# Axalta Coating Systems Ltd. (AXTA) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Axalta Coating Systems Ltd.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1616862/000161686222000010/axta-20211231.htm
Accession: 0001616862-22-000010
Filing date: 2022-02-18
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/AXTA/
All MD&A years: /company/AXTA/mda/
Next year: /company/AXTA/mda/fy2022/ (FY 2022)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

This discussion and analysis deals with comparisons of material changes in the consolidated financial statements for 2021 and 2020. For the comparison of 2020 and 2019, see Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our 2020 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 18, 2021.

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," "believe," "intend," "estimates," "targets," "projected," "projections," "can," "committing," "should," "could," "would," "may," "will," "forecasts" 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" in this Annual Report on Form 10-K and in other document we have filed with, or furnished to, the SEC, 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 47 manufacturing facilities, four technology centers, 48 customer training centers and approximately 13,000 people allows us to meet the needs of customers in over 140 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 Mobility Coatings. Previously named Transportation Coatings, our Mobility Coatings segment was renamed in 2021 with no changes to the underlying business or segment structure. 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 Mobility Coatings segment, we provide advanced coating technologies to OEMs of light and commercial vehicles. These increasingly global customers require a high level of technical support coupled with cost-effective, environmentally responsible, coatings systems that can be applied with a high degree of precision, consistency and speed. The end-markets within this segment are light vehicle and commercial vehicle.

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BUSINESS HIGHLIGHTS

General Business Highlights

Our net sales increased 18.2% for the year ended December 31, 2021 compared with the year ended December 31, 2020. The increased sales were driven by higher volumes of 10.5% as a result of demand recovery from the impacts of COVID-19, higher average selling price and product mix of 4.0%, contributions from acquisitions of 1.9% and a 1.8% benefit from foreign currency translation partially offset by significant impacts of the semiconductor chip and other supply chain shortages that affected our customers. The following trends have impacted our segment and end-market net sales performance:

•Performance Coatings: Net sales increased 23.0% compared to 2020. The increased sales were primarily driven by higher volumes of 13.1% as a result of demand recovery from the impacts of COVID-19, higher average selling prices and product mix of 5.0%, and contributions from acquisitions of 2.8%. Net sales also benefited 2.1% from foreign currency translation driven primarily by fluctuations of the Euro, Chinese Renminbi, and British Pound compared to the U.S. Dollar.

•Mobility Coatings: Net sales increased 8.1% compared to 2020. The increased sales were primarily driven by higher volumes of 5.0% as a result of demand recovery from the impacts of COVID-19 as well as higher average selling prices and product mix of 1.8%, partially offset by significant impacts of semiconductor chip and other supply chain shortages. Net sales also benefited 1.3% from foreign currency translation driven primarily by fluctuations of the Chinese Renminbi and Euro partially offset by fluctuations in the Brazilian Real and Turkish Lira compared to the U.S. Dollar.

Our business serves four end-markets globally with net sales for the years ended December 31, 2021 and 2020 as follows:

[[GREPCENT_TABLE]]
[["(In millions)","","Year Ended December 31,","","2021 vs 2020"],["","","2021","","2020","","% change"],["Performance Coatings"],["Refinish","","$","1,776.4","","","$","1,449.0","","","22.6","%"],["Industrial","","1,319.9","","","1,067.4","","","23.7","%"],["Total Net sales Performance Coatings","","3,096.3","","","2,516.4","","","23.0","%"],["Mobility Coatings"],["Light Vehicle","","1,013.1","","","960.5","","","5.5","%"],["Commercial Vehicle","","306.8","","","260.7","","","17.7","%"],["Total Net sales Mobility Coatings","","1,319.9","","","1,221.2","","","8.1","%"],["Total Net sales","","$","4,416.2","","","$","3,737.6","","","18.2","%"]]
[[/GREPCENT_TABLE]]

Semiconductor chip shortages, supply chain constraints and raw material inflation

During the year ended December 31, 2021, we were impacted globally by semiconductor chip shortages, primarily affecting our Light Vehicle end-market, supply chain shortages as a result of severe weather in the U.S., inflation of raw material costs and logistics constraints. We anticipate the semiconductor chip and supply chain constraints, including the tightness of raw materials and freight and logistic challenges, will continue to impact our results through 2022 and raw material inflation to continue to impact our results into 2022 with potential abatement as the year progresses. We will continue to monitor these conditions and take appropriate actions that we believe will help mitigate costs and other operational impacts.

