Axalta Coating Systems Ltd. — Q3 2020 Form 10-Q
Business context and reporting period: Axalta manufactures and distributes coatings globally through Performance Coatings (refinish and industrial) and Transportation Coatings (light- and commercial-vehicle). This unaudited report covers the quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. Management attributed significant year-to-date demand pressure to COVID-19.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,026.9m | $1,107.0m | $2,663.1m | $3,383.8m |
| Income from operations | $141.7m | $123.0m | $142.3m | $379.5m |
| Net income | $82.5m | $66.4m | $51.7m | $210.4m |
| Diluted earnings per share | $0.35 | $0.28 | $0.22 | $0.88 |
| Cash from operating activities | Not presented separately for quarter | Not presented separately for quarter | $230.9m | $289.8m |
Q3 sales declined 7.2%; nine-month sales fell 21.3%. Cost of goods sold was 61.7% of sales in Q3 versus 63.9% a year earlier, but 66.8% year to date versus 65.2%. Q3 operating income and net income increased year over year despite lower sales; nine-month operating income and net income dropped sharply. The nine-month 2020 tax benefit of $22.7m included a one-time $50.5m benefit from an intellectual-property transfer to Switzerland, partly offset by a $14.3m charge related to a German tax audit settlement position.
Segments and material changes
- Performance Coatings: Q3 sales fell 5.7% to $682.7m; segment Adjusted EBIT rose 7.2% to $133.9m, with margin increasing to 19.6% from 17.3%. Nine-month sales declined 17.4% and Adjusted EBIT fell 35.1%.
- Transportation Coatings: Q3 sales fell 10.2% to $344.2m; segment Adjusted EBIT increased 30.4% to $48.5m, with margin rising to 14.1% from 9.7%. Nine-month sales declined 28.5% and Adjusted EBIT fell 68.7%.
- Management cited lower volumes, particularly from reduced vehicle production and vehicle miles driven, as the principal sales headwind. Cost savings and lower variable costs supported Q3 segment profitability; reduced utilization and inventory reserves weighed on year-to-date results.
Cash, debt and liquidity
- At September 30, 2020, cash and cash equivalents were $1,341.3m, versus $1,017.5m at December 31, 2019. Net cash provided by operating activities was $230.9m for the nine months, down from $289.8m; capital spending was $56.2m.
- Total borrowings, net, were $4,059.6m, versus $3,834.1m at year-end 2019. Long-term debt was $4,010.9m. The company issued $500m of 4.75% senior notes due 2027 and prepaid $300m of 2024 term loans.
- Revolver availability was $366.0m, with no revolver borrowings outstanding. Management said cash, operating cash flow and available borrowing capacity should meet debt service, cost-saving initiatives, liquidity needs and necessary capital expenditures for the next 12 months. The company reported no current financial covenant testing requirement because it had no revolver borrowings.
- Working capital changes used $40.2m of cash during the first nine months. The company reported $60.8m of uses from prepaid expenses and other assets, partly offset by a $43.2m inventory reduction.
Outlook, risks and unusual items
- Management reported sequential improvement as markets reopened and said all manufacturing sites were open at the filing date. It also warned that renewed shutdowns, prolonged pandemic effects or a broader downturn could materially harm demand, operations, financial condition and cash flows.
- Management said the company remained committed to its cost-saving and restructuring initiatives and expected to meet its full-year 2020 savings goals. During Q3, it reported approximately $50m of operating-cost reductions and approximately $60m of incremental cash flow from COVID-related actions. No quantified revenue or earnings guidance was provided.
- A global restructuring announced in July resulted in $52.2m of pretax charges through September, primarily employee severance, and a workforce reduction of approximately 600. The plan was expected to incur total pretax charges of approximately $60m–$65m; remaining payments were expected to be substantially completed within 24 months.
- COVID-19-related credit and inventory risks increased: the doubtful-account allowance rose to $27.2m from $16.0m at year-end, and inventory reserves rose to $19.2m from $13.1m. Management also cited customer, supply-chain, logistics and production disruption risks.
- Other risks include substantial indebtedness, foreign-exchange and interest-rate exposure, environmental remediation and ordinary-course legal claims. Management said pending matters were not expected to materially affect annual consolidated results, though individual quarters could be affected.
Key facts for investors to verify
- How durable the reported Q3 sequential demand recovery is, especially across refinish, industrial and vehicle OEM markets.
- Whether cost savings and restructuring deliver the stated 2020 savings goals, and how final restructuring charges compare with the $60m–$65m estimate.
- The extent to which the $50.5m tax benefit and German tax audit charges affect the sustainability and comparability of reported earnings and cash taxes.
- Whether operating cash generation, liquidity and debt-service capacity remain adequate if COVID-19 disruptions recur or demand weakens.
- Whether receivable allowances, inventory reserves and manufacturing utilization adequately reflect continuing customer-credit and demand risks.