AXALTA COATING SYSTEMS LTD. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K, as well as the information presented under Part II, Item 6, "Selected Financial Data" of this Annual Report on Form 10-K. This discussion and analysis deals with comparisons of material changes in the consolidated financial statements for 2020 and 2019. For the comparison of 2019 and 2018, see the Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our 2019 Annual Report on Form 10-K, filed with theSecurities and Exchange Commission onFebruary 19, 2020 . FORWARD-LOOKING STATEMENTS Many statements made in the following discussion and analysis of our financial condition and results of operations and elsewhere in this Annual Report on Form 10-K that are not statements of historical fact, including statements about our beliefs and expectations, are "forward-looking statements" within the meaning of federal securities laws and should be evaluated as such. Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plan, strategies and capital structure. These statements often include words such as "anticipate," "expect," "suggests," "plan," "believe," "intend," "estimates," "targets," "projects," "should," "could," "would," "may," "will," "forecast" and the negative of these words or other comparable or similar terminology. We base these forward-looking statements or projections on our current expectations, plans and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances and at such time. As you read and consider this Annual Report on Form 10-K, 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, including, but not limited to, the risks and uncertainties described in "Forward-Looking Statements," as well as "Risk Factors", and you should not place undue reliance on these forward-looking statements or projections. Although we believe that these forward-looking statements and projections are based on reasonable assumptions at the time they are made, you should be aware that many factors, including, but not limited to, those described in "Risk Factors", 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. These cautionary statements should not be construed by you to be exhaustive and are made only as of the date of this Annual Report on Form 10-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. OVERVIEW We are a leading global manufacturer, marketer and distributor of high performance coatings systems and products. We have over a 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 46 manufacturing facilities, four technology centers, 53 customer training centers and approximately 13,000 people 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 approximately 4,000 independent, locally based distributors. We operate our business in two operating segments, Performance Coatings and Transportation Coatings. Our segments are based on the type and concentration of customers served, service requirements, methods of distribution and major product lines. Through our Performance Coatings segment, we provide high-quality liquid and powder coatings solutions to a fragmented and local customer base. We are one of only a few suppliers with the technology to provide precise color matching and highly durable coatings systems. The end-markets within this segment are refinish and industrial. Through our Transportation Coatings segment we provide advanced coating technologies and services to OEMs of light and commercial vehicles. These increasingly global customers require a high level of technical support coupled with cost-effective, environmentally responsible, coatings systems that can be applied with a high degree of precision, consistency and speed. The end-markets within this segment are light vehicle and commercial vehicle. 31 -------------------------------------------------------------------------------- Table of Contents BUSINESS HIGHLIGHTS General Business Highlights Our net sales decreased 16.6% for the year endedDecember 31, 2020 compared with the year endedDecember 31, 2019 , driven by a decrease in volumes of 15.7% as a result of demand largely due to COVID-19 impacts on our business. The decrease in volumes is inclusive of negative impacts of portfolio changes of 0.6% associated with the prior year sale of a consolidated joint venture. Further contributing to the decrease was slightly lower average selling price due to product mix as well as impacts of unfavorable currency translation of 0.8%. The following trends have impacted our segment and end-market sales performance: •Performance Coatings: Net sales decreased 13.9% compared to 2019 driven primarily by a decrease in volumes of 13.0% as a result of decreased demand largely due to COVID-19 across both end-markets, inclusive of the negative net impacts of portfolio changes of 0.9% associated with the sale of our consolidated powder joint venture inChina . Furthering the decrease during the period were the impacts of unfavorable foreign currency translation of 0.2%, as well as a 0.7% decrease from lower average selling prices resulting primarily from a change in product mix in the refinish end-market. •Transportation Coatings: Net sales decreased by 21.7% compared to 2019 driven primarily by a decrease in volumes of 20.8% as a result of customer shutdowns caused by COVID-19, as well as the impacts of unfavorable foreign currency translation of 2.0%. Partially offsetting the decline in volumes and foreign currency headwinds during the year was an increase of 1.1% from increased average selling prices and product mix across both end-markets. Our business serves four end-markets globally with net sales for the years endedDecember 31, 2020 and 2019 as follows: (In millions) Year Ended December 31, 2020 vs 2019 2020 2019 % change Performance Coatings Refinish$ 1,449.0 $ 1,760.4 (17.7) % Industrial 1,067.4 1,163.0 (8.2) % Total Net sales Performance Coatings 2,516.4 2,923.4 (13.9) % Transportation Coatings Light Vehicle 960.5 1,208.4 (20.5) % Commercial Vehicle 260.7 350.4 (25.6) % Total Net sales Transportation Coatings 1,221.2 1,558.8 (21.7) % Total Net sales$ 3,737.6 $ 4,482.2 (16.6) % Coronavirus (COVID-19) Pandemic During the year endedDecember 31, 2020 , the COVID-19 pandemic had a significant adverse impact on the demand for our products and, thus, our income from operations. These impacts have affected our results globally. We have seen improvements as countries began reopening and are continuing to maintain a cautious outlook as certain countries have experienced incremental pandemic-driven restrictions in the second half of the fourth quarter. We have taken action to both plan for and address the near-term impact commensurate with the decline in demand in certain areas of our business. The focus has been on dynamically adjusting our cost structure and our results already include benefits from actions taken to reduce discretionary spending across the organization which has been aided by our highly variable cost structure. We have seen sequential improvements in customer demand since May, including significantly increased profitability in the second half of the year; however, if the global pandemic continues or evolves, the effects could have a material adverse impact on our future results of operations, financial condition and cash flows. Consistent with the actions taken or required by governmental authorities, we shut down certain manufacturing operations in regions around the world in April andMay 2020 . As ofDecember 31, 2020 all of our manufacturing sites are currently open, and we have taken steps to enhance safety standards in place to protect our workers. The periods of reduced production levels did create a significant adverse impact on our results of operations for the year endedDecember 31, 2020 ; however, this is not expected to be sustained into 2021, given continued recovery seen across our business. Any future disruption to our production levels could have a material adverse effect on our financial condition, liquidity and results of operations. 