Axalta Coating Systems Ltd. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. Amounts are in millions of U.S. dollars unless stated otherwise. The interim financial statements are unaudited.
Business context and results
Axalta manufactures and distributes coatings through Performance Coatings (refinish and industrial) and Transportation Coatings (light and commercial vehicle). It reported 2016 Q3 revenue of $1,029.1, including net sales of $1,023.4. For the first nine months, revenue was $3,062.8 and net sales were $3,044.1.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $1,023.4 | $1,000.3 | $3,044.1 | $3,083.6 |
| Operating income | $120.2 | $123.9 | $374.5 | $368.7 |
| Net income (loss) | $(9.5) | $36.4 | $71.2 | $58.8 |
| Net income (loss) attributable to controlling interests | $(10.7) | $35.1 | $67.5 | $55.1 |
| Diluted EPS | $(0.04) | $0.15 | $0.28 | $0.23 |
| Adjusted EBITDA | $233.2 | $216.9 | $680.6 | $654.4 |
Q3 operating margin was approximately 11.7% of total revenue, versus 12.3% a year earlier; nine-month operating margin was approximately 12.2%, versus 11.9%. Adjusted EBITDA margin on net sales was approximately 22.8% for Q3 and 22.4% for the nine-month period, compared with 21.7% and 21.2%, respectively. Adjusted EBITDA is a non-GAAP measure and excludes items including refinancing costs, foreign-exchange remeasurement, restructuring and stock compensation.
Material changes and segment performance
- Q3 net sales rose 2.3%, reflecting volume growth of 2.5% and higher average selling prices of 1.9%, partly offset by 2.1% adverse currency effects. Nine-month net sales declined 1.3%; unfavorable currency translation reduced sales by 5.2%, partly offset by pricing and volume growth.
- Q3 Performance Coatings sales increased 3.1% to $619.3 and Transportation Coatings sales increased 1.1% to $404.1. For nine months, Performance Coatings sales were nearly flat at $1,794.4, while Transportation Coatings sales declined 2.9% to $1,249.7.
- Nine-month commercial vehicle sales fell 15.9% to $254.8; light vehicle sales increased 1.1% to $994.9. Management cited commercial vehicle and Latin American volume weakness, offset in part by growth in North America and Asia.
- Adjusted EBITDA increased year over year in both segments in Q3 and for the nine-month period. Management attributed improvement chiefly to pricing, lower variable costs and, in some periods, acquisition contributions; currency and higher operating costs were offsets.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $323.8, versus $163.8 in 2015. Management attributed the improvement to lower working-capital cash use; 2016 working-capital changes used $130.3, primarily reflecting higher receivables and other assets associated with seasonal sales timing.
- Investing cash outflow was $205.1, including $103.5 for acquisitions and $95.3 for capital expenditures. Financing cash outflow was $65.3. Cash and cash equivalents ended the period at $528.3, up from $485.0 at year-end 2015.
- Total borrowings were reported at $3,482.3 before current/long-term classification and unamortized financing discounts and costs; long-term borrowings on the balance sheet were $3,428.1. Cash less reported total borrowings implies net debt of approximately $2,954.0.
- Axalta refinanced its 2021 notes with 2024 dollar and euro notes and 2025 euro notes, and made voluntary term-loan prepayments. The new notes carry stated rates of 4.875%, 4.250% and 3.750%, respectively. Refinancing and debt-extinguishment costs contributed $81.9 to Q3 other expense and $84.2 for the nine-month period; interest expense declined year over year.
- Revolving-credit availability was $378.5, net of $21.5 in letters of credit; there were no revolver borrowings, and the company reported covenant compliance. Management believed available cash, operating cash flow and borrowing capacity would be adequate for debt service, initiatives and capital expenditures over the next 12 months.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or sales guidance. Management described continued cost-saving, growth and product-development initiatives, and cited lower raw-material costs and pricing as contributors to margin improvement.
- Venezuela remained exposed to currency controls, economic deterioration and uncertainty around the DICOM exchange rate. Axalta recorded $23.9 of Venezuelan currency losses for the first nine months and a $10.5 impairment of a non-operating real-estate investment. Management warned that further currency weakness, weaker demand, inability to sustain price increases or political changes could adversely affect results or asset recoverability.
- The company identified substantial indebtedness, foreign-exchange and economic risks, raw-material supply and pricing, customer and market concentration, acquisitions, litigation, environmental exposures and other matters as risks. It added uncertainty related to the United Kingdom referendum on leaving the European Union, given its European operations and cross-border business.
- Pending legal and other claims have uncertain outcomes; management did not expect ordinary-course proceedings to have a material adverse effect, but noted certain matters could have material effects if they become probable and estimable. A $150.0 term-loan prepayment in October 2016 was expected to result in an approximately $3.0 pre-tax extinguishment loss.
Most important facts for investors to verify
- How much of adjusted EBITDA growth reflects sustainable pricing, cost savings and underlying volumes versus acquisitions and management-defined adjustments.
- Whether commercial vehicle weakness, currency headwinds and Venezuela-related exposure continue, and whether pricing can offset them.
- Debt maturity and refinancing exposure, future interest costs, covenant headroom and the company’s ability to sustain debt reduction.
- Working-capital trends, capital spending and acquisition-related commitments, including scheduled purchases of remaining noncontrolling interests.
- The ultimate effects of litigation, environmental contingencies, Venezuela asset recoverability and other disclosed risks; the filing does not quantify a clear maximum exposure for these matters.