Axalta Coating Systems Ltd. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. Amounts are in millions of U.S. dollars, except per-share data. Axalta manufactures and sells coatings through Performance Coatings and Mobility Coatings; the latter segment was renamed from Transportation Coatings, with no change to its business structure.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $1,063.6 | $983.5 |
| Income from operations | $52.6 | $65.1 |
| Net income attributable to controlling interests | $15.2 | $52.2 |
| Diluted earnings per share | $0.06 | $0.22 |
| Cash provided by (used for) operating activities | $39.6 | $(0.8) |
| Capital expenditures | $31.8 | $22.7 |
- Sales rose 8.1%, reflecting 4.6% higher volumes, a 3.2% favorable foreign-currency effect, and 0.3% higher price/mix. Management attributed volume growth mainly to recovery from COVID-19 impacts in the prior-year quarter.
- Cost of goods sold was $684.5, or 64.4% of sales, versus $646.8, or 65.8%. Despite higher sales, operating income declined, principally reflecting a $94.4 operational-matter charge included in other operating charges.
- Segment results improved: Performance Coatings sales were $707.3 and Adjusted EBIT was $117.2, versus $647.7 and $79.4; Mobility Coatings sales were $356.3 and Adjusted EBIT was $39.2, versus $335.8 and $25.8. Adjusted EBIT margins increased to 16.6% from 12.3% and 11.0% from 7.7%, respectively.
- Operating cash flow improved to $39.6 from cash use of $0.8. Working capital used $46.5, driven mainly by increased receivables, inventory, and prepaid expenses; management cited collection timing, inventory rebuilding, and raw-material inflation.
- Cash and cash equivalents were $1,266.9 at March 31, down from $1,360.9 at year-end. Total borrowings, net, were $3,860.0, down from $3,892.7. Revolver availability was $366.0, with no revolver borrowings; $34.0 of letters of credit reduced availability. The filing reports no current financial-covenant testing while the revolver is undrawn.
- Financing activities used $92.5, including $63.7 of share repurchases and $26.7 of borrowing repayments. In April, the board increased the repurchase authorization by $625.0, to a total program size of $1.3 billion.
Material changes and unusual items
- Operational matter: Axalta recorded a $94.4 charge for probable losses relating to a discrete 2020 issue affecting certain North American Mobility Coatings customer manufacturing sites. The estimate may change; the company said additional losses of up to $65 could be reasonably possible. Its earlier filing had estimated reasonably possible losses of up to $250. An insurance claim has been submitted, but discussions remain unresolved.
- Net income was also affected by the prior-year tax comparison: Q1 2020 included a $50.5 one-time tax benefit from an intellectual-property transfer, partly offset by a $14.3 German tax-audit charge. Q1 2021 tax expense was $3.8, versus a $24.6 tax benefit in Q1 2020.
- Other operating charges increased to $102.8 from $31.6. Excluding the operational matter, employee termination and related costs were lower than in the prior-year quarter. Q1 restructuring termination-benefit costs were $4.5, compared with $18.5.
- Comprehensive loss attributable to controlling interests was $13.6, including substantial foreign-currency translation losses, despite positive net income.
Outlook, commentary, and risks
- The filing provides no quantified earnings or sales guidance. Management said it expects COVID-19 to continue negatively affecting the business during 2021 and potentially longer, with impacts dependent on the pandemic, variants, restrictions, and regional demand.
- Management reported continued recovery from 2020 and said supply-chain challenges, including logistics, were being monitored, with no significant disruption to date. Raw-material inflation and inventory needs affected working capital.
- Management believes cash, operating cash flow, and available 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 capacity depend on factors beyond its control, including COVID-19, and that its leverage may constrain future financing.
- Borrowings include $2,057.1 of 2024 Dollar Term Loans; required repayments are concentrated in 2024. The filing says contractual obligations had no material change since year-end.
- Other risks include ordinary-course litigation and environmental remediation, as well as German tax audits. Axalta said it may settle up to $11.8 of current unrecognized tax benefits during 2021 in connection with the 2010–2013 German audit, exclusive of interest and penalties.
Important facts for investors to verify
- Updates to the $94.4 operational-matter estimate, potential additional exposure, responsibility among parties, and any insurance recovery.
- Whether demand recovery persists and how COVID-19, supply constraints, logistics, and raw-material inflation affect sales, margins, and working capital.
- Cash generation, leverage, debt-service capacity, and refinancing plans ahead of the large 2024 term-loan maturities.
- Execution and funding of the expanded $1.3 billion share-repurchase program alongside capital spending and debt priorities.
- Progress and outcomes of German tax matters, including the potential settlement and any related interest or penalties.