $378.5 million at December 31, 2013 and June 30, 2014, respectively.
On February 3, 2014, we executed the second amendment to the Senior Secured Credit Facilities. 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”). The New Dollar Term Loans are
subject to an Adjusted Eurocurrency Rate or Base Rate (each as defined in the credit agreement governing the Senior Secured Credit Facilities)
floor of 1.00% and 2.00%, respectively (the “Interest Rate Floor”), plus an applicable rate. The applicable rate for such New Dollar Term Loans
is 3.00% per annum for Eurocurrency Rate Loans (as defined in
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the credit agreement governing the Senior Secured Credit Facilities) and 2.00% per annum for Base Rate Loans (as defined in the credit
agreement governing the Senior Secured Credit Facilities). 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 the Interest Rate Floor, plus an applicable rate.
The applicable rate for such New Euro Term Loans is 3.25% per annum for Eurocurrency Rate Loans. The 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.
The credit agreement governing the Senior Secured Credit Facilities requires us to comply with certain affirmative and negative covenants. As of
June 30, 2014 and December 31, 2013, we were in compliance with all such covenants. All obligations under the Term Loans and Revolving
Facility are guaranteed and collateralized by substantially all the tangible and intangible assets of the Company and its subsidiaries.
Senior Notes
On February 1, 2013, Axalta Coating Systems U.S. Holdings, Inc. (f/k/a U.S. Coatings Acquisition Inc.) and Axalta Coating Systems Dutch
Holding B B.V. (f/k/a Flash Dutch 2 B.V.), our indirect wholly owned subsidiaries (the “Issuers”), offered and sold $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 offered and sold €250.0 million aggregate principal amount of 5.750% senior secured notes due 2021 (the “Euro Senior Notes”) and
related guarantees thereof. Cash fees related to the issuance of the Senior Notes were $33.1 million, are recorded as “Deferred financing costs”
and are amortized as interest expense over the life of the Notes. At June 30, 2014 and December 31, 2013, the remaining unamortized balance of
such costs was $27.4 million and $29.4 million, respectively. The Senior Notes are unconditionally guaranteed on a senior basis by 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 repurchases of 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.
The Euro Senior Notes were sold at par and are due February 1, 2021. The Euro Senior Notes bear interest at 5.750% 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 within “Deferred financing
costs, net” and are amortized as interest expense over the life of the Senior Notes. At June 30, 2014 and December 31, 2013, the remaining
unamortized balance is $8.4 million and $9.0 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 Senior Notes Percentage
2016
2017
2018
2019 and thereafter
104.313%
102.875%
101.438%
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 their issue date until
February 1, 2016 at a redemption price of 103.0%, plus accrued and unpaid interest, if any, to the
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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.
The Dollar Senior Notes were sold at par and are due May 1, 2021. The Dollar Senior Notes bear interest at 7.375% payable semi-annually on
February 1 and August 1. Cash fees related to the issuance of the Dollar Senior Notes were $22.9 million, are recorded within “Deferred
financing costs, net” and are amortized as interest expense over the life of the Senior Notes. At June 30, 2014 and December 31, 2013, the
remaining unamortized balance of such fees was $19.0 million and $20.4 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 Senior Notes Percentage
2016
2017
2018
2019 and thereafter
105.531%
103.688%
101.844%
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.
Other short-term borrowings had an outstanding balance of $15.2 million and $18.2 million at June 30, 2014 and December 31, 2013,
respectively.
Capital Resources
We had cash and cash equivalents at June 30, 2014 and December 31, 2013 of $350.3 million and $459.3 million, respectively. Of these
balances, $288.9 million and $385.2 million were maintained in non-U.S. jurisdictions as of June 30, 2014 and December 31, 2013, respectively.
We believe our organizational structure allows us the necessary flexibility to move funds throughout our subsidiaries to meet our operational
working capital needs.
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Our primary sources of liquidity are cash on hand, cash flow from operations and available borrowing capacity under our Revolving Credit
Facility. Based on our forecasts, we believe that cash flow from operations, available cash on hand and available borrowing capacity under our
Senior Secured Credit Facilities and existing lines of credit will be adequate to service debt, fund the transition-related costs, meet liquidity
needs and fund necessary capital expenditures for the next twelve months.
Our ability to make scheduled payments of principal or interest on, or to refinance, our indebtedness or to fund working capital requirements,
capital expenditures and other current obligations will depend on our ability to generate cash from operations. Such cash generation is subject to
general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
If required, our ability to raise additional financing and our borrowing costs may be impacted by short and long-term debt ratings assigned by
independent rating agencies, which are based, in significant part, on our performance as measured by certain credit metrics such as interest
coverage and leverage ratios. Our highly leveraged nature may limit our ability to procure additional financing in the future.
Purchases of property, plant and equipment for 2014 are expected to be approximately $170 million, of which approximately $60 million will be
related to maintenance capital expenditures and the remainder consists of growth and transition-related capital expenditures. The key growth
projects include the following:
•
In May 2013, we announced that we will expand our existing facility in Jiading, China to manufacture and supply paint to
automobile manufacturers that are expanding into south and central China. We began expansion of the facility with production
expected to begin in 2015.
•
In February 2014, we began the next phase of construction to significantly expand our waterborne production capacity in Guarulhos,
Brazil. The additional facility will more than double capacity, which will help meet the growing demands of the OEMs in South
America where increases in the car parcs are forecast to continue. The additional production is expected to come on line in 2015.
•
In February 2014, we announced a commitment to build a next-generation facility that will expand capacity to provide waterborne
industrial coatings within Wuppertal, Germany. Production at the new operations center is expected to begin in the first quarter of
2015.
For years ending December 31, 2011, 2012 and 2013, our maintenance capital expenditures have ranged from approximately $59 million to $67
million and our growth-related capital expenditures have ranged from approximately $12 million to $16 million. Capital expenditures during the
2013 fiscal year totaled approximately $110 million, which included approximately $38 million of transition-related capital expenditures.
Recent Accounting Guidance
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“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 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early
adoption is not permitted. 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.
Quantitative And Qualitative Disclosures About Market Risk
We are exposed to changes in interest rates and foreign currency exchange rates because we finance certain operations through fixed and
variable rate debt instruments and denominate our transactions in a variety of foreign currencies. We are also exposed to changes in the prices of
certain commodities that we use in production. Changes in these rates and commodity prices may have an impact on future cash flow and
earnings.
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We manage these risks through normal operating and financing activities and, when deemed appropriate, through the use of derivative financial
instruments. We do not enter into financial instruments for trading or speculative purposes.
By using derivative instruments, we are subject to credit and market risk. The fair market value of the derivative instruments is determined by
using valuation models whose inputs are derived using market observable inputs, including interest rate yield curves, as well as foreign exchange
and commodity spot and forward rates, and reflects the asset or liability position as of the end of each reporting period. When the fair value of a
derivative contract is positive, the counterparty owes us, thus creating a receivable risk for us. We are exposed to counterparty credit risk in the
event of non-performance by counterparties to our derivative agreements. We minimize counterparty credit (or repayment) risk by entering into
transactions with major financial institutions of investment grade credit rating.
Our exposure to market risk is not hedged in a manner that completely eliminates the effects of changing market conditions on earnings or cash
flow.
Interest rate risk
We are subject to interest rate market risk in connection with our borrowings. A one-eighth percent change in the applicable interest rate for
borrowings under the Senior Secured Credit Facilities (assuming the Revolving Credit Facility is undrawn and to the extent that the
Eurocurrency Rate (as defined in the credit agreement governing the Senior Secured Credit Facilities) is in excess of the floor rate of the Senior
Secured Credit Facilities) would have an annual impact of approximately $1.2 million on cash interest expense considering the impact of our
hedging positions currently in place.
We selectively use derivative instruments to reduce market risk associated with changes in interest rates. The use of derivatives is intended for
hedging purposes only and we do not enter into derivative instruments for speculative purposes. During the Successor 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 our
variable rate borrowings under the Senior Secured Credit Facilities. The interest rate swaps were designated and qualified as cash flow hedges.
In addition to interest rate swaps, we purchased a €300.0 million 1.5% interest rate cap on our Euro Term Loan that matures on September 29,
2017. The interest rate cap is not designated as a hedging instrument. As such, the changes in fair values of the derivatives are recorded in
interest expense in the current period.
As discussed in Note 22 to the notes to our audited financial statements, we have taken additional measures to reduce our cost of borrowing by
entering into an amendment to the Senior Secured Credit Facilities as of February 3, 2014. The re-pricing enacted pursuant to the amendment
reduces the margin applicable to our cost of borrowing from 3.5% to 3.0% for Eurocurrency Rate Loans and from 2.5% to 2.0% for Base Rate
Loans and our cost of borrowing under the Euro Term Loan facility from 4.0% to 3.25%. The amendment provides for an additional reduction of
these rates by 25 basis points if the Total Net Leverage Ratio is less than or equal to 4.50:1.00. In addition, the LIBOR floor on each term loan
was reduced from 1.25% to 1.00% and the base rate floor on the Dollar Term Loan facility was reduced from 2.25% to 2.0%.
Foreign exchange rates risk
We are exposed to foreign currency risk by virtue of our international operations. The majority of our net sales for both the Pro Forma year
ended December 31, 2013 and the Predecessor year ended December 31, 2012 were from operations/sales outside the United States.
In the majority of our jurisdictions, we earn revenue and incur costs in the local currency of such jurisdiction. We incur significant costs in
foreign currencies including the Euro, Mexican peso, Brazilian real, the Chinese yuan/renminbi and the Venezuelan bolívar. As a result,
movements in exchange rates could cause our expenses to
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fluctuate, impacting our future profitability and cash flows. Our purchases of raw materials in Latin America, EMEA and Asia Pacific and future
business operations and opportunities, including the continued expansion of our business outside North America, may further increase the risk
that cash flows resulting from these activities may be adversely affected by changes in currency exchange rates. If and when appropriate, we
intend to manage these risks through foreign currency hedges and/or by utilizing local currency funding of these expansions. We do not intend to
hold financial instruments for trading or speculative purposes.
Our Euro Senior Notes and the Euro Term Loan are denominated in Euro. As a result, movements in the Euro exchange rate in relation to the
U.S. dollar could cause the amount of Euro Senior Notes and Euro Term Loan borrowings to fluctuate, impacting our future profitability and
cash flows.
Additionally, in order to fund the purchase price for certain assets of DPC and the capital stock and other equity interests of certain non-U.S.
entities, a combination of equity contributions and intercompany loans were utilized to capitalize certain non-U.S. subsidiaries. In certain
instances, the intercompany loans are denominated in currencies other than the functional currency of the affected subsidiaries. Where
intercompany loans are not a component of permanently invested capital of the affected subsidiaries, increases or decreases in the value of the
subsidiaries’ functional currency against other currencies will affect our results of operations.
Commodity price risk
We are subject to changes in our cost of sales caused by movements in underlying commodity prices (primarily oil and natural gas).
Approximately 50% of our cost of sales is represented by raw materials. A substantial portion of the purchased raw materials include monomers,
pigments, resins and solvents. Our price fluctuations generally follow industry indices. We historically have not entered into long-term purchase
contracts related to the purchase of raw materials. If and when appropriate, we intend to manage these risks using purchase contracts with our
suppliers.
Treasury policy
Our treasury policy seeks to ensure that adequate financial resources are available for the development of our businesses while managing our
currency and interest rate risks. Our policy is to not engage in speculative transactions. Our policies with respect to the major areas of our
treasury activity are set forth above.
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Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2013:
(dollars in millions)
Contractual Obligations
Debt, including current portion (1)
Senior Secured Credit Facilities, consisting of the following:
Term Loan Facilities:
Dollar Term Loan
Euro Term Loan
Senior Notes, consisting of the following:
Dollar Senior Notes
Euro Senior Notes
Other borrowings
Interest payments (1)
Operating Leases
Pension contributions (2)
Purchase obligations
Transition service agreements (3)
Uncertain tax positions, including interest and penalties (4)
Management fee (5)
Total
(1)
(2)
(3)
(4)
(5)
Obligations Due In:
2015-2016
2017-2018
Total
2014
$2,282.8
547.7
$ 23.0
5.5
$
750.0
344.9
18.2
1,415.2
138.6
18.9
19.4
47.0
—
27.8
$5,610.5
—
—
18.2
215.7
34.3
18.9
6.1
47.0
—
3.0
$371.7
—
—
—
427.2
50.3
—
11.1
—
—
6.0
$ 551.6
46.0
11.0
$
Thereafter
46.0
11.0
$ 2,167.8
520.2
—
—
—
419.8
29.0
—
1.1
—
—
6.0
$ 512.9
750.0
344.9
—
352.5
25.0
—
1.1
—
—
12.8
$ 4,174.3
Amounts assume that the Senior Secured Credit Facilities and Senior Notes are repaid upon maturity, and the Revolving Credit Facility
remains undrawn, which may or may not reflect future events. Future interest payments include commitment fees on the unused portion of
the Revolving Credit Facility, and reflect the interest payments on our Dollar Term Loan, Euro Term Loan and the Senior Notes. Future
interest payments assume December 31, 2013 interest rates will prevail throughout all future periods. Actual interest payments and
repayment amounts may change.
We expect to make contributions to our defined benefit pension plans beyond 2014; however, the amount of any contributions is dependent
on the future economic environment and investment returns, and we are unable to reasonably estimate the pension contributions beyond
2014.
We have various Transition Service Agreements with DuPont, which are generally cancellable on 90-days’ notice. These amounts reflect
our estimated liability through January 2015.
As of December 31, 2013, we had approximately $20.1 million of uncertain tax positions, including interest and penalties. Due to the high
degree of uncertainty regards future timing of cash flows associated with these liabilities, we are unable to estimate the years in which
settlement will occur with the respective taxing authorities.
We entered into a consulting services agreement with Carlyle in connection with the Acquisition. Pursuant to this agreement, subject to
certain conditions, we are required to pay Carlyle an annual management fee of $3.0 million per year through the initial term, March 31,
2023. For years beyond 2023, we are unable to estimate the management fees. At the consummation of this offering, the consulting
services agreement will terminate. As a result, we will be responsible for a termination payment to Carlyle, which is currently estimated to
be $13.4 million dollars, and all future payment obligations set forth in this table will be terminated.
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On February 3, 2014, we completed a repricing amendment to our Senior Secured Credit Facilities (see Note 27 to our Audited Consolidated
Financial Statements contained elsewhere in this prospectus). The amendment lowered the effective interest rates on both the Dollar Term and
Euro Term Loans. As a result, the following table reflects our obligations subsequent to the amendment:
Contractual Obligations
Amended debt payments
New Dollar Term Loan
New Euro Term Loan
Interest payments
Total
2014
$2,282.8
$ 547.7
$1,284.0
$ 17.3
$ 4.1
$195.2
Obligations Due In:
2015-2016
2017-2018
$ 46.0
$ 11.0
$ 382.9
$ 46.0
$ 11.0
$ 376.3
Thereafter
$ 2,173.5
$ 521.6
$ 329.6
Off Balance Sheet Arrangements
In connection with the Acquisition, we assumed certain obligations under which we directly guarantee various debt obligations under agreements
with third parties related to equity affiliates, customers and suppliers. At June 30, 2014 (Successor), December 31, 2013 (Successor) and
December 31, 2012 (Predecessor), we had directly guaranteed $1.6 million, $1.6 million and $14.3 million of such obligations, respectively.
These 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, 2014 (Successor), December 31, 2013 (Successor) and
December 31, 2012 (Predecessor).
No other off balance sheet arrangements existed as of June 30, 2014 and December 31, 2013.
Critical Accounting Policies and Estimates
Our discussion and analysis of results of operations and financial condition are based upon our financial statements. These financial statements
have been prepared in accordance with U.S. GAAP unless otherwise noted. The preparation of these financial statements requires us to make
estimates and judgments that affect the amounts reported in the financial statements. We base our estimates and judgments on historical
experiences and assumptions believed to be reasonable under the circumstances and re-evaluate them on an ongoing basis. Actual results could
differ from our estimates under different assumptions or conditions. Our significant accounting policies, which may be affected by our estimates
and assumptions, are more fully described in Note 3 to our audited financial statements that appear elsewhere in this prospectus.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly
uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates
that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes the following critical
accounting policies reflect its most significant estimates and assumptions used in the preparation of the financial statements.
Accounting for Business Combinations
We account for business combinations under the acquisition method of accounting. This method requires the recording of acquired assets,
including separately identifiable intangible assets, and assumed liabilities at their acquisition date fair values. The excess of the purchase price
over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining the fair value of assets acquired and liabilities
assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with
respect to future cash inflows and outflows, discount rates, royalty rates, asset lives and market multiples, among other items.
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The fair values of intangible assets were estimated using an income approach, either the excess earnings method (customer relationships) or the
relief from royalty method (technology and trademarks). Under the excess earnings method, an intangible asset’s fair value is equal to the
present value of the incremental after-tax cash flows attributable solely to the intangible asset over its remaining useful life. Under the relief from
royalty method, fair value is measured by estimating future revenue associated with the intangible asset over its useful life and applying a royalty
rate to the revenue estimate. These intangible assets enable us to secure markets for our products, develop new products to meet the evolving
business needs and competitively produce our existing products.
The fair value of real properties acquired was based on the consideration of their highest and best use in the market. The fair values of property,
plant, and equipment, other than real properties, were based on the consideration that unless otherwise identified, they will continue to be used
“as is” and as part of the ongoing business. In contemplation of the in-use premise and the nature of the assets, the fair value was developed
primarily using a cost approach. The determination of the fair value of assets acquired and liabilities assumed involves assessing factors such as
the expected future cash flows associated with individual assets and liabilities and appropriate discount rates at the date of the acquisition.
The fair value of the noncontrolling interests, related to acquired joint ventures, were estimated by applying an income approach. This fair value
measurement is based on significant inputs that are not observable in the market and thus represents a fair value measurement categorized within
Level 3 of the fair value hierarchy. Key assumptions included a discount rate, a terminal value based on a range of long-term sustainable growth
rates and adjustments because of the lack of control that market participants would consider when measuring the fair value of the noncontrolling
interests.
The results of operations for businesses acquired are included in the financial statements from the date of the acquisition.
See Note 4 to our Audited Consolidated Financial Statements for further detail on the Acquisition and related accounting.
Asset Impairments
Factors that could result in future impairment charges, among others, include changes in worldwide economic conditions, changes in technology,
changes in competitive conditions and customer preferences, and fluctuations in foreign currency exchange rates. These risk factors are
discussed in “Risk Factors,” included elsewhere in this prospectus.
Goodwill
Goodwill represents costs in excess of fair values assigned to underlying net assets of acquired companies and is not amortized; instead it is
subject to annual review unless conditions arise that require a more frequent evaluation. We conducted our initial annual goodwill impairment
assessment as of October 1, 2013 and plan on conducting our annual assessment each year in October, unless conditions exist that would require
a more frequent evaluation.
In reviewing goodwill for impairment, an entity has the option to first assess qualitative factors to determine whether the existence of events or
circumstances leads to a determination that it is more likely than not (greater than 50%) that the estimated fair value of a reporting unit is less
than its carrying amount. Such qualitative factors may include the following:
•
macroeconomic conditions;
•
industry and market considerations;
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•
cost factors;
•
overall financial performance; and
•
other relevant entity-specific events.
If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to
perform the two-step quantitative impairment test; otherwise no further analysis is required. An entity also may elect not to perform the
qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test. The ultimate outcome of the goodwill
impairment review for a reporting unit should be the same whether an entity chooses to perform the qualitative assessment or proceeds directly
to the two-step quantitative impairment test.
Under the two-step quantitative impairment test, the evaluation of impairment involves comparing the current fair value of each reporting unit to
its carrying value, including goodwill.
There are several methods of estimating a reporting unit’s fair value, including market quotations, underlying asset and liability fair value
determinations, and other valuation techniques, such as discounted projected future net earnings or net cash flows and multiples of earnings of
comparable entities with similar operations and economic characteristics and reference transactions in the same or similar lines of business. We
use a combination of discounted projected future earnings or cash flow methods and multiples of earnings in estimating a reporting unit’s fair
value. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, Fair Value
Measurement .
The process of evaluating the potential impairment of goodwill is subjective because it requires the use of estimates and assumptions as to our
future cash flows, discount rates commensurate with the risks involved in the assets, future economic and market conditions, competition,
customer relations, pricing, raw material costs, production costs, selling, general and administrative expenses, income taxes and other taxes.
Although we base cash flow forecasts on assumptions that are consistent with plans and estimates we use to manage our Company, there is
significant judgment in determining the cash flows. Due to the inherent uncertainty in forecasting cash flows and earnings, actual future results
may vary significantly from the forecasts. Based on the degree of uncertainty, we cannot quantify the potential effect of the change in estimates
on our results of operations and financial position.
Goodwill is allocated to, and evaluated for impairment at, the reporting unit level, which is defined as an operating segment or one level below
an operating segment. We have two operating segments – Performance Coatings and Transportation Coatings – that also serve as our reportable
segments. We have goodwill allocated to eight reporting units. At December 31, 2013, our $1,113.6 million in total goodwill is allocated to
reportable segments as follows: $1,038.8 million in Performance Coatings and $74.8 million in Transportation Coatings.
If the carrying amount of a reporting unit, including goodwill, exceeds the estimated fair value, then the fair values of the individual assets
(including identifiable intangible assets) and liabilities of the reporting unit are estimated. The excess of the estimated fair value of the reporting
unit over the estimated fair value of its net assets would establish the implied value of goodwill. The excess of the recorded amount of goodwill
over the implied value is then charged to earnings as an impairment loss.
Due primarily to the recent timing of the Acquisition, we chose to proceed directly to the two-step quantitative impairment test for year ended
December 31, 2013. Based on the results of our annual impairment review conducted in October 2013, management concluded that fair value
exceeded the carrying value for all reporting units with recorded goodwill and no impairments existed.
Other intangible assets
We conducted our initial annual indefinite-lived intangible assets impairment assessment as of October 1, 2013 and plan to update this
assessment annually each October, unless conditions arise that would require a more
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frequent evaluation. In assessing the recoverability of indefinite-lived intangible assets, projections regarding estimated discounted future cash
flows and other factors are made to determine if impairment has occurred. If we conclude that there has been impairment, we will write down the
carrying value of the asset to its fair value. Each year, we evaluate those intangible assets with indefinite lives to determine whether events and
circumstances continue to support the indefinite useful lives. When testing indefinite-lived intangible assets for impairment, we have the option
to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than
not (more than 50%) that the fair value of an indefinite-lived intangible asset is less than its carrying amount. Such qualitative factors may
include the following:
•
macroeconomic conditions;
•
industry and market considerations;
•
cost factors;
•
overall financial performance; and
•
other relevant entity-specific events.
Based on the results of our annual impairment review conducted in October 2013, management concluded that the fair value exceeded carrying
value and no impairments existed.
Definite-lived intangible assets, such as technology, trademarks, customer relationships and non-compete agreements are amortized over their
estimated useful lives, generally for periods ranging from 4 to 20 years. The reasonableness of the useful lives of these assets is continually
evaluated. Once these assets are fully amortized, they are removed from the balance sheet.
The in-process research and development projects we acquired are considered indefinite-lived intangible assets until the abandonment or
completion of the associated research and development efforts. Upon completion of the research and development process, the carrying values of
acquired in process research and development projects are reclassified as definite-lived assets and are amortized over their useful lives. If the
project is abandoned, we record the write-off as a loss in the statement of operations. During the year ended December 31, 2013, we abandoned
certain projects with a carrying amount of $3.2 million. We recorded a loss of $3.2 million associated with these projects, which is included as a
component of amortization of acquired intangibles in the consolidated statement of operations.
Long-Lived Assets
Long-lived assets, which includes property, plant and equipment, and definite-lived intangible assets, are assessed for impairment whenever
events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. The impairment testing involves comparing
the carrying amount of the asset to the forecasted undiscounted future cash flows generated by that asset. In the event the carrying amount of the
asset exceeds the undiscounted future cash flows generated by that asset and the carrying amount is not considered recoverable, an impairment
exists. An impairment loss is measured as the excess of the asset’s carrying amount over its fair value. An impairment loss is recognized in the
statement of operations in the period that the impairment occurs.
Stock-Based Compensation
Successor periods
On July 31, 2013, we granted approximately 4.1 million, 5.7 million and 6.4 million non-qualified service-based stock options to certain
employees with strike prices of $5.92, $8.88 and $11.84 (per share), respectively.
During 2014, we granted 1.1 million non-qualified service-based stock options to certain employees with strike prices of $5.92, $7.21, $8.88 and
$11.84 per share. Options generally vest over a 5 year period, and vesting of a portion of the options could accelerate in the event of a change in
control. Option life cannot exceed ten years.
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During the six-month period ended June 30, 2014 and for the year ended December 31, 2013, the Company recorded compensation expense of
$3.8 million and $7.4 million, respectively. Compensation expense related to service-based non-qualified stock options is equivalent to the grantdate fair value of the awards determined under the Black-Scholes option pricing model and is being recognized as compensation expense over
the service period utilizing graded vesting. At the grant date, we had estimated a forfeiture rate of zero due to the limited history and
expectations of forfeitures.
The fair value of options granted in 2013 ranged from $0.95 per share to $2.01 per share. The fair value of options granted in 2014 ranged from
$1.53 per share to $3.01 per share. Principal weighted average assumptions used in applying the Black-Scholes model were as follows:
Key Assumptions
2013 Grants
Volatility
Risk-Free Interest Rate
Dividend Yield
Expected Term
28.61%
2.13%
0%
7.81 years
2014 Grants
28.38%
2.21%
0%
7.81 years
To estimate the expected stock option term for the $5.92 and $7.21 stock options referred to above, we used the simplified method as the options
were granted at fair value and Axalta, a privately-held company, has no exercise history. Based upon this simplified method, the $5.92 per share
stock options have an expected term of 6.5 years. The strike price for the $8.88 and $11.84 per share tranches of options exceeded the 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.
As we are a privately-held company with no trading history, expected volatility was estimated using trading data derived from publicly held peer
group companies over the expected term of the options. We do not anticipate paying cash dividends in the foreseeable future and, therefore, use
an expected dividend yield of zero.
During 2013 we issued 1.3 million shares of common stock to certain employees at fair value for $7.4 million in proceeds. Because we were not
publicly traded on the grant date, the market value of the stock for the 2013 stock awards was estimated based upon the Acquisition price as
there were no significant changes in operations since the closing date of February 1, 2013.
For the 2014 stock awards, we estimated the per share fair value of our common stock 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” (the “Practice Aid”). In conducting this valuation, we considered all objective and subjective factors that we believed to be
relevant, including our best estimate of our business condition, prospects and operating performance. Within this contemporaneous valuation, a
range of factors, assumptions and methodologies were used. The significant factors included:
•
the fact that we were a private company with illiquid securities;
•
our historical operating results;
•
our discounted future cash flows, based on our projected operating results;
•
valuations of comparable public companies; and
•
the risk involved in the investment, as related to earnings stability, capital structure, competition and market potential.
For the contemporaneous valuation of our common stock, management estimated, as of the issuance date, our enterprise value on a continuing
operations basis, using the income and market approaches, as described in the Practice Aid. The income approach utilized the discounted cash
flow (“DCF”) methodology based on our financial forecasts and projections, as detailed below. The market approach utilized the Guideline
Public Company and Guideline Transactions methods, as detailed below.
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For the DCF methodology, we prepared annual projections of future cash flows through 2018. Beyond 2018, projected cash flows through the
terminal year were projected at long-term sustainable growth rates consistent with long-term inflationary and industry expectations. Our
projections of future cash flows were based on our estimated net debt-free cash flows and were discounted to the valuation date using a
weighted-average cost of capital estimated based on market participant assumptions.
For the Guideline Public Company and Guideline Transactions methods, we identified a group of comparable public companies and recent
transactions within the chemicals industry. For the comparable companies, we estimated market multiples based on trading prices and trailing 12
months EBITDA. These multiples were then applied to our trailing 12 months EBITDA. When selecting comparable companies, consideration
was given to industry similarity, their specific products offered, financial data availability and capital structure.
For the comparable transactions, we estimated market multiples based on prices paid for the related transactions and trailing 12 months
EBITDA. These multiples were then applied to our trailing 12 months EBITDA. The results of the market approaches corroborated the fair value
determined using the income approach.
Predecessor periods
DuPont maintained certain stock-based compensation plans for the benefit of certain of its officers, directors and employees, including, prior to
the Acquisition, certain DPC employees. DPC recognized stock-based compensation within the consolidated and combined statement of
operations based upon fair values. Total stock-based compensation expense included in the consolidated and combined statement of operations
was $0.1 million, $0.5 million and $1.9 million for the Predecessor period January 1, 2013 through January 31, 2013 and the Predecessor years
ended December 31, 2012 and 2011, respectively.
Retirement Benefits
Successor periods
In connection with the Acquisition, we assumed certain defined benefit pension plan and other long-term employee benefit plan obligations and
acquired certain related plan assets for both current and former employees of our subsidiaries.
The defined benefit pension plans for our subsidiaries represent single-employer plans. ASC 805, Business Combinations , requires recognition
of a pension asset or liability of a single-employer defined benefit pension plan in connection with recording assets and liabilities of a business
combination accounted for as a purchase. A pension liability is recorded for the excess of the projected benefit obligation over the fair value of
the plan assets. The projected benefit obligation and the fair value of plan assets were remeasured at the acquisition date using current discount
rates and assumptions. The amount recorded for the pension asset or liability in a purchase transaction essentially represents a “fresh start”
approach. Accordingly, our subsequent net periodic pension cost does not include amortization of any prior service cost/credit, net gain or loss,
or transition amount that existed prior to the date of the acquisition.
The defined benefit obligations for remaining current employees of non-U.S. subsidiaries assumed by us were carved out of defined benefit
pension plans retained by DuPont. We have created new defined benefit pension plans and are in the process of finalizing the creation of new
defined benefit pension plans for all affected participants. The Acquisition Agreement requires DuPont to transfer assets generally in the form of
cash, insurance contracts or marketable securities from DuPont’s defined benefit pension plans to our defined benefit pension plans. As of
December 31, 2013, DuPont had completed the asset transfers for all plans except the plan covering the Company’s Canadian employees. The
Canadian plan assets continue to be invested and managed by DuPont until the required regulatory approvals are received at which time the
assets will be transferred to a newly created trust.
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For multiemployer plans, ASC 805, Business Combinations , requires an obligation to the plan for a portion of its unfunded benefit obligations
to be established at the acquisition date when withdrawal from the multiemployer plan is probable. As withdrawal from the DuPont defined
benefit pension plan and related transfer of plan assets were required pursuant to the Acquisition Agreement, an estimate of the unfunded benefit
obligations was recorded as of the closing date of the Acquisition for certain foreign benefit plans. The plan assets have been or will be directly
transferred to the pension trust. Accordingly, assumed defined benefit obligations were presented net of the estimate of the plan assets to be
transferred by DuPont.
The amounts recognized in the audited financial statements related to pension and other long-term employee benefits are determined from
actuarial valuations. Inherent in these valuations are assumptions including expected return on plan assets, discount rates at which liabilities
could have been settled, rate of increase in future compensations levels, mortality rates and health care costs trend rates. These assumptions will
be updated annually and are disclosed in Note 9 of the audited financial statements. In accordance with U.S. GAAP, actual results that differed
from the assumptions are accumulated and amortized over future periods and therefore, affect expense recognized and obligations recorded in
future periods.
The discount rate is determined as of each measurement date, based on a review of yield rates associated with long-term, high-quality corporate
bonds. The calculation separately discounts benefit payments using the spot rates from a long-term, high-quality corporate bond yield curve.
The estimated impact of a 25 basis point increase of the discount rate to the net periodic benefit cost for 2014 would result in a decrease of $0.4
million, while the impact of a 25 basis point decrease of the discount rate would result in an increase of approximately $0.3 million. The
estimated impact of a 25 basis point increase of the expected return on asset assumption on the net periodic benefit cost for 2014 would result in
a decrease of approximately $0.7 million, while the impact of a 25 basis point decrease would result in an increase of $0.7 million.
Predecessor periods
Certain of DPC’s employees participated in defined benefit pension and other long-term employee benefit plans accounted for in accordance
with the guidance for defined benefit pension and other long-term employee benefit plans in accordance with ASC 715, Compensation—
Retirement Benefits . Certain DPC employees were previously covered under DuPont and DuPont subsidiaries’ sponsored plans, which were
accounted for in accordance with accounting guidance in ASC 715. The majority of pension and other long-term employee benefit expenses
during the Predecessor periods were specifically identified by employee. In addition, a portion of expense was allocated in shared entities and
reported with cost of goods sold, selling, general and administrative expenses and research and development expenses in the Predecessor
consolidated and combined statements of operations. For the U.S. pension plan and other defined benefit plans (the U.S. plans), DuPont
considered DPC employees to be part of a multiemployer plan of DuPont. The expense related to the current and former employees of DPC is
included in the Predecessor consolidated and combined financial statements. Non U.S. pensions and other long-term employee benefit plans (the
non-U.S. plans) were accounted for as single employer plans where DPC recorded assets, liabilities and expenses related to the current DPC
workforce.
Income taxes
Successor periods
The provision for income taxes was determined using the asset and liability approach of accounting for income taxes. Under this approach,
deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid.
The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the period.
Deferred taxes result from differences between the financial and tax basis of our assets and liabilities and are adjusted for changes in tax rates
and tax laws when changes are enacted. Valuation allowances are recorded to reduce
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deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred tax assets and liabilities are measured using
enacted tax rates applicable in the years in which they are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax law is recognized in income in the period that includes the enactment date.
At June 30, 2014, we had a net deferred tax asset balance of $26.8 million, after valuation allowances of $76.4 million. At December 31, 2013,
we had a net deferred tax asset balance of $16.0 million, after valuation allowances of $63.4 million. In evaluating the ability to realize deferred
tax assets, the Company relies on, in order of increasing subjectivity, taxable income in prior carryback years, the future reversals of existing
taxable temporary differences, tax planning strategies and forecasted taxable income using historical and projected future operating results.
We provide for income and foreign withholding taxes, where applicable, on undistributed earnings of all subsidiaries and related companies to
the extent that such earnings are not deemed to be permanently invested. At June 30, 2014 and December 31, 2013, deferred income taxes of
approximately $17.7 million and $15.9 million have been provided on such subsidiary earnings, respectively.
The breadth of our operations and the global complexity of tax regulations require assessments of uncertainties and judgments in estimating
taxes we will ultimately pay. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various
jurisdictions, outcomes of tax litigation and resolution of disputes arising from federal, state and international tax audits in the normal course of
business. A liability for unrecognized tax benefits is recorded when management concludes that the likelihood of sustaining such positions upon
examination by taxing authorities is less than “more likely than not.” Interest and penalties accrued related to unrecognized tax benefits are
included in the provision for income taxes. At December 31, 2013, the Company had gross unrecognized tax benefits for both domestic and
foreign operations of $38.9 million.
See Note 13 to our Audited Consolidated Financial Statements included elsewhere in this prospectus for further detail on our accounting for
income taxes.
Predecessor periods
During the Predecessor periods, we attributed current and deferred income taxes of DuPont to the DPC standalone financial statements in a
manner that is systematic, rational and consistent with the asset and liability method prescribed by ASC 740, Income Taxes. Accordingly, our
income tax provision was prepared following the “Separate Return Method.” The separate return method applies ASC 740 to the standalone
financial statements of each member of the consolidated group as if the group member were a separate taxpayer and a standalone enterprise. As a
result, we may not have included in the separate consolidated and combined financial statements of the Predecessor actual tax transactions
included in the consolidated financial statements of DuPont. Similarly, the tax treatment of certain items reflected in the separate Predecessor
consolidated and combined financial statements may not be reflected in the consolidated financial statements and tax returns of DuPont;
therefore, such items as alternative minimum tax, net operating losses, credit carryforwards and valuation allowances may exist in the standalone
financial statements that may or may not exist in DuPont’s consolidated financial statements.
The provision for income taxes was determined using the asset and liability approach of accounting for income taxes. Under this approach,
deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid.
The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the period.
Deferred taxes result from differences between the financial and tax basis of our assets and liabilities and are adjusted for changes in tax rates
and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax
benefit will not be realized. Income tax related penalties are included in the provision for income taxes.
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In general, the taxable income (loss) of our various entities was included in DuPont’s consolidated tax returns, where applicable in jurisdictions
around the world. As such, we have not historically prepared separate income tax returns for many of our entities. Consequently, income taxes
currently payable for these entities are deemed to have been remitted to DuPont, in cash, in the period the liability arose and income taxes
currently receivable are deemed to have been received from DuPont in the period that we would have recognized a refund had we been a
separate taxpayer.
Prior to the presale structuring that occurred in the latter part of 2012, no direct ownership relationships existed among all our various legal
entities. Consequently, no provision has been made for income taxes on unremitted earnings of subsidiaries and affiliates. Four new Dutch
holding companies were created in 2012 to hold a significant portion of the DPC operations in Latin America, EMEA and Asia. No provision
was made for income taxes on unremitted earnings of subsidiaries and affiliates due to the indirect ownership structure (for entities not owned by
the new Dutch holding companies) and because earnings of the direct subsidiaries of the new Dutch holding companies were deemed to be
indefinitely invested.
Derivatives and Hedging
The fair values of all derivatives are recognized as assets or liabilities at the balance sheet date. For derivatives designated as fair value hedges, if
any, we measure hedge effectiveness by formally assessing, at least quarterly, the historical high correlation of changes in the fair value of the
hedged item and the derivative hedging instrument. For derivatives designated as cash flow hedges, if any, we measure hedge effectiveness by
formally assessing, at least quarterly, the probable high correlation of the expected future cash flows of the hedged item and the derivative
hedging instrument. The ineffective portions of both types of hedges are recorded in the consolidated statement of operations in the current
period. If the hedging relationship ceases to be highly effective or it becomes probable that an expected transaction will no longer occur, future
gains or losses on the derivative instrument are recorded in the statement of operations.
We account for interest rate swaps related to our existing long-term borrowings as cash flow hedges. The fair values of the derivatives are
classified as current and noncurrent in the balance sheet based upon the maturity of the underlying derivative. As of December 31, 2013, theses
balances are classified as noncurrent in the consolidated balance sheet. The effective portions of the changes in the fair values of these
derivatives are recorded in other comprehensive income and are reclassified to interest expense in the period in which earnings are impacted by
the hedged items or in the period that the transaction no longer qualifies as a cash flow hedge. The ineffective portions of the changes in fair
values of the derivatives are recorded in interest expense, while the effective portion is reported in interest expense in the period in which
earnings are impacted by the hedged items.
If no hedging relationship is designated, derivatives are marked to market through the statement of operations. Cash flows from derivatives are
recognized in the statement of cash flows in a manner consistent with the underlying transactions.
See Note 24 to our Audited Consolidated Financial Statements included elsewhere in this prospectus for further detail on our derivatives and
hedging instruments.
Foreign Currency Translation
Successor periods
Our reporting currency is the U.S. dollar. As a result of the Acquisition, we had reevaluated our functional currency accounting conclusions. Due
primarily to our new legal entity organization structure, global cash management and raw material sourcing strategies, we determined that the
functional currency of certain subsidiaries operating outside of the United States is the local currency of the respective subsidiaries. Assets and
liabilities of these operations are translated into U.S. dollars at end-of-period exchange rates; income and
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expenses are translated using the average exchange rates for the reporting period. Resulting cumulative translation adjustments are recorded as a
component of stockholders’ equity in the consolidated balance sheet of the Successor at December 31, 2013 in Accumulated other
comprehensive (loss).
Gains and losses from transactions denominated in foreign currencies other than an entities’ functional currency are included in the consolidated
statement of operations in Other (income) expense, net.
Predecessor periods
For the Predecessor period, our reporting currency was the U.S. dollar as DuPont management determined that the U.S. dollar was the functional
currency of DPC’s legal entities and this functional currency was appropriate for the DPC organizational legal entity structure and the economic
environment in which DPC operated during the period covered by the Predecessor consolidated and combined financial statements. For these
legal entities, foreign currency denominated asset and liability amounts were remeasured into U.S. dollars at the end-of-period exchange
rates. Nonmonetary assets, such as inventories, prepaid expenses, fixed assets and intangible assets were remeasured in U.S. dollars at historical
exchange rates. Foreign currency denominated income and expense elements were remeasured into U.S. dollars at average exchange rates in
effect during the year, except for expenses related to nonmonetary assets, which were remeasured at historical exchange rates.
Gains and losses from transactions denominated in foreign currencies other than an entities’ functional currency are included in the combined
statement of operations in Other (income) expense, net.
Allowance for doubtful accounts
We maintain an allowance for doubtful accounts that reduces receivables to amounts that are expected to be collected. In estimating the
allowance, management considers factors such as current overall geographic and industry-specific economic conditions, statutory requirements,
accounts receivable turnover, historical and anticipated customer performance, historical experience with write-offs as a standalone company
and the level of past-due amounts. Changes in these conditions may result in additional allowances. After all attempts to collect a receivable
have failed and local legal requirements are met, the receivable is written off against the allowance.
Contingencies
Contingencies, by their nature, relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a
liability has been incurred as well as in estimating the amount of potential loss. The most important contingencies impacting our financial
statements are those related to environmental remediation, pending or threatened litigation against the Company and the resolution of matters
related to open tax years.
Environmental remediation costs are accrued when it is probable that a liability has been incurred and the amount can be reasonably estimated.
Estimates of environmental reserves require evaluating government regulation, available technology, site-specific information and remediation
alternatives. We accrue an amount equal to our best estimate of the costs to remediate based upon the available information. The extent of
environmental impacts may not be fully known and the processes and costs of remediation may change as new information is obtained or
technology for remediation is improved. Our process for estimating the expected cost for remediation considers the information available,
technology that can be utilized and estimates of the extent of environmental damage. Adjustments to our estimates are made periodically as
additional information received as remediation progresses.
We are subject to legal proceedings and claims arising out of our business operations. We routinely assess the likelihood of any adverse
outcomes to these matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these
contingencies is made after analysis of each known claim. We
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have an active risk management program consisting of numerous insurance policies secured from many carriers. These policies often provide
coverage that is intended to minimize the financial impact, if any, of the legal proceedings. The required reserves may change in the future due to
new developments in each matter.
For more information on these matters, see Note 13 and Note 8 to our Audited Consolidated Financial Statements included elsewhere in this
prospectus.
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OUR INDUSTRY
In 2013, we were the fourth largest supplier in the $127 billion global coatings industry as measured by sales, according to Orr & Boss. The
global coatings industry is characterized by multiple end-markets and applications. Market participants include a few global coatings suppliers
and many smaller, regionally focused suppliers that maintain a presence in select product categories and local markets.
Within the broad global coatings market, we focus on automotive refinish, light vehicle, commercial vehicle and industrial end-markets, which
Orr & Boss estimates to collectively represent $37 billion of annual sales. The chart below illustrates the composition of the global coatings
industry by application and indicates the end-markets in which we participate:
We operate in attractive end-markets, with the top four suppliers collectively holding an estimated 67% market share in the automotive refinish
end-market and 74% market share in the light vehicle end-market. This structure is a result of few suppliers having the technological capabilities,
global manufacturing footprint, efficient supply chain, and overall scale to meet customer needs. These characteristics allow global coatings
providers to serve customers locally while continuing to leverage global innovation, product platforms, relationships and best practices.
The refinish, industrial, light vehicle and commercial vehicle end-markets are collectively expected to grow at a CAGR of 5.8%, or $12.2 billion,
from 2013 to 2018, according to Orr & Boss. This growth is due to specific end-market drivers as well as key industry trends, which favor large
multi-national suppliers, including:
•
Increasingly stringent environmental regulations : Evolving regulations in all major geographies have placed limits on the emission
of VOCs and HAPs. As a result, customers are shifting toward regulation-compliant, low-VOC solventborne and waterborne
coatings. Few coatings suppliers have the technology and products to meet these increasingly stringent requirements.
•
Global procurement model : Multi-national light vehicle OEMs are increasingly utilizing global procurement teams to stipulate
product specifications and color standardization requirements, which are implemented at the local level. These customers select
coatings providers on the basis of their ability to consistently deliver advanced technological solutions on a global basis.
•
Increased efficiency : Customers are encouraging coatings manufacturers to invest in new product offerings that require fewer
application steps, resulting in lower capital and energy costs.
•
Vehicle light-weighting: With more stringent vehicle emissions and fuel consumption regulations, light vehicle OEMs are focused on
reducing vehicle weight to improve fuel economy. This is driving the
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need for new, and frequently multiple, substrates on the exterior of the vehicle. Historically, OEMs have manufactured vehicles
primarily with steel components but are now increasingly incorporating other materials, including aluminum, carbon fiber and
plastics. These materials often require specialized primers and low-temperature curing formulations to achieve uniform appearance,
color and finish.
•
Emerging market growth: Emerging market demand in our end-markets is expected to grow at a CAGR of approximately 8.4% from
2013 to 2018, according to Orr & Boss. This is primarily due to increased government infrastructure spending and increased middle
class consumption, which will increase the car parc. As per-capita wealth expands, consumers are also demanding higher-quality
products, driving demand for more advanced coatings systems in these markets.
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BUSINESS
We are a leading global manufacturer, marketer and distributor of high performance coatings systems. We generate approximately 90% of our
revenue in markets where we hold the #1 or #2 global market position, including the #1 position in our core automotive refinish end-market with
approximately a 25% global market share. We have a nearly 150-year heritage in the coatings industry and are known for manufacturing highquality products with well-recognized brands supported by market-leading technology and customer service. Over the course of our history we
have remained at the forefront of our industry by continually developing innovative coatings technologies designed to enhance product
performance and appearance, while improving customer productivity and profitability.
Our diverse global footprint of 35 manufacturing facilities, 7 technology centers, 45 customer training centers and approximately 12,650
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. Our scale and strong local presence are
critical to our success, allowing us to leverage our technology portfolio and customer relationships globally while meeting customer demands
locally.
For the LTM Period, our net sales were $4,342 million, Adjusted EBITDA was $799 million, or 18.4% of net sales, and net income was $12
million. We have renewed the organization’s focus on profitable growth, achieving year-over-year net sales and Adjusted EBITDA growth for
each of the five full quarters following the Acquisition. Additionally, we have undertaken several transformational initiatives that we believe
have laid the foundation for future growth, resulting in significant new business wins, many of which we expect to contribute to sales beginning
in 2015. We have also begun implementing several EBITDA enhancement initiatives that we believe will drive meaningful earnings growth over
the next several years. As of June 30, 2014, we had cash of $350 million and outstanding indebtedness of $3,901 million, which may limit the
availability of financial resources to pursue our growth initiatives.
Our business is organized into two segments, Performance Coatings and Transportation Coatings, serving four end-markets globally as
highlighted below:
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Segment Overview
Performance Coatings
Through our Performance Coatings segment we provide high-quality liquid and powder coatings solutions to a fragmented and local customer
base. We are one of only a few suppliers with the technology to provide precise color matching and highly durable coatings systems. The endmarkets within this segment are refinish and industrial.
Our Served End-Markets
Refinish:
The refinish end-market represented an estimated $7.3 billion in 2013 global sales according to Orr & Boss. We hold the #1 global market
position in this end-market with an estimated 25% share, based on our 2013 net sales of $1.8 billion. The global automotive refinish end-market
grew at a CAGR of approximately 2.3% from 2008 to 2013 and is expected to grow at a CAGR of approximately 4.3% from 2013 to 2018,
according to Orr & Boss.
Sales in this end-market are driven by the number of vehicle collisions and owners’ propensity to repair their vehicles. The number of vehicle
collisions in a given market is primarily determined by the size of the car parc and the aggregate number of miles driven in that market. The
refinish end-market is expected to grow annually at 3.2% and 2.5% from 2013 to 2018 in EMEA and North America, respectively. In emerging
markets, rising per capita income and a growing middle class are expected to drive continued increases in vehicle sales and size of the car parc,
resulting in a projected market CAGR of 7.7% from 2013 to 2018.
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Although refinish coatings typically represent only a small portion of the overall vehicle repair cost, they are critical to the vehicle owner’s
satisfaction given their impact on appearance. As a result, body shop operators are most focused on coatings brands with a strong track record of
performance and reliability. Body shops look for suppliers and brands with productivity enhancements, regulatory compliance, consistent
quality, the presence of ongoing technical support and exact color match technologies. Color matching is a critical component of coatings
supplier selection, since inexact matching adversely impacts vehicle appearance and can significantly impact the speed and volume of repairs at
a given shop.
We develop, market and supply a complete portfolio of innovative coatings systems and color matching technologies to facilitate faster
automotive collision repairs relative to competing technologies. Our color matching technology provides Axalta-specific formulations that
enable body shops to accurately match thousands of vehicle colors, regardless of vehicle brand, color, age or supplier of the original paint during
production. It would be time consuming and costly for a new entrant to create such an extensive color inventory. We believe that our global
footprint, strong customer value proposition and portfolio of advanced coatings technologies position us to maintain and grow our marketleading position in refinish.
Industrial:
The industrial end-market represented an estimated $19.7 billion in 2013 global sales, growing at a CAGR of approximately 5.6% from 2008 to
2013, and is forecasted to grow at a CAGR of approximately 6.8% from 2013 to 2018, according to Orr & Boss.
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The industrial end-market is comprised of liquid and powder coatings used in a broad array of end-market applications. Within the industrial
end-market, we focus on the following:
•
General Industrial : coatings for a wide and diverse array of applications, including HVAC, shelving, appliances and electrical
storage components, as well as specialized coatings used for coating the interior of metal drums and packaging.
•
Electrical Insulation : coatings to insulate copper wire used in motors and transformers and coatings to insulate sheets forming
magnetic circuits of motors and transformers.
•
Architectural : exterior powder coatings typically used in the construction of commercial structures, residential windows and doors,
as well as liquid interior and exterior house paint.
•
Transportation : coatings for automotive components, chassis and wheels to protect against corrosion, provide increased durability
and impart appropriate aesthetics.
•
Oil & Gas : powder products to coat tanks, pipelines, valves and fittings protecting against chemicals, corrosion and extreme
temperatures in the oil & gas industry.
Demand in this end-market is driven by a wide variety of macroeconomic factors, such as growth in GDP and industrial production. There has
also been an increase in demand for products that enhance environmental sustainability, corrosion resistance and productivity. These global
trends are bolstered by regional and industry specific trends, such as the high level of current investment in the North and South American oil &
gas industries. Customers select industrial coatings based on protection, durability and appearance.
Performance Coatings Products and Brands
We offer a comprehensive range of specially-formulated waterborne and solventborne products and systems used by the global automotive
repair industry to refinish damaged vehicles. Our refinish products and systems include a range of coatings layers required to match the vehicle’s
color and appearance, producing an indistinguishable repair. These layers include:
•
Primer : designed to inhibit corrosion while providing a smooth sub-surface for the basecoat.
•
Basecoat : contains colored, metallic and effect pigments to match the vehicle’s color and aesthetics.
•
Clearcoat : final coat that protects the colored basecoat from the environment and provides a glossy finish.
•
Thinners & Reducers : used in all stages of the process for managing rheology, flow and drying rates.
We provide a system that allows body shops to match 54,000 active color variations in the global market. Our color science is manifested in our
tints, one of the most technologically advanced parts of the refinish coatings system, which makes up the majority of our products in a body
shop. We have a large color library composed of over 4.2 million colors and a number of well-known, long-standing brands, including Cromax,
Standox and Spies Hecker. Spies Hecker and Standox are two of our oldest brands, first introduced in 1882 and 1955, respectively.
Our color matching and retrieval systems allow customers to quickly match any color, preventing body shop technicians from having to repeat
the color matching process multiple times, saving time and materials. The color matching process begins with a technician scanning a damaged
vehicle with one of our advanced color matching tools, such as our AcquireRx hand-held spectrophotometer. AcquireRx will determine the
unique flake and color characteristics for the specific vehicle. These characteristics may vary significantly, even for vehicles of the same make,
model and original color, based on a variety of factors, including a vehicle’s age, plant at which it was assembled, weather conditions and
operating history. AcquireRx electronically connects with our ColorNet database, which indicates to the technician the precise mix of tints and
colors needed to recreate that specific color instance. In addition to AcquireRx, we offer our customers several other color matching tools,
including our VINdicator database, which identifies vehicle color based on its vehicle identification number, and traditional color matching
wheels.
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We are also a leading global developer, manufacturer and supplier of functional and decorative liquid and powder coatings for a large number of
diversified applications in the industrial end-market. We provide a full portfolio of products for applications including architectural cladding and
fittings, automotive coatings, general industrial, job coaters, electrical insulation coatings, HVAC, appliances, rebar and oil & gas pipelines. Our
liquid systems are used to provide insulation and corrosion protection for electrical conductors and components, provide chemical resistance for
the interiors of metal packaging drums, protect automotive parts and serve as basecoats for alloy and steel wheels. Powder coatings products,
where we hold the #2 global market position, are often an environmentally responsible, lower cost alternative to liquid coatings. These coatings
are typically electrostatically sprayed using a specialized spray gun and cured to create a uniform, high-quality finish. In the oil & gas industry
our powder products are used to protect components from corrosion and severe conditions such as extreme temperatures.
Our industrial brands include Voltatex, Voltron, Aqua EC, CorMax, Chemophan, Lutophen, Stollaquid and Syntopal for liquid coatings and
Alesta, Nap-Gard and Abcite for powder.
Performance Coatings Sales, Marketing and Distribution
We leverage a large global refinish sales and technical support team to effectively serve our broad refinish customer base of approximately
80,000 body shops. The majority of our products are supplied by our network of over 4,000 independent local distributors. In select regions,
such as in parts of Europe, we also sell directly to customers. Distributors maintain an inventory of our products to fill orders from body shops in
their market and assume credit risk and responsibility for logistics, delivery and billing. In certain countries, we utilize importers that buy
directly from us and actively market our products to body shops. Our relationships with our top ten distributors are longstanding, with an average
relationship length of over 30 years.
Our large sales force manages relationships directly with our customers to drive demand for our products, which in turn are purchased through
our distributor network. Due to the local nature of the refinish industry, our sales force operates on a regional/country basis to provide clients
with responsive customer service and local insight. As part of their coverage efforts, salespeople introduce new products to body shops and
provide technical support and ongoing training. We have established 45 customer training centers, which helps to deepen our customer
relationships.
Our sales force also helps to drive shop productivity improvements and to install or upgrade body shop color matching and mixing equipment to
improve shop profitability. Once a coating and color system is installed, a body shop almost exclusively uses its specific supplier’s products. The
proprietary nature of a coatings supplier’s color systems, the substantial inventory needed to support a body shop and the body shop’s familiarity
with an established brand lead to high levels of customer retention. Historically, our customer retention rate has been around 95%.
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To effectively reach our customers in the industrial end-market we generally ship directly and leverage a dedicated sales force and technical
service team that operates on a regional basis. We are one of only three truly global powder coatings producers that can satisfy the needs and
specifications of a customer in multiple regions of the world, while maximizing productivity from the broad scale and scope of our operations.
Performance Coatings Customers
Within our Performance Coatings segment, we sell coatings to customers in more than 130 countries. No single customer represented more than
3.6% of our Performance Coatings net sales and our top ten customers accounted for only 12.7% of our Performance Coatings net sales during
the LTM Period.
We serve a broad, fragmented customer base of approximately 80,000 body shops, including:
•
Independent Body Shops: Single location body shops that utilize premium, mainstream, or economy brands based on the local
market.
•
Multi-Shop Operators: Body shops with more than one location focused on providing premium paint jobs with industry leading
efficiency. MSOs use premium/mainstream coatings and state-of-the-art painting technology to increase shop productivity, allowing
them to repair more vehicles faster.
•
OEM Dealership Body Shops : High-productivity body shops, located in OEM car dealerships, that operate like MSOs and provide
premium services to customers using premium/mainstream coatings.
Within North America, we believe MSOs are the fastest growing customer segment, gaining influence and share relative to other body shop
segments. Underlying this trend is the MSOs’ ability to reduce repair costs for insurers, while also increasing operational consistency. As a result
of this productivity and consistency, insurers have used Direct Repair Programs (DRPs) to direct traffic to MSOs, increasing their growth. We
believe, based on management estimates, that we hold the #1 market position with MSOs in North America and are well positioned to grow with
these customers in the future.
Performance Coatings Competition
Our primary competitors in the refinish end-market include PPG, BASF and Akzo Nobel, but we also compete against regional players in local
markets. Similarly, in industrial coatings, we compete against multi-national suppliers, such as Akzo Nobel, PPG, Valspar and BASF, and
regional players in local markets. We are one of the few performance coatings players that can provide the customer service, technology, color
design capability and product performance necessary to deliver exceptional value to our customers.
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Transportation Coatings
Through our Transportation Coatings segment, we provide advanced coating technologies to OEMs of light and commercial vehicles. These
increasingly global customers require a high level of technical support coupled with cost-effective, environmentally responsible coatings systems
that can be applied with a high degree of precision, consistency and speed.
Our Served End-Markets
Light Vehicle:
The light vehicle end-market represented an estimated $7.3 billion in 2013 global sales, according to Orr & Boss. We hold the #2 global market
position in this end-market with an estimated 19% share, based on our 2013 net sales of $1.4 billion. Sales in this end-market are driven by new
vehicle production. The global light vehicle end-market grew at a CAGR of approximately 4.6% from 2008 to 2013 and is expected to grow at a
CAGR of approximately 4.9% from 2013 to 2018, according to Orr & Boss, as new vehicle production is expected to grow 4.5% from 2013 to
2018, according to LMC Automotive.
Source: Orr & Boss and management estimates (2013).
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Demand for light vehicle products is driven by the production of light vehicles in a particular region. Light vehicle production growth is
expected to be highest in emerging markets where OEMs plan to open 67 new plants between 2014 and 2017, resulting in a light vehicle
coatings CAGR of approximately 7.4% from 2013 to 2018, according to Orr & Boss.
Light vehicle OEMs select coatings providers on the basis of their global ability to deliver advanced technological solutions that improve
exterior appearance and durability and provide long-term corrosion protection. Customers also look for suppliers that can enhance process
efficiency to reduce overall manufacturing costs and provide on-site technical support. Rigorous environmental and durability testing as well as
obtaining engineering approvals are also key criteria used by global light vehicle OEMs when selecting coatings providers. Globally integrated
suppliers are important because they offer products with consistent standards across regions and are able to deliver high-quality products in
sufficient quantity while meeting OEM service requirements. Our global scale, differentiated technology platform and customer focus, including
on-site support, position us to be a global partner and solutions provider to the most discerning and demanding light vehicle OEMs. We are one
of the few coatings producers that can provide OEMs with global product specifications, standardized color development, compatibility with an
ever-increasing number of substrates, increasingly complex colors and environmentally responsible coatings while continuing to simplify and
reduce steps in the coatings application process.
Commercial Vehicle:
The commercial vehicle end-market represented an estimated $3.3 billion in 2013 global sales, according to Orr & Boss. The commercial vehicle
end-market grew at a CAGR of approximately 1.5% from 2008 to 2013 and is expected to grow at a CAGR of approximately 4.8% from 2013 to
2018, according to Orr & Boss.
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Sales in this end-market are generated from a variety of applications including non-automotive transportation ( e.g. , HDT, bus and rail) and
ACE, as well as related markets such as trailers, recreational vehicles and personal sport vehicles. This end-market is primarily driven by global
commercial vehicle production, which is influenced by overall economic activity, government infrastructure spending, equipment replacement
cycles and evolving environmental standards.
We hold the #1 market position in the global HDT and bus market with a 31% share. We have a particularly strong presence in the North
American HDT market as a result of our leading Imron brand, extensive color library and dedication to service. Since the Acquisition, we have
increased our focus on globalizing our HDT business, particularly in China where commercial vehicle OEMs produce nearly four times the
number of trucks produced in North America. In 2014, we began serving Foton Daimler, one of the largest truck manufacturers in the region
with our high-performance waterborne coatings. We believe our broad portfolio of products, advanced technology and significant manufacturing
capabilities will enable us to build upon this success and further penetrate the market.
Commercial vehicle OEMs select coatings providers on the basis of their ability to consistently deliver advanced technological solutions that
improve exterior appearance, protection and durability and provide extensive color libraries and matching capabilities at the lowest total cost-inuse, while meeting stringent environmental requirements. Particularly for HDT applications, truck owners demand a greater variety of custom
colors and advanced product technologies to enable custom designs. Our strong market position and growth are driven by our ability to provide
customers with our market-leading brand, Imron, as well as leveraging our global product lines, regional knowledge and service. Additionally, to
capture further growth we are launching a new suite of products to meet our customers’ evolving needs.
Transportation Products and Brands
We develop and supply a complete coatings product line for light vehicle OEMs for the original coating of new vehicles. Products are designed
to enhance the styling and appearance of a vehicle’s exterior while providing protection from the elements, extending the life of the vehicle.
Widely recognized in the industry for our advanced and patented technologies, our products not only increase productivity and profitability for
OEMs but also produce attractive and durable finishes. Our light vehicle coatings portfolio is one of the broadest in the industry.
The coatings operation is a critical component of the vehicle assembly process, requiring a high degree of precision and speed. The paint shop
process typically includes a dip process, three application zones and three high-temperature ovens that cure each coating layer at temperatures
ranging from 320°F to 400°F ( i.e. , “high bake”). Our key products consist of the four main coatings layers:
•
Electrocoat : We offer a complete line of electrocoats including lead-, tin- and HAP-free and high throw-power coatings systems.
•
Primer : We manufacture advanced technology primers to meet any OEM requirement including high solids solventborne,
waterborne and wet-on-wet consolidated process primers.
•
Basecoat: We are a global leader in wet-on-wet applications for consolidated processes in both solventborne and waterborne
basecoats and offer a complete color palette in solventborne and waterborne basecoats in both conventional and consolidated
processes.
•
Clearcoat : We provide a full line of clearcoat technology that can be specifically adapted to OEM requirements and plant
application conditions. We pioneered silane-based, one-component etch resistant clearcoats and superior appearance and durability
two-component urethane clearcoats.
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The coatings process accounts for a majority of the total energy consumed during the vehicle manufacturing process. As a result, we have
developed consolidated systems that help our OEM customers lower costs by reducing energy consumption while increasing productivity. For
example, our Eco-Concept and 3-Wet systems eliminate an energy-intensive baking step in the coating process, as shown in the graphic below.
OEMs are also increasingly looking to reduce the weight of vehicles in response to increasing vehicle emissions and fuel consumption
regulations. As a result, OEMs are constructing vehicle platforms using a variety of new materials in addition to steel and plastic, including
aluminum, carbon fiber and other substrates, each of which requires specialized coatings formulations to create a uniform color and finish. We
continue to innovate with our OEM customers in driving this trend, as evidenced by use of our coatings on their flagship vehicle platforms.
We also develop and supply a wide array of coatings systems for a broad range of commercial applications including HDT, bus, rail and ACE.
The products simultaneously enhance aesthetic appearance and provide protection from the elements. We meet the demands of commercial
vehicle customers with our extensive offering of over 70,000 different colors. In the HDT market, because the metal and composite components
are painted simultaneously in an automatic process, most truck OEMs use low bake coatings to ensure that the plastic composite parts on a
truck’s exterior do not deform during the process. Truck owners demand a wide variety of custom colors that are formulated using a combination
of on-site mixing machines at the OEM or direct shipments of premixed high volume colors from us. Our commercial vehicle brands include
Imron, CorMax, Centari, ExcelPro, Rival, Imron Elite, Corlar epoxy primers, Aqua EC, Stollaqua and Chemolit.
Transportation Sales, Marketing and Distribution
We have full-time technical representatives stationed at OEM facilities around the world. These on-site representatives provide customer
support, monitor the painting process and track paint demand at each assembly plant. Monitoring OEM line performance in real-time allows our
technical support teams to help improve paint department operating efficiency and provide performance feedback to our formulating chemists
and paint manufacturing teams. Our customer technical support representatives also help OEMs manage their physical inventory by forecasting
facility coatings demand based on the customer’s build schedule.
We sell and ship products directly to light vehicle OEM customers in each of our four regions coordinated via a global point of contact for each
customer, and assist OEMs with on-site customer support. Located in 13 countries, our manufacturing facilities provide a local presence that
enables us to cultivate strong relationships, gain intimate customer knowledge, provide superior technical support to our key customers and
maintain “just-in-time” product delivery capabilities critical to OEMs. Our local presence also allows us to quickly react to changing local
dynamics, offer high-quality products and provide excellent customer service.
Since the Acquisition, we have re-aligned our light vehicle organization to better reflect the global nature of our customer base. This realignment
has included recruiting a global head of light vehicle with extensive automotive experience as well as the development of global account teams
to serve as primary points of contact for our OEM customers. These changes have had a significant impact on our business, contributing to new
business awards in 26 OEM plants globally since the beginning of 2013.
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In the commercial vehicle end-market, we employ a dedicated sales and technical service team to support our diverse customer base, including a
direct sales force supporting the HDT market. We ship our coatings directly to commercial vehicle OEMs and provide on-site technical service
representatives that play an important role by helping optimize the painting process and by providing responsive customer support.
Transportation Customers
We provide our products to light and commercial vehicle customers at over 200 assembly plants worldwide, including nine of the top ten global
automotive manufacturers. We have a stable customer base with several relationships dating back approximately 90 years and believe we are
well positioned with the fastest growing OEMs in both the developed and emerging markets.
Within our Transportation Coatings segment, we sell coatings to approximately 1,400 customers in more than 55 countries. No single customer
represented more than 18.5% of our Transportation Coatings net sales, and our top ten customers accounted for 72.5% of our Transportation
Coatings net sales during the LTM Period.