32 -------------------------------------------------------------------------------- Table of Contents We are actively monitoring and managing supply chain challenges, including logistics, but thus far there have been no significant disruptions. Our supply chain team is coordinating with our suppliers to identify and mitigate potential areas of risk and manage inventories. Further, we are actively monitoring our customers' credit worthiness, and while there has been an increase in credit risk levels, at this point we are not aware of any material changes to our customers' ability to settle outstanding receivables. A significant portion of our non-operations focused workforce continues to work remotely while we monitor COVID-19 and adhere to government guidelines for safe operation. We expect to continue to be able to meet our customers' needs while ensuring the safety of our employees, customers and communities. From a liquidity standpoint, we had$1,360.9 million of cash and cash equivalents and$366.0 million of available borrowing capacity under our Senior Secured Credit Facilities as ofDecember 31, 2020 . We have no outstanding borrowings on the Revolving Credit Facility as ofDecember 31, 2020 and, therefore, are not currently subject to any financial covenants under the Senior Secured Credit Facilities. Capital and Liquidity Highlights DuringJanuary 2020 , we voluntarily prepaid$300.0 million of the outstanding principal on the 2024 Dollar Term Loans. DuringJune 2020 , we issued$500.0 million in aggregate principal amount of 4.750% Senior Notes due 2027, with the proceeds to be used for general corporate purposes and to pay related transaction costs and expenses. DuringNovember 2020 , we issued$700.0 million in aggregate principal amount of 3.375% Senior Notes due 2029, from which the net proceeds, together with cash on hand, were used to redeem$500.0 million aggregate principal amount of the 4.875% Senior Notes due 2024 and €335.0 million aggregate principal amount of the 4.250% Senior Notes due 2024, as well as to pay related redemption premiums and transaction costs. In conjunction with the November issuance, we entered into cross-currency swaps with aggregate notional amounts totaling$396.3 million at a weighted average interest rate of 2.15%. During the year endedDecember 31, 2020 , we repurchased 0.9 million shares for total consideration of$25.0 million as we continue to execute against our previously approved share repurchase program. See Note 18 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information. Strategic Review OnMarch 31, 2020 , we announced that our Board of Directors concluded that the previously announced review of strategic alternatives was complete and that the ongoing execution of our strategic plan is the best alternative to maximize value for Axalta's shareholders. 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 and services across all major geographic areas. Our net sales include total sales less estimates for returns and price allowances. Price allowances include discounts for prompt payment as well as volume-based incentives. Our overall net sales are generally impacted by the following factors: •fluctuations in overall economic activity within the geographic markets in which we operate; •underlying growth in one or more of our end-markets, either worldwide or in particular geographies in which we operate; •the type of products used within existing customer applications, or the development of new applications requiring products similar to ours; •changes in product sales prices (including volume discounts and cash discounts for prompt payment); •changes in the level of competition faced by our products, including price competition and the launch of new products by competitors; •our ability to successfully develop and launch new products and applications; •changes in buying habits of our customers (including our distributors); and •fluctuations in foreign exchange rates. 33 -------------------------------------------------------------------------------- Table of Contents 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 Part I, Item 1A, "Risk Factors-Risks Related to our Business." Cost of goods sold ("cost of sales") Our cost of sales consists principally of the following: •Production materials costs. These include costs of the materials needed to manufacture products for distribution. These costs generally increase on an aggregate basis as production volumes increase. A significant amount of the materials used in production are purchased on a global lowest-cost basis. •Employee costs. These include the compensation and benefit costs, including share-based compensation expense, for employees involved in our manufacturing operations and on-site technical support services. 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; •fluctuations in foreign exchange rates; and •changes in sales volumes, average selling prices and product mix. Selling, general and administrative expenses ("SG&A") Our selling, general and administrative expense consists of all expenditures incurred in connection with the sales and marketing of our products, as well as technical support for our customers and administrative overhead costs, including: •compensation and benefit costs for management, sales personnel and administrative staff, including share-based compensation expense. Expenses relating to our sales personnel increase or decrease principally with changes in sales volume due to the need to increase or decrease sales personnel to meet changes in demand. Expenses relating to administrative personnel generally do not increase or decrease directly with changes in sales volume; and •depreciation, advertising and other selling expenses, such as expenses incurred in connection with travel and communications. Changes in selling, general and administrative expense as a percentage of net sales have historically been impacted by a number of factors, including: •changes in sales volume, as higher volumes enable us to spread the fixed portion of our administrative expense over higher sales; •changes in our customer base, as new customers may require different levels of sales and marketing attention; •new product launches in existing and new markets, as these launches typically involve a more intense sales activity before they are integrated into customer applications; •customer credit issues requiring increases to the allowance for doubtful accounts; and •fluctuations in foreign exchange rates. 34 -------------------------------------------------------------------------------- Table of Contents Other operating charges Our other operating charges includes termination benefits and other employee related costs, strategic review and retention costs, offering and transactional costs, divestiture and impairment charges, details of which are included in our reconciliations of segment operating performance to income before income taxes. Research and development expenses Research and development expenses represent 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, Senior Notes and other indebtedness. Other expense (income), net Other expense (income), net represents costs incurred on various non-operational items including costs incurred in conjunction with our debt refinancing and extinguishment transactions, interest income, as well as foreign exchange gains and losses and non-operational impairment losses unrelated to our core business. 