Axalta Coating Systems Ltd. — 2015 Q2 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited interim financial statements. Axalta manufactures and sells coatings through Performance Coatings (refinish and industrial) and Transportation Coatings (light and commercial vehicle) segments.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $1,094.1m | $1,126.6m | $2,083.3m | $2,174.0m |
| Total revenue | $1,101.1m | $1,134.3m | $2,098.6m | $2,188.7m |
| Income from operations | $143.0m | $107.8m | $244.8m | $179.6m |
| Net income (loss) | $(24.3)m | $55.8m | $22.4m | $52.1m |
| Adjusted EBITDA | $255.5m | $221.1m | $437.5m | $407.8m |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $5.0m | $13.7m |
- Q2 operating margin was approximately 13.0%, versus 9.5% a year earlier; six-month operating margin was approximately 11.7%, versus 8.2%. Cost of sales fell to 62.1% of net sales in Q2 from 65.9%, and to 63.8% for the half from 66.5%.
- Q2 net loss attributable to controlling interests was $25.1m, or $0.11 per diluted share. Six-month net income attributable to controlling interests was $20.0m, or $0.08 per diluted share.
- Q2 interest expense was $49.2m, down from $54.9m. The six-month amount was $99.2m, down from $113.9m.
- At June 30, cash and cash equivalents were $307.8m, versus $382.1m at year-end. Current assets were $1,863.8m and current liabilities $837.1m.
- Borrowings had a $3,559.3m carrying value, including current borrowings; required future repayments totaled $3,642.2m before unamortized discounts and financing costs. No revolving-credit-facility borrowings were outstanding; $379.0m was available after letters of credit.
- Six-month capital spending was $56.6m. Cash decreased $74.3m, including a $45.8m adverse effect from exchange-rate changes.
Changes versus comparable periods
- Net sales declined 2.9% in Q2 and 4.2% for the first half, principally because currency translation reduced sales by approximately 11% in each period. Excluding currency translation, management reported sales growth of about 7% for the half, from higher prices and volumes.
- Six-month Performance Coatings sales fell 6.6%, while Transportation Coatings sales fell 0.6%. Adjusted EBITDA increased in both segments: Performance Coatings to $269.2m from $261.2m and Transportation Coatings to $168.3m from $146.6m.
- Q2 other expense was $88.6m, compared with $1.6m of other income a year earlier. The six-month comparison was $92.5m expense versus $2.9m expense, driven largely by currency remeasurement and a Venezuela asset impairment.
- Six-month operating cash flow was lower than the prior year as working-capital increases of $285.5m, including receivables, inventory and other assets, largely absorbed cash generated before working-capital changes.
Outlook, risks and unusual items
- Management gave no specific revenue or earnings guidance. It said cash on hand, operating cash flow and available borrowing capacity should be adequate for debt service, working capital, initiatives and capital spending over the next 12 months. It expects the Axalta Way cost-saving initiative to support profitability improvement over the next several years.
- Axalta changed its Venezuelan remeasurement rate to SIMADI, 197.7 bolivars per U.S. dollar, from SICAD I at 12.0. This generated a $53.2m exchange loss. Management cited uncertainty over access to foreign currency and future remittances.
- The company recorded a $30.6m impairment on a Venezuelan real-estate investment, reducing its carrying value from $52.6m to $22.0m. Management said other evaluated productive long-lived assets were recoverable based on demand and price-increase assumptions; failure to sustain demand or price increases could lead to future impairment.
- The Q2 tax provision was $29.5m despite $5.2m of pretax income, reflecting a 567.3% effective tax rate; nondeductible currency losses and impairment contributed. The six-month effective tax rate was 57.8%, versus 17.0% in 2014.
- Q2 stock-based compensation included $8.2m from accelerated vesting after Carlyle’s ownership fell below 50% in April. Six-month stock-based compensation was $14.2m. Restructuring costs were $16.7m for the half.
- The $437.5m six-month Adjusted EBITDA is a non-GAAP measure and includes adjustments such as foreign-exchange effects, restructuring and other costs, and the impairment charge. The filing cautions that it should not be viewed as a substitute for GAAP results.
- Management said it expected no material effect from pending ordinary-course lawsuits, while noting that outcomes of certain claims are uncertain and could have material effects. The company also highlighted substantial indebtedness, foreign-exchange exposure, international operations and Venezuela-related restrictions as risks.
- 2014 comparative financial statements were revised for errors in amortization of financing costs and original issue discounts; the correction increased reported net income by $2.5m for Q2 and $5.3m for the first half of 2014.
Important facts for investors to verify
- Whether Venezuelan currency access, the SIMADI rate and planned price increases support the company’s assumptions and avoid further asset impairment.
- How much reported sales and earnings trends reflect currency translation versus underlying pricing, volume and cost changes.
- Whether working-capital needs improve enough to convert earnings into operating cash flow while servicing approximately $3.6bn of borrowings.
- The sustainability of segment Adjusted EBITDA growth and the size and recurrence of adjustments excluded from that non-GAAP measure.
- The timing and cost of restructuring and Axalta Way initiatives, and any material developments in litigation or other contingencies.