Try our mobile app

Axalta Coating Systems reported for 2019 q4

Published: 2020-02-19 16:45:25 ET (After Market Close)
<<<  go to AXTA company page

Index


56

Table of Contents

Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Axalta Coating Systems Ltd.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Axalta Coating Systems Ltd. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2019 appearing under item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principle
As discussed in Notes 1 and 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in which it accounts for revenue from contracts with customers in 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s report on internal control over financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i)pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

57

Table of Contents

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Measurement of Unrecognized Tax Benefits
As described in Notes 1 and 11 to the consolidated financial statements, management has recorded unrecognized tax benefits of $50.3 million as of December 31, 2019. As disclosed by management, the breadth of operations and the global complexity of tax regulations requires management to make assessments of uncertainties and judgments in estimating taxes. 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 determines the likelihood of sustaining such positions upon examination by taxing authorities is less than “more-likely- than not.”
The principal considerations for our determination that performing procedures relating to the measurement of unrecognized tax benefits is a critical audit matter are there was significant judgment by management when applying the more-likely-than-not recognition criteria to the Company’s tax positions, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence obtained related to the measurement of unrecognized tax benefits. Additionally, the audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the identification and recognition of the liability for unrecognized tax benefits, including controls addressing completeness of the unrecognized tax benefits and controls over measurement of the liability. These procedures also included, among others, evaluating the significant judgment used by management in applying the more-likely-than-not recognition criteria and in measuring the Company’s unrecognized tax benefits. Professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of assumptions made by management, the technical merits of positions taken based upon application of the tax law and new information, and the measurement of unrecognized tax benefits.

/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 19, 2020
We have served as the Company’s auditor since 2011.

58

Table of Contents

AXALTA COATING SYSTEMS LTD.
Consolidated Statements of Operations
(In millions, except per share data)
Year Ended December 31,
2019
2018
2017
Net sales
$
4,482.2

$
4,696.0

$
4,377.0

Cost of goods sold
2,917.9

3,106.3

2,780.5

Selling, general and administrative expenses
822.1

876.4

934.7

Other operating charges
70.7

82.7

131.6

Research and development expenses
70.2

73.1

65.3

Amortization of acquired intangibles
113.1

115.4

101.2

Income from operations
488.2


442.1


363.7

Interest expense, net
162.6

159.6

147.0

Other (income) expense, net
(4.4
)
15.0

27.1

Income before income taxes
330.0

267.5

189.6

Provision for income taxes
77.4

54.2

141.9

Net income
252.6

213.3

47.7

Less: Net income attributable to noncontrolling interests
3.6

6.2

11.0

Net income attributable to controlling interests
$
249.0

$
207.1

$
36.7

Basic net income per share
$
1.06

$
0.87

$
0.15

Diluted net income per share
$
1.06

$
0.85

$
0.15


The accompanying notes are an integral part of these consolidated financial statements.


59

Table of Contents

AXALTA COATING SYSTEMS LTD.
Consolidated Statements of Comprehensive Income
(In millions)
Year Ended December 31,
2019
2018
2017
Net income
$
252.6

$
213.3

$
47.7

Other comprehensive (loss) income, before tax:
Foreign currency translation adjustments
5.4

(94.1
)
85.6

Unrealized gain on securities


0.4

Unrealized (loss) gain on derivatives
(33.1
)
2.4

0.9

Unrealized gain (loss) on pension and other benefit plan obligations
(46.1
)
(6.4
)
31.3

Other comprehensive (loss) income, before tax
(73.8
)
(98.1
)
118.2

Income tax (benefit) provision related to items of other comprehensive (loss) income
(17.4
)
(0.3
)
6.6

Other comprehensive (loss) income, net of tax
(56.4
)
(97.8
)
111.6

Comprehensive income
196.2

115.5

159.3

Less: Comprehensive income attributable to noncontrolling interests
6.6

2.7

13.2

Comprehensive income attributable to controlling interests
$
189.6

$
112.8

$
146.1


The accompanying notes are an integral part of these consolidated financial statements.

60

Table of Contents

AXALTA COATING SYSTEMS LTD.
Consolidated Balance Sheets
(In millions, except per share data)
December 31,
2019
2018
Assets
Current assets:
Cash and cash equivalents
$
1,017.5

$
693.6

Restricted cash
3.0

2.8

Accounts and notes receivable, net
830.1

860.8

Inventories
591.6

613.0

Prepaid expenses and other current assets
131.2

139.4

Total current assets
2,573.4

2,309.6

Property, plant and equipment, net
1,223.0

1,298.2

Goodwill
1,208.9

1,230.8

Identifiable intangibles, net
1,223.9

1,348.0

Other assets
588.8

489.1

Total assets
$
6,818.0

$
6,675.7

Liabilities, Shareholders’ Equity
Current liabilities:
Accounts payable
$
483.7

$
522.8

Current portion of borrowings
43.9

42.2

Other accrued liabilities
545.3

475.6

Total current liabilities
1,072.9

1,040.6

Long-term borrowings
3,790.2

3,821.8

Accrued pensions
285.2

261.9

Deferred income taxes
115.5

140.8

Other liabilities
144.6

100.1

Total liabilities
5,408.4

5,365.2

Commitments and contingent liabilities (Note 6)


Shareholders’ equity
Common shares, $1.00 par, 1,000.0 shares authorized, 250.1 and 246.7 shares issued at December31, 2019 and 2018, respectively
249.9

245.3

Capital in excess of par
1,474.1

1,409.5

Retained earnings
443.2

198.6

Treasury shares, at cost, 15.2 and 11.1 shares at December 31, 2019 and 2018, respectively
(417.5
)
(312.2
)
Accumulated other comprehensive loss
(395.5
)
(336.1
)
Total Axalta shareholders’ equity
1,354.2

1,205.1

Noncontrolling interests
55.4

105.4

Total shareholders’ equity
1,409.6

1,310.5

Total liabilities and shareholders’ equity
$
6,818.0

$
6,675.7


The accompanying notes are an integral part of these consolidated financial statements.