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, 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. RESULTS OF OPERATIONS The following discussion should be read in conjunction with the information contained in the accompanying financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Our historical results of operations summarized and analyzed below may not necessarily reflect what will occur in the future. Net sales Years Ended December 31, 2020 vs 2019 2020 2019 $ Change % Change Net sales 3,737.6 4,482.2$ (744.6) (16.6) % Volume effect (15.1) % Impact of portfolio changes (0.6) % Price/Mix effect (0.1) % Exchange rate effect (0.8) % Net sales decreased due to the following: n Lower sales volumes across both segments and all regions driven by significantly reduced global automotive production, lower vehicle miles driven and the associated impact on collision repairs and accelerated industrial slowdown primarily as a result of COVID-19 impacts n Unfavorable impacts of currency translation, due primarily to the weakening of the Brazilian Real and Mexican Peso, partially offset by the strengthening of the Euro, compared to theU.S. dollar n Negative impacts as a result of portfolio changes resulting from the sale of our consolidated joint venture interests within our Performance Coatings segment during the second quarter of 2019 n Lower average selling prices resulting primarily from a change in product mix in refinish, largely offset by an increase across both end-markets within the Transportation Coatings segment, primarily within light vehicle 35 --------------------------------------------------------------------------------
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Cost of sales
Years Ended December 31, 2020 vs 2019
2020 2019 $ Change % Change
Cost of sales $ 2,457.9 $ 2,917.9 $ (460.0) (15.8) %
% of net sales 65.8 % 65.1 %
Cost of sales decreased due to the following:
n Lower sales volumes across both segments and all regions as a result of COVID-19 impacts
n Reduction in costs due to operational efficiencies associated with our temporary cost
savings initiatives, including decreased compensation related expenses, mostly associated
with COVID-19 related cost reduction actions
n Decreased variable input costs across both segments and all regions
n Lower costs as a result of portfolio changes resulting from the sale of our consolidated
joint venture interests within our Performance Coatings segment during the second quarter
of 2019
n Decrease in depreciation expense for operating equipment
n Favorable impacts of currency translation, due primarily to the weakening of the
Brazilian Real and Mexican Peso, partially offset by the strengthening of the Euro,
compared to the U.S. dollar
Partially offset by:
n Increased expenses of $35.3 million associated with reduced utilization at certain
manufacturing sites and $9.3 million associated with inventory reserves, primarily in the
second quarter of 2020
Cost of sales as a percentage of net sales increased due to the following:
n Lower sales volume covering fixed costs, including impacts of reduced utilization at
certain manufacturing sites and increased inventory reserves
Partially offset by:
n Decreases associated with variable cost savings and operational efficiencies associated
with temporary cost savings initiatives, including decreased compensation related expenses
associated with COVID-19 related cost reduction actions
Selling, general and administrative expenses
Years Ended December 31, 2020 vs 2019
2020 2019 $ Change % Change
Selling, general and administrative expenses
(15.5) %
Selling, general and administrative expenses decreased due to the following:
n Reduction in costs due to operational efficiencies associated with our temporary cost
savings initiatives, including decreased compensation-related expenses associated with
COVID-19 related cost reduction actions
n Decline in third-party commissions and sales incentive compensation driven by a decrease in
net sales
n Lower costs as a result of portfolio changes resulting from the sale of our consolidated
joint venture interests within our Performance Coatings segment during the second quarter of
2019
n Favorable impacts of currency translation, due primarily to the weakening of the Brazilian
Real and Mexican Peso, partially offset by the strengthening of the Euro, compared to the U.S.
dollar
Partially offset by:
n Increased reserves for trade receivables of $6.2 million to $11.7 million from $5.5 million
in 2019, primarily due to impacts from COVID-19
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Other operating charges
Years Ended December 31, 2020 vs 2019
2020 2019 $ Change % Change
Other operating charges $ 110.8 $ 70.7 $ 40.1 56.7 %
Other operating charges increased due to the following:
n Increase in termination benefits and other employee related costs associated with our
cost saving initiatives of $39.7 million from $35.2 million in the prior year to $74.9
million in the current year
n Increased expenses of $17.3 million associated with the review of strategic
alternatives that was concluded in March 2020 as discussed above within "Business
Highlights - Strategic Review" and retention costs from $13.4 million in the prior year
to $30.7 million in the current year
Partially offset by:
n Decreased divestiture and impairment charges of $16.2 million from $21.1 million in
the prior year to $4.9 million in the current year, primarily driven by charges recorded
in 2019 in China related to the abandonment of engineering work for aspects of our China
footprint project which was adjusted due to evolving market conditions
Research and development expenses
Years Ended December 31, 2020 vs 2019
2020 2019 $ Change % Change
Research and development expenses $ 55.2 $ 70.2 $ (15.0) (21.4) %
Research and development expenses decreased due to the following:
n Decrease in operating expenses as a result of operational efficiencies associated with
temporary cost savings initiatives, including decreased compensation-related expenses
associated with COVID-19 related cost reduction actions
Amortization of acquired intangibles
Years Ended December 31, 2020 vs 2019
2020 2019 $ Change % Change
Amortization of acquired intangibles $ 113.2 $ 113.1 $ 0.1 0.1 %
Amortization of acquired intangibles increased modestly due to the following:
n Fluctuations of foreign currency exchange rates during the year, primarily related to
the Euro compared to the U.S. dollar
Interest expense, net
Years Ended December 31, 2020 vs 2019
2020 2019 $ Change % Change
Interest expense, net $ 149.9 $ 162.6 $ (12.7) (7.8) %
Interest expense, net decreased primarily due to the following:
n Decrease in average interest rates due to LIBOR decreases on our variable rate debt
over the comparable period as well as lower interest rate on the 2029 Senior Notes
issued in November 2020
n Decrease in principal due to the voluntary prepayment of $300.0 million on our 2024
Dollar Term Loans in January 2020 , and the redemption of our $500.0 million 2024 Dollar
Senior Notes and €335 million 2024 Euro Senior Notes in connection with the November
2020 refinancing
Partially offset by:
n Increase in principal from our November refinancing, resulting in the issuance of
$500.0 million and $700.0 million aggregate principal amount of the 2027 Dollar Senior
Notes and 2029 Dollar Senior Notes, respectively
n Decreases in the benefits from our derivative instruments as a result of LIBOR
decreases
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Other expense (income), net
Years Ended December 31, 2020 vs 2019
2020 2019 $ Change % Change
Other expense (income), net $ 33.4 $ (4.4) $ 37.8 (859.1) %
Other expense (income), net increased due to the following:
n Debt extinguishment and refinancing related costs of $34.4 million in the current year,
driven primarily by redemption and transactional costs associated with the November 2020
redemption of our 2024 Senior Notes, as well as the write-off of unamortized deferred
financing costs and original issue discounts due to the November redemption and the
voluntary prepayment of $300.0 million of outstanding principal on our 2024 Dollar Term
Loans in January 2020 .
