Axalta Coating Systems Ltd. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Axalta manufactures and sells coatings through Performance Coatings (refinish and industrial) and Transportation Coatings (light and commercial vehicle). Financial amounts below are in millions unless noted.
Financial performance and liquidity
- Q2 revenue: Net sales were $1,206.5, up 10.8% year over year; total revenue, including other revenue, was $1,212.2. Six-month net sales were $2,372.3, up 13.2%.
- Profit: Q2 operating income was $146.5 versus $47.5, and net income attributable to controlling interests was $74.9 versus a $20.8 loss; diluted EPS was $0.31 versus a $0.09 loss. For the first half, operating income was $266.5 versus $157.9, controlling-interest net income was $144.8 versus $43.3, and diluted EPS was $0.59 versus $0.18.
- Margins: Gross margin, calculated from net sales less cost of goods sold, was approximately 34.2% in Q2 versus 36.6% a year earlier, and 33.8% for the first half versus 36.5%. Cost of goods sold rose faster than sales, with management citing raw-material cost pressure and revenue-standard accounting effects.
- Adjusted EBITDA: Q2 was $247.6, up 9.0%; first-half Adjusted EBITDA was $467.6, up 8.7%. This is a company-defined non-GAAP measure.
- Cash flow: First-half operating cash flow was $121.0 versus $94.1. Investing used $174.4, including $78.2 for acquisitions, $74.6 for capital expenditures and $26.9 for an additional joint-venture interest. Financing used $157.3, including $103.8 of treasury-stock purchases. Cash and cash equivalents were $551.1 at June 30, down from $769.8 at year-end.
- Debt and liquidity: Borrowings totaled $3,882.1, including current borrowings; long-term borrowings were $3,842.2. Cash less total borrowings was approximately $3,331.0 of net debt. Revolver availability was $356.8, net of $43.2 in letters of credit, with no revolver borrowings. The company reported compliance with credit-facility covenants.
Material changes versus prior year
- Performance Coatings drove growth: Q2 sales rose 18.3% and first-half sales 21.1%, supported by acquisitions, higher volumes, pricing and favorable currency translation. First-half Industrial sales increased 48.7%.
- Transportation Coatings was weaker: Q2 sales declined 0.8% and Adjusted EBITDA declined 11.6%; first-half sales increased 1.4% while Adjusted EBITDA fell 11.2%. Management cited lower selling prices and higher variable costs, including raw materials.
- The 2017 comparison included a $70.9 Venezuela deconsolidation charge; there was no corresponding charge in 2018. Accordingly, the year-over-year improvement in reported income is not solely a measure of underlying operating growth.
- Axalta adopted the new revenue standard in 2018. For the six months, it increased reported net income by $1.6 versus prior accounting, while reclassifying costs between SG&A and cost of goods sold; comparative periods were not recast.
- In April, the company refinanced and repriced its Dollar Term Loans, using proceeds and cash to repay the 2023 Euro Term Loans. Related swaps converted $475.0 of principal exposure to euro fixed-rate debt; management expects approximately $10.0 of annual cash-interest savings. Interest expense nevertheless rose 10.2% in the first half versus the prior year.
Outlook, commentary and risks
- Management said available cash, operating cash flow and borrowing capacity are expected to cover debt service, cost-saving initiatives, liquidity needs and necessary capital expenditures for the next 12 months. No specific revenue or earnings guidance is provided in the supplied filing text.
- Raw-material inflation pressured margins. Other cited exposures include foreign-exchange movements, higher interest rates, economic and automotive-market conditions, customer and distributor concentration, competition, acquisition execution, environmental matters and substantial indebtedness.
- The company reported ordinary-course legal matters and customer-obligation bank guarantees of $14.5, with no guarantee liability recorded. Management did not expect pending litigation, individually or collectively, to have a material adverse effect.
- The U.S. tax-law provisional charge recorded in 2017 was reduced by $12.4 following additional Treasury guidance; management said further adjustment may be possible as guidance develops.
- The filing states disclosure controls were effective at June 30, 2018, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Performance Coatings growth and pricing can offset raw-material inflation, and whether Transportation Coatings profitability stabilizes.
- How much sales and earnings growth came from acquisitions and currency, versus organic volume and pricing; also assess the non-GAAP Adjusted EBITDA reconciliations.
- Cash conversion and working-capital requirements: first-half working-capital uses were $253.2, including $133.5 for receivables.
- Debt, interest-rate and refinancing exposure, including the assumptions behind the estimated $10.0 annual interest savings and the company’s ability to service its substantial debt.
- Potential remaining effects of revenue-standard adoption, U.S. tax-law guidance, acquisition accounting, and legal or environmental contingencies.