Axalta Coating Systems Ltd. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Axalta manufactures and sells coatings through Performance Coatings (refinish and industrial) and Mobility Coatings (light and commercial vehicle) segments. Dollar amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $1,238.7 | $1,088.6 | $3,647.7 | $3,279.0 |
| Income from operations | $123.5 | $124.7 | $313.4 | $367.7 |
| Net income attributable to controlling interests | $62.4 | $69.1 | $148.0 | $210.7 |
| Diluted EPS | $0.28 | $0.30 | $0.66 | $0.90 |
| Cash provided by operating activities | Not stated for quarter | $48.2 | $290.0 |
- Q3 sales increased 13.8%; nine-month sales rose 11.2%. Nine-month growth reflected price/mix (+9.5%), volume (+4.2%) and acquisitions, net of a commercial-agreement restructuring impact (+2.3%), offset by currency (-4.8%).
- Profitability weakened: Q3 cost of sales was 70.8% of sales versus 68.5%; nine-month cost of sales was 71.3% versus 66.6%. Operating margin was approximately 10.0% in Q3 versus 11.5%, and 8.6% for nine months versus 11.2%.
- Q3 net income fell 8% year over year; nine-month net income fell 30%. Higher input and operating costs, foreign exchange and lower segment earnings weighed on results.
- Segment results: Q3 Performance Coatings sales were $838.0 million (+7.5%) and Adjusted EBIT $121.8 million (down 0.8%); Mobility Coatings sales were $400.7 million (+29.5%) and Adjusted EBIT $3.6 million versus a $2.7 million loss. For nine months, Performance Coatings Adjusted EBIT declined to $341.6 million from $379.7 million; Mobility Coatings declined to $6.4 million from $42.2 million.
- Nine-month cash from operations decreased to $48.2 million from $290.0 million, principally as working capital used $366.5 million, including receivables, inventory and prepaid assets. Capital expenditures were $107.5 million. Cash used in investing was $67.9 million and cash used in financing was $274.9 million, including $200.1 million of share repurchases.
- Cash and cash equivalents were $517.4 million at September 30, 2022, down from $840.6 million at year-end 2021. Total borrowings, net, were $3,730.0 million, including $3,663.3 million of long-term debt. Revolver availability was $528.9 million; current assets were $2,668.4 million versus current liabilities of $1,349.7 million.
Changes, outlook and material items
- Sales growth reflected pricing to offset inflation and stronger Mobility volumes, but higher raw-material, freight, logistics, energy and labor costs pressured margins. Management said inflation and supply-chain constraints, including raw-material and logistics tightness, were expected to continue weighing on results through the remainder of 2022.
- A commercial-agreement restructuring/customer concession resulted in a $25.0 million nine-month charge: $20.3 million reduced net sales and $4.7 million was recorded in other expense. The concession followed a customer recapitalization and a new long-term exclusive sales agreement.
- The former CEO stepped down effective August 31, 2022; Rakesh Sachdev became Interim CEO and President. The board had begun a search for a permanent CEO.
- Management cited semiconductor shortages affecting automotive customers, other supply constraints, inflation, freight disruption, COVID-related uncertainty and China lockdowns. Russia and Ukraine represented less than 1% of nine-month sales, but escalation of the conflict or sanctions could have a material adverse effect. Russia-related reserves and other impacts totaled $4.8 million for nine months, including a $1.3 million net benefit in Q3.
- A North America Mobility Coatings operational matter remains subject to estimation and insurance recovery. At September 30, estimated liabilities were $43.9 million and related insurance receivables were $38.7 million; actual costs and recoveries could differ materially.
- Axalta said available cash, operating cash flow and borrowing capacity should be adequate for debt service, liquidity needs and necessary capital expenditures over the next 12 months, while cautioning that cash generation and refinancing capacity depend on factors outside its control. No specific earnings or sales guidance was provided in the supplied filing text.
Key investor verification points
- Track working-capital conversion and operating cash flow, especially receivables and inventory, alongside continued share repurchases.
- Assess whether pricing can continue to offset input-cost inflation and whether segment margins recover, particularly in Mobility Coatings.
- Review debt maturities, interest-rate exposure and refinancing needs; approximately $1,993 million of scheduled repayments are due in 2024.
- Monitor the operational matter’s ultimate repair costs, insurance coverage and timing of recoveries, as well as customer credit exposure from upfront incentives.
- Follow the CEO search and the business effects of currency movements, geopolitical developments, sanctions and COVID-related disruption.