Coronavirus ("COVID-19") Pandemic

During the year ended December 31, 2021, our business continued to recover from the significant adverse impact on the demand for our products and, thus, our income from operations, caused by the COVID-19 pandemic, which began in early 2020. While we have seen a return to more stable quarter-over-quarter demand for our products and services, we remain cognizant of future COVID-19 developments, such as impacts from new variants, including employee absenteeism, shutdowns or other restrictions, that could impact our future results of operations, financial condition and cash flows. The risks and uncertainties related to the COVID-19 pandemic are discussed in further detail within Note 1 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Acquisitions Highlights

During the year ended December 31, 2021, we successfully completed two strategic acquisitions within our Performance Coatings segment, including the acquisition of U-POL, which are discussed in further detail within Note 3 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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Capital and Liquidity Highlights

During the year ended December 31, 2021, we repurchased 8.2 million shares for total consideration of $243.7 million as we continue to execute against our previously approved share repurchase program. In April 2021, our Board of Directors authorized an increase in our common share repurchase program of $625.0 million, bringing the size of the program, initially announced in March 2017, to a total of $1.3 billion, of which we have repurchased $682.6 million through December 31, 2021.

During the year ended December 31, 2021, in connection with the Tenth Amendment to the Credit Agreement (the "Tenth Amendment") discussed within Note 18 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we increased the borrowing capacity under our revolving credit facility from $400.0 million to $550.0 million and extended the maturity of the revolving credit facility from 2024 to 2026, provided that such date will be accelerated in certain circumstances as set forth in the Tenth Amendment.

See Note 18 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.

Environmental, Social and Governance Framework

In January 2022, we announced a new ESG framework that details longer-term ESG goals and strategies. See Part I, Item 1, "Business—Environmental, Social and Governance" included elsewhere in this Annual Report on Form 10-K for additional information.

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, quality 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.

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, but product prices are also influenced by changes in market dynamics. 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.

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•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, cost of poor quality, including product claims and other general manufacturing expenses, such as expenses for utilities and energy consumption.

The main factors that influence our cost of sales as a percentage of net sales include:

•changes in the price of raw materials;

•changes in the costs of labor, logistics and energy;

•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 the costs of labor;

•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.

Other operating charges

Our other operating charges include termination benefits and other employee related costs, strategic review and retention costs, acquisition and divestiture-related costs, impairment charges, an operational matter, which is discussed further in Note 6 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K, and gains of sales of facilities 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.

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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 (income) expense, net

Other (income) expense, 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

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,","","2021 vs 2020"],["","","2021","","2020","","$ Change","","% Change"],["Net sales","","$","4,416.2","","","$","3,737.6","","","$","678.6","","","18.2","%"],["Volume effect","","","","","","","","10.5","%"],["Impact of portfolio changes","","","","","","","","1.9","%"],["Price/Mix effect","","","","","","","","4.0","%"],["Exchange rate effect","","","","","","","","1.8","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Net sales increased primarily due to the following:"],["n Higher sales volumes across both segments as a result of demand recovery from the impacts of COVID-19 on 2020 results, partially muted by customer production limitations resulting from significant impacts of semiconductor and other supply-chain constraints"],["n Higher average selling price driven in both segments as a result of pricing actions taken to offset input price inflation"],["n Increased sales through the acquisitions discussed within Note 3 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K"],["n Favorable impacts of currency translation, due primarily to the fluctuations of the Euro, Chinese Renminbi and British Pound compared to the U.S. dollar"]]
[[/GREPCENT_TABLE]]

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Cost of sales

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,","","2021 vs 2020"],["","","2021","","2020","","$ Change","","% Change"],["Cost of sales","","$","2,987.3","","","$","2,457.9","","","$","529.4","","","21.5","%"],["% of net sales","","67.6","%","","65.8","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Cost of sales increased primarily due to the following:"],["n Higher sales volumes across both segments as a result of demand recovery from the impacts of COVID-19 on 2020 results"],["n Higher variable input costs due to raw material inflation and supply chain impacts"],["n Increased compensation-related expenses because of the lapse of temporary COVID-19 related cost reduction actions in the prior year"],["n Increased costs associated with the acquisitions discussed within Note 3 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K"],["n Unfavorable impacts of currency translation, due primarily to the fluctuations of the Euro and Chinese Renminbi compared to the U.S. dollar"],["Cost of sales as a percentage of net sales increased primarily due to the following:"],["n Higher variable input costs due to raw material inflation and supply chain impacts"],["n Increased compensation-related expenses because of the lapse of temporary COVID-19 related cost reduction actions in the prior year"],["Partially offset by:"],["n Higher sales volume covering fixed costs"]]
[[/GREPCENT_TABLE]]

