Axalta Coating Systems Ltd. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts are in U.S. dollars; financial figures are in millions except per-share data. Axalta manufactures and distributes coatings through Performance Coatings and Transportation Coatings.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $652.7 | $1,157.5 | $1,636.2 | $2,276.8 |
| Operating income (loss) | $(64.5) | $157.9 | $0.6 | $256.5 |
| Net income (loss) | $(83.2) | $99.9 | $(30.8) | $144.0 |
| Net income (loss) attributable to controlling interests | $(82.8) | $98.4 | $(30.6) | $141.8 |
| Diluted EPS | $(0.35) | $0.42 | $(0.13) | $0.60 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(2.5) | $68.8 |
Q2 gross margin was approximately 23.5%, versus 35.3% a year earlier; operating margin was approximately (9.9)%, versus 13.6%. For the first half, operating margin was approximately 0.0%, versus 11.3% in 2019. These are calculated from reported figures.
- Q2 sales fell 43.6% year over year; first-half sales declined 28.1%. Management attributed the decline primarily to COVID-19-driven demand and volume reductions.
- At June 30, cash and cash equivalents were $1,123.6; total borrowings, net, were $4,021.3, including $3,980.0 of long-term debt. Approximate net debt, calculated as net borrowings less cash, was $2,897.7.
- Revolver availability was $361.0, with no revolver borrowings and $39.0 of letters of credit outstanding. The company reported $10.2 of borrowings under other lines of credit.
- Total assets were $6,668.6 and shareholders’ equity was $1,258.6. Cash increased by $106.0 during the first half, including a $159.1 financing cash inflow.
Material changes and operating trends
- Both segments weakened sharply. Q2 Performance Coatings sales declined 36.3% and adjusted EBIT fell to $1.5 from $127.6. Transportation Coatings sales declined 57.4%; adjusted EBIT was a loss of $39.3, compared with income of $40.4.
- For the first half, Performance Coatings sales fell 23.1% and adjusted EBIT was $80.9 versus $206.2. Transportation Coatings sales fell 37.2% and adjusted EBIT was a loss of $13.5 versus income of $74.6.
- Higher cost of goods sold as a share of sales—76.5% in Q2 versus 64.7%—reflected lower volume and fixed-cost absorption, reduced site utilization, and higher inventory reserves, partly offset by cost reductions and lower variable input costs.
- First-half operating cash flow turned negative as working-capital uses of $98.4 offset $95.9 of cash generated before working-capital movements. Receivables and inventory reductions partly offset decreases in accounts payable and accrued liabilities.
Outlook, commentary, and risks
- Management said demand improved sequentially during Q2 as economies reopened, but warned that prolonged or renewed COVID-19 restrictions could materially harm results, liquidity, and cash flows. Manufacturing sites were open at the filing date; demand and production disruption remained uncertain.
- Management reported approximately $75 of Q2 operating-cost reductions and approximately $70 of incremental cash flow from COVID-related actions. It expected to meet full-year 2020 Axalta Way savings goals, although timing had shifted toward short-term liquidity priorities.
- A July 29, 2020 restructuring announcement, subsequent to quarter-end, projected pretax charges of approximately $40–45, including $30–35 primarily in employee severance and other cash costs; expected capital expenditures were $10–15. The plan targeted approximately 550 fewer employees, with possible additional European reductions, and approximately $50 of annual savings, mostly by the end of 2021. Actions were expected to take up to 24 months and were subject to consultations and local requirements.
- In June, the company issued $500 of 4.750% senior notes due 2027. It had also prepaid $300 of 2024 term loans in January. Required repayments include $2,870.3 in 2024, highlighting a significant maturity concentration.
- First-half results included a one-time $50.5 tax benefit from transferring intellectual property to a Swiss subsidiary and a $14.3 tax charge related to a German tax audit settlement. The company said it expected to realize the deferred tax assets associated with the transfer.
- Other notable charges included restructuring and employee-related costs, strategic-review and retention costs, and $3.2 of first-half impairment charges, primarily related to the decision to exit the Performance Coatings business in Argentina. The strategic review concluded in March, with the board choosing to continue the existing strategy.
- Customer credit-loss allowances and inventory reserves increased amid COVID-19 uncertainty. The filing also discusses ordinary-course litigation and environmental remediation; management did not expect pending lawsuits to have a material effect but noted quarterly impacts could be material.
- Management stated that available cash, operating cash flow, and borrowing capacity were expected to cover debt service, liquidity needs, and necessary capital expenditures for the next 12 months, while cautioning that prolonged disruption or limited refinancing access could constrain funding.
Key facts for investors to verify
- Whether demand recovery persisted after Q2, particularly in automotive, refinish, and industrial end-markets, and whether further shutdowns affected operations.
- Progress and realized savings from the restructuring, including actual cash charges, capital spending, workforce changes, and timing of benefits.
- Liquidity and debt-service capacity, especially the 2024 maturity concentration, leverage, covenant position, and access to refinancing.
- Collection and inventory risks, including changes in customer credit quality, doubtful-account allowances, and inventory reserves.
- Realizability of the $50.5 deferred tax benefit and developments in German tax audits and other contingencies.