Axalta Coating Systems Ltd. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Axalta manufactures and sells coatings through Performance Coatings and Transportation Coatings, serving refinish, industrial, light-vehicle and commercial-vehicle markets.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $955.6 million | $989.2 million | Down 3.4% |
| Total revenue | $961.6 million | $997.5 million | Down $35.9 million |
| Income from operations | $103.3 million | $101.8 million | Up $1.5 million |
| Net income | $30.6 million | $46.7 million | Down $16.1 million |
| Net income attributable to controlling interests | $29.7 million | $45.1 million | Down $15.4 million |
| Diluted EPS | $0.12 | $0.19 | Down $0.07 |
| Adjusted EBITDA (non-GAAP) | $194.8 million | $182.0 million | Up 7.0% |
| Cash used for operating activities | $18.0 million | $98.7 million | Use narrowed by $80.7 million |
| Capital expenditures | $40.3 million | $31.5 million | Up $8.8 million |
Cost of goods sold was 63.5% of net sales versus 65.7% a year earlier, implying gross margin improved to approximately 36.5% from 34.3%. Operating margin was approximately 10.8% of net sales versus 10.3%. Management attributed lower unit costs to cost-saving initiatives and lower raw-material prices, alongside higher selling prices.
Segments and material period comparisons
- Performance Coatings: Sales of $543.0 million, down 2.5%; Adjusted EBITDA of $110.1 million, up 2.8%. Excluding currency effects, sales increased approximately 4.8%, led by refinish pricing and stronger industrial volumes, partly offset by weaker Latin American refinish volumes.
- Transportation Coatings: Sales of $412.6 million, down 4.5%; Adjusted EBITDA of $84.7 million, up 13.1%. Excluding currency effects, sales increased approximately 0.7%; higher pricing and lower North American variable costs supported EBITDA, while commercial-vehicle volumes weakened.
- Reported net sales fell mainly because currency translation reduced sales by approximately 6.4%; sales volumes declined 2.1%, partly offset by a 5.1% increase from higher average selling prices. Commercial Vehicle sales declined 15.8% and Refinish sales declined 3.7%; Industrial sales were approximately flat.
- Net income fell despite higher operating income, primarily reflecting the tax provision rising to $14.6 million from $1.2 million and other expense increasing to $8.0 million from $3.9 million. The effective tax rate was 32.3% versus 2.5%; the prior-year rate benefited from tax effects associated with currency losses.
Cash, debt and liquidity
- Cash and cash equivalents were $419.5 million at March 31, 2016, down from $485.0 million at year-end. Cash declined $63.6 million before exchange-rate effects; the net decrease including exchange effects was $65.5 million.
- Operating cash use reflected $142.0 million of working-capital outflows, including seasonal payments of accrued liabilities and increases in receivables, inventory and other assets. Operating cash use improved from $98.7 million in Q1 2015.
- Borrowings were $3,458.8 million gross carrying value, including term loans and senior notes; reported long-term debt was $3,405.1 million. Cash less gross borrowings implies net debt of approximately $3.04 billion. Interest expense, net, was $50.1 million.
- Revolver availability was $377.9 million, net of $22.1 million in letters of credit; no revolver borrowings were outstanding. Current assets were $1,878.0 million and current liabilities $781.2 million.
- Required debt repayments total $3,516.7 million, including $2,368.9 million scheduled in 2020. The filing reports no material change in contractual obligations since year-end.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects cash on hand, operating cash flow and available borrowing capacity to be adequate for debt service, working capital, cost-saving initiatives and capital expenditures over the next 12 months; this depends on generating cash from operations.
- In April 2016, after quarter-end, Axalta voluntarily prepaid $100.0 million of New Dollar Term Loans and expects to record an approximately $2.3 million pretax loss on extinguishment.
- Venezuela’s currency regime remains uncertain. Axalta continued to use the SIMADI rate for remeasurement and recorded $7.1 million of currency losses in Q1. Management cited potential impairment risk if demand, pricing or operational-control assumptions are not met. Venezuelan subsidiary sales were $9.9 million versus $30.0 million a year earlier.
- Other expense included exchange losses, including losses on Euro borrowings, partly offset by remeasurement gains on intercompany balances. Q1 2015 included a $5.4 million gain on remeasurement of a previously held equity-method investment that did not recur.
- Commitments and contingencies include pending civil, regulatory and environmental matters; outcomes are uncertain and some potential effects could be material if probable and estimable. Management does not expect ordinary-course proceedings, individually or collectively, to have a material adverse effect. The filing reports no material change in previously disclosed risk factors or market risks.
- Key stated risks include economic and automotive-market weakness, currency and raw-material volatility, competition, customer concentration, substantial indebtedness, international operations, environmental liabilities, litigation, and execution of growth and cost-saving plans.
Important facts for investors to verify
- Whether price increases and cost savings can offset currency pressure and weaker volumes, particularly in Latin America and commercial vehicles.
- Whether working-capital seasonality reverses sufficiently to support positive operating cash flow and planned capital spending.
- Debt reduction, refinancing and covenant headroom, especially given the large 2020 maturity and the company’s leverage.
- Venezuelan exchange-rate access, local pricing and demand assumptions, and any resulting impairment or further currency losses.
- The sustainability of reported Adjusted EBITDA growth relative to GAAP net income, including the effects of adjustments and the increased stock-based compensation expense.
- The potential financial impact of legal, environmental and other contingencies; the filing does not provide a clear quantified estimate for uncertain matters.