Selling, general and administrative expenses

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,","","2021 vs 2020"],["","","2021","","2020","","$ Change","","% Change"],["Selling, general and administrative expenses","","$","738.7","","","$","695.0","","","$","43.7","","","6.3","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Selling, general and administrative expenses increased primarily due to the following:"],["n Unfavorable impacts of currency translation, due primarily to the fluctuations of the Euro and Chinese Renminbi compared to the U.S. dollar"],["n Increased expenses as a result of acquisitions discussed within Note 3 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K"],["n Higher operating costs including compensation-related costs, due to the lapse of temporary COVID-19 related cost reductions in the prior year, partially offset by the reduction in costs resulting from operational efficiencies associated with our structural cost savings initiatives"],["n Increase in commissions and sales incentive compensation driven by increased sales"],["Partially offset by:"],["n Lower bad debt expenses in 2021 compared to 2020 of $10.0 million associated with trade receivables"]]
[[/GREPCENT_TABLE]]

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Other operating charges

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,","","2021 vs 2020"],["","","2021","","2020","","$ Change","","% Change"],["Other operating charges","","$","44.0","","","$","110.8","","","$","(66.8)","","","(60.3)","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Other operating charges changed primarily due to the following:"],["n Decrease of $38.0 million in termination benefits and other employee related costs associated with our cost saving initiatives from $74.9 million in the prior year to $36.9 million in the current year"],["n Decrease of $21.0 million associated with retention awards and the review of strategic alternatives that was concluded in March 2020, from $30.7 million in the prior year to $9.7 million in the current year"],["n Gains of $18.7 million in the current year related to the sales of manufacturing facilities"],["n Decrease of $5.1 million in impairment charges primarily related to impairments and associated write-downs in the prior year resulting from our decision to exit the Performance Coatings segment business in Argentina, which did not re-occur in the current year"],["n Impacts of currency translation were immaterial when compared with 2020"],["Partially offset by:"],["n Increase of $11.8 million in expenses for acquisition-related costs during the current year primarily associated with costs associated with the U-POL acquisition"]]
[[/GREPCENT_TABLE]]

Research and development expenses

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,","","2021 vs 2020"],["","","2021","","2020","","$ Change","","% Change"],["Research and development expenses","","$","62.4","","","$","55.2","","","$","7.2","","","13.0","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Research and development expenses increased primarily due to the following:"],["n Increase in compensation-related expenses and other spending due to the absence of temporary cost savings initiatives that were in place during 2020"],["n Impacts of currency translation were immaterial when compared with 2020"]]
[[/GREPCENT_TABLE]]

Amortization of acquired intangibles

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,","","2021 vs 2020"],["","","2021","","2020","","$ Change","","% Change"],["Amortization of acquired intangibles","","$","121.4","","","$","113.2","","","$","8.2","","","7.2","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Amortization of acquired intangibles increased primarily due to the following:"],["n Amortization related to intangible assets acquired in our acquisitions discussed within Note 3 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K"],["n Unfavorable impacts of foreign currency translation, primarily related to fluctuations of the Euro compared to the U.S. dollar"]]
[[/GREPCENT_TABLE]]

Interest expense, net

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,","","2021 vs 2020"],["","","2021","","2020","","$ Change","","% Change"],["Interest expense, net","","$","134.2","","","$","149.9","","","$","(15.7)","","","(10.5)","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Interest expense, net decreased primarily due to the following:"],["n Decrease in variable interest rates due to LIBOR decreases on our variable rate debt over the comparable period and benefits on our fixed rate debt issued with our debt refinancing activity in November 2020"],["n Impacts of currency translation were immaterial when compared with 2020"],["Partially offset by:"],["n Unfavorable impacts of increased average principal over the comparable period resulting from our 2020 debt refinancing activities"],["n Unfavorable impacts of our derivative instruments used to hedge the variable interest rate exposure on certain debt arrangements"]]
[[/GREPCENT_TABLE]]

