Axalta Coating Systems Ltd. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts are in millions of U.S. dollars, except per-share data. Axalta manufactures and sells coatings globally through Performance Coatings and Mobility Coatings.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $1,088.6 | $1,026.9 | $3,279.0 | $2,663.1 |
| Income from operations | $124.7 | $141.7 | $367.7 | $142.3 |
| Net income attributable to controlling interests | $69.1 | $82.5 | $210.7 | $51.9 |
| Diluted EPS | $0.30 | $0.35 | $0.90 | $0.22 |
| Operating cash flow | Not separately provided | Not separately provided | $290.0 | $230.9 |
- Q3 sales rose 6.0%, but operating income fell 12.0% and controlling-interest net income fell 16.2%. Cost of goods sold increased 17.5%; gross margin was approximately 31.5%, versus 38.3% a year earlier.
- Nine-month sales increased 23.1%, while operating income increased to $367.7 from $142.3 and net income attributable to controlling interests rose to $210.7 from $51.9. The prior-year comparison included substantial restructuring and other charges and a $50.5 tax benefit from an intellectual-property transfer; periods are not directly comparable.
- Nine-month cash from operations increased to $290.0. Investing used $719.9, principally for acquisitions ($647.3) and capital expenditures ($98.7); financing used $279.5, including $213.8 of share repurchases. Cash and cash equivalents were $627.7 at quarter-end, down from $1,360.9 at December 2020.
- Total borrowings, net of financing costs and discounts, were $3,842.5, compared with $3,892.7 at December 2020. Revolver availability was $516.0, net of letters of credit. Management said available cash, operating cash flow and borrowing capacity should cover debt service, liquidity needs and necessary capital expenditures for the next 12 months.
Business changes and segment results
- Nine-month sales growth reflected demand recovery, higher pricing and product mix, favorable currency translation and acquisitions. Volume increased 14.9%; price and mix contributed 4.1%, and currency translation 3.0%.
- Performance Coatings sales rose 14.1% in Q3 and 26.5% year to date. Q3 Adjusted EBIT declined to $122.8 from $133.9, with margin falling to 15.8% from 19.6%, mainly amid raw-material inflation and higher operating costs. Nine-month Adjusted EBIT increased to $379.7 from $214.8.
- Mobility Coatings sales fell 10.1% in Q3, including a 15.2% volume decline, primarily from light-vehicle customer production limits tied to semiconductor and other supply shortages. Segment Adjusted EBIT was a loss of $2.7, compared with income of $48.5. Nine-month sales increased 16.0% and Adjusted EBIT was $42.2, versus $35.0.
- Axalta completed its $619.8 U-POL acquisition on September 15, adding automotive aftermarket coatings and products to Performance Coatings. Purchase accounting was preliminary at quarter-end; the acquisition added $349.7 of goodwill, which the filing says is not tax deductible.
Outlook, risks and unusual items
- Management expected semiconductor and other supply-chain shortages, raw-material inflation, severe-weather effects and logistics constraints to continue affecting results into 2022. It cited pricing actions and cost mitigation efforts. No numerical earnings or sales guidance is provided in the supplied filing text.
- Management said COVID-19 continued to affect the business and could remain a negative factor in 2021 or longer; future effects were uncertain and could be materially adverse.
- A Mobility Coatings operational matter generated a recorded liability of $48.0 and insurance receivable of $48.7 at September 30. Management said the probable-loss estimate could be materially lower or higher depending on repair costs and additional insurance coverage. The matter had previously been estimated as potentially involving losses up to $250.0.
- Q3 other operating benefits included an $18.7 benefit for the operational matter and an $8.9 gain on sale of a closed facility; these were partly offset by restructuring and acquisition-related costs. Nine-month results also included $8.3 of income related to a Brazilian indirect-tax law change.
- The company repurchased 7.3 million shares for $213.8 during the first nine months. The repurchase authorization was increased by $625.0 to $1.3 billion; $647.4 remained at September 30.
Most important facts for investors to verify
- Whether pricing actions can keep pace with raw-material inflation and restore margins, particularly in Mobility Coatings.
- How semiconductor and supply-chain constraints, especially in light vehicles, develop relative to management’s expectation that impacts continue into 2022.
- Final U-POL purchase accounting, integration performance and the acquisition’s contribution to sales, earnings and cash flow.
- Ultimate repair costs and insurance recoveries for the operational matter, including any change to the recorded liability or receivable.
- Cash conversion and leverage following acquisition spending, elevated working-capital needs, and continued share repurchases.