Transportation Competition
We primarily compete against large multi-national suppliers such as PPG and BASF in the light and commercial vehicle end-markets.
Additionally, we compete against certain regional players in Asia Pacific. With our state-of-the-art coatings solutions and local presence in key
OEM markets, we are one of the few competitors in the industry that offers global manufacturers the combination of high-quality products,
personalized, top-rate technical service and short lead-times for product delivery.
Our Competitive Strengths
Leading positions in attractive end-markets
We are a global leader in manufacturing, marketing and distributing advanced coatings systems with approximately 90% of our revenue
generated in markets where we hold the #1 or #2 global market position. We are one of only a small number of global coatings suppliers in each
of our end-markets, which positions us favorably in an industry where global scale is a competitive advantage.
Market-leading refinish business driven by recurring aftermarket sales: We are the leading coatings supplier to the global automotive refinish
end-market where we hold an estimated 25% share and the top four global suppliers hold an estimated 67% share. This end-market has
consistently grown across economic cycles as the
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overall rate of collisions and repairs are not highly cyclical. Our refinish products offer quality, durability and superior color technology
supported by a large color formula library that enables customers to precisely match colors. We supply our fragmented customer base of
approximately 80,000 body shops through a global network of over 4,000 independent local distributors. Furthermore, body shops utilize our
color matching system, inventory replacement process and training capabilities, which foster brand loyalty and have historically resulted in a
high customer retention rate.
Well positioned in light vehicle end-market poised for growth: We are the second largest coatings provider to the global light vehicle endmarket, which is expected to grow at a CAGR of approximately 4.9% from 2013 to 2018, according to Orr & Boss. In this end-market, the top
four suppliers hold an estimated 74% share. We have developed a full complement of unique consolidated coating systems. These integrated
solutions include our “Eco-Concept,” “3-Wet” and “2-Wet Monocoat” products that provide our customers with advanced, environmentally
responsible systems that eliminate either a coatings layer or steps in the coatings process, thereby increasing productivity and reducing energy
costs. In addition, we offer our customers on-site technical services as well as “just-in-time” product delivery. We are an integrated part of our
customers’ assembly lines, which allows our technical support teams to improve operating efficiency and provide real-time performance
feedback to our formulating chemists and manufacturing teams. We have been awarded new business in 26 OEM plants globally since the
beginning of 2013, demonstrating the strength of our competitive positioning. We expect to recognize sales from the majority of these new
contracts in 2015.
Sustainable competitive advantages driven by global scale, established brands and technology
We believe that we are one of only a few coatings providers that have the scale, manufacturing capabilities, brand reputation and technology to
meet the purchasing criteria that are most critical to our customers on a global basis.
Our extensive manufacturing and distribution networks as well as our high-caliber technical capabilities enable us to meet customers’ volume
and service requirements without interruption. Our global footprint also enables us to react quickly to changing local dynamics while leveraging
our overall scale to cost-effectively develop and deliver leading edge technologies and solutions. In refinish, our scale gives us the ability to
convert a large number of body shops to our systems in a short period of time, which has been a key competitive advantage in the growing North
American MSO segment. Additionally, our scale and technical abilities enable us to meet the needs of our multi-national light vehicle customers,
who increasingly require dedicated global account teams and high-quality, advanced coatings systems that can be applied consistently to global
vehicle platforms.
Branding is another key factor that customers consider when choosing a coatings provider. Customers typically look to established brands when
making their purchase decisions in our refinish, industrial and commercial vehicle end-markets. We have an extensive portfolio of established
brands that leverage our advanced technology and a nearly 150 year heritage including our flagship global brand families of Cromax, Standox,
Spies Hecker and Imron liquid products, our Alesta and Nap-Gard powder products and our Voltatex electrical insulation coatings.
Our technology is also a key competitive advantage. Our technology portfolio includes over 1,800 patents issued or pending and includes key
assets such as our extensive color database and color matching technology, advanced multi-substrate formulations, process technology and
VOC-compliant products. Our technology is developed and supported by our extensive research, development and technical resources, including
over 1,300 employees. In addition to developing new and innovative products, we also provide significant technical assistance to our customers
in the initial integration of our systems and technologies into their operations as well as ongoing assistance to support their operations. We also
benefit from technology synergies across our end-markets. The colors, coatings properties and multi-substrate formulations we develop as a light
vehicle coatings manufacturer help us sustain our leading refinish market position as we leverage insights from new light vehicle coatings to help
develop innovative refinish coatings in the future.
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Diverse revenue base
We generate our revenue from diverse end-markets, customers and geographies, which has historically reduced the financial impact of any single
end-market, customer or region and limited the impact of economic cycles. Net sales in our end-markets of refinish, light vehicle, industrial and
commercial vehicle represented 42%, 32%, 17% and 9% of net sales during the LTM Period, respectively. We also serve a globally diverse and
highly fragmented customer base, with no single customer representing more than 7.6% of our net sales, and our top ten customers representing
approximately 31% of our net sales during the LTM Period. Additionally, we generated approximately 39% of our net sales in EMEA, 30% in
North America, 16% in Asia Pacific and 15% in Latin America during the LTM Period. Our global reach positions us to benefit from emerging
market growth in Asia, Latin America and Eastern Europe as well as the continued economic recovery in Western Europe and United States.
Strong financial performance and cash flow characteristics
We have an attractive financial profile with gross margins of 34.3% and Adjusted EBITDA margins of 18.4% for the LTM Period.
The refinish end-market serves as the foundation of our financial profile, representing 42% of our consolidated net sales for the LTM Period.
Our track record of consistent price increases driving strong Adjusted EBITDA performance and low levels of maintenance capital expenditures
has allowed us to consistently generate strong cash flows that we are re-investing in the business to position us for future earnings growth.
We have generated year-over-year net sales and Adjusted EBITDA growth for each of the five full quarters since the Acquisition, driven in part
by the initial impact of our transformational growth initiatives. In addition, we have implemented numerous initiatives intended to reduce our
fixed and variable costs and improve working capital productivity. Examples include transitioning our IT systems to more cost-effective
solutions that better meet our needs as an independent company, developing a global procurement team to reduce procurement costs, and
investing in a European manufacturing re-alignment to position the region for profitable growth. We believe that these initiatives will continue to
generate significant cost savings in the future. Many are in their early stages of implementation and have only recently begun to contribute to our
financial results.
Experienced management team
We have augmented our management team with world-class talent and meaningful end-market expertise, with 12 of our 17 most senior
managers joining since the Acquisition. We have also recruited key regional and local managers with both operational and commercial
leadership experience. This team has added new and diverse
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perspectives to the business from a range of industries. Our management team is led by our CEO, Charlie Shaver, who has over 34 years of
chemical and global operating experience, including most recently President and CEO of TPC Group. He is supported by a senior management
team comprised of global, regional and country focused leaders with diverse backgrounds and skill sets. The management team has extensive
international experience with a strong track record of improving operations and executing strategic growth initiatives, including mergers and
acquisitions.
Our Business Strategy
Pursue and execute new business wins in high-growth areas of our end-markets
We have aligned our resources to better serve the high-growth areas of our refinish and light vehicle end-markets. In the North American refinish
end-market, we have created dedicated sales, conversion and service teams to serve MSOs, which are gaining share in the North American
collision repair market by reducing insurance company costs and providing consistently high customer satisfaction. Through new business wins
with MSO customers, we have become a leading coatings provider to the North American MSO market, which we expect to grow from 14% of
the North American collision repair market in 2012 to 24% by 2017. We are targeting growth opportunities with both existing MSO and new
MSO accounts and believe that we are well positioned to gain additional share as result of our dedicated account teams, high productivity
offerings and broad distribution network.
We have been awarded new business in 26 OEM plants globally since the beginning of 2013, with 16 of these plants located in China, where
OEMs are rapidly expanding production to meet increasing demand for new vehicles. We expect that many of these new contracts will begin
generating sales in 2015. Our success in this end-market has been driven by a new leadership team that has restructured our organization to
mirror the increasingly global focus of OEMs. We will continue to pursue business in new plants in emerging markets such as China, Mexico
and Eastern Europe, by leveraging our proprietary manufacturing processes, our broad range of VOC-compliant coatings and our substantial
sales and technical support organizations.
Accelerate growth in emerging markets
We have a strong presence in emerging markets, which generated 30% of our sales during the LTM Period. These markets are characterized by
increasing levels of vehicle production, a growing car parc, an expanding middle class and GDP growth above the global average, all of which
drive greater demand for coatings. We believe that we are well positioned to capitalize on this increasing demand with local manufacturing
facilities and extensive sales and technical service teams dedicated to these markets. In China, where we have operated a wholly owned business
for 30 years, we are expanding our sales force and investing in new plant capacity, including a $50 million waterborne capacity expansion at our
Jiading facility, which we expect to come on line in early 2015. We are also in the process of expanding our production capacity in Mexico and
Brazil to drive future earnings growth.
Globalize existing product lines
Since the Acquisition, we have identified significant opportunities to leverage our existing products across geographies. For example, we are the
market leader in the North American HDT market, but only recently began serving the Chinese market, which produces nearly four times the
number of heavy duty trucks produced in the United States. This initiative has generated early positive results; for example, in 2014 we began
serving Foton Daimler, one of the largest truck manufacturers in the region, with our high performance waterborne coatings. As government
regulations in China will require more environmentally responsible products in new production lines, we are well positioned to capture growth in
the HDT end-market. In refinish, we are leveraging legacy formulations from developed markets to satisfy growing mainstream demand in
emerging markets. We also intend to pursue similar geographic opportunities with several of our other industrial and commercial product
offerings.
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Invest in high-return projects to drive earnings growth
We are in the early stages of implementing several initiatives that we believe will continue to generate significant earnings growth, including
establishing a global procurement organization, realigning our European manufacturing operations and investing capital in growth projects with
high expected returns. Since the Acquisition, we have built a global procurement organization, which is executing several programs to reduce
costs by streamlining inputs, reducing the number of sole-sourced raw materials, and partnering with new, high-quality suppliers to meet our
purchasing needs. These programs are in their early stages and we believe they will continue to generate significant earnings growth over the
next several years. In Europe, we are investing to upgrade, automate and re-align disparate manufacturing operations to bring the region’s cost
structure in line with the rest of the world and better position us to meet increasing local demand. We believe that these European investments,
which we began in 2014, will generate approximately $100 million of incremental Adjusted EBITDA by 2017. Finally, we believe we have
significant opportunities to pursue high return projects identified since the Acquisition. These include capacity expansion projects in China,
Germany, Mexico and Brazil and productivity initiatives from which we expect to benefit over the next several years.
Maintain and further develop technology leadership
We will continue to build on our nearly 150-year heritage of developing market-leading technology. We leverage our intimate customer
relationship and network of customer training centers to align product innovation with customer needs. For example, in the North American
refinish end-market we have recently launched Cromax Mosaic, a new VOC-compliant solventborne coatings line, to complement our broad
waterborne coatings portfolio. Body shops have embraced this product, which enables them to meet environmental regulations while using
existing application equipment and techniques. We have a robust pipeline of over 80 new product innovations, the majority of which we intend
to launch over the next two years, including several products focused on emerging markets. Similarly in the light vehicle end-market, our
proprietary 3-Wet, Eco-Concept, 2-Wet monocoat systems and high throw electrocoat systems have generated new customer wins as OEMs seek
to increase efficiency and reduce costs. We believe this commitment to new product development will help us maintain our technology
leadership and strong market position.
Research and Development
Our focus on technology has allowed us to proactively provide customers with next-generation offerings that enhance productivity and satisfy
increasingly strict environmental regulations. Since our entry into the coatings industry nearly 150 years ago, we believe we have consistently
been at the forefront of coatings technology innovation. These innovations have played a fundamental role in our ability to maintain and grow
our global market share as well as deliver substantial financial returns.
We believe that we are a technology leader well positioned to benefit from a continued industry shift to more productive, environmentally
responsible products. Our technology development is led by a highly experienced and educated workforce that is focused on new product
development, color development, technical customer support and improving our manufacturing processes. As such, our technology development
covers two critical interrelated aspects for us, Research & Development as well as Technical Support & Development. In total, as of June 30,
2014, we have more than 1,300 employees dedicated to technology development. For the years ended December 31, 2013 and 2012, our research
and development expenses were $40.5 million and $41.5 million, respectively. We operate seven technology centers throughout the world where
we develop and align our technology investments with regional business needs.
Intellectual Property
Our technology innovation efforts and industry expertise have built a strong intellectual property base of patents and trademarks. As of June 30,
2014, we had a portfolio of over 1,300 issued patents and over 500 pending
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patent applications, as well as more than 250 trademarks, and we actively apply for patents and trademarks on new products and process
innovations. In addition to protecting our technology with patents, we have a rich portfolio of proprietary technical knowledge, giving us a
valuable competitive advantage in the industry.
Raw Materials
We use thousands of different raw materials, which fall into five broad categories: resins; pigments; solvents; monomers and additives. For the
LTM Period, our total raw material spend was approximately $1.4 billion, representing approximately 50% of our cost of sales. Approximately
78% of these raw materials are derived from crude oil and natural gas. While prices for these raw materials typically fluctuate with energy
prices, such fluctuations are mitigated by the fact that our raw materials are downstream from crude oil and natural gas. The remaining raw
material inputs are composed primarily of minerals (pigments) or natural products ( e.g ., fats and oils).
Since the Acquisition, we have created a global procurement department to help us control raw material spend. We have strong, long-standing
relationships with our top suppliers and maintain multiple supplier relationships for most major raw materials in order to protect against potential
work stoppages and/or significant price increases. However, we have also been focused on locating and qualifying new suppliers in developing
countries to help with cost savings and localized supply, as well as to limit the number of sole sourced inputs. We purchase from a diverse group
of suppliers of raw materials, with our top ten suppliers representing approximately 42% of our 2013 spending on raw materials.
Historically, we have been able to manage raw material volatility through a combination of price increases and, in limited circumstances,
contractual raw material recovery mechanisms. Furthermore, since 2001, despite significant increases and unprecedented volatility in oil prices,
our variable cost of sales have remained stable, between 39% to 42% of net sales. Additionally, since the economic downturn, we have worked
with our light vehicle customers to better manage fluctuations in raw material prices through the addition to agreements of “opener” clauses that
stipulate the renegotiation of pricing if raw material costs fluctuate significantly above or below expectations.
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Real Property
Our extensive geographic footprint is comprised of 35 manufacturing facilities (including nine manufacturing sites operated by our joint
ventures), 7 major technology centers and 45 customer training centers supporting our global operations. The table below presents summary
information regarding our facilities as of June 30, 2014.
Type of Facility/Country
Location
Segment
Ajax
Front Royal, VA
Ft. Madison, IA
Houston, TX
Hilliard, OH
Mt. Clemens, MI
Toledo, OH
Transportation
Performance; Transportation
Performance; Transportation
Performance
Performance
Performance; Transportation
Performance; Transportation
Guarulhos
Monterrey
Ocoyoacac
Tlalnepantla
Valencia
Performance; Transportation
Performance
Performance; Transportation
Performance; Transportation
Performance; Transportation
Guntramsdorf
Mechelen
Montbrison
Wuppertal
Landshut
Vastervik
Bulle
Gebze
Darlington
Performance; Transportation
Performance; Transportation
Performance
Performance; Transportation
Performance
Performance
Performance
Performance; Transportation
Performance
Riverstone
Changchun
Jiading
Savli
Kuala Lumpur
Performance; Transportation
Performance; Transportation
Performance; Transportation
Performance; Transportation
Performance
Chengdu
Dongguan
Huangshan
Qingpu
Shangdong
Cartagena de Indias
Cikarang
Taipei
Amatitlan
Performance
Performance
Performance
Performance
Performance
Performance
Performance
Transportation
Performance
Manufacturing Facilities
North America
Canada
United States of America
Latin America
Brazil
Mexico
Venezuela
EMEA
Austria
Belgium
France
Germany
Sweden
Switzerland
Turkey
United Kingdom
Asia Pacific
Australia
China
India
Malaysia
Joint Venture Owned Manufacturing
Facilities
China
Colombia
Indonesia
Taiwan
Guatemala
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Type of Facility/Country
Joint Venture Partner-Owned
Manufacturing Facilities
China
Japan
South Africa
Russia
Technology Centers
Belgium
China
France
Germany
Mexico
United States of America
Customer Training Centers
Location
Segment
Wuhan
Amagasaki
Chiba
Durban
Port Elizabeth
Moscow
Performance
Transportation
Transportation
Transportation
Transportation
Transportation
Mechelen
Shanghai
Montbrison
Wuppertal
Mexico City
Mt. Clemens, MI
Wilmington, DE
Performance; Transportation
Performance; Transportation
Performance
Performance; Transportation
Performance; Transportation
Performance; Transportation
Performance; Transportation
Location by Region
North America
Latin America
EMEA
Asia Pacific
Number of Facilities
10
7
15
13
Joint Ventures
We are party to 10 joint ventures, five of which are focused on the industrial end-market. We are the majority shareholder in all but three of our
joint ventures. Our fully consolidated joint venture-related net sales were $221.9 million and $219.3 million for 2013 and for the LTM Period,
respectively. See “Risk Factors—Risks Related to our Business—Risks Related to Other Aspects of our Business—Our joint ventures may not
operate according to our business strategy if our joint venture partners fail to fulfill their obligations.”
Employees
As of June 30, 2014, we had approximately 12,650 employees located throughout the world consisting of sales, technical, manufacturing
operations, supply chain and customer service personnel. This figure does not include joint venture employees and contractors.
As of June 30, 2014, approximately 64% of our employees globally were covered by organized labor agreements, including works councils, with
fewer than 50 employees in the United States covered by organized labor agreements. We consider our employee relations to be excellent.
Health, Safety and Environmental
We are subject to various laws and regulations around the world governing the protection of the environment and health and safety, including the
discharge of pollutants to air and water and the management and disposal of hazardous substances. We have an excellent safety record. Our
enhanced focus on health, safety and environmental improvements has resulted in a 54% reduction in our Total Recordable Safety Incident rate
from year-end 2003 to year-end 2013, which is seven times better than the 2012 U.S. coatings industry average (0.35 versus a U.S. industry
average of 2.44). Furthermore, all of our manufacturing facilities are ISO14001 certified.
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We believe that all of our manufacturing and distribution facilities are operated in compliance in all material respects, with existing
environmental requirements, including the operating permits required thereunder at our facilities. From time to time, we may be subject to
notices of violation from environmental regulatory agencies or other claims regarding our compliance with environmental requirements. For
example, in April 2014, the U.S. Environmental Protection Agency (the “EPA”) issued a notice of violation regarding certain hazardous waste
management requirements relating to our Front Royal, Virginia facility, and has proposed a penalty of $552,700 in connection with such notice.
We have responded to the EPA, dispute the basis upon which the EPA has alleged a violation and continue to discuss the resolution of this
matter with the EPA. In addition, the EPA has informed us that it may issue a notice of violation in connection with the alleged failure by our
Front Royal facility prior to the Acquisition to report certain chemical emissions data in 2009, 2010 and 2011 required to be reported to the EPA
under federal law. We believe that we are currently in compliance with such reporting requirements and will work with the EPA to resolve any
alleged past violations. We do not expect that either of these compliance issues will have a material impact on us.
In addition, many of our manufacturing sites have a long history of industrial operations, and cleanup is or may be required at a number of these
locations. Although we are indemnified by DuPont for certain environmental liabilities and we do not expect outstanding cleanup obligations to
have a material impact on our financial position, the ultimate cost of cleanup is subject to a number of variables and difficult to accurately
predict. We also may incur significant additional costs as a result of contamination that is discovered and/or cleanup obligations that are imposed
at these or other properties in the future.
Legal Proceedings
We are from time to time party to legal proceedings that arise in the ordinary course of business. We are not involved in any litigation other than
that which has arisen in the ordinary course of business. We do not expect that any currently pending lawsuits will have a material effect on us.
See “Risk Factors—Risks Related to our Business—Risks Related to Legal and Regulatory Compliance and Litigation—Our results of
operations could be adversely affected by litigation” and “Risk Factors—Risks Related to our Business—Risks Related to Other Aspects of our
Business—DuPont’s breach of its obligations in connection with the Acquisition, including failure to comply with its indemnification
obligations, may materially affect our business and operating results.”
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MANAGEMENT
The following table provides information regarding our executive officers and our Board of Directors:
Name
Age
Charles W. Shaver
Robert W. Bryant
Steven R. Markevich
Joseph F. McDougall
Michael F. Finn
Michael A. Cash
Orlando A. Bustos
Robert M. McLaughlin
Andreas C. Kramvis
Gregory S. Ledford
Martin W. Sumner
Wesley T. Bieligk
Gregor P. Böhm
Allan M. Holt
55
46
54
44
48
53
51
57
62
57
40
35
50
62
Position
Chairman and Chief Executive Officer
Executive Vice President and Chief Financial Officer
Senior Vice President and President, OEM
Senior Vice President and Chief Human Resources Officer
Senior Vice President and General Counsel
Senior Vice President and President, Industrial Coatings
Director
Director
Director
Director
Director
Director
Director
Director
Charles W. Shaver
Mr. Shaver has been our Chairman of the Board and Chief Executive Officer since February 2013. With over 34 years of leadership roles in the
global petrochemical, oil and gas industry, he was most recently the Chief Executive Officer and President of the TPC Group from 2004 to April
2011. Mr. Shaver also served as Vice President and General Manager for General Chemical, a division of Gentek, from 2001 through 2004 and
as a Vice President and General Manager for Arch Chemicals from 1999 through 2001. Mr. Shaver began his career with The Dow Chemical
Company serving in a series of operational, engineering and business positions from 1980 through 1996. He has an extensive background of
leadership roles in a variety of industry organizations, including serving on the American Chemistry Council Board of Directors, the American
Chemistry Council Finance Committee and the National Petrochemical and Refiners Association Board and Executive Committee. Mr. Shaver
currently serves as a member of the Board of Directors for U.S. Silica and Taminco, Inc. Mr. Shaver earned his B.S. in Chemical Engineering
from Texas A&M University. The Board of Directors has concluded that Mr. Shaver should serve as a director because of his leadership role
with our company, his experience in the chemical industry and his significant directorship experience.
Robert W. Bryant
Mr. Bryant became our Executive Vice President and Chief Financial Officer in February 2013. Previously, Mr. Bryant served as the Senior
Vice President and Chief Financial Officer of Roll Global LLC. Before joining Roll Global in 2007, he was the Executive Vice President of
Strategy, New Business Development, and Information Technology at Grupo Industrial Saltillo, S.A.B. de C.V. Prior to joining Grupo Industrial
Saltillo in 2004, Mr. Bryant was President of Bryant & Company, which he founded in 2001. Prior positions included serving as Managing
Principal with Texas Pacific Group’s Newbridge Latin America, L.P., a Senior Associate with Booz Allen & Hamilton Inc. and an Assistant
Investment Officer with the International Finance Corporation (IFC). Mr. Bryant began his career at Credit Suisse First Boston. Mr. Bryant
graduated summa cum laude and Phi Beta Kappa with a B.A. in Economics from the University of Florida and received his M.B.A. from the
Harvard Business School.
Steven R. Markevich
Mr. Markevich became our Senior Vice President and President, OEM in June 2013. Previously, Mr. Markevich was Chief Executive Officer of
GKN Driveline. Prior to that role, from July 2010 to August 2012, he was
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President, GKN Sinter Metals, responsible for global operations. From October 2007 to July 2010, Mr. Markevich was President, North
American Operations for GKN Sinter Metals, and began his tenure with GKN in 2007 as Vice President, Sales & Marketing. At Siegel-Robert
Automotive, he led the company’s commercial strategy, sales, account and program management initiatives. While at Guardian Automotive,
Mr. Markevich served in numerous leadership roles and was responsible for all senior level customer relationships. His career began at
Deloitte & Touche consulting and the National Steel Corporation. Mr. Markevich holds a finance degree from University of Michigan’s Ross
School of Business and is a Certified Public Accountant as well as being certified in Production & Inventory Management (CPIM). He has
completed the Global Senior Leadership Program at UCLA and holds memberships in the Society of Automotive Engineers (SAE), Original
Equipment Suppliers Association (OESA) and American Powder Metallurgy Institute International (APMI).
Joseph F. McDougall
Mr. McDougall became our Senior Vice President and Chief Human Resources Officer in May 2013. Previously, Mr. McDougall was Vice
President, Human Resources, Communications and Six Sigma for Honeywell Performance Materials and Technologies. He served in a number
of positions in Honeywell prior to this most recent position including Vice President, Human Resources for their Air Transport Division,
Director of Human Resources for Honeywell Corporate from 2004-2007, Director of Compensation, Benefits and HRIS for Honeywell’s
Specialty Materials Group from 2003-2004. Prior to joining Honeywell, Mr. McDougall served in human resources leadership roles at the
Goodson Newspaper Group and Robert Wood Johnson University Hospital at Hamilton. He started his career as a human resources and benefits
consultant. Mr. McDougall holds a B.A. from Rider University and graduated Beta Gamma Sigma with an M.B.A. from The Pennsylvania State
University.
Michael F. Finn
Mr. Finn became our Senior Vice President and General Counsel as well as Chief Compliance Officer in April 2013. Mr. Finn also leads
Axalta’s Corporate Secretary function. Previously, Mr. Finn was Vice President and General Counsel of General Dynamics’ Advanced
Information Systems subsidiary. Before that, he was Vice President, General Counsel and Director of Ethics and Export Compliance at General
Dynamics United Kingdom. From 2002 to 2005, Mr. Finn served as Senior Counsel for General Dynamics Corporation. Between 1999 and 2002
he was General Counsel and Vice President at Sideware Inc. and Associate General Counsel and Senior Director of Business Affairs at Teligent
Inc. Prior to those roles, Mr. Finn worked in several positions most notably as an Associate at Willkie, Farr & Gallagher and as an Attorney at
the Office of the General Counsel at the FCC. Mr. Finn graduated from Indiana University with a degree in Finance and graduated cum laude
from New York University’s School of Law.
Michael A. Cash
Mr. Cash became our Senior Vice President and President, Industrial Coatings in August 2013. Prior to joining Axalta, Mr. Cash was Managing
Director, Powder Coatings—Asia Pacific Region at AkzoNobel Coatings and previously in charge of AkzoNobel’s powder business throughout
the Americas. Mr. Cash also held a number of positions at The Sherwin-Williams Company including Vice President, Automotive International,
Vice President of Automotive Marketing and Vice President and Chief Financial Officer of its joint venture with Herberts GmbH, which was
then a Hoechst company. Earlier in his career, Mr. Cash was Vice President and Chief Financial Officer of Carstar Automotive, a U.S. autobody
repair franchise. Mr. Cash received his B.A. in Business Administration from Miami University (Ohio).
Orlando A. Bustos
Mr. Bustos became a member of our Board of Directors following the Acquisition and has over 25 years of experience in the automotive
industry and has held numerous senior executive positions. Mr. Bustos has
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extensive experience managing global operations, executing complex restructurings and forging new business development in emerging markets,
with specific emphasis on China. He is the Chairman and Chief Executive Officer of OHorizons Global, an international management consulting
firm focused on the automotive and industrial sectors. Mr. Bustos previously served as Business Leader for Electronics and Controls, OE
Powertrain, Hybrid Systems, and Driveline at General Motors Global Powertrain Group and was the Executive Director of Global Purchasing.
During his tenure at General Motors, his responsibilities included leading corporate wide initiatives in the areas of globalization, powertrain,
operations, and global purchasing and supply chain throughout Europe, South America and Asia. Mr. Bustos is currently on the Board of
Directors of the Michigan Science Center, and serves on its executive committee, and of the OHorizons Foundation. Previously, he has been on
the Board of Directors of Cooper-Standard, and served on its compensation committee, GMI Diesel Engineering in Japan, Isuzu Motors Polska
in Poland, and DMAX in the United States. Mr. Bustos earned a B.S. in Electrical Engineering from the Georgia Institute of Technology and an
M.B.A. as a Sloan Fellow from the Massachusetts Institute of Technology. The Board of Directors has concluded that Mr. Bustos should serve
as a director because he has significant directorship experience and has significant core business skills, including financial and strategic
planning.
Robert M. McLaughlin
Mr. McLaughlin became a member of our Board of Directors in April 2014. Mr. McLaughlin is Senior Vice President and Chief Financial
Officer of Airgas, Inc. and a member of the company’s Management Committee. Airgas is a leading U.S. supplier of industrial, medical and
specialty gases, and hardgoods, such as personal protective equipment, welding equipment and other related products. Prior to assuming his
current position on October 3, 2006, Mr. McLaughlin served as Vice President and Controller since joining Airgas in 2001. From 1999 to 2001
he served as Vice President of Finance for Asbury Automotive Group. From 1992 to 1999, Mr. McLaughlin was Vice President of Finance and
held other senior financial positions at Unisource Worldwide, Inc. He began his career at Ernst & Young in 1979. He was a Certified Public
Accountant and earned his Bachelor’s degree in accounting from the University of Dayton. The Board of Directors has concluded that
Mr. McLaughlin should serve as a director because he has significant and diverse business experience and has significant experience on all
aspects of financial management and strategic planning in a public company environment.
Andreas C. Kramvis
Mr. Kramvis became a member of our Board of Directors in July 2014. Mr. Kramvis is a Vice Chairman of Honeywell focused on enabling the
global deployment of HOS Gold, advancing the company’s software initiative through improved software development processes, and driving
expansion in High Growth Regions, which are all critical components of Honeywell’s 5-year plan. Prior to this role, Mr. Kramvis served as the
President and Chief Executive Officer of Honeywell Performance Materials and Technologies, a global leader in process technology for the oil
and gas industry as well as the development and production of high-purity, high-quality performance chemicals and materials. Mr. Kramvis has
also served as the President of Honeywell’s Environmental and Combustion Controls business. Intimately familiar with key markets and
economies around the world, Mr. Kramvis has managed companies with global scope across five different industries. He is the author of a book
titled “Transforming the Corporation: Running a Business in the 21st Century,” which demonstrates how to systematically transform a business
for high performance. Andreas is a graduate of Cambridge University, where he studied engineering specializing in electronics and he holds an
M.B.A. from Manchester Business School. The Board of Directors has concluded that Mr. Kramvis should serve as a director because he brings
extensive experience regarding the management of public and private companies, and the financial services industry.
Gregory S. Ledford
Mr. Ledford became a member of our Board of Directors following the Acquisition. Mr. Ledford is a Managing Director at Carlyle and is head
of the firm’s Industrial & Transportation team. He joined Carlyle in 1988 and,
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prior to his appointment as Managing Director, held the positions of Vice President and Principal, responsible for leading Carlyle’s Investments
in numerous companies. From 1991 to 1997, he was Chairman and CEO of the Reilly Corp., a former Carlyle portfolio company. In addition, he
was Director of Capital Leasing for MCI Telecommunications. Mr. Ledford is a member of the Board of Directors of Allison Transmission,
Greater China Intermodal, HD Supply and Veyance Technologies. Mr. Ledford is a graduate of the University of Virginia’s McIntire School of
Commerce. He received an M.B.A. from Loyola College. The Board of Directors has concluded that Mr. Ledford should serve as a director
because he brings extensive experience regarding the management of public and private companies, and the financial services industry.
Martin W. Sumner
Mr. Sumner became a member of our Board of Directors in August 2012. Mr. Sumner is a Managing Director at Carlyle focused on U.S. buyout
opportunities in the industrial and transportation sectors. Mr. Sumner has led, or been a key contributor in, Carlyle’s current investments in
Allison Transmission and Veyance Technologies where he serves on the Board and is chairman of the audit committee. He previously served on
the Board of AxleTech International Holdings prior to its sale to General Dynamics and the Board of United Components prior to its sale to the
Rank Group. Mr. Sumner received his M.B.A. from Stanford University, where he was an Arjay Miller Scholar. He received a B.S. in
economics, magna cum laude, from the Wharton School of the University of Pennsylvania. The Board of Directors has concluded that
Mr. Sumner should serve as a director because he has significant directorship experience and has significant core business skills, including
financial and strategic planning.
Wesley T. Bieligk
Mr. Bieligk became a member of our Board of Directors following the Acquisition. Mr. Bieligk is a Vice President at Carlyle focused on buyout
opportunities in the industrial and transportation sectors. Mr. Bieligk is a member of the Board of Directors of Signode Industrial Group and
Greater China Intermodal. In addition, he has been actively involved in Carlyle’s investments in Allison Transmission and the Hertz
Corporation. Mr. Bieligk received an M.B.A. with honors from The Wharton School at the University of Pennsylvania and a B.S. in commerce
with distinction from The McIntire School of Commerce at the University of Virginia. The Board of Directors has concluded that Mr. Bieligk
should serve as a director because he has significant directorship experience and has significant core business skills, including financial and
strategic planning.
Gregor P. Böhm
Mr. Böhm became a member of our Board of Directors following the Acquisition. Mr. Böhm is a Managing Director at Carlyle and Co-head of
the firm’s Europe Buyout group. He is based in London. Mr. Böhm is a member of the Board of HC Starck, Puccini, Ameos and Alloheim. He
has previously served on the Boards of Andritz, Messer Cutting and Welding, Beru, Honsel Edscha, and HT Troplast. Prior to joining Carlyle,
Mr. Böhm was a Manager at I.M.M., one of Germany’s leading buyout groups. Prior to that he was an Analyst with Morgan Stanley’s Mergers
and Acquisitions department in London. Mr. Böhm is a graduate of Cologne University and earned his M.B.A. from Harvard Business School.
The Board of Directors has concluded that Mr. Böhm should serve as a director because he has significant directorship experience and has
significant core business skills, including financial and strategic planning.
Allan M. Holt
Mr. Holt became a member of our Board of Directors following the Acquisition. Mr. Holt is a Managing Director at Carlyle and is co-head of
the firm’s U.S. Buyout group. He previously was head of Carlyle’s Global Aerospace, Defense, Technology and Business/Government Services
team where he led many of Carlyle’s most successful investments. Mr. Holt joined Carlyle in 1992, initially with primary responsibilities as
Senior Vice President and Chief Financial Officer of one of Carlyle’s portfolio companies, where he was involved in the
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negotiation and sale of the business. Mr. Holt is a member of the Boards of Directors of Booz Allen Hamilton Holding Corp., HCR ManorCare
Inc., NBTY, Inc., Ortho-Clinical Diagnostics Bermuda Co. Ltd. and SS&C Technologies, Inc. Mr. Holt is a graduate of Rutgers University and
received his M.B.A. from the University of California, Berkeley. The Board of Directors has concluded that Mr. Holt should serve as a director
because he brings extensive experience regarding the management of public and private companies, and the financial services industry.
Controlled Company
For purposes of the rules of the NYSE, we expect to be a “controlled company.” Under NYSE rules, controlled companies are companies of
which more than 50% of the voting power for the election of directors is held by an individual, a group or another company. We expect that
Carlyle will continue to own more than 50% of the combined voting power of our common shares upon completion of this offering and will
continue to have the right to designate a majority of the members of our Board of Directors for nomination for election and the voting power to
elect such directors following this offering. Accordingly, we expect to be eligible to, and we intend to, take advantage of certain exemptions
from corporate governance requirements provided in the rules of the NYSE. Specifically, as a controlled company we would not be required to
have (i) a majority of independent directors, (ii) a nominating and corporate governance committee composed entirely of independent directors
or (iii) a compensation committee composed entirely of independent directors. Therefore, following this offering we will not have a majority of
independent directors, and our nominating and corporate governance and compensation committees will not consist entirely of independent
directors. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the NYSE rules.
The controlled company exemption does not modify the independence requirements for the audit committee, and we intend to comply with the
requirements of the Sarbanes-Oxley Act and the NYSE rules, which require that our audit committee be composed of at least three members, one
of whom will be independent upon the listing of our common shares on the NYSE, a majority of whom will be independent within 90 days of
the date of this prospectus, and each of whom will be independent within one year of the date of this prospectus.
Board of Directors Composition
Our Board of Directors currently consists of nine members. Mr. Shaver is our Chairman of the Board of Directors. The exact number of
members on our Board of Directors may be modified from time to time by the Board of Directors and the Board of Directors may fill any
vacancies subject to the terms of our principal stockholders agreement. Following this offering, our Board of Directors will be divided into three
classes whose members serve three-year terms expiring in successive years. Directors hold office until their successors have been duly elected
and qualified or until the earlier of their respective death, resignation or removal.
At each annual meeting of shareholders, the successors to the directors whose terms will then expire will be elected to serve from the time of
election and qualification until the third annual meeting of shareholders following such election. Any additional directorships resulting from an
increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of
the directors.
In connection with the Acquisition, on February 1, 2013, we entered into a stockholders agreement, which we amended and restated on July 31,
2013 and to which Carlyle and members of management who hold common shares are party. Upon the effectiveness of the registration statement
of which this prospectus forms a part, we will also enter into a new principal stockholders agreement. See “Certain Relationships and Related
Person Transactions—Stockholders Agreements.”
When considering whether directors and nominees have the experience, qualifications, attributes or skills, taken as a whole, to enable the Board
of Directors to satisfy their oversight responsibilities effectively in light of our business and structure, the Board of Directors focused primarily
on each person’s background and experience as
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reflected in the information discussed in each of the directors’ individual biographies set forth immediately above. We believe that our directors
provide an appropriate diversity of experience and skills relevant to the size and nature of our business.
Board of Directors Committees
Our Board of Directors directs the management of our business and affairs and conducts its business through meetings of the Board of Directors
and three standing committees: the executive committee, the audit committee and the compensation committee. Effective upon completion of
this offering, we expect that our Board of Directors will also have a nominating and corporate governance committee. In addition, from time to
time, other committees may be established under the direction of our Board of Directors when necessary or advisable to address specific issues.
Each of the executive committee, the audit committee and the compensation committee operates, and the nominating and corporate governance
committee will operate, under a charter that has been or will be approved by our Board of Directors. A copy of each of the audit committee,
compensation committee and nominating and corporate governance committee charters will be available on our website upon completion of this
offering.
In addition, the principal stockholders agreement that we expect to enter into upon effectiveness of the registration statement of which this
prospectus forms a part will provide that each committee of the Board of Directors will include a proportional number of directors designated by
Carlyle that is no less than the proportion of directors designated by Carlyle then serving on our Board of Directors, subject to Company’s
obligation to comply with any applicable independence requirements.
Executive Committee
Our executive committee, which following this offering will consist of Messrs. Shaver (Chairman), Ledford and Böhm, is responsible for,
among its other duties and responsibilities, assisting the board in its decision-marking processes, reviewing certain transactions consummated by
the Company or any of its subsidiaries and considering matters concerning the Company that may arise from time to time.
Audit Committee
Our audit committee, which following this offering will consist of Messrs. McLaughlin (Chairman), Kramvis, Sumner and Bieligk, is
responsible for, among its other duties and responsibilities, assisting our Board of Directors in overseeing: our accounting and financial reporting
processes and other internal control processes, the audits and integrity of our financial statements, our compliance with legal and regulatory
requirements, the qualifications and independence of our independent registered public accounting firm, and the performance of our internal
audit function and independent registered public accounting firm. Our audit committee is directly responsible for the appointment,
compensation, retention and oversight of our independent registered public accounting firm.
Our Board of Directors has determined that Messrs. McLaughlin and Kramvis are each an “audit committee financial expert” as such term is
defined under the applicable regulations of the SEC and have the requisite accounting or related financial management expertise and financial
sophistication under the applicable rules and regulations of the NYSE. Our Board of Directors has also determined that Messrs. McLaughlin and
Kramvis are independent under Rule 10A-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the NYSE
standard, for purposes of the audit committee. Rule 10A-3 under the Exchange Act requires us to have (i) a majority of independent audit
committee members within 90 days of the effectiveness of the registration statement of which this prospectus forms a part and (ii) all
independent audit committee members (within the meaning of Rule 10A-3 under the Exchange Act and the NYSE standard) within one year of
the effectiveness of the registration statement of which this prospectus forms a part.
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We intend to comply with these independence requirements within the appropriate time periods. All members of our audit committee are able to
read and understand fundamental financial statements, are familiar with finance and accounting practices and principles and are financially
literate.
Compensation Committee
Our compensation committee, which following this offering will consist of Messrs. Sumner (Chairman), Ledford and Bustos, is responsible for,
among its other duties and responsibilities, reviewing and approving the compensation philosophy for our Chief Executive Officer, reviewing
and approving all forms of compensation and benefits to be provided to our other executive officers and reviewing and overseeing the
administration of our equity incentive plans.
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee, which following this offering we expect will consist of Messrs. Sumner (Chairman) and
Ledford, is responsible for, among its other duties and responsibilities, identifying and recommending candidates to our Board of Directors for
election to our Board of Directors, reviewing the composition of members of our Board of Directors and its committees, developing and
recommending to the Board of Directors corporate governance guidelines that are applicable to us, and overseeing our Board of Directors and its
committees evaluations.
Compensation Committee Interlocks and Insider Participation
During the year ended December 31, 2013, our compensation committee consisted of Messrs. Sumner (Chairman), Ledford and Bustos. None of
the members of our compensation committee is currently one of our officers or employees. During the year ended December 31, 2013, none of
our executive officers served as a member of the Board of Directors or compensation committee, or other committee serving an equivalent
function, of any entity that has one or more executive officers who serve as members of our Board of Directors or our compensation committee.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all of our directors and employees, including our executive officers. A
copy of the Code of Business Conduct and Ethics will be available on our website and will also be provided to any person without charge.
Requests should be made in writing to the Senior Vice President and General Counsel at Axalta Coating Systems Ltd., Two Commerce Square,
2001 Market Street, Suite 3600, Philadelphia, PA, 19103 or by telephone at (855) 547-1461.
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COMPENSATION DISCUSSION AND ANALYSIS
Executive Summary
This Compensation Discussion and Analysis provides an overview and analysis of (i) the elements of our compensation program for our named
executive officers identified below, (ii) the material compensation decisions made under that program and reflected in the executive
compensation tables that follow this Compensation Discussion and Analysis and (iii) the material factors considered in making those decisions.
As a company dedicated to a pay-for-performance culture, we intend to provide our named executive officers with compensation that is
significantly performance based. Our executive compensation program is designed to align executive pay with our performance on both short
and long-term bases, link executive pay to specific, measurable results intended to create value for shareholders, and utilize compensation as a
tool to assist us in attracting and retaining the high-caliber executives that we believe are critical to our long-term success.
Compensation for our named executive officers consists primarily of the elements, and their corresponding objectives, identified in the following
table.
Compensation Element
Primary Objective
Base salary
To recognize performance of job responsibilities and to attract and retain individuals with
superior talent.
Axalta Bonus Plan (annual performance-based
compensation, “ABP”)
To promote our near-term performance objectives across the entire workforce and reward
individual contributions to the achievement of those objectives. ABP awards for 2013 are
shown in the Summary Compensation Table below under the heading “Non-equity
Incentive Plan Compensation.”
Discretionary long-term equity incentive awards
To emphasize our long-term performance objectives, encourage the maximization of
shareholder value and retain key executives by providing an opportunity to participate in
the ownership of our common shares.
Retirement savings (401(k)) and nonqualified
deferred compensation
To provide an opportunity for tax-efficient savings and long-term financial security.
Severance and change in control benefits
To encourage the continued attention and dedication of key individuals when considering
strategic alternatives.
Other elements of compensation and perquisites
To attract and retain talented executives in a cost-efficient manner by providing benefits
with high perceived values at relatively low cost to us.
To serve the foregoing objectives, our overall compensation program is generally designed to be adaptive rather than purely formulaic. Our
compensation committee, which was formed in January 2014, has primary authority to determine and approve compensation decisions with
respect to our named executive officers. Prior to the formation of our compensation committee, compensation decisions were carried out by our
Board of Directors. For 2013, compensation for our named executive officers reflected the dynamics of the markets in which we compete for
executive talent, as each of our named executive officers commenced service with us upon, or in some cases shortly following, our becoming a
standalone company as a result of the Acquisition. As a result, compensation levels, which included base salaries, bonuses and target non-equity
incentive based compensation, and stock option award levels, were determined in significant part based on arm’s-length negotiations with the
named executive officers prior to their commencement of service with us.
For the year ended December 31, 2013, our named executive officers (our “NEOs”) are:
•
Charles W. Shaver, Chairman and Chief Executive Officer,
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•
Robert W. Bryant, Executive Vice President, Chief Financial Officer,
•
Steven R. Markevich, Senior Vice President and President, OEM,
•
Joseph F. McDougall, Senior Vice President, Chief Human Resources Officer, and
•
Michael F. Finn, Senior Vice President, General Counsel.
Our compensation decisions for the NEOs in 2013 are discussed below in relation to each of the above-described elements of our compensation
program. The below discussion is intended to be read in conjunction with the executive compensation tables and related disclosures that follow
this Compensation Discussion and Analysis.
Compensation Overview
Our overall compensation program is structured to attract, motivate and retain highly qualified executives by paying them competitively,
consistent with our success and their contribution to that success. We believe compensation should be structured to ensure that a significant
portion of an executive’s compensation opportunity will be related to factors that directly and indirectly influence shareholder value.
Accordingly, we set goals designed to link each NEO’s compensation to our performance and the NEO’s own performance. Consistent with our
performance-based philosophy, we provide a base salary to our NEOs and include a significant incentive-based component of their
compensation, which includes variable ABP awards based on our financial and operational performance, as well as stock option awards,
including a significant amount of premium priced options, granted to our NEOs in connection with our becoming a standalone company as a
result of the Acquisition or, if later, upon commencement of employment with us, which option awards are meant to align our NEOs’ interests
with our long-term performance.
Total compensation for our NEOs has been allocated between cash and equity compensation, taking into consideration the balance between
providing short-term incentives and long-term investment in our financial performance, to align the interests of management with the interests of
shareholders. The variable ABP awards and the equity awards are designed to ensure that total compensation reflects our overall success or
failure and to motivate the NEOs to meet appropriate performance measures, thereby maximizing total return to shareholders. In connection with
this offering, we intend to adopt a new equity incentive plan (the “2014 Equity Incentive Plan” or the “2014 Plan”) and which will be effective
prior to the consummation of this offering. The 2014 Plan is discussed in more detail under “—Executive Compensation Plans—2014 Equity
Incentive Plan” below.
Determination of Compensation Awards
The compensation committee is provided with the primary authority to determine and approve the compensation paid to our NEOs. The
compensation committee is charged with, among other things, reviewing compensation policies and practices to ensure (i) adherence to our
compensation philosophies and (ii) that the total compensation paid to our NEOs is fair, reasonable and competitive, taking into account our
position within our industry, including our comparative performance, and our NEOs’ level of expertise and experience in their respective
positions. Prior to the formation of our compensation committee in January 2014, compensation decisions were carried out by our Board of
Directors. In furtherance of the considerations described above, the compensation committee will be primarily responsible for (i) determining
any future adjustments to base salary and target bonus levels (representing the bonus that may be awarded expressed as a percentage of base
salary or as a dollar amount for the year), (ii) assessing the performance of the Chief Executive Officer and other NEOs for each applicable
performance period and (iii) determining the awards to be paid to our Chief Executive Officer and other NEOs under the ABP for each year. To
aid the compensation committee in making its determinations, the Chief Executive Officer is expected to (and for 2013 did) provide
recommendations to the compensation committee regarding the compensation of all NEOs, excluding himself. The performance of our senior
executive management team is expected to be reviewed at least annually by the compensation committee, and we anticipate that the
compensation committee will determine any adjustments to each NEO’s compensation at least annually.
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In determining compensation levels for our NEOs, we considered each NEO’s particular position and responsibility and relied upon the
judgment and industry experience of the members of our Board of Directors, including their knowledge of competitive compensation levels in
our industry. We believe that base salaries should be competitive with salaries for executive officers in similar positions and with similar
responsibilities in our marketplace. However, in making compensation determinations for 2013, we did not rely on benchmarking or
compensation consultants, did not directly compare compensation levels with any other companies, and did not refer to any specific
compensation survey or other data. Rather, in alignment with the considerations described above, we determined the total amount of
compensation for our NEOs, and the allocation of total compensation among each of our three main components of compensation, in reliance
upon the judgment and general industry knowledge of the members of our Board of Directors obtained through years of service with
comparably-sized companies in our industry and other similar industries to ensure we attract, develop and retain superior talent.
Stock Ownership Requirements
To directly align the interests of our NEOs with us and our shareholders, our compensation committee has adopted stock ownership guidelines.
The guidelines require that, within five years after this offering, the Chief Executive Officer must directly or indirectly own an amount of our
common shares equal to five times the Chief Executive Officer’s base salary, and the Chief Executive Officer’s executive and senior vice
president direct reports must directly or indirectly own an amount of our common shares equal to two times their respective base salaries. If
executives do not comply with the ownership requirement, they must retain 50% of our common shares acquired upon stock option exercises and
75% of our common shares issued upon the vesting of restricted stock, restricted stock unit and performance share grants, in each case, net of
applicable taxes. The compensation committee expects to annually review each NEO’s compliance with the stock ownership guidelines based on
the NEO’s current base salary and the price of our common shares as of the end of the prior year.
Base Compensation for 2013
Base Salaries
We set base salaries for our NEOs upon their commencement of employment with us in 2013, generally at a level we deemed necessary to attract
and retain individuals with superior talent and based on our individual negotiations with our NEOs, each of whom commenced service with us in
2013. Each year we expect to determine base salary adjustments after evaluating the job responsibilities and demonstrated proficiency of the
NEOs as assessed by the compensation committee, and for NEOs other than the Chief Executive Officer, in conjunction with recommendations
to be made by the Chief Executive Officer. No formulaic base salary increases are provided to the NEOs, and no NEOs have received base
salary increases since their commencement of service with us in 2013.
The base salaries for our NEOs are set forth in the following table:
Base Salary
Name and Principal Position
($)
Charles W. Shaver
Chairman & Chief Executive Officer
Robert W. Bryant
Executive Vice President, Chief Financial Officer
Steven R. Markevich
Senior Vice President & President, OEM
Joseph F. McDougall
Senior Vice President & Chief Human Resources Officer
Michael F. Finn
Senior Vice President & General Counsel
750,000
525,000
500,000
385,000
350,000
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Sign-on and Retention Bonuses
In 2013, in connection with the commencement of employment with us of certain of our NEOs, we entered into special sign-on and retention
bonus arrangements, as follows:
•
Mr. Bryant: Mr. Bryant’s employment agreement provided for a single lump sum sign-on bonus payment of $221,000, provided that
he remained employed with us through June 15, 2013.
•
Mr. Markevich: Mr. Markevich received an initial sign-on bonus payment of $250,000 upon his commencement of employment with
us in April 2013. Mr. Markevich’s employment agreement also provided for an additional retention bonus payment of $300,000,
provided that he remained continuously employed with us through April 15, 2014.
•
Mr. McDougall: Mr. McDougall received an initial sign-on bonus payment of $250,000. Mr. McDougall’s employment agreement
also provided for an additional retention bonus payment of $210,000, provided that he remained continuously employed with us
through December 31, 2013.
The retention and sign-on bonuses were determined based on individual negotiations with these NEOs and were awarded as an inducement for
such NEOs to join and remain with the Company for designated time periods. These payments were also intended to compensate the NEOs for
relinquishing unvested equity compensation or other incentive opportunities from their prior employers. The retention and sign-on bonuses were
intended as one-time special payments, and we do not presently have any intent to provide our NEOs with any new rights to payments of this
type.
Annual Performance-Based Compensation for 2013
We structure our compensation programs to reward NEOs based on our performance and the individual executive’s relative contribution to that
performance. This allows NEOs to receive ABP awards in the event certain specified corporate performance measures are achieved. The annual
ABP pool is determined by the compensation committee based upon a formula with reference to the extent of achievement of corporate-level
performance goals established annually by the compensation committee. The ABP is designed to reward NEOs for contributions made to help us
meet our annual performance goals. The amount actually received by NEOs will depend on our performance and individual performance during
the year. The compensation committee may make discretionary adjustments to the formulaic ABP awards to reflect its subjective determination
of an individual’s impact and contribution to overall corporate performance, as discussed below.
Under the terms of the ABP, the NEOs’ formulaic ABP awards are based on a percentage of their base salaries and currently range from 60% to
100% for target-level performance achievement. Maximum formulaic ABP awards vary according to each executive and are set at levels that we
determine are necessary to maintain competitive compensation practices and properly motivate our NEOs by rewarding them for our short-term
performance and their contributions to that performance. With the exception of Messrs. Markevich and McDougall, whose employment
agreements provided for 2013 only that they would receive an ABP award at least equal to their target level, none of our NEOs were entitled to
receive a guaranteed ABP award for 2013. We do not presently intend to provide for any guaranteed ABP amounts for our current NEOs in
future years and each of our NEOs ultimately earned ABP amounts for 2013 in excess of target, as described in more detail below.
Once the extent of achievement of corporate ABP performance targets and the formulaic ABP calculations have been determined, the
compensation committee may adjust the amount of ABP awards paid upward or downward based upon its overall subjective assessment of each
NEO’s performance, business impact, contributions, leadership and attainment of individual objectives established periodically throughout the
year, as well as other related factors. In addition, ABP funding amounts may be adjusted by the compensation committee to account for unusual
events such as extraordinary transactions, asset dispositions and purchases, and mergers and acquisitions if, and to the extent, the compensation
committee does not consider the effect of such events indicative of our performance.
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The following chart sets forth the formulaic ABP awards for threshold and target-level performance and the maximum ABP awards for our
NEOs:
Name and Principal Position
Formulaic ABP at
Formulaic ABP at
threshold
performance
(% of base salary)
target-level
performance
(% of base salary)
Charles W. Shaver
Chairman & Chief Executive Officer
Robert W. Bryant
Executive Vice President, Chief Financial
Officer
Steven R. Markevich
Senior Vice President & President, OEM
Joseph F. McDougall
Senior Vice President & Chief Human
Resources Officer
Michael F. Finn
Senior Vice President & General Counsel
Maximum ABP
award
(% of base salary)
60%
100%
200%
45%
75%
150%
45%
75%
150%
36%
60%
120%
36%
60%
120%
For the year ended December 31, 2013, ABP performance goals were based upon Adjusted EBIT (as defined below), Gross Adjusted Free Cash
Flow (as defined below) and individual performance metrics. For this purpose, “Adjusted EBIT” was defined as our consolidated earnings before
interest expense or income, income tax expense or income, and other adjustments as defined in the credit agreement governing our Senior
Secured Credit Facilities. “Adjusted Free Cash Flow” was defined as net cash flow before debt repayments and repurchases, cash interest
expense or income, government price reduction payments and hedging collateral change. Individual performance is generally based on personal
contributions, as described in more detail below.
For each performance year, the compensation committee assigns a target, threshold and maximum value to each performance metric. ABP award
amounts for performance between the threshold and maximum levels are determined at the beginning of the applicable performance period and
depend on the level of achievement for each metric relative to its assigned performance target, in accordance with a predetermined payout
matrix. The minimum ABP award under the payout matrix ( i.e. , 60% of the target ABP award) is payable only upon achievement of the
threshold performance goals for each performance metric ( i.e. , 80% of each performance target). The maximum ABP award under the payout
matrix ( i.e. , 200% of the target ABP award) is payable only upon achievement of maximum-level performance goals for each performance
metric ( i.e. , approximately 133% of each performance target). ABP award amounts increase linearly between threshold and target-level
performance and linearly between target and maximum-level performance. The following chart sets forth the weighting of each performance
metric, the threshold, target and maximum performance goals, and the actual performance achieved under our ABP program for the year ended
December 31, 2013:
Weighting
Performance Metric
(%)
Adjusted EBIT (1)
Adjusted Free Cash Flow (1)
Individual Performance (3)
(1)
(2)
(3)
Threshold
($ MM)
50
25
25
635.0
430.0
—
Target
($ MM)
793.7
537.4
—
Maximum
Achieved
($ MM)
($ MM)
1031.8
698.7
—
840.1
— (2)
—
Excluding one-time costs and expenses related to the Acquisition.
As a result of the impact of certain Acquisition-related matters on our free cash flow for 2013, the compensation committee made certain
adjustments to our 2013 Adjusted Free Cash Flow targets. This resulted in an achievement level at 3.7% above target and a resulting
payout level for this component of 111.1%.
Individual performance payouts vary by participant, as described below.
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For the individual performance component of the ABP, the compensation committee provides each NEO with a discretionary ABP individual
performance factor reflecting the committee’s subjective assessments of each NEO’s performance, business impact, contributions and
leadership, among other factors. For 2013, the compensation committee considered the following key achievements in determining the ABP
individual performance component for each of our NEOs:
•
Mr. Shaver : Mr. Shaver’s individual performance factor reflected several elements, including his overall leadership after the
Acquisition. Under Mr. Shaver’s leadership we outperformed financial targets set by the Board of Directors, had a strong operating
record on safety and exceeded our Board of Directors’ expectations regarding transition-related items. Mr. Shaver personally
recruited a number of senior executives who contributed significantly to our performance.
•
Mr. Bryant : Mr. Bryant’s individual performance factor reflected his leadership of the financial transition after the Acquisition, our
overall corporate performance and the quality and experience of the new finance leadership team that was hired in 2013. Mr. Bryant
has been instrumental in leading the effort to quickly and effectively make us a standalone company.
•
Mr. Markevich : Mr. Markevich’s individual performance factor reflected his ability to quickly create a strategy for our light vehicle
OEM market, including a global plan on retaining and winning key accounts. We believe that Mr. Markevich’s leadership has been a
driving force in shaping our light vehicle coatings business into a customer-facing, metric-driven, global business.
•
Mr. McDougall : Mr. McDougall’s individual performance factor reflected the rapid development and deployment of contemporary
human resources practices across the Company. In addition, Mr. McDougall led the ongoing initiative to recruit key executives and
directors. Mr. McDougall has played an important role in the formation and ongoing operation of our leadership team.
•
Mr. Finn : Mr. Finn’s individual performance factor reflected his significant contributions to the Company, including his legal
contributions. Mr. Finn has led the transformation of the General Counsel role while ensuring that all commercial and operational
legal matters are appropriately resolved. Mr. Finn has been a key contributor in our overall leadership after the Acquisition.
Based on the considerations described above and our level of performance in relation to the corporate ABP performance targets, the ABP awards
earned by Messrs. Shaver, Bryant, McDougall and Finn equaled 136.6% of their respective target ABP awards (or 136.6% of base salary for
Mr. Shaver, 102.4% of base salary for Mr. Bryant, and 82.0% of base salary for Mr. McDougall and Mr. Finn). The total ABP award for
Mr. Markevich equaled 121.6% of his target ABP award (or 91.2% of his base salary). Based on our overall strong performance, the
compensation committee also elected to disregard provisions in Messrs. Shaver’s, Bryant’s and McDougall’s employment agreements providing
that their 2013 ABP awards would be prorated to reflect their partial year of service during their first year of employment in 2013.
Discretionary Long-Term Equity Incentive Awards
Our NEOs, along with other key employees, were granted stock options to purchase our common shares in connection with our becoming a
separate company as a result of the Acquisition or, if later, at the commencement of their employment with us, and are eligible to receive
additional awards of stock options or other equity or equity-based awards under our equity incentive plan at the discretion of the compensation
committee. However, we have not historically made annual or regular equity grants to our NEOs or other key employees.
Equity award grants are tied to time-based vesting requirements and the creation of shareholder value. They are designed not only to compensate
but also to motivate and retain the recipients by providing an opportunity for the recipients to participate in the ownership of our common shares.
The equity award grants to members of the senior management team also promote our long-term compensation objectives by aligning the
interests of the executives with the interests of our shareholders.
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Generally, stock options granted under our equity incentive plan have vesting schedules that are designed to encourage an optionee’s continued
employment and exercise prices that are designed to reward an optionee for our performance. Stock options generally expire ten years from the
date of the grant and vest in five equal annual installments, subject to the optionee’s continued employment on each applicable vesting date. For
stock options awarded to our NEOs in 2013, the first 20% of their options vested on January 1, 2014, and the remaining shares vest in 20%
allotments on each anniversary of January 1, 2014. The stock options are also subject to vesting acceleration in certain circumstances. For more
information about vesting acceleration of the stock options, see the discussion below under the heading “—Potential Payments Upon
Termination or Change-in-Control.” Vesting of the stock options will not be accelerated upon the completion of this offering.
We have historically granted to key employees options with staggered exercise prices, such that the exercise price of a portion of the option is
substantially greater than (in increments of 1.5 times and 2 times) the fair market value of the shares underlying the option on the date of grant,
thereby creating incentives for our NEOs and other key employees to seek to generate increased shareholder value.
The number of the stock options awarded to our NEOs during the year ended December 31, 2013 is listed below.
Name
Number of Options Granted
Charles W. Shaver
Robert W. Bryant
Steven R. Markevich
Joseph F. McDougall
Michael F. Finn
4,463,805
1,517,692
1,031,635
545,575
495,977
In determining these individual stock option awards for each of our NEOs, we generally took into account their relative levels of responsibility
and authority within our organizational structure and their anticipated contributions to our success in driving stockholder value over the long
term. Award amounts were also subject to individual negotiations with each NEO in connection with their commencement of employment with
us.
Defined Contribution Plans
401(k) Plan
We maintain a defined contribution plan that is tax-qualified under Section 401(k) of the Code (the “401(k) Plan”). The 401(k) Plan permits our
eligible salaried employees to defer receipt of portions of their eligible salaries, subject to certain limitations imposed by the Code, by making
contributions to the 401(k) Plan, including flexible compensation contributions, Roth contributions, catch-up contributions and after-tax
contributions.
We provide matching contributions to the 401(k) Plan in an amount equal to 100% of each participant’s pre-tax contribution up to a maximum of
6% of the participant’s annual eligible salary, subject to certain other limits. In 2013, we made a company contribution to the 401(k) Plan in an
amount equal to 3% of eligible salary, subject to other limits. In 2014, the 401(k) Plan was amended to provide matching contributions in an
amount equal to 100% of each participant’s pre-tax contribution up to a maximum of 4% of the participant’s annual eligible salary, subject to
certain other limits, and a company contribution of up to 2% of the participant’s annual eligible salary, subject to our performance.
Participants are 100% vested in all contributions, including company contributions. The 401(k) Plan is offered on a nondiscriminatory basis to
all of our salaried employees, including NEOs.
Deferred Compensation Plan
In addition to the 401(k) Plan, we maintain a retirement savings restoration plan (the “Restoration Plan”), which is a nonqualified deferred
compensation plan that for 2013 permitted a select group of our management,
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including NEOs and other key employees, to defer up to 6% of their compensation in excess of the Code compensation limits. We provided
matching contributions to the Restoration Plan in an amount equal to 100% of the participant’s deferral election. We also provided nonelective
contributions in an amount equal to 3% of the participant’s compensation in excess of the Code compensation limits. A participant’s deferrals
and matching contributions are 100% fully vested and nonelective contributions are fully vested after three years of credited service.
The compensation committee believes that matching and company contributions assist us in attracting and retaining talented employees and
executives. The 401(k) Plan and the Restoration Plan provide an opportunity for participants to save money for retirement on a tax-deferred basis
and to achieve financial security, thereby promoting retention.
Employment and Severance Arrangements
The compensation committee considers the maintenance of a sound management team to be essential to protecting and enhancing our best
interests. To that end, we recognize that the uncertainty that may exist among management with respect to their “at-will” employment with us
may result in the departure or distraction of management personnel to our detriment. Accordingly, the compensation committee has determined
that severance arrangements are appropriate to encourage the continued attention and dedication of certain members of our management and to
allow them to focus on the value to shareholders of strategic alternatives without concern for the impact on their continued employment. Each of
the NEOs has an employment agreement that provides for severance benefits upon termination of employment.
Mr. Shaver’s employment agreement has a term beginning on the date of the completion of the Acquisition, which was February 1, 2013, and
ending on the third anniversary thereof. The agreement is extended automatically for successive 18 month periods thereafter unless either party
delivers notice of non-renewal to the other no later than 45 days before the end of the applicable term. Upon our termination of Mr. Shaver’s
employment without cause (which includes our non-extension of the term) or by Mr. Shaver for good reason, subject to his timely execution of a
general release of claims against us, Mr. Shaver would be entitled to receive a payment equal to 3.0 times his annual base salary, payable in
regular installments over an 18-month period in accordance with our regular payroll practices, and his ABP award earned in the year preceding
his termination to the extent unpaid. In addition, if such a termination occurs within one year following a change in control, subject to
Mr. Shaver’s timely execution of a general release of claims against us, Mr. Shaver would be entitled to receive a lump-sum payment equal to
4.0 times his annual base salary, instead of installment payments equal to 3.0 times his annual base salary, and an additional lump-sum payment
of $60,000. During his employment and for 18 months following termination (or for 24 months following termination if he is entitled to changein-control payments), Mr. Shaver’s employment agreement prohibits him from competing with our business and from soliciting our employees,
customers or distributors to terminate their employment or arrangements with us. “Cause” is defined in Mr. Shaver’s employment agreement to
mean (i) his failure to substantially perform his duties (other than a failure resulting from disability) or materially comply with any of our
policies, (ii) a determination by our Board of Directors that he has failed to carry out or comply with any lawful and reasonable directive of our
Board of Directors, (iii) his breach of a material provision of his employment agreement, (iv) his conviction, plea of no contest, or imposition of
unadjudicated probation for any felony or crime involving moral turpitude, (v) his unlawful use (including being under the influence) or
possession of illegal drugs on our premises or while performing his duties and responsibilities or (vi) his commission of an act of fraud,
embezzlement, misappropriation, willful misconduct or breach of fiduciary duty against us. “Good reason” is defined in Mr. Shaver’s
employment agreement to mean: (i) a decrease in Mr. Shaver’s annual base salary, other than a decrease of less than 10% in connection with a
contemporaneous decrease in annual base salaries for other senior executives, (ii) a material reduction in authority or responsibilities or (iii) a
relocation of Mr. Shaver’s primary office by more than 35 miles from our headquarters.
