424B1 1 d764723d424b1.htm FINAL PROSPECTUS Final Prospectus
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Filed Pursuant to Rule 424(b)(1)
Registration Statement No. 333-198271

PROSPECTUS

50,000,000 Shares

 

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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 50,000,000 common shares in this offering.

The public offering price is $19.50 per share. Prior to this offering, no public market existed for our common shares. Our common shares have been approved for listing 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      Total  

Public offering price

   $ 19.50       $ 975,000,000   

Underwriting discount(1)

   $ 0.975       $ 48,750,000   

Proceeds, before expenses, to the selling shareholders

   $ 18.525       $ 926,250,000   

 

  (1) We have agreed to reimburse the underwriters for certain expenses in connection with this offering.

The underwriters may also purchase up to an additional 7,500,000 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 November 14, 2014.

 

 

 

Citigroup   Goldman, Sachs & Co.   Deutsche Bank Securities   J.P. Morgan
BofA Merrill Lynch   Barclays   Credit Suisse   Morgan Stanley
Jefferies   UBS Investment Bank   Baird   BB&T Capital Markets   Nomura   SMBC Nikko

The date of this prospectus is November 11, 2014.


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Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     24   

Forward-Looking Statements

     46   

Use of Proceeds

     48   

Dividend Policy

     49   

Capitalization

     50   

Dilution

     52   

Selected Historical Financial Information

     53   

Unaudited Pro Forma Condensed Combined and Consolidated Financial Information

     56   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     67   

Our Industry

     114   

Business

     116   

Management

     135   

Compensation Discussion and Analysis

     142   

Certain Relationships and Related Person Transactions

     158   

Principal And Selling Shareholders

     161   

Description of Share Capital

     163   

Shares Eligible For Future Sale

     170   

Bermuda Company Considerations

     172   

Taxation

     178   

Underwriting

     182   

Legal Matters

     189   

Experts

     189   

Where You Can Find More Information

     189   

Enforcement of Judgments

     189   

Index to Consolidated Financial Statements

     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®, Eco-Concept, 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 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 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:

 

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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 end-market 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:

 

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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.

 

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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 end-market, 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.

 

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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

 

 

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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.

 

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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, 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 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,

2013
 
     Low     Mid-Point     High    

Net Sales

        

Refinish

   $ 477.5      $ 478.1      $ 478.8      $ 462.4   

Industrial

     184.8        185.4        186.0        181.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Performance Coatings

     662.3        663.5        664.8        643.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Light vehicle

     341.8        342.5        343.1        339.8   

Commercial vehicle

     102.3        102.9        103.5        91.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Transportation Coatings

     444.1        445.4        446.6        430.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

   $ 1,106.4      $ 1,108.9      $ 1,111.4      $ 1,074.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Year-over-year % change

     3.0     3.2     3.4  

 

    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
Ended
September 30,

2013
 
     Three Months Ended
September 30, 2014
   
     Low     Mid-Point     High    

Adjusted EBITDA

        

Performance Coatings

   $ 147.2      $ 148.5      $ 149.7      $ 147.3   

Transportation Coatings

     78.3        79.5        80.8        46.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Adjusted EBITDA

     225.5        228.0        230.5        194.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense, net

     52.6        52.6        52.6        62.7   

Provision (benefit) for income taxes

     7.5        7.5        7.5        (26.3

Depreciation and amortization

     76.2        76.2        76.2        87.5   

Foreign exchange remeasurement losses (gains)

     59.6        59.6        59.6        (9.7

Long-term employee benefit plan adjustments

     (4.7     (4.7     (4.7     1.8   

Termination benefits and other employee related costs (a)

     3.2        3.2        3.2        47.9   

Consulting and advisory fees (b)

     8.8        8.8        8.8        11.3   

Transition-related costs (c)

     36.7        36.7        36.7        8.1   

Other adjustments (d)

     5.6        5.6        5.6        3.5   

Management fee expense

     0.8        0.8        0.8        0.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (loss)

   $ (20.8   $ (18.3   $ (15.8   $ 6.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) 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.
  (b) 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.
  (c) Represents charges associated with the transition from DuPont to a standalone entity, including branding and marketing, information technology related costs and facility transition costs.
  (d) 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.”

 

 

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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.

 

 

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Table of Contents

The Offering

 

Common shares offered by the selling shareholders

50,000,000 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 7,500,000 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.”

 

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 50,000,000 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;

 

    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.

 

 

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Table of Contents
    Predecessor          Successor          Pro forma  
    Year
Ended
December 31,
    January 1
through
January 31,
         Year
Ended
December 31,
    Six Months
Ended
June 30,
         Year
Ended
December 31,
    Six Months
Ended
June 30,
    12 Months
Ended
June 30,
 

(dollars and shares in
millions, except per share
data)

  2011     2012     2013          2013     2013     2014          2013     2013     2014     2014  

Statement of operations data:

                           

Net sales

  $ 4,281.5      $ 4,219.4      $ 326.2          $ 3,951.1      $ 1,783.6      $ 2,174.0          $ 4,277.3      $ 2,109.8      $ 2,174.0      $ 4,341.5   

Other revenue

    34.3        37.4        1.1            35.7        13.7        14.7            36.8        14.8        14.7        36.7   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    4,315.8        4,256.8        327.3            3,986.8        1,797.3        2,188.7            4,314.1        2,124.6        2,188.7        4,378.2   