61

Table of Contents

AXALTA COATING SYSTEMS LTD.
Consolidated Statement of Changes in Shareholders’ Equity
(In millions)
Common Stock
Number of Shares
Par/Stated Value
Capital In
Excess Of
Par
Retained earnings (Accumulated deficit)
Treasury Shares, at cost
Accumulated
Other
Comprehensive
Loss
Non-controlling
Interests
Total
Balance December31, 2016
240.5

$
239.3

$
1,294.3

$
(58.1
)
$

$
(350.4
)
$
121.5

$
1,246.6

Comprehensive income:
Net income



36.7



11.0

47.7

Net unrealized gain on securities, net of tax of $0.0 million





0.4


0.4

Net realized and unrealized gain on derivatives, net of tax of $0.5 million





0.4


0.4

Long-term employee benefit plans, net of tax of $6.1 million





25.2


25.2

Foreign currency translation, net of tax of $0.0 million





83.4

2.2

85.6

Total comprehensive income



36.7


109.4

13.2

159.3

Recognition of stock-based compensation


38.5





38.5

Shares issued under compensation plans
3.4

3.1

21.7





24.8

Common stock purchases
(2.0
)



(58.4
)


(58.4
)
Dividends declared to noncontrolling interests






(3.0
)
(3.0
)
Balance December31, 2017
241.9

$
242.4

$
1,354.5

$
(21.4
)
$
(58.4
)
$
(241.0
)
$
131.7

$
1,407.8

Comprehensive income (loss):
Net income



207.1



6.2

213.3

Net realized and unrealized gain on derivatives, net of tax of $1.1 million





1.3


1.3

Long-term employee benefit plans, net of tax benefit of $1.4 million





(5.0
)

(5.0
)
Foreign currency translation, net of tax of $0.0 million





(90.6
)
(3.5
)
(94.1
)
Total comprehensive income



207.1


(94.3
)
2.7

115.5

Cumulative effect of an accounting change



12.9


(0.8
)
0.1

12.2

Recognition of stock-based compensation


37.3





37.3

Shares issued under compensation plans
2.8

2.9

14.8





17.7

Noncontrolling interests of acquired subsidiaries


2.9




(28.1
)
(25.2
)
Common stock purchases
(9.1
)



(253.8
)


(253.8
)
Dividends declared to noncontrolling interests






(1.0
)
(1.0
)
Balance December31, 2018
235.6

$
245.3

$
1,409.5

$
198.6

$
(312.2
)
$
(336.1
)
$
105.4

$
1,310.5

Comprehensive income (loss):
Net income



249.0



3.6

252.6

Net realized and unrealized gain on derivatives, net of tax benefit of $4.8 million





(28.3
)

(28.3
)
Long-term employee benefit plans, net of tax benefit of $12.6 million





(33.5
)

(33.5
)
Foreign currency translation, net of tax of $0 million





2.4

3.0

5.4

Total comprehensive income (loss)



249.0


(59.4
)
6.6

196.2

Cumulative effect of an accounting change



(0.7
)



(0.7
)
Correction to previous cumulative effect upon adoption of ASU 2014-09



(3.7
)



(3.7
)
Recognition of stock-based compensation


15.7





15.7

Shares issued under compensation plans
3.4

4.6

44.9





49.5

Changes in ownership of noncontrolling interests


4.0




(55.1
)
(51.1
)
Common stock purchases
(4.1
)



(105.3
)


(105.3
)
Dividends declared to noncontrolling interests






(1.5
)
(1.5
)
Balance December31, 2019
234.9

$
249.9

$
1,474.1

$
443.2

$
(417.5
)
$
(395.5
)
$
55.4

$
1,409.6

The accompanying notes are an integral part of these consolidated financial statements.

62

Table of Contents

AXALTA COATING SYSTEMS LTD.
Consolidated Statements of Cash Flows
(In millions)
Year Ended December 31,
2019
2018
2017
Operating activities:
Net income
$
252.6

$
213.3

$
47.7

Adjustment to reconcile net income to cash provided by operating activities:


Depreciation and amortization

353.0


369.1


347.5

Amortization of deferred financing costs and original issue discount

8.8


8.0


8.0

Debt extinguishment and refinancing related costs

0.2


9.5


13.4

Deferred income taxes

15.7


6.1


91.7

Realized and unrealized foreign exchange losses (gains), net

5.9


17.3


(3.6
)
Stock-based compensation

15.7


37.3


38.5

Divestitures, impairment charges and loss on deconsolidation of Venezuela
21.1


78.5

Interest income on swaps designated as net investment hedges

(14.7
)

(9.4
)


Other non-cash, net

(0.1
)

(0.9
)

4.4

Changes in operating assets and liabilities:


Trade accounts and notes receivable
(10.1
)
(22.3
)
(15.2
)
Inventories
10.8

(48.1
)
(19.9
)
Prepaid expenses and other assets
(118.9
)
(157.3
)
(84.9
)
Accounts payable
18.2

49.5

39.8

Other accrued liabilities
5.3

(8.4
)
6.7

Other liabilities
9.6

32.4

(12.6
)
Cash provided by operating activities
573.1

496.1

540.0

Investing activities:


Acquisitions, net of cash acquired
(3.3
)
(82.8
)
(564.4
)
Purchase of property, plant and equipment
(112.5
)
(143.4
)
(125.0
)
Proceeds from sale of consolidated joint venture, net of cash divested
8.2



Interest proceeds on swaps designated as net investment hedges
14.7

9.4


Proceeds from settlement of swaps designated as net investment hedges

22.5


Other investing activities, net
(1.0
)
5.1

(0.2
)
Cash used for investing activities
(93.9
)
(189.2
)
(689.6
)
Financing activities:


Proceeds from long-term borrowings

468.9

483.6

Payments on short-term borrowings
(39.5
)
(44.7
)
(14.1
)
Payments on long-term borrowings
(27.6
)
(511.3
)
(50.0
)
Financing-related costs
(1.5
)
(10.8
)
(10.4
)
Proceeds from option exercises
50.3

17.4

24.8

Dividends paid to noncontrolling interests
(1.5
)
(1.0
)
(3.0
)
Investments in noncontrolling interests
(31.1
)
(26.9
)

Purchase of treasury stock
(105.3
)
(253.8
)
(58.4
)
Deferred acquisition-related consideration
(2.2
)
(6.0
)
(5.2
)
Cash (used for) provided by financing activities
(158.4
)
(368.2
)
367.3

Increase (decrease) in cash and cash equivalents
320.8

(61.3
)
217.7

Effect of exchange rate changes on cash
3.3

(15.2
)
17.1

Cash at beginning of period
696.4

772.9

538.1

Cash at end of period
$
1,020.5

$
696.4

$
772.9




Cash at end of period reconciliation:


Cash and cash equivalents
$
1,017.5

$
693.6

$
769.8

Restricted cash
3.0

2.8

3.1

Cash at end of period
$
1,020.5

$
696.4

$
772.9




Supplemental cash flow information:


Cash paid during the year for:


Interest, net of amounts capitalized
$
156.9

$
152.4

$
130.1

Income taxes, net of refunds
42.2

57.4

61.7

Non-cash investing activities:




Accrued capital expenditures
$
16.6

$
10.1

$
30.2

The accompanying notes are an integral part of these consolidated financial statements.