Provision for income taxes
Years Ended December 31,
2020 2019
Income before income taxes $ 122.2 $ 330.0
Provision for income taxes 0.2 77.4
Statutory U.S. Federal income tax rate 21.0 % 21.0 %
Effective tax rate 0.2 % 23.5 %
Effective tax rate vs. statutory U.S. Federal income tax rate (20.8) % 2.5 %
(Favorable) Unfavorable Impact
Items impacting the effective tax rate vs. statutory
2020 2019
Earnings generated in jurisdictions where the statutory rate is
lower than the
$ (13.9) $ (16.3) Changes in valuation allowance 10.0 18.8 Foreign exchange gain (loss), net 8.2 (2.8) Stock-based compensation excess tax benefits (0.3) (11.4) Non-deductible expenses and interest 4.6 4.1 Increase in unrecognized tax benefits (2) 54.9 11.2 Intra-entity asset transfer (3) (50.8) - Foreign taxes (4) 7.0 21.4 Other - net (5) (42.7) (23.9) (1) Primarily related to earnings inBermuda ,Germany , Luxembourg andSwitzerland . (2) In 2020 we recorded charges of$14.3 million in connection with the income tax audit inGermany and$27.3 million inthe Netherlands related to realized exchange gain.The Netherlands item is fully offset by a tax benefit of$27.3 million recorded in 2020 to adjust to the prior year tax filing position. (3) Related to the step-up of tax-deductible basis upon transfer of certain intellectual property rights to our Swiss subsidiary. (4) In 2019, the unfavorable impact is primarily related to an adjustment for certain tax attributes for which the Company determined are no longer realizable. This was mostly offset by a tax benefit for the decrease to the valuation allowance on the tax attributes previously recorded as a result of changes underU.S. tax reform. (5) In 2020, the Company recorded a tax benefit of$41.8 million inthe Netherlands , of which$27.3 million is related to realized exchange gain and$14.5 million related to rate change on deferred taxes, which are both fully offset by a tax expense of$27.3 million for the increase to unrecognized tax benefits and$14.5 million for an increase to the valuation allowance, respectively. In 2019, The Company recorded a tax benefit of$24.9 million in Luxembourg related to a local statutory impairment, which is fully offset by a tax expense of$24.9 million for the increase to the valuation allowance. 38 -------------------------------------------------------------------------------- Table of Contents SEGMENT RESULTS The Company's products and operations are managed and reported in two operating segments: Performance Coatings and Transportation Coatings. See Note 20 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information. Performance Coatings Segment Net sales Years Ended December 31, 2020 vs 2019 2020 2019 $ Change % Change Net sales$ 2,516.4 $ 2,923.4 $ (407.0) (13.9) % Volume effect (12.1) % Impact of portfolio changes (0.9) % Price/Mix effect (0.7) % Exchange rate effect (0.2) % Net sales decreased due to the following: n Lower organic volumes across both end-markets and all regions due to decreased demand primarily as a result of lower vehicle miles driven and the associated impact on collision repairs and industrial production due to COVID-19 n Organic volumes rebounded in the second half of the year; however, were still below prior year by 5.1%, driven by the Industrial end-market which had an increase of 3.1% versus the prior year comparable period n Negative impacts as a result of portfolio changes within our industrial end-market, which included the sale of our consolidated joint venture interests during the second quarter of 2019 n Lower average selling prices across both end-markets, primarily driven by a change in product mix sold in refinish n Unfavorable impacts of currency translation, due primarily to the weakening of the Brazilian Real, Mexican Peso and Turkish Lira, partially offset by the strengthening of the Euro, compared to theU.S. dollar Adjusted EBIT Years Ended December 31, 2020 vs 2019 2020 2019 $ Change % Change Adjusted EBIT$ 344.3 $ 449.1 $ (104.8) (23.3) % Adjusted EBIT Margin 13.7 % 15.4 % Adjusted EBIT decreased due to the following: n Lower organic volumes across both end-markets and all regions due to decreased demand primarily as a result of lower vehicle miles driven and lower industrial production due to COVID-19 n Lower average selling prices due to product mix across both end-markets n Unfavorable impacts of currency translation, due primarily to the weakening of the Brazilian Real and Mexican Peso compared to theU.S. dollar Partially offset by: n Lower operating expenses across both end-markets and all regions, resulting from operational efficiencies associated with our temporary cost savings initiatives including lower compensation expense associated with COVID-19 related cost reduction actions and decreased costs to support net sales n Lower variable input costs across both end-markets and all regions Adjusted EBIT margins decreased during the year due to the following: n Lower organic volumes in the first half of the year primarily due to COVID-19, largely offset by volume recoveries in the second half of the year combined with lower operating expenses and variable input costs 39 -------------------------------------------------------------------------------- Table of Contents Transportation Coatings Segment Net Sales Years Ended December 31, 2020 vs 2019 2020 2019 $ Change % Change Net sales$ 1,221.2 $ 1,558.8 $ (337.6) (21.7) % Volume effect (20.8) % Price/Mix effect 1.1 % Exchange rate effect (2.0) % Net sales decreased due to the following: n Lower organic volumes across both end-markets and all regions due to decreased demand primarily as a result of significantly reduced global automotive production due to COVID-19 n Organic volumes rebounded in the second half of the year; however, were still below prior year by 4.4%, driven by a strong recovery in light vehicle production at OEMs n Unfavorable impacts of currency translation, due primarily to the weakening of the Brazilian Real compared to theU.S. dollar Partially offset by: n Higher average selling prices across both end-markets and all regions exceptNorth America , which has remained stable, primarily driven by light vehicle Adjusted EBIT Years Ended December 31, 2020 vs 2019 2020 2019 $ Change % Change Adjusted EBIT$ 82.9 $ 137.4 $ (54.5) (39.7) % Adjusted EBIT Margin 6.8 % 8.8 % Adjusted EBIT decreased due to the following: n Lower organic volumes across both end-markets and all regions due to decreased demand primarily as a result of significantly reduced global automotive production due to COVID-19 n Unfavorable impacts of currency translation, due primarily to the weakening of the Brazilian Real compared to theU.S. dollar Partially offset by: n Lower operating expenses across both end-markets and all regions, resulting from operational efficiencies associated with our temporary cost savings initiatives including lower compensation expense associated with COVID-19 related cost reduction actions and costs to decreased support net sales n Higher average selling