Cost of goods sold(1)

    3,074.5        2,932.6        232.2            2,772.8        1,327.6        1,446.0            2,909.0        1,463.8        1,446.0        2,891.2   

Selling, general and administrative expenses(2)

    869.1        873.4        70.8            1,040.6        397.0        497.3            1,113.6        470.0        497.3        1,140.9   

Research and development expenses

    49.6        41.5        3.7            40.5        18.5        23.4            44.2        22.2        23.4        45.4   

Amortization of acquired intangibles

    —          —          —              79.9        38.0        42.4            86.5        44.9        42.4        84.0   

Merger and acquisition related expenses

    —          —          —              28.1        28.1        —              —          —          —          —     
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    322.6        409.3        20.6            24.9        (11.9     179.6            160.8        123.7        179.6        216.7   

Interest expense, net

    0.2        —          —              215.1        90.4        113.9            210.8        99.1        110.9        222.6   

Bridge financing commitment fees

    —          —          —              25.0        25.0        —              —          —          —          —     

Other expense (income), net

    20.2        16.3        5.0            48.5        59.1        2.9            31.0        43.4        (1.8     (14.2
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    302.2        393.0        15.6            (263.7     (186.4     62.8            (81.0     (18.8     70.5        8.3   

Provision (benefit) for income taxes

    120.7        145.2        7.1            (44.8     (8.1     10.7            1.9        36.7        11.7        (23.1
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    181.5        247.8        8.5            (218.9     (178.3     52.1            (82.9     (55.5     58.8        31.4   

Less: Net income attributable to noncontrolling interests

    2.1        4.5        0.6            6.0        2.3        2.6            6.6        2.9        2.6        6.3   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to controlling interests

  $ 179.4      $ 243.3      $ 7.9          $ (224.9   $ (180.6   $ 49.5          $ (89.5   $ (58.4   $ 56.2      $ 25.1   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Per share data:

                           

Earnings (loss) per share:

                           

Basic and diluted

            $ (0.97   $ (0.77   $ 0.22          $ (0.39   $ (0.26   $ 0.25      $ 0.11   

Weighted average shares outstanding, basic and diluted

              228,280,574        228,149,996        229,069,356            228,269,484        228,149,996        229,069,356        228,725,385   

Other financial data:

                           

Cash flows from:

                           

Operating activities

  $ 236.2      $ 388.8      $ (37.7       $ 376.8      $ 161.6      $ 13.7               

Investing activities

    (116.6     (88.2     (8.3         (5,011.2     (4,872.2     (102.8            

Financing activities

    (125.1     (290.6     43.0            5,098.1        5,095.8        (12.2            

Depreciation and amortization

    108.7        110.7        9.9            300.7        140.6        152.9            327.3        167.5        152.9        312.7   

Capital expenditures

    82.7        73.2        2.4            107.3        23.4        100.8            109.7        25.8        100.8        184.7   

Adjusted EBITDA(3)

    570.1        661.8        38.4            699.0        307.5        407.8            737.6        346.1        407.8        799.3   

 

 

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     Predecessor           Pro Forma Successor  
     Year Ended
December 31,
          Year Ended
December 31,
    12 Months
Ended
June 30,
 

(dollars in millions)

   2011      2012           2013     2014  

Selected annual financial data:

              

Net sales

   $ 4,281.5       $ 4,219.4           $ 4,277.3      $ 4,341.5   

Net income (loss)

   $ 181.5       $ 247.8           $ (82.9   $ 31.4   

Adjusted EBITDA(3)

   $ 570.1       $ 661.8           $ 737.6      $ 799.3   

 

     Predecessor           Successor  
     December 31,           December 31,      June 30, 2014  

(dollars in millions)

   2012           2013      Actual      Pro Forma  

Balance sheet data (at end of period):

               

Cash and cash equivalents

   $ 28.7           $ 459.3       $ 350.3       $ 333.1   

Working capital(4)

     605.2             952.2         971.5         954.3   

Total assets

     2,878.6             6,737.1        
6,704.6
  
     6,690.4   

Debt, net of discount

     0.2             3,920.9         3,900.9         3,900.9   

Net debt(5)

     (28.5          3,461.6         3,550.6         3,567.8   

Total liabilities

     1,181.6             5,525.3         5,447.9         5,447.9   

Total stockholders’ equity/combined equity

     1,697.0             1,211.8         1,256.7         1,242.5   

 

(1) 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.
(2) 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.
(3) 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.

 

 

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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.