63

Table of Contents
Notes to Consolidated Financial Statements
(In millions, unless otherwise noted)

Index
Note
Page


64

Table of Contents
Notes to Consolidated Financial Statements
(In millions, unless otherwise noted)

(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated balance sheets of Axalta Coating Systems Ltd. (“Axalta,” the “Company,” “we,” “our” and “us”), at December31, 2019 and 2018 and the related consolidated statements of operations, consolidated statements of comprehensive income (loss), consolidated statements of cash flows and consolidated statements of changes in shareholders' equity for the years ended December31, 2019, 2018 and 2017 included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and are audited. In the opinion of management, these statements include all adjustments, consisting only of normal, recurring adjustments, necessary for a fair statement of the financial position of Axalta.
Venezuela Deconsolidation
During the year ended December31, 2017, we deconsolidated our Venezuelan subsidiary from our consolidated financial statements and began accounting for our investment in our100%owned Venezuelan subsidiary using the cost method of accounting. See Note 22 for additional information.
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Axalta and its subsidiaries, and entities in which a controlling interest is maintained. For those consolidated subsidiaries in which the Company’s ownership is less than100%, the outside shareholders’ interests are shown as noncontrolling interests.Investments in companies in which Axalta, directly or indirectly, owns20%to50%of the voting stock and has the ability to exercise significant influence over operating and financial policies of the investee are accounted for using the equity method of accounting. As a result, Axalta’s share of the earnings or losses of such equity affiliates is included in the accompanying consolidated statements of operations and our share of these companies’ stockholders’ equity is included in the accompanying consolidated balance sheet. Certain of our joint ventures are accounted for on a one-month lag basis, the effect of which is not material. We eliminated all intercompany accounts and transactions in the preparation of the accompanying consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the period. The estimates and assumptions include, but are not limited to, receivable and inventory valuations, fixed asset valuations, valuations of goodwill and identifiable intangible assets, including analysis of impairment, valuations of long-term employee benefit obligations, income taxes, environmental matters, litigation, stock-based compensation, restructuring and allocations of costs. Our estimates are based on historical experience, facts and circumstances available at the time and various other assumptions that are believed to be reasonable. Actual results could differ materially from those estimates.
Accounting for Business Combinations
We account for business combinations under the acquisition method of accounting. This method requires the recording of acquired assets, including separately identifiable intangible assets and assumed liabilities at their acquisition date fair values. The method records any excess purchase price over the fair value of acquired net assets as goodwill. Included in the determination of the purchase price is the fair value of contingent consideration, if applicable, based on the terms and applicable targets described within the acquisition agreements (e.g., projected revenues or EBITDA). Subsequent to the acquisition date, the fair value of the liability, if determined to be payable in cash, is revalued at each balance sheet date with adjustments recorded within earnings.
The determination of the fair value of assets acquired, liabilities assumed and noncontrolling interests involves assessments of factors such as the expected future cash flows associated with individual assets and liabilities and appropriate discount rates at the closing date of the acquisition. When necessary, we consult with external advisors to help determine fair value. For non-observable market values determined using Level 3 assumptions, we determine fair value using acceptable valuation principles, including most commonly the excess earnings method for customer relationships, relief from royalty method for technology and trademarks, cost method for inventory and a combination of cost and market methods for property, plant and equipment, as applicable.
We included the results of operations from the acquisition date in the financial statements for all businesses acquired.

65

Table of Contents
Notes to Consolidated Financial Statements
(In millions, unless otherwise noted)

Revenue Recognition
See Note 2 for disclosure of our revenue recognition accounting policy.
Cash, Cash Equivalents and Restricted Cash
Cash equivalents represent highly liquid investments considered readily convertible to known amounts of cash within threemonths or less from time of purchase. They are carried at cost plus accrued interest, which approximates fair value because of the short-term maturity of these instruments. Cash balances may exceed government insured limits in certain jurisdictions.
Restricted cash on our consolidated balance sheets primarily represents cash used to secure certain customer guarantees.
Fair Value Measurements
GAAP defines a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level1 measurements) and the lowest priority to unobservable inputs (Level3 measurements). A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The following valuation techniques are used to measure fair value for assets and liabilities:
Level1—Quoted market prices in active markets for identical assets or liabilities;
Level2—Significant other observable inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs); and
Level3—Unobservable inputs for the asset or liability, which are valued based on management’s estimates of assumptions that market participants would use in pricing the asset or liability.
Derivatives and Hedging
The Company from time to time utilizes derivatives to manage exposures to currency exchange rates and interest rate risk. The fair values of all derivatives are recognized as assets or liabilities at the balance sheet date. Changes in the fair value of these instruments are reported in income or AOCI, depending on the use of the derivative and whether it qualifies for hedge accounting treatment and is designated as such.
Gains and losses on derivatives that qualify and are designated as cash flow hedging instruments are recorded in AOCI, to the extent the hedges are effective, until the underlying transactions are recognized in income.
Gains and losses on derivatives that qualify and are designated as net investment hedges are recorded in AOCI, to the extent the hedges are effective, until the underlying transactions are recognized in income.
Gains and losses on derivatives qualifying and designated as fair value hedging instruments, as well as the offsetting losses and gains on the hedged items, are reported in income in the same accounting period. Derivatives not designated as hedging instruments are marked-to-market at the end of each accounting period with the results included in income.
Cash flows from derivatives are recognized in the consolidated statements of cash flows in a manner consistent with the underlying transactions.
Receivables and Allowance for Doubtful Accounts
Receivables are carried at amounts that approximate fair value. Receivables are recognized net of an allowance for doubtful accounts receivable. The allowance for doubtful accounts receivable reflects the best estimate of losses inherent in the accounts receivable portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other available evidence. Accounts receivable are written down or off when a portion or all of such account receivable is determined to be uncollectible.
Inventories
Inventories are valued at the lower of cost or net realizable value with cost being determined on the weighted average cost method. Elements of cost in inventories include:
raw materials,
direct labor, and
manufacturing and indirect overhead.

