Axalta Coating Systems Ltd. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This annual filing also reports quarterly results, including the fourth quarter. Axalta is a global coatings manufacturer operating in Performance Coatings (refinish and industrial) and Transportation Coatings (light and commercial vehicles).
Financial performance
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net sales | $4,087.2 million | $4,361.7 million |
| Operating income | $468.9 million | $369.5 million |
| Net income | $97.9 million | $34.7 million |
| Net income attributable to controlling interests | $93.7 million | $27.4 million |
| Operating cash flow | $399.6 million | $251.4 million |
| Capital expenditures | $138.1 million | $188.4 million |
| Cash and cash equivalents at year-end | $485.0 million | $382.1 million |
| Indebtedness at year-end | $3,441.5 million | $3,614.3 million |
Reported net sales fell 6.3%, chiefly because unfavorable currency translation reduced sales by approximately 11.6%. Excluding currency translation, net sales rose approximately 5.3%, reflecting volume growth and higher prices. Cost of sales declined to 63.5% of net sales from 66.4%; operating margin was approximately 11.5% versus 8.5%, and net margin approximately 2.4% versus 0.8%. Operating cash flow less capital expenditures was approximately $261.5 million.
Adjusted EBITDA, a non-GAAP measure, increased 3.2% to $867.2 million from $840.5 million; its margin was approximately 21.2% versus 19.3%. The filing cautions that this measure excludes items including interest, taxes and certain unusual costs and is not a substitute for GAAP results.
Performance Coatings sales decreased 7.7% to $2,385.1 million; segment Adjusted EBITDA declined 1.6% to $539.1 million. Transportation Coatings sales decreased 4.2% to $1,702.1 million; segment Adjusted EBITDA increased 12.0% to $328.1 million.
Changes, liquidity and debt
- Profitability improved despite the sales decline, supported by cost-saving initiatives, lower raw-material costs and volume growth. Reported net income rose to $97.9 million from $34.7 million.
- Working capital was $1,035.7 million. Axalta had $375.1 million of available revolving-credit capacity, net of letters of credit, and no revolver borrowings at year-end. Management said cash, operating cash flow and available facilities were expected to cover operating needs, debt service and planned capital expenditures for the next 12 months.
- Debt remained substantial: $2,042.5 million on the Dollar Term Loan, $428.0 million on the Euro Term Loan, and $1,024.4 million of senior notes, plus other borrowings. Term loans mature in 2020 and senior notes in 2021. The company reported compliance with debt covenants.
- Cash increased by $102.9 million during 2015. Operating cash flow improved, while investing cash use included $138.1 million of capital spending and $29.6 million for acquisitions; financing cash use included $127.3 million of term-loan repayments.
Outlook, commentary and material risks
- No specific numerical earnings or revenue guidance is provided. Management said productivity and “Axalta Way” cost-reduction initiatives, capacity expansion and operational improvements were expected to support profitability over the next several years.
- Management identified foreign exchange as a major headwind. Foreign-exchange losses were $93.7 million in 2015, and currency translation materially reduced reported sales and contributed to a $164.3 million currency translation loss in comprehensive income.
- Venezuela remained a significant uncertainty. Axalta used the SIMADI rate, approximately 199.5 bolivars per U.S. dollar at year-end, after changing from SICAD I. Currency devaluation contributed to a $30.6 million impairment of a real-estate investment. Management said productive long-lived assets remained recoverable, but this depended on demand and the ability to sustain price increases.
- The tax provision was $63.3 million, a 39.3% effective rate, compared with $2.1 million in 2014. The 2015 result included effects from nondeductible Venezuelan impairment and losses in jurisdictions where tax benefits were not expected.
- Other principal risks include high leverage and refinancing/cash-flow needs, economic and vehicle-market cyclicality, raw-material cost or supply changes, customer and distributor concentration, foreign-currency volatility, environmental and litigation exposure, pension obligations, and cyber or operational disruption. The filing says pending ordinary-course litigation was not expected to have a material effect; ultimate environmental and legal exposures remain uncertain.
- Axalta reported no dividends planned for the foreseeable future. Carlyle held 29.6% of common shares at year-end and retained significant influence. The independent auditor gave an unqualified opinion and reported effective internal control over financial reporting.
Fourth-quarter snapshot
For the three months ended December 31, 2015, total revenue was $1,009.6 million and net income was $39.1 million; net income attributable to controlling interests was $38.6 million, or $0.16 per diluted share. The filing does not provide a clear standalone fourth-quarter comparison of segment Adjusted EBITDA in the supplied text.
Important facts for investors to verify
- Underlying sales and segment trends excluding currency effects, especially whether volume and pricing gains persist.
- Venezuela’s exchange-rate access, inflation and pricing assumptions, and potential impairment exposure beyond the recorded $30.6 million charge.
- Cash generation, working-capital requirements, debt repayment capacity and compliance with financing covenants as major maturities approach.
- How much of Adjusted EBITDA improvement reflects durable operating gains versus adjustments and one-time items.
- Exposure to environmental, pension and other contingent liabilities, including the scope and enforceability of DuPont indemnities.