prices across both end-markets and most regions n Lower variable input costs across both end-markets and all regions Adjusted EBIT margins decreased during the year due to the following: n Lower organic volumes in the first half of the year primarily due to COVID-19, largely offset by volume recoveries in the second half of the year combined with lower operating expenses and variable input costs 40 -------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity are cash on hand, cash flow from operations and available borrowing capacity under our Senior Secured Credit Facilities. AtDecember 31, 2020 , availability under the Revolving Credit Facility was$366.0 million , net of$34.0 million of letters of credit outstanding. All such availability may be utilized without violating any covenants under the credit agreement governing such facility or the indentures governing the Senior Notes. AtDecember 31, 2020 , we had$16.5 million of outstanding borrowings under other lines of credit. Our remaining available borrowing capacity under other lines of credit in certain non-U.S. jurisdictions totaled$6.1 million . We or our affiliates, at any time and from time to time, may purchase shares of our common stock, the Senior Notes or other indebtedness. Any such purchases may be made through the open market or privately negotiated transactions with third parties or pursuant to one or more redemption, tender or exchange offers or otherwise, upon such terms and at such prices, as well as with such consideration, as we, or any of our affiliates, may determine. Cash Flows Years endedDecember 31, 2020 and 2019 Years Ended December 31, (In millions) 2020 2019 Net cash provided by (used for): Operating activities: Net income$ 122.0 $ 252.6 Depreciation and amortization 320.3 353.0
Amortization of deferred financing costs and original issue discount
9.0 8.8
Debt extinguishment and refinancing related costs 34.4 0.2
Deferred income taxes (55.4) 15.7
Realized and unrealized foreign exchange losses, net 3.9 5.9
Stock-based compensation 15.1 15.7
Divestiture and impairment charges 5.7 21.1
Interest income on swaps designated as net investment hedges (14.5) (14.7)
Other non-cash, net 10.5 (0.1)
Net income adjusted for non-cash items 451.0 658.2
Changes in operating assets and liabilities 58.3 (85.1)
Operating activities 509.3 573.1
Investing activities (61.5) (93.9)
Financing activities (130.9) (158.4)
Effect of exchange rate changes on cash 26.6 3.3
Net increase in cash $ 343.5 $ 324.1
Year Ended December 31, 2020
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the year ended December 31, 2020
was $509.3 million . Net income before deducting non-cash items (depreciation,
amortization and other non-cash items) generated cash of $451.0 million . This
was aided by inflows from working capital of $58.3 million , for which the most
significant drivers were inflows from accounts payable, inventory and other
liabilities of $103.0 million , $39.6 million and $31.7 million , respectively.
These inflows were driven by management of accounts payable and other
liabilities and sell through of inventory. The inflows were partially offset by
outflows for other accrued liabilities of $70.1 million , primarily associated
with accruals for employee termination expenses, accounts receivable of $26.0
million due to timing of collections and prepaid expenses and other assets of
$19.9 million , primarily due to business incentive payments.
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Net Cash Used for Investing Activities
Net cash used for investing activities for the year ended December 31, 2020 was
$61.5 million , driven primarily by purchases of property, plant and equipment of
$82.1 million , partially offset by interest proceeds on swaps designated as net
investment hedges of $14.5 million .
Net Cash Used for Financing Activities
Net cash used for financing activities for the year ended December 31, 2020 was
$130.9 million . This was driven by cash proceeds of $500.0 million and
$700.0 million for the issuance of our 2027 Dollar Senior Notes and 2029 Dollar
Senior Notes, respectively, partially offset by the voluntary prepayment of
$300.0 million on the outstanding principal on the 2024 Dollar Term Loan, and
redemptions of $500.0 million and $396.3 million of the 2024 Dollar Senior Notes
and 2024 Euro Senior Notes, respectively. Also contributing to the net outflows
were routine repayments on short-term and long-term borrowings of $65.8 million ,
payments for redemption fees and refinancing-related costs of $39.9 million and
repurchases of our common stock of $26.0 million .
Other Impacts on Cash
Currency exchange impacts on cash for the year ended December 31, 2020 were
favorable by $26.6 million , which was driven primarily by the strengthening of
the Euro, Chinese Renminbi and British Pound compared to the U.S. Dollar.
Year Ended December 31, 2019
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the year ended December 31, 2019
was $573.1 million . Net income adjusted for non-cash items (depreciation,
amortization and other non-cash items) generated cash of $658.2 million . This
was partially offset by changes in operating assets and liabilities of $85.1
million . The most significant drivers were increases in prepaid expenses and
other assets of $118.9 million due to business incentive payments and payments
for employee retention, as well as accounts receivables of $10.1 million due to
timing of collections. Partially offsetting these outflows were increases in
accounts payable and other liabilities of $18.2 million and $9.6 million ,
respectively, and a decrease in inventory of $10.8 million .
Net Cash Used for Investing Activities
Net cash used for investing activities for the year ended December 31, 2019 was
$93.9 million . These primary uses were for purchases of property, plant and
equipment of $112.5 million and business acquisitions of $3.3 million , partially
offset by interest proceeds on swaps designated as net investment hedges of
$14.7 million and net proceeds from the sale of our consolidated joint venture
of $8.2 million as discussed in Note 3 of the consolidated financial statements
included elsewhere in this Annual Report on Form 10-K.
Net Cash Used for Financing Activities
Net cash used for financing activities for the year ended December 31, 2019 was
$158.4 million . This change was driven by purchases of common stock totaling
$105.3 million , payments of $67.1 million on short-term and long-term
borrowings, investments in noncontrolling interests of $31.1 million , deferred
acquisition-related payments of $2.2 million and dividends paid to
noncontrolling interests of $1.5 million . These payments were partially offset
by cash received from stock option exercises of $50.3 million .
Other Impacts on Cash
Currency exchange impacts on cash for the year ended December 31, 2019 were
favorable by $3.3 million , which was driven primarily by the strengthening of
the British Pound and Mexican Peso compared to the U.S. Dollar.