66

Table of Contents
Notes to Consolidated Financial Statements
(In millions, unless otherwise noted)

Stores and supplies are valued at the lower of cost or net realizable value; cost is generally determined by the weighted average cost method. Inventories deemed to have costs greater than their respective market values are reduced to net realizable value with a loss recorded in income in the period recognized.
Property, Plant and Equipment
Property, plant and equipment acquired in an acquisition are recorded at fair value as of the acquisition date and are depreciated over the estimated useful life using the straight-line method. Subsequent additions to property, plant and equipment, including the fair value of any asset retirement obligations upon initial recognition of the liability, are recorded at cost and are depreciated over the estimated useful life using the straight-line method. See Note 15 for a range of estimated useful lives used for each property, plant and equipment class.
Software included in property, plant and equipment represents the costs of software developed or obtained for internal use. Software costs are amortized on a straight-line basis over their estimated useful lives. Upgrades and enhancements are capitalized if they result in added functionality, which enables the software to perform tasks it was previously incapable of performing. Software maintenance and training costs are expensed in the period in which they are incurred.
Leases
See Note 7 for disclosure of our accounting policy over leases.
Goodwill and Other Identifiable Intangible Assets
Goodwill represents the excess of purchase price over the fair values of underlying net assets acquired in a business combination. Goodwill and indefinite-lived intangible assets are tested for impairment on an annual basis as of October1st; however, these tests are performed more frequently if events or changes in circumstances indicate that the asset may be impaired. The fair value methodology is based on prices of similar assets or other valuation methodologies including discounted cash flow techniques.
When testing goodwill and indefinite-lived intangible assets for impairment, we first have an option to assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that an impairment exists. Such qualitative factors may include the following: macroeconomic conditions; industry and market considerations; cost factors; overall financial performance; and other relevant entity-specific events. If based on this qualitative assessment we determine that an impairment is more likely than not, or if we elect not to perform a qualitative assessment, we would be required to perform a quantitative impairment test.
Under the quantitative goodwill impairment test, the evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit is less than the carrying value, the difference is recorded as an impairment loss not to exceed the amount of recorded goodwill.
In2019, we forwent the qualitative test and tested goodwill and indefinite-lived intangible assets for impairment by performing a quantitative analysis. The quantitative analysis determined that all reporting units and indefinite-lived intangible assets had fair values in significant excess (greater than 40%) of carrying values.
Definite-lived intangible assets, such as technology, trademarks, customer relationships and non-compete agreements are amortized over their estimated useful lives, generally for periods ranging from 2 to 25 years. Once these assets are fully amortized, they are removed from the balance sheet. We evaluate these assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets might not be recoverable. The reasonableness of the useful lives of definite and indefinite-lived assets are regularly evaluated.
Impairment of Long-Lived Assets
The carrying value of long-lived assets to be held and used is evaluated when events or changes in circumstances indicate the carrying value may not be recoverable. The carrying value of a long-lived asset is considered impaired when the total projected undiscounted cash flows from the asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. The fair value methodology used is an estimate of fair market value and is based on prices of similar assets or other valuation methodologies including present value techniques. Long-lived assets to be disposed of other than by sale are classified as held for use until their disposal. Long-lived assets to be disposed of by sale are classified as held for sale and are reported at the lower of carrying amount or fair market value less cost to sell. Depreciation is discontinued for long-lived assets classified as held for sale.

67

Table of Contents
Notes to Consolidated Financial Statements
(In millions, unless otherwise noted)

Research and Development
Research and development costs incurred in the normal course of business consist primarily of employee-related costs and are expensed as incurred. In process research and development projects acquired in a business combination are recorded as intangible assets at their fair value as of the acquisition date, using Level 3 assumptions. Subsequent costs related to acquired in process research and development projects are expensed as incurred. In process research and development intangible assets are considered indefinite-lived until the abandonment or completion of the associated research and development efforts. These indefinite-lived intangible assets are tested for impairment consistent with the impairment testing performed on other indefinite-lived intangible assets discussed above. Upon completion of the research and development process, the carrying value of acquired in process research and development projects is reclassified as a finite-lived asset and is amortized over its useful life.
Environmental Liabilities and Expenditures
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Accrued environmental liabilities are not discounted. Claims for recovery from third parties, if any, are reflected separately as an asset. We record recoveries at the earlier of when the gain is probable and reasonably estimable or realized. For the years ending December31, 2019, 2018 and 2017, we have not recognized income associated with recoveries from third parties.
Costs related to environmental remediation are charged to expense in the period incurred. Other environmental costs are also charged to expense in the period incurred, unless they increase the value of the property or reduce or prevent contamination from future operations, in which case, they are capitalized and depreciated.
Litigation
We accrue for liabilities related to litigation matters when available information indicates that the liability is probable, and the amount can be reasonably estimated. Legal costs such as outside counsel fees and expenses are charged to expense in the period incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. Deferred tax assets are also recognized for tax losses, interest and tax credit carryforwards. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates applicable in the years in which they are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax law is recognized in income in the period that includes the enactment date.
Where we do not intend to indefinitely reinvest earnings of our subsidiaries, we provide for income taxes and withholding taxes, where applicable, on unremitted earnings. We do not provide for income taxes on unremitted earnings of our subsidiaries that are intended to be indefinitely reinvested.
We recognize the benefit of an income tax position only if it is "more likely than not" that the tax position will be sustained. The tax benefits recognized are measured based on the largest benefit that has a greater than 50% likelihood of being realized. Additionally, we recognize interest and penalties accrued related to unrecognized tax benefits as a component of provision for income taxes. The current portion of unrecognized tax benefits is included in "Other accrued liabilities" and the long-term portion is included in "Other liabilities" in the accompanying consolidated balance sheets.
Foreign Currency Translation
The reporting currency is the U.S. Dollar. In most cases, our non-U.S. based subsidiaries use their local currency as the functional currency for their respective business operations. Assets and liabilities of these operations are translated into U.S.Dollars at end-of-period exchange rates; income and expenses are translated using the average exchange rates for the reporting period. Resulting cumulative translation adjustments are recorded as a component of shareholders’ equity in the accompanying consolidated balance sheets in AOCI.
Gains and losses from transactions denominated in currencies other than the functional currencies are included in the consolidated statements of operations in other (income) expense, net.
During the year ended December31, 2018, our subsidiary in Argentina was determined to be U.S. Dollar functional currency. This determination was made upon conclusion that the Argentinian Peso was hyper-inflationary.