 

 

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The following table reconciles net income (loss) to EBITDA and Adjusted EBITDA for the periods presented:

 

    Predecessor          Successor          Pro forma  
    Year
Ended
December 31,
    January 1
through
January 31,
         Year
Ended
December 31,
    Six Months
Ended
June 30,
         Year
Ended
December 31,
    Six Months
Ended
June 30,
    12 Months
Ended
June 30,
 

(dollars in millions)

  2011     2012     2013          2013     2013     2014          2013     2013     2014     2014  

Net income (loss)

  $ 181.5      $ 247.8      $ 8.5          $ (218.9   $ (178.3   $ 52.1          $ (82.9   $ (55.5   $ 58.8      $ 31.4   

Interest expense, net

    0.2        —          —              215.1        90.4        113.9            210.8        99.1        110.9        222.6   

Provision (benefit) for income taxes

    120.7        145.2        7.1            (44.8     (8.1     10.7            1.9        36.7        11.7        (23.1

Depreciation and amortization

    108.7        110.7        9.9            300.7        140.6        152.9            327.3        167.5        152.9        312.7   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    411.1        503.7        25.5            252.1        44.6        329.6            457.1        247.8        334.3        543.6   

Inventory step-up(a)

    —          —          —              103.7        103.7        —              —          —          —          —     

Merger and acquisition related costs(b)

    —          —          —              28.1        28.1        —              —          —          —          —     

Financing fees(c)

    —          —          —              25.0        25.0        3.1            —          —          —          —     

Foreign exchange remeasurement losses (gains)(d)

    23.4        17.7        4.5            48.9        59.6        (14.5         34.0        44.7        (14.5     (25.2

Long-term employee benefit plan adjustments(e)

    32.8        36.9        2.3            9.5        3.0        4.5            11.8        5.3        4.5        11.0   

Termination benefits and other employee related costs(f)

    (2.6     8.6        0.3            147.5        17.2        5.9            147.8        17.5        5.9        136.2   

Consulting and advisory fees(g)

    —          —          —              54.7        21.9        20.7            54.7        21.9        20.7        53.5   

Transition-related costs(h)

    —          —          —              29.3        7.4        47.5            29.3        7.4        47.5        69.4   

Other adjustments(i)

    14.7        12.6        0.1            2.3        (0.2     11.0            2.4        (0.1     11.0        13.5   

Dividends in respect of noncontrolling interest(j)

    (1.0     (1.9     —              (5.2     (4.1     (1.6         (5.2     (4.1     (1.6     (2.7

Management fee expense(k)

    —          —          —              3.1        1.3        1.6            —          —          —          —     

Allocated corporate and standalone costs, net(l)

    91.7        84.2        5.7            —          —          —              5.7        5.7        —          —     
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 570.1      $ 661.8      $ 38.4          $ 699.0      $ 307.5      $ 407.8          $ 737.6      $ 346.1      $ 407.8      $ 799.3   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) 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.
  (b) 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.
  (c) 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.
  (d) 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.
  (e) 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.
  (f) 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) 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.
  (h) Represents charges associated with the transition from DuPont to a standalone entity, including branding and marketing, information technology related costs and facility transition costs.
  (i) 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.
  (j) Represents the payment of dividends to our joint venture partners by our consolidated entities that are not wholly owned.
  (k) Pursuant to Axalta’s 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.
  (l) 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 Year Ended
December 31, 2011
     Predecessor Year Ended
December 31, 2012
     Predecessor Period
from January 1, 2013
through
January 31, 2013
 

Allocated corporate costs

   $ 333.5       $ 333.3       $ 25.4   

Standalone costs

     (241.8      (249.1      (19.7
  

 

 

    

 

 

    

 

 

 

Total

   $ 91.7       $ 84.2       $ 5.7   
  

 

 

    

 

 

    

 

 

 

 

(4) Working capital is defined as current assets less current liabilities.
(5) Net debt is defined as debt, net of discount, less cash and cash equivalents.

 

 

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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 end-markets. 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 end-markets 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 long-lived 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 lower-margin 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 77.6% of our common shares (or 74.3% 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, 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 50,000,000 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, 178,242,110, or 77.81% of our total outstanding common shares (or 170,742,110 shares (or 74.54% of our total outstanding common shares) if the underwriters exercise their option to purchase additional shares in full), 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;

 

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    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.

 

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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.”

 

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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

   $ 350.3   
  

 

 

 

Debt:

  

Senior Secured Credit Facilities, consisting of the following(1):

  

Revolving Credit Facility

     —     

Dollar Term Loan, net of discount

     2,258.3   

Euro Term Loan, net of discount

     537.0   

Dollar Senior Notes(2)

     750.0   

Euro Senior Notes(3)

     340.4   

Other indebtedness(4)

     15.2   
  

 

 

 

Total debt

     3,900.9   
  

 

 

 

Total stockholders’ equity:

  

Common Shares, $1.00 par value per share: 1,000,000,000 shares authorized; 229,069,356 shares issued and outstanding

     229.1   

Capital in excess of par

     1,137.5   

Accumulated deficit

     (204.4

Accumulated other comprehensive income

     25.7   
  

 

 

 

Total stockholders’ equity

     1,187.9   

Noncontrolling interests

     68.8   
  

 

 

 

Total stockholders’ equity and noncontrolling interests

   $ 1,256.7   
  

 

 

 

Total capitalization

   $ 5,157.6   
  

 

 

 

 

(1) 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.”
(2) Consists of $750.0 million in aggregate principal amount of 7.375% senior unsecured notes due 2021 (the “Dollar Senior Notes”).
(3) 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”).
(4) Includes indebtedness to fund short-term operational requirements primarily in our Latin American jurisdictions.

 

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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:

 

    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.

