Axalta Coating Systems Ltd. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Figures are in U.S. dollars; financial statement amounts are in millions except per-share data. Axalta manufactures coatings and reports Performance Coatings and Transportation Coatings segments.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $1,157.5 | $1,212.2 | $2,276.8 | $2,384.2 |
| Income from operations | $157.9 | $146.5 | $256.5 | $266.5 |
| Net income attributable to controlling interests | $98.4 | $74.9 | $141.8 | $144.8 |
| Diluted EPS | $0.42 | $0.31 | $0.60 | $0.59 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $68.8 | $121.0 |
Q2 gross margin was approximately 35.3%, compared with 34.5% a year earlier; operating margin was approximately 13.6% versus 12.1%. For the first half, gross margin was approximately 34.1% versus 34.2%, and operating margin approximately 11.3% versus 11.2%. First-half operating cash flow fell despite lower capital spending: capital expenditures were $47.2 million versus $74.6 million.
- Segment results, Q2: Performance Coatings sales declined 3.7% to $756.7 million, while Adjusted EBIT rose 17.2% to $127.6 million and margin increased to 16.9% from 13.9%. Transportation Coatings sales declined 6.0% to $400.8 million; Adjusted EBIT increased 5.5% to $40.4 million, with margin at 10.1% versus 9.0%.
- Balance sheet at June 30: Cash and cash equivalents were $577.3 million; total borrowings were $3,856.1 million, including $3,812.4 million of long-term borrowings. Approximate net debt was $3.28 billion. Current assets were $2,312.1 million and current liabilities $996.8 million.
Changes and drivers
- Sales declined 4.5% in both Q2 and the first half. First-half drivers included unfavorable currency translation of 4.2%, lower volumes of 3.4%, and portfolio impacts; higher average selling prices of 3.1% partly offset these effects.
- Transportation Coatings was more pressured in the first half: sales fell 7.0% and Adjusted EBIT fell 10.4%, mainly due to lower light-vehicle volumes, currency and higher raw-material costs. Performance Coatings first-half sales fell 3.1%, while Adjusted EBIT rose 11.5%, supported by pricing and cost efficiencies.
- First-half net income attributable to controlling interests declined to $141.8 million from $144.8 million, although Q2 income increased year over year. First-half interest expense rose to $82.3 million from $78.7 million.
- Operating cash flow was reduced by $262.7 million of working-capital uses, especially higher receivables ($152.9 million) and prepaid expenses and other assets ($81.6 million). Cash and cash equivalents decreased from $693.6 million at year-end 2018.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said it expects cash from operations, cash on hand and available borrowing capacity to be adequate for debt service, cost-saving initiatives, liquidity needs and necessary capital expenditures over the next 12 months, while noting this depends on cash generation and other factors.
- On June 19, 2019, the Board initiated a comprehensive review of strategic alternatives to maximize shareholder value. The company gave no assurance about the outcome or timing and warned of potential disruption, costs, employee distraction, difficulty sustaining business relationships and share-price volatility.
- Q2 included $6.7 million of accelerated depreciation related to the Mechelen, Belgium facility closure; first-half expense was $12.8 million. The joint-venture divestiture resulted in a Q2 gain of $1.3 million but a first-half loss of $3.9 million.
- The company repurchased 4.1 million shares for $105.3 million in the first half. It amended its $400 million revolving credit facility, extending maturity to March 2024 and reducing interest margins; unused availability was $363.4 million at June 30. The company reported compliance with debt covenants.
- Management cited substantial indebtedness and exposure to economic and automotive-market conditions, competition, customer and distributor concentration, raw-material costs, currency movements, cybersecurity, environmental matters, litigation and strategic-review uncertainty. Pending ordinary-course legal matters were not expected by management to have a material effect. Disclosure controls were assessed as effective.
- Accounting and presentation items: Axalta adopted the new lease standard on January 1, 2019, recognizing lease assets and liabilities; adoption reduced retained earnings by $0.7 million. It also corrected an immaterial prior-period cash-flow classification error for a $26.9 million noncontrolling-interest payment, moving it from investing to financing activities.
Important facts for investors to verify
- Whether the strategic review leads to a transaction, and its costs, timing and effects on operations or customer relationships.
- Whether pricing and cost savings can offset persistent volume weakness, foreign-exchange headwinds and raw-material inflation, particularly in Transportation Coatings.
- Working-capital conversion and the sustainability of operating cash flow, given the first-half decline and receivables increase.
- Debt-service capacity, variable-rate exposure, covenant headroom and liquidity under less favorable operating conditions.
- Effects of the Mechelen closure, divestiture and repurchases on future earnings, cash needs and share count.