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Other (income) expense, net

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,","","2021 vs 2020"],["","","2021","","2020","","$ Change","","% Change"],["Other (income) expense, net","","$","(12.3)","","","$","33.4","","","$","(45.7)","","","(136.8)","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Other (income) expense, net changed primarily due to the following:"],["n Reduction in debt extinguishment and refinancing related costs of $34.2 million"],["n Income of $8.3 million recorded in 2021 related to a tax law change with respect to certain Brazilian indirect taxes"],["n Favorable impact of foreign exchange losses of $4.9 million when compared with the prior-year period driven by the Euro and Swiss Franc"],["Partially offset by:"],["n A net benefit of $0.8 million during the prior period as a result of changes in pension curtailment, settlements, and special termination benefits activity within accumulated other comprehensive loss"]]
[[/GREPCENT_TABLE]]

Provision for income taxes

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2021","","2020"],["Income before income taxes","","$","340.5","","","$","122.2"],["Provision for income taxes","","76.1","","","0.2"],["Statutory U.S. Federal income tax rate","","21.0","%","","21.0","%"],["Effective tax rate","","22.4","%","","0.2","%"],["Effective tax rate vs. statutory U.S. Federal income tax rate","","1.4","%","","(20.8)","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","(Favorable) Unfavorable Impact"],["Items impacting the effective tax rate vs. statutory U.S. federal income tax rate","","2021","","2020"],["Earnings generated in jurisdictions where the statutory rate is lower than the U.S. Federal rate (1)","","$","(16.9)","","","$","(13.9)"],["Changes in valuation allowance","","18.1","","","10.0"],["Foreign exchange gain, net","","2.2","","","8.2"],["Stock-based compensation excess tax shortfalls (benefits)","","0.4","","","(0.3)"],["Non-deductible expenses and interest","","5.7","","","4.6"],["Change in unrecognized tax benefits (2)","","(4.9)","","","54.9"],["Intra-entity asset transfer (3)","","\u2014","","","(50.8)"],["Foreign taxes","","8.7","","","7.0"],["Other - net (4)","","(7.0)","","","(42.7)"]]
[[/GREPCENT_TABLE]]

(1)    Primarily related to earnings in Bermuda, Germany, Luxembourg, and Switzerland.

(2)    In 2020, we recorded charges of $14.3 million in connection with the income tax audit in Germany and $27.3 million in the 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)    In 2020, the Company recorded a tax benefit related to the step-up of tax-deductible basis upon transfer of certain intellectual property rights to our Swiss subsidiary.

(4)    In 2021, the Company recorded a tax benefit of $2.9 million in the Netherlands, which is fully offset by a tax expense of $2.9 million for an increase to the valuation allowance. In 2020, the Company recorded a tax benefit of $41.8 million in the 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.

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SEGMENT RESULTS

The Company's products and operations are managed and reported in two operating segments: Performance Coatings and Mobility 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

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,","","2021 vs 2020"],["","","2021","","2020","","$ Change","","% Change"],["Net sales","","$","3,096.3","","","$","2,516.4","","","$","579.9","","","23.0","%"],["Volume effect","","","","","","","","13.1","%"],["Impact of portfolio changes","","","","","","","","2.8","%"],["Price/Mix effect","","","","","","","","5.0","%"],["Exchange rate effect","","","","","","","","2.1","%"],["Adjusted EBIT","","$","479.4","","","$","344.3","","","$","135.1","","","39.2","%"],["Adjusted EBIT Margin","","15.5","%","","13.7","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Net sales increased primarily due to the following:"],["n Higher sales volumes across both end-markets and all regions as a result of demand recovery from the impacts of COVID-19"],["n Higher average selling prices and product mix across both end-markets, driven by price actions within both end-markets and improved product mix in Refinish North America"],["n Favorable impact from portfolio changes as a result of acquisitions closed during 2021"],["n Favorable impacts of currency translation, due primarily to the fluctuations of the Euro, Chinese Renminbi and British Pound compared to the U.S. dollar"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Adjusted EBIT increased primarily due to the following:"],["n Higher sales volumes across both end-markets as a result of demand recovery from the impacts of COVID-19"],["n Higher average selling prices and product mix across both end-markets and most regions"],["n Favorable impacts of currency translation, due primarily to the fluctuations of the Canadian Dollar, Chinese Renminbi and British Pound compared to the U.S. dollar"],["Partially offset by:"],["n Higher variable input costs across both end-markets and all regions primarily due to inflation of raw materials and logistics costs"],["n Higher operating costs due to the lapse of temporary cost savings in the prior year, partially offset by the reduction in costs resulting from operational efficiencies associated with our structural cost savings initiatives"],["Adjusted EBIT margins increased primarily due to the following:"],["n Higher sales volumes across both end-markets as a result of demand recovery from the impacts of COVID-19"],["n Higher average selling prices and product mix across both end-markets and most regions"],["n Favorable impacts of currency translation, due primarily to the fluctuations of the Canadian Dollar, Chinese Renminbi and British Pound compared to the U.S. dollar"],["Partially offset by:"],["n Higher variable input costs across both end-markets and all regions primarily due to inflation of raw materials and logistics costs"],["n Higher operating costs due to the lapse of temporary cost savings in the prior year, partially offset by the reduction in costs resulting from operational efficiencies associated with our structural cost savings initiatives"]]
[[/GREPCENT_TABLE]]