 

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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 50,000,000 common shares by the selling shareholders in this offering, based upon a public offering price of $19.50 per share, and 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

     $ 19.50   

Net tangible book value per share as of June 30, 2014

   $ 5.19     

Decrease in net tangible book value per share attributable to this offering

     (0.06  
  

 

 

   

As adjusted net tangible book value per share after this offering

       5.13   
    

 

 

 

Dilution per share to new investors

     $ 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 a public offering price of $19.50 per share before deducting the underwriting discounts and commissions and other estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number      Percent     Amount      Percent    
     (in thousands, other than percentages and per share amounts)  

Existing shareholders

     179,069         78.2   $ 1,059,582         52.1   $ 5.92   

New investors

     50,000         21.8        975,000         47.9        19.50   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     229,069         100   $ 2,034,582         100   $ 8.88   
  

 

 

    

 

 

   

 

 

    

 

 

   

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.”

 

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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.

 

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    Predecessor     Successor  
    Year Ended December 31,     January 1
through
January 31,
    Year Ended
December 31,
    Six Months
Ended June 30,
 

(dollars in millions)

  2009     2010     2011     2012     2013     2013     2013     2014  

Statement of Operations Data:

               

Net sales

  $ 3,431.4      $ 3,802.0      $ 4,281.5      $ 4,219.4      $ 326.2      $ 3,951.1      $ 1,783.6      $ 2,174.0   

Other revenue

    17.3        27.8        34.3        37.4        1.1        35.7        13.7        14.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    3,448.7        3,829.8        4,315.8        4,256.8        327.3        3,986.8        1,797.3        2,188.7   

Cost of goods sold(1)

    2,445.8        2,676.0        3,074.5        2,932.6        232.2        2,772.8        1,327.6        1,446.0   

Selling, general and administrative expenses(2)

    867.9        827.6        869.1        873.4        70.8        1,040.6        397.0        497.3   

Research and development expenses

    59.2        52.4        49.6        41.5        3.7        40.5        18.5        23.4   

Amortization of acquired intangibles

    —          —          —          —          —          79.9        38.0        42.4   

Merger and acquisition related expenses

    —          —          —          —          —          28.1        28.1        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    75.8        273.8        322.6        409.3        20.6        24.9        (11.9     179.6   

Interest expense, net

    0.4        1.1        0.2        —          —          215.1        90.4        113.9   

Bridge financing commitment fees

    —          —          —          —          —          25.0        25.0        —     

Other expense (income), net

    (31.3     0.6        20.2        16.3        5.0        48.5        59.1        2.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

    106.7        272.1        302.2        393.0        15.6        (263.7     (186.4     62.8   

Provision (benefit) for income taxes

    28.7        99.1        120.7        145.2        7.1        (44.8     (8.1     10.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    78.0        173.0        181.5        247.8        8.5        (218.9     (178.3     52.1   

Less: Net income attributable to noncontrolling interests

    3.8        4.9        2.1        4.5        0.6        6.0        2.3        2.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to controlling interests

  $ 74.2      $ 168.1      $ 179.4      $ 243.3      $ 7.9      $ (224.9   $ (180.6   $ 49.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

Per share data:

               

Earnings (loss) per share:

               

Basic and diluted

            $ (0.97   $ (0.77   $ 0.22   

Weighted average shares outstanding, basic and diluted

              228,280,574        228,149,996        229,069,356   
 

(dollars in millions)

                                               

Other Financial Data:

               

Cash flows from:

               

Operating activities

  $ 320.6      $ 203.2      $ 236.2      $ 388.8      $ (37.7   $ 376.8      $ 161.6      $ 13.7   

Investing activities

    (77.6     (77.3     (116.6     (88.2     (8.3     (5,011.2     (4,872.2     (102.8

Financing activities

    (238.2     (125.0     (125.1     (290.6     43.0        5,098.1        5,095.8        (12.2

Depreciation and amortization

    126.7        111.2        108.7        110.7        9.9        300.7        140.6        152.9   

Capital expenditures

    55.4        80.2        82.7        73.2        2.4        107.3        23.4        100.8   

 

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     Predecessor      Successor  
     As of December 31,      As of
December 31,
     As of
June 30,
 

(dollars in millions)

   2009      2010      2011      2012      2013      2014  

Balance sheet data:

                   

Cash and cash equivalents

   $ 17.3       $ 21.9       $ 18.8       $ 28.7       $ 459.3       $ 350.3   

Working capital(3)

     488.9         604.4         640.0         605.2         952.2         971.5   

Total assets

     2,851.5         2,823.8         2,833.6         2,878.6         6,737.1         6,704.6   

Debt, net of discount

     4.5         0.8         0.9         0.2         3,920.9         3,900.9   

Total liabilities

     1,155.6         1,059.1         1,028.4         1,181.6         5,525.3         5,447.9   

Total stockholders’ equity/combined equity

     1,695.9         1,764.7         1,805.1         1,697.0         1,211.8         1,256.7   

 

(1) 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.
(2) 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.
(3) 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.