Financial Condition
We had cash and cash equivalents at December 31, 2020 and 2019 of $1,360.9
million and $1,017.5 million , respectively. Of these balances, $761.7 million
and $540.0 million were maintained in non-U.S. jurisdictions as of December 31,
2020 and 2019, respectively. We believe our organizational structure allows us
the necessary flexibility to move funds throughout our subsidiaries to meet our
operational working capital needs.
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Our 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. Our primary sources of liquidity are cash on hand, cash flow from
operations and available borrowing capacity under our Senior Secured Credit
Facilities. Based on our forecasts, we believe that cash flow from operations,
available cash on hand and available borrowing capacity under our Senior Secured
Credit Facilities and existing lines of credit will be adequate to service debt,
fund our cost saving initiatives, meet liquidity needs and fund necessary
capital expenditures for the next twelve months.
Our ability to make scheduled payments of principal or interest on, or to
refinance, our indebtedness or to fund working capital requirements, capital
expenditures and other current obligations will depend on our ability to
generate cash from operations. Such cash generation is subject to general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond our control, including the effects of COVID-19.
If required, our ability to raise additional financing and our borrowing costs
may be impacted by short and long-term debt ratings assigned by independent
rating agencies, which are based, in significant part, on our performance as
measured by certain credit metrics such as interest coverage and leverage
ratios. Our highly leveraged nature may limit our ability to procure additional
financing in the future.
The following table details our borrowings outstanding at the periods indicated:
December 31,
(In millions) 2020 2019
2024 Dollar Term Loans $ 2,063.2 $ 2,387.5
2024 Dollar Senior Notes - 500.0
2024 Euro Senior Notes - 375.2
2025 Euro Senior Notes 552.1 504.0
2027 Dollar Senior Notes 500.0 -
2029 Dollar Senior Notes 700.0 -
Short-term and other borrowings 118.0 109.0
Unamortized original issue discount (6.3) (10.5)
Unamortized deferred financing costs (34.3) (31.1)
3,892.7 3,834.1
Less:
Short-term borrowings 29.9 19.6 Current portion of long-term borrowings 24.3 24.3 Long-term debt$ 3,838.5 $ 3,790.2 Our indebtedness, including the Senior Secured Credit Facilities and Senior Notes, is more fully described in Note 18 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We believe that we continue to maintain sufficient liquidity to meet our requirements, including our leverage and associated interest as well as our working capital needs. Availability under the Revolving Credit Facility was$366.0 million and$361.2 million atDecember 31, 2020 andDecember 31, 2019 , respectively, all of which may be borrowed by us without violating any covenants under the credit agreement governing such facility or the indentures governing the Senior Notes. 43 -------------------------------------------------------------------------------- Table of Contents The following table details our borrowings outstanding, average effective interest rates and the associated interest expense, inclusive of the amortization of debt issuance costs, debt discounts and the impact of derivative instruments for the years endedDecember 31, 2020 and 2019, respectively: Years Ended December 31, 2020 2019 Average Effective Interest Average Effective Interest (In millions) Principal Interest Rate Expense Principal Interest Rate Expense Term Loans$ 2,063.2 3.0 %$ 68.0 $ 2,387.5 3.9 %$ 92.7 Revolving Credit Facility - N/A 1.4 - N/A 1.6 Senior Notes 1,752.1 4.5 % 75.2 1,379.2 4.6 % 62.9 Short-term and other borrowings 118.0 Various 5.3 109.0 Various 5.4 Total$ 3,933.3 $ 149.9 $ 3,875.7 $ 162.6 After giving effect to our cross-currency and interest rate hedges, our borrowings denominated inU.S. Dollar as ofDecember 31, 2020 and 2019 were$2,509.9 million and$2,521.5 million , respectively, with weighted average interest rates of 3.6% and 3.9%. After giving effect to our cross-currency and interest rate hedges, our borrowings denominated in Euro as ofDecember 31, 2020 and 2019 were$1,423.4 million and$1,354.2 million , respectively, with weighted average interest rates of 2.5% and 3.1%. Contractual Obligations The following table summarizes our contractual obligations atDecember 31, 2020 : Contractual Obligations Due In: (In millions) Total 2021 2022-2023 2024-2025 Thereafter Debt, including current portion Senior Secured Credit Facilities, consisting of the following: 2024 Dollar Term Loans$ 2,063.2 $ 24.3 $ 48.6 $ 1,990.3 $ - Senior Notes, consisting of the following: 2025 Euro Senior Notes 552.1 - - 552.1 - 2027 Dollar Senior Notes 500.0 - - - 500.0 2029 Dollar Senior Notes 700.0 - - - 700.0 Other borrowings 54.0 26.7 27.3 - - Interest payments (1) 592.1 109.8 218.1 145.8 118.4 Finance leases (2) 96.6 5.0 11.8 11.9 67.9 Operating leases 117.6 32.1 42.1 20.2 23.2 Pension contributions (3) 5.5 5.5 - - - Purchase obligations (4) 151.4 56.7 48.9 21.1 24.7 Uncertain tax positions, including interest and penalties (5) 7.2 7.2 - - - Employee retention award payments (6) 16.5 16.5 - - - Total$ 4,856.2 $ 283.8 $ 396.8 $ 2,741.4 $ 1,434.2 (1)Interest payments are based on principal amounts of our Senior Secured Credit Facilities and Senior Notes atDecember 31, 2020 including commitment fees on the unused portion of the Revolving Credit Facility. Future interest payments assumeDecember 31, 2020 variable rates will prevail throughout all future periods and do not consider the effect of our derivative instruments. See Note 18 and Note 19 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional disclosures related to our interest rates and derivatives, respectively. (2)Finance lease payments, within the table above, represent total cash rental costs to be paid over the terms of these leases, which include principal and interest. (3)We expect to make contributions to our defined benefit pension plans beyond 2021; however, the amount of any contributions is dependent on the future economic environment and investment returns, and we are unable to reasonably estimate the pension contributions beyond 2021. (4)Purchase obligations include various commitments atDecember 31, 2020 , and reflect the minimum contractual obligations under legally enforceable contracts. 44 -------------------------------------------------------------------------------- Table of Contents (5)AtDecember 31, 2020 , we had approximately$110.5 million of gross uncertain tax positions, including interest and penalties that could result in potential payments. The Company anticipates that it is reasonably possible it will settle up to$12.4 million , including interest and penalties, of its current uncertain tax positions within 2021 due to the conclusion of the 2010-2013 German income tax audit, of which we expect a cash outflow of$7.2 million , including interest and penalties. Due to the high degree of uncertainty regarding future timing of cash flows associated with the remaining uncertain tax positions, we are unable to estimate the years in which additional settlement will occur with the respective taxing authorities. (6)Employee retention award payments for certain employees contingent upon service through this point to help ensure continuity of the Company's business. Off Balance Sheet Arrangements See Note 6 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for disclosure of our guarantees of certain customers' obligations to third parties. Recent Accounting Guidance See Note 1 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a summary of recent accounting guidance. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of results of operations and financial condition are based upon our consolidated financial statements. These financial statements have been prepared in accordance withU.S. GAAP unless otherwise noted. