Axalta Coating Systems Ltd. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars; financial figures are in millions unless otherwise noted.
Business context
Axalta manufactures and sells high-performance coatings in more than 130 countries through two segments: Performance Coatings (refinish and industrial) and Transportation Coatings (light vehicle and commercial vehicle). The company reported approximately 14,000 employees and 50 manufacturing facilities. About 66% of 2018 net sales came from outside the United States.
Financial results and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $4,669.7 | $4,352.9 |
| Income from operations | $442.1 | $363.7 |
| Net income | $213.3 | $47.7 |
| Net income attributable to controlling interests | $207.1 | $36.7 |
| Diluted EPS | $0.85 | $0.15 |
| Operating cash flow | $496.1 | $540.0 |
| Capital expenditures | $143.4 | $125.0 |
| Cash and cash equivalents at year-end | $693.6 | $769.8 |
| Total indebtedness at year-end | $3,864.0 | $3,915.6 |
- Net sales grew 7.3%: reported drivers included 4.1% volume growth, including 3.5% from acquisitions, 2.6% from price/mix and 0.6% favorable currency translation.
- Income from operations was 9.5% of net sales, versus 8.4% in 2017. Reported cost of sales was 66.5% of net sales versus 63.9%; comparison is affected by adoption of the new revenue standard, which moved certain customer-support costs from SG&A to cost of sales. Excluding that standard’s impact, cost of sales was 65.1% of net sales in 2018 versus 63.9% in 2017.
- Adjusted EBITDA, a non-GAAP measure, was $937.2, up from $885.2; margin was 20.1% versus 20.3%. Segment Adjusted EBITDA was $668.3 for Performance Coatings and $268.9 for Transportation Coatings.
- Operating cash flow declined $43.9, largely reflecting $154.2 of working-capital uses, including customer incentive payments and inventory builds. Operating cash flow less capital expenditures was approximately $352.7.
- Year-end working capital was $1,269.0. Revolving-credit availability was $355.2, net of letters of credit. Management stated that cash, expected operating cash flow and available borrowing capacity should be adequate for the next 12 months.
- Net debt was approximately $3,170.4, calculated as reported indebtedness less cash and cash equivalents. The company was in compliance with debt covenants at year-end.
Fourth-quarter results
Fourth-quarter 2018 revenue was $1,165.8, compared with $1,172.4 in fourth-quarter 2017. Operating income was $127.8 versus $101.9; net income was $76.8 versus a net loss of $55.6; and diluted EPS was $0.32 versus a loss of $0.26. The year-over-year net-income comparison was substantially affected by a $107.8 tax charge recorded in fourth-quarter 2017 related to U.S. tax reform.
Material changes and unusual items
- Performance Coatings net sales increased 13.1% to $3,025.7, led by industrial coatings, which grew 23.5%, including acquisition effects. Refinish sales rose 6.6%.
- Transportation Coatings net sales decreased 2.0% to $1,644.0. Light-vehicle sales fell 2.5%, primarily reflecting lower prices and volumes, particularly in China. Segment Adjusted EBITDA declined 16.2% to $268.9, and margin fell to 16.4% from 19.1%, with higher raw-material costs also weighing on results.
- Raw materials represent approximately 45%–55% of cost of sales. Management said cost inflation exceeded price recapture during 2018.
- Axalta completed seven acquisitions in 2018 for aggregate spending of $79.9. It also paid $26.9 for an additional 24.5% interest in a joint venture, taking ownership to 75.5%.
- The announced Mechelen, Belgium facility closure is expected to generate total pre-tax charges of $120–$130 and require $65–$75 of capital expenditures for production transfer and start-up. The company recorded $70.6 of severance and $10.3 of incremental accelerated depreciation in 2018; it expects about $30 of annual pre-tax savings beginning in the second half of 2020.
- The 2018 effective tax rate was 20.3%, compared with 74.8% in 2017, when the tax provision included the U.S. tax-reform charge. Axalta recorded a $12.5 tax benefit in 2018 to complete its accounting for the legislation.
- Cash repurchases totaled $253.8 in 2018, including $100.3 in the fourth quarter. The company said it does not intend to pay common-share dividends in the foreseeable future.
- The company adopted ASC 606 revenue accounting in 2018 using the modified retrospective method; prior-year figures were not recast. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Outlook, risks and contingencies
No specific consolidated revenue or earnings guidance is provided in the filing. Management expects the Mechelen restructuring to be completed in the second half of 2020 and anticipates approximately $30 in annual pre-tax savings once the benefits begin. Management’s 12-month liquidity assessment is based on its forecasts and is not a guarantee of future cash generation.
- Key operating risks include economic and automotive-market cyclicality, raw-material price and supply volatility, competitive pricing, customer and distributor concentration, and the ability to pass cost increases through to customers.
- International operations expose Axalta to foreign-exchange, trade, political and regulatory risks. The company also identified uncertainty around Brexit and European vehicle-testing rules.
- Indebtedness of approximately $3.9 billion creates interest-rate, refinancing and cash-flow risks. A portion of debt has variable-rate exposure; hedging reduces but does not eliminate market risk.
- Defined-benefit pension plans had a net funded deficit of $251.4 at year-end, and Axalta expects to contribute $6.7 in 2019.
- Environmental remediation, product and other litigation, customer guarantees, tax examinations and uncertain tax positions may create future costs. Management did not expect pending litigation, individually or in aggregate, to have a material adverse effect; timing of potential tax settlements could not be estimated.
- Leadership changed in 2018: Robert Bryant became CEO in October and Sean Lannon became CFO. The filing identifies leadership transition as a risk.
Important facts for investors to verify
- Whether Performance Coatings growth and pricing can offset raw-material inflation, and whether Transportation Coatings margins stabilize.
- Cash conversion and working-capital trends, especially customer incentives and inventory, alongside acquisition and capital-spending requirements.
- Progress, total costs, transfer capital expenditures and timing of savings from the Mechelen closure.
- Debt maturities, variable-rate exposure, covenant headroom and the sustainability of management’s liquidity forecast.
- How much reported earnings improvement reflects operating performance versus tax effects, restructuring costs and other adjustments used in Adjusted EBITDA.
- Potential changes in environmental, pension, tax and foreign-exchange exposures, including the outcome of open tax examinations and the consequences of Brexit.