 

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Unaudited Pro Forma Condensed Consolidated Balance Sheet

As of June 30, 2014

(in millions)

 

     Historical     Adjustments
for

Offering
           Pro forma  

Assets

         

Current assets:

         

Cash and cash equivalents

   $ 350.3      $ (17.2     (a)       $ 333.1   

Restricted cash

     1.9        —             1.9   

Accounts and notes receivable, net

     953.8        —             953.8   

Inventories

     576.4        —             576.4   

Prepaid expenses and other

     63.4        —             63.4   

Deferred income taxes

     18.1        —             18.1   
  

 

 

   

 

 

      

 

 

 

Total current assets

     1,963.9        (17.2        1,946.7   

Net property, plant and equipment

     1,621.3        —             1,621.3   

Goodwill

     1,110.1        —             1,110.1   

Identifiable intangibles, net

     1,394.4        —             1,394.4   

Deferred financing costs, net

     102.0        —             102.0   

Deferred income taxes

     285.4        3.0        (b)         288.4   

Other assets

     227.5        —             227.5   
  

 

 

   

 

 

      

 

 

 

Total assets

   $ 6,704.6      $ (14.2      $ 6,690.4   
  

 

 

   

 

 

      

 

 

 

Liabilities and Stockholders’ Equity

         

Current liabilities:

         

Accounts payable

   $ 527.1        —           $ 527.1   

Current portion of borrowings

     43.7        —             43.7   

Deferred income taxes

     6.3        —             6.3   

Other accrued liabilities

     415.3        —             415.3   
  

 

 

   

 

 

      

 

 

 

Total current liabilities

     992.4        —             992.4   

Long-term borrowings

     3,857.2        —             3,857.2   

Deferred income taxes

     270.4        —             270.4   

Other liabilities

     327.9        —             327.9   
  

 

 

   

 

 

      

 

 

 

Total liabilities

     5,447.9        —             5,447.9   

Commitments and contingent liabilities

         

Stockholders’ equity

         

Common stock

     229.1        —             229.1   

Capital in excess of par

     1,137.5        —             1,137.5   

Accumulated deficit

     (204.4     (14.2     (c)         (218.6

Accumulated other comprehensive income

     25.7        —             25.7   
  

 

 

   

 

 

      

 

 

 

Total stockholders’ equity

     1,187.9        (14.2        1,173.7   
  

 

 

   

 

 

      

 

 

 

Noncontrolling interests

     68.8        —             68.8   

Total stockholders’ equity and noncontrolling interests

     1,256.7        (14.2        1,242.5   
  

 

 

   

 

 

      

 

 

 

Total liabilities, stockholders’ equity and noncontrolling interests

   $ 6,704.6      $ (14.2      $ 6,690.4   
  

 

 

   

 

 

      

 

 

 

 

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Unaudited Pro Forma Condensed Consolidated Statement Of Operations

For the Six Months Ended June 30, 2014

(In millions, except per share data)

 

     Successor                                   
     Six Months
Ended June 30,
2014
     Adjustments
for

Financing
           Adjustments
for

Offering
           Pro forma  

Net sales

   $ 2,174.0       $ —           $ —           $ 2,174.0   

Other revenue

     14.7         —             —             14.7   
  

 

 

    

 

 

      

 

 

      

 

 

 

Total revenue

     2,188.7         —             —             2,188.7   

Cost of goods sold

     1,446.0         —             —             1,446.0   

Selling, general and administrative expenses

     497.3         —             —             497.3   

Research and development expenses

     23.4         —             —             23.4   

Amortization of acquired intangibles

     42.4         —             —             42.4   
  

 

 

    

 

 

      

 

 

      

 

 

 

Income from operations

     179.6         —             —             179.6   

Interest expense, net

     113.9         (3.0     (e)         —             110.9   

Other expense (income), net

     2.9         (3.1     (g)         (1.6     (h)         (1.8
  

 

 

    

 

 

      

 

 

      

 

 

 

Income before income taxes

     62.8         6.1           1.6           70.5   

Provision for income taxes

     10.7         0.6        (i)         0.4        (i)         11.7   
  

 

 

    

 

 

      

 

 

      

 

 

 

Net income

     52.1         5.5           1.2           58.8   

Less: Net income attributable to noncontrolling interests

     2.6         —             —             2.6   
  

 

 

    

 

 

      

 

 

      

 

 

 

Net income attributable to controlling interests

   $ 49.5       $ 5.5         $ 1.2         $ 56.2   
  

 

 

    

 

 

      

 

 

      

 

 

 

Per share data:

               

Earnings per share:

               

Basic and diluted

   $ 0.22                 $ 0.25   

Weighted average shares outstanding:

               

Basic and diluted

     229,069,356                   229,069,356   

 

 

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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          Successor                                            
    January 1
through
January 31,
2013
         Six Months
Ended

June 30, 2013
    Adjustments
for
Acquisition
          Adjustments
for
Financing
          Adjustments
for
Offering
          Pro forma  

Net sales

  $ 326.2          $ 1,783.6      $ —          $     —          $     —          $ 2,109.8   

Other revenue

    1.1            13.7        —            —            —            14.8   
 

 

 

       

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total revenue

    327.3            1,797.3        —            —            —            2,124.6   

Cost of goods sold

    232.2            1,327.6        (96.0     (a     —            —            1,463.8   

Selling, general and administrative expenses

    70.8            397.0        2.2        (a     —            —            470.0   

Research and development expenses

    3.7            18.5        —            —            —            22.2   

Amortization of acquired intangibles

    —              38.0        6.9        (b     —            —            44.9   

Merger and acquisition related expenses

    —              28.1        (28.1     (c     —            —            —     
 

 

 

       

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Income (loss) from operations

    20.6            (11.9     115.0          —            —            123.7   

Interest expense, net

    —              90.4        —            8.7        (e     —            99.1   

Bridge financing commitment fees

    —              25.0        —            (25.0     (f     —            —     

Other expense, net

    5.0            59.1        (19.4     (d     —            (1.3     (h     43.4   
 

 