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Mobility Coatings Segment

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,","","2021 vs 2020"],["","","2021","","2020","","$ Change","","% Change"],["Net sales","","$","1,319.9","","","$","1,221.2","","","$","98.7","","","8.1","%"],["Volume effect","","","","","","","","5.0","%"],["Price/Mix effect","","","","","","","","1.8","%"],["Exchange rate effect","","","","","","","","1.3","%"],["Adjusted EBIT","","$","38.7","","","$","82.9","","","$","(44.2)","","","(53.3)","%"],["Adjusted EBIT Margin","","2.9","%","","6.8","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Net sales increased primarily due to the following:"],["n Higher sales volumes across both end-markets as a result of demand recovery from the impacts of COVID-19, partially offset by customer production limitations due to significant impacts of semiconductor chip and other supply chain constraints"],["n Higher average selling prices and product mix driven by Light Vehicle price actions within most regions"],["n Favorable impacts of currency translation, due primarily to the fluctuations of the Chinese Renminbi and Euro compared to the U.S. dollar, partially offset by fluctuations of the Brazilian Real and Turkish Lira compared to the U.S. dollar"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Adjusted EBIT decreased primarily due to the following:"],["n Higher variable input costs across all regions and both end-markets due to raw material inflation"],["Partially offset by:"],["n Higher average selling price and product mix driven by price actions to offset inflation"],["n Lower operating expenses"],["n Higher sales volumes across both end-markets"],["Adjusted EBIT margins decreased due to the following:"],["n Higher variable input costs across all regions due to raw material inflation"],["Partially offset by:"],["n Higher average selling price and product mix driven by price actions to offset inflation"],["n Lower operating expenses"],["n Higher sales volumes across both end-markets"]]
[[/GREPCENT_TABLE]]

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.

At December 31, 2021, availability under the Revolving Credit Facility was $527.9 million, net of $22.1 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. At December 31, 2021, we had $24.0 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 $22.2 million.

We, or our affiliates, at any time and from time to time, may purchase shares of our common stock or the Senior Notes, and may prepay our Term Loans or other indebtedness. Any such purchases of our common stock or Senior Notes 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.

We have various supplier finance programs in place around the world. We partner with large banking institutions and utilize these programs to enhance our liquidity profile. Depending on the program, the liabilities under the program are classified either as accounts payable or current portion of borrowings on our consolidated balance sheets. Our facility in China is more fully described in Note 18 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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Cash Flows

Years ended December 31, 2021 and 2020

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["(In millions)","","2021","","2020"],["Net cash provided by (used for):"],["Operating activities:"],["Net income","","$","264.4","","","$","122.0"],["Depreciation and amortization","","316.5","","","320.3"],["Amortization of deferred financing costs and original issue discount","","8.9","","","9.0"],["Debt extinguishment and refinancing related costs","","0.2","","","34.4"],["Deferred income taxes","","15.0","","","(55.4)"],["Realized and unrealized foreign exchange losses, net","","10.1","","","3.9"],["Stock-based compensation","","14.9","","","15.1"],["Gain on sales of facilities","","(19.7)","","","\u2014"],["Interest income on swaps designated as net investment hedges","","(18.0)","","","(14.5)"],["Other non-cash, net","","11.7","","","16.2"],["Net income adjusted for non-cash items","","604.0","","","451.0"],["Changes in operating assets and liabilities","","(45.4)","","","58.3"],["Operating activities","","558.6","","","509.3"],["Investing activities","","(716.0)","","","(61.5)"],["Financing activities","","(334.5)","","","(130.9)"],["Effect of exchange rate changes on cash","","(20.9)","","","26.6"],["Net (decrease) increase in cash","","$","(512.8)","","","$","343.5"]]
[[/GREPCENT_TABLE]]

