Axalta Coating Systems Ltd. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited consolidated results. Axalta manufactures and sells coatings through Performance Coatings (refinish and industrial) and Transportation Coatings (light and commercial vehicle).
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $1,072.1m | $1,101.1m | $2,033.7m | $2,098.6m |
| Operating income | $151.0m | $143.0m | $254.3m | $244.8m |
| Net income (loss) | $50.1m | $(24.3)m | $80.7m | $22.4m |
| Net income attributable to controlling interests | $48.5m | $(25.1)m | $78.2m | $20.0m |
| Diluted earnings (loss) per share | $0.20 | $(0.11) | $0.32 | $0.08 |
| Adjusted EBITDA | $252.6m | $255.5m | $447.4m | $437.5m |
Q2 operating margin was approximately 14.1% of total revenue; first-half operating margin was approximately 12.5%. Net sales fell 2.7% in Q2 and 3.0% for the half, chiefly from unfavorable foreign exchange, partly offset by higher selling prices and volumes. For the six months, currency translation reduced sales by 6.7%, while pricing and volume contributed 3.2% and 0.5% growth, respectively.
- Margins and costs: Cost of goods sold declined to 60.9% of net sales in Q2 from 62.1%; for the first half it declined to 62.1% from 63.8%. Management cited cost-saving initiatives, lower raw-material costs and higher prices.
- Segments: First-half Performance Coatings sales declined 1.7% to $1,175.1m and Adjusted EBITDA declined 0.7% to $267.4m. Transportation Coatings sales declined 4.7% to $845.6m, while Adjusted EBITDA rose 7.0% to $180.0m. Commercial Vehicle sales were notably weaker, down 17% for the half.
- Other expense: First-half other expense was $40.8m versus $92.5m, reflecting lower foreign-exchange losses and a smaller Venezuela real-estate impairment. 2016 also included a $2.3m debt-extinguishment loss.
Cash flow, debt and liquidity
- First-half operating cash flow was $179.3m, compared with $5.0m in 2015. Working-capital changes used $116.8m, primarily because of higher receivables and other assets; the prior-year working-capital use was $285.5m.
- Capital expenditures were $64.8m; investing cash use was $67.6m. Financing cash use was $108.3m, including $113.7m of long-term debt payments and a voluntary $100m term-loan prepayment.
- Cash and cash equivalents were $480.1m at June 30, 2016, versus $485.0m at year-end 2015. Total borrowings were $3,353.2m carrying value, down from $3,441.5m; long-term debt on the balance sheet was $3,298.1m.
- Revolver availability was $378.1m after $21.9m of letters of credit; no revolving-credit borrowings were outstanding. The company reported compliance with debt covenants, and the financial covenant was not applicable at quarter-end.
- Management said cash, operating cash flow and available borrowing capacity should be adequate for debt service, cost-saving initiatives, liquidity and capital spending over the next 12 months. It was monitoring debt markets and expected to refinance debt or amend revolver tenure opportunistically if attractive terms were available.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided in the supplied filing text. Management cautions that interim results are not necessarily indicative of full-year results.
- Venezuela remained exposed to severe currency and economic uncertainty. Axalta used the DICOM rate of 626 bolivars per U.S. dollar to remeasure monetary balances and recorded $22.7m of first-half currency losses and a $10.5m impairment of non-operating real estate. Further currency weakness, inability to sustain price increases, or political and economic disruption could materially affect results. Venezuela represented less than 2% of first-half consolidated sales.
- Foreign currency was a significant headwind, particularly in Latin America and Asia. The filing also identifies risks from automotive-market conditions, raw-material supply and prices, competition, customer concentration, substantial indebtedness, litigation, environmental matters and other global operations.
- The UK vote to leave the European Union created uncertainty for Axalta’s European operations, cross-border business and financial markets; the company said the potential effects could be adverse but could not be predicted.
- Restructuring costs were $5.6m for the first half, with related payments expected to be completed within 12–15 months from June 30, 2016. Pending lawsuits and claims have uncertain outcomes; management did not expect ordinary-course proceedings to have a material adverse effect, while noting some matters could have material effects if they become probable and estimable.
- Disclosure controls were assessed as effective at June 30, 2016; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether sales-volume and pricing gains can offset ongoing currency effects, especially in Latin America and Asia.
- Whether Transportation Coatings’ improved Adjusted EBITDA is sustainable given weaker commercial-vehicle demand and lower segment sales.
- Cash conversion and working-capital needs, alongside planned capital spending and the company’s ability to reduce debt.
- Venezuela exchange-rate developments, asset recoverability and the assumptions supporting continued operations and price increases.
- Debt maturities and refinancing plans: scheduled repayments include $2,264.2m in 2020; verify financing terms, covenant headroom and interest-rate exposure.
- How much reported profitability depends on non-GAAP adjustments; first-half Adjusted EBITDA adds back foreign-exchange losses, impairment, stock compensation and other items.