 

       

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Income (loss) before income taxes

    15.6            (186.4     134.4          16.3          1.3          (18.8

Provision (benefit) for income taxes

    7.1            (8.1     36.2        (i     1.1        (i     0.4        (i     36.7   
 

 

 

       

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Net income (loss)

    8.5            (178.3     98.2          15.2          0.9          (55.5

Less: Net income attributable to noncontrolling interests

    0.6            2.3        —            —            —            2.9   
 

 

 

       

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Net income (loss) attributable to controlling interests

  $ 7.9          $ (180.6   $ 98.2        $ 15.2        $ 0.9        $ (58.4
 

 

 

       

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Per share data:

                     

Earnings (loss) per share:

                     

Basic and diluted

        $ (0.77               $ (0.26
 

Weighted average shares outstanding:

                     

Basic and diluted

          228,149,996                    228,149,996   

 

 

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Unaudited Pro Forma Condensed Combined and Consolidated Statement Of Operations

For the Year Ended December 31, 2013

(In millions, except per share data)

 

    Predecessor          Successor                                            
    January 1
through
January 31,
2013
         Year Ended
December 31,
2013
    Adjustments
for
Acquisition
          Adjustments
for
Financing
          Adjustments
for

Offering
          Pro forma  

Net sales

  $ 326.2          $ 3,951.1      $ —          $ —          $     —          $ 4,277.3   

Other revenue

    1.1            35.7        —            —            —            36.8   
 

 

 

       

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total revenue

    327.3            3,986.8        —            —            —            4,314.1   

Cost of goods sold

    232.2            2,772.8        (96.0     (a     —            —            2,909.0   

Selling, general and administrative expenses

    70.8            1,040.6        2.2        (a     —            —            1,113.6   

Research and development expenses

    3.7            40.5        —            —            —            44.2   

Amortization of acquired intangibles

    —              79.9        6.6        (b     —            —            86.5   

Merger and acquisition related expenses

    —              28.1        (28.1     (c     —            —            —     
 

 

 

       

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Income from operations

    20.6            24.9        115.3          —            —            160.8   

Interest expense, net

    —              215.1        —            (4.3     (e     —            210.8   

Bridge financing commitment fees

    —              25.0        —            (25.0     (f     —            —     

Other expense, net

    5.0            48.5        (19.4     (d     —            (3.1     (h     31.0   
 

 

 

       

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Income (loss) before income taxes

    15.6            (263.7     134.7          29.3          3.1          (81.0

Provision (benefit) for income taxes

    7.1            (44.8     36.3        (i     2.4        (i     0.9        (i     1.9   
 

 

 

       

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Net income (loss)

    8.5            (218.9     98.4          26.9          2.2          (82.9

Less: Net income attributable to noncontrolling interests

    0.6            6.0        —            —            —            6.6   
 

 

 

       

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Net income (loss) attributable to controlling interests

  $ 7.9          $ (224.9   $ 98.4        $ 26.9        $ 2.2        $ (89.5
 

 

 

       

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Per share data:

                     

Earnings (loss) per share:

                     

Basic and diluted

        $ (0.97               $ (0.39
 

Weighted average shares outstanding:

                     

Basic and diluted

          228,280,574                    228,269,484   

 

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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)

   $ (13.4

Legal, accounting and associated fees

     (3.8
  

 

 

 
   $ (17.2
  

 

 

 

 

  (1) 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.”

 

(b) Represents the tax effect of the adjustments in note (a) above (in millions):

 

     Pro forma
Adjustment
    Weighted
average
statutory
income tax
rate(1)
    As of
June 30, 2014
 

Pro forma adjustment (a), termination payment to Carlyle(1)

   $ (13.4     22.7   $ 3.0   

Pro forma adjustment (a), legal, accounting and associated fees(2)

     (3.8     0.0     —     
      

 

 

 
       $ 3.0   
      

 

 

 

 

  (1) Reflects our United States statutory tax rate of 38.5% net of the impact of permanent differences.
  (2) Reflects our effective tax rate due to certain transaction costs in our parent company not being deductible.

 

(c) 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)

   $ (17.2

Pro forma adjustment (b)

     3.0   
  

 

 

 
   $ (14.2
  

 

 

 

 

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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):

 

     Year ended
December 31,
2013
    Six months
ended June 30,
2013
 

Total increase in depreciation(1)

   $ 7.9      $ 7.9   

Impact to cost of sales for conforming Predecessor periods to weighted average cost flow assumption(2)

     (0.2     (0.2

Impact to cost of sales for inventory step-up related to the
Acquisition(3)

     (103.7     (103.7
  

 

 

   

 

 

 

Decrease applicable to cost of goods sold

   $ (96.0   $ (96.0
  

 

 

   

 

 

 

 

  (1) 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):

 

                   Estimated annual depreciation and
amortization
 
     Acquisition
Date Fair
Value
     Estimated
useful life
     Year ended
December 31,
2013
    Six months
ended June 30,
2013
 

Description:

          

Property, plant and equipment

   $ 1,705.9         Various       $ 208.2      $ 104.1   

Less: Aggregated historical depreciation

           (198.1     (94.0
        

 

 

   

 

 

 
         $ 10.1      $ 10.1   
        

 

 

   

 

 

 

Reflected in:

          

Cost of goods sold

         $ 7.9      $ 7.9   

Selling, general and administrative expenses

           2.2        2.2   
        

 

 

   

 

 

 
         $ 10.1      $ 10.1   
        

 

 

   

 

 

 

 

  (2) 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
  (3) Represents the effect of the increase in inventory stepped-up to fair value as a result of the application of acquisition accounting.