Year Ended December 31, 2021

Net Cash Provided by Operating Activities

Net cash provided by operating activities for the year ended December 31, 2021 was $558.6 million. Net income before deducting non-cash items (depreciation, amortization and other non-cash items) generated cash of $604.0 million. This was offset by net uses of working capital of $45.4 million, for which the most significant drivers were increases in inventory, accounts and notes receivable and prepaid expenses and other assets of $111.6 million, $80.5 million and $45.3 million, respectively. These outflows were primarily driven by inflation of raw material costs, increased accounts receivable associated with net sales growth, insurance receivables related to an operational matter within the Mobility Coatings segment, which is discussed further in Note 6 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K, and timing of business incentive payments. The outflows were partially offset by increases in accounts payable of $140.1 million due to inflation of raw material costs and management of accounts payable and other accruals of $66.2 million primarily related to an operational matter within the Mobility Coatings segment which is discussed further in Note 6 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Net Cash Used for Investing Activities

Net cash used for investing activities for the year ended December 31, 2021 was $716.0 million. The primary uses were $649.0 million for business acquisitions, which are discussed further in Note 3 of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K, and purchases of property, plant and equipment of $121.6 million. The outflows were partially offset by proceeds received from sales of assets of $37.8 million, driven primarily by the sales of facilities discussed further in Note 5 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K, and $18.0 million of interest proceeds on swaps designated as net investment hedges, which are discussed further in Note 19 to 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, 2021 was $334.5 million. The primary uses were for the purchase of common stock totaling $243.8 million and payments of $100.9 million on borrowings.

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Other Impacts on Cash

Currency exchange impact on cash for the year ended December 31, 2021 were unfavorable by $20.9 million, which was driven primarily by fluctuations in the Euro compared to the U.S. Dollar partially offset by fluctuations in the Chinese Renminbi compared to the U.S. Dollar.

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 $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.

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 shares 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.

Financial Condition

We had cash and cash equivalents at December 31, 2021 and 2020 of $840.6 million and $1,360.9 million, respectively. Of these balances, $471.9 million and $761.7 million were maintained in non-U.S. jurisdictions as of December 31, 2021 and 2020, respectively. We believe at this time our organizational structure allows us the necessary flexibility to move funds throughout our subsidiaries to meet our operational working capital needs.

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, selling 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.

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The following table details our borrowings outstanding at the periods indicated:

[[GREPCENT_TABLE]]
[["","","December 31,"],["(In millions)","","2021","","2020"],["2024 Dollar Term Loans","","$","2,038.9","","","$","2,063.2"],["2025 Euro Senior Notes","","508.8","","","552.1"],["2027 Dollar Senior Notes","","500.0","","","500.0"],["2029 Dollar Senior Notes","","700.0","","","700.0"],["Short-term and other borrowings","","113.8","","","118.0"],["Unamortized original issue discount","","(4.6)","","","(6.3)"],["Unamortized deferred financing costs","","(27.3)","","","(34.3)"],["Total borrowings, net","","3,829.6","","","3,892.7"],["Less:"],["Short-term borrowings","","55.4","","","29.9"],["Current portion of long-term borrowings","","24.3","","","24.3"],["Long-term debt","","$","3,749.9","","","$","3,838.5"]]
[[/GREPCENT_TABLE]]

Our indebtedness, including the Senior Secured Credit Facilities, Senior Notes and short-term borrowings, 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 payments as well as our working capital needs. During the year ended December 31, 2021,we entered into the Tenth Amendment to the Credit Agreement in order to, among other things, increase the commitments available pursuant to the Revolving Credit Facility from $400.0 million to $550.0 million and extend the maturity from 2024 to 2026, provided that such date will be accelerated in certain circumstances as set forth in the Tenth Amendment. As a result, availability under the Revolving Credit Facility was $527.9 million and $366.0 million at December 31, 2021 and December 31, 2020, 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.