68

Table of Contents
Notes to Consolidated Financial Statements
(In millions, unless otherwise noted)

Employee Benefits
Defined benefit plans specify an amount of pension benefit that an employee will receive upon retirement, usually dependent on factors such as age, years of service and compensation. The obligation in respect of defined benefit plans is calculated separately for each plan by estimating the amount of the future benefits that employees earn in return for their service in the current and prior periods. These benefits are then discounted to determine the present value of the obligations and are then adjusted for the impact of any unamortized prior service costs. The discount rate used is based upon market indicators in the region (generally, the yield on bonds that are denominated in the currency in which the benefits will be paid) and that have maturity dates approximating the terms of the obligations. The calculations are performed by qualified actuaries using the projected unit credit method. The obligation of defined benefit plans recorded on our consolidated balance sheets is net of the current fair value of assets. See Note 8 for further information.
Stock-Based Compensation
Our stock-based compensation is comprised of Axalta stock options, restricted stock awards, restricted stock units, performance stock awards and performance share units and are measured at fair value on the grant date or date of modification, as applicable. We recognize compensation expense on a graded-vesting attribution basis over the requisite service period, inclusive of impacts of any current period modifications of previously granted awards. Compensation expense is recorded net of forfeitures, which we have elected to record in the period they occur.
Earnings per Common Share
Basic earnings per common share is computed by dividing net income attributable to Axalta’s common shareholders by the weighted average number of shares outstanding during the period. Diluted earnings per common share is computed by dividing net income attributable to Axalta’s common shareholders by the weighted average number of shares outstanding during the period increased by the number of additional shares that would have been outstanding related to potentially dilutive securities; anti-dilutive securities are excluded from the calculation.These potentially dilutive securities are calculated under the treasury stock method and consist of stock options, restricted stock awards, restricted stock units, performance stock awards and performance share units.
Reclassifications
During theyear ended December 31, 2019, the consolidated statements of operations were updated to combine "Net sales" and "Other revenue" into "Net sales", as well as separately present Other operating charges, previously included in Selling, general and administrative expenses and Venezuela asset impairment and deconsolidation charge, as a separate line item within Income from operations. Other operating charges include termination benefits and other employee related costs, strategic review and retention costs, acquisition and divestiture-related costs, and deconsolidation and impairment charges, details of which are included in our reconciliations of segment operating performance to income before income taxes in Note 20.
The 2018 and 2017 consolidated statements of operations have been updated for comparability with the current year presentation.
Correction of Immaterial Errors to Prior Period Financial Statements
During the year ended December 31, 2019, the Company identified and corrected an error that affected the previously-issued 2018 annual and interim financial statements. Specifically, the financial statements reflected an investment in noncontrolling interest payment of $26.9 million within investing activities as opposed to its appropriate classification within financing activities. The Company determined that this correction was immaterial to the previously-issued financial statements. However, given the significance of the error and for comparability purposes, we have revised the consolidated statements of cash flows for the year ended December31, 2018. This revision has no impact on the consolidated statements of operations or balance sheets.
Year Ended December 31, 2018
As Reported
Revised
Cash used for investing activities
$
(216.1
)
$
(189.2
)
Cash used for financing activities
$
(341.3
)
$
(368.2
)


69

Table of Contents
Notes to Consolidated Financial Statements
(In millions, unless otherwise noted)

Recently Adopted Accounting Guidance
In January 1, 2019, we adopted Accounting Standards Update ("ASU") 2016-02, "Leases," which, together with amendments comprising ASC 842, requires lessees to identify arrangements that should be accounted for as leases and generally recognized, for operating and finance leases with terms exceeding twelve months, a right-of-use asset (or "ROU") and lease liability on the balance sheet. In addition to this main provision, this standard included a number of additional changes to lease accounting. This standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either the adoption date or the beginning of the earliest comparative period presented in the financial statements as its date of initial application. We used the adoption date as our date of initial application. As a result, historical financial information was not updated, and the disclosures required under the new standard are not provided as of and for periods before January 1, 2019. See Note 7 for further information on the implementation of the standard.
The new standard provides a number of optional practical expedients in transition. We elected the package of practical expedients, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We also elected the practical expedient pertaining to land easements which permits entities to forgo the evaluation of existing land easement arrangements in transition to determine if they contain a lease. We did not elect the use-of-hindsight practical expedient. The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short term lease recognition exemption and we will not recognize ROU assets or lease liabilities for qualifying leases (leases with a term of less than 12 months from lease commencement). We also elected the accounting policy election to not separate lease and non-lease components for all asset classes.
The Company implemented an outsourced software solution to support the ongoing accounting requirements that this standard will have on our consolidated financial statements. We have evaluated completeness and accuracy of lease data entered into the software solution and updated our processes, policies, and internal controls. Changes to our internal controls covered the identification, accounting and disclosure of leases both upon adoption and subsequent to adoption. Adoption of ASU 2016-02 at January 1, 2019 resulted in a one-time loss to retained earnings of $0.7 million on our consolidated balance sheet and consolidated statement of changes in shareholders' equity related to the net difference of derecognition of existing assets and debt obligations associated with our leases historically accounted for as sale-leaseback financings, for which the ASU requires accounting for as a lease at the date of initial application.
Of the accounting standards we have adopted in 2019, the below standard did not have a material impact:
ASU
Effective Date
2018-16
Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
January 1, 2019

Accounting Guidance Issued But Not Yet Adopted
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, "Financial Instruments - Credit Losses". ASU 2016-13 replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires considerations of a broader range of reasonable and supportable information to inform credit loss estimates. The new standard is effective for fiscal years beginning after December 15, 2019. The provisions of this standard will primarily impact the allowance for doubtful accounts on our trade accounts receivables, in which we will apply historical loss percentages, combined with reasonable and supportable forecasts of future losses to the respective aging categories. The Company does not expect material impacts to our financial statements, related disclosures, key processes or changes to internal controls.
In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes" as part of its initiative to reduce complexity in accounting standards. The ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The new standard is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of ASU 2019-12 on our financial statements.

