Axalta Coating Systems Ltd. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited results compared with the three months ended March 31, 2018. Axalta manufactures and distributes coatings through Performance Coatings and Transportation Coatings. Unless stated otherwise, amounts are in U.S. dollars.
Financial results and position
- Revenue: Net sales were $1,119.3 million, down 4.5% from $1,172.0 million. Unfavorable currency translation reduced sales by 4.8%; lower volumes reduced sales by 2.1%, partly offset by 2.1% higher price/product mix and a 0.3% contribution from acquisitions.
- Profitability: Operating income was $98.6 million versus $120.0 million; operating margin was 8.8% versus 10.2%. Net income attributable to controlling interests was $43.4 million versus $69.9 million; diluted EPS was $0.18 versus $0.28. Gross margin was 32.9%, compared with 33.8%.
- Segment performance: Performance Coatings sales fell 2.4% to $713.3 million, while Adjusted EBIT rose 3.4% to $78.6 million and margin increased to 11.0% from 10.4%. Transportation Coatings sales fell 7.9% to $406.0 million; Adjusted EBIT declined 24.0% to $34.2 million and margin fell to 8.4% from 10.2%. Light vehicle sales declined 10.6%.
- Cash flow: Operating cash flow was negative $57.9 million, compared with negative $21.0 million. Working-capital uses were $205.2 million, mainly from receivables, prepaid and other assets, inventory, and lower accrued liabilities. Capital expenditures were $20.5 million; operating cash flow less capital expenditures was negative $78.4 million. Cash used in investing was $18.8 million and cash used in financing was $101.8 million, including $65.7 million of treasury-share purchases and a $26.9 million purchase of a noncontrolling interest.
- Liquidity and debt: Cash and cash equivalents were $501.1 million at quarter-end, versus $693.6 million at December 31, 2018; restricted cash was $2.8 million. Total borrowings, net of unamortized financing costs and discounts, were $3,852.5 million, versus $3,864.0 million. Revolver availability was $356.1 million, net of letters of credit. The company reported compliance with debt covenants and said forecast cash, operating cash flow and available borrowing capacity should meet needs for the next 12 months.
- Other metrics: The effective tax rate rose to 24.3% from 14.3%. Total assets were $6,673.4 million and total shareholders’ equity was $1,279.6 million at March 31, 2019.
Material changes and notable items
- Lower sales primarily reflected currency headwinds and weaker volumes, especially in Transportation Coatings; higher selling prices partly offset these pressures. Higher raw-material costs and lower fixed-cost absorption weighed on margins.
- Axalta recorded $5.2 million of loss on assets held for sale after agreeing to sell its 60% interest in a Performance Coatings joint venture. The disposal group’s assets and liabilities were classified as held for sale.
- Accelerated depreciation related to the previously announced Mechelen, Belgium facility closure was $6.1 million, recorded in cost of goods sold.
- The company repurchased 2.55 million shares for $65.8 million during the quarter, with $300.7 million remaining under its authorization. It also paid $26.9 million to acquire the remaining 24.5% interest in a previously consolidated joint venture.
- Adoption of the new lease standard on January 1, 2019 resulted in recognition of lease assets and liabilities and a $0.7 million reduction to retained earnings. The company also revised 2018 cash-flow presentation to reclassify a $26.9 million noncontrolling-interest payment from investing to financing activities; it said the correction was immaterial and did not affect earnings or balance sheets.
Outlook, risks and contingencies
The filing provides no specific numerical guidance. Management cited general economic and automotive-industry conditions, raw-material prices and supply, foreign exchange, customer and distributor concentration, competition, execution of growth initiatives, substantial indebtedness, and environmental, legal and operational exposures among the risks that could affect results. It warned that operating cash flow may be insufficient to service debt or meet other needs and that refinancing might not be available on acceptable terms, while stating that expected liquidity was adequate for the next 12 months. The company reported ordinary-course legal matters and did not expect pending lawsuits to have a material effect. Disclosure controls were concluded to be effective as of March 31, 2019.
Important facts for investors to verify
- Whether volume trends and foreign-exchange effects improve, particularly in light vehicle coatings, and whether pricing continues to offset input-cost inflation.
- Whether working-capital outflows reverse and operating cash flow recovers from the first-quarter deficit.
- Debt levels, variable-rate exposure, interest costs, covenant compliance and continued access to the revolver.
- Completion and final economics of the joint-venture divestiture, including any further related charges.
- How management’s stated 12-month liquidity expectations compare with subsequent cash generation, capital allocation and business conditions.