Axalta Coating Systems Ltd. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; unaudited. Axalta manufactures and distributes coatings through Performance Coatings and Transportation Coatings, serving refinish, industrial, light-vehicle and commercial-vehicle markets.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $1,005.1M | $1,115.8M | $3,103.7M | $3,304.5M |
| Operating income | $123.9M | $104.0M | $368.7M | $283.6M |
| Net income (loss) attributable to controlling interests | $35.1M | ($19.9M) | $55.1M | $29.6M |
| Diluted EPS | $0.15 | ($0.09) | $0.23 | $0.13 |
| Adjusted EBITDA | $216.9M | $228.0M | $654.4M | $635.8M |
- Revenue and margins: Net sales declined 9.8% in Q3 and 6.1% for the nine-month period. Management attributed the declines primarily to foreign-currency translation; excluding currency, nine-month sales increased about 6%. Gross margin, calculated from net sales and cost of goods sold, was approximately 37.2% in Q3 versus 34.3%, and 36.5% for nine months versus 33.8%. Operating margin was approximately 12.4% in Q3 versus 9.4%, and 12.0% for nine months versus 8.6%.
- Cash flow: Nine-month operating cash flow was $163.8M, up from $59.4M. Investing used $111.1M, including $93.8M of capital expenditures and $19.9M of acquisitions; financing provided $30.1M. Cash and cash equivalents were $411.6M at September 30, versus $382.1M at year-end 2014. Working-capital increases of $283.0M partly offset cash generated before working-capital changes.
- Debt and liquidity: Borrowings were $3,553.5M, net of unamortized discounts and financing costs, compared with $3,614.3M at December 31, 2014. The revolving facility had no borrowings and $379.0M available, net of letters of credit. Required debt repayments total $3,631.2M, of which $3,498.8M is due thereafter. Management said cash, operating cash flow and available borrowing capacity should cover debt service, operating needs and capital spending for the next 12 months.
Material changes and management commentary
- Foreign-exchange translation was a major headwind: management estimated it reduced nine-month net sales by 11.6%, while volume and pricing gains partly offset the impact. Nine-month sales increased in constant-currency terms across both segments.
- Cost of goods sold as a percentage of net sales improved to 62.8% in Q3 from 65.7%, and to 63.5% for nine months from 66.2%. Management cited cost-saving initiatives, lower raw-material costs and higher average selling prices.
- Q3 Adjusted EBITDA declined 4.9% year over year; nine-month Adjusted EBITDA increased 2.9%. Nine-month Transportation Coatings Adjusted EBITDA rose 8.9%, while Performance Coatings was nearly flat.
- Nine-month other expense increased to $111.4M from $65.1M, including $90.2M of net exchange losses and a $30.6M impairment of a Venezuelan real-estate investment. The company moved its Venezuelan remeasurement rate to SIMADI in June 2015, recording a $52.6M net exchange loss for the nine months.
- Axalta continued its Axalta Way cost-reduction and commercial-alignment initiative, with management stating it expects the efforts to support profitability improvements over the next several years. The filing provides no specific earnings or revenue guidance.
- In October 2015, after quarter-end, the company voluntarily repaid $100M of its Dollar Term Loan and expected to record an approximately $2.5M pretax extinguishment loss.
Risks, contingencies and unusual items
- Venezuelan operations face exchange controls, uncertainty over currency availability and restrictions on repatriating cash. The company’s impairment assessment for productive long-lived assets depends on continued demand and its ability to implement and sustain price increases; if assumptions fail, further impairment could result. Venezuela represented $110.8M of nine-month net sales.
- The effective tax rate was 45.2% for the nine months, versus 35.0% in 2014, reflecting currency effects and the nondeductible Venezuelan impairment, among other factors. The company also recorded $5.0M of tax benefits relating to prior periods and said the error was not material to current or prior periods.
- The company is highly leveraged and exposed to currency movements, international economic and political conditions, raw-material costs, competition and customer concentration. It reported ordinary-course legal, regulatory and environmental matters; outcomes are uncertain, and some matters could be material, although management did not expect currently pending lawsuits to have a material effect.
- Adjusted EBITDA is a non-GAAP measure with significant adjustments, including foreign-exchange losses, restructuring and advisory costs, stock-based compensation and the Venezuela impairment. It should not be treated as a substitute for GAAP earnings or cash flow.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting occurred during the quarter.
Investor verification priorities
- Assess whether constant-currency volume and pricing growth can offset continued currency pressure, particularly in Latin America and Europe.
- Monitor Venezuelan exchange-rate access, cash repatriation, price increases and the recoverability of operating assets.
- Review debt service, leverage, covenant headroom and the impact of the October $100M repayment against substantial long-dated maturities.
- Reconcile Adjusted EBITDA to GAAP results and evaluate working-capital demands and cash conversion.
- Track restructuring and cost-saving spending, tax-rate effects, and developments in legal, environmental and other contingencies.