70

Table of Contents
Notes to Consolidated Financial Statements
(In millions, unless otherwise noted)

(2)REVENUE
We recognize revenue at the point our contractual performance obligations with our customers are satisfied. This occurs at the point in time when control of our products transfers to the customer based on considerations of right to payment, transfer of legal title, physical possession, risks and rewards of ownership and customer acceptance. For the majority of our revenue, control transfers upon shipment of our products to our customers. Our remaining revenue is recorded upon delivery or consumption for our product sales or as incurred for services provided and royalties earned.
Revenue is measured as the amount of consideration we expect to receive in exchange for our products or services. Our contracts, including those subject to standard terms and conditions under multi-year agreements, are largely short-term in nature and each customer purchase order typically represents a contract with the delivery of coatings representing the only separate performance obligation.
For certain customer arrangements within our light vehicle, industrial and commercial vehicle end-markets, revenue is recognized upon shipment, as this is the point in time we have concluded that control of our product has transferred to our customer based on our considerations of the indicators of control in the contracts, including right of use and risk and reward of ownership. For consignment arrangements, revenue is recognized upon actual consumption by our customers, as this represents the point in time that control is determined to have transferred to the customer based on the contractual arrangement.
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.
All costs incurred directly in satisfaction of our performance obligations associated with revenue are reported in cost of goods sold on the statements of operations. We also provide certain customers with incremental up-front consideration, including Business Incentive Payments ("BIPs"), which are capitalized as a component of other assets and amortized over the estimated life of the contractual arrangement as a reduction of net sales. We do not receive a distinct service or good in return for these BIPs, but rather receive volume commitments and/or sole supplier status from our customers over the life of the contractual arrangements, which approximates a five-year weighted average useful life. The termination clauses in these contractual arrangements include standard clawback provisions that enable us to collect monetary damages in the event of a customer’s failure to meet its commitments under the relevant contract. At December31, 2019 and 2018, the total carrying value of BIPs were $191.2 million and $190.8 million, respectively, and are presented within other assets on the consolidated balance sheets. For the years ended December31, 2019, 2018 and 2017 $66.9 million, $65.5 million and $65.0 million, respectively, was amortized and reflected as reductions of net sales in the consolidated statements of operations. The total carrying value of BIPs excludes other upfront incentives made in conjunction with long-term customer commitments of $79.0 million and $56.0 million at December31, 2019 and 2018, respectively, which will be repaid in future periods.
We accrue for sales returns and other allowances based on our historical experience, as well as expectations based on current information relevant to our customers. We include the amounts billed to customers for shipping and handling fees in net sales and include costs incurred for the delivery of goods as cost of goods sold in the statement of operations.
Recognition of licensing and royalty income occurs at the point in time when agreed upon performance obligations are satisfied, the amount is fixed or determinable, and collectability is reasonably assured.
Consideration for products in which control has transferred to our customers that is conditional on something other than the passage of time is recorded as a contract asset within prepaid expenses and other current assets on the balance sheet. The contract asset balances at December31, 2019 and 2018 were $37.5 million and $47.2 million, respectively.

71

Table of Contents
Notes to Consolidated Financial Statements
(In millions, unless otherwise noted)

The arrangements discussed above that have changed under the new revenue standard have resulted in a difference in timing of revenue recognition and classification of associated costs compared with historical U.S. GAAP. In addition to the application of the modified retrospective method to open contracts at the date of adoption, we have applied certain other policy elections upon adoption of the new revenue standard beginning January 1, 2018, including accounting for shipping and handling costs as contract fulfillment costs, as well as excluding from the transaction price any taxes imposed on and collected from customers in revenue producing transactions. Other practical expedients associated with the new revenue standard were assessed by management and concluded to be not applicable, including the application of a portfolio approach, costs to obtain a contract, existence of significant financing components, contract modifications and right to invoice.
Revenue Streams
Our revenue streams are disaggregated based on the types of products and services offered in contracts with our customers, which are depicted in each of our four end-markets.
Refinish - We develop, market and supply a complete portfolio of innovative coatings systems and color matching technologies to facilitate faster automotive collision repairs relative to competing technologies. Our refinish products and systems include a range of coatings layers required to match the vehicle’s color and appearance, producing a repair surface indistinguishable from the adjacent surface.
Industrial - The industrial end-market is comprised of liquid and powder coatings used in a broad array of end-market applications. We are also a leading global developer, manufacturer and supplier of functional and decorative liquid and powder coatings for a large number of diversified applications in the industrial end-market. We provide a full portfolio of products for applications including architectural cladding and fittings, automotive coatings, general industrial, job coaters, electrical insulation coatings, HVAC, appliances, industrial wood, coil, rebar and oil & gas pipelines.
Light Vehicle - 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.
Commercial Vehicle - Sales in the commercial vehicle end-market are generated from a variety of applications including non-automotive transportation (e.g., heavy duty truck, bus and rail) and Agricultural, Construction and Earthmoving, as well as related markets such as trailers, recreational vehicles and personal sport vehicles. This end-market is primarily driven by global commercial vehicle production, which is influenced by overall economic activity, government infrastructure spending, equipment replacement cycles and evolving environmental standards. Commercial vehicle OEMs select coatings providers on the basis of their ability to consistently deliver advanced technological solutions that improve exterior appearance, protection and durability and provide extensive color libraries and matching capabilities at the lowest total cost-in-use, while meeting stringent environmental requirements.
We also have other revenue streams which include immaterial revenues relative to the net sales of our four end-markets, comprised of sales of royalties and services, primarily within our light vehicle and refinish end-markets.
See Note 20 for net sales by end-market.
(3)ACQUISITIONS AND DIVESTITURES
During the year ended December 31, 2019, we completed the sale of our 60% interest in a consolidated joint venture within our Performance Coatings segment in China for net proceeds of $8.2 million. On the divestiture, we recorded a pre-tax loss of $3.4 million in other operating charges within our consolidated statements of operations for the year ended December31, 2019.
Other Activity
We purchased additional interests in certain previously consolidated joint ventures within our industrial end-market, increasing our total ownership to 100% for total consideration of $31.1 million. These included the remaining 40% interest in a joint venture in our Asia Pacific region and the remaining 24.5% interest pursuant to the stock purchase agreement for a joint venture acquired during the year ended December 31, 2016.

