Axalta Coating Systems Ltd. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022 unless otherwise noted. Axalta manufactures and distributes coatings through Performance Coatings and Mobility Coatings. Amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Net sales | $1,283.9 | $1,174.1 | Up 9.4%; price/mix +9.4%, volume +2.7%, foreign exchange −2.7% |
| Gross profit margin | 29.8% | 28.7% | Derived from net sales less cost of goods sold |
| Income from operations | $125.3 | $86.3 | Operating margin 9.8% vs. 7.4%, derived |
| Net income | $60.5 | $40.9 | Net income attributable to controlling interests was $60.5 vs. $41.5 |
| Diluted EPS | $0.27 | $0.18 | |
| Interest expense, net | $48.2 | $32.6 | Up 47.9%, largely reflecting higher interest costs on the 2029 Dollar Term Loans |
| Cash from operating activities | $(51.8) | $(43.9) | Working-capital uses exceeded cash generation before working-capital changes |
| Capital expenditures | $41.4 | $42.5 | |
| Cash and cash equivalents | $512.1 | $645.2 at Dec. 31, 2022 | Restricted cash was an additional $2.6 |
| Total borrowings, net | $3,647.1 | $3,704.3 at Dec. 31, 2022 | Derived net debt was approximately $3,135, subtracting cash and cash equivalents |
Segments and material changes
- Performance Coatings: Sales increased 4.0% to $847.1; segment Adjusted EBIT rose 15.5% to $109.3 and margin increased to 12.9% from 11.6%. Higher price/mix more than offset input-cost inflation, while Industrial volumes declined.
- Mobility Coatings: Sales increased 21.4% to $436.8; segment Adjusted EBIT was $23.5 versus $0.5, with margin of 5.4% versus 0.1%. Higher volumes and price/mix supported improvement.
- Consolidated sales growth reflected pricing actions and stronger Mobility volumes, partly offset by unfavorable currency translation. Cost of goods sold rose 7.7%, slower than sales, and its share of sales declined to 70.2% from 71.3%.
- Cash used in operating activities increased to $51.8 from $43.9. Q1 2023 working-capital uses were $205.0, including receivables and prepaid assets, lower accounts payable and accrued liabilities; inventory reductions partially offset these uses.
- Axalta prepaid $75.0 of term-loan principal in Q1 and another $25.0 in April 2023. Q1 financing cash use was $88.4, compared with $208.1 in the prior-year quarter, which included $175.1 of share repurchases.
Liquidity, outlook, risks and unusual items
- At March 31, 2023, revolving-credit availability was $529.6, net of letters of credit; additional available capacity under certain non-U.S. lines was $50.3. Management said available cash, operating cash flow and borrowing capacity should be adequate for debt service, liquidity needs and necessary capital expenditures over the next 12 months.
- Management reported continued raw-material inflation, with sequential price stabilization, and said improved selling prices had helped offset increased costs. No specific earnings or revenue guidance is provided in the supplied filing text.
- Debt and interest costs remain important risks: the filing cites elevated interest rates and the company’s highly leveraged position as potential constraints on financing and financial flexibility. Other stated uncertainties include inflation, economic and geopolitical conditions, foreign exchange, and the Russia-Ukraine conflict.
- Q1 included a $7.1 impairment charge related to the anticipated exit of a non-core Mobility Coatings business category and $1.8 of debt extinguishment/refinancing-related costs. The company also recorded a $1.4 benefit from updated Russia-related receivable reserve estimates.
- An operational matter involving certain North America Mobility customer sites has estimated liabilities of $40.5 and insurance receivables of $38.7 at March 31, 2023. The filing says actual losses could be materially lower or higher depending on repair costs and insurance coverage. Other ordinary-course legal and environmental matters are also disclosed; management says excess exposure is not expected to be material annually, but could affect a particular quarter.
Important facts for investors to verify
- Whether pricing and product mix continue to offset raw-material, labor and other operating-cost inflation.
- Whether Mobility Coatings’ sales and margin gains are sustainable, and whether Industrial weakness persists.
- Working-capital conversion, particularly receivables and accrued liabilities, and the path back to positive operating cash flow.
- Debt service and refinancing exposure as interest costs remain elevated; track borrowings, available revolver capacity and further voluntary prepayments.
- Resolution and insurance recovery for the operational matter, along with impairment, restructuring and other contingent exposures.