Axalta Coating Systems Ltd. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Axalta manufactures and distributes coatings globally through Performance Coatings (refinish and industrial) and Transportation Coatings (light and commercial vehicle). Figures are in U.S. dollars; amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $1,107.0 | $1,146.0 | $3,383.8 | $3,530.2 |
| Income from operations | $123.0 | $47.8 | $379.5 | $314.3 |
| Net income (loss) | $66.4 | $(11.6) | $210.4 | $136.5 |
| Net income attributable to controlling interests | $65.5 | $(13.1) | $207.3 | $131.7 |
| Diluted EPS | $0.28 | $(0.05) | $0.88 | $0.54 |
| Operating cash flow | — | — | $289.8 | $245.5 |
- Q3 sales decreased 3.4%; nine-month sales decreased 4.1%. Management attributed the nine-month decline to lower volumes (including portfolio changes) and unfavorable currency translation, partly offset by higher average selling prices.
- Approximate Q3 gross margin was 36.1%, versus 33.8% a year earlier; operating margin was 11.1%, versus 4.2%. These percentages are calculated from reported sales and costs/income from operations.
- Segment Adjusted EBIT improved: Performance Coatings was $124.9 in Q3 (up 20.0%) and $331.1 for nine months (up 14.6%); Transportation Coatings was $37.2 in Q3 (up 45.3%) and $111.8 for nine months (up 2.7%). Segment Adjusted EBIT is a management measure, not consolidated Adjusted EBIT.
- Nine-month cash provided by operations was $289.8; investing used $59.0 and financing used $145.0. Operating cash flow included $189.1 of working-capital uses, notably receivables and prepaid/other assets.
- At September 30, cash and cash equivalents were $767.2; total borrowings were $3,814.7, including $3,772.3 of long-term debt. Approximate net debt was $3,047.5. The company reported $362.5 of available revolving-credit capacity, net of letters of credit, and compliance with credit covenants.
- Current assets were $2,433.1 and current liabilities $1,034.9. Cash increased from $693.6 at December 31, 2018; total borrowings declined from $3,864.0.
Material changes versus prior comparable periods
- Despite lower sales, Q3 net income moved from a loss to profit and operating income rose substantially. Lower SG&A—especially reduced severance costs—was a major contributor; Q3 restructuring costs were $29.2 versus $81.4 in Q3 2018.
- For the first nine months, SG&A fell to $655.2 from $745.8, while income from operations rose to $379.5 from $314.3. Cost savings and lower stock compensation contributed, partly offset by raw-material inflation and $18.2 of accelerated depreciation related to the Mechelen, Belgium facility closure.
- Performance Coatings nine-month sales declined 3.5%, while Transportation Coatings sales declined 5.3%. Industrial and light vehicle sales were weaker; commercial vehicle sales increased.
- The nine-month effective tax rate fell to 19.3% from 26.0%, reflecting valuation-allowance changes and stock-based compensation tax benefits, among other factors.
- Cash from operations rose from $245.5 to $289.8. Capital expenditures fell to $73.9 from $109.5; share repurchases were $105.3 versus $147.8.
Outlook, management commentary, risks and unusual items
- The board’s comprehensive review of strategic alternatives, announced June 19, 2019, remained ongoing. The filing gives no assurance of an outcome or timing and provides no numerical earnings or sales guidance.
- A retention program for eligible employees could cost up to approximately $40.0 over 18–24 months. Management said available cash, operating cash flow and borrowing capacity should be adequate for debt service, cost-saving initiatives, liquidity needs and necessary capital expenditures over the next 12 months; it cautioned that cash generation and refinancing are subject to risks.
- Key disclosed risks include economic weakness—particularly in automotive and transportation—customer and distributor concentration or purchasing changes, raw-material prices and supply, foreign-exchange exposure, competition, substantial indebtedness, environmental liabilities, and disruption or costs arising from the strategic review.
- The company sold its 60% interest in a consolidated Performance Coatings joint venture, recording a $3.4 nine-month pretax loss (and a $0.5 Q3 gain from a subsequent estimate change). It also spent $31.1 to acquire remaining interests in certain industrial joint ventures.
- Axalta adopted lease accounting on January 1, 2019, recording lease assets and liabilities; the adoption reduced retained earnings by $0.7. The company also corrected an immaterial prior-period cash-flow classification error: $26.9 of noncontrolling-interest investment payments was reclassified from investing to financing activities for 2018.
- Legal proceedings were described as ordinary-course matters not expected to have a material effect. Environmental remediation costs may nevertheless have a material impact in a particular quarter. Disclosure controls were assessed as effective at September 30, 2019.
Important facts for investors to verify
- Progress and potential costs or business effects of the strategic-alternatives review and employee-retention program.
- Whether sales-volume weakness, currency headwinds and raw-material inflation persist, and whether pricing and cost savings continue to offset them.
- Cash conversion and working-capital trends, capital spending, share repurchases, and the company’s ability to reduce substantial debt.
- Performance of light vehicle, industrial, refinish and commercial vehicle end-markets, including the effect of divestitures and portfolio changes.
- Future costs associated with restructuring, the Mechelen facility closure, environmental matters and other contingencies.