72

Table of Contents
Notes to Consolidated Financial Statements
(In millions, unless otherwise noted)

(4)GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Goodwill
The following table shows changes in the carrying amount of goodwill from December31, 2017 to December31, 2019 by reportable segment:
Performance
Coatings
Transportation
Coatings
Total
December31, 2017
$
1,189.2

$
82.0

$
1,271.2

Goodwill from acquisitions
2.9


2.9

Purchase accounting adjustments
(0.2
)

(0.2
)
Foreign currency translation
(40.4
)
(2.7
)
(43.1
)
December31, 2018
$
1,151.5

$
79.3

$
1,230.8

Goodwill from acquisitions
0.5


0.5

Purchase accounting adjustments
1.4


1.4

Divestiture
(5.6
)

(5.6
)
Foreign currency translation
(16.9
)
(1.3
)
(18.2
)
December31, 2019
$
1,130.9

$
78.0

$
1,208.9


Identifiable Intangible Assets
The following table summarizes the gross carrying amounts and accumulated amortization of identifiable intangible assets by major class:
December31, 2019
GrossCarrying
Amount
Accumulated
Amortization
NetBook
Value
Weighted average
amortizationperiods (years)
Technology
$
540.2

$
(310.6
)
$
229.6

10.4
Trademarks—indefinite-lived
264.9


264.9

Indefinite
Trademarks—definite-lived
99.7

(30.1
)
69.6

15.8
Customer relationships
923.8

(271.3
)
652.5

19.1
Other
15.2

(7.9
)
7.3

5.0
Total
$
1,843.8

$
(619.9
)
$
1,223.9

December31, 2018
GrossCarrying
Amount
Accumulated
Amortization
Net Book
Value
Weightedaverage
amortization periods (years)
Technology
$
545.7

$
(260.7
)
$
285.0

10.4
Trademarks—indefinite-lived
269.0


269.0

Indefinite
Trademarks—definite-lived
100.6

(24.0
)
76.6

15.8
Customer relationships
929.9

(222.9
)
707.0

19.1
Other
15.7

(5.3
)
10.4

5.1
Total
$
1,860.9

$
(512.9
)
$
1,348.0


In-process research and development projects not yet commercialized and classified within technology assets were $1.9 million and $2.3 million at December31, 2019 and 2018, respectively.

73

Table of Contents
Notes to Consolidated Financial Statements
(In millions, unless otherwise noted)

The estimated amortization expense related to the fair value of acquired intangible assets for each of the succeeding five years is:
2020
$
113.0

2021
$
112.4

2022
$
110.3

2023
$
71.0

2024
$
66.2


(5)RESTRUCTURING
In accordance with the applicable guidance for ASC 712, Nonretirement Postemployment Benefits, we accounted for termination benefits and recognized liabilities when the loss was considered probable that employees were entitled to benefits and the amounts could be reasonably estimated.
We have incurred costs in connection with involuntary termination benefits associated with our corporate-related initiatives and cost-saving opportunities associated with our Axalta Way initiatives. These amounts are recorded within selling, general and administrative expenses in the consolidated statements of operations. The payments associated with these actions are expected to be completed within 12 to 24 months from the balance sheet date.
The following table summarizes the activity related to the restructuring reserves and expenses for the years ended December31, 2019, 2018 and 2017:
Balance at January1, 2017
$
66.1

Expense recorded
36.2

Payments made
(36.1
)
Foreign currency translation
6.8

Venezuela deconsolidation impact
(1.5
)
Balance at December 31, 2017
$
71.5

Expense recorded
79.8

Payments made
(46.4
)
Foreign currency translation
(2.2
)
Balance at December 31, 2018
$
102.7

Expense recorded
34.4

Payments made
(57.3
)
Foreign currency translation
(1.8
)
Balance at December 31, 2019
$
78.0


Restructuringchargesincurred during the years ended December 31, 2019 and2018 included actions to reduce operational costs throughactivities to rationalize ourmanufacturing footprint, including the impacts from the closure of our Mechelen, Belgium manufacturing facility announced during the year ended December31, 2018. Axalta expects to incur aggregate pre-tax charges of approximately $135-140 million related to the shutdown of the Mechelen facility. Components of the aggregate pre-tax charges include approximately $90 million in severance costs, non-cash accelerated depreciation costs of approximately $40-45 million associated with the reduced useful lives of the impacted manufacturing assets and other shutdown related costs of approximately $5 million. Pre-tax charges incurred in fiscal years 2018 and 2019 were $80.9 million and $43.2 million, respectively, with the remainder to be incurred during 2020. Completion of the transfer and start-up of production at other Axalta manufacturing facilities is estimated to require capital expenditures of approximately $35-45 million, of which we have incurred approximately $8 million as of December 31, 2019. Axalta commenced the closure in the third quarter of 2018 and anticipates completion of the closure activities during the first half of 2020 with capital expenditures to be incurred into 2021. Axalta expects the charges to result in annual pre-tax savings of approximately $30 million, which are expected to begin realization during the second half of 2020.
During the year ended December31, 2017, we recorded impairment losses of $7.6 million associated with manufacturing facilities based on market price estimates recorded within other (income) expense, net. See Note 10 for further information.

74

Table of Contents
Notes to Consolidated Financial Statements
(In millions, unless otherwise noted)