 

(b) Represents incremental amortization applicable to purchase price allocation to intangible assets. The allocation of incremental amortization expense is based on Axalta’s historical classification.

 

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Assumed allocation of purchase price to fair value of amortizable intangibles (in millions):

 

     DuPont
Performance
Coatings
Acquisition
     Weighted
average
estimated
useful life
(years)
     Estimated annual
depreciation and amortization
 
           Year ended
December 31,
2013
    Six months ended
June 30,

2013
 

Description:

          

Technology

   $ 403.0         10       $ 40.3      $ 20.2   

Trademarks

     41.7         14.8         2.8        1.4   

Customer relationships

     764.3         19.4         39.8        19.9   

Non-compete

     1.5         4         0.4        0.2   

Less: Aggregated historical amortization(1)

           (76.7     (34.8
        

 

 

   

 

 

 
         $ 6.6      $ 6.9   
        

 

 

   

 

 

 

 

  (1) Exclusive of the $3.2 million associated with abandoned acquired in process research and development projects.

 

(c) Represents the net adjustment to remove one-time non-recurring expenses related to the Acquisition (in millions):

 

     Year ended
December 31,

2013
    Six months ended
June 30,

2013
 

Decrease in acquisition-related transaction expenses

   $ (28.1   $ (28.1
  

 

 

   

 

 

 

 

(d) Represents the adjustment to remove the non-recurring loss on foreign currency contract directly related to the Acquisition (in millions):

 

     Year ended
December 31,

2013
    Six months ended
June 30,

2013
 

Acquisition related loss on foreign currency contract to hedge Euro denominated financing

   $ (19.4   $ (19.4
  

 

 

   

 

 

 

Decrease in other expense, net

   $ (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,
2013
    Six Months
Ended June 30,
2014
    Six months
ended June 30,
2013
 

Borrowings under Term Loans(1)

   $ 114.3      $ 56.7      $ 57.3   

Borrowings under Senior Notes(2)

     74.4        37.2        37.2   

Revolver unused availability fee(3)

     2.0        1.0        1.0   

Amortization of deferred financing fees and original issue discount(4)

     20.3        10.3        10.1   
  

 

 

   

 

 

   

 

 

 

Total pro forma interest expense

     211.0        105.2        105.6   
  

 

 

   

 

 

   

 

 

 

Less: Aggregated historical interest expense

     (215.3     (108.2     (96.9
  

 

 

   

 

 

   

 

 

 
   $ (4.3   $ (3.0   $ 8.7   
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents
  (1) 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.
  (2) 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%.
  (3) Based on unused availability of $400.0 million under the Revolving Credit Facility with an unused facility charge of 0.5% per annum.
  (4) Reflects the non-cash amortization of deferred financing fees and original issue discount related to the Financing over the term of the related facility.

 

     Year ended
December 31,
2013
    Six months
ended June 30,
2013
 

(f)     Represents pro forma adjustment to remove bridge loan commitment fees

   $ (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):

 

     Year ended
December 31,
2013
    Six Months
Ended June 30,
2014
    Six months
ended June 30,
2013
 

Adjustment to remove historical Carlyle management fees

   $ (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
    Weighted
average
statutory income
tax rate
    Six Months Ended
June 30, 2014
 

The Financing Transactions

      

Pro forma adjustment (e), interest expense

   $ (3.0     10.0 %(2)    $ 0.3   

Pro forma adjustment (g), debt modification fees

   $ (3.1     9.4 %(2)      0.3   
      

 

 

 
       $ 0.6   
      

 

 

 

The Offering

      

Pro forma adjustment (h), management fee

   $ (1.6     27.8 %(3)    $ 0.4   
      

 

 

 

 

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Table of Contents

Six months ended June 30, 2013

   Pro forma
adjustment
    Weighted
average
statutory
income
tax rate
    Six Months
Ended June 30,
2013
 

The Acquisition

      

Pro forma adjustment (a), depreciation

   $ 10.1        33.0 %(4)    $ (3.3

Pro forma adjustment (a), LIFO to weighted average

   $ (0.2     33.2 %(5)      0.1   

Pro forma adjustment (a), inventory step-up

   $ (103.7     33.2 %(5)      34.5   

Pro forma adjustment (b), amortization of intangibles

   $ 6.9        23.4 %(1)      (1.6

Pro forma adjustment (c), acquisition related expenses

   $ (28.1     23.1 %(6)      6.5   

Pro forma adjustment (d), foreign currency contract

   $ (19.4     0.0 %(7)      —     
      

 

 

 

Pro forma adjustment to income tax provision

       $ 36.2   
      

 

 

 

The Financing

      

Pro forma adjustment (e), interest expense

   $ 8.7        23.0 %(2)    $ (2.0

Pro forma adjustment (f), bridge loan commitment fees

   $ (25.0     12.4 %(8)      3.1   
      

 

 

 

Pro forma adjustment to income tax provision

       $ 1.1   
      

 

