Axalta Coating Systems Ltd. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts are in U.S. dollars; financial statements are unaudited.
Business context and results
Axalta manufactures and sells coatings through Performance Coatings (refinish and industrial) and Mobility Coatings (light and commercial vehicle). The company reported a substantial recovery from the COVID-19-affected prior-year period, when demand and manufacturing utilization were depressed.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $1,126.8 million | $652.7 million | $2,190.4 million | $1,636.2 million |
| Income (loss) from operations | $190.4 million | $(64.5) million | $243.0 million | $0.6 million |
| Net income (loss) | $126.4 million | $(83.2) million | $142.1 million | $(30.8) million |
| Diluted earnings (loss) per share | $0.54 | $(0.35) | $0.60 | $(0.13) |
| Operating cash flow | Not separately provided | Not separately provided | $147.1 million | $(2.5) million |
Q2 sales rose 72.6%; first-half sales rose 33.9%. For the first half, management attributed growth chiefly to higher volumes as demand recovered, with price/mix and currency also contributing. Cost of goods sold was 66.8% of sales in Q2 versus 76.5% a year earlier, and 65.6% for the first half versus 70.0%. The improvement reflected higher volume, better utilization and cost savings, partly offset by raw-material inflation.
Segments and material changes
- Performance Coatings: Q2 sales were $805.8 million, up 67.1%; first-half sales were $1,513.1 million, up 33.9%. Segment Adjusted EBIT was $139.7 million for Q2 and $256.9 million for the first half, versus $1.5 million and $80.9 million, respectively, in 2020. First-half growth reflected volume recovery, pricing/mix, currency and cost efficiencies, partly offset by input-cost inflation.
- Mobility Coatings: Q2 sales were $321.0 million, up 88.2%; first-half sales were $677.3 million, up 33.7%. Segment Adjusted EBIT was $5.7 million for Q2 and $44.9 million for the first half, compared with losses of $39.3 million and $13.5 million. Recovery and improved utilization helped; raw-material inflation and, in Q2, weaker price/mix were offsets.
- Segment Adjusted EBIT is management’s segment measure and is not the same as consolidated Adjusted EBIT. Reported operating income and Q2 results were also affected by unusual items, including a benefit related to the operational matter described below.
Cash, debt and liquidity
First-half operating cash flow was $147.1 million, versus cash use of $2.5 million in 2020. Working-capital uses totaled $179.3 million, chiefly receivables, inventories and prepaid/other assets, partly offset by higher payables and accruals. Investing activities used $91.3 million, including $60.3 million of capital expenditures and $37.6 million for an acquisition. Financing activities used $169.9 million, including $123.7 million of share repurchases and $55.3 million of borrowing repayments.
At June 30, cash and cash equivalents were $1,230.9 million, total borrowings net of financing costs were $3,853.9 million, and long-term debt was $3,813.4 million. Approximate borrowings less cash were $2,623.0 million. The revolving facility was increased from $400 million to $550 million and extended to 2026, subject to specified acceleration provisions; $516 million was available after letters of credit. Management said forecast cash, operating cash flow and borrowing availability should cover debt service, liquidity needs and necessary capital expenditures for the next 12 months, while cautioning that cash generation and refinancing depend on factors beyond its control.
Outlook, risks and unusual items
- The filing gives no specific financial guidance. Management expected COVID-19 to continue to affect the business during 2021 and potentially longer, and anticipated supply-chain constraints, semiconductor shortages and raw-material inflation to continue into the second half of 2021.
- Operational matter: A Q1 charge of $94.4 million was reduced by a Q2 benefit of $71.8 million, resulting in a first-half net charge of $22.6 million. At June 30, $50.1 million of liabilities and $29.4 million of insurance receivables were recorded. The company said it did not then believe incremental reasonably possible losses remained, but actual repair costs and insurance recovery could make the ultimate amount materially lower or higher.
- Q2 included $8.3 million of income from a Brazilian indirect-tax law change. First-half restructuring termination-benefit costs were $27.0 million; payments are expected to be substantially completed within 24 months.
- On July 6, 2021, Axalta agreed to acquire U-POL for £428 million in cash, subject to regulatory and other customary closing conditions. The filing also describes an April acquisition of a Chinese wire-enamels producer; its financial impact was not material as of the reporting date.
- The company repurchased 4.2 million shares for approximately $123.6 million in the first half. Its repurchase authorization was increased by $625 million to $1.3 billion; $562.5 million had been used through June 30.
Important facts for investors to verify
- Track the operational matter’s final repair costs, insurance collections and settlement of the recorded liability.
- Assess whether pricing and cost actions can offset continued raw-material inflation, semiconductor-related production constraints and broader supply-chain disruption.
- Review debt maturities, covenant terms and liquidity needs alongside the planned U-POL acquisition and continued share repurchases.
- Separate underlying operating trends from the prior-year COVID-19 comparison and current-period unusual benefits and charges; the filing provides no quantified forward guidance.