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Mr. Bryant’s employment agreement has a term beginning on the date of completion of the Acquisition, which was February 1, 2013, and ending
on the third anniversary thereof. The agreement is extended automatically for successive 18 month periods thereafter unless either party delivers
notice of non-renewal to the other no later than 45 days before the end of the applicable term. Upon our termination of Mr. Bryant’s employment
without cause (which includes our non-extension of the term) or by Mr. Bryant for good reason, subject to his timely execution of a general
release of claims against us, Mr. Bryant would be entitled to receive: (i) a payment equal to 1.0 times his annual base salary, payable in regular
installments over a 12-month period in accordance with our regular payroll practices, (ii) his ABP award earned in the year preceding his
termination to the extent unpaid and (iii) a prorated portion of his ABP award for the year in which termination occurs with the amount of the
award based on actual performance, as determined by our Board of Directors. In addition, if such a termination occurs within one year following
a change in control, subject to Mr. Bryant’s timely execution of a general release of claims against us, Mr. Bryant would be entitled to receive a
payment equal to 2.0 times his annual base salary, instead of 1.0 times, payable over a 24-month period, instead of a 12-month period. During
his employment and for 12 months following termination (or for 18 months following termination if he is entitled to change-in-control
payments), Mr. Bryant’s employment agreement prohibits him from competing with our business and from soliciting our employees, customers
or distributors to terminate their employment or arrangements with us. “Cause” is defined in Mr. Bryant’s employment agreement to mean (i) his
substantial, repeated and willful failure to perform duties as reasonably directed by our Board of Directors, (ii) his material failure to carry out or
comply with any lawful and reasonable directive of our Board of Directors or Chief Executive Officer that is not inconsistent with his
employment agreement, (iii) his breach of a material provision of his employment agreement or material company policy, (iv) his conviction,
plea of no contest or imposition of unadjudicated probation for any felony or crime involving moral turpitude,(v) his unlawful use (including
being under the influence) or possession of illegal drugs on our premises or while performing his duties and responsibilities, (vi) his willful or
prolonged and unexcused absence from work (other than by reason of disability due to physical or mental illness) or (vii) his commission of an
act of fraud, embezzlement, misappropriation, willful misconduct or material breach of fiduciary duty against us. For purposes of Mr. Bryant’s
employment agreement, “good reason” has the same meaning as in Mr. Shaver’s employment agreement.
Mr. Markevich’s employment agreement has a term beginning on May 2, 2013 and ending on the third anniversary thereof. The agreement is
extended automatically for successive 12 month periods thereafter unless either party delivers notice of non-renewal to the other no later than 60
days before the end of the applicable term. Upon our termination of Mr. Markevich’s employment without cause (which includes our nonextension of the term) or by Mr. Markevich for good reason, subject to his timely execution of a general release of claims against us,
Mr. Markevich would be entitled to receive: (i) a payment equal to 1.5 times his annual base salary, payable in regular installments over an 18month period in accordance with our regular payroll practices, (ii) his sign-on or retention bonus payments to the extent unpaid and (iii) his ABP
award earned in the year preceding his termination to the extent unpaid. In addition, if such a termination occurs within 60 days prior to or one
year following a change in control, subject to Mr. Markevich’s timely execution of a general release of claims against us, Mr. Markevich would
be entitled to receive a payment equal to 2.0 times his annual base salary, instead of 1.5 times, payable over a 24-month period, instead of an 18month period. During his employment and for 12 months following termination, Mr. Markevich’s employment agreement prohibits him from
competing with our business and, for 18 months following termination, from soliciting our employees, customers or distributors to terminate
their employment or arrangements with us. For purposes of Mr. Markevich’s employment agreement, “cause” and “good reason” have the same
meanings as in Mr. Shaver’s employment agreement.
Mr. McDougall’s employment agreement has a term beginning on May 1, 2013 and ending on the third anniversary thereof. The agreement is
extended automatically for successive 12 month periods thereafter unless either party delivers a notice of non-renewal to the other no later than
60 days before the end of the applicable term. Upon our termination of Mr. McDougall’s employment without cause (which includes our nonextension of the term) or by Mr. McDougall for good reason, subject to his timely execution of a general release of claims against us,
Mr. McDougall would be entitled to receive: (i) a payment equal to 1.0 times his annual base salary,
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payable in regular installments over a 12-month period in accordance with our regular payroll practices, and (ii) his ABP award earned in the
year preceding his termination to the extent unpaid. In addition, if such termination occurs within one year following a change in control, subject
to Mr. McDougall’s timely execution of a general release of claims against us, Mr. McDougall would be entitled to receive a payment equal to
2.0 times his annual base salary, instead of 1.0 times, payable over a 24-month period, instead of an 12-month period. During his employment
and for 12 months following termination, Mr. McDougall’s employment agreement prohibits him from competing with our business and, for 18
months following termination, from soliciting our employees, customers or distributors to terminate their employment or arrangements with us.
For purposes of Mr. McDougall’s employment agreement, “cause” has substantially the same meaning as in Mr. Shaver’s employment
agreement, except that failing to substantially perform his duty or materially comply with our policies does not constitute “cause;” instead,
“cause” includes the Board of Directors’ determination of gross of willful misconduct and mismanagement by Mr. McDougall that is injurious to
us or that results in his inability to substantially perform his duties. “Good reason” has the same meaning as in Mr. Shaver’s employment
agreement.
Mr. Finn’s employment agreement has a term beginning on March 26, 2013 and ending on the second anniversary thereof. The agreement is
extended automatically for successive 12 month periods thereafter unless either party delivers a notice of non-renewal to the other no later than
60 days before the end of the applicable term. Upon our termination of Mr. Finn’s employment without cause (which includes our non-extension
of the term) or by Mr. Finn for good reason, subject to his timely execution of a general release of claims against us, Mr. Finn would be entitled
to receive: (i) a payment equal to 1.0 times his annual base salary, payable in regular installments over a 12-month period in accordance with our
regular payroll practices, (ii) a prorated portion of his ABP award for the year in which termination occurs in a sum no less than his target
percentage and (iii) his ABP award earned in the year preceding his termination, to the extent unpaid, in a sum no less than his target percentage
(except, if members of senior management generally receive less than target bonus payouts for the applicable year, then Mr. Finn is entitled to
receive the average bonus payout levels provided generally to members of senior management). In addition, if such termination occurs within
one year following a change in control, subject to Mr. Finn’s timely execution of a general release of claims against us, Mr. Finn would be
entitled to receive payments equal to 2.0 times his target ABP award (instead of a prorated portion of his target ABP award), and payments equal
to 2.0 times his annual base salary payable over a 24-month period (instead of 1.0 times his annual base salary payable over a 12-month period).
During his employment and for 12 months following termination, Mr. Finn’s employment agreement prohibits him from competing with our
business and, for 18 months following termination, from soliciting our employees, customers or distributors to terminate their employment or
arrangements with us. For purposes of Mr. Finn’s employment agreement, “cause” and “good reason” have the same meanings as in
Mr. Shaver’s employment agreement.
“Change in control” is defined in all of our NEOs’ employment agreements to mean: (i) the sale, in one transaction or a series of related
transactions (including one or more stock sales, mergers, business combinations, recapitalizations, consolidations, reorganizations, restructurings
or similar transactions) of all or substantially all of our consolidated assets to any person (other than Carlyle) or (ii) any transaction or series of
related transactions resulting in any person (other than Carlyle) acquiring at least 50% of the aggregate voting power of all of our outstanding
voting securities.
Other Elements of Compensation and Perquisites
We provide NEOs with certain personal benefits and perquisites, which we do not consider to be a significant component of executive
compensation but which we recognize are an important factor in attracting and retaining talented executives. NEOs are eligible under the same
plans as all other employees for medical, dental, vision and short-term disability insurance, and may participate to the same extent as all other
employees in our tuition reimbursement program. To induce the NEOs to join the Company after the Acquisition, we agreed to reimburse them
for certain relocation and temporary living and commuting expenses. All of our NEOs’ employment agreements stipulate that these were onetime reimbursements for expenses incurred in connection with their
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commencing employment with us in 2013. In addition, beginning in 2014, we have determined to provide the following additional perquisites to
our NEOs and certain other senior management personnel: executive physical, umbrella liability insurance and global travel insurance benefits.
The value of personal benefits and perquisites we provided to each of our NEOs in 2013 is set forth below in our Summary Compensation Table.
Summary Compensation Table for 2013
The following table sets forth certain information with respect to the compensation paid to our NEOs for the year ended December 31, 2013.
Non-equity
Incentive Plan
Name and Principal Position
Year
Salary
($)
Charles W. Shaver
Chairman & CEO
Robert W. Bryant
EVP & CFO
Steven R. Markevich
SVP & President, OEM
Joseph F. McDougall
SVP & Chief Human Resources Officer
Michael F. Finn
SVP & General Counsel
2013
687,500
2013
481,250
2013
(1)
(2)
(3)
(4)
Bonus
($)
(1)
—
Option
Awards (2)
($)
Compensation
(4)
($)
($)
Total
($)
6,163,263
1,024,500
124,863
8,000,126
221,000
2,095,508
537,800
204,859
3,540,417
260,417
250,000
1,424,399
456,000
15,712
2,406,528
2013
252,482
460,000
753,288
315,500
19,836
1,801,106
2013
235,985
684,807
286,800
257,990
1,465,582
—
Amounts represent the sign-on and retention bonuses paid to our NEOs in connection with their commencement of service with us in 2013.
For additional information, see “—Base Compensation for 2013—Sign-on and Retention Bonuses.”
Amounts represent the aggregate grant date fair value of stock option awards determined in accordance with FASB ASC Topic 718. Refer
to Note 10 to our Audited Consolidated Financial Statements included elsewhere in this prospectus for information regarding the
assumptions used to value these awards.
Amount represents awards earned under our ABP for 2013. For additional information, see “—Annual Performance-Based Compensation
for 2013.”
Other compensation includes relocation and temporary commuting expenses, and our contributions to the NEOs’ 401(k) and deferred
compensation plan accounts as set forth in the following table.
Temporary
Employer
Contribution
Commute
($)
to 401(k)
($)
Relocation
(1)
Name
($)
Charles W. Shaver
Robert W. Bryant
Steven R. Markevich
Joseph F. McDougall
Michael F. Finn
(1)
All Other
Compensation
(3)
36,962
161,546
1,161
—
236,751
38,776
—
—
—
—
10,200
22,950
14,063
19,836
21,239
Amounts shown include tax reimbursement payments of $22,607 for Mr. Bryant and $74,953 for Mr. Finn.
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Employer
Contribution
to NQDC
Plan
($)
38,925
20,363
488
—
—
Total
($)
124,863
204,859
15,712
19,836
257,990
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Grants of Plan-Based Awards for 2013
Estimated Future Payouts Under NonEquity Incentive Plan Awards
Name
Grant Date
Charles W. Shaver
2013 ABP
2013 Stock options
Threshold
($)
Target
($)
450,000
750,000(1)
Maximum
($)
All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#) (6)
Exercise
or Base
Price of
Option
Awards
($/sh)
1,500,000
7/31/2013
1,785,522
Robert W. Bryant
2013 ABP
2013 Stock options
Steven R. Markevich
2013 ABP
2013 Stock options
Joseph F. McDougall
2013 ABP
2013 Stock options
Michael F. Finn
2013 ABP
2013 Stock options
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Grant
Date Fair
Value of
Option
Awards
($) (7)
236,250
393,750(2)
1,690,246
1,562,332
1,115,951
11.84
8.88
5.92
2,227,431
2,245,585
607,076
531,192
379,424
11.84
8.88
5.92
574,683
757,326
763,499
412,654
361,071
257,910
11.84
8.88
5.92
390,635
514,783
518,981
218,229
190,951
136,395
11.84
8.88
5.92
206,585
272,241
274,462
198,390
173,591
123,996
11.84
8.88
5.92
187,805
247,491
249,511
787,500
7/31/2013
225,000
375,000(3)
750,000
7/31/2013
138,600
231,000(4)
462,000
7/31/2013
126,000
210,000(5)
420,000
7/31/2013
Actual award earned under our annual ABP program for 2013 was $1,024,500. See “—Annual Performance-Based Compensation for
2013” above for a discussion of the calculation of this amount.
Actual award earned under our annual ABP program for 2013 was $537,800. See “—Annual Performance-Based Compensation for 2013”
above for a discussion of the calculation of this amount.
Actual award earned under our annual ABP program for 2013 was $456,000. See “—Annual Performance-Based Compensation for 2013”
above for a discussion of the calculation of this amount.
Actual award earned under our annual ABP program for 2013 was $315,500. See “—Annual Performance-Based Compensation for 2013”
above for a discussion of the calculation of this amount.
Actual award earned under our annual ABP program for 2013 was $286,500. See “—Annual Performance-Based Compensation for 2013”
above for a discussion of the calculation of this amount.
These options became or will become exercisable with respect to 20% of the underlying shares on each of January 1, 2014, January 1,
2015, January 1, 2016, January 1, 2017 and January 1, 2018.
Amounts represent the aggregate grant date fair value of stock option awards determined in accordance with FASB ASC Topic 718. Refer
to Note 10 to our Audited Consolidated Financial Statements included elsewhere in this prospectus for information regarding the
assumptions used to value these awards.
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Outstanding Equity Awards at December 31, 2013
The following table provides information regarding the stock options held by the NEOs as of December 31, 2013.
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
(1)
Name
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
(2)
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
Option
Exercise
Price ($)
Option
Expiration
Date
Charles W. Shaver
—
—
—
1,785,522
1,562,332
1,115,951
—
—
—
11.84
8.88
5.92
7/31/2023
7/31/2023
7/31/2023
Robert W. Bryant
—
—
—
607,076
531,192
379,424
—
—
—
11.84
8.88
5.92
7/31/2023
7/31/2023
7/31/2023
Steven R. Markevich
—
—
—
412,654
361,071
257,910
—
—
—
11.84
8.88
5.92
7/31/2023
7/31/2023
7/31/2023
Joseph F. McDougall
—
—
—
218,229
190,951
136,395
—
—
—
11.84
8.88
5.92
7/31/2023
7/31/2023
7/31/2023
Michael F. Finn
—
—
—
198,390
173,591
123,996
—
—
—
11.84
8.88
5.92
7/31/2023
7/31/2023
7/31/2023
(1)
(2)
No options were exercisable as of December 31, 2013.
These options became or will become exercisable with respect to 20% of the underlying shares on each of January 1, 2014, January 1,
2015, January 1, 2016, January 1, 2017 and January 1, 2018.
Options Exercised and Shares Vested
None of our NEOs exercised options or became vested in our common shares during the year ended December 31, 2013.
Pension Benefits for 2013
Our NEOs do not participate in any pension plans and received no pension benefits during the year ended December 31, 2013.
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Nonqualified Deferred Compensation
Our NEOs participate in a nonqualified deferred compensation plan and received nonqualified deferred compensation during the year ended
December 31, 2013 to the extent their eligible compensation exceeded the limit established by the IRS for tax-qualified defined contribution
plans. For additional information, see the discussion above under the heading “—Defined Contribution Plans—Deferred Compensation Plan.”
Executive
Contributions
Company
Contributions
Aggregate
Earnings in
Aggregate
Withdrawals/
Aggregate
Balance at
Distributions
in Last FY
($)
Name
Charles W. Shaver
Robert W. Bryant
Steven R. Markevich
Joseph F. McDougall
Michael F. Finn
in Last FY
($)
25,950
13,575
325
—
—
38,925
20,363
488
—
—
Last FY
($)
—
—
—
—
—
Last FYE
($)
($)
—
—
—
—
—
64,875
33,938
813
—
—
Potential Payments Upon Termination or Change-in-Control
Each of our NEOs has an employment agreement that provides for severance benefits upon termination of employment. See “—Employment
and Severance Arrangements” above for a description of the employment and severance arrangements with our NEOs. Assuming a termination
of employment effective as of December 31, 2013 (i) by us without cause, (ii) by the executive for good reason or (iii) by us without cause or the
executive for good reason within one year following a change in control (or, for Mr. Markevich, within 60 days prior to or one year following a
change in control), each of our NEOs would have received the following severance payments and benefits:
Termination
Termination
Without Cause
(Including
Non-Extension
Name
Payment Type
Charles W. Shaver
Robert W. Bryant
Salary
Other
Total
Salary
Bonus (1)
Total
of Term)
($)
Resignation
for Good
Reason
($)
Without
Cause or
Resignation
for Good
Reason
Following a
Change in
Control
($)
2,250,000
2,250,000
2,250,000
2,250,000
3,000,000
60,000
3,060,000
525,000
525,000
1,050,000
525,000
525,000
1,050,000
750,000
300,000
1,050,000
750,000
300,000
1,050,000
1,000,000
300,000
1,300,000
Steven R. Markevich
Salary
Retention Bonus (2)
Total
Joseph F. McDougall
Salary
Total
385,000
385,000
385,000
385,000
770,000
770,000
Michael F. Finn
Salary
Bonus (3)
Total
350,000
210,000
560,000
350,000
210,000
560,000
700,000
420,000
1,120,000
(1)
Mr. Bryant would have remained eligible to receive his 2013 ABP award, in an amount determined in the discretion of the compensation
committee based on performance. The amount actually paid to Mr. Bryant with respect to his 2013 ABP award is set forth in the Summary
Compensation Table above under the heading “Non-equity Incentive Plan Compensation.”
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(2)
(3)
Mr. Markevich would receive his $300,000 retention bonus (otherwise payable for remaining continuously employed through April 15,
2014).
Mr. Finn would have remained eligible to receive his 2013 ABP award in an amount no less than his target ABP amount of $210,000, or, if
within one year following a change in control, 2.0 times that amount. The amount actually paid to Mr. Finn with respect to his 2013 ABP
award is set forth in the Summary Compensation Table above under the heading “Non-equity Incentive Plan Compensation.”
In addition, pursuant to our NEOs’ stock option agreements, their stock options are subject to vesting acceleration in the following
circumstances.
•
Liquidity Event . A liquidity event generally would occur if Carlyle sold at least 50% of its equity investment in us, or if we sold
substantially all of our assets (other than to Carlyle). A liquidity event could include a change in control, which is described below.
Each NEO’s options vest and become exercisable immediately prior to a liquidity event if the NEO remains continuously employed
from the option grant date through the liquidity event, or if the NEO is terminated by us without cause or by the NEO for good
reason within six months prior to the liquidity event.
•
Change in Control . A change in control generally would occur if Carlyle sold at least 50% of our voting securities, or we sold
substantially all of our assets (other than to Carlyle). The options vest and become exercisable immediately prior to a change in
control if the options do not remain outstanding, or if the successor entity does not assume the options or substitute an equivalent
award. The options also vest and become exercisable if the NEO is terminated by us without cause or by the NEO for good reason in
connection with a change in control. If such termination occurs within six months prior to a change in control, then the options vest
and become exercisable immediately prior to the change in control. If such termination occurs following a change in control (and the
options remain outstanding, or the successor entity assumes the options or substitutes an equivalent award), then the options vest and
become exercisable immediately prior to the NEO’s termination.
•
Exchange of Shares . An exchange of shares generally would occur if our shares are exchanged for securities listed on a national
securities exchange (other than in connection with an initial public offering). The options vest and become exercisable upon the
earliest of: (i) six months after such transaction’s effective date; (ii) the date the NEO is terminated by us without cause or due to
disability, or by the NEO for good reason, following such transaction or (iii) the date of the NEO’s death following such transaction.
As of December 31, 2013, due to our limited operating history as a standalone company as of such time, it was estimated that the fair market
value of our shares did not exceed the exercise price for any of our NEOs’ stock options. As a result, it is believed that no value would have
accrued to the NEOs upon the occurrence of a hypothetical vesting acceleration event on December 31, 2013.
Compensation Risk
The compensation committee has analyzed the potential risks arising from our compensation policies and practices, and has determined that
there are no such risks that are reasonably likely to have a material adverse effect on us.
Director Compensation for 2013
Directors, who are our employees or who are representatives of Carlyle, receive no additional compensation for serving on our Board of
Directors or its committees. Pursuant to our director compensation program as in effect prior to the consummation of this offering, we pay each
of our other directors, which we refer to as our non-employee directors, $75,000 per year in cash for service on our Board of Directors, payable
quarterly in arrears. Our non-employee directors are also eligible to receive awards under our equity incentive plans to the same extent as other
service providers, except with regard to incentive stock options. Each of our non-employee
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directors received an option award to purchase up to 55,048 of our common shares in 2014. The option awards were intended as one-time grants
tied to the commencement of the director’s service with us. They were granted with an exercise price not less than fair market value on the date
of grant and have escalating exercise prices similar to the options granted to our NEOs in 2013. The options vest in annual installments over five
years beginning on the date of grant, except that for Mr. Bustos, the options were 20% vested as of the date of grant in recognition of his service
with us during 2013.
In 2013, we provided the following compensation to Mr. Bustos, who was the only non-employee director providing services to us in 2013.
Fees Earned or
Option Awards
Paid in Cash
($) (1)
Name
Orlando Bustos
(1)
(2)
75,000
($) (2)
486,211
Total
($)
561,211
Represents cash compensation for Mr. Bustos’s service on our Board of Directors in 2013. These amounts were paid in early 2014.
Mr. Bustos is also the Chairman and Chief Executive Officer of OHorizons Global, an international management consulting firm. In
connection with the Acquisition, prior to Mr. Bustos’s service on our Board of Directors, we also paid consulting fees and expenses to
OHorizons. For additional information, please see discussion under the heading “Certain Relationships and Related Person Transactions—
OHorizons Consulting Agreement.”
Amount represents an option award to purchase up to 352,143 of our common shares granted to OHorizons Global as part of the consulting
services. The options vest in five equal annual installments with the first installment vesting on January 1, 2014. For additional
information, please see discussion under the heading “Certain Relationships and Related Person Transactions—OHorizons Consulting
Agreement.” The amount shown is the aggregate grant date fair value of the stock option award determined in accordance with FASB ASC
Topic 718. Refer to Note 10 to our Audited Consolidated Financial Statements included elsewhere in this prospectus for information
regarding the assumptions used to value these awards. The stock option awards described in the narrative above this director compensation
table are not included in this table because they were granted in 2014.
Executive Compensation Plans
2014 Equity Incentive Plan
In connection with this offering, we will adopt the 2014 Plan. We are currently in the process of determining the terms and conditions of the
2014 Plan and will update this disclosure to provide a description of the 2014 Plan prior to the effectiveness of the registration statement of
which this prospectus is a part.
Prior Equity Plan
In addition to the 2014 Plan, we also maintain a 2013 Equity Incentive Plan (the “2013 Plan”). Following the adoption of the 2014 Plan, we will
not grant any future awards under the 2013 Plan. Our compensation committee administers the 2013 Plan.
Our Board of Directors and shareholders adopted and approved the 2013 Plan. The 2013 Plan authorized us to grant to our and our subsidiaries’
employees, officers, directors and consultants options to purchase our common shares, restricted stock, restricted stock units and other stockbased awards. As of June 30, 2014, 17,098,022 options were outstanding under the 2013 Plan, and no other equity awards are outstanding under
the 2013 Plan.
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CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
Our Board of Directors has adopted a written statement of policy for the evaluation of and the approval, disapproval and monitoring of
transactions involving us and “related persons.” For the purposes of the policy, “related persons” will include our executive officers, directors,
director nominees and shareholders owning five percent or more of our outstanding common shares, and each of their respective immediate
family members.
The policy covers any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which we
were or are to be a participant, the amount involved exceeds $100,000 and a related person had or will have a direct or indirect material interest.
Pursuant to this policy, our management will present to our nominating and corporate governance committee each proposed related person
transaction, including all relevant facts and circumstances relating thereto. Our nominating and corporate governance committee will then:
•
review the relevant facts and circumstances of each related person transaction, including the financial terms of such transaction, the
benefits to us, the availability of other sources for comparable products or services, if the transaction is on terms no less favorable to
us than those that could be obtained in arm’s-length dealings with an unrelated third party or employees generally and the extent of
the related person’s interest in the transaction; and
•
take into account the impact on the independence of any independent director and the actual or apparent conflicts of interest.
All related person transactions may only be consummated if our nominating and corporate governance has approved or ratified such transaction
in accordance with the guidelines set forth in the policy. Certain types of transactions have been pre-approved by our nominating and corporate
governance under the policy. These pre-approved transactions include:
•
the purchase of Axalta’s products and resolution of warranty claims relating to Axalta products on an arm’s length basis in the
ordinary course of business on terms and conditions generally available to other similarly situated customers;
•
transactions in the ordinary course of business where the interest of the related person arises solely from the ownership of a class of
equity securities in our company where all holders of such class of equity securities will receive the same benefit on a pro rata basis;
•
certain employment and compensation arrangements;
•
transactions in the ordinary course of business where the related person’s interest arises only from: (i) his or her position as a director
of another entity that is party to the transaction; (ii) an equity interest of less than 10% in another entity that is party to the
transaction; or (iii) a limited partnership interest of less than 10%, subject to certain limitations; and
•
transactions related to the provision of certain investment advisory and other services related to the Company’s employee benefit
plan where the related person was not a related person at the time the Company engaged the related person for such services.
No director may participate in the approval of a related person transaction for which he or she, or his or her immediate family members, is a
related person. In the event that no members of the nominating and corporate governance committee are disinterested with regard to a specific
transaction, such transaction will be considered by the audit committee.
Consulting Agreement
On February 1, 2013, in connection with the Acquisition, we entered into a consulting agreement with Carlyle, pursuant to which we pay Carlyle
a fee for consulting and oversight services provided to us and our subsidiaries. Pursuant to this agreement, subject to certain conditions, we pay
an annual management fee to Carlyle of
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$3 million plus expenses. Further, under this agreement Carlyle was entitled to additional reasonable fees and compensation agreed upon by the
parties for advisory and other services provided by Carlyle to us from time to time, including additional advisory and other services associated
with acquisitions and divestitures or sales of equity or debt instruments. Carlyle also received a one-time transaction fee of $35 million upon
consummation of the Acquisition for transactional advisory and other services. Except for this one-time transaction fee, Carlyle did not provide
any additional services beyond consulting and oversight services for the years ended December 31, 2013 and 2012. We will pay Carlyle a fee of
approximately $13.4 million to terminate the consulting agreement in connection with the consummation of this offering.
Stockholders Agreements
In connection with the Acquisition we entered into a stockholders agreement, which we amended and restated on July 31, 2013, and to which
Carlyle, members of management who hold our common shares and certain other of our shareholders are party. Certain of the operative
provisions of that stockholders agreement will terminate upon the consummation of this initial public offering; however, the management
stockholders party to that agreement will continue to be restricted thereunder from transferring any of their shares for 180 days after the initial
public offering. Upon the effectiveness of the registration statement of which this prospectus forms a part, we expect to enter into a new
stockholders agreement with Carlyle (the “principal stockholders agreement”). Pursuant to the principal stockholders agreement, we expect our
Board of Directors will initially consist of nine members, with Carlyle having the right to designate eight of the board members and, in addition,
our principal executive officer shall have the right to serve as a board member, who, for so long as he serves as our Chief Executive Officer, will
be Mr. Shaver. We expect that the size of our Board of Directors will be increased to consist of 11 directors, of which Carlyle, pursuant to the
terms of the principal stockholders agreement, will have the right to designate ten directors. The number of board members that Carlyle (or such
permitted transferee or affiliate) is entitled to designate is subject to maintaining certain ownership thresholds. If Carlyle (or such permitted
transferee or affiliate) loses its right to designate any directors pursuant to the terms of the principal stockholders agreement, these positions will
be filled by our stockholders in accordance with our memorandum of association and our amended and restated bye-laws. See “Description of
Share Capital” for more information regarding our memorandum of association and our amended and restated bye-laws. In addition, the
principal stockholders agreement will provide that each committee of the Board of Directors will include a proportional number of directors
designated by Carlyle (or such permitted transferee or affiliate) that is no less than the proportion of directors designated by Carlyle then serving
on our Board of Directors designated by Carlyle as is then serving on the Board of Directors), subject to Company’s obligation to comply with
any applicable independence requirements.
The principal stockholders agreement will also include provisions pursuant to which we will grant Carlyle (or such permitted transferee or
affiliate) the right to cause us, in certain instances, at our expense, to file registration statements under the Securities Act covering resales of our
common shares held by Carlyle (or such permitted transferee or affiliate) or to piggyback on such registration statements in certain
circumstances. These shares will represent approximately 79.6% of our common shares after this offering, or 76.6% if the underwriters exercise
their option to purchase additional shares in full. These shares also may be sold under Rule 144 under the Securities Act, depending on their
holding period and subject to restrictions in the case of shares held by persons deemed to be our affiliates. The principal stockholders agreement
will also require us to indemnify Carlyle (or such permitted transferee or affiliate) and its affiliates in connection with any registrations of our
securities.
Indemnification Agreements
In connection with the completion of this offering, we expect to enter into indemnification agreements with each of our directors and certain of
our officers. We expect that these indemnification agreements will provide the directors and officers with contractual rights to indemnification
and expense advancement that are, in some cases, broader than the specific indemnification provisions contained under Bermuda law. We
believe that these indemnification agreements will be, in form and substance, substantially similar to those commonly entered into in transactions
of like size and complexity sponsored by private equity firms.
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Employment Agreements
See “Compensation Discussion and Analysis—Employment, Severance and Change in Control Arrangements” for information regarding the
employment agreements that we have entered into with certain of our executive officers.
OHorizons Consulting Agreement
In connection with the Acquisition, we paid consulting fees and expenses to OHorizons, an international management consulting network, of
approximately $2.1 million, of which $0.1 million was incurred in the Successor year ended December 31, 2013 and the remainder was incurred
in the Successor period from August 24, 2012 through December 31, 2012. One of our directors, Orlando Bustos, is the Chairman and Chief
Executive Officer of OHorizons Global. As part of the compensation for the consulting services, we granted OHorizons Global an option award
to purchase up to 352,143 of our common shares that had a fair value of approximately $0.5 million.
Service King Collision Repair
Service King Collision Repair, an affiliate of Carlyle, has purchased products from our distributors in the past and may continue to do so in the
future. In August 2013, we entered into a new long-term sales agreement with Service King to be their exclusive provider of coatings. Terms of
the agreement are consistent with industry standards. Related party sales for the Successor year ended December 31, 2013 were $2.0 million.
Common Share Purchases by Officers and Directors
Since August 24, 2012, certain of our officers and directors have purchased an aggregate 1,604,384 of our common shares at fair market value
with an aggregate purchase price of approximately $10 million.
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PRINCIPAL AND SELLING SHAREHOLDERS
We had 229,069,356 common shares outstanding as of June 30, 2014 after giving effect to the 1.69-for-1 stock split described elsewhere in this
prospectus, which were owned by 20 shareholders. As of June 30, 2014, certain investment funds affiliated with Carlyle owned approximately
99.5% of our common shares, while the remainder is owned by our Chairman and Chief Executive Officer and certain of our current employees.
The following table sets forth information with respect to the beneficial ownership of our common shares as of June 30, 2014, and as adjusted to
reflect the common shares offered hereby, by:
•
each person known to own beneficially more than 5% of the capital stock, including each of our selling shareholders;
•
each of our directors;
•
each of our named executive officers; and
•
all of our directors and executive officers as a group.
The amounts and percentages of shares beneficially owned are reported on the basis of SEC regulations governing the determination of
beneficial ownership of securities. Under SEC rules, a person is deemed to be a “beneficial” owner of a security if that person has or shares
voting power or investment power, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed
to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Securities that can be
so acquired are deemed to be outstanding for purposes of computing any other person’s percentage. Under these rules, more than one person
may be deemed to be a beneficial owner of securities as to which such person has no economic interest.
The following table gives effect to the 1.69-for-1 stock split described elsewhere in this prospectus. Except as otherwise indicated in these
footnotes, each of the beneficial owners listed has, to our knowledge, sole voting and investment power with respect to the shares of capital stock
and the business address of each such beneficial owner is c/o Axalta Coating Systems Ltd., Two Commerce Square, 2001 Market Street, Suite
3600, Philadelphia, Pennsylvania 19103.
Shares Beneficially
Owned After the
Offering
Name of Beneficial Owner
Principal Shareholders
Investments funds affiliated with The Carlyle
Group (1)
Executive Officers and Directors
Charles W. Shaver (2)
Robert W. Bryant (3)
Stephen K. Markevich (4)
Joseph F. McDougall (5)
Michael F. Finn (6)
Orlando A. Bustos (7)
Robert M. McLaughlin
Andreas C. Kramvis
Martin W. Sumner
Wesley T. Bieligk
Gregor P. Böhm
Allan M. Holt
Gregory S. Ledford
All executive officers and directors as a group
(14 persons)
Shares Beneficially
Owned Prior to the
Offering
Number
Percent
227,811,996
98.00%
Excluding
Exercise of Option to Purchase
Additional Shares
Number
Percent
182,811,996
78.65%
Including
Exercise of Option to
Purchase Additional Shares
Number
Percent
176,061,996
75.74%
2,123,522
691,577
557,186
256,255
308,149
151,867
69,290
277,732
—
—
—
—
—
*
*
*
*
*
*
*
*
—
—
—
—
—
2,123,522
691,577
557,186
256,255
308,149
151,867
69,290
277,732
—
—
—
—
—
*
*
*
*
*
*
*
*
—
—
—
—
—
2,123,522
691,577
557,186
256,255
308,149
151,867
69,290
277,732
—
—
—
—
—
*
*
*
*
*
*
*
*
—
—
—
—
—
4,139,156
1.78
4,139,156
1.78
4,139,156
1.78
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*
Denotes less than 1.0% of beneficial ownership.
(1)
Includes 49,388,381 shares held by Carlyle Partners V SA1 Cayman, L.P. (“CPV SA1”), 43,171,969 shares held by Carlyle Partners V
SA2 Cayman, L.P. (“CPV SA2”), 44,513,933 shares held by Carlyle Partners V SA3 Cayman, L.P. (“CPV SA3”), 2,773,866 shares held
by Carlyle Partners V-A Cayman, L.P. (“CPV-A”), 5,324,317 shares held by CP V Coinvestment A Cayman, L.P. (“CPV Coinvest A”),
639,204 shares held by CP V Coinvestment B Cayman, L.P. (“CPV Coinvest B”), 28,969,654 shares held by Carlyle Coatings Partners,
L.P. (“CCP” and, together with CPV SA1, CPV SA2, CPV SA3, CPV-A, CPV Coinvest A and CPV Coinvest B, the “Carlyle Cayman
Shareholders”) and 53,030,672 shares held by CEP III Participations, S.à r.l. SICAR (“CEP III” and, together with the Carlyle Cayman
Shareholders, the “Carlyle Shareholders”).
Carlyle Group Management L.L.C. is the general partner of The Carlyle Group L.P., which is a publicly traded entity listed on NASDAQ.
The Carlyle Group L.P. is the managing member of Carlyle Holdings II GP L.L.C., which is the general partner of Carlyle Holdings II
L.P., which is the general partner of TC Group Cayman Investment Holdings, L.P., which is the general partner of TC Group Cayman
Investment Holdings Sub L.P., which is the sole member of CP V General Partner, L.L.C. and the sole shareholder of CEP III Managing
GP Holdings, Ltd. CP V General Partner, L.L.C. is the general partner of TC Group V Cayman, L.P., which is the general partner of each
of the Carlyle Cayman Shareholders. CEP III Managing GP Holdings, Ltd. is the general partner of CEP III Managing GP, L.P., which is
the general partner of Carlyle Europe Partners III, L.P., which is the sole shareholder of CEP III.
Voting and investment determinations with respect to the shares held by the Carlyle Cayman Shareholders are made by an investment
committee of TC Group V, L.P. comprised of Daniel D’Aniello, William Conway, David Rubenstein, Louis Gerstner, Allan Holt, Peter
Clare, Gregor Böhm, Kewsong Lee and Thomas Mayrhofer. Voting and investment determinations with respect to the shares held by the
CEP III are made by an investment committee of CEP III Managing GP, L.P. comprised of Daniel D’Aniello, William Conway, David
Rubenstein, Louis Gerstner, Allan Holt, Kewsong Lee and Thomas Mayrhofer. Each member of the investment committees disclaims
beneficial ownership of such shares.
The address for each of TC Group Cayman Investment Holdings, L.P., TC Group Cayman Investment Holdings Sub L.P., TC Group V
Cayman, L.P. and the Carlyle Cayman Shareholders is c/o Intertrust Corporate Services, 190 Elgin Avenue, George Town, Grand Cayman,
E9 KY1-9005, Cayman Islands. The address for CEP III is c/o The Carlyle Group, 2, avenue Charles de Gaulle, L -1653 Luxembourg,
Luxembourg. The address of each of the other persons or entities named in this footnote is c/o The Carlyle Group, 1001 Pennsylvania Ave.
NW, Suite 220 South, Washington, D.C. 20004-2505.
(2)
Includes 338,000 common shares and 1,785,522 common shares which may be acquired upon the exercise of stock options which have
vested or will vest within 60 days of the filing of this prospectus.
(3)
Includes 84,500 common shares and 607,077 common shares which may be acquired upon the exercise of stock options which have vested
or will vest within 60 days of the filing of this prospectus.
(4)
Includes 144,532 common shares and 412,654 common shares which may be acquired upon the exercise of stock options which have
vested or will vest within 60 days of the filing of this prospectus.
(5)
Includes 38,025 common shares and 218,230 common shares which may be acquired upon the exercise of stock options which have vested
or will vest within 60 days of the filing of this prospectus.
(6)
Includes 109,758 common shares and 198,391 common shares which may be acquired upon the exercise of stock options which have
vested or will vest within 60 days of the filing of this prospectus.
(7)
Includes 11,010 common shares which may be acquired upon the exercise of stock options which have vested and are held directly by the
reporting person. Also includes 140,857 common shares which may be acquired upon the exercise of stock options which have vested or
will vest within 60 days of the filing of this prospectus held by OHorizons Global, a firm of which Mr. Bustos is the Chairman and Chief
Executive Officer.
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DESCRIPTION OF SHARE CAPITAL
The following description of our share capital summarizes certain provisions of our amended memorandum of association and our amended and
restated bye-laws that will become effective as of the closing of this offering. Such summaries do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, all of the provisions of our amended memorandum of association and amended and restated
bye-laws, copies of which have been filed as exhibits to the registration statement of which this prospectus forms a part. Prospective investors
are urged to read the exhibits for a complete understanding of our amended memorandum of association and amended and restated bye-laws.
General
We are an exempted company incorporated under the laws of Bermuda. We are registered with the Registrar of Companies in Bermuda under
registration number 46832. We were incorporated on August 24, 2012 under the name Flash Bermuda Co. Ltd. Our registered office is located at
Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda.
The objects of our business are unrestricted, and the Company has the capacity of a natural person. We can therefore undertake activities without
restriction on our capacity.
Prior to the closing of this offering our shareholders will approve certain amendments to our bye-laws that will become effective upon closing of
this offering. The following description assumes that such amendments have become effective.
Since our incorporation, other than an increase in our authorized share capital to 1,000,000,000 shares, there have been no material changes to
our share capital, mergers, amalgamations or consolidations of us or any of our subsidiaries, no material changes in the mode of conducting our
business, no material changes in the types of products produced or services rendered. On May 9, 2013, we changed our name from Flash
Bermuda Co. Ltd. to Axalta Coating Systems Bermuda Co., Ltd., and on August 8, 2014, we changed our name from Axalta Coating Systems
Bermuda Co., Ltd. to Axalta Coating Systems Ltd. There have been no bankruptcy, receivership or similar proceedings with respect to us or our
subsidiaries.
There have been no public takeover offers by third parties for our shares nor any public takeover offers by us for the shares of another company
that have occurred during the last or current financial years.
We have applied for listing of our common shares on the NYSE under the symbol “AXTA”.
Initial settlement of our common shares will take place on the closing date of this offering through The Depository Trust Company (“DTC”) in
accordance with its customary settlement procedures for equity securities registered through DTC’s book-entry transfer system. Each person
beneficially owning common shares registered through DTC must rely on the procedures thereof and on institutions that have accounts therewith
to exercise any rights of a holder of the common shares.
Share Capital
Immediately following the completion of this offering, our authorized share capital will consist of issued common shares, par value $1.00 per
share, and undesignated shares, par value $1.00 per share that our Board of Directors is authorized to designate from time to time as common
shares or as preference shares. Upon completion of this offering, there will be 229,069,356 common shares issued and outstanding, excluding
710,270 common shares issuable upon exercise of options granted as of June 30, 2014, and no preference shares issued and outstanding. All of
our issued and outstanding common shares prior to completion of this offering are and will be fully paid.
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Pursuant to our amended and restated bye-laws, subject to the requirements of the NYSE and to any resolution of the shareholders to the
contrary, our Board of Directors is authorized to issue any of our authorized but unissued shares. There are no limitations on the right of nonBermudians or non-residents of Bermuda to hold or vote our shares.
Common Shares
Holders of common shares have no pre-emptive, redemption, conversion or sinking fund rights. Holders of common shares are entitled to one
vote per share on all matters submitted to a vote of holders of common shares. Unless a different majority is required by law or by our amended
and restated bye-laws, resolutions to be approved by holders of common shares require approval by a simple majority of votes cast at a meeting
at which a quorum is present.
In the event of our liquidation, dissolution or winding up, the holders of common shares are entitled to share equally and ratably in our assets, if
any, remaining after the payment of all of our debts and liabilities, subject to any liquidation preference on any issued and outstanding preference
shares.
Preference Shares
Pursuant to Bermuda law and our amended and restated bye-laws, our Board of Directors may, by resolution, establish one or more series of
preference shares having such number of shares, designations, dividend rates, relative voting rights, conversion or exchange rights, redemption
rights, liquidation rights and other relative participation, optional or other special rights, qualifications, limitations or restrictions as may be fixed
by the Board of Directors without any further shareholder approval. Such rights, preferences, powers and limitations, as may be established,
could have the effect of discouraging an attempt to obtain control of the company.
Dividend Rights
Under Bermuda law, a company may not declare or pay dividends if there are reasonable grounds for believing that: (i) the company is, or would
after the payment be, unable to pay its liabilities as they become due; or (ii) that the realizable value of its assets would thereby be less than its
liabilities. Under our amended and restated bye-laws, each common share is entitled to dividends if, as and when dividends are declared by our
Board of Directors, subject to any preferred dividend right of the holders of any preference shares.
Any cash dividends payable to holders of our common shares listed on the NYSE will be paid to American Stock Transfer & Trust Company,
LLC, our paying agent in the United States for disbursement to those holders.
Variation of Rights
If at any time we have more than one class of shares, the rights attaching to any class, unless otherwise provided for by the terms of issue of the
relevant class, may be varied either: (i) with the consent in writing of the holders of 75% of the issued shares of that class; or (ii) with the
sanction of a resolution passed by a majority of the votes cast at a general meeting of the relevant class of shareholders at which a quorum
consisting of at least two persons holding or representing one-third of the issued shares of the relevant class is present. Our amended and restated
bye-laws specify that the creation or issue of shares ranking equally with existing shares will not, unless expressly provided by the terms of issue
of existing shares, vary the rights attached to existing shares. In addition, the creation or issue of preference shares ranking prior to common
shares will not be deemed to vary the rights attached to common shares or, subject to the terms of any other class or series of preference shares,
to vary the rights attached to any other class or series of preference shares.
Transfer of Shares
Our Board of Directors may, in its absolute discretion and without assigning any reason, refuse to register the transfer of a share on the basis that
it is not fully paid. Our Board of Directors may also refuse to recognize an
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instrument of transfer of a share unless it is accompanied by the relevant share certificate and such other evidence of the transferor’s right to
make the transfer as our Board of Directors shall reasonably require. Subject to these restrictions, a holder of common shares may transfer the
title to all or any of his common shares by completing a form of transfer in the form set out in our amended and restated bye-laws (or as near
thereto as circumstances admit) or in such other common form as our Board of Directors may accept. The instrument of transfer must be signed
by the transferor and transferee, although in the case of a fully paid share our Board of Directors may accept the instrument signed only by the
transferor.
Where our shares are listed or admitted to trading on any appointed stock exchange, such as the NYSE, they will be transferred in accordance
with the rules and regulations of such exchange.
Meetings of Shareholders
Under Bermuda law, a company is required to convene at least one general meeting of shareholders each calendar year, which we refer to as the
annual general meeting. However, the shareholders may by resolution waive this requirement, either for a specific year or period of time, or
indefinitely. When the requirement has been so waived, any shareholder may, on notice to the company, terminate the waiver, in which case an
annual general meeting must be called. We have chosen not to waive the convening of an annual general meeting.
Bermuda law provides that a special general meeting of shareholders may be called by the Board of Directors of a company and must be called
upon the request of shareholders holding not less than 10% of the paid-up capital of the company carrying the right to vote at general meetings.
Bermuda law also requires that shareholders be given at least five days’ advance notice of a general meeting, but the accidental omission to give
notice to any person does not invalidate the proceedings at a meeting. Our amended and restated bye-laws provide that our Board of Directors
may convene an annual general meeting and the chairman or a majority of our directors then in office may convene a special general meeting.
Under our amended and restated bye-laws, at least 14 days’ notice of an annual general meeting or ten days’ notice of a special general meeting
must be given to each shareholder entitled to vote at such meeting. This notice requirement is subject to the ability to hold such meetings on
shorter notice if such notice is agreed: (i) in the case of an annual general meeting by all of the shareholders entitled to attend and vote at such
meeting; or (ii) in the case of a special general meeting by a majority in number of the shareholders entitled to attend and vote at the meeting
holding not less than 95% in nominal value of the shares entitled to vote at such meeting. Subject to the rules of the NYSE, the quorum required
for a general meeting of shareholders is two or more persons present in person at the start of the meeting and representing in person or by proxy
in excess of 50% of all issued and outstanding common shares.
Access to Books and Records and Dissemination of Information
Members of the general public have a right to inspect the public documents of a company available at the office of the Registrar of Companies in
Bermuda. These documents include a company’s amended and restated memorandum of association, including its objects and powers, and
certain alterations to the amended and restated memorandum of association. The shareholders have the additional right to inspect the bye-laws of
the company, minutes of general meetings and the company’s audited financial statements, which must be presented in the annual general
meeting. The register of members of a company is also open to inspection by shareholders and by members of the general public without charge.
The register of members is required to be open for inspection for not less than two hours in any business day (subject to the ability of a company
to close the register of members for not more than thirty days in a year). A company is required to maintain its share register in Bermuda but
may, subject to the provisions of the Companies Act establish a branch register outside of Bermuda. A company is required to keep at its
registered office a register of directors and officers that is open for inspection for not less than two hours in any business day by members of the
public without charge. Bermuda law does not, however, provide a general right for shareholders to inspect or obtain copies of any other
corporate records.
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Election and Removal of Directors
Our amended and restated bye-laws provide that our Board of Directors shall consist of such number of directors as the Board of Directors may
determine. After this offering, our Board of Directors will consist of nine directors. Our Board of Directors is divided into three classes that are,
as nearly as possible, of equal size. Each class of directors is elected for a three-year term of office, but the terms are staggered so that the term
of only one class of directors expires at each annual general meeting. The initial terms of the Class I, Class II and Class III directors will expire
in 2015, 2016 and 2017, respectively. At each succeeding annual general meeting, successors to the class of directors whose term expires at the
annual general meeting will be elected for a three-year term.
A shareholder holding not less than 10% in nominal value of the common shares in issue may propose for election as a director someone who is
not an existing director or is not proposed by our Board of Directors. Where a Director is to be elected at an annual general meeting, notice of
any such proposal for election must be given not less than 90 days nor more than 120 days before the anniversary of the last annual general
meeting prior to the giving of the notice or, in the event the annual general meeting is called for a date that is not less than 30 days before or after
such anniversary the notice must be given not later than ten days following the earlier of the date on which notice of the annual general meeting
was posted to shareholders or the date on which public disclosure of the date of the annual general meeting was made. Where a Director is to be
elected at a special general meeting, that notice must be given not later than 7 days following the earlier of the date on which notice of the
special general meeting was posted to shareholders or the date on which public disclosure of the date of the special general meeting was made.
For so long as investment funds affiliated with Carlyle own more than 50% of the common shares in issue, a director may be removed with or
without cause by the shareholders, provided notice of the shareholders meeting convened to remove the director is given to the director. The
notice must contain a statement of the intention to remove the director and a summary of the facts justifying the removal and must be served on
the director not less than 14 days before the meeting. The director is entitled to attend the meeting and be heard on the motion for his removal.
Once investment funds affiliated with Carlyle cease to own more than 50% of the common shares in issue, a director may be removed, only with
cause, by the shareholders, provided notice of the shareholders meeting convened to remove the director is given to the director. The notice must
contain a statement of the intention to remove the director and a summary of the facts justifying the removal and must be served on the director
not less than 14 days before the meeting. The director is entitled to attend the meeting and be heard on the motion for his removal.
Proceedings of Board of Directors
Our amended and restated bye-laws provide that our business is to be managed and conducted by our Board of Directors. Bermuda law permits
individual and corporate directors and there is no requirement in our bye-laws or Bermuda law that directors hold any of our shares. There is also
no requirement in our amended and restated bye-laws or Bermuda law that our directors must retire at a certain age.
The compensation of our directors is determined by the Board of Directors, and there is no requirement that a specified number or percentage of
“independent” directors must approve any such determination. Our directors may also be paid all travel, hotel and other reasonable out-of-pocket
expenses properly incurred by them in connection with our business or their duties as directors.
A director who discloses a direct or indirect interest in any contract or arrangement with us as required by Bermuda law is not entitled to vote in
respect of any such contract or arrangement in which he or she is interested unless the chairman of the relevant meeting of the Board of Directors
determines that such director is not disqualified from voting.
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Indemnification of Directors and Officers
Section 98 of the Companies Act provides generally that a Bermuda company may indemnify its directors, officers and auditors against any
liability which by virtue of any rule of law would otherwise be imposed on them in respect of any negligence, default, breach of duty or breach
of trust, except in cases where such liability arises from fraud or dishonesty of which such director, officer or auditor may be guilty in relation to
the company. Section 98 further provides that a Bermuda company may indemnify its directors, officers and auditors against any liability
incurred by them in defending any proceedings, whether civil or criminal, in which judgment is awarded in their favor or in which they are
acquitted or granted relief by the Supreme Court of Bermuda pursuant to Section 281 of the Companies Act.
Our amended and restated bye-laws provide that we shall indemnify our officers and directors in respect of their actions and omissions, except in
respect of their fraud or dishonesty, and that we shall advance funds to our officers and directors for expenses incurred in their defense upon
receipt of an undertaking to repay the funds if any allegation of fraud or dishonesty is proved. Our amended and restated bye-laws provide that
the shareholders waive all claims or rights of action that they might have, individually or in right of the company, against any of the company’s
directors or officers for any act or failure to act in the performance of such director’s or officer’s duties, except in respect of any fraud or
dishonesty of such director or officer. Section 98A of the Companies Act permits us to purchase and maintain insurance for the benefit of any
officer or director in respect of any loss or liability attaching to him in respect of any negligence, default, breach of duty or breach of trust,
whether or not we may otherwise indemnify such officer or director. We have purchased and maintain a directors’ and officers’ liability policy
for such purpose.
Amendment of Memorandum of Association and Bye-laws
Bermuda law provides that the memorandum of association of a company may be amended by a resolution passed at a general meeting of
shareholders. Our amended and restated bye-laws provide that no bye-law shall be rescinded, altered or amended, and no new bye-law shall be
made, unless it shall have been approved by a resolution of our Board of Directors and by a resolution of our shareholders including the
affirmative vote of a majority of all votes entitled to be cast on the resolution.
Under Bermuda law, the holders of an aggregate of not less than 20% in par value of a company’s issued share capital or any class thereof have
the right to apply to the Supreme Court of Bermuda for an annulment of any amendment of the memorandum of association adopted by
shareholders at any general meeting, other than an amendment that alters or reduces a company’s share capital as provided in the Companies
Act. Where such an application is made, the amendment becomes effective only to the extent that it is confirmed by the Supreme Court of
Bermuda. An application for an annulment of an amendment of the memorandum of association must be made within 21 days after the date on
which the resolution altering the company’s memorandum of association is passed and may be made on behalf of persons entitled to make the
application by one or more of their number as they may appoint in writing for the purpose. No application may be made by shareholders voting
in favor of the amendment.
Amalgamations and Mergers
The amalgamation or merger of a Bermuda company with another company or corporation (other than certain affiliated companies) requires the
amalgamation or merger agreement to be approved by the company’s Board of Directors and by its shareholders. Unless the company’s bye-laws
provide otherwise, the approval of 75% of the shareholders voting at such meeting is required to approve the amalgamation or merger
agreement, and the quorum for such meeting must be two or more persons holding or representing more than one-third of the issued shares of the
company.
Under Bermuda law, in the event of an amalgamation or merger of a Bermuda company with another company or corporation, a shareholder of
the Bermuda company who did not vote in favor of the amalgamation or merger
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and who is not satisfied that fair value has been offered for such shareholder’s shares may, within one month of notice of the shareholders
meeting, apply to the Supreme Court of Bermuda to appraise the fair value of those shares.
Shareholder Suits
Class actions and derivative actions are generally not available to shareholders under Bermuda law. The Bermuda courts, however, would
ordinarily be expected to permit a shareholder to commence an action in the name of a company to remedy a wrong to the company where the
act complained of is alleged to be beyond the corporate power of the company or illegal, or would result in the violation of the company’s
memorandum of association or bye-laws. Furthermore, consideration would be given by a Bermuda court to acts that are alleged to constitute a
fraud against the minority shareholders or, for instance, where an act requires the approval of a greater percentage of the company’s shareholders
than that which actually approved it.
When the affairs of a company are being conducted in a manner that is oppressive or prejudicial to the interests of some part of the shareholders,
one or more shareholders may apply to the Supreme Court of Bermuda, which may make such order as it sees fit, including an order regulating
the conduct of the company’s affairs in the future or ordering the purchase of the shares of any shareholders by other shareholders or by the
company.
Our amended and restated bye-laws contain a provision by virtue of which our shareholders waive any claim or right of action that they have,
both individually and on our behalf, against any director or officer in relation to any action or failure to take action by such director or officer,
except in respect of any fraud or dishonesty of such director or officer. We have been advised by the SEC that in the opinion of the SEC, the
operation of this provision as a waiver of the right to sue for violations of federal securities laws would likely be unenforceable in U.S. courts.
Capitalization of Profits and Reserves
Pursuant to our amended and restated bye-laws, our Board of Directors may (i) capitalize any part of the amount of our share premium or other
reserve accounts or any amount credited to our profit and loss account or otherwise available for distribution by applying such sum in paying up
unissued shares to be allotted as fully paid bonus shares pro rata (except in connection with the conversion of shares) to the shareholders; or
(ii) capitalize any sum standing to the credit of a reserve account or sums otherwise available for dividend or distribution by paying up in full,
partly paid or nil paid shares of those shareholders who would have been entitled to such sums if they were distributed by way of dividend or
distribution.
Registrar or Transfer Agent
A register of holders of the common shares will be maintained by Codan Services Limited in Bermuda, and a branch register will be maintained
in the United States by American Stock Transfer & Trust Company, LLC, which will serve as branch registrar and transfer agent.
Untraced Shareholders
Our amended and restated bye-laws provide that our Board of Directors may forfeit any dividend or other monies payable in respect of any
shares that remain unclaimed for six years from the date when such monies became due for payment. In addition, we are entitled to cease
sending dividend warrants and checks by post or otherwise to a shareholder if such instruments have been returned undelivered to, or left
uncashed by, such shareholder on at least two consecutive occasions or, following one such occasion, reasonable enquires have failed to
establish the shareholder’s new address. This entitlement ceases if the shareholder claims a dividend or cashes a dividend check or a warrant.
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Certain Provisions of Bermuda Law
We have been designated by the Bermuda Monetary Authority as a non-resident for Bermuda exchange control purposes. This designation
allows us to engage in transactions in currencies other than the Bermuda dollar, and there are no restrictions on our ability to transfer funds
(other than funds denominated in Bermuda dollars) in and out of Bermuda or to pay dividends to U.S. residents who are holders of our common
shares.
The Bermuda Monetary Authority has given its consent for the issue and free transferability of all of the common shares that are the subject of
this offering to and between residents and non-residents of Bermuda for exchange control purposes, provided our shares remain listed on an
appointed stock exchange, which includes the NYSE. Approvals or permissions given by the Bermuda Monetary Authority do not constitute a
guarantee by the Bermuda Monetary Authority as to our performance or our creditworthiness. Accordingly, in giving such consent or
permissions, neither the Bermuda Monetary Authority nor the Registrar of Companies in Bermuda shall be liable for the financial soundness,
performance or default of our business or for the correctness of any opinions or statements expressed in this prospectus. Certain issues and
transfers of common shares involving persons deemed resident in Bermuda for exchange control purposes require the specific consent of the
Bermuda Monetary Authority.
In accordance with Bermuda law, share certificates are only issued in the names of companies, partnerships or individuals. In the case of a
shareholder acting in a special capacity (for example as a trustee), certificates may, at the request of the shareholder, record the capacity in which
the shareholder is acting. Notwithstanding such recording of any special capacity, we are not bound to investigate or see to the execution of any
such trust.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common shares, and no predictions can be made about the effect, if any, that
market sales of our common shares or the availability of such shares for sale will have on the market price prevailing from time to time.
Nevertheless, the actual sale of, or the perceived potential for the sale of, our common shares in the public market may have an adverse effect on
the market price for our common shares and could impair our ability to raise capital through future sales of our securities. See “Risk Factors—
Risks Related to this Offering and Ownership of our Common Shares—Future sales of our common shares in the public market could lower our
share price, and any additional capital raised by us through the sale of equity or convertible debt securities may dilute your ownership in us and
may adversely affect the market price of our common shares.” Upon the completion of this offering, we will have 229,069,356 outstanding
common shares. Of these shares, 827,246 common shares will be freely transferable without restriction or further registration under the
Securities Act by persons other than “affiliates,” as that term is defined in Rule 144 under the Securities Act. Generally, the balance of our
outstanding common shares are “restricted securities” within the meaning of Rule 144 under the Securities Act, subject to the limitations and
restrictions that are described below. Common shares purchased by our affiliates will be “restricted securities” under Rule 144. Restricted
securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144 or 701
promulgated under the Securities Act.
Lock-Up Agreements
In connection with this offering, we, our executive officers and directors and Carlyle have agreed, subject to certain exceptions, not to sell or
transfer any common shares or securities convertible into, exchangeable for, exercisable for, or repayable with our common shares, for 180 days
after the date of this prospectus without first obtaining the written consent of the representatives of the underwriters. Requests for the consent of
the representatives of the underwriters to the sale of shares by us, our executive officers or our directors or by Carlyle prior to the expiration of
these lock-up agreements will be considered on a case-by-case basis by the representatives. When determining whether or not to grant their
consent, the representatives may consider, among other factors, the reasons given by us or the relevant shareholder, as applicable, for requesting
the consent, the number of shares for which the consent is being requested and market conditions at such time. See “Underwriting.”
Rule 144
In general, under Rule 144 as in effect on the date of this prospectus, beginning 90 days after the consummation of this offering, a person (or
persons whose common shares are required to be aggregated) who is an affiliate and who has beneficially owned our common shares for at least
six months is entitled to sell in any three-month period a number of shares that does not exceed the greater of:
•
1% of the number of shares then outstanding, which will equal approximately 2.3 million shares immediately after consummation of
this offering; or
•
the average weekly trading volume in our shares on the NYSE during the four calendar weeks preceding the filing of a notice on
Form 144 with respect to such a sale.
Sales by our affiliates under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current
public information about us. An “affiliate” is a person that directly, or indirectly through one or more intermediaries, controls or is controlled by,
or is under common control with an issuer.
Under Rule 144, a person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of ours at any time during the 90
days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least six months (including the holding period of any
prior owner other than an affiliate), would be entitled to sell those shares subject only to availability of current public information about us, and
after
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beneficially owning such shares for at least 12 months (including the holding period of any prior owner other than an affiliate), would be entitled
to sell an unlimited number of shares without restriction. To the extent that our affiliates sell their common shares, other than pursuant to
Rule 144 or a registration statement, the purchaser’s holding period for the purpose of effecting a sale under Rule 144 commences on the date of
transfer from the affiliate.
Rule 701
In general, under Rule 701 as in effect on the date of this prospectus, any of our employees, directors, officers, consultants or advisors who
purchased shares from us in reliance on Rule 701 in connection with a compensatory stock or option plan or other written agreement before the
effective date of this offering, or who purchased shares from us after that date upon the exercise of options granted before that date, are eligible
to resell such shares 90 days after the effective date of this offering in reliance upon Rule 144. If such person is not an affiliate, such sale may be
made subject only to the manner of sale provisions of Rule 144. If such a person is an affiliate, such sale may be made under Rule 144 without
compliance with the holding period requirement, but subject to the other Rule 144 restrictions described above.
S-8 Registration Statement
In conjunction with this offering, we expect to file a registration statement on Form S-8 under the Securities Act, which will register up to
28,971,593 common shares available for issuance under our equity incentive plans. That registration statement will become effective upon filing,
and 827,246 common shares covered by such registration statement are eligible for sale in the public market immediately after the effective date
of such registration statement, subject to Rule 144 volume limitations applicable to affiliates, vesting restrictions with us and the lock-up
agreements described above.
Registration Rights
We intend to enter into a principal stockholders agreement in connection with the completion of this offering, pursuant to which we will grant
Carlyle (or such permitted transferee or affiliate) the right to cause us, in certain instances, at our expense, to file registration statements under
the Securities Act covering resales of our common shares held by Carlyle (or such permitted transferee or affiliate) or to piggyback on such
registration statements in certain circumstances. These shares will represent approximately 79.6% of our common shares after this offering, or
76.6% if the underwriters exercise their option to purchase additional shares in full. These shares also may be sold under Rule 144 under the
Securities Act, depending on their holding period and subject to restrictions in the case of shares held by persons deemed to be our affiliates. The
principal stockholders agreement will also require us to indemnify certain of our shareholders and their affiliates in connection with any
registrations of our securities. We do not anticipate that the principal stockholders agreement will contain any prescribed cash penalties or
additional penalties as a result of delays in registering our common shares.
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BERMUDA COMPANY CONSIDERATIONS
Our corporate affairs are governed by our memorandum of association and bye-laws and by the corporate law of Bermuda. The provisions of the
Companies Act, which applies to us, differ in certain material respects from laws generally applicable to U.S. companies incorporated in the
State of Delaware and their stockholders. The following is a summary of significant differences between the Companies Act (including
modifications adopted pursuant to our bye-laws) and Bermuda common law applicable to us and our shareholders and the provisions of the
Delaware General Corporation Law applicable to U.S. companies organized under the laws of Delaware and their stockholders.
Bermuda
Delaware
Shareholder meetings
–
May be called by the board of directors and must be called upon the
request of shareholders holding not less than 10% of the paid-up
capital of the company carrying the right to vote at general meetings.
–
May be held at such time or place as designated in the
certificate of incorporation or the bylaws, or if not so
designated, as determined by the board of directors.
–
May be held in or outside Bermuda.
–
May be held in or outside of Delaware.
–
Notice:
–
Notice:
–
Shareholders must be given at least five days’ advance notice
of a general meeting, but the unintentional failure to give notice
to any person does not invalidate the proceedings at a meeting.
–
Written notice shall be given not less than ten nor more
than 60 days before the meeting.
–
Notice of general meetings must specify the place, the day and
hour of the meeting and in the case of special general meetings,
the general nature of the business to be considered.
–
Whenever stockholders are required to take any action at
a meeting, a written notice of the meeting shall be given
which shall state the place, if any, date and hour of the
meeting, and the means of remote communication, if any.
Shareholder’s voting rights
–
Shareholders may act by written consent to elect directors.
Shareholders may not act by written consent to remove a director or
auditor.
–
With limited exceptions, stockholders may act by written
consent to elect directors unless prohibited by the certificate of
incorporation.
–
Generally, except as otherwise provided in the bye-laws, or the
Companies Act, any action or resolution requiring approval of the
shareholders may be passed by a simple majority of votes cast. Any
person authorized to vote may authorize another person or persons to
act for him or her by proxy.
–
Any person authorized to vote may authorize another person
or persons to act for him or her by proxy.
–
The voting rights of shareholders are regulated by a company’s byelaws and, in certain circumstances, by the Companies Act. The byelaws may specify the number to constitute a quorum and if the byelaws permit, a general
–
For stock corporations, the certificate of incorporation or
bylaws may specify the number to constitute a quorum, but in
no event shall a quorum consist of less than one-third of shares
entitled to vote at a meeting. In the absence of
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Delaware
meeting of the shareholders of a company may be held with only one
individual present if the requirement for a quorum is satisfied.
such specifications, a majority of shares entitled to vote shall
constitute a quorum.
–
Our bye-laws provide that when a quorum is once present in general
meeting it is not broken by the subsequent withdrawal of any
shareholders.
–
When a quorum is once present to organize a meeting, it is not
broken by the subsequent withdrawal of any stockholders.
–
The bye-laws may provide for cumulative voting, although our byelaws do not.
–
The certificate of incorporation may provide for cumulative
voting.