We recognized impairments of $17.7 million, during the year ended December31, 2019, primarily related to the abandonment of engineering work for aspects of our China footprint project which has been adjusted due to evolving market conditions. The impairments are included in the consolidated statements of operations in other operating charges.
(6)COMMITMENTS AND CONTINGENCIES
Guarantees
We guarantee certain of our customers’ obligations to third parties, whereby any default by our customers on their obligations could force us to make payments to the applicable creditors. At December31, 2019 and 2018, we had outstanding bank guarantees of $11.6 million and $12.7 million, respectively, which expire in 2020 or thereafter. We monitor the obligations to evaluate whether we have a liability at the balance sheet date, for which none existed as of December31, 2019 and 2018.
Other
We are subject to various pending lawsuits, legal proceedings and other claims in the ordinary course of business, including civil, regulatory and environmental matters. These litigation matters may involve third-party indemnification obligations and/or insurance covering all or part of any potential damage against us. All of these matters are subject to many uncertainties and, accordingly, we cannot determine the ultimate outcome of the proceedings and other claims at this time, although management does not believe that such proceedings, individually or in the aggregate, will have a material adverse effect on the consolidated financial statements of Axalta.The potential effects, if any, on such consolidated financial statements will be recorded in the period in which these matters are probable and estimable.
We are involved in environmental remediation and ongoing compliance activities at several sites. The timing and duration of remediation and ongoing compliance activities are determined on a site by site basis depending on local regulations. The amounts recorded represent our estimable future remediation costs and other anticipated environmental liabilities. We have not recorded liabilities at sites where a liability is probable, but that a range of loss is not reasonably estimable. We believe that any sum we may be required to pay in connection with environmental remediation matters in excess of the amounts recorded would likely occur over a period of time and would likely not have a material adverse effect upon our results of operations, financial condition or cash flows on a consolidated annual basis, however, could have a material adverse impact in a particular quarterly reporting period.
(7)LEASES
We have operating and finance leases for certain of our technology centers, warehouses, office spaces, land, and equipment. As described within Note 1, we adopted ASU 2016-02, "Leases," on January 1, 2019 requiring, among other changes, operating and finance leases with terms exceeding twelve months to be recognized as ROU assets and lease liabilities on the balance sheet.
ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The lease term is determined to be the non-cancelable period including any lessee renewal options which are considered to be reasonably certain of exercise. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company used judgment to determine an appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term in a similar economic environment. Lease expense for fixed lease payments on operating leases is recognized over the expected term on a straight-line basis, while lease expense for fixed lease payments on finance leases is recognized using the effective interest.
Certain of our lease agreements include rental payments based on an index or adjusted periodically for inflation. The changes to the CPI are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. In addition, variable lease expense also includes elements of a contract that is based on usage during the term. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

75

Table of Contents
Notes to Consolidated Financial Statements
(In millions, unless otherwise noted)

Supplemental balance sheet information related to leases is summarized as follows:
December31, 2019
Assets
Classification
Operating lease assets, net
Other assets (1)
$
95.6

Finance lease assets, net
Property, plant and equipment, net (2)
66.9

Total leased assets
$
162.5

Liabilities
Current
Operating lease liabilities
Other accrued liabilities
$
29.3

Finance lease liabilities
Current portion of borrowings
2.9

Noncurrent
Operating lease liabilities
Other liabilities
69.5

Finance lease liabilities
Long-term borrowings
62.2

Total lease liabilities
$
163.9

(1)
Operating lease assets are recorded net of accumulated amortization of $18.4 million as of December31, 2019.
(2)
Finance lease assets are recorded net of accumulated amortization of $4.6 million as of December31, 2019.
Components of lease expense are summarized as follows:
December31, 2019
Finance lease cost
Amortization of right-of-use assets
$
4.1

Interest on lease liabilities
3.5

Operating lease cost
36.5

Variable lease cost
2.9

Short-term lease cost
1.2

Net lease cost
$
48.2

Supplemental cash flow information related to leases is summarized as follows:
December31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
36.8

Operating cash flows from finance leases
$
3.5

Financing cash flows from finance leases
$
1.9

Right-of-use assets obtained in exchange for lease obligations:
Operating leases
$
23.3

Finance leases
$
0.5


Lease term and discount rate information is summarized as follows:
December31, 2019
Weighted-average remaining lease term (years)
Operating leases
4.9

Finance leases
16.7

Weighted-average discount rate
Operating leases
3.6
%
Finance leases
5.2
%


76

Table of Contents
Notes to Consolidated Financial Statements
(In millions, unless otherwise noted)

Maturities of lease liabilities as of December31, 2019 is as follows:
Operating Leases
Finance Leases
Year
2020
$
31.1

$
5.9

2021
24.8

5.6

2022
17.1

5.8

2023
12.6

5.8

2024
6.4

5.8

Thereafter
17.2

71.9

Total lease payments
$
109.2

$
100.8

Less: imputed interest
10.4

35.7

Present value of lease liabilities
$
98.8

$
65.1


As discussed in Note 1, we have elected the transition methodology to apply the standard at the beginning of the period of adoption, January 1, 2019, through a cumulative-effect adjustment to retained earnings. Under this transition method, the application date of the new standard shall begin in the reporting period in which we have adopted the standard. For comparability purposes, the following table reflects the total remaining cash payments related to all transactions during the rental term at December31, 2018 associated with three lease arrangements that were treated as sale-leaseback financing transactions under ASC 840 and disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2018:
Sale-leaseback Obligations
2019
$
5.3

2020
5.4

2021
5.4

2022
5.7

2023
5.7

Thereafter
77.1

Total minimum payments
$
104.6


At December31, 2018, future minimum payments under non-cancelable operating leases under ASC 840 were as follows:
Operating
Leases
2019
$
34.6

2020
23.5

2021
17.1

2022
13.2

2023
11.5

Thereafter
16.6

Total minimum payments
$
116.5


(8)LONG-TERM EMPLOYEE BENEFITS
Defined Benefit Pensions
Axalta has defined benefit plans that cover certain employees worldwide, with over 85% of the projected benefit obligation within the European region as of December31, 2019.

77

Table of Contents
Notes to Consolidated Financial Statements
(In millions, unless otherwise noted)

Obligations and Funded Status
The measurement date used to determine defined benefit obligations was December31. The following table sets forth the changes to the projected benefit obligations ("PBO") and plan assets for the years ended December31, 2019 and 2018 and the funded status and amounts recognized in the accompanying consolidated balance sheets at December31, 2019 and 2018 for our defined benefit pension plans:
Year Ended December 31,
2019
2018
Change in benefit obligation:
Projected benefit obligation at beginning of year
$
583.7

$
636.9

Service cost
7.2

8.8

Interest cost
13.1

13.1

Participant contributions
1.2

1.3

Actuarial losses (gains), net
60.9

(3.3
)
Plan curtailments, settlements and special termination benefits
(7.1
)
(19.4
)
Benefits paid
(22.5
)
(25.6
)
Business combinations and other adjustments
(0.1
)
0.7

Foreign currency translation
4.3

(28.8
)
Projected benefit obligation at end of year
640.7

583.7

Change in plan assets:
Fair value of plan assets at beginning of year
332.3

365.0

Actual return on plan assets
28.3

(1.4
)
Employer contributions
16.9

24.6

Participant contributions
1.2

1.3

Benefits paid
(22.5
)
(