Axalta Coating Systems Ltd. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparison is with the three months ended March 31, 2017. Amounts are in millions of U.S. dollars except per-share data.
Business context and reporting period
Axalta manufactures and sells coatings globally through Performance Coatings (refinish and industrial) and Transportation Coatings (light vehicle and commercial vehicle). Its unaudited results reflect adoption of the new revenue standard (ASC 606) on January 1, 2018 using the modified retrospective method; prior-period figures were not recast.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $1,165.8 | $1,007.8 |
| Total revenue | $1,172.0 | $1,013.7 |
| Income from operations | $120.0 | $110.4 |
| Net income | $71.0 | $65.9 |
| Net income attributable to controlling interests | $69.9 | $64.1 |
| Diluted EPS | $0.28 | $0.26 |
| Adjusted EBITDA (non-GAAP) | $220.0 | $203.1 |
| Cash used for operating activities | $21.0 | $4.7 |
- Sales increased 15.7%. Management attributed the increase to volume growth of 8.6% (including 8.4% from acquisitions), favorable currency translation of 6.3%, and a net 0.8% contribution from pricing.
- Cost of goods sold rose 21.0% to $776.0; as a share of net sales it increased to 66.6% from 63.6%. Management cited raw-material cost pressure and $13.6 of expense reclassified from SG&A under ASC 606.
- Operating income increased 8.7%, while operating margin on total revenue was approximately 10.2%, versus 10.9% a year earlier. Net income increased 7.7%.
- Performance Coatings sales rose 24.3% to $728.7 and Adjusted EBITDA increased 22.5% to $143.2. Transportation Coatings sales rose 3.7% to $437.1, but Adjusted EBITDA fell 10.9% to $76.8.
- Operating cash flow was negative as working capital consumed $182.7, including higher receivables and inventory and lower accrued liabilities. Capital spending was $39.5; acquisitions used $78.2, with a further $26.9 payment for an additional joint-venture interest. Cash and cash equivalents were $600.4 at quarter-end, down from $769.8 at December 31, 2017.
- Total borrowings were $3,961.3, including current and short-term amounts; long-term borrowings on the balance sheet were $3,919.5. Revolver availability was $365.2, net of letters of credit. The company reported compliance with debt covenants.
Material changes, outlook, risks and unusual items
- Two North American Performance Coatings acquisitions closed during the quarter for aggregate spending of $75.4. The acquired Industrial Wood business contributed $62.3 of sales and $7.6 of pretax income in Q1 2018.
- Transportation Coatings faced lower average selling prices, principally in light vehicles, reflecting prior customer price concessions and unfavorable mix; higher raw-material costs also pressured results. Performance Coatings benefited from acquisitions, pricing and currency, partly offset by raw-material inflation.
- In April 2018, Axalta amended its credit agreement, increasing dollar term-loan principal by $475 to $2,430.0 and using proceeds plus cash to repay the euro term loans. A cross-currency swap converted $475 of principal into euro fixed-rate debt at 1.95%. Management estimated annual cash-interest savings of approximately $10.
- Management said available cash, operating cash flow and borrowing capacity should be adequate for debt service, cost-saving initiatives, working capital and necessary capital expenditures over the next 12 months. No specific revenue or earnings guidance was provided in the supplied filing text.
- Principal risks identified include adverse automotive and economic conditions, raw-material price or supply changes, customer and distributor concentration or purchasing changes, foreign-exchange movements, substantial indebtedness, acquisition execution, environmental liabilities, litigation, and tax-law or regulatory changes. Management said pending ordinary-course legal matters were not expected to have a material effect.
- ASC 606 increased Q1 2018 reported net sales by $5.8 and net income by $2.9 versus presentation under the prior standard, while moving $13.6 of expenses from SG&A to cost of goods sold. The company also reduced its provisional U.S. tax-law charge by $12.4 after reviewing additional guidance; further adjustments remained possible.
Important facts for investors to verify
- Whether the sales and EBITDA contribution from recent acquisitions is sustainable, and how organic Performance Coatings volumes develop.
- Whether raw-material inflation and Transportation Coatings pricing pressure continue to weigh on margins.
- Whether working-capital investment moderates and operating cash flow improves after the seasonal Q1 outflow.
- Debt and liquidity after the April refinancing, including actual interest savings and the effect of foreign-currency exposure.
- Final purchase accounting for the Q1 acquisitions and any further changes to the provisional tax effects of U.S. tax legislation.