Axalta Coating Systems Ltd. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Axalta manufactures and sells performance and transportation coatings globally. The filing also reports fourth-quarter results; amounts below are in U.S. dollars.
Financial performance
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $4,073.5 million | $4,087.2 million |
| Operating income | $408.3 million | $468.9 million |
| Net income | $47.6 million | $97.9 million |
| Net income attributable to controlling interests | $41.8 million | $93.7 million |
| Diluted earnings per share | $0.17 | $0.39 |
| Operating cash flow | $559.3 million | $409.8 million |
| Capital expenditures | $136.2 million | $138.1 million |
| Adjusted EBITDA | $907.1 million | $867.2 million |
Net sales fell 0.3%: unfavorable currency translation reduced sales 4.6%, partly offset by pricing growth of 2.6% and volume growth of 1.7%, including acquisition contributions. Cost of sales declined to 62.0% of net sales from 63.5%; this implies gross margin of approximately 38.0%, versus 36.5%. Operating margin was approximately 10.0%, versus 11.5%; net margin was approximately 1.2%, versus 2.4%. Adjusted EBITDA margin increased to approximately 22.3% from 21.2%.
Fourth quarter: Revenue was $1,034.6 million, compared with $1,009.6 million in fourth-quarter 2015. Net loss was $34.4 million versus net income of $39.1 million; diluted loss per share was $0.15 versus diluted earnings per share of $0.16. The 2016 quarter included a $57.9 million Venezuela operating-asset impairment and $36.6 million of restructuring costs.
Segments and material changes
| Segment | 2016 net sales | Change | 2016 Adjusted EBITDA |
|---|---|---|---|
| Performance Coatings | $2,403.2 million | +0.8% | $554.4 million |
| Transportation Coatings | $1,670.3 million | -1.9% | $352.7 million |
Performance Coatings sales benefited from pricing, volume and acquisitions, while currency effects offset growth. Transportation Coatings growth in light vehicles was offset by weaker commercial-vehicle demand and currency headwinds. Commercial Vehicle sales declined 15.0%; Light Vehicle sales increased 2.1%.
Net income declined despite higher Adjusted EBITDA, reflecting lower operating income, a $97.6 million debt refinancing and extinguishment charge included in other expense, and the Venezuela impairment. Interest expense declined to $178.2 million from $196.5 million following debt prepayments and refinancing. The effective tax rate was 45.6%, compared with 39.3%.
Cash, debt and liquidity
Cash and cash equivalents were $535.4 million at year-end, up from $485.0 million. Operating cash flow rose to $559.3 million, while investing activities used $257.0 million, including $114.8 million for acquisitions and $136.2 million for capital expenditures. Financing activities used $232.6 million, primarily reflecting debt repayments and refinancing.
Reported indebtedness was $3,263.9 million, down from $3,441.5 million. The company had $378.7 million available under its revolving credit facility, net of letters of credit, and reported compliance with debt covenants. Current assets of $1,920.0 million and current liabilities of $919.7 million produced working capital of $1,000.3 million. Management said cash, operating cash flow and available borrowing capacity should adequately fund operations, debt service and capital expenditures for the next 12 months, subject to risks and assumptions.
Outlook, risks and unusual items
The filing provides no quantified earnings or revenue guidance. Management described continued growth initiatives, cost-saving programs and expansion in underrepresented markets; it expects the European leadership relocation to Switzerland to support long-term regional profitability. In 2016, Axalta completed acquisitions across both segments for $114.8 million net of cash acquired, contributing $50.4 million of sales.
- Venezuela: currency and economic deterioration led to a $57.9 million impairment of operating assets and a $10.5 million impairment of a real-estate investment. Management warned that further devaluation or weaker demand could cause additional losses; Venezuela generated about 1% of consolidated revenue.
- Foreign exchange: approximately 70% of 2016 net sales were outside the United States, exposing results and cash flows to currency movements.
- Debt and interest rates: substantial leverage, variable-rate exposure, covenant restrictions and refinancing needs could constrain financial flexibility.
- Other business risks include cyclical automotive and industrial demand, raw-material prices and supply, customer and distributor concentration, competition, environmental liabilities, litigation, cybersecurity and execution of cost-saving and acquisition plans.
- The company does not intend to pay common-share dividends in the foreseeable future. Pending lawsuits arise in the ordinary course; management did not expect them to have a material effect. The auditor reported effective internal control over financial reporting.
Investor facts to verify
- Whether the 2016 decline in GAAP net income and the fourth-quarter loss are primarily explained by Venezuela impairment, refinancing costs, restructuring and tax effects.
- How much of Adjusted EBITDA growth reflects sustainable pricing and operating improvement versus acquisition contributions and exclusions from the non-GAAP measure.
- Whether cash generation and the $378.7 million revolver availability remain sufficient given $3.26 billion of debt and substantial scheduled interest obligations.
- Whether Venezuela’s operating outlook, exchange-rate assumptions and asset valuations warrant further impairment or cash-flow risk.
- Whether acquired businesses deliver expected returns and whether cost-saving initiatives can be completed without disrupting operations.