Axalta Coating Systems Ltd. — Q1 2022 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2022, compared with Q1 2021. Axalta manufactures and sells coatings through Performance Coatings (refinish and industrial) and Mobility Coatings (light and commercial vehicle). The Q1 results include contributions from businesses acquired in 2021, including U-POL.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $1,174.1 million | $1,063.6 million |
| Income from operations | $86.3 million | $52.6 million |
| Net income attributable to controlling interests | $41.5 million | $15.2 million |
| Diluted EPS | $0.18 | $0.06 |
| Cash from (used for) operating activities | $(43.9) million | $39.6 million |
| Capital expenditures | $42.5 million | $31.8 million |
- Sales increased 10.4%: price and mix contributed 8.8%, acquisitions 3.6%, and volume 1.0%; foreign exchange reduced growth by 3.0%.
- Cost of goods sold rose 22.3% to $837.4 million. Gross margin fell to 28.7% from 35.6%; operating margin was approximately 7.4%, versus 4.9% in Q1 2021. Higher raw-material, energy, logistics and other costs outpaced pricing.
- Segment results weakened despite sales growth. Performance Coatings sales rose 15.1%, but Adjusted EBIT declined to $94.6 million from $117.2 million and margin to 11.6% from 16.6%. Mobility Coatings sales rose 1.0%, while Adjusted EBIT fell to $0.5 million from $39.2 million and margin to 0.1% from 11.0%.
- Operating cash flow deteriorated to an outflow, principally as working capital used $162.1 million, including higher receivables and inventories; the increase in accounts payable partly offset those uses.
- Cash and cash equivalents were $576.2 million at March 31, down from $840.6 million at year-end. Total borrowings, net, were $3,815.3 million, including $3,739.2 million of long-term debt. Revolver availability was $527.9 million.
Material changes and capital allocation
- Net income rose year over year in part because Q1 2021 included $94.4 million of expense for the Mobility Coatings operational matter; Q1 2022 expense for that matter was $0.1 million. Other operating charges were $7.7 million versus $102.8 million.
- Axalta repurchased 6.4 million shares for $175.1 million in Q1 2022, compared with $63.7 million in Q1 2021. Remaining repurchase authorization was $442.3 million at quarter-end.
- Cash used in financing was $208.1 million, primarily reflecting share repurchases and $30.9 million of borrowing payments.
Outlook, risks and contingencies
- The filing gives no specific full-year earnings or sales guidance. Management expected semiconductor and other supply constraints, raw-material inflation, and freight and logistics challenges to continue affecting results through 2022; pricing and other mitigating actions were underway.
- Management said COVID-19 could continue to negatively affect the business during 2022 and potentially longer. China operations had been temporarily affected by local lockdowns.
- Russia-related sanctions and the conflict with Ukraine created uncertainty around commodities, currencies and raw-material supply. Axalta recorded $5.8 million of incremental receivables and inventory reserves related to sanctions in Q1.
- The operational matter remained an estimation risk: the company reported $48.6 million of accrued liabilities and $38.2 million of estimated insurance receivables at March 31. Actual costs and insurance recoveries could differ materially.
- Axalta stated that cash, operating cash flow and available borrowing capacity should be adequate for debt service, liquidity needs and necessary capital expenditures over the next 12 months, while noting that cash generation and refinancing depend on factors beyond its control. COVID-19 and geopolitical developments were among the risks cited.
- Other ordinary-course litigation and environmental matters remained pending. The company said excess payments were not expected to materially affect annual consolidated results, though they could affect a particular quarter. A California air-quality settlement of about $1.38 million was paid in February 2022.
Important facts for investors to verify
- Whether price increases can catch up with input-cost inflation and restore segment margins, particularly in Mobility Coatings.
- Whether supply constraints, customer production limits, China lockdowns and Russia-related disruption persist or worsen.
- How working-capital needs and operating cash flow develop after the Q1 outflow.
- The eventual costs, insurance recoveries and settlement timing for the operational matter.
- Debt maturities and refinancing capacity, including the substantial 2024 term-loan repayment shown in the filing.
- Whether share repurchases continue at a pace consistent with liquidity and leverage priorities.