STOCK-BASED COMPENSATION

During the three and nine months ended September 30, 2015, we recognized $7.9 million and $22.1 million, respectively, in stock-based compensation expense. Included in the $22.1 million of stock compensation expense recorded during the nine months ended September 30, 2015 was $8.2 million of stock-based compensation expense attributable to the accelerated vesting of all issued and outstanding stock options issued under the Axalta Coating Systems Bermuda Co., Ltd. 2013 Equity Incentive Plan (the "2013 Plan"), as a result of the April 2015 Secondary Offerings which reduced Carlyle's interest in Axalta to below 50%, triggering a liquidity event (the "Liquidity Event") as defined in the 2013 Plan.

We recognized a tax benefit on stock-based compensation of $2.8 million and $6.6 million for the three and nine months ended September 30, 2015, respectively.

During the three and nine months ended September 30, 2014, we recognized $2.3 million and $6.1 million, respectively, in stock-based compensation expense. We recognized a tax benefit of $0.9 million and $2.2 million for the three and nine months ended September 30, 2014, respectively.

Stock-based compensation expense is primarily allocated to cost of goods sold and selling, general and administrative expenses on the condensed consolidated statements of operations.

Description of Equity Incentive Plans

In 2013, Axalta’s Board of Directors approved the 2013 Plan which reserved an aggregate of 19,839,143 common shares of the Company for issuance to employees, directors and consultants. The 2013 Plan provided for the issuance of stock options, restricted stock or other stock-based awards. No further awards may be granted pursuant to the 2013 Plan.

In 2014, Axalta's Board of Directors approved the Axalta Coating Systems Ltd. 2014 Incentive Award Plan (the "2014 Plan") which reserved an aggregate 11,830,000 common shares of the Company for issuance to employees, directors and consultants. The 2014 Plan provides for the issuance of stock options, restricted stock and other stock-based awards. All awards granted pursuant to the 2014 Plan must be authorized by the Board of Directors of Axalta or a designated committee thereof. Our Board of Directors has generally delegated responsibility for administering the 2014 Plan to our Compensation Committee.

The terms of the awards may vary with each grant and are determined by the Compensation Committee within the guidelines of the 2013 and 2014 Plans. Options granted under the 2013 Plan in 2013 and 2014 were assigned a 4.4 to 5 year vesting period; however, vesting was accelerated as a result of the Liquidity Event. In 2013, we granted approximately 16.3 million non-qualified, service-based stock options to certain employees and directors under the 2013 Plan, with strike prices of $5.92, $8.88 and $11.84 per share. During 2014, we granted approximately 1.6 million non-qualified, service-based stock options to certain employees and directors under the 2013 Plan with strike prices of $5.92, $7.21, $8.88 and $11.84 per share.

In 2015, we have granted 1.2 million non-qualified, service-based stock options to certain employees and directors under the 2014 Plan with strike prices between $25.34 and $34.80 per share. Options granted vest ratably over three years and have a life of no more than ten years. We also granted 0.9 million shares of restricted stock awards and 0.7 million restricted stock units at fair values between $25.34 and $34.80.

Stock Options

The Black-Scholes option pricing model is used to estimate fair values of the options as of the date of the grant. The weighted average fair value of options granted in 2015, 2014 and 2013 was $8.20, $1.92 and $1.38 per share, respectively. Principal weighted average assumptions used in applying the Black-Scholes model were as follows:



	2015 Grants		2014 Grants		2013 Grants
Expected Term	6.00 years		7.81 years		7.81 years
Volatility	22.22	%	28.28	%	28.61	%
Dividend Yield	—		—		—
Discount Rate	1.79	%	2.21	%	2.13	%

For the 2015 grants, the market value of the stock is the closing price of the stock on the date of grant. The market value of the stock for the 2014 grants was estimated using a contemporaneous valuation consistent with the American Institute of Certified Public Accountants Practice Aid, "Valuation of Privately Held Company Equity Securities Issued as Compensation." For the 2013 grants, the market value of the stock was based upon the Acquisition transaction since our common shares were not publicly traded at the time of grant and there had been no significant changes in operations since the closing date of the transaction.

To estimate the expected stock option term for the $5.92 per share and $7.21 per share tranches of stock options referred to above, we used the simplified method as the options were granted at fair value and we, as a privately held company at the grant dates, had no exercise history. Based upon this simplified method, the $5.92 per share and $7.21 per share stock options had an expected term of 6.5 years. The strike price for the $8.88 per share and $11.84 per share tranches of options exceeded fair value at the grant date which required the use of an estimate of an implicitly longer holding period, resulting in the term of 8.25 years.

The expected term assumptions used for the 2015 grants were also determined using the simplified method and resulted in an expected term of 6.0 years.

We do not anticipate paying cash dividends in the foreseeable future and, therefore, use an expected dividend yield of zero. Volatility for option grants is based upon our peer group due to the limited trading history of our common shares in public markets. The discount rate was derived from the U.S. Treasury yield curve.

The exercise price and market value per share amounts presented above were as of the date the stock options were granted.

A summary of stock option award activity as of and for the nine months ended September 30, 2015, is presented below:



	Awards/Units (millions)		Weighted- Average Exercise Price		Aggregate Intrinsic Value (millions)		Weighted Average Remaining Contractual Life (years)
Outstanding at January 1, 2015	17.1		$	9.38
Granted	1.2		$	31.45
Exercised	(7.0	)	$	8.91
Forfeited	—		$	—
Outstanding at September 30, 2015	11.3		$	12.01
Vested and expected to vest at September 30, 2015	11.3		$	12.01	$	158.5	8.05
Exercisable at September 30, 2015	10.1		$	9.70	$	158.2	7.86

Cash received by the company upon the exercise of options for the nine months ended September 30, 2015 was $60.4 million. The expected tax benefits related to the exercises during the three and nine months ended September 30, 2015 are $15.1 million and $54.9 million, respectively. The Company may settle option exercises by issuing new shares, treasury shares or shares purchased on the open market.

Compensation cost is recorded net of forfeitures. The forfeiture rate assumption is the estimated annual rate at which unvested awards are expected to be forfeited during the vesting period. Periodically, management will assess whether it is necessary to adjust the estimated rate to reflect changes in actual forfeitures or changes in expectations. At September 30, 2015, the Company has estimated its annual forfeiture rate at 0% due to its limited history and expectations of forfeitures.

At September 30, 2015, there was $7.5 million of unrecognized compensation cost relating to outstanding unvested stock options expected to be recognized over the weighted average period of 2.6 years. Compensation expense is recognized for the fair values of the stock options over the requisite service period of the awards using the graded-vesting attribution method.

Restricted Stock Awards and Restricted Stock Units

During the nine months ended September 30, 2015, we issued 1.7 million shares of restricted stock awards and restricted stock units with an average grant price of $32.29 per share. A portion of these awards vest ratably over three years. Other awards granted to certain members of management cliff vest over two and three year periods.

A summary of restricted stock and restricted stock unit award activity as of September 30, 2015 is presented below:



	Awards (millions)	Weighted-Average Fair Value
Outstanding at January 1, 2015	—	$	—
Granted	1.7	$	32.29
Vested	—	$	—
Forfeited	—	$	—
Outstanding at September 30, 2015	1.7	$	32.29

At September 30, 2015, there was $43.8 million of unamortized expense relating to unvested restricted stock and restricted stock units that is expected to be amortized over a weighted average period of 2.6 years. Compensation expense is recognized for the fair values of the awards over the requisite service period of the awards using the graded-vesting attribution method.