–
The amalgamation or merger of a Bermuda company with another
company or corporation (other than certain affiliated companies)
requires the amalgamation or merger agreement to be approved by
the company’s board of directors and by its shareholders. Unless the
company’s bye-laws provide otherwise, the approval of 75% of the
shareholders voting at such meeting is required to approve the
amalgamation or merger agreement, and the quorum for such
meeting must be two or more persons holding or representing more
than one-third of the issued shares of the company.
–
Any two or more corporations existing under the laws of the
state may merge into a single corporation pursuant to a board
resolution and upon the majority vote by stockholders of each
constituent corporation at an annual or special meeting.
–
Every company may at any meeting of its board of directors sell,
lease or exchange all or substantially all of its property and assets as
its board of directors deems expedient and in the best interests of the
company to do so when authorized by a resolution adopted by the
holders of a majority of issued and outstanding shares of a company
entitled to vote.
–
Every corporation may at any meeting of the board sell, lease
or exchange all or substantially all of its property and assets as
its board deems expedient and for the best interests of the
corporation when so authorized by a resolution adopted by the
holders of a majority of the outstanding stock of a corporation
entitled to vote.
–
Any company that is the wholly owned subsidiary of a holding
company, or one or more companies which are wholly owned
subsidiaries of the same holding company, may amalgamate or
merge without the vote or consent of shareholders provided that the
approval of the board of directors is obtained and that a director or
officer of each such company signs a statutory solvency declaration
in respect of the relevant company.
–
Any corporation owning at least 90% of the outstanding
shares of each class of another corporation may merge the
other corporation into itself and assume all of its obligations
without the vote or consent of stockholders; however, in case
the parent corporation is not the surviving corporation, the
proposed merger shall be approved by a majority of the
outstanding stock of the parent corporation entitled to vote at a
duly called stockholder meeting.
–
Any mortgage, charge or pledge of a company’s property and assets
may be authorized without the consent of shareholders subject to any
restrictions under the bye-laws.
–
Any mortgage or pledge of a corporation’s property and assets
may be authorized without the vote or consent of stockholders,
except to the extent that the certificate of incorporation
otherwise provides.
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Bermuda
Delaware
Directors
–
The board of directors must consist of at least one director.
–
The board of directors must consist of at least one member.
–
The number of directors is fixed by the bye-laws, and any changes
to such number must be approved by the board of directors and/or
the shareholders in accordance with the company’s bye-laws.
–
–
Removal:
Number of board members shall be fixed by the bylaws,
unless the certificate of incorporation fixes the number of
directors, in which case a change in the number shall be made
only by amendment of the certificate of incorporation.
–
Removal:
–
Under our bye-laws, as long as investment funds affiliated with
Carlyle hold a majority of the common shares in issue, any or
all directors may be removed, with or without cause by the
holders of a majority of the shares entitled to vote at a special
meeting convened and held in accordance with the bye-laws for
the purpose of such removal. Once investment funds affiliated
with Carlyle cease to own a majority of our common shares in
issue, any or all directors may be removed only with cause by
the holders of a majority of the shares entitled to vote at a
special meeting convened and held in accordance with the byelaws for the purpose of such removal.
–
Any or all of the directors may be removed, with or
without cause, by the holders of a majority of the shares
entitled to vote unless the certificate of incorporation
otherwise provides.
–
In the case of a classified board, stockholders may effect
removal of any or all directors only for cause.
Duties of directors
–
The Companies Act authorizes the directors of a company, subject
to its bye-laws, to exercise all powers of the company except those
that are required by the Companies Act or the company’s bye-laws
to be exercised by the shareholders of the company. Our bye-laws
provide that our business is to be managed and conducted by our
Board of Directors. At common law, members of a board of
directors owe a fiduciary duty to the company to act in good faith in
their dealings with or on behalf of the company and exercise their
powers and fulfill the duties of their office honestly. This duty
includes the following essential elements:
–
a duty to act in good faith in the best interests of the company;
–
a duty not to make a personal profit from opportunities that
arise from the office of director;
–
a duty to avoid conflicts of interest; and
–
a duty to exercise powers for the purpose for which such
powers were intended.
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–
Under Delaware law, the business and affairs of a corporation
are managed by or under the direction of its board of directors.
In exercising their powers, directors are charged with a
fiduciary duty of care to protect the interests of the corporation
and a fiduciary duty of loyalty to act in the best interests of its
stockholders. The duty of care requires that a director act in
good faith, with the care that an ordinarily prudent person
would exercise under similar circumstances. Under this duty, a
director must inform himself of, and disclose to stockholders,
all material information reasonably available regarding a
significant transaction. The duty of loyalty requires that a
director act in a manner he reasonably believes to be in the
best interests of the corporation. He must not use his corporate
position for personal gain or advantage. This duty prohibits
self-dealing by a director and mandates that the best interest of
the corporation and its stockholders take precedence over any
interest possessed by a director, officer or controlling
shareholder and not shared by the stockholders generally.
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Bermuda
Delaware
–
–
In general, actions of a director are presumed to have been
made on an informed basis, in good faith and in the honest
belief that the action taken was in the best interests of the
corporation. However, this presumption may be rebutted by
evidence of a breach of one of the fiduciary duties. Should
such evidence be presented concerning a transaction by a
director, a director must prove the procedural fairness of the
transaction, and that the transaction was of fair value to the
corporation.
–
Delaware law provides that a parent corporation, by resolution
of its board of directors and without any stockholder vote, may
merge with any subsidiary of which it owns at least 90% of
each class of its capital stock. Upon any such merger, and in
the event the parent corporate does not own all of the stock of
the subsidiary, dissenting stockholders of the subsidiary are
entitled to certain appraisal rights.
–
Delaware law also provides, subject to certain exceptions, that
if a person acquires 15% of voting stock of a company, the
person is an “interested stockholder” and may not engage in
“business combinations” with the company for a period of
three years from the time the person acquired 15% or more of
voting stock.
–
The Companies Act imposes a duty on directors and officers of a
Bermuda company:
–
to act honestly and in good faith with a view to the best
interests of the company; and
–
to exercise the care, diligence and skill that a reasonably
prudent person would exercise in comparable circumstances.
The Companies Act also imposes various duties on directors and
officers of a company with respect to certain matters of management
and administration of the company. Under Bermuda law, directors
and officers generally owe fiduciary duties to the company itself, not
to the company’s individual shareholders, creditors or any class
thereof. Our shareholders may not have a direct cause of action
against our directors.
Takeovers
–
An acquiring party is generally able to acquire compulsorily the
common shares of minority holders of a company in the following
ways:
–
–
By a procedure under the Companies Act known as a “scheme
of arrangement.” A scheme of arrangement could be effected
by obtaining the agreement of the company and of holders of
common shares, representing in the aggregate a majority in
number and at least 75% in value of the common shareholders
present and voting at a court ordered meeting held to consider
the scheme of arrangement. The scheme of arrangement must
then be sanctioned by the Bermuda Supreme Court. If a scheme
of arrangement receives all necessary agreements and
sanctions, upon the filing of the court order with the Registrar
of Companies in Bermuda, all holders of common shares could
be compelled to sell their shares under the terms of the scheme
of arrangement.
By acquiring pursuant to a tender offer 90% of the shares or
class of shares not already owned by, or by a nominee for, the
acquiring party (the offeror), or any of its subsidiaries. If an
offeror has, within four months after the making of an offer for
all the shares or class of shares not owned by, or by a nominee
for, the
offeror, or any of its subsidiaries, obtained the approval of the
holders of 90% or more of all
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Delaware
the shares to which the offer relates, the offeror may, at any time within
two months beginning with the date on which the approval was obtained,
by notice compulsorily acquire the shares of any nontendering
shareholder on the same terms as the original offer unless the Supreme
Court of Bermuda (on application made within a one-month period from
the date of the offeror’s notice of its intention to acquire such shares)
orders otherwise.
–
Where the acquiring party or parties hold not less than 95% of
the shares or a class of shares of the company, by acquiring,
pursuant to a notice given to the remaining shareholders or
class of shareholders, the shares of such remaining shareholders
or class of shareholders. When this notice is given, the
acquiring party is entitled and bound to acquire the shares of
the remaining shareholders on the terms set out in the notice,
unless a remaining shareholder, within one month of receiving
such notice, applies to the Supreme Court of Bermuda for an
appraisal of the value of their shares. This provision only
applies where the acquiring party offers the same terms to all
holders of shares whose shares are being acquired.
Dissenter’s rights of appraisal
–
A dissenting shareholder (that did not vote in favor of the
amalgamation or merger) of a Bermuda exempted company is
entitled to be paid the fair value of his or her shares in an
amalgamation or merger.
Dissolution
–
Under Bermuda law, a solvent company may be wound up by way
of a shareholders’ voluntary liquidation. Prior to the company
entering liquidation, a majority of the directors shall each make a
statutory declaration, which states that the directors have made a full
enquiry into the affairs of the company and have formed the opinion
that the company will be able to pay its debts within a period of 12
months of the commencement of the
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–
With limited exceptions, appraisal rights shall be available for
the shares of any class or series of stock of a corporation in a
merger or consolidation.
–
The certificate of incorporation may provide that appraisal
rights are available for shares as a result of an amendment to
the certificate of incorporation, any merger or consolidation or
the sale of all or substantially all of the assets.
–
Under Delaware law, a corporation may voluntarily dissolve
(i) if a majority of the board of directors adopts a resolution to
that effect and the holders of a majority of the issued and
outstanding shares entitled to vote thereon vote for such
dissolution; or (ii) if all stockholders entitled to vote thereon
consent in writing to such dissolution.
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Delaware
winding up and must file the statutory declaration with the Registrar of
Companies in Bermuda. The general meeting will be convened primarily
for the purposes of passing a resolution that the company be wound up
voluntarily and appointing a liquidator. The winding up of the company is
deemed to commence at the time of the passing of the resolution.
Shareholder’s derivative actions
–
Class actions and derivative actions are generally not available to
shareholders under Bermuda law. Bermuda courts, however, would
ordinarily be expected to permit a shareholder to commence an
action in the name of a company to remedy a wrong to the company
where the act complained of is alleged to be beyond the corporate
power of the company or illegal, or would result in the violation of
the company’s memorandum of association or bye-laws.
Furthermore, consideration would be given by a Bermuda court to
acts that are alleged to constitute a fraud against the minority
shareholders or, for instance, where an act requires the approval of a
greater percentage of the company’s shareholders than that which
actually approved it.
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–
In any derivative suit instituted by a stockholder of a
corporation, it shall be averred in the complaint that the
plaintiff was a stockholder of the corporation at the time of the
transaction of which he complains or that such stockholder’s
stock thereafter devolved upon such stockholder by operation
of law.
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TAXATION
The following sets forth material Bermuda and U.S. federal income tax consequences of an investment in our common shares. It is based upon
laws and relevant interpretations thereof as of the date of this prospectus, all of which are subject to change. This discussion does not address all
possible tax consequences relating to an investment in our common shares, such as the tax consequences under U.S. state, local and other tax
laws.
Bermuda Tax Considerations
At the present time, there is no Bermuda income or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance
tax payable by us or by our shareholders in respect of our shares. We have obtained an assurance from the Minister of Finance of Bermuda under
the Exempted Undertakings Tax Protection Act 1966 that, in the event that any legislation is enacted in Bermuda imposing any tax computed on
profits or income, or computed on any capital asset, gain or appreciation or any tax in the nature of estate duty or inheritance tax, such tax shall
not, until March 31, 2035, be applicable to us or to any of our operations or to our shares, debentures or other obligations except insofar as such
tax applies to persons ordinarily resident in Bermuda or is payable by us in respect of real property owned or leased by us in Bermuda.
U.S. Federal Income Tax Considerations
The following discussion describes the material U.S. federal income tax consequences to U.S. Holders (defined below) (and solely to the extent
described below under “—FATCA,” to non-U.S. persons) under present law of an investment in our common shares. The discussion below
applies only to U.S. Holders that acquire our common shares in this offering, hold our common shares as capital assets and that have the U.S.
dollar as their functional currency. The discussion below is based on the Code, existing and, in some cases, proposed U.S. Treasury regulations,
as well as judicial and administrative interpretations thereof, all as of date of this prospectus. All of the foregoing authorities are subject to
change or differing interpretation, which change or differing interpretation could apply retroactively and could affect the tax consequences
described below. There can be no assurance that the U.S. Internal Revenue Service will not assert a different position concerning any of the tax
consequences discussed below or that any such position would not be sustained by a court. This summary does not address any estate or gift tax
consequences or any state, local, or non-U.S. tax consequences, nor does it address the Medicare contribution tax on net investment income.
The following discussion does not deal with the tax consequences to any particular investor and does not describe all of the tax consequences to
persons in special tax situations such as:
•
banks;
•
certain financial institutions;
•
regulated investment companies;
•
insurance companies;
•
broker dealers;
•
traders that elect to mark to market;
•
tax-exempt entities;
•
persons liable for alternative minimum tax;
•
certain U.S. expatriates;
•
persons holding our common shares as part of a straddle, hedging, constructive sale, conversion or integrated transaction;
•
persons that actually or constructively own 10% or more of the company’s voting stock;
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•
persons that are resident or ordinarily resident in or have a permanent establishment in a jurisdiction outside the United States;
•
persons who acquired our common shares pursuant to the exercise of any employee share option or otherwise as compensation; or
•
persons holding our common shares through partnerships or other pass-through entities.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S.
FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL AND NON-U.S. TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES.
The discussion below of the U.S. federal income tax consequences to “U.S. Holders” applies to a holder that is a beneficial owner of our
common shares and is, for U.S. federal income tax purposes,
•
an individual who is a citizen or resident of the United States;
•
a corporation (or other entity taxable as a corporation) organized under the laws of the United States, any State or the District of
Columbia;
•
an estate whose income is subject to U.S. federal income taxation regardless of its source; or
•
a trust that (1) is subject to the supervision of a court within the United States and the control of one or more U.S. persons or (2) has a
valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
The tax treatment of an entity taxable as a partnership for U.S. federal income tax purposes that holds our common shares generally will depend
on such partner’s status and the activities of the partnership.
Dividends
Subject to the passive foreign investment company rules discussed below, the gross amount of distributions made by the Company with respect
to our common shares (including the amount of any non-U.S. taxes withheld therefrom, if any) generally will be includable in a U.S. Holder’s
gross income in the year received as dividend income, but only to the extent that such distributions are paid out of the Company’s current or
accumulated earnings and profits as determined under U.S. federal income tax principles. The Company does not currently maintain calculations
of its earnings and profits under U.S. federal income tax principles because the Company currently has no intentions of making distributions to
its shareholders. Nevertheless, the Company may compute and maintain calculations of its earnings and profits under U.S. federal income tax
principles if and when the Company’s decision on distributions changes. Absent a calculation by the Company of its earnings and profits under
U.S. federal income tax principles, a U.S. Holder should expect to treat all cash distributions as dividends for such purposes. The dividends will
not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations. With
respect to certain non-corporate U.S. Holders (including individuals), dividends may be taxed at the lower capital gains rate applicable to
“qualified dividend income,” provided that (1) our common shares are readily tradable on an established securities market in the United States,
(2) the Company is neither a PFIC (as defined below) nor treated as such with respect to the U.S. Holder for the taxable year in which the
dividend is paid and the preceding taxable year and (3) certain holding period requirements are met. Under U.S. Internal Revenue Service
authority, common or ordinary shares generally are considered, for purposes of clause (1) above to be readily tradable on an established
securities market in the United States if they are listed on the NYSE, as our common shares are.
The dividends will generally be foreign source and considered “passive category” income, and non-U.S. taxes withheld therefrom, if any, may be
creditable against the U.S. Holder’s U.S. federal income tax liability, subject to applicable limitations. If the Company is a “United States-owned
foreign corporation,” however, a portion of
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the dividends allocable to the Company’s U.S. source earnings and profits may be re-characterized as U.S. source. A “United States-owned
foreign corporation” is any foreign corporation in which U.S. persons own, directly or indirectly, 50% or more (by vote or by value) of the stock.
In general, United States-owned foreign corporations with less than 10% of earnings and profits attributable to sources within the United States
are excepted from these rules. The rules governing the treatment of foreign taxes and foreign tax credits are complex, and U.S. Holders should
consult their tax advisors about the impact of these rules in their particular situations.
Sale or Other Disposition of Common Shares
Subject to the passive foreign investment company rules discussed below, upon a sale or other disposition of our common shares, a U.S. Holder
will recognize a capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized and
the U.S. Holder’s tax basis in such common shares. Any such gain or loss generally will be U.S. source gain or loss and will be treated as longterm capital gain or loss if the U.S. Holder’s holding period in our common shares exceeds one year. Non-corporate U.S. Holders (including
individuals) generally will be subject to U.S. federal income tax on long-term capital gain at preferential rates. The deductibility of capital losses
is subject to significant limitations.
Passive Foreign Investment Company
We would be classified as a passive foreign investment company (a “PFIC”), for any taxable year if either: (a) at least 75% of our gross income
is “passive income” for purposes of the PFIC rules or (b) at least 50% of the value of our assets (determined on the basis of a quarterly average)
produce or are held for the production of passive income. For this purpose, we will be treated as owning our proportionate share of the assets and
earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, 25% or more (by value) of the
stock. Under the PFIC rules, if we were considered a PFIC at any time that a U.S. Holder holds our common shares, we would continue to be
treated as a PFIC with respect to such holder’s investment unless (i) we cease to be a PFIC and (ii) the U.S. Holder has made a “deemed sale”
election under the PFIC rules.
Based on the anticipated market price of our common shares in this offering and expected price of our common shares following this offering,
and the composition of our income and assets as well as current and expected operations, we do not expect to be treated as a PFIC for U.S.
federal income tax purposes for the current taxable year or in the foreseeable future. This is a factual determination, however, that must be made
annually after the close of each taxable year. Therefore, there can be no assurance that we will not be classified as a PFIC for the current taxable
year or for any future taxable year.
If we are considered a PFIC at any time that a U.S. Holder holds our common shares, any gain recognized by the U.S. Holder on a sale or other
disposition of our common shares, as well as the amount of any “excess distribution” (defined below) received by the U.S. Holder, would be
allocated ratably over the U.S. Holder’s holding period for our common shares. The amounts allocated to the taxable year of the sale or other
disposition (or the taxable year of receipt, in the case of an excess distribution) and to any year before we became a PFIC would be taxed as
ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or
corporations, as appropriate, for that taxable year, and an interest charge would be imposed. For the purposes of these rules, an excess
distribution is the amount by which any distribution received by a U.S. Holder on its ordinary shares exceeds 125% of the average of the annual
distributions on our common shares received during the preceding three years or the U.S. Holder’s holding period, whichever is shorter. Certain
elections may be available that would result in alternative treatments (such as mark-to-market treatment) of our common shares.
If we are treated as a PFIC with respect to a U.S. Holder for any taxable year, the U.S. Holder will be deemed to own shares in any of our
subsidiaries that are also PFICs and generally be subject to the treatment described above with respect to any distribution on or disposition of
such shares. An election for mark-to-market treatment,
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however, would likely not be available with respect to any such subsidiaries. If we are considered a PFIC, a U.S. Holder will also be subject to
information reporting requirements on an annual basis. U.S. Holders should consult their own tax advisors about the potential application of the
PFIC rules to an investment in our common shares.
U.S. Information Reporting and Backup Withholding
Dividend payments with respect to our common shares and proceeds from the sale, exchange or redemption of our common shares may be
subject to information reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding. Backup withholding will not apply,
however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification or who is otherwise
exempt from backup withholding. U.S. Holders who are required to establish their exempt status may be required to provide such certification on
U.S. Internal Revenue Service Form W-9. U.S. Holders should consult their tax advisors regarding the application of the U.S. information
reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a U.S. Holder’s U.S. federal
income tax liability, and such holder may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing
the appropriate claim for refund with the U.S. Internal Revenue Service and furnishing any required information.
Information With Respect to Foreign Financial Assets
Certain U.S. Holders who are individuals and certain entities may be required to report information relating to our common shares, subject to
certain exceptions (including an exception for common shares held in accounts maintained by certain U.S. financial institutions). U.S. Holders
should consult their tax advisors regarding their reporting obligations with respect to their ownership and disposition of our common shares.
FATCA
Provisions under Sections 1471 through 1474 of the Code and applicable Treasury Regulations commonly referred to as “FATCA” generally
impose 30% withholding on certain “withholdable payments” and, in the future, may impose such withholding on “foreign passthru payments”
made by a “foreign financial institution” (each as defined in the Code) that has entered into an agreement with the U.S. Internal Revenue Service
to perform certain diligence and reporting obligations with respect to the foreign financial institution’s U.S.-owned accounts. The applicable
Treasury Regulations treat an entity as a “financial institution” if it is a holding company formed in connection with or availed of by a private
equity fund or other similar investment vehicle established with an investment strategy of investing, reinvesting, or trading in financial assets.
The United States has entered into an IGA with Bermuda, which modifies the FATCA withholding regime described above, although the U.S.
Internal Revenue Service and Bermuda tax authorities have not yet provided final guidance regarding compliance with the Bermuda IGA. It is
not clear whether we would be treated as a financial institution subject to the diligence, reporting and withholding obligations under FATCA or
the Bermuda IGA. Furthermore, it is not yet clear how the Bermuda IGA will address foreign passthru payments. Prospective investors should
consult their tax advisors regarding the potential impact of FATCA, the Bermuda IGA and any non-U.S. legislation implementing FATCA, on
their investment in our common shares.
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UNDERWRITING
Citigroup Global Markets Inc., Goldman, Sachs & Co., Deutsche Bank Securities Inc. and J.P. Morgan Securities LLC are acting as
representatives of each of the underwriters named below. Subject to the terms and conditions set forth in an underwriting agreement among us,
the selling shareholders and the underwriters, the selling shareholders have agreed to sell to the underwriters, and each of the underwriters has
agreed, severally and not jointly, to purchase from the selling shareholders, the number of our common shares set forth opposite its name below.
Underwriter
Number
of Shares
Citigroup Global Markets Inc.
Goldman, Sachs & Co.
Deutsche Bank Securities Inc.
J.P. Morgan Securities LLC
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Barclays Capital Inc.
Credit Suisse Securities (USA) LLC
Morgan Stanley & Co. LLC
Jefferies LLC
UBS Securities LLC
Robert W. Baird & Co. Incorporated
BB&T Capital Markets, a division of BB&T Securities, LLC
Nomura Securities International, Inc.
SMBC Nikko Securities America, Inc.
Total
45,000,000
Subject to the terms and conditions set forth in the underwriting agreement, the underwriters have agreed, severally and not jointly, to purchase
all of the shares sold under the underwriting agreement if any of these shares are purchased. If an underwriter defaults, the underwriting
agreement provides that the purchase commitments of the nondefaulting underwriters may be increased or the underwriting agreement may be
terminated.
We and the selling shareholders have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal
matters by their counsel, including the validity of the shares, and other conditions contained in the underwriting agreement, such as the receipt by
the underwriters of officers’ certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public
and to reject orders in whole or in part.
The representatives have advised us and the selling shareholders that the underwriters propose initially to offer the shares to the public at the
public offering price set forth on the cover page of this prospectus and to dealers at that price less a concession not in excess of $
per
share. After the initial offering, the public offering price, concession or any other term of the offering may be changed. Sales of shares made
outside of the United States may be made by affiliates of the underwriters.
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The following table shows the public offering price and underwriting discount that the selling shareholders are to pay to the underwriters in
connection with this offering. The information assumes either no exercise or full exercise by the underwriters of their option to purchase
additional shares.
Paid by the Selling
Shareholder
No Exercise
Full Exercise
Per Share
Total
$
$
$
$
The expenses of the offering, including expenses incurred by the selling shareholders but not including the underwriting discount, are estimated
at $6,500,000 million, and are payable by us. We have agreed to reimburse the underwriters for certain expenses relating to clearing this offering
with the Financial Industry Regulatory Authority, Inc. in an amount up to $20,000.
The underwriters have agreed to reimburse us for certain expenses incurred by us in connection with this offering upon closing of the offering.
The selling shareholders have granted an option to the underwriters to purchase up to 6,750,000 additional common shares at the public offering
price, less the underwriting discount. The underwriters may exercise this option within 30 days of the date of this prospectus. If the underwriters
exercise this option, each will be obligated, subject to conditions contained in the underwriting agreement, to purchase a number of additional
common shares proportionate to that underwriter’s initial amount reflected in the above table.
We, our executive officers and directors and certain of our existing security holders, including the selling shareholders, have agreed, subject to
certain exceptions, not to sell or transfer any common shares or securities convertible into, exchangeable for, exercisable for, or repayable with
common shares, for 180 days after the date of this prospectus without first obtaining the written consent of the representatives of the
underwriters. Specifically, we and these other persons have agreed, with certain limited exceptions, not to directly or indirectly:
•
offer, pledge, sell or contract to sell any common shares;
•
sell any option or contract to purchase any common shares;
•
purchase any option or contract to sell any common shares;
•
grant any option, right or warrant for the sale of any common shares;
•
otherwise dispose of or transfer any common shares;
•
request or demand that we file a registration statement related to the common shares; or
•
enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of any common
shares whether any such swap or transaction is to be settled by delivery of shares or other securities, in cash or otherwise.
This lock-up provision applies to common shares and to securities convertible into or exchangeable or exercisable for or repayable with common
shares. It also applies to common shares owned now or acquired later by the person executing the agreement or for which the person executing
the agreement later acquires the power of disposition. Requests for the consent of the representatives of the underwriters to the sale of shares by
us, our executive officers or our directors or by Carlyle prior to the expiration of these lock-up agreements will be considered on a case-by-case
basis by the representatives. When determining whether or not to grant their consent, the representatives may consider, among other factors, the
reasons given by us or the relevant shareholder, as applicable, for requesting the consent, the number of shares for which the consent is being
requested and market conditions at such time.
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In the event that either (x) during the last 17 days of the lock-up period referred to above, we issue an earnings release or material news or a
material event relating to us occurs or (y) prior to the expiration of the lock-up period, we announce that we will release earnings results or
become aware that material news or a material event will occur during the 16-day period beginning on the last day of the lock-up period, we
have agreed to extend the restrictions described above until the expiration of the 18-day period beginning on the issuance of the earnings release
or the occurrence of the material news or material event.
We have applied to list our common shares on the NYSE under the symbol “AXTA”.
Before this offering, there has been no public market for our common shares. The initial public offering price will be determined through
negotiations between us and the representatives. In addition to prevailing market conditions, the factors to be considered in determining the
initial public offering price are:
•
the valuation multiples of publicly traded companies that the representatives believe to be comparable to us;
•
our financial information;
•
the history of, and the prospects for, us and the industry in which we compete;
•
an assessment of our management, its past and present operations, and the prospects for, and timing of, our future net sales; and
•
the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also possible that after the offering the common shares will not trade in the public
market at or above the initial public offering price.
The underwriters do not expect to sell more than 5% of the common shares in the aggregate to accounts over which they exercise discretionary
authority.
Until the distribution of the shares is completed, SEC rules may limit underwriters and selling group members from bidding for and purchasing
our common shares. However, the representatives may engage in transactions that stabilize the price of the common shares, such as bids or
purchases to peg, fix or maintain that price.
In connection with the offering, the underwriters may purchase and sell our common shares in the open market. These transactions may include
short sales, purchases on the open market to cover positions created by short sales and stabilizing transactions. Short sales involve the sale by the
underwriters of a greater number of shares than they are required to purchase in the offering. “Covered” short sales are sales made in an amount
not greater than the underwriters’ option to purchase additional shares described above. The underwriters may close out any covered short
position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of
shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase shares through the option to purchase additional shares. “Naked” short sales
are sales in excess of the option to purchase additional shares. The underwriters must close out any naked short position by purchasing shares in
the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on
the price of our common shares in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing
transactions consist of various bids for or purchases of shares of common shares made by the underwriters in the open market prior to the
completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the
underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in
stabilizing or short covering transactions.
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Similar to other purchase transactions, the underwriters’ purchases to cover the syndicate short sales may have the effect of raising or
maintaining the market price of our common shares or preventing or retarding a decline in the market price of our common shares. As a result,
the price of our common shares may be higher than the price that might otherwise exist in the open market. The underwriters may conduct these
transactions on the exchange on which our common shares will be listed, in the over-the-counter market or otherwise.
None of us, the selling shareholders or any of the underwriters make any representation or prediction as to the direction or magnitude of any
effect that the transactions described above may have on the price of our common shares. In addition, none of us, the selling shareholders or any
of the underwriters make any representation that the representatives will engage in these transactions or that these transactions, once
commenced, will not be discontinued without notice.
In connection with the offering, certain of the underwriters or securities dealers may distribute prospectuses by electronic means, such as e-mail.
In addition, the representatives may facilitate Internet distribution for this offering to certain of its Internet subscription customers. The
representatives may allocate a limited number of common shares for sale to its online brokerage customers. An electronic prospectus is available
on Internet web sites maintained by the representatives. Other than the prospectus in electronic format, the information on the web sites of the
representatives is not part of this prospectus.
The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities
trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging,
financing and brokerage activities. Certain of the underwriters and their respective affiliates have, from time to time, performed, and may in the
future perform, various financial advisory, investment banking, commercial banking and other services for us for which they received or will
receive customary fees and expenses. Furthermore, certain of the underwriters and their respective affiliates may, from time to time, enter into
arm’s-length transactions with us in the ordinary course of their business.
In the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of
investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for
their own account and for the accounts of their customers, and such investment and securities activities may involve securities and/or instruments
of ours. The underwriters and their respective affiliates may also make investment recommendations and/or publish or express independent
research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short
positions in such securities and instruments.
Citigroup Global Markets Inc., Deutsche Bank Securities Inc., Barclays Capital Inc., Credit Suisse Securities (USA) LLC, Morgan Stanley &
Co. LLC, Jefferies & Company, Inc., UBS Securities LLC and SMBC Nikko Capital Market Limited were initial purchasers in connection with
our offering of the Senior Notes.
Affiliates of Citigroup Global Markets Inc., Goldman, Sachs & Co., Deutsche Bank Securities Inc., J.P. Morgan Securities LLC, Barclays
Capital Inc., Credit Suisse Securities (USA) LLC, Morgan Stanley & Co. LLC, Jefferies LLC, UBS Securities LLC and SMBC Nikko Securities
America, Inc. are lenders and/or agents under the Senior Secured Credit Facilities.
Other than in the United States, no action has been taken by us, the selling shareholders or the underwriters that would permit a public offering
of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus
may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the
offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance
with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform
themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or
a solicitation is unlawful.
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Notice to Prospective Investors in the European Economic Area
In relation to each Member State of the European Economic Area that has implemented the Prospectus Directive (each, a “Relevant Member
State”), no offer of shares may be made to the public in that Relevant Member State other than:
A. to any legal entity which is a qualified investor as defined in the Prospectus Directive;
B. to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive,
150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus
Directive, subject to obtaining the prior consent of the representatives; or
C. in any other circumstances falling within Article 3(2) of the Prospectus Directive,
provided that no such offer of shares shall require us or the representatives to publish a prospectus pursuant to Article 3 of the Prospectus
Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive.
Each person in a Relevant Member State who initially acquires any shares or to whom any offer is made will be deemed to have represented,
acknowledged and agreed that it is a “qualified investor” within the meaning of the law in that Relevant Member State implementing Article 2(1)
(e) of the Prospectus Directive. In the case of any shares being offered to a financial intermediary as that term is used in Article 3(2) of the
Prospectus Directive, each such financial intermediary will be deemed to have represented, acknowledged and agreed that the shares acquired by
it in the offer have not been acquired on a non-discretionary basis on behalf of, nor have they been acquired with a view to their offer or resale
to, persons in circumstances which may give rise to an offer of any shares to the public other than their offer or resale in a Relevant Member
State to qualified investors as so defined or in circumstances in which the prior consent of the representatives has been obtained to each such
proposed offer or resale.
We, the representatives and their affiliates will rely upon the truth and accuracy of the foregoing representations, acknowledgements and
agreements.
This prospectus has been prepared on the basis that any offer of shares in any Relevant Member State will be made pursuant to an exemption
under the Prospectus Directive from the requirement to publish a prospectus for offers of shares. Accordingly any person making or intending to
make an offer in that Relevant Member State of shares which are the subject of the offering contemplated in this prospectus may only do so in
circumstances in which no obligation arises for us or any of the underwriters to publish a prospectus pursuant to Article 3 of the Prospectus
Directive in relation to such offer. Neither we nor the underwriters have authorized, nor do they authorize, the making of any offer of shares in
circumstances in which an obligation arises for us or the underwriters to publish a prospectus for such offer.
For the purpose of the above provisions, the expression “an offer to the public” in relation to any shares in any Relevant Member State means the
communication in any form and by any means of sufficient information on the terms of the offer and the shares to be offered so as to enable an
investor to decide to purchase or subscribe the shares, as the same may be varied in the Relevant Member State by any measure implementing
the Prospectus Directive in the Relevant Member State and the expression “Prospectus Directive” means Directive 2003/71/EC (including the
2010 PD Amending Directive, to the extent implemented in the Relevant Member States) and includes any relevant implementing measure in the
Relevant Member State and the expression “2010 PD Amending Directive” means Directive 2010/73/EU.
Notice to Prospective Investors in the United Kingdom
In addition, in the United Kingdom, this document is being distributed only to, and is directed only at, and any offer subsequently made may
only be directed at persons who are “qualified investors” (as defined in the
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Prospectus Directive) (i) who have professional experience in matters relating to investments falling within Article 19 (5) of the Financial
Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the “Order”) and/or (ii) who are high net worth companies (or
persons to whom it may otherwise be lawfully communicated) falling within Article 49(2)(a) to (d) of the Order (all such persons together being
referred to as “relevant persons”). This document must not be acted on or relied on in the United Kingdom by persons who are not relevant
persons. In the United Kingdom, any investment or investment activity to which this document relates is only available to, and will be engaged
in with, relevant persons.
Notice to Prospective Investors in Switzerland
The shares may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (“SIX”) or on any other stock exchange
or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance
prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of
the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any
other offering or marketing material relating to the shares or the offering may be publicly distributed or otherwise made publicly available in
Switzerland.
Neither this document nor any other offering or marketing material relating to the offering, us, the shares have been or will be filed with or
approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of shares will not be supervised by,
the Swiss Financial Market Supervisory Authority FINMA (“FINMA”), and the offer of shares has not been and will not be authorized under the
Swiss Federal Act on Collective Investment Schemes (“CISA”). The investor protection afforded to acquirers of interests in collective
investment schemes under the CISA does not extend to acquirers of shares.
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LEGAL MATTERS
The validity of the common shares and certain other matters of Bermuda law will be passed upon for us by Conyers Dill & Pearman Pte. Ltd.,
our special Bermuda counsel. Certain matters of U.S. federal and New York State law will be passed upon for us by Latham & Watkins LLP,
Washington, District of Columbia, and for the underwriters by Cravath, Swaine & Moore LLP, New York, New York.
EXPERTS
The consolidated financial statements of Axalta Coating Systems Ltd. as of December 31, 2013 and 2012 and for the year ended December 31,
2013 and for the period August 24, 2012 to December 31, 2012, and the combined financial statements of the Predecessor, Dupont Performance
Coatings, a business formerly owned by E. I. du Pont de Nemours and Company, as of December 31, 2012 and 2011 and for the period
January 1, 2013 to January 31, 2013 and for the years ended December 31, 2012 and 2011, included in this Prospectus have been so included in
reliance on the reports of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as
experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 pursuant to the Securities Act. This prospectus, which constitutes part of the
registration statement, does not contain all the information set forth in the registration statement. For further information, we refer you to the
registration statement and the exhibits and schedules filed as a part of the registration statement. Statements contained in this prospectus as to the
contents of any contract or other document filed as an exhibit to the registration statement are not necessarily complete. If a contract or document
has been filed as an exhibit to the registration statement, we refer you to the copy of the contract or document that has been filed.
You may inspect a copy of the registration statement and the exhibits and schedules to the registration statement without charge at the Public
Reference Room of the SEC at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. You can receive copies of these documents upon payment of a duplicating fee by writing to the
SEC. The SEC maintains a web site at www.sec.gov that contains reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC. You can also inspect our registration statement on this web site.
Upon completion of this offering, we will become subject to the information and reporting requirements of the Exchange Act pursuant to
Section 13 thereof. Our filings with the SEC (other than those exhibits specifically incorporated by reference into the registration statement of
which this prospectus forms a part) are not incorporated by reference into this prospectus.
ENFORCEMENT OF JUDGMENTS
We are a Bermuda exempted company. As a result, the rights of holders of our common shares will be governed by Bermuda law and our
memorandum of association and bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of
companies incorporated in other jurisdictions. A number of our directors and some of the named experts referred to in this prospectus are not
residents of the United States, and a substantial portion of our assets are located outside the United States. As a result, it may be difficult for
investors to effect service of process on those persons in the United States or to enforce in the United States judgments obtained in U.S. courts
against us or those persons based on the civil liability provisions of the U.S. securities
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laws. It is doubtful whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the United States, against us or
our directors or officers under the securities laws of those jurisdictions or entertain actions in Bermuda against us or our directors or officers
under the securities laws of other jurisdictions. Our registered address in Bermuda is Clarendon House, 2 Church Street, Hamilton HM 11,
Bermuda.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page(s)
Unaudited Condensed Consolidated Financial Statements:
Combined Statement of Operations of DuPont Performance Coatings for the period from January 1, 2013 through January 31, 2013
(Predecessor) and Condensed Consolidated Statements of Operations of Axalta Coating Systems Ltd. for the six months ended
June 30, 2013 and June 30, 2014
(Successor)
F-2
Combined Statement of Comprehensive Income of DuPont Performance Coatings for the period from January 1, 2013 through
January 31, 2013 (Predecessor) and Condensed Consolidated Statements of Comprehensive Income (Loss) of Axalta Coating
Systems Ltd. for the six months ended June 30, 2013 and June 30, 2014 (Successor)
F-3
Condensed Consolidated Balance Sheets of Axalta Coating Systems Ltd. as of December 31, 2013 and June 30, 2014 (Successor)
F-4
Combined Statement of Cash Flows of DuPont Performance Coatings for the period from January 1, 2013 through January 31, 2013
(Predecessor) and Condensed Consolidated Statements of Cash Flows of Axalta Coating Systems Ltd. for the six months ended
June 30, 2013 and June 30, 2014
(Successor)
F-5
Notes to Unaudited Condensed Consolidated Financial Statements
F-6
Audited Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
F-34
Combined Statements of Operations of DuPont Performance Coatings for the years ended December 31, 2011 and 2012
(Predecessor) and for the period from January 1, 2013 through January 31, 2013 (Predecessor) and Consolidated Statements of
Operations of Axalta Coating Systems Ltd. for the period from August 24, 2012 through December 31, 2012 (Successor) and for
the year ended December 31, 2013 (Successor)
F-36
Combined Statements of Comprehensive Income of DuPont Performance Coatings for the years ended December 31, 2011 and 2012
and for the period from January 1, 2013 through January 31, 2013 (Predecessor) and Consolidated Statements of Comprehensive
Income (Loss) of Axalta Coating Systems Ltd. for the period from August 24, 2012 through December 31, 2012 (Successor) and
for the year ended December 31, 2013 (Successor)
F-37
Combined Balance Sheet of DuPont Performance Coatings as of December 31, 2012 (Predecessor) and Consolidated Balance Sheets
of Axalta Coating Systems Ltd. as of December 31, 2012 and December 31, 2013 (Successor)
F-38
Combined Statement of Changes in Stockholders’ Equity of DuPont Performance Coatings for the years ended December 31, 2011
and 2012 (Predecessor) and for the period from January 1, 2013 through January 31, 2013 (Predecessor) and Consolidated
Statement of Changes in Stockholders’ Equity of Axalta Coating Systems Ltd. for the period from August 24, 2012 through
December 31, 2012 (Successor) and for the year ended December 31, 2013 (Successor)
F-39
Combined Statements of Cash Flows of DuPont Performance Coatings for the years ended December 31, 2012 and 2011
(Predecessor) and for the period from January 1, 2013 through January 31, 2013 (Predecessor) and Consolidated Statement of
Cash Flows of Axalta Coating Systems Ltd. for the period from August 24, 2012 through December 31, 2012 (Successor) and for
the year ended December 31, 2013 (Successor)
F-41
Notes to Audited Consolidated Financial Statements
F-42
F-1
Table of Contents
AXALTA COATING SYSTEMS LTD.
DuPont Performance Coatings Combined (Predecessor) and Condensed Consolidated (Successor)
Statements of Operations (Unaudited)
(Dollars in millions, except share and per share data)
Predecessor
Period from
January 1, 2013
through
January 31,
2013
Net sales
Other revenue
Total revenue
Cost of goods sold
Selling, general and administrative expenses
Research and development expenses
Amortization of acquired intangibles
Merger and acquisition related expenses
Income (loss) from operations
Interest expense, net
Bridge financing commitment fees
Other expense, net
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Less: Net income attributable to noncontrolling interests
Net income (loss) attributable to controlling interests
$
$
326.2
1.1
327.3
232.2
70.8
3.7
—
—
20.6
—
—
5.0
15.6
7.1
8.5
0.6
7.9
Earnings (loss) per common share attributable to Axalta (basic and diluted)
Weighted average shares outstanding, basic and diluted
The accompanying notes are an integral part of these financial statements.
F-2
Successor
Six Months
Ended June 30,
2013
Six Months
Ended June 30,
2014
$
1,783.6
13.7
1,797.3
1,327.6
397.0
18.5
38.0
28.1
(11.9)
90.4
25.0
59.1
(186.4)
(8.1)
(178.3)
2.3
(180.6)
$
(0.77)
228,149,996
$
$
$
$
2,174.0
14.7
2,188.7
1,446.0
497.3
23.4
42.4
—
179.6
113.9
—
2.9
62.8
10.7
52.1
2.6
49.5
0.22
229,069,356
Table of Contents
AXALTA COATING SYSTEMS LTD.
DuPont Performance Coatings Combined (Predecessor) and Condensed Consolidated (Successor)
Statements of Comprehensive Income (Loss) (Unaudited)
(Dollars in millions)
Predecessor
Period from
January 1, 2013
through January 31,
Successor
Six Months Ended
2013
Net income (loss)
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments
Unrealized gain (loss) on securities
Unrealized gain (loss) on derivatives
Unrealized gain on pension and other benefit plan
obligations
Other comprehensive income (loss), before tax
Income tax (provision) benefit related to items of
other comprehensive income (loss)
Other comprehensive income (loss), net of tax
Comprehensive income (loss)
Less: Comprehensive income attributable to
noncontrolling interests
Comprehensive income (loss) attributable to
controlling interests
$
June 30, 2013
8.5
$
June 30, 2014
$
52.1
13.1
(1.4)
7.4
(9.9)
0.8
(5.0)
1.1
1.3
—
19.1
4.8
(9.3)
(0.5)
0.8
9.3
(2.4)
16.7
(161.6)
1.0
(8.3)
43.8
8.7
2.3
$
The accompanying notes are an integral part of these financial statements.
F-3
(178.3)
—
0.2
—
0.6
$
Six Months Ended
(163.9)
2.6
$
41.2
Table of Contents
AXALTA COATING SYSTEMS LTD.
Condensed Consolidated (Successor) Balance Sheets (Unaudited)
(Dollars in millions)
Assets
Current assets:
Cash and cash equivalents
Restricted cash
Accounts and notes receivable, net
Inventories
Prepaid expenses and other assets
Deferred income taxes
Total current assets
Net property, plant, and equipment
Goodwill
Identifiable intangibles, net
Deferred financing costs, net
Deferred income taxes
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Current portion of borrowings
Deferred income taxes
Other accrued liabilities
Total current liabilities
Long-term borrowings
Deferred income taxes
Other liabilities
Total liabilities
Commitments and contingent liabilities (Note 7)
Stockholders’ equity
Common stock, $1.00 par, 1,000,000,000 shares authorized, 229,069,356 shares issued and
outstanding at June 30, 2014 and; 229,069,356 shares issued and outstanding at
December 31, 2013
Capital in excess of par
Accumulated deficit
Accumulated other comprehensive income
Total stockholders’ equity
Noncontrolling interests
Total stockholders’ equity and noncontrolling interests
Total liabilities, stockholders’ equity and noncontrolling interests
Successor
December 31, 2013
June 30, 2014
$
459.3
—
865.9
550.2
50.2
30.0
1,955.6
1,622.6
1,113.6
1,439.6
110.6
271.9
223.2
6,737.1
$
478.5
46.7
5.5
472.7
1,003.4
3,874.2
280.4
367.3
5,525.3
$
229.1
1,133.7
(253.9)
34.0
1,142.9
68.9
1,211.8
6,737.1
$
$
$
$
$
$
The accompanying notes are an integral part of these financial statements.
F-4
$
$
$
350.3
1.9
953.8
576.4
63.4
18.1
1,963.9
1,621.3
1,110.1
1,394.4
102.0
285.4
227.5
6,704.6
527.1
43.7
6.3
415.3
992.4
3,857.2
270.4
327.9
5,447.9
229.1
1,137.5
(204.4)
25.7
1,187.9
68.8
1,256.7
6,704.6
Table of Contents
AXALTA COATING SYSTEMS LTD.
DuPont Performance Coatings Combined (Predecessor) and Condensed Consolidated (Successor)
Statements of Cash Flows (Unaudited)
(Dollars in millions)
Operating activities:
Net income (loss)
Adjustment to reconcile net (loss) income to cash provided by
(used for) operating activities:
Depreciation and amortization
Amortization of financing costs and original issue discount
Fair value step up of acquired inventory sold
Bridge financing commitment fees
Debt modification fees
Deferred income taxes
Unrealized (gains) losses on derivatives
Realized and unrealized foreign exchange (gains) losses, net
Stock-based compensation
Other non-cash, net
Decrease (increase) in operating assets:
Accounts and notes receivable
Inventories
Prepaid expenses and other assets
Increase (decrease) in operating liabilities:
Accounts payable
Other accrued liabilities
Other liabilities
Cash provided by (used for) operating activities
Investing activities:
Acquisition of DuPont Performance Coatings (net of cash
acquired)
Purchase of property, plant and equipment
Purchase of interest rate cap
Settlement of foreign currency contract
Restricted cash
Purchase of intangibles
Purchase of investment in affiliate
Proceeds from sale of assets
Cash used for investing activities
Financing activities:
Proceeds from Senior Secured Credit Facilities, net
Issuance of Senior Notes
Proceeds from short-term borrowings
Payments on short-term borrowings
Payments of deferred financing costs
Payments of long-term debt
Bridge financing commitment fees
Dividends paid to noncontrolling interests
Debt modification fees
Equity contribution
Net transfer from DuPont
Cash provided by (used for) financing activities
Increase (decrease) in cash and cash equivalents
Effect of exchange rate changes on cash
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Predecessor
Period from
January 1, 2013
through January 31,
2013
Six months ended
June 30, 2013
Six months ended
June 30, 2014
$
$
$
8.5
$
Successor
52.1
9.9
—
—
—
—
9.1
—
4.5
—
(3.9)
140.6
8.3
103.7
25.0
—
(58.5)
(7.6)
35.2
—
(1.6)
152.9
10.3
—
—
3.1
(14.1)
3.8
(19.2)
3.8
(7.5)
25.8
(19.3)
3.1
(37.8)
35.5
(23.5)
(112.3)
(24.3)
(41.4)
(29.9)
(43.8)
(1.7)
(37.7)
47.6
74.9
(1.9)
161.6
59.5
(47.6)
(5.4)
13.7
—
(2.4)
—
—
(6.3)
(1.2)
1.6
(8.3)
(4,827.0)
(23.4)
(3.1)
(19.4)
—
—
—
0.7
(4,872.2)
—
(100.8)
—
—
(1.9)
(0.2)
—
0.1
(102.8)
—
—
—
—
—
—
—
—
—
—
43.0
43.0
(3.0)
—
28.7
25.7
2,817.3
1,089.4
5.0
(10.8)
(126.0)
—
(25.0)
(4.1)
—
1,350.0
—
5,095.8
385.2
—
—
385.2
—
—
16.7
(17.2)
—
(7.1)
—
(1.6)
(3.0)
—
—
(12.2)
(101.3)
(7.7)
459.3
350.3
$
The accompanying notes are an integral part of these financial statements.
F-5
(178.3)
$
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
(1)
BASIS OF PRESENTATION OF THE INTERIM UNAUDITED COMBINED AND CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The interim combined and 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. (formerly known as Flash Bermuda Co. Ltd. or Axalta Coating Systems Bermuda Co., Ltd.), a Bermuda
exempted Limited Liability Company and its consolidated subsidiaries (“Axalta” or the “Company”) at June 30, 2014 and December 31,
2013, the results of operations for the six months ended June 30, 2014 and 2013 and cash flows for the six months ended June 30, 2014
and June 30, 2013. These interim unaudited combined and condensed consolidated financial statements should be read in conjunction with
the consolidated and combined financial statements and notes included in Axalta’s Annual Report. 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.
The results of operations for the six months ended June 30, 2014 are not necessarily indicative of the results to be expected for a full year.
The 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, compromised the
DuPont Performance Coatings business (“DPC’) (“Acquisition”) closed on February 1, 2013. The accompanying condensed consolidated
balance sheets of Axalta at June 30, 2014 and December 31, 2013 and related interim consolidated statements of operations and
consolidated statements of comprehensive income for the six months ended June 30, 2014 and 2013 and of cash flows for the six months
ended June 30, 2014 and 2013 are labeled as “Successor.” The consolidated financial statements for the Successor include the accounts of
Axalta and its subsidiaries, and entities in which a controlling interest is maintained.
The accompanying combined statements of operations and statements of comprehensive income for the period from January 1, 2013
through January 31, 2013 and of cash flows for the period from January 1, 2013 through January 31, 2013, do not include adjustments or
transactions attributable to the Acquisition, and are labeled as “Predecessor”. As a result of the application of acquisition accounting as of
the closing date of the Acquisition, the financial statements for the Successor periods and the Predecessor periods are presented on a
different basis and are, therefore, not comparable.
During the Predecessor periods, DPC operated either as a reportable segment or part of a reportable segment within E. I. du Pont de
Nemours and Company, a corporation incorporated under the laws of the State of Delaware (“DuPont”); consequently, standalone financial
statements were not historically prepared for DPC. The accompanying combined financial statements of DPC have been prepared from
DuPont’s historical accounting records and are presented on a standalone basis as if the operations had been conducted independently from
DuPont. In this context, prior to presale structuring activities occurring in the latter part of 2012, no direct ownership relationship existed
among all of the various legal entities comprising DPC. The Predecessor combined financial statements include the historical operations,
assets and liabilities of the legal entities that are considered to comprise the DPC business.
DPC comprised certain standalone legal entities for which discrete financial information was available, as well as portions of legal entities
for which discrete financial information was not available (shared entities). Discrete financial information was not available for DPC
within shared entities as DuPont did not record every transaction at the DPC level, but rather at the DuPont corporate level. For shared
entities for which discrete financial information was not available, allocation methodologies were applied to certain accounts to allocate
amounts to DPC as discussed in Note 6.
F-6
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
The Predecessor interim unaudited combined statements of operations include all revenues and costs directly attributable to DPC,
including costs for facilities, functions and services used by DPC. Costs for certain functions and services performed by centralized
DuPont organizations were directly charged to DPC based on usage or other allocations methods. The results of operations also include
allocations of (i) costs for administrative functions and services performed on behalf of DPC by centralized staff groups within DuPont,
(ii) DuPont’s general corporate expenses, and (iii) certain pension and other postretirement benefit costs. As more fully described in Note
12, current and deferred income taxes and related tax expense were determined on the standalone results of the DPC operations in each
country as if it were a separate taxpayer (i.e., following the separate return methodology).
All charges and allocations of cost for facilities, functions and services performed by DuPont organizations were deemed paid by DPC to
DuPont, in cash, in the period in which the costs were recorded in the Predecessor combined statement of operations. Allocations to DPC
of current income taxes payable were deemed to have been remitted, in cash, to DuPont in the period the related tax expense was recorded.
Allocations of current income taxes receivable were deemed to have been remitted to DPC, in cash, by DuPont in the period in which the
receivable applies only to the extent that a refund of such taxes could have been recognized by DPC on a standalone basis under the law of
the relevant taxing jurisdiction.
DuPont used a centralized approach to cash management and financing its operations. Accordingly, cash, cash equivalents, debt and
interest expense were not allocated to DPC in the Predecessor combined financial statements. Transactions between DPC and DuPont were
accounted for through the parent company net investment. DPC purchased materials and services from, and sold materials and services to,
DuPont operations not included in the defined scope of DPC. Transactions between DuPont and DPC were deemed to be settled
immediately through the parent company net investment. Cash, cash equivalents, debt and interest expense in the Predecessor interim
unaudited combined balance sheet and statement of operations represent cash, cash equivalents, debt and interest expense held locally by
certain of DPC’s majority owned joint ventures. DuPont’s current and long-term debt was not pushed down to the Predecessor interim
unaudited combined financial statements because it was not specifically identifiable to DPC.
All of the allocations and estimates in the Predecessor interim unaudited combined financial statements were based on assumptions that
management of DuPont and DPC believed were reasonable. However, the Predecessor interim unaudited combined financial statements
included herein may not be indicative of the financial position, results of operations and cash flows of the Company in the future or if DPC
had been a separate, standalone entity during the Predecessor periods presented.
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 the third quarter ended September 30, 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 as part of the financing of the
Acquisition. The correction of these items impacted the condensed consolidated balance sheets at June 30, 2014 and December 31, 2013,
and the condensed consolidated statements of operations, and statements of comprehensive income (loss) for the six-month periods ending
June 30, 2014 and 2013 presented herein. The Company assessed the applicable guidance and concluded that these errors were not material
to the Company’s condensed 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-month periods ended September 30, 2014 consolidated
statement of operations. As a result of this analysis, the unaudited condensed consolidated financial statements at June 30, 2014 and
December 31, 2013, and for the six-month periods ending June 30,
F-7
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
2014 and 2013 presented herein have been revised to reflect the correction of the aforementioned errors. The correction of the error
increased net income by $5.3 million and $8.1 million for the six months ended June 30, 2014 and 2013, respectively, through a reduction
in interest expense of $6.0 million (net of a tax provision of $0.7 million) and $6.4 million (net of a tax benefit of $1.7 million),
respectively. The correction of the error impacted Deferred Financing Costs, Long-term borrowings, Non-current deferred income tax
assets and Other accrued liabilities by $15.3 million, ($3.9) million, ($2.5) million and ($0.1) million at June 30, 2014 and by $10.5
million, ($2.7) million, ($1.7) million and $0.0 million at December 31, 2013, respectively.
Certain reclassifications have been made to Net Sales, Other expense, net, and Selling, general and administrative expenses on the
Predecessor combined statements of operations to conform to the Successor presentation.
As we have completed our accounting associated with the Acquisition, the finalization of our valuations and the refinement of our
assumptions impacted the recognized values assigned to assets acquired and liabilities assumed. As a result, Net sales, depreciation
expense, and income tax benefit were retrospectively adjusted to reflect a $4.6 million increase, a $7.9 million increase and a $2.6 million
decrease, respectively, for the six months ended June 30, 2013.
(2)
RECENT ACCOUNTING GUIDANCE
Accounting Guidance Issued But Not Yet Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“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 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal
years. Early adoption is not permitted. 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)
ACQUISITION OF DUPONT PERFORMANCE COATINGS
On August 30, 2012, we entered into a purchase agreement with DuPont whereby, Axalta and certain of its subsidiaries acquired from
DuPont and its affiliates certain assets of DPC and all of the capital stock and other equity interests of certain entities engaged in the DPC
business (the “Acquisition Agreement”) pursuant to which we acquired the assets and legal entities of DPC from DuPont for a purchase
price of $4,925.9 million plus or minus a working capital adjustment and pension adjustment. Axalta and DuPont finalized the working
capital and pension adjustments to the purchase price which resulted in a reduction to the purchase price of $18.6 million to $4,907.3
million.
We accounted for the Acquisition as a business combination in accordance with ASC 805, Business Combinations , using the acquisition
method of accounting. At December 31, 2013, the amounts presented for the Acquisition were finalized.
F-8
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
The following table summarizes the fair values of the net assets acquired as of the February 1, 2013 Acquisition date adjusted for
measurement period adjustments:
February 1, 2013
Measurement
(As Initially
Reported)
Period
Adjustments
February 1, 2013
Cash and cash equivalents
Accounts and notes receivable—trade, net
Inventories
Prepaid expenses and other
Net property, plant and equipment
Identifiable intangibles, net
Other assets—noncurrent
Accounts payable
Other accrued liabilities
Other liabilities
Deferred income taxes
Noncontrolling interests
Net assets acquired before goodwill on acquisition
Goodwill on acquisition
Net assets acquired
$
$
79.7
855.8
673.0
8.2
1,707.7
1,539.3
98.8
(409.1)
(232.0)
(331.1)
(312.9)
(66.7)
3,610.7
1,315.2
4,925.9
$
$
—
22.7
3.0
(1.3)
(1.8)
(19.0)
19.1
(6.9)
7.5
(35.3)
223.2
—
211.2
(229.8)
(18.6)
(As Adjusted)
$
$
79.7
878.5
676.0
6.9
1,705.9
1,520.3
117.9
(416.0)
(224.5)
(366.4)
(89.7)
(66.7)
3,821.9
1,085.4
4,907.3
The measurement period adjustments reflect new information obtained about facts and circumstances that existed at the closing date of the
Acquisition, primarily related to indemnification assets, inventories, other miscellaneous current assets and liabilities, property, plant and
equipment, intangible assets, and the related deferred income taxes. With the exception of those items detailed in Note 1, no measurement
period adjustments had a material impact on the statement of operations or cash flows requiring retrospective application.
The determination of Goodwill was recognized for the Acquisition as the excess of the purchase price over the net identifiable assets
recognized. The Goodwill is primarily attributed to our assembled workforce, corporate and operational synergies and the going concern
value of the anticipated future economic benefits associated with DPC being operated as a standalone entity.
The fair values of intangible assets were estimated using an income approach, either the excess earnings method (customer relationships)
or the relief from royalty method (technology and trademarks). Under the excess earnings method, an intangible asset’s fair value is equal
to the present value of the incremental after-tax cash flows attributable solely to the intangible asset over its remaining useful life. Under
the relief from royalty method, fair value is measured by estimating future revenue associated with the intangible asset over its useful life
and applying a royalty rate to the revenue estimate. These intangible assets enable us to develop new products to meet the evolving
business needs as well as competitively produce our existing products.
The fair value of real properties acquired was based on the consideration of their highest and best use in the market. The fair values of
property, plant, and equipment, other than real properties, were based on the consideration that unless otherwise identified, they will
continue to be used “as is” and as part of the ongoing business. In contemplation of the in-use premise and the nature of the assets, the fair
value was developed primarily using a cost approach. The determination of the fair value of assets acquired and liabilities assumed
involves assessing factors such as the expected future cash flows associated with individual assets and liabilities and appropriate discount
rates at the date of the acquisition.
F-9
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
The fair value of the noncontrolling interests, related to acquired joint ventures, were estimated by applying an income approach. This fair
value measurement is based on significant inputs that are not observable in the market and thus represents a fair value measurement
categorized within Level 3 of the fair value hierarchy. Key assumptions included a discount rate, a terminal value based on a range of longterm sustainable growth rates and adjustments because of the lack of control that market participants would consider when measuring the
fair value of the noncontrolling interests.
The Company was formed on August 24, 2012 for the purpose of consummating the Acquisition of DPC and, consequently has no
financial statements as of and for periods prior to that date. Prior to the Acquisition, we generated no revenue and incurred no expenses
other than merger and acquisition costs and debt financing costs in anticipation of the Acquisition. We incurred merger and acquisition
related costs of $29.0 million which were expensed during the Successor period August 24, 2012 through December 31, 2012 and incurred
debt financing costs of $4.6 million which were recorded as Other assets and Other accrued liabilities as of December 31, 2012
(Successor). The $33.6 million of merger and acquisition related costs and debt financing costs incurred were accrued as a component of
Other accrued liabilities at December 31, 2012 (Successor). The amounts were paid at closing of the Acquisition with proceeds from the
borrowings under the Senior Secured Credit Facilities.
The following unaudited supplemental pro forma information presents the financial results as if the acquisition of DPC had occurred on
January 1, 2012. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be
indicative of what would have occurred had the acquisition been made on January 1, 2012, nor is it indicative of any future results.
Six Months Ended
June 30, 2013
(Unaudited)
Net sales
Net loss
$
$
2,109.8
(58.7)
The 2013 supplemental pro forma net loss was adjusted to exclude $53.1 million of acquisition-related costs incurred in 2013 and $123.1
million of non-recurring expense consisting primarily of $103.7 million related to the fair market value adjustment to acquisition-date
inventory.
(4)
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
(a)
Goodwill
The following table shows changes in the carrying amount of goodwill for the Predecessor year ended December 31, 2012 and the
Predecessor period from January 1, 2013 to January 31, 2013 by reportable segment:
At January 1, 2012
Foreign currency translation
December 31, 2012
Foreign currency translation
January 31, 2013
Performance
Coatings
Transportation
Coatings
$
$
$
$
F-10
517.9
—
517.9
—
517.9
$
$
70.9
—
70.9
—
70.9
Total
$588.8
—
$588.8
—
$588.8
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
The following table shows changes in the carrying amount of goodwill for the Successor six months ended June 30, 2014 by
reportable segment:
At January 1, 2014
Purchase accounting adjustments
Foreign currency translation
June 30, 2014
Performance
Coatings
Transportation
Coatings
$ 1,038.8
11.6
(14.8)
$ 1,035.6
$
74.8
0.8
(1.1)
74.5
$
Total
$1,113.6
12.4
(15.9)
$1,110.1
During the six months ended June 30, 2014 we identified and recorded purchase accounting adjustments of $12.4 million related to
corrections subsequent to the end of the purchase accounting measurement period.
(b)
Identifiable Intangible Assets
The following table summarizes the gross carrying amounts and accumulated amortization of identifiable intangible assets by major
class:
December 31, 2013
Gross
Carrying
Amount
Technology
Trademarks—indefinite-lived
Trademarks—definite-lived
Customer relationships
Non-compete agreements
Total
$ 425.2
284.4
41.7
761.9
1.5
$1,514.7
$
Accumulated
June 30, 2014
Gross
Carrying
Amount
Technology
Trademarks—indefinite-lived
Trademarks—definite-lived
Customer relationships
Non-compete agreements
Total
$ 425.1
284.4
41.7
760.3
1.5
$1,513.0
Accumulated
Amortization
Net Book
Value
$ 387.9
284.4
39.1
727.0
1.2
$1,439.6
(37.3)
—
(2.6)
(34.9)
(0.3)
(75.1)
$
Weighted average
amortization
periods
10.0
Indefinite
14.8
19.4
4.0
Weighted average
Amortization
$
(57.9)
—
(4.1)
(56.1)
(0.5)
(118.6)
$
Net Book
Value
amortization
periods
$ 367.2
284.4
37.6
704.2
1.0
$1,394.4
10.0
Indefinite
14.8
19.4
4.0
Activity related to in process research and development projects for the six months ended June 30, 2014:
In Process Research and Development
Beginning
Balance at
January 1, 2014
Completed
Abandoned
at June 30, 2014
$
$
$
$
15.7
Ending Balance
(4.1)
(0.1)
11.5
Amortization expense for the Predecessor period from January 1, 2013 through January 31, 2013 was $2.6 million, which was primarily
reported as a reduction in Net sales. Amortization expense for the Successor six months ended June 30, 2014 was $42.4 million.
Amortization of acquired intangibles, including the impairment loss of $3.2 million associated with abandoned in process research and
development projects, for the Successor six months ended June 30, 2013 was $38.0 million.
F-11
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
The estimated amortization expense for the remainder of 2014 and for each of the succeeding five years is:
2014
2015
2016
2017
2018
2019
(5)
$
$
$
$
$
$
42.1
84.2
84.2
83.8
83.8
83.8
RESTRUCTURING
(a)
Successor Periods
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.
Since the Acquisition date, we have incurred costs associated with involuntary termination benefits associated with corporate-related
initiatives associated with our transition and cost-saving opportunities related to the separation from DuPont. During the six months
ended June 30, 2014 and 2013 we incurred restructuring costs of $1.4 million and $6.5 million, respectively. These amounts are
recorded within Selling, general, and administrative expenses in the condensed consolidated statement of operations. The payments
associated with these actions are expected to be completed in June 2015.
The following tables summarize the activities related to the restructuring reserves, recorded within Other accrued liabilities, and
expenses for the Successor six months ended June 30, 2014 and June 30, 2013, respectively:
Year to Date
June 30, 2013
Balance at February 1, 2013
Expense Recorded
Payments Made
Foreign Currency Changes
Balance at June 30, 2013
$
$
0.5
6.5
(1.6)
—
5.4
Year to Date
June 30, 2014
Balance at December 31, 2013
Expense Recorded
Payments Made
Foreign Currency Changes
Balance at June 30, 2014
(b)
$
$
98.4
1.4
(29.2)
(1.3)
69.3
Predecessor Periods
During the Predecessor period there was no expense recorded associated with involuntary termination benefits.
F-12
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
(6)
RELATIONSHIP WITH DUPONT
Predecessor Periods
Historically, the DPC businesses were managed and operated in the normal course of business with other affiliates of DuPont.
Accordingly, certain shared costs were allocated to DPC and reflected as expenses in the standalone Predecessor interim unaudited
combined financial statements. Management of DuPont considered the allocation methodologies used to be reasonable and
appropriate reflections of the historical DuPont expenses attributable to DPC for purposes of the standalone combined financial
statements of DPC; however, the expenses reflected in the Predecessor interim unaudited combined financial statements may not be
indicative of the actual expenses that would have been incurred during the periods presented if DPC had operated as a separate,
standalone entity. In addition, the expenses reflected in the Predecessor interim unaudited combined financial statements may not be
indicative of related expenses that will be incurred in the future by us.