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts reported in the financial statements. We base our estimates and judgments on historical experiences and assumptions believed to be reasonable under the circumstances and re-evaluate them on an ongoing basis. Actual results could differ from our estimates under different assumptions or conditions. Our significant accounting policies, which may be affected by our estimates and assumptions, are more fully described in Note 1 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes the following critical accounting policies reflect its most significant estimates and assumptions used in the preparation of the financial statements. Accounting for Business Combinations Determining the fair value of assets acquired and liabilities assumed requires management's judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, royalty rates, customer attrition rates, technology migration rates, asset lives and market multiples, among other items. The fair values of intangible assets are estimated using an income approach, either the excess earnings method (customer relationships) or the relief from royalty method (technology and trademarks). Under the excess earnings method, an intangible asset's fair value is equal to the present value of the incremental after-tax cash flows attributable solely to the intangible asset over its remaining useful life. With respect to customer relationships, fair values are calculated using the excess earnings method and customer attrition is a key input used to determine the applicable after-tax cash flows. Under the relief from royalty method, fair value is measured by estimating future revenue associated with the intangible asset over its useful life and applying a royalty rate to the revenue estimate. These intangible assets enable us to secure markets for our products, develop new products to meet the evolving business needs and competitively produce our existing products. The fair values of real properties acquired are based on the consideration of their highest and best use in the market. The fair values of property, plant and equipment, other than real properties, are based on the consideration that unless otherwise identified, they will continue to be used "as is" and as part of the ongoing business. In contemplation of the in-use premise and the nature of the assets, the fair value is developed primarily using a cost approach. The fair value of noncontrolling interests, when applicable, are estimated by applying an income approach and is based on significant inputs that are not observable in the market and thus represents a fair value measurement categorized within Level 3 of the fair value hierarchy. Key assumptions in the valuation of noncontrolling interest included a discount rate, a terminal value based on a range of long-term sustainable growth rates and adjustments because of the lack of control that market participants would consider when measuring the fair value of the noncontrolling interests. 45 -------------------------------------------------------------------------------- Table of Contents The fair value of the contingent consideration liabilities is estimated by applying an income approach using the Black-Scholes option pricing model. The fair value measurements are based on significant inputs that are not observable in the market and thus represents a fair value measurement categorized within Level 3 of the fair value hierarchy. Key assumptions in the valuation of contingent consideration liabilities included discount rates, expected terms, volatility rates and operating results as applicable based on the targets identified in the respective acquisition agreements. See Note 1 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information. Asset Impairments Factors that could result in future impairment charges or changes in useful lives, among others, include changes in worldwide economic conditions, changes in technology, changes in competitive conditions and customer preferences, and fluctuations in foreign currency exchange rates. These risk factors are discussed in Part I, Item 1A, "Risk Factors," included elsewhere in this Annual Report on Form 10-K. Goodwill and indefinite-lived intangible assets The Company tests indefinite-lived intangible assets and goodwill for impairment annually by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair values of a reporting unit or indefinite-lived intangible asset is less than its carrying amount. Fair values used under the quantitative impairment assessment are estimated using a combination of discounted projected future earnings or cash flow methods, that are based on projections of the amounts and timing of future revenue and cash flows, and multiples of earnings in estimating fair value. In conjunction with our impairment assessments of indefinite-lived intangible assets, we also review the reasonableness of the indefinite useful lives associated with these assets, in which we evaluate whether indicators exist that future cash flows associated with these assets could be realized over a finite period. In 2020, we performed a qualitative evaluation for impairment over our reporting units and indefinite-lived intangible assets and concluded that it was not more likely than not that the fair values are less than the respective carrying amounts. The inputs utilized in a quantitative analysis are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, Fair Value Measurement. The process of evaluating the potential impairment of goodwill and indefinite-lived intangible assets is subjective because it requires the use of estimates and assumptions as to our future cash flows, discount rates commensurate with the risks involved in the assets, future economic and market conditions, as well as other key assumptions. We believe that the amounts recorded in the financial statements related to goodwill and indefinite-lived intangible assets are based on the best estimates and judgments of the appropriate Axalta management, although actual outcomes could differ from our estimates. See Note 1 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information. Long-Lived Assets Long-lived assets, which includes property, plant and equipment, and definite-lived intangible assets, such as technology, trademarks, customer relationships and non-compete agreements, are continually assessed for impairment at the asset group level whenever events or changes in circumstances indicate the carrying amount of the asset group may not be recoverable. Such impairment assessments involve comparing the carrying amount of the asset group, determined at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets, to the forecasted undiscounted future cash flows generated by that asset group (i.e. a recoverability test). In the event the carrying amount of the asset group exceeds the undiscounted future cash flows generated by that asset group and the carrying amount is not considered recoverable, an impairment exists. An impairment loss is measured as the excess of the asset group's carrying amount over its fair value. Stock-Based Compensation Compensation expense related to service-based, non-qualified stock options is equivalent to the grant-date fair value of the awards determined under the Black-Scholes option pricing model and is recognized as compensation expense over the service period utilizing the graded vesting attribution method. Compensation expense related to the restricted stock awards and restricted stock units is equal to the grant-date fair value of the awards determined by the closing share price on the date of the grant. The related expense is recognized as compensation expense over the service period utilizing the graded vesting attribution method. Compensation expense related to performance stock awards and performance share units which are determined to have a market condition is determined at the grant-date of the awards using a valuation methodology (Monte Carlo simulation model) to account for the market conditions linked to these awards and are recognized as compensation expense over the service period utilizing the graded vesting attribution method. We recognize compensation expense net of forfeitures, which we have elected to record at the time of occurrence. 