Axalta Coating Systems Ltd. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with the three months ended March 31, 2019 unless otherwise noted. Amounts are in U.S. dollars. Axalta manufactures and sells coatings through Performance Coatings and Transportation Coatings segments.
Financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $983.5 million | $1,119.3 million | Down 12.1% |
| Income from operations | $65.1 million | $98.6 million | Down 34.0% |
| Operating margin | 6.6% | 8.8% | Down 2.2 percentage points |
| Net income attributable to controlling interests | $52.2 million | $43.4 million | Up $8.8 million |
| Diluted EPS | $0.22 | $0.18 | Up $0.04 |
| Cash used for operating activities | $0.8 million | $57.9 million | Improved by $57.1 million |
| Capital expenditures | $22.7 million | $20.5 million | Up $2.2 million |
Gross profit was $336.7 million, or 34.2% of sales, compared with $368.0 million, or 32.9%, a year earlier. Interest expense, net, declined to $36.5 million from $41.3 million. The 2020 tax benefit was $24.6 million, versus a tax provision of $14.2 million in 2019; net income therefore benefited from significant tax items described below.
Cash and cash equivalents were $657.2 million at March 31, down from $1,017.5 million at December 31, 2019. Total borrowings were $3,519.7 million, down from $3,834.1 million; cash-adjusted borrowings were approximately $2.86 billion. Long-term borrowings were $3,479.5 million. Revolver availability was $361.3 million, with no revolver borrowings. Cash used in investing activities was $18.6 million and cash used in financing activities was $321.3 million, chiefly reflecting a voluntary $300 million term-loan prepayment. Working-capital movements offset most cash generated before working-capital changes.
Segment performance and changes
- Performance Coatings: Sales fell 9.2% to $647.7 million. Segment Adjusted EBIT rose 1.0% to $79.4 million, and margin increased to 12.3% from 11.0%. Price increases, lower input costs, and cost savings partly offset weaker volumes and currency effects.
- Transportation Coatings: Sales fell 17.3% to $335.8 million. Segment Adjusted EBIT declined 24.6% to $25.8 million, and margin decreased to 7.7% from 8.4%, primarily due to lower volumes and unfavorable currency translation.
- Consolidated sales declined mainly from lower volumes (reported volume effect of 10.3%); unfavorable currency translation reduced sales by 2.1%, and portfolio changes by 1.5%. Higher price/product mix added 1.8%.
- Other operating charges rose to $31.6 million from $7.1 million, including $19.5 million of termination and employee-related costs and $11.5 million tied to the strategic review and retention awards.
Outlook, risks, and unusual items
- COVID-19: Management said the pandemic materially reduced demand, initially most notably in China and later across other regions. Some facilities were temporarily shut or operated at reduced production; management reported no significant supply-chain disruption to date. The duration and financial impact were uncertain and could materially adversely affect results, liquidity, and cash flows.
- Management expected its COVID-19 response to generate more than $225 million of 2020 cash flow: over $100 million from cost savings and over $125 million principally from reduced capital spending and deferred payments. It said it remained committed to its full-year Axalta Way savings goals, though timing could shift as liquidity became a priority. No sales or earnings guidance was provided in the supplied filing text.
- Management stated that cash, operating cash flow, and available borrowing capacity were expected to be adequate for debt service, liquidity needs, and necessary capital expenditures over the next 12 months. It also cautioned that prolonged disruption could materially affect performance and liquidity. The company is highly leveraged.
- The effective tax rate was negative 88.5%. A $50.5 million deferred tax benefit arose from transferring certain intellectual property to a Swiss subsidiary; a $14.3 million tax charge related to the German 2010–2013 tax audit. The company disclosed a newly identified potential interpretation of non-U.S. tax law whose adverse impact, if any, was not yet estimable and could be material.
- Axalta prepaid $300 million of 2024 Dollar Term Loans in January and recorded debt extinguishment/refinancing costs. AOCI fell to a loss of $513.9 million from $395.5 million, largely reflecting foreign-currency translation and derivative losses; comprehensive loss attributable to controlling interests was $66.2 million.
- Ordinary-course litigation and environmental matters remained pending. Management did not expect currently pending lawsuits to have a material effect overall, but noted that contingencies could materially affect a particular quarter.
Important facts for investors to verify
- COVID-19’s subsequent effects on end-market volumes, facility operations, customer credit, and the timing and realization of the stated 2020 cash-flow and savings targets.
- The assumptions and recoverability supporting the $50.5 million deferred tax asset, and developments in the German tax matters and the newly identified tax-law issue.
- Liquidity, covenant headroom, refinancing exposure, and debt maturities, including the substantial scheduled 2024 repayments.
- Whether working-capital cash use and lower demand persist, and how capital spending, customer incentives, and deferred payments evolve.
- Potential effects of currency and derivative movements, restructuring charges, environmental obligations, and other legal contingencies.