(1)
Cash Management and Financing
Except for its joint ventures, DPC participated in DuPont’s centralized cash management and financing programs.
Disbursements were made through centralized accounts payable systems which were operated by DuPont, while cash receipts
were transferred to centralized accounts maintained by DuPont. As cash was disbursed and received by DuPont, it was
accounted for by DPC through the parent company net investment. All short and long-term debt requirements of the DPC
business were financed by DuPont and financing decisions for wholly owned subsidiaries and majority owned joint ventures
were determined by DuPont’s central treasury operations.
(2)
Allocated Corporate Costs
The Predecessor interim unaudited combined financial statements include significant transactions with DuPont involving
leveraged functional services (such as information systems, accounting, other financial services, purchasing and legal) and
general corporate expenses that were provided to DPC by centralized DuPont organizations. Throughout the Predecessor
periods covered by the combined financial statements of DPC, the costs of these leveraged functions and services were
directly charged or allocated to DPC using methods management believes were reasonable. The methods for directly charging
specifically identifiable functions and services to DPC included negotiated usage rates and dedicated employee assignments.
The method for allocating shared leveraged functional services to DPC was based on proportionate formulas involving
controllable fixed costs and in certain instances was allocated to DPC based on demand. Controllable fixed costs are fixed
costs less depreciation and amortization and nonrecurring transactions. The methods for allocating general corporate expenses
to DPC were based on revenue. However, the expenses reflected in the Predecessor interim unaudited combined financial
statements may not be indicative of the actual expenses that would have been incurred during the periods presented if DPC
had operated as a separate, standalone entity.
F-13
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
The allocated leveraged functional service expenses and general corporate expenses included in cost of goods sold, selling,
general, and administrative expenses and research and development expenses in the Predecessor interim unaudited combined
statement of operations were as follows:
Predecessor
Period from
January 1,
2013 through
January 31,
2013
Cost of goods sold
Selling, general, and administrative expenses
Research and development expenses
Total
$
$
14.2
1.4
0.1
15.7
Allocated leveraged functional service expenses and general corporate expenses are recorded in the Predecessor combined
statement of operations as follows:
Predecessor
Period from
January 1,
2013 through
January 31,
2013
Leveraged functional services
General corporate expenses
Total
(3)
$
$
14.2
1.5
15.7
Purchases from and Sales to Other DuPont Businesses
Throughout the Predecessor periods covered by the Predecessor combined financial statements, DPC purchased materials
(Titanium Dioxide and DuPont Sontara ® maintenance wipes) from DuPont and its non-DPC businesses.
Purchases include the following amounts:
Predecessor
Period from
January 1,
2013 through
January 31,
2013
DPC purchases of products from other DuPont businesses
Total
$
$
7.9
7.9
There were no material sales to other DuPont businesses during the periods covered by the Predecessor interim unaudited
condensed combined financial statements.
F-14
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
(7)
COMMITMENTS AND CONTINGENT LIABILITIES
(a)
Guarantees
In connection with the Acquisition, we assumed certain guarantee obligations which directly guaranteed various debt obligations
under agreements with third parties related to the following: equity affiliates, customers, suppliers and other affiliated companies.
At both June 30, 2014 and December 31, 2013, we had directly guaranteed $1.6 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, 2014 and December 31, 2013.
We assess the payment/performance risk by assigning default rates based on the duration of the guarantees. These default rates are
assigned based on the external credit rating of the counterparty or through internal credit analysis and historical default history for
counterparties that do not have published credit ratings. For counterparties without an external rating or available credit history, a
cumulative average default rate is used.
(b)
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 impact 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, of these matters on the consolidated financial statements of Axalta will be recorded in the period in
which they 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 consolidated financial statements of Axalta.
F-15
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
(8)
LONG-TERM EMPLOYEE BENEFITS
Components of Net Periodic Benefit Cost
The following table sets forth the components of net periodic benefit cost for the Successor six months ended June 30, 2014 and
June 30, 2013 and the Predecessor period from January 1, 2013 through January 31, 2013:
Pension Benefits
Predecessor
Period from
January 1,
2013 through
Successor
Six Months
Ended June 30,
Six Months
Ended June 30,
2013
2014
January 31,
2013
Components of net periodic benefit cost:
Net periodic benefit cost:
Service cost
Interest cost
Expected return on plan assets
Amortization of actuarial (gain) loss
Amortization of prior service cost
Net periodic benefit cost
$
$
1.6
1.7
(1.8)
1.1
—
2.6
Predecessor
Period from
January 1,
2013 through
$
$
$
$
—
—
—
—
—
$
8.4
12.0
(7.4)
(0.2)
—
12.8
$
Other Long-Term Employee Benefits
Successor
Six Months
Ended June 30,
Six Months
Ended June 30,
2013
2014
January 31,
2013
Components of net periodic benefit cost:
Net periodic benefit cost:
Service cost
Interest cost
Amortization of actuarial (gain) loss
Amortization of prior service cost
Net periodic benefit cost
7.4
8.6
(5.5)
—
—
10.5
$
$
—
—
—
—
—
$
$
0.1
0.1
—
—
0.2
Significant events
During the six months ended June 30, 2014, the Company executed an amendment to one of our Non-U.S. defined benefit pension plans.
The amendment effectively eliminated the accrual of future benefits for all participants as of March 31, 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 gain within Accumulated other
comprehensive income.
F-16
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
(9)
STOCK-BASED COMPENSATION
(a)
Successor period
During the six months ended June 30, 2014, we recognized $3.8 million in stock-based compensation expense which was allocated to
cost of goods sold, selling, general and administrative expenses, and research and development expenses. There was no stock-based
compensation expense incurred during the Successor six months ended June 30, 2013.
At June 30, 2014, there was $13.1 million of unrecognized compensation cost relating to outstanding unvested stock options.
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.
There were no material issuances of stock options during the six months ended June 30, 2014. At June 30, 2014, only stock options
have been granted under the Equity Incentive Plan. For awards granted during the six months ended June 30, 2014, the fair value of
the Company’s common stock was estimated at $12.17 per share.
We estimated the per share fair value of our common stock using a contemporaneous valuation using income and market approaches.
The income approach utilized the discounted cash flow (“DCF”) methodology based on our internal financial forecasts and
projections. The market approach utilized the Guideline Public Company and Guideline Transactions methods. For the DCF
methodology, we prepared annual projections of future cash flows through 2018. Beyond 2018, projected cash flows through the
terminal year were projected at long-term sustainable growth rates consistent with long-term inflationary and industry expectations.
Our projections of future cash flows were based on our estimated net debt-free cash flows and were discounted to the valuation date
using a weighted-average cost of capital estimated based on market participant assumptions.
For the Guideline Public Company and Guideline Transactions methods, we identified a group of comparable public companies and
recent transactions within the chemicals industry. For the comparable companies, we estimated market multiples based on trading
prices and trailing 12 months EBITDA. These multiples were then applied to our trailing 12 months EBITDA. When selecting
comparable companies, consideration was given to industry similarity, their specific products offered, financial data availability and
capital structure.
For the comparable transactions, we estimated market multiples based on prices paid for the related transactions and trailing 12
months EBITDA. These multiples were then applied to our trailing 12 months EBITDA. The results of the market approaches
corroborated the fair value determined using the income approach.
(b)
Predecessor periods
DuPont maintained certain stock-based compensation plans for the benefit of certain of its officers, directors and employees,
including, prior to the Acquisition, certain DPC employees. DPC recognized stock-based compensation within the interim unaudited
combined statement of operations based upon fair values. The fair value of awards granted totaled $2.0 million for the Predecessor
period from January 1, 2013 through January 31, 2013.
Total stock-based compensation expense included in the interim unaudited combined statement of operations was $0.1 million for the
Predecessor period from January 1, 2013 through January 31, 2013.
F-17
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
(10) RELATED PARTY TRANSACTIONS
(a)
The 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 are 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. In addition, we
may pay Carlyle additional fees associated with other future transactions. During the Successor six months ended June 30, 2014 and
2013, we recorded expense of $1.6 million and $1.3 million, related to this consulting agreement, respectively. In addition, Carlyle
Investment also received a one-time fee of $35.0 million upon effectiveness of the Acquisition for services rendered in connection
with the Acquisition and related acquisition financing. Of this amount, $21.0 million was recorded as merger and acquisition
expenses and $14.0 million was recorded as a component of deferred financing costs in the Successor six months ended June 30,
2013.
(b)
Service King Collision Repair
Service King Collision Repair, a portfolio company of funds affiliated with Carlyle, has purchased products from our distributors in
the past and may continue to do so in the future. In August 2013, we entered into a new long-term sales agreement with Service King
to be their exclusive provider of coatings. Terms of the agreement are consistent with industry standards. Related party sales through
our distribution network for the Successor six months ended June 30, 2014 were $4.0 million. During the Successor six months
ended June 30, 2013 and the Predecessor period from January 1, 2013 through January 31, 2013, sales to Service King Collision
Repair were immaterial.
(c)
Other
A director of the Company is the Chairman and Chief Executive Officer of an international management consulting firm focused on
the automotive and industrial sectors. In connection with the Acquisition, we incurred consulting fees and expenses from the
consulting firm of $0.1 million, during the Successor six months ended June 30, 2013. We also granted the consulting firm a stock
option award to purchase up to 352,143 of our common shares which had a fair value of $0.5 million.
(11) OTHER EXPENSE, NET
Predecessor
Period from
January 1,
2013 through
Successor
Six Months
Ended June 30,
January 31,
2013
Exchange (gain)/losses
Management fee and expenses
Miscellaneous expense (income)
Total
$
$
4.5
—
0.5
5.0
Six Months
Ended June 30,
2013
$
$
2014
59.6
1.3
(1.8)
59.1
$
$
(14.5)
1.6
15.8
2.9
Based on recent changes to the Venezuelan currency exchange rate mechanisms in 2014 and our recent participation in the
Venezuela’s Complementary System of Foreign Currency Administration
F-18
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
(SICAD I) auction process during the six-months ended June 30, 2014, we changed the exchange rate we used to remeasure our
Venezuelan subsidiary’s financial statements into U.S. dollars. The exchange rate was determined by such auction process, which
was 10.0 to 1 compared to the historical indexed rate of 6.3 to 1. Further, we also believe the equity of our Venezuelan subsidiary
would be realized through a dividend utilizing the auction process through SICAD I. The devaluation of the exchange rates resulted
in a gain of $12.2 million for the six months ended June 30, 2014 due to our Venezuelan operations being in a net monetary liability
position.
(12) INCOME TAXES
During the second quarter of 2014, documentation was secured to support tax deductions related to pre-acquisition activities. As a result of
these findings, we recorded a discrete tax benefit of $21.1 million in the six months ended June 30, 2014, which is primarily related to an
adjustment for unrecognized tax benefits of $9.8 million and the reversal of interest and penalties of $7.1 million. Interest and penalties
associated with unrecognized tax benefits are recognized as components of Provision (benefit) for income taxes. Additionally, we amended
our income tax return related to this matter, resulting in additional tax benefits of $4.2 million. The total tax benefit of $21.1 million was
partially offset by the reduction in indemnity assets of $12.5 million related to the pre-acquisition tax liabilities noted above, which
resulted in a reduction to Other expense, net.
(13) EARNINGS PER COMMON SHARE
Basic earnings per common share excludes the dilutive impact of potentially dilutive securities and is computed by dividing net income by
the weighted average number of common shares outstanding for the period. Diluted earnings per common share includes the effect of
potential dilution from the exercise of outstanding stock options and unvested restricted stock. Potentially dilutive securities have been
excluded in the weighted average number of common shares used for the calculation of earnings per share in periods of net loss because
the effect of such securities would be anti-dilutive. A reconciliation of the Company’s basic and diluted earnings per common share was as
follows (in millions, except shares and earnings per share):
Successor
Six Months Ended
2013
Net income (loss) attributable to Axalta
Pre-Acquisition net income (loss) attributable to Axalta
Net income (loss) to common shareholders (1)
Basic and diluted weighted average shares outstanding (1)
$
Earnings per Common Share:
Basic net income (loss) per share
Diluted net income (loss) per share
(1)
2014
(180.6)
(3.9)
$
(176.7)
228,149,996
$
$
$
$
$
(0.77)
(0.77)
49.5
—
$
49.5
229,069,356
0.22
0.22
As of February 1, 2013, the date of the Acquisition, the Company received the initial Equity Contribution of $1,350.0 million.
Accordingly, the net income (loss) to common shareholders and the weighted average shares outstanding calculation is based
on the period from February 1, 2013 to June 30, 2013.
The number of anti-dilutive shares that have been excluded in the computation of diluted earnings per share for the Successor six months
ended June 30, 2014 were 17.1 million. There were no potentially dilutive securities outstanding during the Successor six months ended
June 30, 2013.
F-19
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
Basic and diluted weighted average shares outstanding have been adjusted to reflect the Company’s 100,000 for 1 stock split which
occurred in July 2013, and the Company’s 1.69 to 1 stock split which occurred in October 2014.
(14) ACCOUNTS AND NOTES RECEIVABLE, NET
December 31,
2013
Accounts receivable—trade, net
Miscellaneous(a)
Total
(a)
$
$
637.5
228.4
865.9
June 30,
2014
$ 722.3
231.5
$ 953.8
Miscellaneous includes service revenue receivables, trade notes receivable, non-income taxes, rebates from suppliers, advances to
employees and indemnification assets, which, pursuant to the terms of the Acquisition Agreement, DuPont agreed to indemnify us
with respect to certain pre-Acquisition employee-related, environmental and tax liabilities.
Accounts and notes receivable are carried at amounts that approximate fair value. Accounts receivable—trade, net are net of allowances of
$8.9 million and $6.5 million at June 30, 2014 and December 31, 2013, respectively. Bad debt expense for the Successor six months ended
June 30, 2014 and June 30, 2013 was $2.2 million and $0.7 million, respectively. For the Predecessor period from January 1, 2013 through
January 31, 2013, bad debt expense was $0.2 million.
(15) INVENTORIES
December 31,
2013
Finished products
Semi-finished products
Raw materials and supplies
Total
$
$
329.3
90.2
130.7
550.2
June 30,
2014
$ 345.5
89.9
141.0
$ 576.4
Inventories, including stores and supplies inventories, are valued at the lower of cost or market with cost being determined on the weighted
average cost method. Stores and supplies inventories were $22.6 million and $21.2 million at June 30, 2014 and December 31, 2013,
respectively.
F-20
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
(16) NET PROPERTY, PLANT and EQUIPMENT
Depreciation expense amounted to $87.5 million for the Successor six months ended June 30, 2014. For the Successor six months ended
June 30, 2013, depreciation expense amounted to $88.4 million. Depreciation expense amounted to $7.2 million for the Predecessor period
from January 1, 2013 through January 31, 2013.
December 31,
2013
Land
Buildings
Equipment
Construction in progress
Total
Accumulated depreciation
Net property, plant, and equipment
$
$
98.9
411.0
1,178.6
117.7
1,806.2
(183.6)
1,622.6
June 30,
2014
$
99.6
423.0
1,248.7
129.9
1,901.2
(279.9)
$1,621.3
(17) OTHER ACCRUED LIABILITIES
December 31,
June 30,
2013
Compensation and other employee-related costs
Restructuring
Discounts, rebates, and warranties
Miscellaneous
Total
$
$
2014
168.0
98.4
65.0
141.3
472.7
$ 139.9
69.3
75.3
130.8
$ 415.3
(18) LONG-TERM BORROWINGS
Borrowings and capital lease obligations are summarized as follows:
December 31,
2013
Dollar Term Loan
Euro Term Loan
Dollar Senior Notes
Euro Senior Notes
Short-term borrowings
Unamortized original issue discount
$
$
Less:
Short term borrowings
Current portion of long-term borrowings
Long-term debt
$
$
F-21
June 30,
2014
2,282.8
547.7
750.0
344.9
18.2
(22.7)
3,920.9
$2,277.0
539.3
750.0
340.4
15.2
(21.0)
$3,900.9
18.2
28.5
3,874.2
$
15.2
28.5
$3,857.2
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
(a)
Senior Secured Credit Facilities, as amended
On February 3, 2014, Dutch B B.V., as “Dutch Borrower”, and its indirect wholly-owned subsidiary, Axalta US Holdings, as “US
Borrower”, executed the second amendment to the Senior Secured Credit Facilities. The Senior Secured Credit Facilities are
governed by a credit agreement (the “Credit Agreement”). 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”). 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 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 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.
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 of the Dutch Borrower. 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 Dollar Term Loan and the 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 Amendment, 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, the Company may increase available revolving or term facility borrowings
up to $400.0 million.
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 or
3.50:1, 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 is applicable only when greater than 25% of the Revolving Credit Facility (including
letters of credit) is outstanding at the end of the fiscal quarter.
F-22
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
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 amortized as interest expense over the life of the Senior Secured Credit Facilities. The
breakout of the deferred financing costs and original issue discount at June 30, 2014 is as follows:
Deferred Financing
Original Issue
Costs
Beginning Balance at February 1, 2013
Amortization expense for the year ended December 31, 2013
Unamortized balance at December 31, 2013
Amortization expense for the six months ended June 30, 2014
Unamortized Balance at June 30, 2014
$
$
Discount
92.9
(11.6)
81.3
(6.7)
74.6
$
$
25.7
(3.0)
22.7
(1.7)
21.0
Amortization expense related to deferred financing costs, net for the six months ended June 30, 2014 and 2013 were $6.7 million and
$4.8 million, respectively. Amortization expense related to original issue discounts for the six months ended June 30, 2014 and 2013
were $1.7 million and $1.3 million, respectively.
At June 30, 2014, there were no borrowings under the Revolving Credit Facility. At June 30, 2014, letters of credit issued under the
Revolving Credit Facility totaled $21.5 million which reduced the availability under the Revolving Credit Facility to $378.5 million.
(b)
Significant Terms of the 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, Dutch B.B.V. issued €250.0 million aggregate principal amount of 5.750% senior secured notes due
2021 (the “Euro Senior Notes”) and related guarantees thereof. Cash fees related to the issuance of the Senior Notes were $33.1
million, are recorded within Deferred financing costs, net and are amortized as interest expense over the life of the Notes. At June 30,
2014 and December 31, 2013, the remaining unamortized balance was $27.4 million and $29.4 million, respectively. The expense
related to the amortization of the Deferred financing costs for the six months ended June 30, 2014 and 2013 was $2.0 million and
$1.7 million, respectively.
The Senior Notes are unconditionally guaranteed on a senior basis by 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% payable semiannually on February 1 and August 1. Cash fees related to the issuance of the Euro Senior Notes were $10.2 million, and are
recorded within “Deferred financing costs, net”
F-23
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
and are amortized into interest expense over the life of the Senior Notes. At June 30, 2014 and December 31, 2013, the remaining
unamortized balance was $8.4 million and $9.0 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
2017
2018
2019 and thereafter
104.313%
102.875%
101.438%
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.
(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% payable semiannually on February 1 and August 1. Cash fees related to the issuance of the Dollar Senior Notes were $22.9 million, are recorded
within “Deferred financing costs, net” and are amortized as interest expense over the life of the Senior Notes. At June 30, 2014 and
December 31, 2013, the remaining unamortized balance was $19.0 million and $20.4 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
2017
2018
2019 and thereafter
105.531%
103.688%
101.844%
100.000%
F-24
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
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.
(c)
Short-term borrowings
On September 12, 2013, we entered into short-term borrowings in the amount of $27.8 million to partially fund the acquisition of a
real estate investment property which closed in October 2013. The short-term borrowings associated with this acquisition have a
maturity date of September 12, 2014, accrue interest at a rate of 11% per annum and had an outstanding balance of $2.7 million and
$17.8 million at June 30, 2014 and December 31, 2013, respectively. Other miscellaneous short-term borrowings had an outstanding
balance of $12.5 million and $0.4 million at June 30, 2014 and December 31, 2013, respectively.
(d)
Bridge financing commitment fees
On August 30, 2012, we signed a debt commitment letter, which was subsequently amended and restated, that included a bridge
facility comprised of $1,100.0 million of unsecured U.S. bridge loans and a $300.0 million of secured bridge loans (the “Bridge
Facility”), which was to be utilized to partially fund the Acquisition in the event that permanent financing was not obtained.
Drawings under the Bridge Facility were subject to certain conditions. Upon the issuance of the Senior Notes and the entry into the
Senior Secured Credit Facilities, the commitments under the Bridge Facility terminated. Commitment fees related to the Bridge
Facility of $21.0 million and associated fees of $4.0 million were expensed upon the termination of the Bridge Facility during the six
months ended June 30, 2013.
(e)
Future repayments
Below is a schedule of required future repayments of all borrowings outstanding at June 30, 2014.
Remainder of 2014
2015
2016
2017
2018
Thereafter
$
18.9
39.0
28.4
28.4
28.5
3,778.7
$3,921.9
F-25
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
(19) FAIR VALUE ACCOUNTING
(a)
Assets measured at fair value on a nonrecurring basis
During the Successor six months ended June 30, 2014, we recorded a loss of $0.1 million associated with the abandonment of certain
in process research and development projects acquired in the Acquisition. During the Successor six months ended June 30, 2013 we
recorded an impairment loss of $3.2 million associated with the abandonment of certain in process research and development projects
acquired in the Acquisition. During the Predecessor period from January 1, 2013 through January 31, 2013, no assets were adjusted
to their fair values on a nonrecurring basis. See Note 4 for further discussion related to the fair values of in process research and
development projects acquired in the Acquisition.
(b)
Fair value of financial instruments
Cash and cash equivalents —The carrying amount of cash equivalents approximates fair value because the original maturity is less
than 90 days.
Accounts and notes receivable —The carrying amount of accounts and notes receivable approximates fair value because of their
short outstanding terms.
Available for sale securities —The fair values of available for sale securities at June 30, 2014 and December 31, 2013 were $5.1
million and $4.9 million, respectively. 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.
Accounts payable —The carrying amount of accounts payable approximates fair value because of their short outstanding terms.
Short-term borrowings —The carrying value of short-term bank borrowings equals fair value because their interest rates reflect
current market rates.
Long-term borrowings —The fair values of the Dollar Senior Notes and Euro Senior Notes at June 30, 2014 were $815.6 million and
$364.2 million, respectively. The fair values at December 31, 2013 were $798.8 million and $362.1 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 Dollar Term Loan and the Euro Term Loan at June 30, 2014 were $2,279.8 million and $543.9 million,
respectively. The fair values at December 31, 2013 were $2,297.1 million and $552.5 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.
(20) DERIVATIVE AND OTHER HEDGING 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 Successor six months ended June 30, 2013, we entered into a foreign currency contract to hedge the variability of the US dollar
equivalent of the original borrowings under the Euro Term Loan and the
F-26
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
proceeds from the issuance of Euro Senior Notes. Changes in the fair value of this instrument were recorded in current period earnings and
were presented in Other (income) expense, net as a component of Exchange (gains) losses. Losses related to the settlement of forward
contracts recognized during the Successor six months ended June 30, 2013 totaled $19.4 million. Cash flows resulting from the settlement
of the derivative instrument on February 1, 2013 are reported as investing activities.
During the Successor six months ended June 30, 2013, we entered into five interest rate swaps with notional amounts totaling $1,173.0
million to hedge interest rate exposures relate to our variable rate borrowings under the Senior Secured Credit Facilities. The maturity date
of the interest rate swaps is September 29, 2017. The interest rate swaps were designated and qualified as cash flow hedges.
The following table presents the location and fair values using Level 2 inputs of derivative instruments included in our interim unaudited
condensed consolidated and combined balance sheet:
Other assets:
Interest rate swaps
Interest rate cap
Total assets
Other liabilities:
Interest rate swaps
Other accrued liabilities:
Foreign currency contracts
Total liabilities
December 31, 2013
June 30, 2014
$
$
$
10.5
3.4
13.9
$
5.6
0.3
5.9
$
1.2
$
2.0
$
—
1.2
$
—
2.0
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is
reported as a component of other comprehensive income (“OCI”) 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 table sets forth the locations and amounts recognized during the six months ended June 30, 2014 and June 30, 2013 for these
cash flow hedges.
Derivatives
in Cash Flow
Hedging
Relationships
Amount of
(Gain) Loss
Recognized in
OCI on
Derivatives
(Effective
Portion)
Six
Six
Months
Months
Ended
Ended
June 30,
June 30,
2013
2014
Interest rate contracts
$ (7.4)
$
5.0
Location of (Gain)
Loss Reclassified
from
Accumulated OCI
Amount of
(Gain) Loss
Reclassified from
Accumulated
OCI to Income
(Effective
Portion)
Six
Six
Months
Months
Ended
Ended
June 30,
June 30,
into Income
(Effective Portion)
Interest
expense, net
F-27
2013
$
1.1
2014
$
3.2
Location of
(Gain) Loss
Recognized in
Income on
Derivatives
(Ineffective Portion)
Interest
expense, net
Amount of
(Gain) Loss
Recognized in
Income on
Derivatives
(Ineffective
Portion)
Six
Six
Months
Months
Ended
Ended
June 30,
June 30,
2013
$ (5.9)
2014
$
0.7
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
Also during the Successor six months ended June 30, 2013, the Company purchased a €300.0 million 1.5% interest rate cap on its Euro
Term Loan which matures on September 29, 2017. The company 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 instruments are recorded in current period earnings
and are presented in interest expense.
During the Predecessor period, DPC, through DuPont, entered into contractual arrangements (derivatives) to reduce its exposure to foreign
currency risk. The foreign currency derivative program was utilized for financial risk management and consisted of forward contracts. The
derivative instruments were not designated as hedging instruments. Changes in the fair value of the derivative instruments are recorded in
current period earnings and are presented in Other (income) expense, net as a component of exchange (gains) losses.
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:
Predecessor
Period from
January 1, 2013
Derivatives Not
Designated as Hedging
Instruments under ASC
815
Foreign currency forward
contract
Interest rate cap
Location of (Gain) Loss
Recognized in Income on
Derivatives
Other (income)
expense, net as a
component of
Exchange (gain) loss
Interest expense, net
through
January 31,
2013
$
$
2.0
—
2.0
Successor
Six Months
Ended June 30,
Six Months
Ended June 30,
2013
2014
$
$
21.4
(1.7)
19.7
$
$
1.9
3.1
5.0
(21) 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: 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.
F-28
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
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.
January 1 through January 31, 2013
Net sales(1)
Equity in earnings (losses) in unconsolidated affiliates
Adjusted EBITDA(2)
Investment in unconsolidated affiliates
Capital Expenditures
Performance
Coatings
Predecessor
Transportation
Coatings
$
$
186.8
—
15.0
2.0
1.5
Performance
Coatings
For the six months ended June 30, 2013
Net sales(1)
Equity in earnings in unconsolidated affiliates
Adjusted EBITDA(2)
Investment in unconsolidated affiliates
Capital Expenditures
$ 1,036.4
1.3
212.9
6.7
14.5
Performance
Coatings
For the six months ended June 30, 2014
Net sales(1)
Equity in earnings in unconsolidated affiliates
Adjusted EBITDA(2)
Investment in unconsolidated affiliates
Capital Expenditures
(1)
$ 1,281.1
0.5
261.2
8.3
61.5
The Company has no intercompany sales.
F-29
139.4
(0.3)
17.7
6.7
0.9
Successor
Transportation
Coatings
$
747.2
0.1
94.6
11.6
8.9
Successor
Transportation
Coatings
$
892.9
0.3
146.6
8.0
39.3
Total
$ 326.2
(0.3)
32.7
8.7
2.4
Total
$1,783.6
1.4
307.5
18.3
23.4
Total
$2,174.0
0.8
407.8
16.3
100.8
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
(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:
Predecessor
January 1 through
January 31,
2013
Adjusted EBITDA
Inventory step-up(a)
Merger and acquisition related costs(b)
Financing fees(c)
Foreign exchange remeasurement losses(d)
Long-term employee benefit plan adjustments(e)
Termination benefits and other employee related costs(f)
Consulting and advisory fees(g)
Transition-related costs(h)
Other adjustments(i)
Dividends in respect of noncontrolling interest(j)
Management fee expense(k)
EBITDA
Interest expense, net
Depreciation and amortization
Income (loss) before income taxes
(a)
(b)
(c)
(d)
(e)
$
$
32.7
—
—
—
(4.5)
(2.3)
(0.3)
—
—
(0.1)
—
—
25.5
—
(9.9)
15.6
Successor
Six Months Ended
June 30,
2013
2014
$ 307.5
(103.7)
(28.1)
(25.0)
(59.6)
(3.0)
(17.2)
(21.9)
(7.4)
0.2
4.1
(1.3)
44.6
(90.4)
(140.6)
$(186.4)
$ 407.8
—
—
(3.1)
14.5
(4.5)
(5.9)
(20.7)
(47.5)
(11.0)
1.6
(1.6)
329.6
(113.9)
(152.9)
$ 62.8
During the Successor Six Months Ended June 30, 2013, we recorded a non-cash fair value adjustment associated with our
acquisition accounting for inventories. These amounts increased cost of goods sold by $103.7 million.
In connection with the Acquisition, we incurred $28.1 million of merger and acquisition costs during the Successor Six
Months Ended June 30, 2013. These costs consisted primarily of investment banking, legal and other professional advisory
services costs.
On August 30, 2012, we signed a debt commitment letter which included the Bridge Facility. Upon the issuance of the Senior
Notes and the entry into the Senior Secured Credit Facilities, the commitments under the Bridge Facility terminated.
Commitment fees related to the Bridge Facility of $21.0 million and associated fees of $4.0 million were expensed upon
payment and the termination of the Bridge Facility. In connection with the refinancing of the Senior Secured Credit Facilities
in February 2014 (discussed further in Note 18), we recognized $3.1 million of costs.
Eliminates foreign exchange gains and losses resulting from the remeasurement of assets and liabilities denominated in
foreign currencies, including a $19.4 million loss related to the acquisition date settlement of a foreign currency contract used
to hedge the variability of Euro-based financing.
For the Successor Six Months Ended June 30, 2014 and 2013, eliminates the non-service cost components of employee
benefits costs. For the Predecessor period January 1, 2013 through
F-30
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
(f)
(g)
(h)
(i)
(j)
(k)
January 31, 2013, eliminates (1) all U.S. pension and other long-term employee benefit costs that were not assumed as part of
the Acquisition and (2) the non-service cost component of the pension and other long-term employee benefit costs for the
foreign pension plans that were assumed as part of the Acquisition.
Represents expenses primarily related to employee termination benefits, including our initiative to improve the overall cost
structure within the European region, and other employee-related costs. Termination benefits include the costs associated with
our headcount initiatives for establishment of new roles and elimination of old roles and other costs associated with cost
saving opportunities that were related to our transition to a standalone entity.
Represents fees paid to consultants, advisors, and other third-party professional organizations for professional services
rendered in conjunction with the transition from DuPont to a standalone entity.
Represents charges associated with the transition from DuPont to a standalone entity, including branding and marketing,
information technology related costs, and facility transition costs.
Represents costs for certain unusual or non-operational losses and the non-cash impact of natural gas and currency hedge
losses allocated to DPC by DuPont, stock-based compensation, asset impairments, equity investee dividends, indemnity
income associated with the Transaction, and loss (gain) on sale and disposal of property, plant and equipment.
Represents the payment of dividends to our joint venture partners by our consolidated entities that are not wholly owned.
Pursuant to Axalta’s management agreement with Carlyle Investment Management, L.L.C., an affiliate of Carlyle, for
management and financial advisory services and oversight provided to Axalta and its subsidiaries, Axalta is required to pay an
annual management fee of $3.0 million and out-of-pocket expenses.
Our business serves four end-markets globally as follows:
Predecessor
January 1 through
January 31,
2013
Performance Coatings
Refinish
Industrial
Total net sales Performance Coatings
Transportation Coatings
Light vehicle
Commercial vehicle
Total net sales Transportation Coatings
Total net sales
$
$
Successor
Six Months ended June 30,
2013
2014
129.4
57.4
186.8
$
740.7
295.7
1,036.4
111.6
27.8
139.4
326.2
598.8
148.4
747.2
$ 1,783.6
$
906.3
374.8
1,281.1
703.0
189.9
892.9
$ 2,174.0
Segment information for the Predecessor period has been recast to conform to the Successor segment presentation.
Asset information is not reviewed or included with our internal management reporting. Therefore, the Company has not disclosed asset
information for each reportable segment.
F-31
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
(22) ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table reconciles changes in Accumulated other comprehensive income (“AOCI”) by component:
Pension and
Other Long-
Predecessor Balance, December 31, 2012
Current year deferrals to AOCI
Reclassifications from AOCI to Net
income
Net Change
Predecessor Balance, January 31, 2013
Unrealized
Currency
Translation
Adjustments
term
Employee
Benefit
Adjustments
Unrealized
Unrealized
loss on
securities
Gain on
Derivatives
$
$
$
—
—
—
—
—
$
(142.3)
0.7
—
(141.6)
(141.6)
$
$
1.4
0.2
—
1.6
1.6
$
$
—
—
—
—
—
Accumulated
Other
Comprehensive
Income
$
$
(140.9)
0.9
—
(140.0)
(140.0)
The income tax related to the adjustment for pension and other long-term employee benefits for the Predecessor one month ended
January 31, 2013 was $0.4 million. The cumulative income tax benefit related to the adjustment for pension and other long-term employee
benefits at January 31, 2013 was $76.3 million. The income tax related to the change in the unrealized gain on derivatives for the
Predecessor one month ended January 31, 2013 was $0.0 million. The cumulative income tax cost related to the adjustment for unrealized
gain on derivatives at January 31, 2013 was $0.0 million. The income tax related to the change in the unrealized loss on securities for the
Predecessor one month ended January 31, 2013 was $0.1 million. The cumulative income tax cost related to the adjustment for unrealized
loss on securities at January 31, 2013 was $0.9 million.
Pension and
Other Long-
Successor Balance, December 31, 2012
Current year deferrals to AOCI
Reclassifications from AOCI to Net income
Net Change
Successor Balance, June 30, 2013
Unrealized
Currency
Translation
Adjustments
term
Employee
Benefit
Adjustments
Unrealized
Unrealized
loss on
securities
Gain on
Derivatives
$
$
$
$
—
13.1
—
13.1
13.1
$
F-32
—
—
—
—
—
$
—
(1.0)
—
(1.0)
(1.0)
$
$
—
5.7
(1.1)
4.6
4.6
Accumulated
Other
Comprehensive
Income
$
$
—
17.8
(1.1)
16.7
16.7
Table of Contents
Condensed Notes to Interim Combined (Predecessor) and Condensed Consolidated (Successor)
Financial Statements (Unaudited)
(Dollars in millions, unless otherwise noted)
The income tax related to the adjustment for pension and other long-term employee benefits for the Successor six months ended June 30,
2013 was $0.0 million. The cumulative income tax cost related to the adjustment for pension and other long-term employee benefits at
June 30, 2013 was $0.0 million. The income tax related to the change in the unrealized gain on derivatives for the Successor six months
ended June 30, 2013 was $2.8 million. The cumulative income tax cost related to the adjustment for unrealized gain on derivatives at
June 30, 2013 was $2.8 million. The income tax related to the change in the unrealized loss on securities for the Successor six months
ended June 30, 2013 was $0.5 million. The cumulative income tax benefit related to the adjustment for unrealized loss on securities at
June 30, 2013 was $0.5 million.
Pension and
Other Long-
Successor Balance, December 31,
2013
Current year deferrals to AOCI
Pension curtailment gain
Reclassifications from AOCI to Net
income
Net Change
Successor Balance, June 30, 2014
Unrealized
Currency
Translation
Adjustments
term
Employee
Benefit
Adjustments
Unrealized
Unrealized
loss on
securities
Gain on
Derivatives
$
$
$
$
24.3
(9.9)
—
—
(9.9)
14.4
$
7.5
(0.6)
4.7
(0.2)
3.9
11.4
$
(0.9)
0.8
—
—
0.8
(0.1)
$
$
3.1
0.1
—
(3.2)
(3.1)
—
Accumulated
Other
Comprehensive
Income
$
$
34.0
(9.6)
4.7
(3.4)
(8.3)
25.7
The income tax related to the adjustment for pension and other long-term employee benefits for the Successor six months ended June 30,
2014 was $0.9 million. The cumulative income tax cost related to the adjustment for pension and other long-term employee benefits at
June 30, 2014 and December 31, 2013 was $4.4 million and $3.5 million, respectively. The income tax related to the change in the
unrealized gain on derivatives for the Successor six months ended June 30, 2014 were $1.9 million. The cumulative income tax cost related
to the adjustment for unrealized gain on derivatives at June 30, 2014 and December 31, 2013 was $0.0 million and $1.9 million,
respectively.
(23) SUBSEQUENT EVENTS
In October 2014, the Board of Directors approved a 1.69-for-1 stock split of the Company’s issued and outstanding common stock, which
was effective on October 28, 2014. The stock split did not change the par value of the Company’s common stock. The condensed
consolidated financial statements have been retroactively adjusted to give effect to the stock split.
These interim unaudited condensed consolidated and combined financial statements reflect management’s evaluation of subsequent events,
through August 14, 2014, the initial date the interim unaudited condensed consolidated and combined financial statements were available
to be issued and through October 30, 2014, the date of the most recent revision.
F-33
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Axalta Coating Systems Ltd.
In our opinion, the accompanying combined balance sheet as of December 31, 2012 and the related combined statements of operations, of
comprehensive income (loss), of changes in DuPont’s net investment in DuPont Performance Coatings and of cash flows for the period from
January 1, 2013 through January 31, 2013, and for each of the two years in the period ended December 31, 2012 present fairly, in all material
respects, the financial position of DuPont Performance Coatings (Predecessor), a business formerly owned by E. I. du Pont de Nemours and
Company, at December 31, 2012 and the results of their operations and their cash flows for the period from January 1, 2013 through January 31,
2013, and for each of the two years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Philadelphia, PA
March 31, 2014, except for Note 25 to the combined financial statements, as to which the date is August 20, 2014
F-34
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Axalta Coating Systems Ltd.
In our opinion, the accompanying consolidated balance sheets as of December 31, 2013 and 2012 and the related consolidated statements of
operations, of comprehensive income (loss), of changes in stockholders’ equity and of cash flows for the year ended December 31, 2013 and for
the period from August 24, 2012 to December 31, 2012 present fairly, in all material respects, the financial position of Axalta Coating Systems
Ltd. and its subsidiaries (Successor) at December 31, 2013 and 2012 and the results of their operations and their cash flows for the year ended
December 31, 2013 and for the period from August 24, 2012 to December 31, 2012 in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
/s/ PricewaterhouseCoopers LLP
Philadelphia, PA
March 31, 2014, except for Note 25 and the earnings per common share data included in the consolidated statement of operations and in Note 14
to the consolidated financial statements, as to which the date is August 20, 2014, the revision disclosed in Note 2, as to which the date is October
14, 2014, and the effect of the stock split as disclosed in Notes 10 and 14, as to which the date is October 30, 2014
F-35
Table of Contents
AXALTA COATING SYSTEMS LTD.
DuPont Performance Coatings Combined (Predecessor) and Consolidated (Successor)
Statements of Operations
(Dollars in millions, except per share and share data)
Predecessor
Successor
Period from
Year Ended
December 31,
Year Ended
December 31,
2011
Net sales
Other revenue
Total revenue
Cost of goods sold
Selling, general and administrative expenses
Research and development expenses
Amortization of acquired intangibles
Merger and acquisition related expenses
Income (loss) from operations
Interest expense, net
Bridge financing commitment fees
Other expense, net
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Less: Net income attributable to noncontrolling interests
Net income (loss) attributable to controlling interests
Loss per common share attributable to Axalta (basic and
diluted)
Weighted average shares outstanding, basic and diluted
$
$
January 1,
2013
through
January 31,
2012
4,281.5
34.3
4,315.8
3,074.5
869.1
49.6
—
—
322.6
0.2
—
20.2
302.2
120.7
181.5
2.1
179.4
$
$
4,219.4
37.4
4,256.8
2,932.6
873.4
41.5
—
—
409.3
—
—
16.3
393.0
145.2
247.8
4.5
243.3
Period from
August 24,
2012
through
December 31,
2013
$
$
326.2
1.1
327.3
232.2
70.8
3.7
—
—
20.6
—
—
5.0
15.6
7.1
8.5
0.6
7.9
2012
$
$
$
The accompanying notes are an integral part of these financial statements.
F-36
Year Ended
December 31,
2013
—
—
—
—
—
—
—
29.0
(29.0)
—
—
—
(29.0)
—
(29.0)
—
(29.0)
$
—
—
$
$
3,951.1
35.7
3,986.8
2,772.8
1,040.6
40.5
79.9
28.1
24.9
215.1
25.0
48.5
(263.7)
(44.8)
(218.9)
6.0
(224.9)
(0.97)
228,280,574
Table of Contents
AXALTA COATING SYSTEMS LTD.
DuPont Performance Coatings Combined (Predecessor) and Consolidated (Successor)
Statements of Comprehensive Income (Loss)
(Dollars in millions)
Predecessor
Successor
Period from
Year Ended
December 31,
Year Ended
December 31,
2011
Net income (loss)
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments
Unrealized gain (loss) on securities
Unrealized gain on derivatives
Unrealized gain (loss) on pension and other
benefit plan obligations
Other comprehensive income (loss), before tax
Income tax benefit (provision) related to items
of other comprehensive income
Other comprehensive income (loss), net of tax
Comprehensive income (loss)
Less: Comprehensive income attributable to
noncontrolling interests
Comprehensive income (loss) attributable to
controlling interests
$
2012
181.5
$
Period from
August 24,
2012
through
December 31,
2013
247.8
$
Year Ended
December 31,
2012
8.5
$
2013
(29.0)
$
(218.9)
—
1.9
—
—
0.3
—
—
0.2
—
—
—
—
24.3
(0.9)
5.0
(26.5)
(24.6)
(99.6)
(99.3)
1.1
1.3
—
—
11.0
39.4
8.6
(16.0)
165.5
34.8
(64.5)
183.3
(0.5)
0.8
9.3
—
—
(29.0)
(5.4)
34.0
(184.9)
0.6
—
2.1
$
January 1,
2013
through
January 31,
4.5
163.4
$
178.8
$
8.7
The accompanying notes are an integral part of these financial statements.
F-37
$
(29.0)
6.0
$
(190.9)
Table of Contents
AXALTA COATING SYSTEMS LTD.
DuPont Performance Coatings Combined (Predecessor) and Consolidated (Successor)
Balance Sheets
Predecessor
December 31,
Successor
December 31,
December 31,
2012
(Dollars in millions)
Assets
Current assets:
Cash and cash equivalents
Accounts and notes receivable—trade, net
Inventories
Prepaid expenses and other
Deferred income taxes
Total current assets
Net property, plant, and equipment
Goodwill
Identifiable intangibles, net
Deferred financing costs, net
Investments in affiliates
Other assets
Total assets
Liabilities, Stockholders’ Equity and DuPont’s Net Investment in DuPont
Performance Coatings
Current liabilities:
Accounts payable
Current portion of borrowings
Deferred income taxes
Other accrued liabilities
Total current liabilities
Long-term borrowings
Accrued pensions and other long-term employee benefits
Deferred income taxes
Other liabilities
Total liabilities
Commitments and contingent liabilities (Note 8)
Stockholders’ equity and DuPont’s net investment:
Common stock, $1.00 par, 1,000,000,000 shares authorized, 229,069,356 shares
issued and outstanding at December 31, 2013; 100 shares issued and
outstanding at December 31, 2012
Capital in excess of par
DuPont’s net investment in DuPont Performance Coatings
Accumulated deficit
Accumulated other comprehensive income (loss)
Total stockholders’ equity and DuPont’s net investment
Noncontrolling interests
Total stockholders’ equity, DuPont’s net investment, noncontrolling
interests
Total liabilities, stockholders’ equity, DuPont’s net investment and
noncontrolling interests
$
$
$
$
28.7
807.3
471.0
23.5
24.0
1,354.5
708.8
588.8
66.9
—
7.9
151.7
2,878.6
$
441.7
0.2
11.5
295.9
749.3
—
338.2
27.9
66.2
1,181.6
$
$
2013
—
—
—
—
—
—
—
—
—
—
—
4.6
4.6
$
—
—
—
33.6
33.6
—
—
—
—
33.6
$
$
459.3
865.9
550.2
50.2
30.0
1,955.6
1,622.6
1,113.6
1,439.6
110.6
15.8
479.3
6,737.1
478.5
46.7
5.5
472.7
1,003.4
3,874.2
313.2
280.4
54.1
5,525.3
—
—
1,804.3
—
(140.9)
1,663.4
33.6
—
—
—
(29.0)
—
(29.0)
—
229.1
1,133.7
—
(253.9)
34.0
1,142.9
68.9
1,697.0
(29.0)
1,211.8
2,878.6
The accompanying notes are an integral part of these financial statements.
F-38
2012
$
4.6
$
6,737.1
Table of Contents
AXALTA COATING SYSTEMS LTD.
Combined Statement of Changes in DuPont’s Net Investment in DuPont Performance Coatings (Predecessor) and
Consolidated Statement of Changes in Stockholders’ Equity (Successor)
(Dollars in millions)
Predecessor
DuPont’s Net
Predecessor
Balance January 1, 2011
Comprehensive income:
Net income
Net unrealized gain on securities, net of tax benefit of $0.7
Pension benefit plans, net of tax of $9.3
Total comprehensive income
Net transfers to DuPont
Balance December 31, 2011
Predecessor
Balance December 31, 2011
Comprehensive income:
Net income
Net unrealized gain on securities, net of tax benefit of $0.1
Pension benefit plans, net of tax of $34.9
Total comprehensive income
Net transfers to DuPont
Deconsolidation of joint venture
Balance December 31, 2012
Predecessor
Balance December 31, 2012
Comprehensive income:
Net income
Net unrealized gain on securities, net of tax of $0.1
Pension benefit plans, net of tax of $0.4
Total comprehensive income
Net transfers from DuPont
Dividends declared to noncontrolling interests
Balance January 31, 2013
Investment
in DuPont
Performance
Accumulated
Other
Comprehensive
Noncontrolling
Coatings
Income (Loss)
Interests
$
1,790.3
$
(60.4)
$
179.4
—
—
179.4
(123.0)
1,846.7
$
1,846.7
Total
$
34.8
$1,764.7
$
—
1.3
(17.2)
(15.9)
—
(76.3)
$
2.1
—
—
2.1
(2.1)
34.8
181.5
1.3
(17.2)
165.6
(125.1)
$1,805.2
$
(76.3)
$
34.8
$1,805.2
$
243.3
—
—
243.3
(283.8)
(1.9)
1,804.3
$
—
0.2
(64.8)
(64.6)
—
—
(140.9)
$
4.5
—
—
4.5
(3.9)
(1.8)
33.6
247.8
0.2
(64.8)
183.2
(287.7)
(3.7)
$1,697.0
$
1,804.3
$
(140.9)
$
33.6
$1,697.0
$
7.9
—
—
7.9
43.0
—
1,855.2
$
—
0.2
0.7
0.9
—
—
(140.0)
$
0.6
—
—
0.6
—
(1.5)
32.7
8.5
0.2
0.7
9.4
43.0
(1.5)
$1,747.9
The accompanying notes are an integral part of these financial statements.
F-39
Table of Contents
AXALTA COATING SYSTEMS LTD.
Combined Statement of Changes in DuPont’s Net Investment in DuPont Performance Coatings (Predecessor) and
Consolidated Statement of Changes in Stockholders’ Equity (Successor)
(Dollars in millions)
Capital In
Successor
Balance August 24, 2012
Comprehensive loss:
Net loss
Total comprehensive loss
Balance December 31, 2012
Comprehensive loss:
Net (loss) income
Net unrealized loss on securities, net of
tax of $0.0
Net realized and unrealized gain on
derivatives, net of tax of $1.9
Long-term employee benefit plans, net
of tax of $3.5
Foreign currency translation
Total comprehensive (loss) income
Equity contributions
Recognition of stock-based
compensation
Capitalization of capital in excess of par
Noncontrolling interests of acquired
subsidiaries
Dividends declared to noncontrolling
interests
Balance December 31, 2013
Common
Excess Of
Accumulated
Stock
Par
Deficit
$
—
$
—
$
—
$
—
—
—
$
—
—
—
$
—
$
—
Successor
Accumulated
Other
Comprehensive
Noncontrolling
Income
Interests
$
—
$
(29.0)
(29.0)
(29.0)
$
(224.9)
Total
$
—
$
—
$
—
—
—
$
—
—
—
(29.0)
(29.0)
$ (29.0)
$
—
$
6.0
$ (218.9)
—
—
—
(0.9)
—
(0.9)
—
—
—
3.1
—
3.1
—
—
(224.9)
—
7.5
24.3
34.0
—
—
—
6.0
—
—
—
—
0.1
—
—
—
1,355.3
7.5
24.3
(184.9)
1,355.4
—
229.0
7.4
(229.0)
—
—
—
—
—
—
7.4
—
—
—
—
—
66.7
66.7
—
$ 229.1
—
$1,133.7
$
—
(253.9)
$
—
34.0
The accompanying notes are an integral part of these financial statements.
F-40
$
(3.8)
68.9
(3.8)
$1,211.8
Table of Contents
AXALTA COATING SYSTEMS LTD.
DuPont Performance Coatings Combined (Predecessor) and Consolidated (Successor)
Statements of Cash Flows
(Dollars in millions)
Predecessor
Successor
Period from
Operating activities:
Net (loss) income
Adjustment to reconcile net (loss) income to cash provided by
operating activities:
Depreciation and amortization
Provision for uncollectible accounts
Amortization of financing costs and original issue discount
Fair value step up of acquired inventory sold
Bridge financing commitment fees
Deferred income taxes
Realized and unrealized foreign exchange losses, net
Stock-based compensation
Other non-cash, net
Decrease (increase) in operating assets:
Trade accounts and notes receivable
Restricted cash
Inventories
Prepaid expenses and other assets
Increase (decrease) in operating liabilities:
Accounts payable
Accounts payable, related parties
Other accrued liabilities
Other liabilities
Cash provided by (used for) operating activities
Investing activities:
Acquisition of DuPont Performance Coatings (net of cash
acquired)
Purchase of property, plant and equipment
Investment in real estate property
Purchase of interest rate cap
Settlement of foreign currency contract
Purchase of intangibles
Purchase of investment in affiliate
Proceeds from sale of assets
Cash used for investing activities
Financing activities:
Proceeds from Senior Secured Credit Facilities, net
Issuance of Senior Notes
Proceeds from short-term borrowings
Payments on short-term borrowings
Payments on long-term debt
Payments of deferred financing costs
Bridge financing commitment fees
Dividends paid to noncontrolling interests
Equity contribution
Net transfer (to) from DuPont
Cash provided by (used for) financing activities
Increase (decrease) in cash and cash equivalents
Effect of exchange rate changes on cash
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental cash flow information
Cash paid during the year for:
Interest, net of amounts capitalized
Income taxes, net of refunds
Year Ended
December 31,
Year Ended
December 31,
January 1,
2013
through
January 31,
2011
2012
2013
$
181.5
$
247.8
$
8.5
Period from
August 24,
2012
through
December 31,
Year Ended
December 31,
2012
2013
$
(29.0)
$
(218.9)
108.7
4.6
—
—
—
3.5
—
—
(1.5)
110.7
5.0
—
—
—
9.1
—
—
2.6
9.9
0.2
—
—
—
9.1
4.5
—
(4.1)
—
—
—
—
—
—
—
—
—
300.7
5.4
18.4
103.7
25.0
(120.8)
48.9
7.4
7.8
(5.4)
(13.1)
6.1
2.3
(58.9)
(3.6)
5.7
5.0
25.8
—
(19.3)
3.1
—
—
—
—
(6.4)
—
33.9
(90.9)
(3.0)
13.0
(44.7)
(15.8)
236.2
53.1
1.8
36.4
(25.9)
388.8
(29.9)
—
(43.8)
(1.7)
(37.7)
—
—
29.0
—
—
67.1
—
193.1
2.4
376.8
—
(82.7)
—
—
—
(41.7)
0.3
7.5
(116.6)
—
(73.2)
—
—
—
(21.6)
0.1
6.5
(88.2)
—
(2.4)
—
—
—
(6.3)
(1.2)
1.6
(8.3)
—
—
—
—
—
—
—
—
—
(4,827.6)
(107.3)
(54.5)
(3.1)
(19.4)
—
—
0.7
(5,011.2)
$
—
—
0.4
(0.4)
—
—
—
—
—
(125.1)
(125.1)
(5.5)
2.4
21.9
18.8
$
—
—
—
(0.7)
—
—
—
—
—
(289.9)
(290.6)
10.0
(0.1)
18.8
28.7
$
—
—
—
—
—
—
—
—
—
43.0
43.0
(3.0)
—
28.7
25.7
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
2,817.3
1,089.4
38.8
(25.3)
(21.3)
(126.0)
(25.0)
(5.2)
1,355.4
—
5,098.1
463.7
(4.4)
—
459.3
$
$
0.2
19.6
$
$
—
15.9
$
$
—
13.3
$
$
—
—
$
$
171.9
83.1
The accompanying notes are an integral part of these financial statements.
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Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
(1)
GENERAL AND DESCRIPTION OF THE BUSINESS
Axalta Coating Systems Ltd. (formerly known as Flash Bermuda Co., Ltd. or Axalta Coating Systems Bermuda Co., Ltd.) (“Axalta” or the
“Company”), a Bermuda exempted company limited by shares formed at the direction of The Carlyle Group L.P. (“Carlyle”), was
incorporated on August 24, 2012 for the purpose of consummating the acquisition of DuPont Performance Coatings (“DPC”), a business
formerly owned by E. I. du Pont de Nemours and Company (“DuPont”), including certain assets of DPC and all of the capital stock and
other equity interests of certain entities engaged in the DPC business (the “Acquisition”). Axalta, through its wholly-owned indirect
subsidiaries, acquired DPC on February 1, 2013.
Axalta is a holding company with no business operations or assets other than cash, cash equivalents, certain indemnity receivables from
DuPont and 100% of the ownership interest of Axalta Coating Systems Dutch Co. Top Coöperatief U.A. (formerly known as Flash Dutch
Co. Top Coöperatief U.A.), which itself is a holding company with no operations or assets other than 100% of the capital stock of Axalta
Coating Systems Dutch Holdings A B.V. (formerly known as Flash Dutch 1 B.V.) (“Dutch A B.V.”), which itself is a holding company
with no operations or assets other than 100% of the capital stock of Axalta Coating Systems Dutch Holdings B B.V. (formerly known as
Dutch 2 B.V.) (“Dutch B B.V.”). Dutch B B.V., together with its indirect wholly-owned subsidiary, Axalta Coating Systems U.S.
Holdings, Inc. (formerly known as U.S. Coatings Acquisition Inc.) (“Axalta US Holdings”), are co-borrowers under the Senior Secured
Credit Facilities and co-issuers of the Senior Notes (each as defined below). Our global operations are conducted by indirect wholly-owned
subsidiaries and indirect majority-owned subsidiaries.
The purchase price for the Acquisition was funded by (i) an equity contribution of $1,350.0 million into the Company by affiliates of
Carlyle (the “Equity Contribution”), (ii) proceeds from borrowings under senior secured credit facilities (the “Senior Secured Credit
Facilities”) consisting of a $2,300.0 million Dollar Term Loan facility and a €400.0 million Euro Term Loan facility both of which are due
February 1, 2020 and (iii) proceeds from the issuance of $750.0 million aggregate principal amount of 7.375% senior unsecured notes due
2021 and the issuance of €250.0 million aggregate principal amount of 5.750% senior secured notes due 2021 (collectively the “Senior
Notes”). The Senior Secured Credit Facilities and the Senior Notes are more fully described in Note 22.
Axalta is a leading global manufacturer, marketer and distributor of innovative high performance coatings products primarily serving the
transportation industry. Products are offered in four key end markets including the refinish automotive aftermarket, industrial, light vehicle
or automotive original equipment manufacturers (“OEM”) market, and commercial vehicle market. These products include high
performance liquid and powder coatings for motor vehicles OEMs, the motor vehicle aftermarket, and general industrial applications, such
as coatings for heavy equipment, pipes, appliances and electrical insulation. Aftermarket coatings products are marketed using the Standox,
Spies Hecker, Cromax and Nason brand names. Standox, Spies Hecker and Cromax are focused on the high-end motor vehicle
aftermarkets, while Nason is primarily focused on economy coating applications.
Axalta is globally operated with manufacturing facilities, sales centers, administrative offices and warehouses located throughout the
world. Axalta’s operations are primarily located in the United States, Canada, Brazil, Mexico, Austria, Belgium, Germany, France, the
United Kingdom and China.
(2)
BASIS OF PRESENTATION OF THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
The Acquisition closed on February 1, 2013. The accompanying consolidated balance sheets of Axalta as of December 31, 2013 and
December 31, 2012 and related consolidated statements of operations and consolidated statements of comprehensive income for the year
ended December 31, 2013 and for the period
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Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
from August 24, 2012 through December 31, 2012 and consolidated statements of cash flows and of changes in stockholders’ equity for
the year ended December 31, 2013 and the period from August 24, 2012 through December 31, 2012 are labeled as “Successor”. The
Successor financial statements as of December 31, 2013 and for the year ended December 31, 2013 were prepared reflecting acquisition
accounting and other transaction adjustments resulting from the Acquisition. The consolidated financial statements for the Successor
include the accounts of Axalta and its subsidiaries, and entities in which a controlling interest is maintained.
The accompanying combined balance sheet of DPC as of December 31, 2012 and the related combined statements of operations and
statements of comprehensive income for the period from January 1, 2013 through January 31, 2013 and for the years ended December 31,
2012 and 2011 and consolidated statements of cash flows and of changes in parent company net investment for the period from January 1,
2013 through January 31, 2013 and for the years ended December 31, 2012 and 2011, do not include adjustments or transactions
attributable to the Acquisition, and are labeled as “Predecessor”. As a result of the application of acquisition accounting as of the closing
date of the Acquisition, the financial statements for the Successor periods and the Predecessor periods are presented on a different basis
and are, therefore, not comparable.
During the Predecessor periods, DPC operated either as a reportable segment or part of a reportable segment within DuPont; consequently,
standalone financial statements were not historically prepared for DPC. The accompanying combined financial statements of DPC have
been prepared from DuPont’s historical accounting records and are presented on a standalone basis as if the operations had been conducted
independently from DuPont. In this context, prior to presale structuring activities occurring in the latter part of 2012, no direct ownership
relationship existed among all of the various legal entities comprising DPC. Accordingly, DuPont and its subsidiaries’ net investment in
these operations is shown in lieu of stockholders’ equity in the Predecessor combined financial statements. The Predecessor combined
financial statements include the historical operations, assets and liabilities of the legal entities that are considered to comprise the DPC
business.
DPC comprised certain standalone legal entities for which discrete financial information was available, as well as portions of legal entities
for which discrete financial information was not available (shared entities). Discrete financial information was not available for DPC
within shared entities as DuPont did not record every transaction at the DPC level, but rather at the DuPont corporate level. For shared
entities for which discrete financial information was not available, allocation methodologies were applied to certain accounts to allocate
amounts to DPC as discussed in Note 7.
The Predecessor combined statements of operations include all revenues and costs directly attributable to DPC, including costs for
facilities, functions and services used by DPC. Costs for certain functions and services performed by centralized DuPont organizations
were directly charged to DPC based on usage or other allocations methods. The results of operations also include allocations of (i) costs for
administrative functions and services performed on behalf of DPC by centralized staff groups within DuPont, (ii) DuPont’s general
corporate expenses, and (iii) certain pension and other postretirement benefit costs. As more fully described in Note 13, current and
deferred income taxes and related tax expense were determined on the standalone results of the DPC operations in each country as if it
were a separate taxpayer (i.e., following the separate return methodology).
All charges and allocations of cost for facilities, functions and services performed by DuPont organizations were deemed paid by DPC to
DuPont, in cash, in the period in which the costs were recorded in the Predecessor combined statement of operations. Allocations to DPC
of current income taxes payable were deemed to have been remitted, in cash, to DuPont in the period the related tax expense was recorded.
Allocations of current income taxes receivable were deemed to have been remitted to DPC, in cash, by DuPont in the period in which the
receivable applies only to the extent that a refund of such taxes could have been recognized by DPC on a standalone basis under the law of
the relevant taxing jurisdiction.
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Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
DuPont used a centralized approach to cash management and financing its operations. Accordingly, cash, cash equivalents, debt and
interest expense were not allocated to DPC in the Predecessor combined financial statements. Transactions between DPC and DuPont were
accounted for through the parent company net investment. DPC purchased materials and services from, and sold materials and services to,
DuPont operations not included in the defined scope of DPC. Transactions between DuPont and DPC were deemed to be settled
immediately through the parent company net investment. Cash, cash equivalents, debt and interest expense in the Predecessor combined
balance sheet and statement of operations represent cash, cash equivalents, debt and interest expense held locally by certain of DPC’s
majority owned joint ventures. DuPont’s current and long-term debt was not pushed down to the Predecessor combined financial
statements because it was not specifically identifiable to DPC.
All of the allocations and estimates in the Predecessor combined financial statements were based on assumptions that management of
DuPont and DPC believed were reasonable. However, the Predecessor combined financial statements included herein may not be
indicative of the financial position, results of operations and cash flows of the Company in the future or if DPC had been a separate,
standalone entity during the Predecessor periods presented.
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 the third quarter ended September 30, 2014, the Company identified errors in the determination and calculation of the effective
interest rate amortization for the Deferred Financing Costs and Original Issue Discounts that were incurred in 2013 as part of the financing
of the Acquisition. The correction of these items impacted the consolidated balance sheet at December 31, 2013 and the consolidated
statements of operations and statements of comprehensive income (loss) for the year ending December 31, 2013 as presented in the
Company’s annual financial statements. 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-month periods ended September 30, 2014 consolidated
statement of operations. As a result of this analysis, the 2013 consolidated financial statements were revised to reflect the correction of the
aforementioned errors. The correction of the error increased net income by $11.5 million for the year ended December 31, 2013, through a
reduction in interest expense of $13.2 million (net of a tax provision of $1.7 million). The correction of the error impacted Deferred
Financing Costs, Long-term borrowings and Non-current deferred income tax assets by $10.5 million, ($2.7) million and ($1.7) million at
December 31, 2013, respectively.
Certain reclassifications have been made to Other revenue and Other expense, net, on the Predecessor combined statements of operations
to conform to the Successor presentation.
(3)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of Axalta and its subsidiaries and the combined financial statements of DPC have been prepared in
accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial statements have been
included.
(a)
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the closing date of the
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Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
Acquisition and the date of the financial statements and the reported amounts of sales and expenses during the period. The estimates
and assumptions include, but are not limited to, receivable and inventory valuations, fixed asset valuations, valuations of goodwill
and identifiable intangible assets, including analysis of impairment, valuations of long-term employee benefit obligations, income
taxes, environmental matters, litigation, stock-based compensation, restructuring, and allocations of costs. Our estimates are based on
historical experience, facts and circumstances available at the time and various other assumptions that are believed to be reasonable.
Actual results could differ materially from those estimates.
(b)
Accounting for Business Combinations
We account for business combinations under the acquisition method of accounting. This method requires the recording of acquired
assets, including separately identifiable intangible assets and assumed liabilities at their acquisition date fair values. The method
records any excess purchase price over the fair value of acquired net assets as goodwill.
The determination of the fair value of assets acquired, liabilities assumed, and noncontrolling interests involves assessments of
factors such as the expected future cash flows associated with individual assets and liabilities and appropriate discount rates at the
closing date of the Acquisition. When necessary, we consult with external advisors to help determine fair value. For non-observable
market values, we determine fair value using acceptable valuation principles (e.g., multiple excess earnings, relief from royalty and
cost methods).
We included the results of operations from the acquisition date in the financial statements for all businesses acquired.
(c)
Principles of Consolidation and Combination
The consolidated financial statements of the Successor (“the Successor statements”) include the accounts of Axalta and its
subsidiaries, and entities in which a controlling interest is maintained. For those consolidated subsidiaries in which the Company’s
ownership is less than 100%, the outside stockholders’ interests are shown as noncontrolling interests. Investments in companies in
which Axalta, directly or indirectly, owns 20% to 50% of the voting stock and has the ability to exercise significant influence over
operating and financial policies of the investee are accounted for using the equity method of accounting. As a result, Axalta’s share
of the earnings or losses of such equity affiliates is included in the accompanying consolidated statement of operations and our share
of these companies’ stockholders’ equity is included in “Investments in affiliates” in the accompanying consolidated balance sheet.
The combined financial statements for the Predecessor (“the Predecessor statements”) include the combined assets, liabilities,
revenues, and expenses of DPC.
We eliminated all intercompany accounts and transactions in the preparation of the accompanying consolidated and combined
financial statements.
On September 4, 2012, the three partners of the DPC majority-owned DuPont Powder Coatings Saudi Company Ltd. (“DPC Saudi”),
a non-US joint venture, signed a new shareholder resolution agreement requiring all partners to unanimously agree to all financial
decisions and payments of the business. As a result, DPC concluded that consolidating DPC Saudi was no longer appropriate due to a
lack of financial control in the operations of the business. Consequently, DPC deconsolidated the joint venture, and accounted for it
under the equity method of accounting in the Predecessor statements. This joint venture
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Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
investment in DPC Saudi was not an asset acquired from DuPont in the Acquisition. The deconsolidation of DPC Saudi resulted in a
loss of $1.0 million for the year ended December 31, 2012, which was recorded in Selling, general and administrative expenses in the
combined statement of operations.
