Axalta Coating Systems Ltd. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; selected fourth-quarter results are included below. Amounts are in U.S. dollars.
Business context and reporting period
Axalta manufactures and distributes coatings in more than 130 countries through two segments: Performance Coatings (refinish and industrial) and Transportation Coatings (light and commercial vehicle). The company reported approximately 14,000 employees and 48 manufacturing facilities at year-end.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $4,482.2 million | $4,696.0 million |
| Income from operations | $488.2 million | $442.1 million |
| Net income | $252.6 million | $213.3 million |
| Net income attributable to controlling interests | $249.0 million | $207.1 million |
| Diluted earnings per share | $1.06 | $0.85 |
| Cash from operating activities | $573.1 million | $496.1 million |
| Capital expenditures | $112.5 million | $143.4 million |
| Cash and cash equivalents at year-end | $1,017.5 million | $693.6 million |
| Total indebtedness at year-end | $3,834.1 million | $3,864.0 million |
| Working capital | $1,500.5 million | $1,269.0 million |
Gross margin was approximately 34.9% versus 33.9%; operating margin was approximately 10.9% versus 9.4%; and net margin was approximately 5.6% versus 4.5%. These percentages are calculated from reported figures. Operating cash flow less capital expenditures was $460.6 million in 2019.
Revolving-credit availability was $361.2 million, net of letters of credit. Management stated that cash, operating cash flow and available borrowing capacity were expected to meet debt service, liquidity needs and necessary capital expenditures over the following 12 months. The company reported compliance with debt covenants. Its 2019 effective tax rate was 23.5%, compared with 20.3% in 2018.
Material changes versus prior comparable periods
- Annual sales fell 4.6%, reflecting lower volumes, unfavorable foreign-exchange translation and the sale of a consolidated joint venture; higher average selling prices and product mix partly offset the decline.
- Performance Coatings sales decreased 3.6% to $2,923.4 million; segment Adjusted EBIT increased 12.4% to $449.1 million, and its Adjusted EBIT margin rose to 15.4% from 13.2%.
- Transportation Coatings sales decreased 6.3% to $1,558.8 million; segment Adjusted EBIT rose 1.9% to $137.4 million, and its Adjusted EBIT margin increased to 8.8% from 8.1%.
- Fourth-quarter sales were $1,098.4 million versus $1,165.8 million; operating income was $108.7 million versus $127.8 million; and net income was $42.2 million versus $76.8 million.
- Cash from operations increased by $77.0 million year over year. Cash increased by $324.1 million during 2019, while financing activities used $158.4 million, including $105.3 million of share repurchases.
Outlook, management commentary, risks and unusual items
- The board’s comprehensive review of strategic alternatives, announced in June 2019, remained ongoing; the filing gives no assurance of an outcome or timing. The company incurred approximately $26 million in 2019 for retention payments and advisory fees. The retention program’s maximum anticipated cost was approximately $40 million over 18–24 months.
- The Mechelen, Belgium facility closure was expected to be completed in the first half of 2020. Total pre-tax charges were estimated at $135–140 million, with approximately $35–45 million of capital expenditures for transferring and starting production elsewhere. Axalta expected approximately $30 million of annual pre-tax savings, beginning in the second half of 2020.
- Axalta recorded $17.7 million of impairments, primarily for abandoned engineering work related to its China footprint project, and a $3.4 million pre-tax loss on the sale of a consolidated joint-venture interest.
- In January 2020, after year-end, Axalta prepaid $300 million of term loans and entered into a $200 million interest-rate swap. The prepayment was expected to result in a $2.7 million debt-extinguishment loss.
- Key risks include cyclical automotive and industrial demand, raw-material costs and supply, foreign-exchange movements, substantial indebtedness and variable-rate exposure, the strategic review, environmental liabilities, and execution of restructuring and savings initiatives. The filing provides no specific 2020 sales or earnings guidance.
- Pending litigation and environmental matters were described as arising in the ordinary course; management did not expect them, individually or in aggregate, to materially affect the consolidated financial statements. The auditor reported effective internal control over financial reporting and issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Progress and any outcome of the strategic alternatives review, including associated costs and potential effects on customers, employees and operations.
- Whether the Mechelen closure is completed on schedule and whether forecast savings materialize after transfer costs and charges.
- Volume, pricing and currency trends by segment, especially light-vehicle production and industrial demand.
- Debt service, interest-rate exposure and liquidity after the January 2020 term-loan prepayment.
- Potential cash requirements from tax uncertainties, pension obligations, environmental remediation and customer guarantees.