 

 

The Offering

      

Pro forma adjustment (h), management fee

   $ (1.3     27.8 %(3)    $ 0.4   
      

 

 

 

Pro forma adjustment to income tax provision

       $ 0.4   
      

 

 

 

 

Year ended December 31, 2013

   Pro forma
adjustment
    Weighted
average
statutory
income
tax rate
    Year ended
December 31,
2013
 

The Acquisition

      

Pro forma adjustment (a), depreciation

   $ 10.1        33.0 %(4)      (3.3

Pro forma adjustment (a), LIFO to weighted average

   $ (0.2     33.2 %(5)      0.1   

Pro forma adjustment (a), inventory step-up

   $ (103.7     33.2 %(5)      34.5   

Pro forma adjustment (b), amortization of intangibles

   $ 6.6        23.4 %(1)      (1.5

Pro forma adjustment (c), acquisition related expenses

   $ (28.1     23.1 %(6)      6.5   

Pro forma adjustment (d), foreign currency contract

   $ (19.4     0.0 %(7)      —     
      

 

 

 

Pro forma adjustment to income tax provision

       $ 36.3   
      

 

 

 

The Financing

      

Pro forma adjustment (e), interest expense

   $ (4.3     (16.3 )%(2)      (0.7

Pro forma adjustment (f), bridge loan commitment fees

   $ (25.0     12.4 %(8)      3.1   
      

 

 

 

Pro forma adjustment to income tax provision

       $ 2.4   
      

 

 

 

The Offering

      

Pro forma adjustment (h), management fee

   $ (3.1     27.8 %(3)      0.9   
      

 

 

 

Pro forma adjustment to income tax provision

       $ 0.9   
      

 

 

 

 

  (1) Reflects our weighted average statutory tax rate consisting primarily of the following jurisdictions and related rates:

 

Jurisdiction

   Statutory Rate  

United States

     38.5

Luxembourg(a)

     0.0

Germany

     32.5

 

  (a) Represents our effective tax rate due to prior and expected continued net operating losses.

 

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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

     38.5

Netherlands(a)

     0.0

 

  (a) 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

     38.5

Brazil

     34.0

Germany

     32.5

 

  (5) Reflects our weighted average statutory tax rate consisting primarily of the following jurisdictions and related rates:

 

Jurisdiction

   Statutory Rate  

United States

     38.5

Belgium

     34.0

Germany

     32.5

 

  (6) Reflects our weighted average statutory tax rate consisting primarily of the following jurisdictions and related rates:

 

Jurisdiction

   Statutory Rate  

United States

     38.5

Germany

     32.5

Luxembourg(a)

     0.0

 

  (a) 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

     38.5

Netherlands(a)

     0.0

 

  (a) Represents our effective tax rate due to prior and expected continued net operating losses

 

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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 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.

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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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 cost-effective solutions that better meet our needs as an independent company, developing a global procurement organization to reduce procurement costs and investing in a European manufacturing re-alignment to position the region for profitable growth. 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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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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    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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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            Successor            Pro Forma  
     January 1
through
January 31,
           Six months ended
June 30,
           Six months ended
June 30,
 

(dollars in millions)

   2013            2013     2014            2013     2014  

Net sales

   $ 326.2            $ 1,783.6      $ 2,174.0            $ 2,109.8      $ 2,174.0   

Other revenue

     1.1              13.7        14.7              14.8        14.7   
  

 

 

         

 

 

   

 

 

         

 

 

   

 

 

 

Total revenue

     327.3              1,797.3        2,188.7              2,124.6        2,188.7   

Cost of goods sold

     232.2              1,327.6        1,446.0              1,463.8        1,446.0   

Selling, general and administrative expenses

     70.8              397.0        497.3              470.0        497.3   

Research and development expenses

     3.7              18.5        23.4              22.2        23.4   

Amortization of acquired intangibles

     —                38.0        42.4              44.9        42.4   

Merger and acquisition related expenses

     —                28.1        —                —          —     
  

 

 

         

 

 

   

 

 

         

 

 

   

 

 

 

Income (loss) from operations

     20.6              (11.9     179.6              123.7        179.6   
  

 

 

         

 

 

   

 

 

         

 

 

   

 

 

 

Interest expense, net

     —                90.4        113.9              99.1        110.9   

Bridge financing commitment fees

     —                25.0        —                —          —     

Other expense (income), net

     5.0              59.1        2.9              43.4        (1.8
  

 

 

         

 

 

   

 

 

         

 

 

   

 

 

 

Income (loss) before income taxes

     15.6              (186.4     62.8              (18.8     70.5   

Provision (benefit) for income taxes

     7.1              (8.1     10.7              36.7        11.7   
  

 

 

         

 

 

   

 

 

         

 

 

   

 

 

 

Net income (loss)

     8.5              (178.3     52.1              (55.5     58.8   

Less: Net income attributable to noncontrolling interests

     0.6              2.3        2.6              2.9        2.6   
  

 

 

         

 

 

   

 

 

         

 

 

   

 

 

 

Net income (loss) attributable to controlling interests

   $ 7.9            $ (180.6   $ 49.5            $ (58.4   $ 56.2   
  

 

 

         

 

 

   

 

 

         

 

 

   

 

 

 

 

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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 long-term 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 non-manufacturing 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 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. 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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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