Axalta Coating Systems Ltd. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise noted. Axalta manufactures and distributes coatings through Performance Coatings and Transportation Coatings. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $1,007.8 million | $955.6 million | +5.5% |
| Total revenue | $1,013.7 million | $961.6 million | +5.4% |
| Income from operations | $110.0 million | $103.3 million | +6.5% |
| Net income | $65.9 million | $31.8 million | +107% |
| Net income attributable to controlling interests | $64.1 million | $30.9 million | +107% |
| Diluted EPS | $0.26 | $0.13 | +$0.13 |
| Adjusted EBITDA (non-GAAP) | $203.1 million | $194.8 million | +4.3% |
Operating margin was approximately 10.9% of total revenue, versus 10.7% a year earlier; net margin was approximately 6.5%, versus 3.3%. Cost of goods sold was 63.6% of net sales, broadly unchanged from 63.5%. Interest expense fell $14.3 million to $35.8 million, primarily following 2016 debt prepayments and refinancing. The effective tax rate declined to 13.1% from 29.6%, helped by stock-based compensation tax benefits and earnings in lower-tax jurisdictions.
Sales and segment results
- Sales volume grew 8.9%, including a 4.5% contribution from recent acquisitions. Lower prices reduced sales 1.2%, while unfavorable currency translation reduced them 2.2%.
- Performance Coatings sales rose 8.0% to $586.4 million; Adjusted EBITDA increased 6.2% to $116.9 million. Industrial sales grew 20.4% and refinish sales 2.6%.
- Transportation Coatings sales rose 2.1% to $421.4 million; Adjusted EBITDA increased 1.8% to $86.2 million. Light vehicle sales grew 3.2%, while commercial vehicle sales declined 2.2%.
Cash flow, debt, and liquidity
- Operating cash flow was negative $4.7 million, improving from negative $13.3 million. $156.8 million of cash generated before working-capital changes was more than offset by $161.5 million of working-capital outflows, including receivables, accrued liabilities, inventory, and other assets.
- Investing cash outflow was $89.4 million, including $56.9 million for acquisitions and $32.3 million of capital expenditures. Financing cash outflow was $4.6 million.
- Cash and cash equivalents were $439.1 million at March 31, 2017, down from $535.4 million at year-end; restricted cash was $2.9 million. Total borrowings were $3,307.3 million net of financing discounts and costs. Approximate net debt using cash and cash equivalents was $2,868 million.
- Revolver availability was $378.7 million, net of $21.3 million in letters of credit; there were no revolver borrowings. The company reported compliance with its credit-facility covenants.
- Management said cash, operating cash flow, and available borrowing capacity should be adequate for debt service, operating needs, and necessary capital expenditures over the next 12 months, while warning that future cash generation and refinancing access are not assured.
Material changes, outlook, and risks
- In Q1, Axalta completed two North American acquisitions for total consideration of $62.6 million, including contingent consideration; the acquisitions contributed $8.9 million of quarterly sales. Purchase accounting remained preliminary.
- In April 2017, Axalta announced an agreement to acquire Valspar’s North American Industrial Wood Coatings business for $420 million, expected to be funded through an additional secured-credit-facility tranche. The business had approximately $225 million of 2016 revenue.
- The board authorized a share-repurchase program of up to $675 million, with no expiration date. The filing does not provide a specific repurchase schedule or formal earnings guidance.
- Restructuring costs were $1.0 million in Q1. Axalta expected approximately $7.6 million of 2017 earnings impact from accelerated depreciation related to restructuring plans.
- Venezuela remains exposed to exchange-rate and political uncertainty. Axalta recorded a $1.5 million Venezuelan currency remeasurement loss in Q1; further currency weakening or changes in operating conditions could adversely affect results or asset values.
- The filing identifies substantial indebtedness, customer and market risks, raw-material and currency volatility, environmental and litigation exposures, and acquisition execution as risks. Pending legal matters’ ultimate outcomes were uncertain; management did not expect ordinary-course proceedings to have a material adverse effect.
- Management reported disclosure controls were effective at March 31, 2017, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether volume growth and acquisition contributions continue to offset pricing pressure and unfavorable currency movements.
- Whether working-capital outflows reverse and operating cash flow supports capital spending, debt service, the proposed acquisition, and repurchases.
- The final purchase accounting, integration results, financing terms, and realized performance of the Q1 and Valspar-related acquisitions.
- Debt maturities, leverage, covenant headroom, and the effect of variable rates as interest-rate hedges change or expire.
- Developments in Venezuela, including exchange-rate access, operating performance, and potential impairment risk.