(d)
Revenue Recognition
We recognize revenue after completing the earnings process. We recognize revenue for product sales when we ship products to the
customer in accordance with the terms of the agreement, when there is persuasive evidence of the arrangement, title and risk of loss
have been transferred, collectability is reasonably assured and pricing is fixed or determinable.
For a majority of our product sales, title transfers at the shipping point and delivery is considered complete. For certain OEM
customers, revenue is recognized at the time the customer applies our coatings to its vehicles, as this represents the point in time that
risk of loss has been transferred and delivery is considered complete.
We accrue for sales returns and other allowances based on our historical experience.
We incur up-front costs in order to obtain contracts with certain customers. During the Successor periods, we capitalized these upfront costs as a component of Other assets. During the Predecessor periods, we capitalized costs as a component of Identifiable
intangibles, net. We amortize the related amounts over the estimated life of the contract as a reduction of net sales.
We include the amounts billed to customers for shipping and handling fees in net sales and costs incurred for the delivery of goods as
cost of goods sold in the statement of operations.
Recognition for licensing and royalty income occurs in accordance with agreed upon terms, when performance obligations are
satisfied, the amount is fixed or determinable, and collectability is reasonably assured.
(e)
Other Revenue
Other revenue includes various elements of income resulting from the normal operation of our business. Other revenue includes, but
is not limited to, income for services provided to customers and royalty income.
(f)
Cash and Cash Equivalents
Cash equivalents represent highly liquid investments with maturities of three months or less from time of purchase. They are carried
at cost plus accrued interest, which approximates fair value because of the short-term maturity of these instruments. Cash balances
may exceed government insured limits in certain jurisdictions. During the Predecessor periods, cash and cash equivalents represented
balances held by DPC’s majority owned joint ventures as DPC participated in DuPont’s centralized cash management and financing
programs (see Note 7 for additional information).
(g)
Fair Value Measurements
GAAP defines a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and
the lowest priority to unobservable inputs (Level 3 measurements). A financial instrument’s level within the fair value hierarchy is
based on the lowest level of any input that is significant to the fair value measurement.
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Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
The following valuation techniques are used to measure fair value for assets and liabilities:
Level 1—Quoted market prices in active markets for identical assets or liabilities;
Level 2—Significant other observable inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical or
similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves,
and market-corroborated inputs); and
Level 3—Unobservable inputs for the asset or liability, which are valued based on management’s estimates of assumptions that
market participants would use in pricing the asset or liability.
(h)
Derivatives and Hedging
The Company from time to time utilizes derivatives to manage exposures to currency exchange rates and interest rate risk. The fair
values of all derivatives are recognized as assets or liabilities at the balance sheet date. Changes in the fair value of these instruments
are reported in income or Accumulated other comprehensive income (“AOCI”), depending on the use of the derivative and whether it
qualifies for hedge accounting treatment.
Gains and losses on derivatives that are designated and qualify as cash flow hedging instruments are recorded in AOCI, to the extent
the hedges are effective, until the underlying transactions are recognized in income. To the extent effective, gains and losses on
derivative and nonderivative instruments used as hedges of the Company’s net investment in foreign operations are recorded in
AOCI as part of the cumulative translation adjustment. The ineffective portions of cash flow hedges and hedges of net investment in
foreign operations, if any, are recognized in income immediately.
Gains and losses on derivatives designated and qualifying as fair value hedging instruments, as well as the offsetting losses and gains
on the hedged items, are reported in income in the same accounting period. Derivatives not designated as hedging instruments are
marked-to-market at the end of each accounting period with the results included in income.
Cash flows from derivatives are recognized in the consolidated and combined statements of cash flows in a manner consistent with
the underlying transactions.
(i)
Receivables and Allowance for Doubtful Accounts
Receivables are recognized net of an allowance for doubtful accounts receivable. The allowance for doubtful accounts receivable
reflects the best estimate of losses inherent in the accounts receivable portfolio determined on the basis of historical experience,
specific allowances for known troubled accounts and other available evidence. Accounts receivable are written down or off when a
portion or all of such account receivable is determined to be uncollectible.
(j)
Inventories
Inventories of the Successor are valued at the lower of cost or market with cost being determined on the weighted average cost
method. Elements of cost in inventories include:
•
raw materials,
•
direct labor, and
•
manufacturing overhead.
Stores and supplies are valued at the lower of cost or market; cost is generally determined by the average cost method. Inventories
deemed to have costs greater than their respective market values are
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Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
reduced to net realizable value based upon a review of on-hand inventories and historical and forecasted usage, as well as price
determination or changes in price levels, recorded as a loss in the period recognized.
Inventories of the Predecessor were valued on the basis of cost as determined by the last-in, first-out (“LIFO”) method.
(k)
Property, Plant and Equipment
(1)
Successor periods
Property, plant and equipment of the Successor acquired in the Acquisition were recorded at fair value as of the acquisition
date and are depreciated using the straight-line method. Subsequent additions to property, plant and equipment, including the
fair value of any asset retirement obligations upon initial recognition of the liability, are recorded at cost and are depreciated
using the straight-line method.
Property, plant and equipment acquired in the Acquisition are depreciated over their estimated remaining useful lives. The
weighted average estimated remaining useful lives of property, plant and equipment acquired in connection with the
Acquisition was approximately 11 years. Subsequent additions are depreciated over useful lives ranging from 15 to 25 years
for buildings and 5 to 25 years for equipment. Included within equipment are capitalized costs associated with internal use
computer software, which we amortize on a straight-line basis generally over 5 to 7 years, and furniture and fixtures, which
we depreciate over useful lives ranging from 5 to 10 years.
(2)
Predecessor periods
Property, plant and equipment of the Predecessor were carried at cost and were depreciated using the straight-line method.
Property, plant and equipment placed in service prior to 1995 were depreciated using the sum-of-the-years’ digits method or
other substantially similar methods. Substantially all Predecessor buildings and equipment were depreciated over useful lives
ranging from 15 to 25 years.
(l)
Goodwill and Other Identifiable Intangible Assets
Goodwill represents the excess of purchase price over the fair values of underlying net assets acquired in an acquisition. Goodwill
and indefinite-lived intangible assets are tested for impairment on an annual basis as of October 1; however, these tests are performed
more frequently if events or changes in circumstances indicate that the asset may be impaired. The fair value methodology is based
on prices of similar assets or other valuation methodologies including discounted cash flow techniques.
When testing goodwill and indefinite-lived intangible assets for impairment, we first have an option to assess qualitative factors to
determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%)
that an impairment exists. Such qualitative factors may include the following: macroeconomic conditions; industry and market
considerations; cost factors; overall financial performance; and other relevant entity-specific events. In the event the qualitative
assessment indicates that an impairment is more likely than not, we would be required to perform a quantitative impairment test,
otherwise no further analysis is required.
Under the quantitative goodwill impairment test, the evaluation of impairment involves comparing the current fair value of each
reporting unit to its carrying value, including goodwill. If the carrying amount of a reporting unit, including goodwill, exceeds the
estimated fair value, then individual assets
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Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
(including identifiable intangible assets) and liabilities of the reporting unit are estimated at fair value. The excess of the estimated
fair value of the reporting unit over the estimated fair value of its net assets would establish the implied value of goodwill. The
excess of the recorded amount of goodwill over the implied value is then charged to earnings as an impairment loss.
Definite-lived intangible assets, such as technology, trademarks, customer relationships and non-compete agreements are amortized
over their estimated useful lives, generally for periods ranging from four to 20 years. The reasonableness of the useful lives of these
assets is regularly evaluated. Once these assets are fully amortized, they are removed from the balance sheet. We evaluate these
assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets might not be
recoverable.
(m) Impairment of Long-Lived Assets
The carrying value of long-lived assets to be held and used is evaluated when events or changes in circumstances indicate the
carrying value may not be recoverable. The carrying value of a long-lived asset is considered impaired when the total projected
undiscounted cash flows from the asset are less than its carrying value. In that event, a loss is recognized based on the amount by
which the carrying value exceeds the fair value of the long-lived asset. The fair value methodology used is an estimate of fair market
value and is based on prices of similar assets or other valuation methodologies including present value techniques. Long-lived assets
to be disposed of other than by sale are classified as held for use until their disposal. Long-lived assets to be disposed of by sale are
classified as held for sale and are reported at the lower of carrying amount or fair market value less cost to sell. Depreciation is
discontinued for long-lived assets classified as held for sale.
(n)
Research and Development
Research and development costs incurred in the normal course of business are expensed as incurred. In process research and
development projects acquired in a business combination are recorded as intangible assets at their fair value as of the acquisition
date. Subsequent costs related to acquired in process research and development projects are expensed as incurred. Research and
development intangible assets are considered indefinite-lived until the abandonment or completion of the associated research and
development efforts. Upon completion of the research and development process, the carrying value of acquired in process research
and development projects is reclassified as a finite-lived asset and is amortized over its useful life.
(o)
Environmental Liabilities and Expenditures
Accruals for environmental matters are recorded in cost of goods sold when it is probable that a liability has been incurred and the
amount of the liability can be reasonably estimated. Accrued environmental liabilities are not discounted. Claims for recovery from
third parties, if any, are reflected separately as an asset. We record recoveries at the earlier of when the gain is probable or realized.
For the periods ending December 31, 2013, 2012 and 2011, and January 1, 2013 through January 31, 2013, we have not recognized
any assets or income associated with recoveries from third parties.
Costs related to environmental remediation are charged to expense in the period incurred. Other environmental costs are also charged
to expense in the period incurred, unless they increase the value of the property or reduce or prevent contamination from future
operations, in which case, they are capitalized and amortized.
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Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
(p)
Litigation
We accrue for liabilities related to litigation matters when available information indicates that the liability is probable and the amount
can be reasonably estimated. Legal costs such as outside counsel fees and expenses are charged to expense in the period incurred.
(q)
Income Taxes
(1)
Successor periods
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of assets and liabilities and their respective tax basis. Deferred tax assets are also
recognized for operating losses and tax credit carry forwards. Valuation allowances are recorded to reduce deferred tax assets
when it is more likely than not that a tax benefit will not be realized. Deferred tax assets and liabilities are measured using
enacted tax rates applicable in the years in which they are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax law is recognized in income in the period that includes the enactment date.
Where we do not intend to indefinitely reinvest earnings of our foreign subsidiaries, we provide for income taxes and foreign
withholding taxes, where applicable, on undistributed earnings. We do not provide for income taxes on undistributed earnings
of our foreign subsidiaries that are intended to be indefinitely reinvested.
We recognize the benefit of an income tax position only if it is “more likely than not” that the tax position will be sustained.
The tax benefits recognized are measured based on the largest benefit that has a greater than 50% likelihood of being realized.
Additionally, we recognize interest and penalties accrued related to unrecognized tax benefits as a component of provision for
income taxes. The current portion of unrecognized tax benefits is included in “Income taxes payable” and the long-term
portion is included in the long-term income tax payable in the consolidated balance sheets.
(2)
Predecessor periods
For all Predecessor periods presented, although DPC was included in the consolidated income tax return of DuPont, DPC’s
income taxes are computed and reported under the “separate return method.” Use of the separate return method may result in
differences when the sum of the amounts allocated to standalone tax provisions are compared with amounts presented in
combined financial statements. In that event, related deferred tax assets and liabilities could be significantly different from
those presented herein for the Predecessor periods. Certain tax attributes, e.g., net operating loss carryforwards, which were
reflected in the DuPont consolidated financial statements may or may not exist at the standalone DPC level.
(r)
Foreign Currency Translation
(1)
Successor periods
The reporting currency is the U.S. dollar. In most cases, our non-U.S. based subsidiaries use their local currency as the
functional currency for their respective business operations. Assets and liabilities of these operations are translated into
U.S. dollars at end-of-period exchange rates; income and expenses are translated using the average exchange rates for the
reporting period. Resulting cumulative translation adjustments are recorded as a component of stockholders’ equity in the
consolidated balance sheet in Accumulated other comprehensive income (loss).
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Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
Gains and losses from transactions denominated in currencies other than the functional currencies are included in the
consolidated statement of operations in Other expense, net.
(2)
Predecessor periods
The reporting currency is the U.S. dollar. For the Predecessor period, DuPont management determined that the U.S. dollar
was the functional currency of DPC’s legal entities and this functional currency was appropriate for the economic
environment in which DPC operated during the period covered by the Predecessor combined financial statements. For these
legal entities, foreign currency denominated asset and liability amounts were remeasured into U.S. dollars at the end-of-period
exchange rates. Nonmonetary assets, such as inventories, prepaid expenses, fixed assets and intangible assets were
remeasured in U.S. dollars at historical exchange rates. Foreign currency denominated income and expense elements were
remeasured into U.S. dollars at average exchange rates in effect during the year, except for expenses related to nonmonetary
assets, which were remeasured at historical exchange rates.
(s)
Employee Benefits
(1)
Successor periods
In connection with the Acquisition, we assumed certain defined benefit plan obligations and related plan assets for current
employees of non-U.S. subsidiaries and certain defined benefit plan obligations and plan assets of former employees of
subsidiaries in Austria, Germany and the United Kingdom. All defined pension plan obligations for current and former
employees in the United States, as well as defined pension plan obligations of former employees of non-U.S. subsidiaries,
except for the aforementioned subsidiaries in Austria, Germany and the United Kingdom, were retained by DuPont.
Defined benefit plans specify an amount of pension benefit that an employee will receive on retirement, usually dependent on
factors such as age, years of service and compensation. The net obligation in respect of defined benefit plans is calculated
separately for each plan by estimating the amount of the future benefits that employees have earned in return for their service
in the current and prior periods. These benefits are then discounted to determine the present value of the obligations and are
then adjusted for the impact of any unamortized prior service costs. As required by ASC 805, Business Combinations , all
unamortized prior service costs and actuarial gains (losses) existing at the closing date of the Acquisition were eliminated in
the determination of the fair value of the pension funded status at acquisition. The net obligation is then determined with
reference to the fair value of the plan assets (if any). The discount rate used is the yield on bonds that are denominated in the
currency in which the benefits will be paid and that have maturity dates approximating the terms of the obligations. The
calculations are performed by qualified actuaries using the projected unit credit method.
(2)
Predecessor periods
Certain of DPC’s employees participated in defined benefit pension and other long-term employee benefit plans (the Plans)
accounted for in accordance with ASC 715, Compensation—Retirement Benefits . Certain DPC employees were previously
covered under DuPont and DuPont subsidiaries’ sponsored plans which were accounted for in accordance with accounting
guidance in ASC 715. The majority of pension and other long-term employee expenses during the Predecessor periods were
specifically identified by employee. In addition, a portion of expenses
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Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
was allocated in shared entities and reported within both costs of goods sold, selling, general and administrative and research
and development expenses in the combined statements of operations. For the U.S. pension plan and other long-term employee
benefit plans (the U.S. plans), DuPont considered DPC employees to be part of a multiemployer plan of DuPont. The expense
related to the current and former employees of DPC is included in the Predecessor combined financial statements. Non-U.S.
pensions and other long-term employee benefit plans (the non-U.S. plans) were accounted for as single employer plans where
DPC recorded assets, liabilities and expenses related to the current DPC workforce.
(t)
Stock-based compensation
Our stock-based compensation for the Successor period, comprised of Axalta stock options, is measured at fair value on the grant
date or date of modification, as applicable. We recognize compensation expense on a graded-vesting attribution basis over the
requisite service period.
DuPont maintained certain stock compensation plans for the benefit of certain of its officers, directors and employees, including
DPC’s employees in the Predecessor periods. DPC accounted for all share-based payments to employees, including grants of stock
options, based upon their fair values.
For additional information on our stock-based compensation plan, see Note 10.
(u)
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income attributable to Axalta’s common stockholders by the weighted
average number of shares outstanding during the period. Diluted earnings per common share is computed by dividing net income
attributable to Axalta’s common stockholders by the weighted average number of shares outstanding during the period increased by
the number of additional shares that would have been outstanding related to potentially dilutive securities; Anti-dilutive securities are
excluded from the calculation. These potentially dilutive securities consist of stock options.
(v)
New Accounting Guidance
In July 2013, the Financial Accounting Standards Board (“FASB”) issued ASU 2013-11, “Income Taxes (Topic 740): Presentation of
an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”.
We have elected to early adopt the guidance to present the unrecognized tax benefit as a reduction of the net operating losses
reported within deferred tax assets within the consolidated balance sheet as of December 31, 2013, net of the unrecognized tax
benefit. See Note 13 for detail.
In March 2013, the FASB issued ASU 2013-05, “Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative
Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment
in a Foreign Entity”, issuing clarifying guidance on the accounting for the release of the cumulative translation adjustment when a
parent sells either a part or all of its investment in a foreign entity. This guidance is effective prospectively for annual reporting
periods beginning on or after January 1, 2014, and the interim periods within those annual periods. Management does not expect the
adoption of this guidance to have a material impact on our financial position or results of operations.
In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income,” issuing changes to the
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Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
reporting of amounts reclassified out of accumulated other comprehensive income. These changes require an entity to report the
effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the
amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be
reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that
provide additional detail about those amounts. These requirements are to be applied to each component of accumulated other
comprehensive income. This guidance is effective prospectively for annual reporting periods beginning on or after January 1, 2014,
and the interim periods within those annual periods. Other than the additional disclosure requirements, the adoption of these changes
is not expected to have an impact on our financial position or results of operations.
(4)
ACQUISITION OF DUPONT PERFORMANCE COATINGS
On August 30, 2012, we entered into a purchase agreement (the “Acquisition Agreement”) with DuPont pursuant to which we acquired
DPC from DuPont for a purchase price of $4,925.9 million plus or minus a working capital adjustment and pension adjustment. Axalta and
DuPont finalized the working capital and pension adjustments to the purchase price which resulted in a reduction to the purchase price of
$18.6 million to $4,907.3 million.
We accounted for the Acquisition as a business combination in accordance with ASC 805, Business Combinations using the acquisition
method of accounting. Following an acquisition, we had a period of not more than twelve months from the closing date of the acquisition
to finalize the acquisition date fair values of assets acquired and liabilities assumed, including valuations of identifiable intangible assets
and property, plant and equipment. The determination of fair values of acquired intangible assets and property, plant and equipment,
involves a variety of assumptions, including estimates associated with remaining useful lives. At December 31, 2013, the amounts
presented for the Acquisition have been finalized.
The following table summarizes the fair values of the net assets acquired as of the February 1, 2013 Acquisition date adjusted for
measurement period adjustments:
February 1, 2013
Measurement
(As Initially
Reported)
Period
Adjustments
February 1, 2013
Cash and cash equivalents
Accounts and notes receivable—trade, net
Inventories
Prepaid expenses and other
Net property, plant and equipment
Identifiable intangibles, net
Other assets—noncurrent
Accounts payable
Other accrued liabilities
Other liabilities
Deferred income taxes
Noncontrolling interests
Net assets acquired before goodwill on acquisition
Goodwill on acquisition
Net assets acquired
$
$
79.7
855.8
673.0
8.2
1,707.7
1,539.3
98.8
(409.1)
(232.0)
(331.1)
(312.9)
(66.7)
3,610.7
1,315.2
4,925.9
$
$
—
22.7
3.0
(1.3)
(1.8)
(19.0)
19.1
(6.9)
7.5
(35.3)
223.2
—
211.2
(229.8)
(18.6)
(As Adjusted)
$
$
79.7
878.5
676.0
6.9
1,705.9
1,520.3
117.9
(416.0)
(224.5)
(366.4)
(89.7)
(66.7)
3,821.9
1,085.4
4,907.3
The measurement period adjustments reflect new information obtained about facts and circumstances that existed at the closing date of the
Acquisition, primarily related to indemnification assets, inventories, other miscellaneous assets and liabilities, property, plant and
equipment, intangible assets, and finalization of our opening balance sheet tax basis and the related deferred income taxes.
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Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
The determination of Goodwill in the amount of $1,085.4 million was recognized for the Acquisition as the excess of the purchase price
over the net identifiable assets recognized. The Goodwill is primarily attributed to our assembled workforce, corporate and operational
synergies and the going concern value of the anticipated future economic benefits associated with DPC being operated as a standalone
entity.
The fair values of intangible assets were estimated using an income approach, either the excess earnings method (customer relationships)
or the relief from royalty method (technology and trademarks). Under the excess earnings method, an intangible asset’s fair value is equal
to the present value of the incremental after-tax cash flows attributable solely to the intangible asset over its remaining useful life. Under
the relief from royalty method, fair value is measured by estimating future revenue associated with the intangible asset over its useful life
and applying a royalty rate to the revenue estimate. These intangible assets enable us to develop new products to meet the evolving
business needs as well as competitively produce our existing products.
The fair value of real properties acquired was based on the consideration of their highest and best use in the market. The fair values of
property, plant, and equipment, other than real properties, were based on the consideration that unless otherwise identified, they will
continue to be used “as is” and as part of the ongoing business. In contemplation of the in-use premise and the nature of the assets, the fair
value was developed primarily using a cost approach. The determination of the fair value of assets acquired and liabilities assumed
involves assessing factors such as the expected future cash flows associated with individual assets and liabilities and appropriate discount
rates at the date of the acquisition.
The fair value of the noncontrolling interests, related to acquired joint ventures, were estimated by applying an income approach. This fair
value measurement is based on significant inputs that are not observable in the market and thus represents a fair value measurement
categorized within Level 3 of the fair value hierarchy. Key assumptions included a discount rate, a terminal value based on a range of longterm sustainable growth rates and adjustments because of the lack of control that market participants would consider when measuring the
fair value of the noncontrolling interests.
The Company was formed on August 24, 2012 for the purpose of consummating the Acquisition of DPC and, consequently has no
financial statements as of and for periods prior to that date. Prior to the Acquisition, we generated no revenue and incurred no expenses
other than merger and acquisition costs and debt financing costs in anticipation of the Acquisition. We incurred merger and acquisition
related costs of $29.0 million which were expensed during the Successor period August 24, 2012 through December 31, 2012 and incurred
debt financing costs of $4.6 million which were recorded as Other assets and Other accrued liabilities as of December 31, 2012
(Successor). The $33.6 million of merger and acquisition related costs and debt financing costs incurred were accrued as a component of
Other accrued liabilities at December 31, 2012 (Successor) (see Note 20). The amounts were paid at closing of the Acquisition with
proceeds from the borrowings under the Senior Secured Credit Facilities.
The following unaudited supplemental pro forma information presents the financial results as if the acquisition of DPC had occurred on
January 1, 2012. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be
indicative of what would have occurred had the acquisition been made on January 1, 2012, nor is it indicative of any future results.
Year Ended December 31,
2012
2013
(Unaudited)
(Unaudited)
Net sales
Net loss
$ 4,219.4
$ (270.1)
$ 4,277.3
$ (87.1)
The 2013 supplemental pro forma net loss was adjusted to exclude $53.1 million ($43.5 million, net of pro forma income tax impact) of
acquisition-related costs incurred in 2013 and $123.1 million ($88.6 million,
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Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
net of pro forma income tax impact) of non-recurring expense consisting primarily of $103.7 million related to the fair market value
adjustment to acquisition-date inventory. The 2012 supplemental pro forma net loss was adjusted to include these charges.
(5)
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
(a)
Goodwill
The following table shows changes in the carrying amount of goodwill for the Predecessor year ended December 31, 2012 and the
Predecessor period from January 1, 2013 to January 31, 2013 by reportable segment:
Performance
Transportation
Coatings
At January 1, 2012
Foreign currency translation
December 31, 2012
Foreign currency translation
January 31, 2013
$
$
$
Coatings
517.9
—
517.9
—
517.9
$
$
$
70.9
—
70.9
—
70.9
Total
$588.8
—
$588.8
—
$588.8
The following table shows changes in the carrying amount of goodwill for the Successor year ended December 31, 2013 by
reportable segment:
Performance
Transportation
Coatings
At January 1, 2013
Goodwill resulting from Acquisition
Foreign currency translation
December 31, 2013
$
—
1,012.5
26.3
$ 1,038.8
Coatings
$
$
—
72.9
1.9
74.8
Total
$
—
1,085.4
28.2
$1,113.6
The goodwill recognized at December 31, 2013 that is expected to be deductible for income tax purposes is $617.3 million.
F-55
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
(b)
Identifiable Intangible Assets
The following table summarizes the gross carrying amounts and accumulated amortization of identifiable intangible assets by major
class:
Gross Carrying
Predecessor
Accumulated
Amount
Amortization
Net Book Value
$
$
December 31, 2012
Technology
Trademarks
Customer agreements
Customer lists
Total
$
$
65.0
0.2
124.2
13.2
202.6
$
(65.0)
(0.2)
(67.8)
(2.7)
(135.7)
—
—
56.4
10.5
66.9
$
Successor
Weighted average
Gross Carrying
Accumulated
Amount
Amortization
December 31, 2013
Technology
Trademarks—indefinite-lived
Trademarks—definite-lived
Customer relationships
Non-compete agreements
Total
$
$
425.2
284.4
41.7
761.9
1.5
1,514.7
$
(37.3)
—
(2.6)
(34.9)
(0.3)
(75.1)
$
Net Book
Value
amortization
periods
$ 387.9
284.4
39.1
727.0
1.2
$1,439.6
10.0
Indefinite
14.8
19.4
4.0
The increase in identifiable intangibles between December 31, 2012 (Predecessor) and December 31, 2013 (Successor) was due to
the Acquisition (see Note 4).
The fair value of in process research and development projects acquired in the Acquisition was determined using the cost method.
Activity related to in process research and development projects for the year ended December 31, 2013:
December 31,
In Process research and development
Balance at
Acquisition
Completed
Abandoned
$
$
$
25.4
(6.5)
(3.2)
2013
$
15.7
In the Successor year ended December 31, 2013, amortization expense for acquired intangibles was $79.9 million, which included a
loss of $3.2 million associated with abandoned acquired in process research and development projects, all of which was related to the
Acquisition.
Amortization expense for the Predecessor period from January 1, 2013 through January 31, 2013 and the Predecessor years ended
December 31, 2012 and 2011 was $2.6 million, $25.7 million, and $24.0 million, respectively, which were primarily reported as a
reduction in net sales.
The estimated amortization expense related to the fair value of acquired intangible assets for each of the succeeding five years is:
2014
2015
2016
2017
2018
$87.0
$87.0
$87.0
$87.0
$86.7
F-56
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
(6)
RESTRUCTURING
In accordance with the applicable guidance for Nonretirement Postemployment Benefits, we have accounted for our termination benefits
and the recognized liabilities when the loss was considered probable that employees were entitled to benefits and the amounts could be
reasonably estimated.
(a)
Predecessor Periods
At December 31, 2012 and 2011 of the Predecessor period, total liabilities relating to restructuring activities were $2.1 million and
$7.0 million, respectively. There was no expense recorded during the Predecessor periods January 1, 2013 through January 31, 2013
associated with restructuring. For the Predecessor years ended 2012 and 2011 there were reductions in expense resulting from
changes in estimates of $0.3 million and $2.6 million, respectively, related to changes in previous estimates.
(1)
2008 Restructuring Program
During 2008, in response to the challenging economic environment, DPC initiated a global restructuring program to reduce
costs and improve profitability across its business. The program included the elimination of 1,593 positions by severance
principally located in Western Europe and the U.S. primarily supporting the motor vehicle market.
The following table summarizes the activities related to the 2008 restructuring program during the Predecessor periods ended
December 31, 2012 and 2011:
Employee
Separation
Other
Non-personnel
Costs
Balance at December 31, 2010
Payments
Foreign currency translation
Change in estimate
Balance at December 31, 2011
Payments
Balance at December 31, 2012
(2)
$
$
$
8.8
(6.6)
0.2
(1.2)
1.2
(0.3)
0.9
charges
$
$
$
—
—
—
—
—
—
—
Total
$ 8.8
(6.6)
0.2
(1.2)
$ 1.2
(0.3)
$ 0.9
2009 Restructuring Program
In the second quarter of 2009, in response to global economic recession, DPC committed to an initiative to address the steep
and extended downturn in the motor vehicle market, and the extension of the downturn into industrial markets. The plan was
designed to restructure asset and fixed cost bases in order to improve long-term competitiveness, simplify business processes,
and maximize pre-tax operating income. The plan included the elimination of 221 positions by severance principally located
in the United States of America (U.S.).
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Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
The following table summarizes the activities related to the 2009 restructuring program during the Predecessor periods ended
December 31, 2012 and 2011:
Employee
Separation
Costs
Balance at December 31, 2010
Payments
Foreign currency translation
Change in estimate
Balance at December 31, 2011
Payments
Foreign currency translation
Change in estimate
Balance at December 31, 2012
(b)
$
$
$
33.4
(27.9)
1.6
(1.4)
5.7
(4.2)
(0.2)
(0.3)
1.0
Successor Periods
During the Successor year ended December 31, 2013, we incurred $120.7 million, associated with the involuntary termination
benefits associated with our corporate-related initiatives associated with our transition and cost-saving opportunities related to the
separation from DuPont. These amounts are recorded within Selling, general and administrative expenses in the statement of
operations. The payments associated with these actions are expected to be completed in June 2015.
The following table summarizes the activities related to the Successor year ended December 31, 2013 restructuring reserves:
December 31, 2013
Balance at February 1, 2013 *
Expense recorded
Payments
Foreign currency translation
Balance at December 31, 2013
$
$
0.5
120.7
(23.7)
0.9
98.4
* Represents restructuring liability assumed at the date of Acquisition.
(7)
RELATIONSHIP WITH DUPONT
Predecessor Periods
Historically, the DPC businesses were managed and operated in the normal course of business with other affiliates of DuPont.
Accordingly, certain shared costs were allocated to DPC and reflected as expenses in the standalone Predecessor combined financial
statements. Management of DuPont considered the allocation methodologies used to be reasonable and appropriate reflections of the
historical DuPont expenses attributable to DPC for purposes of the standalone combined financial statements of DPC; however, the
expenses reflected in the Predecessor combined financial statements may not be indicative of the actual expenses that would have
been incurred during the periods presented if DPC had operated as a separate, standalone entity. In addition, the expenses reflected in
the Predecessor combined financial statements may not be indicative of related expenses that will be incurred in the future by us.
F-58
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
(a)
Cash Management and Financing
Except for its joint ventures, DPC participated in DuPont’s centralized cash management and financing programs.
Disbursements were made through centralized accounts payable systems which were operated by DuPont, while cash receipts
were transferred to centralized accounts maintained by DuPont. As cash was disbursed and received by DuPont, it was
accounted for by DPC through the parent company net investment. All short and long-term debt requirements of the DPC
business were financed by DuPont and financing decisions for wholly owned subsidiaries and majority owned joint ventures
were determined by DuPont’s central treasury operations.
(b)
Allocated Corporate Costs
The Predecessor combined financial statements include significant transactions with DuPont involving leveraged functional
services (such as information systems, accounting, other financial services, purchasing and legal) and general corporate
expenses that were provided to DPC by centralized DuPont organizations. Throughout the Predecessor periods covered by the
combined financial statements of DPC, the costs of these leveraged functions and services were directly charged or allocated
to DPC using methods management believes were reasonable. The methods for directly charging specifically identifiable
functions and services to DPC included negotiated usage rates and dedicated employee assignments. The method for
allocating shared leveraged functional services to DPC was based on proportionate formulas involving controllable fixed
costs and in certain instances was allocated to DPC based on demand. Controllable fixed costs are fixed costs less
depreciation and amortization and nonrecurring transactions. The methods for allocating general corporate expenses to DPC
were based on revenue. However, the expenses reflected in the Predecessor combined financial statements may not be
indicative of the actual expenses that would have been incurred during the periods presented if DPC had operated as a
separate, standalone entity.
The allocated leveraged functional service expenses and general corporate expenses included in cost of goods sold, selling,
general, and administrative expenses and research and development expenses in the Predecessor combined statement of
operations were as follows:
Predecessor
Period from
Year Ended
December 31,
Year Ended
December 31,
2011
Cost of goods sold
Selling, general, and administrative expenses
Research and development expenses
Total
$
$
F-59
254.9
22.9
3.1
280.9
January 1,
2013
through
January 31,
2012
$
$
224.7
21.6
2.2
248.5
2013
$
$
14.2
1.4
0.1
15.7
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
Allocated leveraged functional service expenses and general corporate expenses are recorded in the Predecessor combined
statement of operations as follows:
Predecessor
Period from
Year Ended
December 31,
Year Ended
December 31,
2011
Leveraged functional services
General corporate expenses
Total
(c)
$
$
256.7
24.2
280.9
January 1,
2013
through
January 31,
2012
$
$
226.4
22.1
248.5
2013
$
$
14.2
1.5
15.7
Shared Sites
DPC conducted manufacturing operations at 35 plant sites globally. DPC shared three of these plant sites with other non-DPC
DuPont manufacturing operations. Additionally, DPC shared warehouse, sales centers, office space, and research and
development facilities with other DuPont businesses. In general, the property, plant, and equipment primarily or exclusively
used by DPC for these shared locations are included in the Predecessor combined balance sheet.
The full historical cost, accumulated depreciation and depreciation expense for assets at shared manufacturing plant sites and
other facilities where DPC was the primary or exclusive user of the assets have been included in the Predecessor combined
balance sheet and statement of operations. Accordingly, when the use of a DPC primary asset was shared with a non-DPC
DuPont business (manufacturing or otherwise), the cost for the non-DPC usage was deemed to have been charged to the nonDPC business. The amounts credited to cost of goods sold in the Predecessor combined statement of operations for the use of
a DPC primary asset by non-DPC businesses, were less than $0.3 million for the Predecessor period from January 1, 2013
through January 31, 2013 and $1.0 million for each of the Predecessor years ended December 31, 2012 and December 31,
2011.
At shared manufacturing plant sites and other facilities where DPC was not the primary or exclusive user of the assets, the
assets were excluded from the Predecessor combined balance sheet. Accordingly, where DPC used these shared assets, DPC
was deemed to have been charged a cost for its usage of these shared assets by the other DuPont businesses. The amounts
charged to the cost of goods sold in the Predecessor combined statement of operations for the DPC usage of the shared assets
were less than $0.2 million for the Predecessor period from January 1, 2013 through January 31, 2013 and $0.4 million and
$0.5 million for the Predecessor years ended December 31, 2012 and December 31, 2011, respectively.
(d)
Purchases from and Sales to Other DuPont Businesses
Throughout the Predecessor periods covered by the Predecessor combined financial statements, DPC purchased materials
(Titanium Dioxide and DuPont Sontara ® maintenance wipes) from DuPont and its non-DPC businesses.
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Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
Purchases include the following amounts:
Predecessor
Period from
DPC purchases of products from other DuPont
businesses
Year Ended
December 31,
Year Ended
December 31,
January 1,
2013
through
January 31,
2011
2012
2013
$
88.9
$
91.7
$
7.9
There were no material sales to other DuPont businesses during the periods covered by the Predecessor combined financial
statements.
(8)
COMMITMENTS AND CONTINGENT LIABILITIES
(a)
Guarantees
In connection with the Acquisition, we assumed certain guarantee obligations which directly guarantee various debt obligations
under agreements with third parties related to the following: equity affiliates, customers, suppliers and other affiliated companies.
At December 31, 2013 (Successor) and December 31, 2012 (Predecessor), we had directly guaranteed $1.6 million and $14.3 million
of such obligations, respectively. 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
December 31, 2013 (Successor) and December 31, 2012 (Predecessor).
We assess the payment/performance risk by assigning default rates based on the duration of the guarantees. These default rates are
assigned based on the external credit rating of the counterparty or through internal credit analysis and historical default history for
counterparties that do not have published credit ratings. For counterparties without an external rating or available credit history, a
cumulative average default rate is used.
(b)
Product Warranty
We warrant that our products meet standard specifications. Our product warranty liability at December 31, 2013 (Successor) and
December 31, 2012 (Predecessor) was $0.6 million and $0.2 million, respectively. Estimates for warranty costs are based on
historical claims experience.
(c)
Operating Lease Commitments
We use various leased facilities and equipment in our operations. The terms for these leased assets vary depending on the lease
agreement. Net rental expense under operating leases was $45.0 million for the Successor year ended December 31, 2013. Net rental
expense under operating leases was $4.6 million, $43.6 million and $40.5 million for the Predecessor period from January 1, 2013
through January 31, 2013 and the Predecessor years ended December 31, 2012 and December 31, 2011, respectively.
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Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
At December 31, 2013, future minimum payments under non-cancelable operating leases were as follows over each of the next five
years and thereafter:
Operating
Leases
2014
2015
2016
2017
2018
Thereafter
Total minimum payments
(d)
$
34.3
27.8
22.5
15.9
13.1
25.0
$ 138.6
Brazilian Tax Dispute
In 1996, the Brazilian Tax Authority issued an assessment challenging DuPont’s position that certain raw material purchases were
exempt from Brazilian excise taxes. A judicial deposit was made, which is restricted from use for any other purposes, for the amount
of the proposed assessment to avoid interest and penalty charges during the litigation. In November 2008, DuPont received a
definitive unfavorable ruling, but filed an appeal to recover the interest earned on the deposit. The interest earned was not reflected in
the Predecessor combined balance sheet at December 31, 2012. At December 31, 2012 (Predecessor), the accrued tax liability and
related judicial deposit was $24.7 million, respectively. Pursuant to the Acquisition Agreement, DuPont retained the accrued tax
liability and related judicial deposit. Accordingly, no liability or related deposit is recorded in the Successor consolidated balance
sheet at December 31, 2013.
(e)
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 impact 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 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 consolidated financial statements of Axalta.
F-62
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
(9)
LONG-TERM EMPLOYEE BENEFITS
(a)
Defined Benefit Plans and Other Long-Term Employee Benefits
Successor period
Defined Benefit Pensions
In connection with the Acquisition, we assumed certain defined benefit plan obligations for both current and former employees of
subsidiaries in Austria, the United Kingdom and Germany. In addition, we assumed certain defined benefit plan obligations for
current employees of other non-U.S. subsidiaries. All defined benefit pension plan obligations for current and former employees in
the U.S., as well as defined benefit pension plan obligations of former employees of non-U.S. subsidiaries, except for the
aforementioned subsidiaries in the United Kingdom, Austria and Germany, were retained by DuPont.
The defined benefit obligations for remaining current employees of non-U.S. subsidiaries assumed by Axalta were carved out of
defined benefit pension plans retained by DuPont. We have created new defined benefit pension plans for all effected participants.
The Acquisition Agreement required DuPont to transfer assets generally in the form of cash, insurance contracts or marketable
securities from DuPont’s funded defined benefit pension plans to our defined benefit pension plans within 180 days of the closing
date of the Acquisition. The determination of asset transfers has been completed at December 31, 2013 for all plans except the plan
covering our Canadian employees.
During the Predecessor period, DuPont had accounted for the benefit obligations of all the defined benefit plans as though the
employees were participants in a multiemployer plan in the Predecessor period. For multiemployer plans, ASC 805, Business
Combinations , requires an obligation to the plan for a portion of its unfunded benefit obligations to be established at the acquisition
date when withdrawal from the multiemployer plan is probable. As withdrawal from the DuPont defined benefit pension plan and
related transfer of plan assets was required pursuant to the Acquisition Agreement, an estimate of the unfunded benefit obligations
was recorded as of the Acquisition date. The plan assets have been or will be directly transferred to the pension trust. Accordingly,
assumed defined benefit obligations are presented net of the plan assets transferred, or to be transferred in the case of Canada, by
DuPont.
Other Long-Term Employee Benefits
We also assumed in connection with the Acquisition certain long-term employee health care and life insurance benefits for certain
eligible employees in Canada and Brazil. These programs require retiree contributions based on retiree-selected coverage levels for
certain retirees
Predecessor period
DuPont offered various long-term benefits to its employees. DuPont offered U.S. plans that were shared amongst its businesses. In
these cases, the costs, assets, and liabilities of participating employees in these plans are reflected in the Predecessor combined
financial statements as though DPC participated in a multiemployer plan. The total cost of the plan was determined by actuarial
valuation and the business received an allocation of the cost of the plan based upon several factors, including a percentage of salaries,
headcount and fixed costs.
For the non-U.S. plans, the Predecessor combined financial statements have been prepared as though the DPC employees who
participated in the non-U.S. plans were considered separate plans. As such a portion of DuPont’s liabilities, assets and expenses are
included in the Predecessor combined financial
F-63
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
statements. Pension asset allocation for funded plans outside of the U.S. was based on either predominant local country calculation,
or in other cases, by relative benefit obligation of the standalone DPC plan.
Defined Benefit Pensions
DuPont had both funded and unfunded noncontributory defined benefit pension plans covering a majority of the U.S. employees
hired before January 1, 2007, including U.S. employees of DPC. The benefits under these plans were based primarily on years of
service and employees’ pay near retirement. DuPont’s funding policy was consistent with the funding requirements of federal laws
and regulations.
Pension coverage for employees of DuPont’s non-U.S. subsidiaries was provided, to the extent deemed appropriate, through separate
plans. Obligations under such plans were funded by depositing funds with trustees, covered by insurance contracts, or were
unfunded.
Other Long-Term Employee Benefits
DuPont and its Canadian and Brazilian subsidiaries provided medical, dental and life insurance benefits to pensioners and survivors,
and disability and life insurance protection to employees. The associated plans for retiree benefits were unfunded and the cost of the
approved claims was paid from DuPont funds. Essentially all of the cost and liabilities for these retiree benefit plans were attributable
to DuPont’s U.S. plans. The retiree medical plan was contributory with pensioners and survivors’ contributions adjusted annually to
achieve a 50/50 target sharing of cost increases between DuPont and pensioners and survivors. In addition, limits were applied to
DuPont’s portion of the retiree medical cost coverage. U.S. employees hired after December 31, 2006 were not eligible to participate
in the postretirement medical, dental and life insurance plans.
Employee life insurance and disability benefit plans were insured in many countries. However, primarily in the U.S., such plans were
generally self-insured or were fully experience rated. Expenses for self-insured and fully experience rated plans are reflected in the
Predecessor combined financial statements.
Participation in the U.S. Plans
DPC participated in DuPont’s U.S. plans as though they were participants in a multiemployer plan with the other businesses of
DuPont. The following table presents pension expense allocated by DuPont to DPC for DuPont’s significant plans in which DPC
participated.
Predecessor
(b)
Plan Name
EIN/Pension Number
DuPont Pension and Retirement Plan
All Other Plans
51-0014090/001
Year Ended
December 31,
2011
Year Ended
December 31,
2012
January 1,
2013
through
January 31,
2013
$
$
$
$
$
$
31.5
18.4
40.6
16.7
4.2
0.7
Obligations and Funded Status
The measurement date used to determine defined benefit and other long-term employee benefit obligations was December 31. The
following table sets forth the changes to the projected benefit
F-64
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
obligations (“PBO”) and plan assets for the Successor year ended December 31, 2013 and Predecessor year ended December 31,
2012 and the funded status and amounts recognized in the accompanying consolidated and combined balance sheets at December 31,
2013 (Successor) and December 31, 2012 (Predecessor) for the Company’s defined benefit pension and other long-term benefit
plans:
Obligations and Funded Status
Change in benefit obligation:
Projected benefit obligation at beginning of year
Fair value of assumed obligation at Acquisition date
Service cost
Interest cost
Participant contributions
Actuarial losses (gains)—net
Plan curtailments and settlements
Benefits paid
Amendments
Currency translation adjustment
Projected benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Fair value of plan assets at Acquisition date
Actual return on plan assets
Employer contributions
Participant contributions
Benefits paid
Settlements
Currency translation adjustment
Fair value of plan assets at end of year
Funded status, net
Amounts recognized in the consolidated and combined balance
sheets consist of:
Other assets
Other accrued liabilities
Accrued pension and other long-term employee benefits
Net amount recognized
Defined Benefits
Predecessor
Successor
2012
2013
Other Long-Term Employee
Benefits
Predecessor
Successor
2012
2013
$
$
$
$
$
$
$
476.2
—
14.8
22.0
1.1
144.2
—
(23.6)
(1.0)
—
633.7
$
—
579.5
17.0
21.2
1.0
(5.8)
(1.4)
(20.7)
(0.4)
12.6
$ 603.0
$
229.8
—
37.2
42.6
1.1
(23.6)
—
—
287.1
(346.6)
$
—
250.7
16.0
28.6
1.0
(20.7)
(0.6)
6.3
$ 281.3
$ (321.7)
$
0.2
(13.8)
(333.1)
(346.7)
$
$
0.2
(13.3)
(308.6)
$ (321.7)
$
$
$
$
7.4
—
0.3
0.5
—
2.9
—
—
(6.0)
—
5.1
$
—
—
—
—
—
—
—
—
—
(5.1)
$
—
—
(5.1)
(5.1)
$
$
$
$
$
—
5.2
0.2
0.2
—
(0.7)
—
—
—
(0.3)
4.6
—
—
—
—
—
—
—
—
—
(4.6)
—
—
(4.6)
(4.6)
The PBO is the actuarial present value of benefits attributable to employee service rendered to date, including the effects of estimated
future pay increases. The accumulated benefit obligation (“ABO”) is the actuarial present value of benefits attributable to employee
service rendered to date, but does not include the effects of estimated future pay increases.
F-65
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
The following table reflects the ABO for all defined benefit pension plans as of December 31, 2013 and 2012. Further, the table
reflects the aggregate PBO, ABO and fair value of plan assets for pension plans with PBO in excess of plan assets and for pension
plans with ABO in excess of plan assets.
ABO
Plans with PBO in excess of plan assets:
PBO
ABO
Fair value plan assets
Plans with ABO in excess of plan assets:
PBO
ABO
Fair value plan assets
December 31, 2012
December 31, 2013
$
567.6
$
541.5
$
$
$
623.1
558.8
276.3
$
$
$
595.7
534.9
273.8
$
$
$
620.3
558.0
274.7
$
$
$
537.8
488.9
227.2
The pretax amounts not yet reflected in net periodic benefit cost and included in Accumulated other comprehensive income (loss)
include the following:
Predecessor
Defined Benefits:
Accumulated net actuarial gains (losses)
Accumulated prior service (cost) credit
Total
2011
2012
$(112.6)
(1.9)
$(114.5)
$(216.2)
(1.4)
$(217.6)
Successor
2013
$
$
Predecessor
Other Long-Term Employee Benefits:
2011
Accumulated net actuarial gains (losses)
Accumulated prior service (cost) credit
Total
$
$
(0.4)
(4.4)
(4.8)
Successor
2013
2012
$
$
10.0
0.4
10.4
3.1
(1.8)
1.3
$
$
0.6
—
0.6
The accumulated actuarial gains (losses), net for pensions and other long-term employee benefits relate primarily to differences
between the actual net periodic expense and the expected net periodic expense resulting from differences in the significant
assumptions, including primarily return on assets, discount rates and healthcare trends, used in these estimates.
The estimated pre-tax amounts that are expected to be amortized from Accumulated other comprehensive income (loss) into net
periodic benefit cost during 2014 for the defined benefit plans and other long-term employee benefit plans is as follows:
2014
Other Long-Term
Amortization of prior service (cost) credit
Amortization of net actuarial loss (gain)
Total
Defined Benefits
Employee Benefits
$
$
$
F-66
—
(0.4)
(0.4)
$
—
—
—
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
(c)
Components of Net Periodic Pension Benefit Cost
The following table sets forth the components of net periodic pension benefit cost for the Predecessor years ended December 31,
2011 and 2012 and for the Successor year ended December 31, 2013:
Pension Benefits
Predecessor
Successor
Period from
Components of net periodic benefit cost and
amounts recognized in other comprehensive
(income) loss:
Net periodic benefit (credit) cost:
Service cost
Interest cost
Expected return on plan assets
Amortization of actuarial loss, net
Amortization of prior service cost
Settlement loss
Net periodic benefit cost
Changes in plan assets and benefit obligations
recognized in other comprehensive (income)
loss:
Net actuarial (gain) loss, net
Amortization of actuarial loss, net
Prior service (benefit)
Amortization of prior service cost
Settlement (gain) loss
Net translation adjustment
Total (gain) loss recognized in other
comprehensive income
Total recognized in net periodic
benefit cost and other
comprehensive income
Year Ended
December 31,
Year Ended
December 31,
January 1,
2013
through
January 31,
2011
2012
2013
$
15.7
23.0
(18.8)
3.5
0.3
—
23.7
$
26.0
(3.5)
—
(0.3)
—
—
14.8
22.0
(18.4)
5.2
0.2
3.9
27.7
$
112.7
(5.2)
(0.3)
(0.2)
(3.9)
—
1.6
1.8
(1.9)
1.1
—
—
2.6
Period from
August 24,
2012
through
December 31,
Year Ended
December 31,
2012
2013
$
—
(1.1)
—
—
—
—
—
—
—
—
—
—
—
$
—
—
—
—
—
—
17.0
21.2
(11.9)
—
—
—
26.3
(10.6)
—
(0.4)
—
—
0.6
$
22.2
$
103.1
$
(1.1)
$
—
$
(10.4)
$
45.9
$
130.8
$
1.5
$
—
$
15.9
F-67
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
Other Long-Term Employee Benefits
Predecessor
Components of net periodic benefit cost and
amounts recognized in other comprehensive
(income) loss:
Net periodic benefit credit cost:
Service cost
Interest cost
Amortization of actuarial loss, net
Amortization of prior service cost
Net periodic benefit cost
Changes in plan assets and benefit obligations
recognized in other comprehensive (income)
loss:
Net (gain) loss
Amortization of loss
Prior service (benefit) cost
Amortization of prior service (benefit) cost
Net translation adjustment
Total (benefit) loss recognized in other
comprehensive income
Total recognized in net periodic benefit
cost and other comprehensive
income
(d)
Year Ended
December 31,
2011
Year Ended
December 31,
2012
Period from
January 1,
2013
through
January 31,
2013
$
$
$
0.1
0.2
—
—
0.3
—
—
4.3
—
—
0.3
0.5
—
0.2
1.0
2.7
—
(5.9)
(0.2)
—
—
—
—
—
—
Successor
Period from
August 24,
2012
Year Ended
through
December 31,
December 31,
2012
2013
$
—
—
—
—
—
—
—
—
—
—
$
—
—
—
—
—
0.2
0.2
—
—
0.4
(0.7)
—
—
—
0.1
$
4.3
$
(3.4)
$
—
$
—
$
(0.6)
$
4.6
$
(2.4)
$
—
$
—
$
(0.2)
Assumptions
We used the following assumptions in determining the benefit obligations and net periodic benefit cost:
Predecessor
2011
Defined benefits
Weighted-average assumptions:
Discount rate to determine benefit obligations
Discount rate to determine net cost
Rate of future compensation increases to determine benefit
obligation
Rate of future compensation increases to determine net cost
Rate of return on plan assets to determine net cost
F-68
2012
Successor
2013
4.73%
4.91%
3.38%
4.73%
4.11%
4.15%
3.33%
3.24%
7.97%
3.16%
3.33%
7.71%
3.52%
3.69%
5.22%
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
Predecessor
2011
2012
Other Long-Term Employee benefits
Weighted-average assumptions:
Discount rate to determine benefit obligations
Discount rate to determine net cost
Rate of future compensation increases to determine benefit obligations
Rate of future compensation increases to determine net cost
7.69%
5.75%
4.00%
4.25%
4.86%
7.28%
3.00%
4.00%
Successor
2013
4.80%
4.20%
— %
— %
The discount rates used reflect the expected future cash flow based on plan provisions, participant data as of the closing date of the
Acquisition and the currencies in which the expected future cash flows will occur. For the majority of our defined benefit pension
obligations, we utilize prevailing long-term high quality corporate bond indices applicable to the respective country at the
measurement date. In countries where established corporate bond markets do not exist, we utilize other index movement and duration
analysis to determine discount rates. The long-term rate of return on plan assets assumptions reflect economic assumptions applicable
to each country and assumptions related to the preliminary assessments regarding the type of investments to be held by the respective
plans.
Estimated future benefit payments
The following reflects the total benefit payments expected to be paid for defined benefits:
Year ended December 31,
Benefits
2014
2015
2016
2017
2018
2019—2023
$ 33.3
$ 21.6
$ 24.5
$ 22.6
$ 26.2
$156.9
The following reflects the total benefit payments expected to be paid for other long-term employee benefits:
(e)
Year ended December 31,
Benefits
2014
2015
2016
2017
2018
2019—2023
$ —
$ —
$ —
$ 0.1
$ 0.1
$ 0.7
Plan Assets
As discussed above, the defined benefit pension plans for the subsidiaries in Austria, the United Kingdom and Germany represent
single-employer plans and the related plan assets are invested within separate trusts. The defined benefit plan obligations for
remaining current employees of non-U.S. subsidiaries assumed by us were carved out of the defined benefit pension plans retained
by DuPont. At December 31, 2013, DuPont had completed the asset transfers for all funded plans except the plan covering our
Canadian employees. The Canadian plan assets continue to be invested and managed by DuPont until the required regulatory
approvals are received at which time the assets will be transferred to a newly created trust.
F-69
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
Equity securities include varying market capitalization levels. U.S. equity investments are primarily large-cap companies. Fixed
income investments include corporate issued, government issued and asset backed securities. Corporate debt investments include a
range of credit risk and industry diversification. Other investments include real estate and private market securities such as interests
in private equity and venture capital partnerships.
Fair value calculations may not be indicative of net realizable value or reflective of future fair values. Furthermore, although we
believe the valuation methods are appropriate and consistent with other market participants, the use of different methodologies or
assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the
reporting date.
The table below presents the fair values of the defined benefit pension plan assets by level within the fair value hierarchy, as
described in Note 3, at December 31, 2013 and 2012, respectively.
Total
Asset Category:
Cash and cash equivalents
U.S. equity securities
Non-U.S. equity securities
Debt—government issued
Debt—corporate issued
Debt—asset-backed
Hedge Funds
Private market securities
Real estate
Derivatives—asset position
$
6.2
25.9
116.1
66.1
58.3
2.1
0.3
10.9
1.7
0.7
288.3
0.6
(1.8)
$287.1
Pension trust receivables
Pension trust payables
Total
Total
Asset Category:
Cash and cash equivalents
U.S. equity securities
Non-U.S. equity securities
Debt—government issued
Debt—corporate issued
Hedge Funds
Private market securities
Real estate
$
6.7
13.6
71.3
34.4
52.2
0.4
59.5
0.3
238.4
42.9
$281.3
Pension trust receivables
Total
F-70
Fair value measurements at
December 31, 2012
Level 1
Level 2
$
5.9
14.9
55.5
19.9
7.5
0.9
—
—
—
0.2
$104.8
$
0.3
11.0
60.6
46.2
50.8
1.2
0.3
0.4
—
0.5
$171.3
Fair value measurements at
December 31, 2013
Level 1
Level 2
$
6.7
13.2
70.8
34.4
49.3
0.2
—
—
$174.6
$ —
0.4
0.5
—
2.9
0.2
0.2
—
$ 4.2
Level 3
$ —
—
—
—
—
—
—
10.5
1.7
—
$ 12.2
Level 3
$ —
—
—
—
—
—
59.3
0.3
$ 59.6
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
Level 3 assets are primarily ownership interests in investment partnerships and trusts that own private market securities and real estate. The
tables below present a roll forward of activity for these assets for the years ended December 31, 2012 and 2013:
Level 3 assets
Debtcorporate
Total
Ending balance at December 31, 2011
Change in unrealized gain
Purchases, sales and settlements
Transfers out of Level 3
Ending balance at December 31, 2012
$10.1
2.8
(0.6)
(0.1)
$12.2
Ending balance at December 31, 2012
Realized (loss)
Change in unrealized gain
Purchases, sales and settlements
Transfers out of Level 3
Ending balance at December 31, 2013
(f)
issued
$
$
—
0.1
—
(0.1)
—
Private
market
securities
$
8.8
2.4
(0.7)
—
$ 10.5
Real
estate
$ 1.3
0.3
0.1
—
$ 1.7
Total
Level 3 assets
Private
market
securities
Real
estate
$12.2
(0.1)
0.2
45.6
1.7
$59.6
$ 10.5
—
0.2
46.9
1.7
$ 59.3
$ 1.7
(0.1)
—
(1.3)
—
$ 0.3
Assumptions and Sensitivities
The discount rate is determined as of each measurement date, based on a review of yield rates associated with long-term, high-quality
corporate bonds. The calculation separately discounts benefit payments using the spot rates from a long-term, high-quality corporate
bond yield curve.
The long-term rate of return assumption represents the expected average rate of earnings on the funds invested to provide for the
benefits included in the benefit obligations. The long-term rate of return assumption is determined based on a number of factors,
including historical market index returns, the anticipated long-term asset allocation of the plans, historical plan return data, plan
expenses and the potential to outperform market index returns. The expected long-term rate of return on assets was 5.22% for 2013.
For 2014, the expected long-term rate of return is 5.23%.
A significant factor used in estimating future per capita cost of covered healthcare benefits for our retirees and us is the healthcare
cost trend rate assumption. The rate used at December 31, 2013 was 5.00% and is assumed to remain at that level thereafter.
Increasing the assumed healthcare cost trend rates by one percentage point would result in additional annual costs of approximately
$0.1 million. Decreasing the assumed health care cost trend rates by one percentage point would result in a decrease of
approximately $0.1 million in annual costs. The effect on other long-term employee benefit obligations at December 31, 2013 of a
one percentage point increase would be $1.1 million. The effect of a one percentage point decrease would be $0.9 million.
(g)
Anticipated Contributions to Defined Benefit Plan
For funded pension plans, our funding policy is to fund amounts for pension plans sufficient to meet minimum requirements set forth
in applicable benefit laws and local tax laws. Based on the same
F-71
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
assumptions used to measure our benefit obligations at December 31, 2013 we expect to contribute $18.9 million to our defined
benefit plans and $0.0 million to our other long-term employee benefit plans during 2014. No plan assets are expected to be returned
to the Company in 2014.
(h)
Defined Contribution Plans
The Company sponsors defined contribution plans in both its US and non-US subsidiaries, under which salaried and certain hourly
employees may defer a portion of their compensation. Eligible participants may contribute to the plan up to the allowable amount as
determined by the plan of their regular compensation before taxes. All contributions and Company matches are invested at the
direction of the employee. Company matching contributions vest immediately and aggregated $29.1 million for the Successor year
ended December 31, 2013.
(10) STOCK-BASED COMPENSATION
(a)
Successor period
During the year ended December 31, 2013, we recognized $7.4 million in stock-based compensation expense which was allocated to
costs of goods sold, selling, general and administrative expenses, and research and development expenses.
(1)
Description of Equity Incentive Plan
On July 31, 2013, Axalta’s Board of Directors approved the Axalta Coating Systems Bermuda Co., Ltd. 2013 Equity Incentive Plan
(the “2013 Plan”) which reserved an aggregate of 19,839,143 shares of common stock of the Company for issuance to employees,
directors and consultants. The 2013 Plan provides for the issuance of stock options, restricted stock or other stock-based awards.
Options and restricted shares granted pursuant to the equity incentive plan must be authorized by the Board of Directors of Axalta or
a designated committee thereof. At December 31, 2013, only stock options have been granted.
The terms of the options may vary with each grant and are determined by the Compensation Committee within the guidelines of the
equity incentive plan. Options currently vest over 4.4 to 5 years, and vesting of a portion of the options could accelerate in the event
of certain changes in control. Option life cannot exceed ten years. On July 31, 2013, we granted approximately 4.1 million,
5.7 million and 6.4 million in non-qualified stock options to certain employees with strike prices of $5.92, $8.88 and $11.84 (per
share), respectively.
(2)
Stock Options
Information related to the number of shares under options follows:
December 31,
2013
Weighted-Average Expected Term
Weighted-Average Volatility
Weighted-Average Dividend Rate
Weighted-Average Discount Rate
7.81 years
28.61%
—
2.13%
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Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
The Black-Scholes option pricing model was used to estimate fair values of the options as of the date of the grant. The weighted
average fair value of options granted in 2013 was $1.38 per share. Principal assumptions used in applying the Black-Scholes model
were as follows:
$5.92
Awards—
Assumptions
Key Assumptions
Volatility
Risk-Free Interest Rate
Grant date fair value of common stock
Expected term
$8.88/$11.84
Awards—
Assumptions
30.0%
1.8%
$5.92/per share
6.5 years
28.2%
2.2%
$5.92/per share
8.25 years
Due to the proximity of the recent acquisition of DPC to the timing of the option awards, the estimated fair value of the Company’s
common stock of $5.92 per share was based on the equity value paid by a third party as part of an auction process on the acquisition
date of February 1, 2013.
To estimate the expected stock option term for the $5.92 stock options referred to above, we used the simplified method as the
options were granted at fair value and Axalta, a privately-held company, has no exercise history. Based upon this simplified method
the $5.92 per share stock options have 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.
We do not anticipate paying cash dividends in the foreseeable future and, therefore, use an expected dividend yield of zero. Volatility
is based upon the peer groups as the Company is privately-held. Because Axalta is not publicly traded, the market value of the stock
was estimated based upon the Acquisition transaction as there have been no significant changes in operations since the closing date
of February 1, 2013 which occurred within a relatively short time period compared to dates of the option grants.
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 December 31, 2013 and changes during the year then ended, is presented below:
WeightedAggregate
Awards
Outstanding at January 1, 2013
Granted
Exercised
Forfeited
Outstanding at December 31, 2013
Vested and expected to vest at December 31, 2013
Exercisable at December 31, 2013
—
16,263,224
—
(85,309)
16,177,915
16,177,915
—
Average
Exercise
Price
$
$
$
9.32
—
9.32
9.32
9.32
—
Intrinsic
Value
—
—
Weighted
Average
Remaining
Contractual
Life (yrs.)
9.59
—
Compensation cost is recorded net of anticipated 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
F-73
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
reflect changes in actual forfeitures or changes in expectations. At December 31, 2013, the Company has estimated its annual
forfeiture rate at 0% due to its limited history and expectations of forfeitures.
At December 31, 2013, there was $15.0 million of unrecognized compensation cost relating to outstanding unvested stock options
expected to be recognized over the weighted average period of 3.9 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.
(b)
Predecessor periods
DuPont maintained certain stock-based compensation plans for the benefit of certain of its officers, directors’ and employees,
including, prior to the Acquisition, certain DPC employees. DPC recognized stock-based compensation within the combined
statement of operations based upon fair values. The fair value of awards granted totaled $2.0 million for the Predecessor year ended
December 31, 2012.
Total stock-based compensation expense included in the combined statement of operations was $0.1 million, $0.5 million and $1.9
million for the Predecessor period from January 1, 2013 through January 31, 2013 and the Predecessor year ended December 31,
2012 and Predecessor year ended December 31, 2011, respectively.
(11) RELATED PARTY TRANSACTIONS
(a)
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 are 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. In addition, we
may pay Carlyle additional fees associated with other future transactions. During the Successor year ended December 31, 2013, we
recorded expense of $3.1 million, related to this consulting agreement. In addition, Carlyle Investment also received a one-time fee of
$35.0 million upon effectiveness of the Acquisition for services rendered in connection with the Acquisition and related acquisition
financing. Of this amount, $21.0 million was recorded as merger and acquisition expenses and $14.0 million was recorded as a
component of deferred financing costs in the Successor year ended December 31, 2013.
(b)
Service King Collision Repair
Service King Collision Repair, a portfolio company of funds affiliated with Carlyle, has purchased products from our distributors in
the past and may continue to do so in the future. In August 2013, we entered into a new long-term sales agreement with Service King
to be their exclusive provider of coatings. Terms of the agreement are consistent with industry standards. Related party sales for the
Successor year ended December 31, 2013 were $2.0 million.
(c)
Other
A director of the Company is the Chairman and Chief Executive Officer of an international management consulting firm focused on
the automotive and industrial sectors. In connection with the Acquisition, we incurred consulting fees and expenses from the
consulting firm of approximately $2.1 million, of which $0.1 million was incurred in the Successor year ended December 31, 2013
and
F-74
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
the remainder was incurred in the Successor period from August 24, 2012 through December 31, 2012. As part of the compensation
for the consulting services, we granted the consulting firm a stock option award to purchase up to 352,143 of our common shares
which had a fair value of approximately $0.5 million.