The following table details our borrowings outstanding, average effective interest rates and the associated interest expense. Interest expense is inclusive of the amortization of debt issuance costs, debt discounts and the impact of derivative instruments for the years ended December 31, 2021 and 2020, respectively:

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2021","","2020"],["(In millions)","","Principal","","Average Effective Interest Rate","","Interest Expense","","Principal","","Average Effective Interest Rate","","Interest Expense"],["Term Loans","","$","2,038.9","","","2.2%","","$","62.2","","","$","2,063.2","","","3.0%","","$","68.0"],["Revolving Credit Facility","","\u2014","","","N/A","","1.5","","","\u2014","","","N/A","","1.4"],["Senior Notes","","1,708.8","","","4.1%","","65.9","","","1,752.1","","","4.5%","","75.2"],["Short-term and other borrowings","","113.8","","","Various","","4.6","","","118.0","","","Various","","5.3"],["Total","","$","3,861.5","","","","","$","134.2","","","$","3,933.3","","","","","$","149.9"]]
[[/GREPCENT_TABLE]]

After giving effect to our cross-currency and interest rate hedges, our borrowings denominated in U.S. Dollar as of December 31, 2021 and 2020 were $2,481.4 million and $2,509.9 million, respectively, with weighted average interest rates of 3.4% and 3.6%. After giving effect to our cross-currency and interest rate hedges, borrowings denominated in Euro as of December 31, 2021 and 2020 were $1,380.1 million and $1,423.4 million, respectively, with weighted average interest rates of 2.5% and 2.5%.

Contractual Obligations

See Note 7 and Note 18 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for disclosure of our material contractual obligations.

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.

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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 with U.S. GAAP unless otherwise noted. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts reported in the financial statements. We base our estimates and judgments on historical experiences and assumptions believed to be reasonable under the circumstances and re-evaluate them on an ongoing basis. Actual results could differ from our estimates under different assumptions or conditions. Our significant accounting policies, which may be affected by our estimates and assumptions, are more fully described in Note 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.

The fair value of 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 include discount rates, expected terms, volatility rates and operating results as applicable based on the targets identified in the respective acquisition agreements.

At December 31, 2021, we have not finalized the purchase accounting related to $680.2 million of net assets acquired during the year in connection with the acquisitions described in Note 3 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The estimates used to determine the allocation of the purchase price may be modified up to one year from the date of the acquisition as more information is obtained about the fair value of assets acquired and liabilities assumed. Based on historical acquisitions, we do not expect any material adjustments to the current estimates at this time.

See Notes 1 and 3 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.

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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 2021, 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. Based on the results of our 2021 qualitative evaluation, we do not believe the meaningful estimates and assumptions supporting the goodwill and indefinite-lived intangible assets balances have changed materially from our most recent quantitative evaluation in 2019, which rendered cushions in excess of 77% for all reporting units. 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.

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.

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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 with U.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 2022 would result in an increase of approximately $1.0 million or a decrease of approximately $0.3 million, respectively. The estimated impact of a 100 basis point increase or decrease of the expected return on assets assumption on the net periodic benefit cost for 2022 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 $373.1 million of taxable income to fully realize its consolidated net deferred tax assets as of December 31, 2021.

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 of December 31, 2021 is $6.8 million, net of valuation allowances of $210.9 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 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. At December 31, 2021 and 2020, deferred income taxes of approximately $10.6 million and $7.1 million, respectively, have been provided on such subsidiary earnings, respectively. At December 31, 2021, and 2020, we have not recorded a deferred tax liability related to withholding taxes of approximately $177.5 million and $96.1 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. At December 31, 2021 and 2020, the Company had gross unrecognized tax benefits, excluding interest and penalties, for both domestic and foreign operations of $91.4 million and $99.6 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.

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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.

Costs related to the operational matter described in Note 6 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K are accrued when it is probable that a liability has been incurred and the amount can be reasonably estimated. Estimates of probable liabilities for the operational matter require assumptions pertaining to costs incurred by our customers to repair the impacted products. Assumptions include the ultimate number of impacted products that are repaired, re-use of damaged materials, labor rates and efficiency of individuals performing the repairs. A 10% decrease in the total number of products repaired would result in an approximately $5.5 million reduction in the estimated liability. Insurance recoveries related to the operational matter are recorded when probable to the extent they cover incurred or probable liabilities, while recoveries in excess of incurred or probable liabilities are recorded when collection is realizable.

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. The amounts historically accrued for environmental remediation costs are not material to our financial statements.

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.

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