46 -------------------------------------------------------------------------------- Table of Contents See Note 9 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further detail on stock-based compensation. Retirement Benefits The amounts recognized in the audited financial statements related to pension benefits are determined from actuarial valuations. Inherent in these valuations are assumptions including expected return on plan assets, discount rates at which liabilities could have been settled, rate of increase in future compensations levels, and mortality rates. These assumptions are updated annually and are disclosed in Note 8 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. In accordance withU.S. GAAP, actual results that differed from the assumptions are accumulated and amortized over future periods and therefore, affect expense recognized in future periods. The estimated impact of either a 100 basis point increase or decrease of the discount rate to the net periodic benefit cost for 2021 would result in an increase of approximately$0.6 million or$0.5 million , respectively. The estimated impact of a 100 basis point increase or decrease of the expected return on asset assumption on the net periodic benefit cost for 2021 would result in a decrease or increase of approximately$2.3 million , respectively. Income taxes The provision for income taxes was determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the period. Deferred taxes result from differences between the financial and tax basis of our assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates applicable in the years in which they are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax law is recognized in income in the period that includes the enactment date. The Company records a valuation allowance if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company must generate approximately$868.1 million of taxable income to fully realize its consolidated net deferred tax assets as ofDecember 31, 2020 . We evaluate the recoverability of deferred tax assets on a jurisdictional basis by assessing the adequacy of future expected taxable income from all sources, including the reversal of taxable temporary differences, forecasted core business earnings and available tax planning strategies. Our net deferred tax asset balance as ofDecember 31, 2020 is$109.6 million , net of valuation allowances of$208.1 million . In instances where we are in a three-year cumulative loss, we assess all positive and negative factors including any potential aberrational items which may be included within our taxable results. The aberrational items which have impacted our results include significant taxable losses associated with the exercises of pre-IPO stock options that were deep in the money at the time they were exercised, as well as debt extinguishment, refinancing and certain global restructuring costs. We believe, and have assumed, these types of losses are not indicative of our core earnings for purposes of assessing the appropriateness of a valuation allowance. Assumptions around sources of taxable income inherently rely heavily on estimates. We use our historical experience and our short and long-range business forecasts to provide insight. While the Company believes that its judgments and estimations regarding deferred tax assets are appropriate, significant differences in actual experience may require the Company to adjust its valuation allowance and could materially affect the Company's future financial results. We provide for income and foreign withholding taxes, where applicable, on unremitted earnings of all subsidiaries and related companies to the extent that such earnings are not deemed to be permanently invested and cannot be repatriated in a tax free manner. AtDecember 31, 2020 and 2019, deferred income taxes of approximately$7.1 million and$6.0 million , respectively, have been provided on such subsidiary earnings, respectively. AtDecember 31, 2020 , and 2019, we have not recorded a deferred tax liability related to withholding taxes of approximately$96.1 million and$15.6 million , respectively, on unremitted earnings of subsidiaries that are permanently invested. The breadth of our operations and the global complexity of tax regulations require assessments of uncertainties and judgments in estimating taxes we will ultimately pay. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of disputes arising from federal, state and international tax audits in the normal course of business. A liability for unrecognized tax benefits is recorded when management concludes that the likelihood of sustaining such positions upon examination by taxing authorities is less than "more likely than not." Interest and penalties accrued related to unrecognized tax benefits are included in the provision for income taxes. AtDecember 31, 2020 and 2019, the Company had gross unrecognized tax benefits, excluding interest and penalties, for both domestic and foreign operations of$99.6 million and$45.3 million , respectively. See Note 11 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further detail on our accounting for income taxes. 47 -------------------------------------------------------------------------------- Table of Contents Sales deductions In our refinish end-market, our product sales are typically supplied through a network of distributors. Control transfers and revenue is recognized when our products are delivered to our distribution customers. Variable consideration in the form of price, less discounts and rebates, are estimated and recorded, as a reduction to net sales, upon the sale of our products based on our ability to make a reasonable estimate of the amounts expected to be received or incurred. The estimates of variable consideration involve significant assumptions based on the best estimates of inventory held by distributors, applicable pricing, as well as the use of historical actuals for sales, discounts and rebates, which may result in changes in estimates in the future. The timing of payments associated with the above arrangements may differ from the timing associated with the satisfaction of our performance obligations. The period between the satisfaction of the performance obligation and the receipt of payment is dependent on terms and conditions specific to the customers. For transactions in which we expect, at contract inception, the period between the transfer of our products or services to our customer and when the customer pays for that good or service to be greater than one year, we adjust the promised amount of consideration for the effects of any significant financing components that materially change the amount of revenue under the contract. See Note 2 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further detail on our revenue. Contingencies Contingencies, by their nature, relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has been incurred as well as in estimating the amount of potential loss. The most important contingencies impacting our financial statements are those related to environmental remediation, operational matters, pending or threatened litigation against the Company and the resolution of matters related to open tax years. Environmental remediation costs are accrued when it is probable that a liability has been incurred and the amount can be reasonably estimated. Estimates of environmental reserves require evaluating government regulation, available technology, site-specific information and remediation alternatives. We accrue an amount equal to our best estimate of the costs to remediate based upon the available information. The extent of environmental impacts may not be fully known, and the processes and costs of remediation may change as new information is obtained or technology for remediation is improved. Our process for estimating the expected cost for remediation considers the information available, technology that can be utilized and estimates of the extent of environmental damage. Adjustments to our estimates are made periodically as additional information is received and as remediation progresses. We are subject to legal proceedings, claims and potential claims arising out of our business operations. We routinely assess the likelihood of any adverse outcomes to these matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is made after analysis of each known matter. We have an active risk management program consisting of numerous insurance policies secured from many carriers. These policies often provide coverage that is intended to minimize the financial impact, if any, of the legal proceedings. The required reserves may change in the future due to new developments in each matter. For more information on these matters, see Note 6 and Note 11 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. 48
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