(12) OTHER EXPENSE, NET
Predecessor
Exchange losses
Management fee and expenses
Miscellaneous
Total
Year Ended
December 31,
2011
Year Ended
December 31,
2012
Period from
January 1, 2013
through
January 31,
2013
$
$
$
23.4
—
(3.2)
20.2
$
17.7
—
(1.4)
16.3
$
4.5
—
0.5
5.0
$
Successor
Period from
August 24,
2012 through
Year Ended
December 31,
December 31,
2012
2013
$
$
—
—
—
—
$
$
48.9
3.1
(3.5)
48.5
(13) INCOME TAXES
Domestic and Foreign Components of Income Before Income Taxes
Predecessor
Domestic
Foreign
Total
Year Ended
December 31,
2011
Year Ended
December 31,
2012
Period from
January 1, 2013
through
January 31,
2013
$
$
$
$
59.7
242.5
302.2
$
82.8
310.2
393.0
F-75
$
(1.5)
17.1
15.6
Successor
Period from
August 24,
2012 through
Year Ended
December 31,
December 31,
2012
2013
$
$
—
(29.0)
(29.0)
$
$
(153.8)
(109.9)
(263.7)
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
Provision for Income Taxes
Predecessor
U.S. Federal
State
Foreign
Total
Year Ended
December 31, 2011
Current
Deferred
Total
Year Ended
December 31, 2012
Current
Deferred
Total
Period from January 1,
2013 through
January 31, 2013
Current
Deferred
Total
$ 16.4
3.0
97.8
$117.2
$ 30.9
6.6
98.6
$136.1
$ (8.8)
0.1
6.7
$ (2.0)
$
3.9
0.3
(0.7)
$ 3.5
$ 20.3
3.3
97.1
$120.7
$ (4.5)
(0.4)
14.0
$ 9.1
$ 26.4
6.2
112.6
$145.2
$
7.0
(0.2)
2.3
$ 9.1
$ (1.8)
(0.1)
9.0
$ 7.1
Successor
Period from August 24,
2012 through December 31, 2012
Current
Deferred
Total
U.S. Federal
State
Foreign
Total
$
$
—
—
—
—
$
—
—
—
—
$
$
$
—
—
—
—
Current
$
—
2.3
73.7
$ 76.0
Year Ended
December 31, 2013
Deferred
$
(44.6)
(1.6)
(74.6)
$ (120.8)
Total
$(44.6)
0.7
(0.9)
$(44.8)
Reconciliation to US Statutory Rate
Predecessor
$ millions
Statutory U.S. federal income tax / rate(1)
Foreign income taxed at rates other than 35%
Changes in valuation allowances
Foreign exchange loss
Unrecognized tax benefits(2)
Non-deductible acquisition-related costs
Unremitted Earnings
Capital Loss(3)
Withholding taxes
Non-deductible interest
Other—net
Total income tax (benefit)/ effective tax rate
Year Ended
December 31,
2011
$105.8
(9.1)
14.8
7.0
—
—
—
—
—
—
2.2
$120.7
35.0%
(3.0)
4.9
2.3
—
—
—
—
—
—
0.7
39.9%
Year Ended
December 31,
2012
$137.6
(10.9)
9.8
4.7
—
—
—
—
—
—
4.0
$145.2
35.0%
(2.8)
2.5
1.2
—
—
—
—
—
—
1.1
37.0%
Period from
January 1
2013 through
January 31,
2013
$ 5.5
1.0
1.4
0.5
—
—
—
—
—
—
(1.3)
$ 7.1
35.0%
6.6
8.9
3.1
—
—
—
—
—
—
(8.0)
45.6%
Successor
Period from
August 24,
Year Ended
2012 through
December 31,
December 31,
2012
2013
$(10.1)
10.1
—
—
—
—
—
—
—
—
—
$ —
35.0%
(35.0)
—
—
—
—
—
—
—
—
—
— %
$(92.3)
(33.1)
55.0
5.4
35.1
11.9
4.9
(46.7)
5.1
6.4
3.5
$(44.8)
35.0%
12.5
(20.8)
(2.1)
(13.3)
(4.5)
(1.9)
17.7
(1.8)
(2.3)
(1.5)
17.0%
(1) The U.S. statutory rate has been used as management believes it is more meaningful to the Company.
(2) Within this amount the Company recorded an unrecognized tax benefit of $21.1 million related to non-deductible interest and debt acquisition costs, which
is fully offset by a $21.1 million reduction to the valuation allowance.
(3) The Company recognized a tax benefit of $46.7 million related to a capital loss, which is fully offset by a $46.7 million increase to the valuation allowance.
F-76
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
Deferred Tax Balances
Predecessor
Successor
Period from
August 24,
2012 through
Deferred Tax Asset
Tax loss and credit carryforwards(1)
Goodwill and Intangibles
Compensation & Employee Benefits
Accruals & Other Reserves
Interest Expense
Accounts Receivable & Other Assets
Total deferred tax assets
Less: Valuation Allowance
Net, Deferred tax assets
Deferred Tax Liabilities
Inventory
Property, Plant & Equipment
Accounts Receivable & Other Assets
Equity Investment & Other Securities
Unremitted earnings
Other
Total deferred tax liabilities
Net Deferred Tax Asset/(Liability)
Current asset
Current liability
Non-current assets
Non-current liability
Net deferred tax asset/(liability)
(1)
Year Ended
December 31,
December 31,
Year Ended
December 31,
2012
2012
2013
$
$
$
$
96.1
—
78.9
8.5
—
23.1
206.6
(58.7)
147.9
(5.0)
(64.5)
—
—
—
(0.4)
(69.9)
78.0
24.0
(11.5)
93.4
(27.9)
78.0
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
$
$
111.7
89.4
79.1
40.5
8.6
—
329.3
(63.4)
265.9
(1.3)
(218.5)
(8.4)
(5.8)
(15.9)
—
(249.9)
16.0
30.0
(5.5)
271.9
(280.4)
16.0
Included in this amount is a capital loss carryforward of approximately $41.1 million related to a Luxembourg entity, which is fully
offset by a valuation allowance.
At December 31, 2013, the Company had $83.1 million of net operating and capital loss carryforwards (tax effected) in certain non-U.S.
jurisdictions, net of uncertain tax positions. Of these, $53.2 million have no expiration, and the remaining $29.9 million will expire in years
through 2023. In the U.S., there were approximately $24.3 million of federal net operating loss carryforwards which will expire in 2033
and $0.6 million of state net operating loss carryforwards, which will expire in years through 2033. Tax credit carryforwards at
December 31, 2013 amounted to $3.7 million, which are subject to expiration in 2023 through 2033.
The Company had valuation allowances that primarily related to the realization of recorded tax benefits on tax loss carryforwards from
operations in the United Kingdom, Luxembourg and Austria of $63.4 million at December 31, 2013.
The Company has determined that the undistributed earnings of our subsidiaries will not be permanently reinvested, and accordingly, has
provided a deferred tax liability totaling $15.9 million on such income. For the year ended December 31, 2013, the Company has included
in the deferred income tax provision a total of $4.9 million, of which $4.0 million relates to subsidiary earnings and $0.9 million related to
tax law changes.
F-77
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
Total Gross Unrecognized Tax Benefits
Predecessor
Balance at January 1
Increases related to acquisition
Increases related to positions taken
on items from prior years
Decreases related to positions taken
on items from prior years
Increases related to positions taken
in the current year
Settlement of uncertain tax
positions with tax authorities
Decreases due to expiration of
statutes of limitations
Balance at December 31
Year Ended
December 31,
Year Ended
December 31,
2011
2012
$
$
—
—
$
Period from
January 1
2013 through
January 31,
2013
—
—
$
—
—
Successor
Period from
January 1
2013 through
Year Ended
December 31,
January 31,
2013
2013
$
—
—
$
—
11.3
—
—
—
—
—
—
—
—
—
—
—
—
—
—
27.6
—
—
—
—
—
—
—
$
—
—
$
—
—
$
—
—
$
—
38.9
At December 31, 2013, the total amount of unrecognized tax benefits was $38.9 million, of which $17.8 million would impact the effective
tax rate, if recognized. The net increase in the balance from the beginning of the year relates to current year tax positions and the recording
of unrecognized tax benefits pursuant to the acquisition of DPC on February 1, 2013. As of December 31, 2013, we do not anticipate that
the liability for unrecognized tax benefits will materially change within the next twelve months.
The Company includes interest expense and penalties related to unrecognized tax benefits as part of the provision for income taxes.
Accrued interest and penalties are included within the related tax liability line in the balance sheet. Interest and penalties associated with
unrecognized tax benefits are recognized as components of the “Provision for income taxes,” and totaled $7.4 million in 2013. The
Company’s accrual for interest and penalties was $7.1 million at December 31, 2013.
The Company is subject to income tax in approximately 40 jurisdictions outside the U.S. The Company’s significant operations outside the
U.S. are located in Belgium, Germany, United Kingdom, Venezuela and China. The statute of limitations varies by jurisdiction with 2008
being the oldest tax year still open in the material jurisdictions. The Company is currently under audit in certain jurisdictions for tax years
under responsibility of the predecessor. Pursuant to the acquisition agreement, all tax liabilities related to these tax years will be
indemnified by DuPont.
As of December 31, 2013, we had $46.1 million of unrecognized tax benefits, including interest and penalties. Due to the high degree of
uncertainty regards future timing of cash flows associated with these liabilities, we are unable to estimate the years in which settlement will
occur with the respective taxing authorities.
(14) EARNINGS PER COMMON SHARE
Basic earnings per common share excludes the dilutive impact of potentially dilutive securities and is computed by dividing net income by
the weighted average number of common shares outstanding for the period. Diluted earnings per common share includes the effect of
potential dilution from the exercise of
F-78
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
outstanding stock options and unvested restricted stock. Potentially dilutive securities have been excluded in the weighted average number
of common shares used for the calculation of earnings per share in periods of net loss because the effect of such securities would be antidilutive. A reconciliation of the Company’s basic and diluted earnings per common share was as follows (in millions, except shares and
earnings per share):
Successor
Period from
August 24, 2012
Successor
Year Ended
December 31,
2013
through
December 31,
2012
Net loss attributable to Axalta
Pre-Acquisition net loss attributable to Axalta
Net loss to common shareholders (1)
Basic and diluted weighted average shares outstanding (1)
$
Earnings per Common Share:
Basic net loss per share
Diluted net loss per share
(1)
(29.0)
(29.0)
—
—
$
(224.9)
(3.9)
(221.0)
228,280,574
—
—
$
$
(0.97)
(0.97)
As of February 1, 2013, the date of the Acquisition, the Company received the initial Equity Contribution of $1,350.0 million.
Accordingly, the net loss to common shareholders and the weighted average shares outstanding calculation is based on the
period from February 1, 2013 to December 31, 2013.
The number of anti-dilutive shares (stock options) that have been excluded in the computation of diluted earnings per share for the Successor
year ended December 31, 2013 were 16.3 million. There were no anti-dilutive shares for the Successor period ending December 31, 2012.
Basic and diluted weighted average shares outstanding have been adjusted to reflect the Company’s 100,000 for 1 stock split which occurred in
July 2013, and the Company’s 1.69 for 1 stock split which occurred in October 2014.
(15) ACCOUNTS AND NOTES RECEIVABLE—TRADE, NET
Predecessor
December 31,
2012
(a)
(b)
(c)
Successor
December 31,
December 31,
2012
2013
Accounts receivable—trade, net
$
681.5
$
—
$
637.5
Notes receivable—trade, net(a)
35.9
—
44.7
Non-income taxes(b)
41.8
—
47.3
Miscellaneous(c)
48.1
—
136.4
Total
$
807.3
$
—
$
865.9
Notes receivable—trade, net primarily consist of loans with terms of one year or less and are primarily concentrated in China and
Europe.
During the Successor periods, VAT receivables and payables are computed and allocated at the legal entity level. During the
Predecessor period, VAT receivables and payables were generally computed on a legal entity level and allocated to the DPC
business. In certain jurisdictions, these receivables and payables may not be transferable outside of the legal entities.
Miscellaneous includes service revenue receivables, rebates from suppliers, advances to employees and an indemnification asset.
Pursuant to the terms of the Acquisition Agreement, DuPont agreed to
F-79
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
indemnify us with respect to certain pre-Acquisition employee-related, environmental and tax liabilities. The indemnification asset
represents estimated amounts due from DuPont pursuant to the indemnification terms.
Accounts and notes receivable are carried at amounts that approximate fair value. Accounts receivable—trade, net are net of allowances of
$6.5 million and $29.6 million at December 31, 2013 (Successor) and December 31, 2012 (Predecessor), respectively. Our allowances
were adjusted from $30.9 million as of the Predecessor period ended January 31, 2013 to $0 as part of purchase accounting on February 1,
2013. Bad debt expense was $5.4 million for the Successor year ended December 31, 2013, $0.2 million for the Predecessor period from
January 1, 2013 through January 31, 2013 and $5.0 million and $4.6 million for the Predecessor years ended December 31, 2012 and
December 31, 2011, respectively.
(16) INVENTORIES
Predecessor
December 31,
Successor
December 31,
December 31,
2012
Finished products
Semi-finished products
Raw materials and supplies
$
Adjustment of inventories to a LIFO basis
Total
$
321.5
98.2
132.0
551.7
(80.7)
471.0
2012
$
2013
—
—
—
—
—
—
$
$
$
329.3
90.2
130.7
550.2
—
550.2
Inventories of the Predecessor were valued on the basis of cost as determined by the LIFO method. Inventories valued under the
LIFO method comprised 56.0% of inventories before the LIFO adjustments at December 31, 2012 (Predecessor), respectively. Stores
and supplies inventories of $21.2 million and $20.1 million at December 31, 2013 (Successor) and December 31, 2012 (Predecessor)
were valued under the average cost method.
(17) NET PROPERTY, PLANT AND EQUIPMENT
Depreciation expense amounted to $174.3 million for the Successor year ended December 31, 2013. Depreciation expense amounted to
$7.2 million for the Predecessor period from January 1, 2013 through January 31, 2013 and $82.9 million and $84.7 million for the
Predecessor years ended December 31, 2012 and December 31, 2011, respectively. Property, plant and equipment include gross assets
under capital leases of $1.8 million and $1.7 million at December 31, 2012 and December 31, 2011, respectively (Predecessor).
Predecessor
December 31,
Successor
December 31,
December 31,
2012
Land
Buildings
Equipment
Construction in progress
Total
Accumulated depreciation
Net property, plant, and equipment
$
26.0
420.2
1,565.5
61.9
2,073.6
(1,364.8)
$
708.8
F-80
2012
$
$
2013
—
—
—
—
—
—
—
$
$
98.9
411.0
1,178.6
117.7
1,806.2
(183.6)
1,622.6
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
(18) OTHER ASSETS
Predecessor
December 31,
Successor
December 31,
December 31,
2012
Available for sale securities
Deferred income taxes—non-current
Miscellaneous(a)
Total
(a)
$
2012
11.5
93.4
46.8
151.7
$
$
2013
—
—
4.6
4.6
$
$
$
4.9
271.9
202.5
479.3
Miscellaneous other assets primarily relates to an acquisition of real estate of $54.5 million, advances and deposits (which at
December 31, 2012 (Predecessor) include a judicial deposit of $24.7 million related to a Brazilian tax dispute. See Note 8),
capitalized contract-related costs, and derivative assets (see Note 24).
(19) ACCOUNTS PAYABLE
Predecessor
December 31,
Successor
December 31,
December 31,
2012
Trade payables
Non-income taxes(a)
Miscellaneous
Total
(a)
$
$
2012
389.9
43.0
8.8
441.7
$
2013
—
—
—
—
$
$
$
428.8
40.5
9.2
478.5
During the Successor periods, VAT receivables and payables are computed and allocated at the legal entity level. During the
Predecessor period, VAT receivables and payables were generally computed on a legal entity level and allocated to the Axalta
business. In certain jurisdictions, these receivables and payables may not be transferable outside of the legal entities.
(20) OTHER ACCRUED LIABILITIES
Predecessor
December 31,
Successor
December 31,
December 31,
2012
Compensation and other employee-related costs
Current portion of long-term employee benefit plans
Restructuring
Discounts, rebates, and warranties
Income taxes payable
Derivative liabilities
Miscellaneous(a)
Total
(a)
$
$
167.9
13.8
2.1
82.2
—
11.6
18.3
295.9
2012
$
$
—
—
—
—
—
—
33.6
33.6
2013
$
$
168.0
13.3
98.4
65.0
25.1
1.2
101.7
472.7
Miscellaneous at December 31, 2012 (Successor) represents the accrual for merger and acquisition-related costs and debt financing
costs incurred prior the Acquisition. The amounts were paid at closing of the Acquisition with proceeds from the borrowings under
the Senior Secured Credit Facilities.
F-81
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Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
Miscellaneous at December 31, 2013 (Successor) primarily includes accruals of $54.9 million for professional fees and other costs
related to the separation from DuPont, accrued interest of $31.8 million, additional expenses for IT transition and headquarters
facility costs, as well as other normal, recurring accruals for operating expenses.
(21) OTHER LIABILITIES
Predecessor
December 31,
Successor
December 31,
December 31,
2012
Employee-related costs
Accrued litigation(a)
Environmental remediation
Long-term income taxes payable
Miscellaneous
Total
(a)
$
$
2012
30.1
28.9
3.3
—
3.9
66.2
$
$
2013
—
—
—
—
—
—
$
$
19.5
0.5
5.2
20.1
8.8
54.1
Accrued litigation at December 31, 2012 (Predecessor) includes $24.7 million related to a Brazilian tax dispute. Pursuant to the
Acquisition Agreement, DuPont retained the accrued tax liability and related judicial deposit. Accordingly, no liability or related
deposit is recorded in the Successor consolidated balance sheet at December 31, 2013. See further discussion of the Brazilian tax
dispute in Note 8.
(22) LONG-TERM BORROWINGS
Borrowings and capital lease obligations are summarized as follows:
Predecessor
December 31,
Successor
December 31,
2012
Dollar Term Loan
Euro Term Loan
Dollar Senior Notes
Euro Senior Notes
Short-term borrowings
Capital lease obligation
Unamortized original issue discount
$
Less:
Short term borrowings
Current portion of long-term borrowings
Long-term debt
(a)
2013
$
—
—
—
—
—
0.2
—
0.2
$
—
0.2
—
$
$
2,282.8
547.7
750.0
344.9
18.2
—
(22.7)
3,920.9
$
18.2
28.5
3,874.2
Senior Secured Credit Facilities
On February 1, 2013, Dutch B B.V., as “Dutch Borrower”, and its indirect wholly-owned subsidiary, Axalta US Holdings, as “US
Borrower”, entered into the Senior Secured Credit Facilities comprising a $2,300.0 million senior secured US dollar term loan (the
“Dollar Term Loan”), a €400.0 million senior secured Euro term loan (the “Euro Term Loan”) and a $400.0 million senior secured
revolving facility (the “Revolving Credit Facility”). Costs of $92.9 million related to the issuance of the Senior Secured
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Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
Credit Facilities are recorded within “Deferred financing costs, net” and are being amortized as interest expense over the life of the
Senior Secured Credit Facilities. At December 31, 2013, the remaining unamortized balance was $81.2 million. Original issue
discount of $25.7 million related to the Senior Secured Credit Facilities is recorded as a reduction of the principal amount of the
borrowings and is amortized as interest expense over the life of the Senior Secured Credit Facilities. At December 31, 2013, the
remaining unamortized original issue discount was $22.7 million. At December 31, 2013, there were no borrowings under the
Revolving Credit Facility. At December 31, 2013, letters of credit issued under the Revolving Credit Facility totaled $20.7 million
which reduced the availability under the Revolving Credit Facility. Availability under the Revolving Credit Facility was $379.3
million at December 31, 2013.
On February 3, 2014, the Co-Borrowers entered into a repricing amendment to the Senior Secured Credit Facilities. See Note 27 for
further details on this amendment.
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 of the Dutch Borrower. The Senior Secured Credit Facilities are governed by a credit agreement (the
“Credit Agreement”). 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 Dollar Term Loan and the Euro Term Loan. Interest on the Dollar Term Loan is subject to a
floor of 1.25% for Eurocurrency Rate Loans plus an applicable rate of 3.50%. 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 2.25% plus an
applicable rate of 2.50%. Interest on the Euro Term Loan, a Eurocurrency Loan, is subject to a floor of 1.25% plus an applicable rate
of 4.00%.
Interest on any outstanding borrowings under the Revolving Credit Facility is subject to a floor of 1.25% 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 2.25% plus an
applicable rate of 2.50% (subject to an additional step-down to 2.25).
Under circumstances described in the Credit Agreement, the Company may increase available revolving or term facility borrowings
up to $400.0 million.
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 or
3.5:1, 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 is applicable only when greater than 25% of the Revolving Credit Facility (including letters
of credit) is outstanding at the end of the fiscal quarter.
(b)
Significant Terms of the 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,
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Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
Dutch B.B.V. issued €250.0 million aggregate principal amount of 5.750% senior secured notes due 2021 (the “Euro Senior Notes”,
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 within “Deferred financing costs, net” and are amortized as interest expense over the
life of the Senior Notes. At December 31, 2013, the remaining unamortized balance is $29.4 million.
The Senior Notes are unconditionally guaranteed on a senior basis by 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% payable semiannually on February 1 and August 1. Cash fees related to the issuance of the Euro Senior Notes were $10.2 million, are recorded
within “Deferred financing costs, net” and are amortized as interest expense over the life of the Senior Notes. At December 31, 2013,
the remaining unamortized balance is $9.0 million.
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
2017
2018
2019 and thereafter
104.313%
102.875%
101.438%
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.
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Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars 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% payable semiannually on February 1 and August 1. Cash fees related to the issuance of the Dollar Senior Notes were $22.9 million, are recorded
within “Deferred financing costs, net” and are amortized as interest expense over the life of the Senior Notes. At December 31, 2013,
the remaining unamortized balance is $20.4 million.
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
2017
2018
2019 and thereafter
105.531%
103.688%
101.844%
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.
(c)
Short-term borrowings
On September 12, 2013, we entered into short-term borrowings in the amount of $27.8 million to partially fund the acquisition of a
real estate investment property which closed in October 2013. The short-term borrowings associated with this acquisition have a
maturity date of September 12, 2014, accrue interest at a rate of 11% per annum and have an outstanding balance of $17.8 million at
December 31, 2013. Other miscellaneous short-term borrowings have an outstanding balance of $0.4 million at December 31, 2013.
(d)
Bridge financing commitment fees
On August 30, 2012, we signed a debt commitment letter, which was subsequently amended and restated, that included a bridge
facility comprised of $1,100.0 million of unsecured U.S. bridge loans and a $300.0 million of secured bridge loans (the “Bridge
Facility”), which was to be utilized to partially fund the Acquisition in the event that permanent financing was not obtained.
Drawings under the Bridge Facility were subject to certain conditions. Upon the issuance of the Senior Notes and the entry into the
Senior Secured Credit Facilities, the commitments under the Bridge Facility terminated.
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Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
Commitment fees related to the Bridge Facility of $21.0 million and associated fees of $4.0 million were expensed upon the
termination of the Bridge Facility.
(e)
Future repayments
Below is a schedule of required future repayments of all borrowings outstanding at December 31, 2013 (in millions).
2014
2015
2016
2017
2018
Thereafter
Total
$
46.7
28.5
28.5
28.5
28.5
3,782.9
$3,943.6
(23) FAIR VALUE ACCOUNTING
(a)
Assets measured at fair value on a nonrecurring basis
During the Successor year ended December 31, 2013, we recorded a loss of $3.2 million associated with the abandonment of certain
in process research and development projects acquired in the Acquisition. During the Successor period from August 24, 2012
through December 31, 2012, Predecessor period from January 1, 2013 through January 31, 2013, and the Predecessor year ended
December 31, 2012, no assets were adjusted to their fair values on a nonrecurring basis. See Note 5 for further discussion related to
the fair value of in process research and development projects acquired in the Acquisition.
(b)
Fair value of financial instruments
Cash and cash equivalents —The carrying amount of cash equivalents approximates fair value because the original maturity is less
than 90 days.
Accounts and notes receivable —The carrying amount of accounts and notes receivable approximates fair value because of their
short outstanding terms.
Available for sale securities —The fair value of available for sale securities at December 31, 2013 and December 31, 2012 was $4.9
million and $11.5 million, respectively. The fair value was based upon Level 1 inputs where the securities are actively traded with
quoted market prices.
Accounts payable —The carrying amount of accounts payable approximates fair value because of their short outstanding terms.
Short-term bank borrowings —The carrying value of short-term bank borrowings equals fair value because their interest rates reflect
current market rates.
Long-term borrowings —The fair values of the Dollar Senior Notes and Euro Senior Notes at December 31, 2013 were $798.8
million and $362.1 million, respectively. The estimated fair values of these notes are based on recent trades, as reported by a third
party bond 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.
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Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
The fair values of the Dollar Term Loan and the Euro Term Loan at December 31, 2013 were $2,297.1 million and $552.5 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 bond 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.
(24) DERIVATIVE AND OTHER HEDGING 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 Successor year ended December 31, 2013, we entered into a foreign currency contract to hedge the variability of the US dollar
equivalent of the original borrowings under the Euro Term Loan and the proceeds from the issuance of Euro Senior Notes. Changes in the
fair value of this instrument were recorded in current period earnings and were presented in Other expense, net as a component of
Exchange (gains) losses. Losses related to the settlement of forward contracts recognized during the Successor year ended December 31,
2013 totaled $19.4 million. Cash flows resulting from the settlement of the derivative instrument on February 1, 2013 are reported as
investing activities.
During the Successor 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 are designated and qualified as effective cash flow hedges.
The following table presents the location and fair values using Level 2 inputs of derivative instruments included in our consolidated and
combined balance sheet:
Predecessor
December 31,
Successor
December 31,
2012
Foreign currency contracts
Other assets:
Interest rate swaps
Interest rate cap
Total assets
Other accrued liabilities:
Interest rate swaps
Foreign currency contracts
Total liabilities
December 31,
2012
$
2.8
$
—
—
2.8
$
—
11.6
11.6
2013
$
—
$
—
—
—
$
—
—
—
$
—
$
10.5
3.4
13.9
$
1.2
—
1.2
For derivative instruments that are designated and qualify 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.
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Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
The following table sets forth the locations and amounts recognized during the year ended December 31, 2013 for these cash flow hedges.
Derivatives in Cash
Flow Hedging
Relationships
Amount of
(Gain) Loss
Recognized
in OCI on
Derivatives
(Effective
Portion)
Interest rate contracts
$
(5.0)
Location of (Gain)
Loss Reclassified
from Accumulated
OCI into Income
(Effective Portion)
Interest expense, net
Amount of
(Gain) Loss
Reclassified
from
Accumulated
OCI to
Income
(Effective
Portion)
$
4.4
Location of (Gains)
Losses Recognized in
Income on Derivatives
(Ineffective Portion)
Interest expense, net
Amount of
(Gain) Loss
Recognized
in Income on
Derivatives
(Ineffective
Portion)
$
(4.3)
Also during the Successor 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 is recorded in current period earnings and is included in
interest expense.
DPC, through DuPont, entered into contractual arrangements (derivatives) to reduce its exposure to foreign currency risk. The foreign
currency derivative program was utilized for financial risk management and consisted of forward contracts. The derivative instruments
were not designated as hedging instruments. Changes in the fair value of the derivative instruments are recorded in current period earnings
and are presented in Other expense, net as a component of exchange (gains) losses.
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:
Predecessor
Successor
Period from
January 1, 2013
Derivatives Not Designated as
Hedging Instruments under
ASC 815
Foreign currency forward
contract
Interest rate cap
Location of (Gain) Loss
Recognized in Income on
Derivatives
Other expense, net as a
component of Exchange
(gains) losses
Interest expense, net
Year Ended
December 31,
Year Ended
December 31,
2011
2012
$
$
—
—
—
$
$
3.9
—
3.9
through
January 31,
2013
$
$
2.0
—
2.0
Year Ended
December 31,
2013
$
$
20.9
(0.3)
20.6
(25) 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: 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.
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Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
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.
Performance
Predecessor
Transportation
Coatings
Coatings
Total
For the Year ended December 31, 2011
Net sales(1)
Equity in earnings in unconsolidated affiliates
Adjusted EBITDA(2)
Investment in unconsolidated affiliates
Capital Expenditures
$ 2,623.7
—
415.9
—
49.8
$
1,657.8
0.9
62.5
6.4
32.9
Performance
Predecessor
Transportation
Coatings
Coatings
$4,281.5
0.9
478.4
6.4
82.7
Total
For the Year ended December 31, 2012
Net sales(1)
Equity in earnings in unconsolidated affiliates
Adjusted EBITDA(2)
Investment in unconsolidated affiliates
Capital Expenditures
$ 2,479.5
—
426.0
0.8
39.8
$
1,739.9
0.6
151.6
7.1
33.4
Performance
Predecessor
Transportation
Coatings
Coatings
$4,219.4
0.6
577.6
7.9
73.2
Total
January 1 through January 31, 2013
Net sales(1)
Equity in earnings (losses) in unconsolidated affiliates
Adjusted EBITDA(2)
Investment in unconsolidated affiliates
Capital Expenditures
$
186.8
—
15.0
2.0
1.5
$
139.4
(0.3)
17.7
6.7
0.9
Performance
Successor
Transportation
Coatings
Coatings
$ 326.2
(0.3)
32.7
8.7
2.4
Total
For the Year ended December 31, 2013
Net sales(1)
Equity in earnings in unconsolidated affiliates
Adjusted EBITDA(2)
Investment in unconsolidated affiliates
Capital Expenditures
(1)
(2)
$ 2,325.3
1.8
500.2
7.7
56.6
$
1,625.8
0.3
198.8
8.1
50.7
$3,951.1
2.1
699.0
15.8
107.3
The Company has no intercompany sales.
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
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Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
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:
Predecessor
Year ended
December 31,
2011
2012
Adjusted EBITDA
$ 478.4
$ 577.6
Inventory step-up(a)
Merger and acquisition related costs(b)
Financing fees(c)
Foreign exchange remeasurement losses(d)
Long-term employee benefit plan adjustments(e)
Termination benefits and other employee related costs(f)
Consulting and advisory fees(g)
Transition-related costs(h)
Other adjustments(i)
Dividends in respect of noncontrolling interest(j)
Management fee expense(k)
EBITDA
Interest expense, net
Depreciation and amortization
Income before income taxes
—
—
—
(23.4)
(32.8)
2.6
—
—
(14.7)
1.0
—
411.1
(0.2)
(108.7)
$ 302.2
—
—
—
(17.7)
(36.9)
(8.6)
—
—
(12.6)
1.9
—
503.7
—
(110.7)
$ 393.0
(a)
(b)
(c)
(d)
(e)
(f)
January 1
through
January 31,
2013
Successor
August 24
through
Year ended
December 31,
December 31,
2012
2013
$
32.7
$
—
$
—
—
—
(4.5)
(2.3)
(0.3)
—
—
(0.1)
—
—
25.5
—
(9.9)
15.6
$
—
(29.0)
—
—
—
—
—
—
—
—
—
(29.0)
—
—
(29.0)
$
699.0
$
(103.7)
(28.1)
(25.0)
(48.9)
(9.5)
(147.5)
(54.7)
(29.3)
(2.3)
5.2
(3.1)
252.1
(215.1)
(300.7)
(263.7)
During the Successor Year Ended December 31, 2013, we recorded a non-cash fair value adjustment associated with our acquisition
accounting for inventories. These amounts increased cost of goods sold by $103.7 million.
In connection with the Acquisition, we incurred $28.1 million and $29.0 million of merger and acquisition costs during the Successor years
ended December 31, 2013 and December 31, 2012, respectively. These costs consisted primarily of investment banking, legal and other
professional advisory services costs.
On August 30, 2012, we signed a debt commitment letter, which included the Bridge Facility. Upon the issuance of the Senior Notes and
the entry into the Senior Secured Credit Facilities, the commitments under the Bridge Facility terminated. Commitment fees related to the
Bridge Facility of $21.0 million and associated fees of $4.0 million were expensed upon the payment and termination of the Bridge
Facility.
Eliminates foreign exchange gains and losses resulting from the remeasurement of assets and liabilities denominated in foreign currencies,
including a $19.4 million loss related to the acquisition date settlement of a foreign currency contract used to hedge the variability of Eurobased financing.
For the Successor Year Ended December 31, 2013, eliminates the non-service cost components of employee benefit costs. For the
Predecessor period January 1, 2013 through January 31, 2013 and the Predecessor years ended December 31, 2012 and 2011, eliminates
(1) all U.S. pension and other long-term employee benefit costs that were not assumed as part of the Acquisition and (2) the non-service
cost component of the pension and other long-term employee benefit costs for the foreign pension plans that were assumed as part of the
Acquisition.
Represents expenses primarily related to employee termination benefits, including our initiative to improve the overall cost structure within
the European region, and other employee-related costs. Termination benefits include the costs associated with our headcount initiatives for
establishment of new roles and
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Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
(g)
(h)
(i)
(j)
(k)
elimination of old roles and other costs associated with cost saving opportunities that were related to our transition to a standalone entity.
Represents fees paid to consultants, advisors, and other third-party professional organizations for professional services rendered in
conjunction with the transition from DuPont to a standalone entity.
Represents charges associated with the transition from DuPont to a standalone entity, including branding and marketing, information
technology related costs, and facility transition costs.
Represent costs for certain unusual or non-operational losses and the non-cash impact of natural gas and currency hedge losses allocated to
DPC by DuPont, stock-based compensation, asset impairments, equity investee dividends, indemnity income associated with the
Transaction, and loss (gain) on sale and disposal of property, plant and equipment.
Represents the payment of dividends to our joint venture partners by our consolidated entities that are not wholly owned.
Pursuant to Axalta’s management agreement with Carlyle Investment Management, L.L.C., an affiliate of Carlyle, for management and
financial advisory services and oversight provided to Axalta and its subsidiaries, Axalta is required to pay an annual management fee of
$3.0 million plus out-of-pocket expenses.
Segment information for the Predecessor periods has been recast to conform to the Successor segment presentation.
Our business serves four-end markets globally as follows:
Predecessor
Year ended
December 31,
2011
2012
Performance Coatings
Refinish
Industrial
Total net sales Performance Coatings
Transportation Coatings
Light vehicle
Commercial vehicle
Total net sales Transportation Coatings
Total net sales
$1,837.1
786.6
2,623.7
$1,759.3
720.2
2,479.5
1,321.3
336.5
1,657.8
$4,281.5
1,390.6
349.3
1,739.9
$4,219.4
Successor
January 1
through
January 31,
2013
Year ended
December 31,
2013
$
$
$
129.4
57.4
186.8
111.6
27.8
139.4
326.2
$
1,670.0
655.3
2,325.3
1,291.5
334.3
1,625.8
3,951.1
Asset information is not regularly reviewed at a segment level. Therefore, the Company has not disclosed asset information for each reportable
segment.
Geographic Area Information:
The information within the following tables provides disaggregated information related to our net sales and long-lived assets.
F-91
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
Net sales by region were as follows:
Predecessor
Successor
Period from
Year Ended
December 31,
Year Ended
December 31,
2011
North America
EMEA
Asia Pacific
Latin America
Total(a)
$
$
2012
1,172.1
1,853.8
551.0
704.6
4,281.5
$
$
1,238.6
1,675.4
595.0
710.4
4,219.4
Period from
August 24
through
December 31,
January 1
through
January 31,
2013
$
2012
81.6
141.0
51.7
51.9
326.2
$
Year Ended
December 31,
$
2013
—
—
—
—
—
$
$
$
1,165.4
1,540.4
593.7
651.6
3,951.1
Net long-lived assets by region were as follows:
Predecessor
December 31,
Successor
December 31,
2012
North America
EMEA
Asia Pacific
Latin America
Total
(a)
(b)
$
2012
197.9
292.7
100.8
117.4
708.8
$
December 31,
$
$
2013
—
—
—
—
—
$
$
483.8
623.5
218.1
297.2
1,622.6
Net Sales are attributed to countries based on location of the customer. Sales to external customers in China represented approximately
10% of the total for the Successor year ended December 31, 2013, 11% for the Predecessor period ended January 31, 2013 and 8% and 7%
in the Predecessor years ended December 31, 2012 and 2011, respectively. Sales to external customers in Germany represented
approximately 10% of the total for the Successor year ended December 31, 2013 and 11% for the Predecessor period ended January 31,
2013 and 16 % and 11 % in the Predecessor years ended December 31, 2012 and 2011, respectively. Canada, which is included in the
North America region, represents approximately 3% of total sales in all periods.
Long-lived assets, which consist of property, plant and equipment, net, are provided for the Successor Year End December 31, 2013 and
the Predecessor year ended December 31, 2012. Canada long-lived assets amounted to approximately $21.1 million in the Successor Year
Ended December 31, 2013 and $18.2 million in the Predecessor year ended December 31, 2012.
(26) ACCUMULATED OTHER COMPREHENSIVE INCOME
Pension and
Predecessor Balance, December 31, 2012
Current year deferrals to AOCI
Reclassifications from AOCI to Net income
Net Change
Predecessor Balance, January 31, 2013
Unrealized
Currency
Translation
Adjustments
Other
Long-term
Employee
Benefit
Adjustments
$
$
$
—
—
—
—
—
$
F-92
(142.3)
0.7
—
(141.6)
(141.6)
Unrealized
Unrealized
loss on
securities
Gain on
Derivatives
$
$
1.4
0.2
—
1.6
1.6
$
$
—
—
—
—
—
Accumulated
Other
Comprehensive
Income
$
$
(140.9)
0.9
—
(140.0)
(140.0)
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
The income tax related to the adjustment for pension and other long-term employee benefits for the Predecessor one month ended January 31,
2013 was $0.4 million. The cumulative income tax benefit related to the adjustment for pension and other long-term employee benefits at
January 31, 2013 was $76.3 million. The income tax related to the change in the unrealized gain on derivatives for the Predecessor one month
ended January 31, 2013 was $0.0 million. The cumulative income tax cost related to the adjustment for unrealized gain on derivatives at
January 31, 2013 was $0.0 million. The income tax related to the change in the unrealized loss on securities for the Predecessor one month ended
January 31, 2013 was $0.1 million. The cumulative income tax cost related to the adjustment for unrealized loss on securities at January 31,
2013 was $0.9 million.
Pension and
Successor Balance, December 31, 2012
Current year deferrals to AOCI
Reclassifications from AOCI to Net income
Net Change
Successor Balance, December 31, 2013
Unrealized
Currency
Translation
Adjustments
Other
Long-term
Employee
Benefit
Adjustments
$
$
$
—
24.3
—
24.3
24.3
$
—
7.5
—
7.5
7.5
Unrealized
Unrealized
loss on
securities
Gain on
Derivatives
$
$
—
(0.9)
—
(0.9)
(0.9)
$
$
—
7.5
(4.4)
3.1
3.1
Accumulated
Other
Comprehensive
Income
$
$
—
38.4
(4.4)
34.0
34.0
The income tax related to the adjustment for pension and other long-term employee benefits for the Successor year ended December 31, 2013
was $3.5 million. The cumulative income tax benefit related to the adjustment for pension and other long-term employee benefits at
December 31, 2013 was $3.5 million. The income tax related to the change in the unrealized gain on derivatives for the Successor year ended
December 31, 2013 was $1.9 million. The cumulative income tax benefit related to the adjustment for unrealized gain on derivatives at
December 31, 2013 was $1.9 million.
(27) SUBSEQUENT EVENTS
On February 3, 2014 (the “Amendment Effective Date”), the Co-Borrowers completed an amendment (the “Amendment”) to the Senior Secured
Credit Facilities. The Amendment (i) converted all of the outstanding Dollar Term Loans ($2,282.8 million) into a new class of term loans under
the credit agreement governing the Senior Secured Credit Facilities (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 under the credit agreement governing the Senior Secured Credit Facilities (the
“New Euro Term Loans”). The New Dollar Term Loans are subject to a floor of 1.00% for Eurocurrency loans and 2.00% for Base Rate Loans,
plus an applicable rate after the Amendment Effective Date. The applicable rate is 3.00% per annum for Eurocurrency Rate Loans (as defined in
the credit agreement governing the Senior Secured Credit Facilities) and 2.00% per annum for Base Rate Loans (as defined in the credit
agreement governing the Senior Secured Credit Facilities). 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 is 3.25% per annum for Eurocurrency 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.
F-93
Table of Contents
Notes to Combined (Predecessor) and Consolidated (Successor) Financial Statements
(Dollars in millions, unless otherwise noted)
The Company incurred $2.9 million of fees associated with the Amendment.
In October 2014, the Board of Directors approved a 1.69-for-1 stock split of the Company’s issued and outstanding common stock, which
was effective on October 28, 2014. The stock split did not change the par value of the Company’s common stock. The consolidated
financial statements have been retroactively adjusted to give effect to the stock split.
These consolidated and combined financial statements reflect management’s evaluation of subsequent events, through March 31, 2014, the
initial date the consolidated and combined financial statements were available to be issued, and through October 30, 2014, the date of the
most recent revision.
F-94
Table of Contents
Table of Contents
Through and including
(the 25 th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or subscriptions.
45,000,000 Shares
Axalta Coating Systems Ltd.
Common Shares
PROSPECTUS
Citigroup
Goldman, Sachs & Co.
BofA Merrill Lynch
Jefferies
UBS Investment Bank
Barclays
Baird
Deutsche Bank Securities
Credit Suisse
BB&T Capital Markets
J.P. Morgan
Morgan Stanley
Nomura
SMBC Nikko
, 2014
Table of Contents
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13.
Other Expenses of Issuance and Distribution.
The actual and estimated expenses in connection with this offering, all of which will be borne by us, are as follows:
SEC Registration Fee
FINRA Filing Fee
Printing and Engraving Expense
Legal Fees
Accounting Fees
Blue Sky Fees
Stock Exchange Listing Fees
Transfer Agent Fee
Miscellaneous
Total
Item 14.
$ 127,540
163,513
950,000
3,400,000
1,500,000
0
250,000
8,000
100,947
$6,500,000
Indemnification of Directors and Officers
Section 98 of the Companies Act provides generally that a Bermuda company may indemnify its directors, officers and auditors against any
liability which by virtue of any rule of law would otherwise be imposed on them in respect of any negligence, default, breach of duty or breach
of trust, except in cases where such liability arises from fraud or dishonesty of which such director, officer or auditor may be guilty in relation to
the company. Section 98 further provides that a Bermuda company may indemnify its directors, officers and auditors against any liability
incurred by them in defending any proceedings, whether civil or criminal, in which judgment is awarded in their favor or in which they are
acquitted or granted relief by the Supreme Court of Bermuda pursuant to section 281 of the Companies Act.
We have adopted provisions in our bye-laws that provide that we shall indemnify our officers and directors in respect of their actions and
omissions, except in respect of their fraud or dishonesty. Our bye-laws provide that the shareholders waive all claims or rights of action that they
might have, individually or in right of the company, against any of the company’s directors or officers for any act or failure to act in the
performance of such director’s or officer’s duties, except in respect of any fraud or dishonesty of such director or officer. Section 98A of the
Companies Act permits us to purchase and maintain insurance for the benefit of any officer or director in respect of any loss or liability attaching
to him in respect of any negligence, default, breach of duty or breach of trust, whether or not we may otherwise indemnify such officer or
director. We have purchased and maintain a directors’ and officers’ liability policy for such a purpose.
Item 15.
Recent Sales of Unregistered Securities.
The information presented in this Item 15 gives effect to the 1.69-for-1 stock split, which was effectuated on October 28, 2014. Since August 24,
2012, we have granted to our officers and employees options to purchase an aggregate of 17,143,043 of our common shares with per share
exercise prices equal to $5.92, $7.21, $8.88 and $11.84 under our equity incentive plan, which we refer to as the existing equity incentive plan.
Since August 24, 2012, certain of our officers and employees have exercised options granted under the 2013 Plan to purchase a total of 363,248
of our common shares for an aggregate purchase price of approximately $2.9 million. Since August 24, 2012, certain of our officers and
directors have purchased an aggregate of 1,604,382 of our common shares at an aggregate purchase price of approximately $10 million.
II-1
Table of Contents
The sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) of the
Securities Act or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an
issuer not involving any public offering or pursuant to benefit plans and contracts relating to compensation as provided under Rule 701.
Individuals who purchased stock as described above represented their intention to acquire the stock for investment only and not with a view to or
for sale in connection with any distribution thereof, and appropriate legends were affixed to the share certificates issued in such transactions.
Item 16.
Exhibits and Financial Statement Schedules.
(A) Exhibits
E XHIBIT N O .
D ESCRIPTION OF E XHIBIT
1.1
Form of Underwriting Agreement
2.1**
Purchase Agreement, dated as of August 30, 2012, by and between E. I. du Pont de Nemours and Company and
Flash Bermuda Co. Ltd. (n/k/a Axalta Coating System Ltd.)
2.2**
Amendment to Purchase Agreement, dated as of January 31, 2013, by and between E. I. du Pont de Nemours and
Company and Flash Bermuda Co. Ltd. (n/k/a Axalta Coating System Ltd.)
3.1**
Amended Memorandum of Association of Axalta Coating Systems Ltd.
3.2
Form of Amended and Restated Bye-laws of Axalta Coating Systems Ltd.
4.1**
Indenture governing the 7.375% Senior Notes due 2021, dated February 1, 2013 (the “Dollar Senior Notes
Indenture”), among U.S. Coatings Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash
Dutch 2 B.V. (n/k/a Axalta Coating Systems Dutch Holding B B.V.) as Issuers, the Guarantors named therein and
Wilmington Trust, National Association, as Trustee
4.2**
Form of 7.375% Senior Note due 2021 (included in Exhibit 4.1)
4.3**
First Supplemental Indenture to the Dollar Senior Notes Indenture, dated April 26, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee
4.4**
First Supplemental Indenture to the Dollar Senior Notes Indenture, dated May 10, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee
4.5**
Third Supplemental Indenture to the Dollar Senior Notes Indenture, dated July 18, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee
4.6**
Fourth Supplemental Indenture to the Dollar Senior Notes Indenture, dated July 29, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee
4.7**
Fifth Supplemental Indenture to the Dollar Senior Notes Indenture, dated September 17, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee
4.8**
Sixth Supplemental Indenture to the Dollar Senior Notes Indenture dated September 18, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee
II-2
Table of Contents
E XHIBIT N O .
D ESCRIPTION OF E XHIBIT
4.9**
Seventh Supplemental Indenture to the Dollar Senior Notes Indenture, dated December 27, 2013, among U.S.
Coatings Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta
Coating Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee
4.10**
Eighth Supplemental Indenture to the Dollar Senior Notes Indenture, dated July 1, 2014, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee
4.11**
Indenture governing the 5.750% Senior Secured Notes due 2021, dated February 1, 2013 (the “Euro Senior Notes
Indenture”), among U.S. Coatings Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash
Dutch 2 B.V. (n/k/a Axalta Coating Systems Dutch Holding B B.V.) as Issuers, the Guarantors named therein,
Wilmington Trust, National Association, as Trustee and Collateral Agent, Citigroup Global Markets Deutschland
AG, as registrar, and Citibank B.A. London Branch, as Paying Agent and Authenticating Agent
4.12**
Form of 5.750% Senior Secured Note due 2021 (included in Exhibit 4.11)
4.13**
First Supplemental Indenture to the Euro Senior Notes Indenture, dated April 26, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee and Collateral Agent
4.14**
First Supplemental Indenture to the Euro Senior Notes Indenture, dated May 10, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee and Collateral Agent
4.15**
Third Supplemental Indenture to the Euro Senior Notes Indenture, dated July 18, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee and Collateral Agent
4.16**
Fourth Supplemental Indenture to the Euro Senior Notes Indenture, dated July 29, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee and Collateral Agent
4.17**
Fifth Supplemental Indenture to the Euro Senior Notes Indenture, dated September 17, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee and Collateral Agent
4.18**
Sixth Supplemental Indenture to the Euro Senior Notes Indenture, dated September 18, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee and Collateral Agent
4.19**
Seventh Supplemental Indenture to the Euro Senior Notes Indenture, dated December 27, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee and Collateral Agent
4.20**
Eighth Supplemental Indenture to the Euro Senior Notes Indenture, dated July 1, 2014, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee and Collateral Agent
II-3
Table of Contents
E XHIBIT N O .
D ESCRIPTION OF E XHIBIT
4.21
Specimen Common Share Certificate
5.1
Opinion of Conyers Dill & Pearman Pte. Ltd.
10.1**
Credit Agreement, dated as of February 1, 2013 (the “Credit Agreement”), among Flash Dutch 2 B.V. (n/k/a Axalta
Coating Systems Dutch Holding B B.V.) and U.S. Coatings Acquisition Inc. (n/k/a Axalta Coating Systems U.S.
Holdings, Inc.), as Borrowers, Flash Dutch 1 B.V. (n/k/a Axalta Coating Systems Dutch Holding A B.V.) as
Holdings, Coatings Co. U.S. Inc. (n/k/a Axalta Coating Systems U.S., Inc.), as U.S. Holdings, Barclays Bank PLC as
Administrative Agent, Collateral Agent, Swing Line Lender and L/C Issuer, and the other Lenders party thereto
10.2**
Amendment No. 1 Agreement, to the Credit Agreement, dated as of May 24, 2013, among Flash Dutch 2 B.V. (n/k/a
Axalta Coating Systems Dutch Holding B B.V.) as Dutch Borrower, Axalta Coating Systems U.S. Holdings, Inc. as
U.S. Borrower and Barclays Bank PLC, as Administrative Agent
10.3**
Second Amendment to Credit Agreement, dated as of February 3, 2014, by and among Axalta Coating Systems
Dutch Holding B B.V. (the “Dutch Borrower”), and Axalta Coating Systems U.S. Holdings, Inc. (the “U.S.
Borrower” and together with the Dutch Borrower, collectively, the “Borrowers”), Axalta Coating Systems U.S., Inc.
(f/k/a Coatings Co. U.S. Inc.) (“U.S. Holdings”), Axalta Coating Systems Dutch Holding A B.V. (“Holdings”), and
Barclays Bank PLC, as administrative agent (in such capacity, the “Administrative Agent”), as collateral agent (in
such capacity, the “Collateral Agent”), and as designated 2014 Specified Refinancing Term Lender (in such capacity,
the “Designated 2014 Specified Refinancing Term Lender”)
10.4**
Security Agreement, dated February 1, 2013, among the Grantors referred to therein and Barclays Bank PLC, as
Collateral Agent
10.5**
Security Agreement, dated February 1, 2013, among the Grantors referred to therein and Wilmington Trust, National
Association, as Collateral Agent
10.6**
Intellectual Property Security Agreement, dated February 1, 2013, between U.S. Coatings IP Co. LLC (n/k/a Axalta
Coating Systems USA IP Co. LLC) and Barclays Bank PLC, as collateral agent
10.7**
Intellectual Property Security Agreement, dated February 1, 2013, between the U.S. Coatings IP Co. LLC (n/k/a
Axalta Coating Systems USA IP Co. LLC) and Wilmington Trust, National Association, as collateral agent
10.8**
Subsidiary Guaranty, dated as of February 1, 2013, among the Guarantors named therein, the Additional Guarantors
referred to therein and Barclays bank PLC as Administrative Agent
10.9**
Holdings Guaranty, dated as of February 1, 2013, between Flash Dutch 1 B.V. (n/k/a Axalta Coating Systems Dutch
Holding A B.V.) and Barclays Bank PLC as Administrative Agent
10.10**
First Lien Intercreditor Agreement, dated as of February 1, 2013, among Barclays Bank PLC as Bank Collateral
Agent under the Credit Agreement, and as Notes Foreign Collateral Agent under the Indenture, Wilmington Trust,
National Association, as Notes Collateral Agent under the Indenture, each Grantor party thereto and each Additional
Agent from time to time party thereto
10.11**
Share Pledge Agreement in respect of shares in DuPont Performance Coatings Belgium BVBA (n/k/a Axalta Coating
Systems Belgium BVBA), dated 1 February 2013, between Coatings Co (UK) Limited (n/k/a Axalta Coating
Systems UK Holding Limited), Teodur B.V. and Barclays Bank PLC, as collateral agent
10.12**
Share Pledge Agreement in respect of shares in DuPont Performance Coatings Belgium BVBA (n/k/a Axalta Coating
Systems Belgium BVBA), dated 1 February 2013, between Coatings Co (UK) Limited (n/k/a Axalta Coating
Systems UK Holding Limited), Teodur B.V. and Wilmington Trust, National Association, as collateral agent
10.13**
Bank Accounts Pledge Agreement, entered into September 17, 2013, among Axalta Coating Systems Brasil Ltda.,
Wilmington Trust, National Association, as Notes Collateral Agent, and Barclays Bank PLC, as Collateral Agent
II-4
Table of Contents
E XHIBIT N O .
D ESCRIPTION OF E XHIBIT
10.14**
Quota Pledge Agreement, entered into September 17, 2013, among Brazil Coatings Co. Participações Ltda., Axalta
Coating Systems Dutch Holding 2 B.V., Barclays Bank PLC, as Collateral Agent, and Wilmington Trust, National
Association, as Notes Collateral Agent
10.15**
Security Agreement, dated as of May 10, 2013, between Axalta Coating Systems Canada Company (f/k/a DuPont
Performance Coatings Canada Company), Flash Lux Co S.à r.l. (n/k/a Axalta Coating Systems Luxembourg Holding
S.à r.l.), the additional grantors from time to time party thereto, and Barclays Bank PLC, as collateral agent for the
secured parties
10.16**
Security Agreement, dated as of May 10, 2013, between Axalta Coating Systems Canada Company (f/k/a DuPont
Performance Coatings Canada Company), Flash Lux Co S.à r.l. (n/k/a Axalta Coating Systems Luxembourg Holding
S.à r.l.), the additional grantors from time to time party thereto, and Wilmington Trust, National Association, as
collateral agent for the secured parties
10.17**
Securities Account Pledge Agreement in relation to the shares issued by France Coatings Co. (n/k/a Axalta Coating
Systems France Holding SAS), dated 26 April 2013, between Flash Lux Co S.à r.l. (n/k/a Axalta Coating Systems
Luxembourg Holding S.à r.l.), Barclays Bank PLC, as notes foreign collateral agent, and France Coatings Co. (n/k/a
Axalta Coating Systems France Holding SAS)
10.18**
Pledge of Receivables Agreement, dated 26 April 2013, between Lux FinCo Coatings S.à r.l. (n/k/a Axalta Coating
Systems Finance 1 S.à r.l.) and Barclays Bank PLC, as notes foreign collateral agent
10.19**
Securities Account Pledge Agreement in relation to the shares issued by DuPont Performance Coatings France SAS
(n/k/a Axalta Coating Systems France SAS), dated 26 April 2013, between France Coatings Co. (n/k/a Axalta
Coating Systems France Holding SAS), Barclays Bank PLC, as notes foreign collateral agent, and DuPont
Performance Coatings France SAS (n/k/a Axalta Coating Systems France SAS)
10.20**
Account Pledge Agreement, made on 29 July 2013, between Axalta Coating Systems Verwaltungs GmbH (f/k/a
Flash German Co. GmbH), Axalta Coating Systems Deutschland Holding GmbH & Co. KG (f/k/a Germany Coatings
GmbH & Co. KG), Axalta Coating Systems Beteiligungs GmbH (f/k/a Germany Coatings Co GmbH), Standox
GmbH, Spies Hecker GmbH, Axalta Coating Systems Germany GmbH (f/k/a DuPont Performance Coatings GmbH),
Barclays Bank PLC, as collateral agent under the Credit Agreement, and Wilmington Trust, National Association, as
notes collateral agent under the EUR Notes Indenture
10.21**
Global Assignment Agreement, made on 29 July 2013, between Axalta Coating Systems Deutschland Holding
GmbH & Co. KG (f/k/a Germany Coatings GmbH & Co. KG) and Barclays Bank PLC, as collateral agent and
collateral sub-agent
10.22**
Global Assignment Agreement, made on 29 July 2013, between Axalta Coating Systems Beteiligungs GmbH (f/k/a
Germany Coatings Co GmbH) and Barclays Bank PLC, as collateral agent and collateral sub-agent
10.23**
Global Assignment Agreement, made on 29 July 2013, between Axalta Coating Systems Germany GmbH (f/k/a
DuPont Performance Coatings GmbH) and Barclays Bank PLC, as collateral agent and collateral sub-agent
10.24**
Global Assignment Agreement, made on 29 July 2013, between Spies Hecker GmbH and Barclays Bank PLC, as
collateral agent and collateral sub-agent
10.25**
Global Assignment Agreement, made on 29 July 2013, between Standox GmbH and Barclays Bank PLC, as
collateral agent and collateral sub-agent
II-5
Table of Contents
E XHIBIT N O .
D ESCRIPTION OF E XHIBIT
10.26**
Partnership Interest Pledge Agreement, made on 29 July 2013, between Axalta Coating Systems Luxembourg
Holding 2 S.à r.l. (f/k/a Luxembourg Coatings S.à r.l.), Axalta Coating Systems Verwaltungs GmbH (f/k/a Flash
German Co. GmbH), Barclays Bank PLC, as collateral agent under the Credit Agreement, and Wilmington Trust,
National Association, as notes collateral agent under the EUR Notes Indenture
10.27**
Share Pledge Agreement, made on 24 July 2013, between Axalta Coating Systems Beteiligungs GmbH (f/k/a
Germany Coatings Co GmbH), Barclays Bank PLC, as collateral agent under the Credit Agreement, and Wilmington
Trust, National Association, as notes collateral agent under the EUR Notes Indenture
10.28**
Security Purpose Agreement, made on 29 July 2013, between Axalta Coating Systems Germany GmbH (f/k/a
DuPont Performance Coatings GmbH) and Barclays Bank PLC, as collateral agent and collateral sub-agent
10.29**
Security Transfer Agreement, made on 29 July 2013, between Axalta Coating Systems Germany GmbH (f/k/a
DuPont Performance Coatings GmbH) and Barclays Bank PLC, as collateral agent and collateral sub-agent
10.30**
Global Assignment Agreement, made on 1 July 2014, between Axalta Coating Systems Logistik Germany GmbH &
Co. KG and Barclays Bank PLC, as collateral agent and collateral sub-agent
10.31**
Partnership Interest Pledge Agreement, made on 1 July 2014, between Axalta Coating Systems Germany GmbH,
Axalta Coating Systems Verwaltungs GmbH (f/k/a Flash German Co. GmbH), Barclays Bank PLC, as collateral
agent under the Credit Agreement, and Wilmington Trust, National Association as collateral agent under the EUR
Note Indenture
10.32**
Account Pledge Agreement, made on 1 July 2014, between Axalta Coating Systems Logistik Germany GmbH & Co.
KG, Barclays Bank PLC, as collateral agent under the Credit Agreement, and Wilmington Trust, National
Association, as collateral agent under the EUR Notes Indenture
10.33**
Security Transfer Agreement, made on 1 July 2014, between Axalta Coating Systems Logistik Germany GmbH &
Co. KG and Barclays Bank PLC, as collateral agent and collateral sub-agent
10.34**
Pledge Agreement without Transfer of Possession, dated September 18, 2013, between Axalta Coating Systems
México, S. de R.L. de C.V. (f/k/a/ DuPont Performance Coatings México, S. de R.L. de C.V.) and Barclays Bank
PLC, as collateral agent
10.35**
Pledge Agreement without Transfer of Possession, dated September 18, 2013, between Axalta Coating Systems
Servicios México, S. de R.L. de C.V. (f/k/a/ DuPont Performance Coatings Servicios México, S. de R.L. de C.V.) and
Barclays Bank PLC, as collateral agent
10.36**
Equity Interest Pledge Agreement, dated September 18, 2013, among Axalta Coating Systems LA Holding II B.V.
(f/k/a DuPont Performance Coatings LA Holding II B.V.), Axalta Coating Systems México, S. de R.L. de C.V. (f/k/a/
DuPont Performance Coatings México, S. de R.L. de C.V.), Axalta Coating Systems Servicios México, S. de R.L. de
C.V. (f/k/a/ DuPont Performance Coatings Servicios México, S. de R.L. de C.V.) and Barclays Bank PLC, as
collateral agent
10.37**
Equity Interest Pledge Agreement, dated September 18, 2013, among Axalta Coating Systems LA Holding II B.V.
(f/k/a DuPont Performance Coatings LA Holding II B.V.), Axalta Coating Systems Servicios México, S. de R.L. de
C.V. (f/k/a/ DuPont Performance Coatings Servicios México, S. de R.L. de C.V.), Axalta Coating Systems México,
S. de R.L. de C.V. (f/k/a/ DuPont Performance Coatings México, S. de R.L. de C.V.) and Barclays Bank PLC, as
collateral agent
10.38**
Share Pledge Agreement, dated September 18, 2013, between Axalta Powder Coating Systems USA, Inc. (f/k/a
DuPont Powder Coatings USA, Inc.), Axalta Powder Coating Systems México, S.A. de C.V. (f/k/a DuPont Powder
Coatings de México, S.A. de C.V.) and Barclays Bank PLC, as collateral agent
II-6
Table of Contents
E XHIBIT N O .
D ESCRIPTION OF E XHIBIT
10.39**
Debenture, dated 1 February 2013, by Coatings Co (UK) Limited (n/k/a Axalta Coating Systems UK Holding
Limited), DuPont Performance Coatings (U.K.) Limited (n/k/a Axalta Coating Systems UK Limited), and DuPont
Powder Coatings UK Limited (n/k/a Axalta Powder Coating Systems UK Limited), in favour of Wilmington Trust,
National Association, as collateral agent appointed pursuant to the Secured Notes Indenture
10.40**
Debenture, dated 1 February 2013, by Coatings Co (UK) Limited (n/k/a Axalta Coating Systems UK Holding
Limited), DuPont Performance Coatings (U.K.) Limited (n/k/a Axalta Coating Systems UK Limited), and DuPont
Powder Coatings UK Limited (n/k/a Axalta Powder Coating Systems UK Limited), in favour of Barclays Bank PLC,
as collateral agent appointed pursuant to the Credit Agreement
10.41**
Security Over Shares Agreement, dated 1 February 2013, between Flash Lux Co S.à r.l. (n/k/a Axalta Coating
Systems Luxembourg Holding S.à r.l.) and Wilmington Trust, National Association, as collateral agent appointed
pursuant to the Secured Notes Indenture
10.42**
Security Over Shares Agreement, dated 1 February 2013, between Flash Lux Co S.à r.l. (n/k/a Axalta Coating
Systems Luxembourg Holding S.à r.l.) and Barclays Bank PLC, as collateral agent appointed pursuant to the Credit
Agreement
10.43**
Debenture, dated 25 March 2014, by Axalta Coating Systems U.K. (2) Limited in favour of Wilmington Trust,
National Association, as collateral agent under the Secured Notes Indenture
10.44**
Debenture, dated 25 March 2014, by Axalta Coating Systems U.K. (2) Limited in favour of Barclays Bank PLC, as
collateral agent appointed pursuant to the Credit Agreement
10.45**
Security Over Shares Agreement, dated 25 March 2014, between Axalta Coating Systems Belgium BVBA and
Wilmington Trust, National Association, as collateral agent appointed pursuant to the Secured Notes Indenture
10.46**
Security Over Shares Agreement, dated 25 March 2014, between Axalta Coating Systems Belgium BVBA and
Barclays Bank PLC, as collateral agent appointed pursuant to the Credit Agreement
10.47**
Amended and Restated Stockholders Agreement, dated July 31, 2013, among Axalta Coating Systems Bermuda Co.,
Ltd (n/k/a Axalta Coating Systems Ltd.), the Initial Carlyle Stockholders and the Management Stockholders party
thereto
10.48
Form of Indemnification Agreement
10.49**
Employment Agreement between Charles W. Shaver and Coatings Co. U.S. Inc., dated October 26, 2012
10.50**
Employment Agreement between Robert W. Bryant and Coatings Co. U.S. Inc., dated January 12, 2013
10.51**
Employment Agreement between Steven R. Markevich and Coatings Co. U.S. Inc., dated May 2, 2013
10.52**
Employment Agreement between Joseph F. McDougall and Coatings Co. U.S. Inc., dated May 1, 2013
10.53**
Employment Agreement between Michael Finn and Coatings Co. U.S. Inc., dated March 26, 2013
10.54**
Axalta Coating Systems Bermuda Co., Ltd. 2013 Equity Incentive Plan
10.55**
Form of Stock Option Agreement under the Axalta Coating Systems Bermuda Co., Ltd. 2013 Equity Incentive Plan
10.56
Axalta Coating Systems Ltd. 2014 Equity Incentive Plan
10.57
Form of Stock Option Agreement under the Axalta Coating Systems Ltd. 2014 Equity Incentive Plan
II-7
Table of Contents
E XHIBIT N O .
D ESCRIPTION OF E XHIBIT
10.58
Form of Restricted Stock Agreement under the Axalta Coating Systems Ltd. 2014 Equity Incentive Plan
10.59
Form of Restricted Stock Unit Agreement under the Axalta Coating Systems Ltd. 2014 Equity Incentive Plan
10.60**
Axalta Coating Systems LLC Retirement Savings Restoration Plan
10.61**
Axalta Coating Systems, LLC Nonqualified Deferred Compensation Plan
10.62
Form of Principal Stockholders Agreement
21.1
List of Subsidiaries
23.1
Consent of Conyers Dill & Pearman Pte. Ltd. (included in Exhibit 5.1)
23.2
Consent of PricewaterhouseCoopers LLP
23.3**
Consent of Orr & Boss, Inc.
24.1**
Powers of Attorney (included in the signature pages to this registration statement)
* To be filed by amendment.
** Previously filed.
(B)
Financial Statement Schedules
Item 17.
Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in
such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers, and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities
(other than the payment by us of expenses incurred or paid by a director, officer, or controlling person of us in the successful defense of any
action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, we will,
unless in the opinion of counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of
such issue.
We hereby undertake that:
(i)
for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(ii)
for purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-8
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 the registrant has duly caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the city of Philadelphia, state of Pennsylvania, on October 30, 2014.
AXALTA COATING SYSTEMS LTD.
By:
/s/ Charles W. Shaver
Charles W. Shaver
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities
and as of the dates indicated.
Signature
Title
Date
/s/ Charles W. Shaver
Charles W. Shaver
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
October 30, 2014
/s/ Robert W. Bryant
Robert W. Bryant
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
October 30, 2014
/s/ Sean M. Lannon
Sean M. Lannon
Vice President and Global Controller (Principal
Accounting Officer)
October 30, 2014
*
Orlando A. Bustos
Director
October 30, 2014
*
Robert M. McLaughlin
Director
October 30, 2014
*
Andreas C. Kramvis
Director
October 30, 2014
*
Martin W. Sumner
Director
October 30, 2014
*
Wesley T. Bieligk
Director
October 30, 2014
*
Gregor P. Böhm
Director
October 30, 2014
*
Allan M. Holt
Director
October 30, 2014
II-9
Table of Contents
Signature
*
Gregory S. Ledford
Title
Director
*By : /s/ Robert W. Bryant
Robert W. Bryant
Attorney-in-fact
II-10
Date
October 30, 2014
Table of Contents
EXHIBIT INDEX
E XHIBIT N O .
D ESCRIPTION OF E XHIBIT
1.1
Form of Underwriting Agreement
2.1**
Purchase Agreement, dated as of August 30, 2012, by and between E. I. du Pont de Nemours and Company and
Flash Bermuda Co. Ltd. (n/k/a Axalta Coating Systems Ltd.)
2.2**
Amendment to Purchase Agreement, dated as of January 31, 2013, by and between E. I. du Pont de Nemours and
Company and Flash Bermuda Co. Ltd. (n/k/a Axalta Coating Systems Ltd.)
3.1**
Amended Memorandum of Association of Axalta Coating Systems Ltd.
3.2
Form of Amended and Restated Bye-laws of Axalta Coating Systems Ltd.
4.1**
Indenture governing the 7.375% Senior Notes due 2021, dated February 1, 2013 (the “Dollar Senior Notes
Indenture”), among U.S. Coatings Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash
Dutch 2 B.V. (n/k/a Axalta Coating Systems Dutch Holding B B.V.) as Issuers, the Guarantors named therein and
Wilmington Trust, National Association, as Trustee
4.2**
Form of 7.375% Senior Note due 2021 (included in Exhibit 4.1)
4.3**
First Supplemental Indenture to the Dollar Senior Notes Indenture, dated April 26, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee
4.4**
First Supplemental Indenture to the Dollar Senior Notes Indenture, dated May 10, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee
4.5**
Third Supplemental Indenture to the Dollar Senior Notes Indenture, dated July 18, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee
4.6**
Fourth Supplemental Indenture to the Dollar Senior Notes Indenture, dated July 29, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee
4.7**
Fifth Supplemental Indenture to the Dollar Senior Notes Indenture, dated September 17, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee
4.8**
Sixth Supplemental Indenture to the Dollar Senior Notes Indenture dated September 18, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee
4.9**
Seventh Supplemental Indenture to the Dollar Senior Notes Indenture, dated December 27, 2013, among U.S.
Coatings Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta
Coating Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee
II-11
Table of Contents
E XHIBIT N O .
D ESCRIPTION OF E XHIBIT
4.10**
Eighth Supplemental Indenture to the Dollar Senior Notes Indenture, dated July 1, 2014, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee
4.11**
Indenture governing the 5.750% Senior Secured Notes due 2021, dated February 1, 2013 (the “Euro Senior Notes
Indenture”), among U.S. Coatings Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash
Dutch 2 B.V. (n/k/a Axalta Coating Systems Dutch Holding B B.V.) as Issuers, the Guarantors named therein,
Wilmington Trust, National Association, as Trustee and Collateral Agent, Citigroup Global Markets Deutschland
AG, as registrar, and Citibank B.A. London Branch, as Paying Agent and Authenticating Agent
4.12**
Form of 5.750% Senior Secured Note due 2021 (included in Exhibit 4.11)
4.13**
First Supplemental Indenture to the Euro Senior Notes Indenture, dated April 26, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee and Collateral Agent
4.14**
First Supplemental Indenture to the Euro Senior Notes Indenture, dated May 10, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee and Collateral Agent
4.15**
Third Supplemental Indenture to the Euro Senior Notes Indenture, dated July 18, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee and Collateral Agent
4.16**
Fourth Supplemental Indenture to the Euro Senior Notes Indenture, dated July 29, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee and Collateral Agent
4.17**
Fifth Supplemental Indenture to the Euro Senior Notes Indenture, dated September 17, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee and Collateral Agent
4.18**
Sixth Supplemental Indenture to the Euro Senior Notes Indenture, dated September 18, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee and Collateral Agent
4.19**
Seventh Supplemental Indenture to the Euro Senior Notes Indenture, dated December 27, 2013, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee and Collateral Agent
4.20**
Eighth Supplemental Indenture to the Euro Senior Notes Indenture, dated July 1, 2014, among U.S. Coatings
Acquisition Inc. (n/k/a Axalta Coating Systems U.S. Holdings, Inc.) and Flash Dutch 2 B.V. (n/k/a Axalta Coating
Systems Dutch Holding B B.V.), as Issuers, the Guarantors named therein and Wilmington Trust, National
Association, as Trustee and Collateral Agent
II-12
Table of Contents
E XHIBIT N O .
D ESCRIPTION OF E XHIBIT
4.21
Specimen Common Share Certificate
5.1
Opinion of Conyers Dill & Pearman Pte. Ltd.
10.1**
Credit Agreement, dated as of February 1, 2013 (the “Credit Agreement”), among Flash Dutch 2 B.V. (n/k/a Axalta
Coating Systems Dutch Holding B B.V.) and U.S. Coatings Acquisition Inc. (n/k/a Axalta Coating Systems U.S.
Holdings, Inc.), as Borrowers, Flash Dutch 1 B.V. (n/k/a Axalta Coating Systems Dutch Holding A B.V.) as
Holdings, Coatings Co. U.S. Inc. (n/k/a Axalta Coating Systems U.S., Inc.), as U.S. Holdings, Barclays Bank PLC as
Administrative Agent, Collateral Agent, Swing Line Lender and L/C Issuer, and the other Lenders party thereto
10.2**
Amendment No. 1 Agreement, to the Credit Agreement, dated as of May 24, 2013, among Flash Dutch 2 B.V. (n/k/a
Axalta Coating Systems Dutch Holding B B.V.) as Dutch Borrower, Axalta Coating Systems U.S. Holdings, Inc. as
U.S. Borrower and Barclays Bank PLC, as Administrative Agent
10.3**
Second Amendment to Credit Agreement, dated as of February 3, 2014, by and among Axalta Coating Systems
Dutch Holding B B.V. (the “Dutch Borrower”), and Axalta Coating Systems U.S. Holdings, Inc. (the “U.S.
Borrower” and together with the Dutch Borrower, collectively, the “Borrowers”), Axalta Coating Systems U.S., Inc.
(f/k/a Coatings Co. U.S. Inc.) (“U.S. Holdings”), Axalta Coating Systems Dutch Holding A B.V. (“Holdings”), and
Barclays Bank PLC, as administrative agent (in such capacity, the “Administrative Agent”), as collateral agent (in
such capacity, the “Collateral Agent”), and as designated 2014 Specified Refinancing Term Lender (in such capacity,
the “Designated 2014 Specified Refinancing Term Lender”)
10.4**
Security Agreement, dated February 1, 2013, among the Grantors referred to therein and Barclays Bank PLC, as
Collateral Agent
10.5**
Security Agreement, dated February 1, 2013, among the Grantors referred to therein and Wilmington Trust, National
Association, as Collateral Agent
10.6**
Intellectual Property Security Agreement, dated February 1, 2013, between U.S. Coatings IP Co. LLC (n/k/a Axalta
Coating Systems USA IP Co. LLC) and Barclays Bank PLC, as collateral agent
10.7**
Intellectual Property Security Agreement, dated February 1, 2013, between the U.S. Coatings IP Co. LLC (n/k/a
Axalta Coating Systems USA IP Co. LLC) and Wilmington Trust, National Association, as collateral agent
10.8**
Subsidiary Guaranty, dated as of February 1, 2013, among the Guarantors named therein, the Additional Guarantors
referred to therein and Barclays bank PLC as Administrative Agent
10.9**
Holdings Guaranty, dated as of February 1, 2013, between Flash Dutch 1 B.V. (n/k/a Axalta Coating Systems Dutch
Holding A B.V.) and Barclays Bank PLC as Administrative Agent
10.10**
First Lien Intercreditor Agreement, dated as of February 1, 2013, among Barclays Bank PLC as Bank Collateral
Agent under the Credit Agreement, and as Notes Foreign Collateral Agent under the Indenture, Wilmington Trust,
National Association, as Notes Collateral Agent under the Indenture, each Grantor party thereto and each Additional
Agent from time to time party thereto
10.11**
Share Pledge Agreement in respect of shares in DuPont Performance Coatings Belgium BVBA (n/k/a Axalta Coating
Systems Belgium BVBA), dated 1 February 2013, between Coatings Co (UK) Limited (n/k/a Axalta Coating
Systems UK Holding Limited), Teodur B.V. and Barclays Bank PLC, as collateral agent
10.12**
Share Pledge Agreement in respect of shares in DuPont Performance Coatings Belgium BVBA (n/k/a Axalta Coating
Systems Belgium BVBA), dated 1 February 2013, between Coatings Co (UK) Limited (n/k/a Axalta Coating
Systems UK Holding Limited), Teodur B.V. and Wilmington Trust, National Association, as collateral agent
II-13
Table of Contents
E XHIBIT N O .
D ESCRIPTION OF E XHIBIT
10.13**
Bank Accounts Pledge Agreement, entered into September 17, 2013, among Axalta Coating Systems Brasil Ltda.,
Wilmington Trust, National Association, as Notes Collateral Agent, and Barclays Bank PLC, as Collateral Agent
10.14**
Quota Pledge Agreement, entered into September 17, 2013, among Brazil Coatings Co. Participações Ltda., Axalta
Coating Systems Dutch Holding 2 B.V., Barclays Bank PLC, as Collateral Agent, and Wilmington Trust, National
Association, as Notes Collateral Agent
10.15**
Security Agreement, dated as of May 10, 2013, between Axalta Coating Systems Canada Company (f/k/a DuPont
Performance Coatings Canada Company), Flash Lux Co S.à r.l. (n/k/a Axalta Coating Systems Luxembourg Holding
S.à r.l.), the additional grantors from time to time party thereto, and Barclays Bank PLC, as collateral agent for the
secured parties
10.16**
Security Agreement, dated as of May 10, 2013, between Axalta Coating Systems Canada Company (f/k/a DuPont
Performance Coatings Canada Company), Flash Lux Co S.à r.l. (n/k/a Axalta Coating Systems Luxembourg Holding
S.à r.l.), the additional grantors from time to time party thereto, and Wilmington Trust, National Association, as
collateral agent for the secured parties
10.17**
Securities Account Pledge Agreement in relation to the shares issued by France Coatings Co. (n/k/a Axalta Coating
Systems France Holding SAS), dated 26 April 2013, between Flash Lux Co S.à r.l. (n/k/a Axalta Coating Systems
Luxembourg Holding S.à r.l.), Barclays Bank PLC, as notes foreign collateral agent, and France Coatings Co. (n/k/a
Axalta Coating Systems France Holding SAS)
10.18**
Pledge of Receivables Agreement, dated 26 April 2013, between Lux FinCo Coatings S.à r.l. (n/k/a Axalta Coating
Systems Finance 1 S.à r.l.) and Barclays Bank PLC, as notes foreign collateral agent
10.19**
Securities Account Pledge Agreement in relation to the shares issued by DuPont Performance Coatings France SAS
(n/k/a Axalta Coating Systems France SAS), dated 26 April 2013, between France Coatings Co. (n/k/a Axalta
Coating Systems France Holding SAS), Barclays Bank PLC, as notes foreign collateral agent, and DuPont
Performance Coatings France SAS (n/k/a Axalta Coating Systems France SAS)
10.20**
Account Pledge Agreement, made on 29 July 2013, between Axalta Coating Systems Verwaltungs GmbH (f/k/a
Flash German Co. GmbH), Axalta Coating Systems Deutschland Holding GmbH & Co. KG (f/k/a Germany Coatings
GmbH & Co. KG), Axalta Coating Systems Beteiligungs GmbH (f/k/a Germany Coatings Co GmbH), Standox
GmbH, Spies Hecker GmbH, Axalta Coating Systems Germany GmbH (f/k/a DuPont Performance Coatings GmbH),
Barclays Bank PLC, as collateral agent under the Credit Agreement, and Wilmington Trust, National Association, as
notes collateral agent under the EUR Notes Indenture
10.21**
Global Assignment Agreement, made on 29 July 2013, between Axalta Coating Systems Deutschland Holding
GmbH & Co. KG (f/k/a Germany Coatings GmbH & Co. KG) and Barclays Bank PLC, as collateral agent and
collateral sub-agent
10.22**
Global Assignment Agreement, made on 29 July 2013, between Axalta Coating Systems Beteiligungs GmbH (f/k/a
Germany Coatings Co GmbH) and Barclays Bank PLC, as collateral agent and collateral sub-agent
10.23**
Global Assignment Agreement, made on 29 July 2013, between Axalta Coating Systems Germany GmbH (f/k/a
DuPont Performance Coatings GmbH) and Barclays Bank PLC, as collateral agent and collateral sub-agent
10.24**
Global Assignment Agreement, made on 29 July 2013, between Spies Hecker GmbH and Barclays Bank PLC, as
collateral agent and collateral sub-agent
II-14
Table of Contents
E XHIBIT N O .
D ESCRIPTION OF E XHIBIT
10.25**
Global Assignment Agreement, made on 29 July 2013, between Standox GmbH and Barclays Bank PLC, as
collateral agent and collateral sub-agent
10.26**
Partnership Interest Pledge Agreement, made on 29 July 2013, between Axalta Coating Systems Luxembourg
Holding 2 S.à r.l. (f/k/a Luxembourg Coatings S.à r.l.), Axalta Coating Systems Verwaltungs GmbH (f/k/a Flash
German Co. GmbH), Barclays Bank PLC, as collateral agent under the Credit Agreement, and Wilmington Trust,
National Association, as notes collateral agent under the EUR Notes Indenture
10.27**
Share Pledge Agreement, made on 24 July 2013, between Axalta Coating Systems Beteiligungs GmbH (f/k/a
Germany Coatings Co GmbH), Barclays Bank PLC, as collateral agent under the Credit Agreement, and Wilmington
Trust, National Association, as notes collateral agent under the EUR Notes Indenture
10.28**
Security Purpose Agreement, made on 29 July 2013, between Axalta Coating Systems Germany GmbH (f/k/a
DuPont Performance Coatings GmbH) and Barclays Bank PLC, as collateral agent and collateral sub-agent
10.29**
Security Transfer Agreement, made on 29 July 2013, between Axalta Coating Systems Germany GmbH (f/k/a
DuPont Performance Coatings GmbH) and Barclays Bank PLC, as collateral agent and collateral sub-agent
10.30**
Global Assignment Agreement, made on 1 July 2014, between Axalta Coating Systems Logistik Germany GmbH &
Co. KG and Barclays Bank PLC, as collateral agent and collateral sub-agent
10.31**
Partnership Interest Pledge Agreement, made on 1 July 2014, between Axalta Coating Systems Germany GmbH,
Axalta Coating Systems Verwaltungs GmbH (f/k/a Flash German Co. GmbH), Barclays Bank PLC, as collateral
agent under the Credit Agreement, and Wilmington Trust, National Association as collateral agent under the EUR
Note Indenture
10.32**
Account Pledge Agreement, made on 1 July 2014, between Axalta Coating Systems Logistik Germany GmbH & Co.
KG, Barclays Bank PLC, as collateral agent under the Credit Agreement, and Wilmington Trust, National
Association, as collateral agent under the EUR Notes Indenture
10.33**
Security Transfer Agreement, made on 1 July 2014, between Axalta Coating Systems Logistik Germany GmbH &
Co. KG and Barclays Bank PLC, as collateral agent and collateral sub-agent
10.34**
Pledge Agreement without Transfer of Possession, dated September 18, 2013, between Axalta Coating Systems
México, S. de R.L. de C.V. (f/k/a/ DuPont Performance Coatings México, S. de R.L. de C.V.) and Barclays Bank
PLC, as collateral agent
10.35**
Pledge Agreement without Transfer of Possession, dated September 18, 2013, between Axalta Coating Systems
Servicios México, S. de R.L. de C.V. (f/k/a/ DuPont Performance Coatings Servicios México, S. de R.L. de C.V.) and
Barclays Bank PLC, as collateral agent
10.36**
Equity Interest Pledge Agreement, dated September 18, 2013, among Axalta Coating Systems LA Holding II B.V.
(f/k/a DuPont Performance Coatings LA Holding II B.V.), Axalta Coating Systems México, S. de R.L. de C.V. (f/k/a/
DuPont Performance Coatings México, S. de R.L. de C.V.), Axalta Coating Systems Servicios México, S. de R.L. de
C.V. (f/k/a/ DuPont Performance Coatings Servicios México, S. de R.L. de C.V.) and Barclays Bank PLC, as
collateral agent
10.37**
Equity Interest Pledge Agreement, dated September 18, 2013, among Axalta Coating Systems LA Holding II B.V.
(f/k/a DuPont Performance Coatings LA Holding II B.V.), Axalta Coating Systems Servicios México, S. de R.L. de
C.V. (f/k/a/ DuPont Performance Coatings Servicios México, S. de R.L. de C.V.), Axalta Coating Systems México,
S. de R.L. de C.V. (f/k/a/ DuPont Performance Coatings México, S. de R.L. de C.V.) and Barclays Bank PLC, as
collateral agent
II-15
Table of Contents
E XHIBIT N O .
D ESCRIPTION OF E XHIBIT
10.38**
Share Pledge Agreement, dated September 18, 2013, between Axalta Powder Coating Systems USA, Inc. (f/k/a
DuPont Powder Coatings USA, Inc.), Axalta Powder Coating Systems México, S.A. de C.V. (f/k/a DuPont Powder
Coatings de México, S.A. de C.V.) and Barclays Bank PLC, as collateral agent
10.39**
Debenture, dated 1 February 2013, by Coatings Co (UK) Limited (n/k/a Axalta Coating Systems UK Holding
Limited), DuPont Performance Coatings (U.K.) Limited (n/k/a Axalta Coating Systems UK Limited), and DuPont
Powder Coatings UK Limited (n/k/a Axalta Powder Coating Systems UK Limited), in favour of Wilmington Trust,
National Association, as collateral agent appointed pursuant to the Secured Notes Indenture
10.40**
Debenture, dated 1 February 2013, by Coatings Co (UK) Limited (n/k/a Axalta Coating Systems UK Holding
Limited), DuPont Performance Coatings (U.K.) Limited (n/k/a Axalta Coating Systems UK Limited), and DuPont
Powder Coatings UK Limited (n/k/a Axalta Powder Coating Systems UK Limited), in favour of Barclays Bank PLC,
as collateral agent appointed pursuant to the Credit Agreement
10.41**
Security Over Shares Agreement, dated 1 February 2013, between Flash Lux Co S.à r.l. (n/k/a Axalta Coating
Systems Luxembourg Holding S.à r.l.) and Wilmington Trust, National Association, as collateral agent appointed
pursuant to the Secured Notes Indenture
10.42**
Security Over Shares Agreement, dated 1 February 2013, between Flash Lux Co S.à r.l. (n/k/a Axalta Coating
Systems Luxembourg Holding S.à r.l.) and Barclays Bank PLC, as collateral agent appointed pursuant to the Credit
Agreement
10.43**
Debenture, dated 25 March 2014, by Axalta Coating Systems U.K. (2) Limited in favour of Wilmington Trust,
National Association, as collateral agent under the Secured Notes Indenture
10.44**
Debenture, dated 25 March 2014, by Axalta Coating Systems U.K. (2) Limited in favour of Barclays Bank PLC, as
collateral agent appointed pursuant to the Credit Agreement
10.45**
Security Over Shares Agreement, dated 25 March 2014, between Axalta Coating Systems Belgium BVBA and
Wilmington Trust, National Association, as collateral agent appointed pursuant to the Secured Notes Indenture
10.46**
Security Over Shares Agreement, dated 25 March 2014, between Axalta Coating Systems Belgium BVBA and
Barclays Bank PLC, as collateral agent appointed pursuant to the Credit Agreement
10.47**
Amended and Restated Stockholders Agreement, dated July 31, 2013, among Axalta Coating Systems Bermuda Co.,
Ltd. (n/k/a Axalta Coating Systems Ltd.), the Initial Carlyle Stockholders and the Management Stockholders party
thereto
10.48
Form of Indemnification Agreement
10.49**
Employment Agreement between Charles W. Shaver and Coatings Co. U.S. Inc., dated October 26, 2012
10.50**
Employment Agreement between Robert W. Bryant and Coatings Co. U.S. Inc., dated January 12, 2013
10.51**
Employment Agreement between Steven R. Markevich and Coatings Co. U.S. Inc., dated May 2, 2013
10.52**
Employment Agreement between Joseph F. McDougall and Coatings Co. U.S. Inc., dated May 1, 2013
10.53**
Employment Agreement between Michael Finn and Coatings Co. U.S. Inc., dated March 26, 2013
10.54**
Axalta Coating Systems Bermuda Co., Ltd. 2013 Equity Incentive Plan
II-16
Table of Contents
E XHIBIT N O .
D ESCRIPTION OF E XHIBIT
10.55**
Form of Stock Option Agreement under the Axalta Coating Systems Bermuda Co., Ltd. 2013 Equity Incentive Plan
10.56
Axalta Coating Systems Ltd. 2014 Equity Incentive Plan
10.57
Form of Stock Option Agreement under the Axalta Coating Systems Ltd. 2014 Equity Incentive Plan
10.58
Form of Restricted Stock Agreement under the Axalta Coating Systems Ltd. 2014 Equity Incentive Plan
10.59
Form of Restricted Stock Unit Agreement under the Axalta Coating Systems Ltd. 2014 Equity Incentive Plan
10.60**
Axalta Coating Systems LLC Retirement Savings Restoration Plan
10.61**
Axalta Coating Systems, LLC Nonqualified Deferred Compensation Plan
10.62
Form of Principal Stockholders Agreement
21.1
List of Subsidiaries
23.1
Consent of Conyers Dill & Pearman Pte. Ltd. (included in Exhibit 5.1)
23.2
Consent of PricewaterhouseCoopers LLP
23.3**
Consent of Orr & Boss, Inc.
24.1**
Powers of Attorney (included in the signature pages to this registration statement)
*
**
To be filed by amendment.
Previously filed.
II-17
Exhibit 1.1
AXALTA COATING SYSTEMS LTD.
[•] Common Shares, $1.00 par value
Underwriting Agreement
[•], 2014
CITIGROUP GLOBAL MARKETS INC.
GOLDMAN, SACHS & CO.
DEUTSCHE BANK SECURITIES INC.
J.P. MORGAN SECURITIES LLC
As Representatives of
the several Underwriters listed in
Schedule 1 hereto
c/o Citigroup Global Markets Inc.
388 Greenwich Street
New York, NY 10013
Goldman, Sachs & Co.
200 West Street
New York, NY 10282
Deutsche Bank Securities Inc.
60 Wall Street
New York, NY 10005
J.P. Morgan Securities LLC
383 Madison Avenue
New York, NY 10179
Ladies and Gentlemen:
Axalta Coating Systems Ltd., a company incorporated and organized under the laws of Bermuda (the “ Company ”), proposes to issue and
sell to the several Underwriters listed in Schedule 1 hereto (the “ Underwriters ”), for whom you are acting as representatives (the “
Representatives ”), an aggregate of [•] common shares, par value $1.00 per share, of the Company, and the selling shareholders listed in
Schedule 2 hereto, each a member of the Company (the “ Selling Shareholders ”) propose to sell to the several Underwriters an aggregate of [•]
common shares of the Company (collectively, the “ Underwritten Shares ”). In addition, the Selling Shareholders propose to sell, at the option of
the Underwriters, up to an aggregate of [•] additional common shares of the Company (collectively, the “ Option Shares ”). The Underwritten
Shares and the Option Shares are herein referred to as the “ Shares ”. The common shares of the Company to be outstanding after giving effect to
the sale of the Shares are referred to herein as the “ Stock ”.
The Company and each Selling Shareholder hereby confirm their agreement with the several Underwriters concerning the purchase and
sale of the Shares, as follows:
1. Registration Statement . The Company has prepared and filed with the Securities and Exchange Commission (the “ Commission ”)
under the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the “ Securities Act ”), a
registration statement on Form S-1 (File No. 333-198271), including a prospectus, relating to the Shares. Such registration statement, as
amended at the time it became effective, including the information, if any, deemed pursuant to Rule 430A, 430B or 430C under the Securities
Act to be part of the registration statement at the time of its effectiveness (“ Rule 430 Information ”), is referred to herein as the “ Registration
Statement ”; and as used herein, the term “ Preliminary Prospectus ” means each prospectus included in such registration statement (and any
amendments thereto) before effectiveness, any prospectus filed with the Commission pursuant to Rule 424(a) under the Securities Act and the
prospectus included in the Registration Statement at the time of its effectiveness that omits Rule 430 Information, and the term “ Prospectus ”
means the prospectus in the form first used (or made available upon request of purchasers pursuant to Rule 173 under the Securities Act) in
connection with confirmation of sales of the Shares. If the Company has filed an abbreviated registration statement pursuant to Rule 462(b)
under the Securities Act (the “ Rule 462 Registration Statement ”), then any reference herein to the term “Registration Statement” shall be
deemed to include such Rule 462 Registration Statement. Any reference to the Registration Statement shall be deemed to refer to and include the
exhibits filed therewith. Capitalized terms used but not defined herein shall have the meanings given to such terms in the Registration Statement
and the Prospectus.
At or prior to the Applicable Time (as defined below), the Company had prepared the following information (collectively with the pricing
information set forth on Annex B, the “ Pricing Disclosure Package ”): a Preliminary Prospectus dated [•], 2014 and each “free-writing
prospectus” (as defined pursuant to Rule 405 under the Securities Act) listed on Annex B hereto.
“ Applicable Time ” means [•], New York City time, on [•], 2014.
2. Purchase of the Shares by the Underwriters . (a) The Company agrees to issue and sell, and each Selling Shareholder agrees, severally
and not jointly, to sell, its respective portion of the Underwritten Shares to the several Underwriters as provided in this Agreement, and each
Underwriter, on the basis of the representations, warranties and agreements set forth herein and subject to the conditions set forth herein, agrees,
severally and not jointly, to purchase at a price per share (the “ Purchase Price ”) of $[•] from the Company the respective number of
Underwritten Shares set forth opposite such Underwriter’s name in Schedule 1 hereto and from the Selling Shareholders the respective number
of Underwritten Shares set forth opposite such Underwriter’s name in Schedule 3 hereto.
In addition, each Selling Shareholder agrees as and to the extent indicated in Schedule 3 hereto, to sell the Option Shares to the several
Underwriters as provided in this Agreement, and the Underwriters, on the basis of the representations, warranties and agreements set forth herein
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and subject to the conditions set forth herein, shall have the option to purchase, severally and not jointly, from the Selling Shareholders at the
Purchase Price less an amount per share equal to any dividends or distributions declared by the Company and payable on the Underwritten
Shares but not payable on the Option Shares. If any Option Shares are to be purchased, the number of Option Shares to be purchased by each
Underwriter shall be the number of Option Shares that bears the same ratio to the aggregate number of Option Shares being purchased as the
number of Underwritten Shares set forth opposite the name of such Underwriter in Schedule 3 hereto (or such number increased as set forth in
Section 12 hereof) bears to the aggregate number of Underwritten Shares being purchased from the Company and the Selling Shareholders by
the several Underwriters, subject, however, to such adjustments to eliminate any fractional Shares as the Representatives in their sole discretion
shall make.
The Underwriters may exercise the option to purchase Option Shares at any time in whole, or from time to time in part, on or before the
thirtieth day following the date of the Prospectus, by written notice from the Representatives to the Company and the Selling Shareholders (with
a courtesy copy of such notice delivered to Latham & Watkins LLP). Such notice shall set forth the aggregate number of Option Shares as to
which the option is being exercised and the date and time when the Option Shares are to be delivered and paid for, which may be the same date
and time as the Closing Date (as hereinafter defined) but shall not be earlier than the Closing Date or later than the tenth full business day (as
hereinafter defined) after the date of such notice (unless such time and date are postponed in accordance with the provisions of Section 12
hereof). Any such notice shall be given at least two business days prior to the date and time of delivery specified therein.
(a) The Company and the Selling Shareholders understand that the Underwriters intend to make a public offering of the Shares as soon
after the effectiveness of this Agreement as in the judgment of the Representatives is advisable, and initially to offer the Shares on the terms set
forth in the Prospectus. The Company and the Selling Shareholders acknowledge and agree that the Underwriters may offer and sell Shares to or
through any affiliate of an Underwriter.
(b) Payment for the Shares shall be made by wire transfer in immediately available funds to the accounts specified by the Company and the
Selling Shareholders, in the case of the Underwritten Shares, at the offices of Cravath, Swaine & Moore LLP, 825 Eighth Avenue, New York,
NY 10019 at 10:00 A.M., New York City time, on [•], 2014, or at such other time or place on the same or such other date, not later than the fifth
business day thereafter, as the Representatives, the Company and the Selling Shareholders may agree upon in writing or, in the case of the
Option Shares, on the date and at the time and place specified by the Representatives in the written notice of the Underwriters’ election to
purchase such Option Shares. The time and date of such payment for the Underwritten Shares is referred to herein as the “ Closing Date ”, and
the time and date for such payment for the Option Shares, if other than the Closing Date, is herein referred to as the “ Additional Closing Date ”.
Payment for the Shares to be purchased on the Closing Date or the Additional Closing Date, as the case may be, shall be made against
delivery to the Representatives for the respective accounts of the several Underwriters of the Shares to be purchased on such date or the
Additional
-3-
Closing Date, as the case may be, with any transfer taxes payable in connection with the initial sale of such Shares duly paid by the Company
and the Selling Shareholders, as applicable. Delivery of the Shares shall be made through the facilities of The Depository Trust Company (“
DTC ”) unless the Representatives shall otherwise instruct. The certificates for the Shares, in the event the Company or the Selling Shareholders
choose to deliver such Shares in physical form, will be made available for inspection and packaging by the Representatives at the office of DTC
or its designated custodian not later than 1:00 P.M., New York City time, on the business day prior to the Closing Date or the Additional Closing
Date, as the case may be.
(c) Each of the Company and the Selling Shareholders acknowledges and agrees that the Underwriters are acting solely in the capacity of
an arm’s length contractual counterparty to the Company and the Selling Shareholders with respect to the offering of Shares contemplated
hereby (including in connection with determining the terms of the offering) and not as a financial advisor or a fiduciary to, or an agent of, the
Company, the Selling Shareholders or any other person. Additionally, neither the Representatives nor any other Underwriter is advising the
Company, the Selling Shareholders or any other person as to any legal, tax, investment, accounting or regulatory matters in any jurisdiction. The
Company and the Selling Shareholders shall consult with their own advisors concerning such matters and shall be responsible for making its
own independent investigation and appraisal of the transactions contemplated hereby, and the Underwriters shall have no responsibility or
liability to the Company or the Selling Shareholders with respect thereto. Any review by the Underwriters of the Company, the transactions
contemplated hereby or other matters relating to such transactions will be performed solely for the benefit of the Underwriters and shall not be
on behalf of the Company or the Selling Shareholders.
3. Representations and Warranties of the Company . The Company represents and warrants to each Underwriter and each Selling
Shareholder that:
(a) Preliminary Prospectus. No order preventing or suspending the use of any Preliminary Prospectus has been issued by the
Commission, and each Preliminary Prospectus included in the Pricing Disclosure Package, at the time of filing thereof, complied in all
material respects with the Securities Act, and no Preliminary Prospectus, at the time of filing thereof, contained any untrue statement of a
material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided that the Company makes no representation and warranty with respect to any statements or
omissions made in reliance upon and in conformity with information furnished to the Company in writing by (i) any Underwriter through
the Representatives expressly for use in any Preliminary Prospectus, it being understood and agreed that the only such information
furnished by any Underwriter consists of the information described as such in Section 9(c) hereof or (ii) the Selling Shareholders expressly
for use in the Preliminary Prospectus, it being understood and agreed that the only such information furnished by any Selling Shareholder
consists of (A) the legal name and address of such Selling Shareholder set forth in the footnote relating to such Selling Shareholder under
the caption “Principal and Selling Shareholders” and (B) the number of common shares owned by such Selling Shareholder before and
after the offering (excluding percentages) that appears in the table (and corresponding footnotes) under the caption “Principal and Selling
Shareholders” (the “ Selling Shareholders Information ”).
-4-
(b) Pricing Disclosure Package . The Pricing Disclosure Package as of the Applicable Time did not, and as of the Closing Date and
as of the Additional Closing Date, as the case may be, will not, contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading;
provided that the Company makes no representation or warranty with respect to any statements or omissions made in reliance upon and in
conformity with information furnished to the Company in writing by (i) any Underwriter through the Representatives expressly for use in
such Pricing Disclosure Package, it being understood and agreed that the only such information furnished by any Underwriter consists of
the information described as such in Section 9(c) hereof or (ii) the Selling Shareholders expressly for use in the Pricing Disclosure
Package, it being understood and agreed that the only such information furnished by the Selling Shareholders consists of the Selling
Shareholders Information.
(c) Issuer Free Writing Prospectus. Other than the Registration Statement, the Preliminary Prospectus and the Prospectus, the
Company (including its agents and representatives, other than the Underwriters in their capacity as such) has not prepared, used,
authorized, approved or referred to and will not prepare, use, authorize, approve or refer to any “written communication” (as defined in
Rule 405 under the Securities Act) that constitutes an offer to sell or solicitation of an offer to buy the Shares (each such communication by
the Company or its agents and representatives (other than a communication referred to in clause (i) below) an “ Issuer Free Writing
Prospectus ”) other than (i) any document not constituting a prospectus pursuant to Section 2(a)(10)(a) of the Securities Act or Rule 134
under the Securities Act or (ii) the documents listed on Annex B hereto, each electronic road show and any other written communications
approved in writing in advance by the Representatives. Each such Issuer Free Writing Prospectus complied in all material respects with the
Securities Act, has been or will be (within the time period specified in Rule 433) filed in accordance with the Securities Act (to the extent
required thereby) and, when taken together with the Preliminary Prospectus accompanying, or delivered prior to delivery of, such Issuer
Free Writing Prospectus, did not, and as of the Closing Date and as of the Additional Closing Date, as the case may be, will not, contain
any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided that the Company makes no representation and warranty with
respect to any statements or omissions made in each such Issuer Free Writing Prospectus or Preliminary Prospectus in reliance upon and in
conformity with information furnished to the Company in writing by (i) any Underwriter through the Representatives expressly for use in
such Issuer Free Writing Prospectus or Preliminary Prospectus, it being understood and agreed that the only such information furnished by
any Underwriter consists of the information described as such in Section 9(c) hereof (ii) the Selling Shareholders expressly for use in such
Issuer Free Writing Prospectus or Preliminary Prospectus, it being understood and agreed that the only such information furnished by the
Selling Shareholders consists of the Selling Shareholders Information.
-5-
(d) Registration Statement and Prospectus. The Registration Statement has been declared effective by the Commission. No order
suspending the effectiveness of the Registration Statement has been issued by the Commission, and no proceeding for that purpose or
pursuant to Section 8A of the Securities Act against the Company or related to the offering of the Shares has been initiated or, to the
Company’s knowledge, threatened by the Commission; as of the applicable effective date of the Registration Statement and any posteffective amendment thereto, the Registration Statement and any such post-effective amendment complied and will comply in all material
respects with the Securities Act, and did not and will not contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements therein not misleading; and as of the date of the Prospectus and
any amendment or supplement thereto and as of the Closing Date and as of the Additional Closing Date, as the case may be, the Prospectus
will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading; provided that the Company makes no representation and
warranty with respect to any statements or omissions made in reliance upon and in conformity with information furnished to the Company
in writing by (i) any Underwriter through the Representatives expressly for use in the Registration Statement and the Prospectus and any
amendment or supplement thereto, it being understood and agreed that the only such information furnished by any Underwriter consists of
the information described as such in Section 9(c) hereof or (ii) the Selling Shareholders expressly for use in the Registration Statement and
the Prospectus and any amendment or supplement thereto, it being understood and agreed that the only such information furnished by the
Selling Shareholders consists of the Selling Shareholders Information.
(e) Financial Statements. The financial statements and the related notes thereto of the Company and its consolidated subsidiaries and
the DuPont Performance Coatings business (the “ Predecessor ”) and its consolidated subsidiaries included in each of the Registration
Statement, the Pricing Disclosure Package and the Prospectus comply in all material respects with the applicable requirements of the
Securities Act and present fairly the financial position of the Company and its consolidated subsidiaries and the Predecessor and its
consolidated subsidiaries, respectively, as of the dates indicated and the results of their operations and the changes in their cash flows for
the periods specified; such financial statements have been prepared in conformity with generally accepted accounting principles in the
United States applied on a consistent basis throughout the periods covered thereby, except as may be expressly stated in the related notes
thereto, and any supporting schedules included in the Registration Statement present fairly, in all material respects, the information
required to be stated therein; and the other financial information included in each of the Registration Statement, the Pricing Disclosure
Package and the Prospectus has been derived from the accounting records of the Company and its consolidated subsidiaries and the
Predecessor and its consolidated subsidiaries, respectively, and presents fairly, in all material respects, the information
-6-
shown thereby; and the pro forma financial information and the related notes thereto included in the Registration Statement, the Pricing
Disclosure Package and the Prospectus have been prepared in accordance with the Commission’s rules and regulations and guidelines with
respect to pro forma financial information and the assumptions underlying such pro forma financial information set forth in the
Registration Statement, the Pricing Disclosure Package and the Prospectus are reasonable to give effect to the transactions and
circumstances referred to therein.
(f) No Material Adverse Change. Except as set forth in the Registration Statement, the Pricing Disclosure Package and the
Prospectus, since the date of the most recent financial statements of the Company and its subsidiaries included in each of the Registration
Statement, the Pricing Disclosure Package and the Prospectus (i) there has not been any change in the capital stock of the Company (other
than (i) adjustments of, distributions made on or exercises of the Company’s outstanding equity awards and (ii) the grant of awards under
Company Stock Plans (as defined herein), in each case, as described in the Registration Statement, the Pricing Disclosure Package and the
Prospectus) or material change in the long-term debt of the Company or any of its subsidiaries (on a consolidated basis), or any dividend or
distribution of any kind declared, set aside for payment, paid or made by the Company on any class of capital stock, or any material
adverse change, or any development involving a prospective material adverse change, in or affecting the business, properties, consolidated
financial position or results of operations of the Company and its subsidiaries taken as a whole; (ii) neither the Company nor any of its
subsidiaries has entered into any transaction or agreement or incurred any liability or obligation, direct or contingent, that, in either case,
the Company would be required to report under Item 1.01 or Item 2.03 of Form 8-K (were the Company to be subject to the reporting
requirements under the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder
(collectively, the “ Exchange Act ”)) that has not been disclosed prior to the date of this Agreement; and (iii) neither the Company nor any
of its Subsidiaries (as defined below) has sustained any material loss or interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor disturbance or dispute or any action, order or decree of any court or
arbitrator or governmental or regulatory authority.
(g) Organization and Good Standing. Each of the Company and its significant subsidiaries (as such term is defined in Rule 1-02 of
Regulation S-X, each a “ Subsidiary ” and collectively, the “ Subsidiaries ”) have been duly organized and are validly existing and in good
standing under the laws of their respective jurisdictions of organization, are duly qualified to do business and are in good standing in each
other jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such
qualification, and have all power and authority necessary to own or lease their respective properties and to conduct the businesses in which
they are engaged, except where the failure to be so qualified, in good standing or have such power or authority would not, individually or
in the aggregate, reasonably be expected to have a material adverse effect on the business, properties, consolidated financial position or
results of operations of the Company and its subsidiaries taken as a whole (a “ Material Adverse Effect ”) or on the performance by the
Company of its obligations under this Agreement. The subsidiaries listed on Schedule 4 to this Agreement are the only significant
subsidiaries of the Company.
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(h) Capitalization. The Company had an authorized capitalization as set forth in each of the Registration Statement, the Pricing
Disclosure Package and the Prospectus under the heading “Capitalization” as of the date(s) indicated; all the outstanding shares of capital
stock of the Company (including the Shares to be sold by the Selling Shareholders) have been duly authorized and validly issued and are
fully paid and non-assessable and are not subject to any pre-emptive or similar rights; except as described in or expressly contemplated by
the Pricing Disclosure Package and the Prospectus, there are no outstanding rights (including, without limitation, pre-emptive rights),
warrants or options to acquire, or instruments convertible into or exchangeable for, any shares of capital stock or other equity interest in the
Company or any of its subsidiaries, or any contract, commitment, agreement, understanding or arrangement of any kind relating to the
issuance of any capital stock of the Company or any such subsidiary, any such convertible or exchangeable securities or any such rights,
warrants or options; the capital stock of the Company conforms in all material respects to the description thereof contained in the
Registration Statement, the Pricing Disclosure Package and the Prospectus; and all the outstanding shares of capital stock or other equity
interests of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable (except as
otherwise described in each of the Registration Statement, the Pricing Disclosure Package and the Prospectus) and are owned directly or
indirectly by the Company, free and clear of any lien, charge, encumbrance, security interest, restriction on voting or transfer or any other
claim of any third party (other than those incurred in connection with the 5.750% senior secured notes due 2021 issued by U.S. Coatings
Acquisition Inc. and Flash Dutch 2 B.V. (the “ Euro Senior Notes ”) and the Senior Secured Credit Facilities (as defined in the Registration
Statement) or other Liens described in the Registration Statement, the Pricing Disclosure Package and the Prospectus).
(i) Underwriting Agreement. This Agreement has been duly authorized, executed and delivered by the Company.
(j) The Shares. The Shares to be issued and sold by the Company hereunder have been duly authorized by the Company and, when
issued and delivered and paid for as provided herein, will be duly and validly issued, will be fully paid and nonassessable and will
conform, in all material respects, to the descriptions thereof in the Registration Statement, the Pricing Disclosure Package and the
Prospectus; and the issuance of the Shares is not subject to any preemptive or similar rights.
(k) No Violation or Default. Neither the Company nor any of the Company’s subsidiaries is (i) in violation of its charter or by-laws
or similar organizational documents; (ii) in default, and no event has occurred that, with notice or lapse of time or both, would constitute
such a default, in the due performance or observance of any term, covenant or condition contained in any indenture, mortgage, deed of
trust, loan
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agreement or other agreement or instrument to which the Company or any of the Company’s subsidiaries is a party or by which the
Company or any of the Company’s subsidiaries is bound or to which any of the property or assets of the Company or any of the
Company’s subsidiaries is subject; or (iii) in violation of any applicable law or statute or any judgment, order, rule or regulation of any
court or arbitrator or governmental or regulatory authority, except, in the case of clauses (i) (solely with respect to the Company’s
subsidiaries that are not Subsidiaries), (ii) and (iii) above, for any such default or violation that would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
(l) No Conflicts. The execution, delivery and performance by the Company of the Agreement and compliance by the Company with
the terms thereof, the issuance and sale of the Shares and the consummation by the Company of the transactions contemplated by this
Agreement will not (i) conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or
result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the
Company’s subsidiaries pursuant to, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the
Company or any of the Company’s subsidiaries is a party or by which the Company or any of the Company’s subsidiaries is bound or to
which any of the property or assets of the Company or any of the Company’s subsidiaries is subject, (ii) result in any violation of the
provisions of the charter or by-laws or similar organizational documents of the Company or any of the Company’s Subsidiaries or
(iii) result in the violation of any law or statute or any judgment, order, rule or regulation of any court or arbitrator or governmental or
regulatory authority, except, in the case of clauses (i) and (iii) above, for any such conflict, breach, violation or default that would not,
individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(m) No Consents Required. No consent, approval, authorization, order, registration or qualification of or with any court or arbitrator
or governmental or regulatory authority is required for the execution, delivery and performance by the Company of this Agreement, the
issuance and sale of the Shares, and compliance by, the Company with the terms thereof and the consummation by it of the transactions
contemplated by this Agreement, except (i) as have been obtained or made, (ii) for the registration of the Shares under the Securities Act,
(iii) for such consents, approvals, authorizations, orders and registrations or qualifications as may be required by the New York Stock
Exchange (the “ NYSE ”), the Financial Industry Regulatory Authority, Inc. (“ FINRA ”) and under applicable state or foreign securities
laws in connection with the purchase and distribution of the Shares by the Underwriters or (iv) as would not, individually or in the
aggregate, reasonably be expected to materially adversely affect the consummation of the transactions contemplated by this Agreement or
have a Material Adverse Effect.
-9-
(n) Legal Proceedings. Except as described in each of the Registration Statement, the Pricing Disclosure Package and the Prospectus,
(i) there are no legal, governmental or regulatory investigations, actions, suits or proceedings pending to which the Company or any of the
Company’s subsidiaries is a party or to which any property of the Company or any of the Company’s subsidiaries is or, to the Company’s
knowledge, may be the subject that, individually or in the aggregate, if determined adversely to the Company or any of its subsidiaries,
could reasonably be expected to have a Material Adverse Effect and (ii) to the Company’s knowledge no such investigations, actions, suits
or proceedings have been threatened in writing by any governmental or regulatory authority or by others; and (i) there are no current or
pending legal, governmental or regulatory actions, suits or proceedings that are required under the Securities Act to be described in the
Registration Statement, the Pricing Disclosure Package or the Prospectus that are not so described in the Registration Statement, the
Pricing Disclosure Package and the Prospectus and (ii) there are no contracts or other documents that are required under the Securities Act
to be filed as exhibits to the Registration Statement or described in the Registration Statement, the Pricing Disclosure Package or the
Prospectus that are not so filed as exhibits to the Registration Statement or described in the Registration Statement, the Pricing Disclosure
Package and the Prospectus.
(o) Independent Accountants . PricewaterhouseCoopers LLP, who have certified certain financial statements of the Company and its
subsidiaries, has advised the Company that it is an independent registered public accounting firm with respect to the Company and its
subsidiaries within the applicable rules and regulations adopted by the Commission and the Public Company Accounting Oversight Board
(United States) and as required by the Securities Act.
(p) Title to Real and Personal Property. Except (1) as described in each of the Registration Statement, the Pricing Disclosure
Package and the Prospectus or (2) as would not reasonably be expected to have a Material Adverse Effect, the Company and its
Subsidiaries have good and marketable title in fee simple (in the case of real property) to, or have valid rights to lease or otherwise use, all
items of real and personal property of the Company and its Subsidiaries, in each case free and clear of all liens (other than any liens created
pursuant to the terms of the indenture governing the Euro Senior Notes and the credit agreement governing the Senior Secured Credit
Facilities), encumbrances, claims, defects and imperfections of title.
(q) Title to Intellectual Property. Except (1) as described in each of the Registration Statement, the Pricing Disclosure Package and
the Prospectus or (2) as would not reasonably be expected to have a Material Adverse Effect, (i) the Company and its subsidiaries own or
possess adequate rights to use or are licensed to use all material patents, patent applications, trademarks, service marks, trade names,
trademark registrations, service mark registrations, copyrights, licenses and know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures) necessary for the conduct of their respective businesses as
described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, (ii) the conduct of their respective businesses
does not conflict in any material respect with any such rights of others and (iii) the Company and its subsidiaries have not received any
written notice of any claim of infringement of or conflict with any such rights of others.
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(r) No Undisclosed Relationships. No relationship, direct or indirect, exists between or among the Company or any of its subsidiaries,
on the one hand, and, to the Company’s knowledge, the directors, officers or stockholders of the Company or any of its subsidiaries, on the
other, that is required by the Securities Act to be described in the Registration Statement and the Prospectus and that is not so described in
such documents and in the Pricing Disclosure Package.
(s) Investment Company Act. The Company is not and, after giving effect to the offering and sale of the Shares and the application of
the proceeds thereof received by the Company as described in the Registration Statement, the Pricing Disclosure Package and the
Prospectus, will not be an “investment company” or an entity “controlled” by an “investment company” within the meaning of the
Investment Company Act of 1940, as amended, and the rules and regulations of the Commission thereunder (collectively, the “ Investment
Company Act ”).
(t) Taxes. Except as would not reasonably be expected to have a Material Adverse Effect, the Company and its subsidiaries have paid
all federal, state, local and foreign taxes and filed all tax returns required to be paid or filed through the date hereof unless (i) such taxes are
being contested in good faith, (ii) adequate reserves are being maintained for such taxes and (iii) such taxes can be lawfully withheld; and
except as otherwise disclosed in each of the Registration Statement, the Pricing Disclosure Package and the Prospectus or would not
reasonably be expected to have a Material Adverse Effect, there is no tax deficiency that has been, or could reasonably be expected to be,
asserted against the Company or any of the Company’s subsidiaries or any of their respective properties or assets.
(u) Licenses and Permits. Except (1) as described in each of the Registration Statement, the Pricing Disclosure Package and the
Prospectus or (2) in each case as would not reasonably be expected to have a Material Adverse Effect, (i) the Company and its subsidiaries
possess all licenses, sub-licenses, certificates, permits and other authorizations issued by, and have made all declarations and filings with,
the appropriate federal, state, local or foreign governmental or regulatory authorities that are necessary for the ownership or lease of the
properties of their respective businesses or the conduct of their respective businesses as described in the Registration Statement, the Pricing
Disclosure Package and the Prospectus and (ii) neither the Company nor any of its subsidiaries has received notice of any revocation or
modification of any such license, certificate, permit or authorization or has any reason to believe that any such license, sub-license,
certificate, permit or authorization will not be renewed in the ordinary course.
(v) No Labor Disputes. Except (1) as described in each of the Registration Statement, the Pricing Disclosure Package and the
Prospectus or (2) as would not reasonably be expected to have a Material Adverse Effect, no labor disturbance by or dispute with
employees of the Company or any of its Subsidiaries exists or, to the best knowledge of the Company, is contemplated or threatened and
the Company is not aware of any existing or imminent labor disturbance by, or dispute with, the employees of any of the Company’s or
any of the Company’s Subsidiaries’ principal suppliers, contractors or customers.
-11-
(w) Compliance with Environmental Laws. Other than as described in each of the Registration Statement, the Pricing Disclosure
Package and the Prospectus, or except as would not reasonably be expected to have a Material Adverse Effect, (i) there are no claims
against the Company or any of its subsidiaries alleging potential liability under or responsibility for violation of any Environmental Law
(as defined below) related to their respective businesses, operations and properties, and their respective businesses, operations and
properties are in compliance with applicable Environmental Laws; (ii) none of the properties currently or formerly owned or operated by
the Company or any of its subsidiaries is listed or, to the knowledge of the Company, proposed for listing on the National Priorities List
under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 or on the Comprehensive Environmental
Response, Compensation and Liability Information System maintained by the U.S. Environmental Protection Agency or any analogous
foreign, state or local list; (iii) there are no and, to the knowledge of the Company, never have been any underground or aboveground
storage tanks or any surface impoundments, septic tanks, pits, sumps or lagoons in which Hazardous Materials are being or have been
treated, stored or disposed on any property currently owned or operated by the Company or any of its subsidiaries; (iv) there is no asbestos
or asbestos-containing material on or at any property currently owned or operated by the Company or any of its subsidiaries requiring
investigation, remediation, mitigation, removal, or assessment, or other response, remedial or corrective action, pursuant to Environmental
Law (as defined below); (v) there have been no Releases (as defined below) of Hazardous Material (as defined below) on, at, under or from
any property currently or, to the knowledge of the Company, formerly owned or operated by the Company or any of its subsidiaries
(vi) properties currently owned or operated by the Company or any of its subsidiaries do not contain any Hazardous Materials in amounts
or concentrations that (x) constitute a violation of, (y) require response or other corrective action under, or (z) could be reasonably
expected to give rise to liability under, Environmental Law (vii) none of the Company nor any of its subsidiaries is undertaking, and has
not completed, either individually or together with other parties, any investigation, response or other corrective action relating to any actual
or threatened Release of Hazardous Materials at any location, either voluntarily or pursuant to the order of any Governmental Authority or
the requirements of any Environmental Law; (viii) all Hazardous Materials generated, used, treated, handled, or stored at, or transported or
arranged for transport to or from, any property or facility currently or, to the knowledge of the Company, formerly owned or operated by
the Company or any of its subsidiaries have been disposed of in a manner that would not reasonably be expected to result in a liability
under Environmental Law; (ix) the Company and its subsidiaries are and have been in compliance with all applicable Environmental Laws
and have obtained, maintained and complied with all permits, licenses, certificates or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses; and (x) none of the Company nor its subsidiaries has assumed or retained, by
contract or operation of law, any liability or obligation that has resulted in a claim under Environmental law; and (2) none of the
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Company nor its subsidiaries is aware of any facts relating to compliance with Environmental Law that would reasonably be expected to
have a material effect on their capital expenditures, earnings or the competitive position, and there are no proceedings that are pending or
known to be contemplated against the Company or its subsidiaries to which a governmental entity is also a party, other than such
proceedings as to which the Company reasonably believes that no monetary sanctions of $100,000 or more will be imposed. As used
herein: (i) “ Environmental Laws ” means any and all current or future federal, state, local and foreign statutes, laws, including common
law, regulations or ordinances, rules, judgments, orders, decrees, permits licenses or restrictions imposed by a Governmental Authority
relating to pollution or protection of the environment and protection of human health (to the extent relating to exposure to Hazardous
Materials), including those relating to the generation, use, handling, storage, transportation, treatment or Release or threat of Release of
Hazardous Materials; (ii) “ Hazardous Materials ” means all explosive or radioactive substances or wastes and all hazardous or toxic
substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos-containing materials, toxic mold,
polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated as
“hazardous” or “toxic,” or as a “pollutant” or a “contaminant,” pursuant to any Environmental Law; (iii) “ Release ” means any release,
spill, emission, leaking, pumping, pouring, injection, escaping, deposit, disposal, discharge, dispersal, dumping, leaching or migration of
any Hazardous Material (including the abandonment or disposal of any barrels, containers or other closed receptacles containing any
Hazardous Material) into the environment or into, from or through any building or structure and (iv) “ Governmental Authority ” means
any nation or government, any state or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court,
administrative tribunal, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or
functions of or pertaining to government.
(x) Compliance with ERISA. Except (1) as described in each of the Registration Statement, the Pricing Disclosure Package and the
Prospectus or (2) as would not reasonably be expected to have a Material Adverse Effect, (i) each employee benefit plan, within the
meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ ERISA ”), for which the Company or
any member of its “ Controlled Group ” (defined as any organization that is a member of a controlled group of corporations within the
meaning of Section 414 of the Code) would have any liability (each, a “ Plan ”) has been maintained in compliance with its terms and the
requirements of any applicable statutes, orders, rules and regulations, including but not limited to ERISA and the Code; (ii) no prohibited
transaction, within the meaning of Section 406 of ERISA or Section 4975 of the Code, has occurred with respect to any Plan excluding
transactions effected pursuant to a statutory or administrative exemption; (iii) for each Plan that is subject to the funding rules of
Section 412 or 430 of the Code or Section 302 of ERISA, no failure by any Plan to satisfy the minimum funding standards (within the
meaning of Section 412 or 430 of the Code or Section 302 of ERISA, applicable to such Pension Plan), whether or not waived, has
occurred or is reasonably expected to occur; (iv) the fair market value of the assets of each Plan exceeds the present
-13-
value of all benefits accrued under such Plan (determined based on those assumptions used to fund such Plan); (v) no “reportable
event” (within the meaning of Section 4043(c) of ERISA) has occurred or is reasonably expected to occur; and (vi) neither the Company
nor any member of the Controlled Group has incurred, nor reasonably expects to incur, any liability under Title IV of ERISA (other than
contributions to the Plan or premiums to the PBGC, in the ordinary course and without default) in respect of a Plan (including a
“multiemployer plan”, within the meaning of Section 4001(a)(3) of ERISA).
(y) Disclosure Controls . The Company maintains, on behalf of itself and its subsidiaries, an effective system of “disclosure controls
and procedures” (as defined in Rule 13a-15(e) of the Exchange Act) designed to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Commission’s rules and forms, including controls and procedures designed to ensure that such information is
accumulated and communicated to the Company’s management as appropriate to allow timely decisions regarding required disclosure.
(z) Accounting Controls. The Company maintains a system of “internal control over financial reporting” (as defined in Rule 13a-15
(f) of the Exchange Act) that has been designed by, or under the supervision of, their respective principal executive and principal financial
officers, or persons performing similar functions, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with United States generally accepted accounting principles,
including, but not limited to, internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with United States generally accepted accounting principles and to maintain asset accountability;
(iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any
differences. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company is not
aware of any material weakness or significant deficiency in its internal controls over financial reporting.
(aa) Insurance. Except (1) as described in each of the Registration Statement, the Pricing Disclosure Package and the Prospectus
(2) as would not reasonably be expected to have a Material Adverse Effect, the Company and its Subsidiaries have insurance covering their
respective properties, operations, personnel and businesses as is customary in their respective industry, which insurance is in amounts and
insures against such losses and risks as are customarily deemed adequate to protect the Company and its Subsidiaries and their respective
businesses; and neither the Company nor any of its subsidiaries has (i) received written notice from any insurer or agent of such insurer
that capital improvements or other expenditures are required or necessary to be made in order to continue such insurance or (ii) any reason
to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage
at reasonable cost from similar insurers as may be necessary to continue its business as described in the Registration Statement, the Pricing
Disclosure Package and the Prospectus.
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(bb) No Unlawful Payments. Neither the Company nor any of its subsidiaries, nor, to the knowledge of the Company, any director,
officer, employee, authorized agent or controlled affiliate, in each case, acting on behalf of the Company or any of its subsidiaries has
(i) used any funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; (ii) made or
taken an act in furtherance of an offer, promise or authorization of any direct or indirect unlawful payment or benefit to any foreign or
domestic government or regulatory official or employee; (iii) violated or is in violation of any provision of the Foreign Corrupt Practices
Act of 1977, as amended, or any applicable law or regulation implementing the OECD Convention on Combating Bribery of Foreign
Public Officials in International Business Transactions, or committed an offence under the Bribery Act 2010 of the United Kingdom, or
any other applicable anti-bribery or anti-corruption laws; or (iv) made, offered, agreed, requested or taken an act in furtherance of any
unlawful bribe or other unlawful benefit, including, without limitation, any rebate, payoff, influence payment, kickback or other unlawful
or improper payment or benefit. The Company and its subsidiaries have instituted, maintained and enforced policies and procedures
designed to promote and ensure compliance with all applicable anti-bribery and anti-corruption laws.
(cc) Compliance with Money Laundering Laws . The operations of the Company and its subsidiaries are and have been conducted at
all times in compliance with applicable financial recordkeeping and reporting requirements, including those of the Currency and Foreign
Transactions Reporting Act of 1970, as amended, the applicable money laundering statutes of all jurisdictions where the Company or any
of its subsidiaries conducts business, the rules and regulations thereunder and any related or similar rules, regulations or guidelines issued,
administered or enforced by any governmental or regulatory agency (collectively, the “ Money Laundering Laws ”) and no action, suit or
proceeding by or before any court or governmental or regulatory agency, authority or body or any arbitrator involving the Company or any
of its subsidiaries with respect to the Money Laundering Laws is pending or, to the knowledge of the Company, threatened.
(dd) No Conflicts with Sanctions Laws. None of the Company, any of its subsidiaries or, in each case, to the knowledge of the
Company and on behalf of the Company or any of its subsidiaries, any director, officer, employee, authorized agent or controlled affiliate
of the Company or any of its subsidiaries is currently the subject or the target of any sanctions administered or enforced by the U.S.
Government (including, without limitation, the Office of Foreign Assets Control of the U.S. Department of the Treasury (“ OFAC ”) or the
U.S. Department of State and including, without limitation, the designation as a “specially designated national” or “blocked person”), the
United Nations Security Council (“ UNSC ”), the European Union, Her Majesty’s Treasury (“ HMT ”), or other relevant sanctions
authority (collectively, “ Sanctions ”), nor is the Company or any of its subsidiaries located, organized or resident in a country or territory
that is the subject of Sanctions, including, without limitation, Cuba, Iran, North Korea, Sudan and Syria (each, a “ Sanctioned Country ”);
and the Company will not knowingly directly or indirectly use the proceeds of the offering of the Shares hereunder, or lend, contribute or
otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity (i) to fund or facilitate any
activities of or business with any person that, at the time of such funding or facilitation, is the subject or the target of Sanctions, (ii) to fund
or facilitate any activities of or business in any Sanctioned Country or (iii) in any other manner that will result in a violation by any person
(including any person participating in the transaction, whether as underwriter, advisor, investor or otherwise) of Sanctions.
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(ee) No Broker’s Fees. Neither the Company nor any of the Company’s subsidiaries is a party to any contract, agreement or
understanding with any person (other than this Agreement) that would give rise to a valid claim against any of them or any Underwriter for
a brokerage commission, finder’s fee or like payment in connection with the offering and sale of the Shares.
(ff) No Registration Rights . Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus or
those that have been exercised or waived, no person has the right to require the Company to register any securities for sale under the
Securities Act by reason of the filing of the Registration Statement with the Commission, the issuance and sale of the Shares by the
Company or, to the knowledge of the Company, the sale of the Shares to be sold by any Selling Shareholder hereunder.
(gg) No Stabilization. The Company has not taken, directly or indirectly, any action designed to or that could reasonably be expected
to cause or result in any stabilization or manipulation of the price of the Shares.
(hh) Margin Rules . The application of the proceeds received by the Company from the issuance, sale and delivery of the Shares as
described in the Registration Statement, the Pricing Disclosure Package and the Prospectus will not violate Regulation T, U or X of the
Board of Governors of the Federal Reserve System or any other regulation of such Board of Governors.
(ii) Forward-Looking Statements. No forward-looking statement (within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act) contained in the Registration Statement, the Pricing Disclosure Package or the Prospectus has been
made or reaffirmed without a reasonable basis or has been disclosed other than in good faith.
(jj) Statistical and Market Data. Nothing has come to the attention of the Company that has caused the Company to believe that the
statistical and market-related data included in the Registration Statement, the Pricing Disclosure Package and the Prospectus is not based
on or derived from sources that are reliable and accurate in all material respects.
(kk) Sarbanes-Oxley Act . The Company has taken all necessary actions to ensure that, upon the effectiveness of the Registration
Statement, it will be in compliance with all provisions of the Sarbanes-Oxley Act of 2002 and all rules and regulations promulgated
thereunder or implementing the provisions thereof (the “ Sarbanes-Oxley Act ”) that are then in effect and with which the Company is
required to comply as of the effectiveness of the Registration Statement.
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(ll) Status under the Securities Act . At the time of filing the Registration Statement and any post-effective amendment thereto, at the
earliest time thereafter that the Company or any offering participant made a bona fide offer (within the meaning of Rule 164(h)(2) under
the Securities Act) of the Shares and at the date hereof, the Company was not and is not an “ineligible issuer,” as defined in Rule 405 under
the Securities Act.
(mm) Stamp Taxes . Except for any net income, capital gains, branch profits or franchise taxes imposed on the Underwriters by
Bermuda, the United States or any political subdivision or taxing authority thereof or therein as a result of any present or former
connection (other than any connection resulting solely from the transactions contemplated by this Agreement and in each of the
Registration Statement, the Pricing Disclosure Package and the Prospectus) between the Underwriters and the jurisdiction imposing such
tax, no stamp duties or other issuance or transfer taxes are payable by or on behalf of the Underwriters in Bermuda, the United States or
any political subdivision or taxing authority thereof solely in connection with (A) the execution, delivery and performance of this
Agreement, the Registration Statement, the Pricing Disclosure Package and the Prospectus, (B) the issuance and delivery of the Shares in
the manner contemplated by this Agreement and the Prospectus or (C) the sale and delivery by the Underwriters of the Shares as
contemplated herein and in the Prospectus.
(nn) No Immunity . Neither the Company nor any of its subsidiaries or their properties or assets has immunity under Bermuda, U.S.
federal or New York state law from any legal action, suit or proceeding, from the giving of any relief in any such legal action, suit or
proceeding, from set-off or counterclaim, from the jurisdiction of any Bermuda, U.S. federal or New York state court, from service of
process, attachment upon or prior to judgment, or attachment in aid of execution of judgment, or from execution of a judgment, or other
legal process or proceeding for the giving of any relief or for the enforcement of a judgment, in any such court with respect to their
respective obligations, liabilities or any other matter under or arising out of or in connection herewith; and, to the extent that the Company
or any of its subsidiaries or any of its properties, assets or revenues may have or may hereafter become entitled to any such right of
immunity in any such court in which proceedings arising out of, or relating to the transactions contemplated by this Agreement, the
Registration Statement, the Pricing Disclosure Package and the Prospectus, may at any time be commenced, the Company has, pursuant to
Section 18(d) of this Agreement, waived, and it will waive, or will cause its subsidiaries to waive, such right to the extent permitted by law.
(oo) Enforcement of Foreign Judgments . Any final judgment for a fixed or determined sum of money rendered by any U.S. federal
or New York state court located in the State of New York having jurisdiction under its own laws in respect of any suit, action or
proceeding against the Company based upon this Agreement, the Registration Statement, the Pricing Disclosure Package and the
Prospectus would be declared enforceable against the Company by the courts of Bermuda, without reconsideration or reexamination of the
merits.
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(pp) Valid Choice of Law . The choice of laws of the State of New York as the governing law of this Agreement, the Registration
Statement, the Pricing Disclosure Package and the Prospectus is a valid choice of law under the laws of Bermuda and will be honored by
the courts of Bermuda, subject to the restrictions described under the caption “Enforceability of Judgments” in the Registration Statement,
the Pricing Disclosure Package and the Prospectus. The Company has the power to submit, and pursuant to Section 18(c) of this
Agreement, has legally, validly, effectively and irrevocably submitted, to the personal jurisdiction of each New York state and United
States federal court sitting in the Borough of Manhattan in the City of New York and has validly and irrevocably waived any objection to
the laying of venue of any suit, action or proceeding brought in such court.
(qq) Indemnification and Contribution . The