08.03.17
Axalta Coating Systems announced its financial results for the second quarter ended June 30, 2017.
Second Quarter Consolidated Financial Results
Net sales of $1,088.5 million for the second quarter of 2017 increased 2.3%, including 1.5% in unfavorable foreign currency translation impact. Constant currency net sales increased 3.8% in the period, driven by 6.5% in acquisition contribution, partly offset by 0.3% lower volumes and 2.4% lower average selling prices. Slightly lower organic net sales were driven by impacts in Latin America, North America, and EMEA, while Asia Pacific continued to show growth.
Net loss attributable to Axalta was $20.8 million for the second quarter of 2017 compared with net income attributable to Axalta of $50.7 million in Q2 2016. The decrease was primarily driven by losses resulting from the deconsolidation of our Venezuelan operations as well as financing charges related to our Term Loan refinancing during the quarter. Adjusted net income of $75.4 million for the second quarter of 2017 decreased from $83.7 million in Q2 2016.
The deconsolidation of our Venezuelan operations came as a result of a lack of exchangeability between the Venezuelan bolivar and the U.S. dollar coupled with our financial outlook for the foreseeable future. This lack of exchangeability restricted our Venezuelan subsidiary's ability to pay dividends or settle intercompany obligations, which limited our ability to realize the benefits of our Venezuelan operations. In accordance with the applicable accounting guidance, we have deconsolidated our Venezuela operations and will account for our investment at cost going forward. Our cost investment is now valued at $0 at June 30, 2017 which has resulted in a pre-tax charge of $70.9 million for the three months ended June 30, 2017. We will no longer report the consolidated results of our Venezuelan operations.
Adjusted EBITDA of $227.2 million for the second quarter compared with $251.1 million in Q2 2016. This result was led by the impact of lower average pricing, and also included slightly lower volume driven by Latin America and EMEA, modest variable cost pressure and negative foreign currency translation. These factors were offset in part by savings from our operating improvement initiatives.
“Axalta continued to grow the business overall in the second quarter with net sales up 3.8% on a constant currency basis, including closing several notable acquisitions and posting organic growth in key areas of the business as planned,” said Charles W. Shaver, Axalta’s Chairman and Chief Executive Officer. “Both the Industrial and Commercial Vehicle end-markets saw solid mid-single digit organic growth through new account penetration and recovering underlying demand in key regions. Still, our overall net sales and Adjusted EBITDA results were impacted by softness this quarter, particularly in April, due to a mix of specific customer demand, some light vehicle pricing concessions and uneven demand by region in several of our end-markets,” Mr. Shaver said.
“We have assessed our performance and believe Axalta remains on sound footing to achieve our longer-term strategic and financial goals in spite of some shortfalls in the period, and we are making adjustments with the objective of better performance in the remainder of 2017,” Mr. Shaver added. “Key steps are being taken moving forward to implement price increases to offset key input inflation and accelerate cost actions to help deliver our revised 2017 profit outlook.”
“We are encouraged that the broader demand outlook remains stable across our businesses. We see supportive end-market conditions in Refinish, stable overall automotive production for Light Vehicle in spite of some expected pullback in North America this year, and recovering conditions across Commercial Vehicle markets. Our focus remains squarely on managing our customer exposure and adding new accounts, working to offset cost inflation pressures while executing on Axalta Way productivity, and continuing to integrate our recently closed acquisitions. We believe we are set up to show stronger performance from the combination of these efforts in the second half of the year,” Mr. Shaver noted.
Performance Coatings Results
Performance Coatings net sales were $662.9 million in Q2 2017, an increase of 5.1% year-over-year including a 1.8% unfavorable foreign currency translation impact. Constant currency net sales increased 6.9%, driven by a 10.0% acquisition contribution, offset by a 1.9% decrease in volumes, 1.2% lower average selling prices, and 1.8% unfavorable foreign currency translation impact. Net sales in our Refinish end-market decreased 5.8% in Q2 2017 (decreased 4.3% excluding foreign currency translation), led by the impact of lower volumes from Latin America and EMEA as well as pricing pressure from selling channel consolidation in North America. Industrial end-market net sales increased 31.9% in the second quarter (increased 34.4% excluding foreign currency translation and mid-single digits before acquisition contribution).
The Performance Coatings segment generated Adjusted EBITDA of $146.8 million in the second quarter, a 5.8% year-over-year decrease. Negative impact from organic volumes and pricing, coupled with headwinds from variable costs particularly in certain Industrial end-markets, and modest foreign exchange impacts, were partially offset by acquisition volume contribution. Segment Adjusted EBITDA margin of 22.1% in Q2 2017 reflected a 260 basis point decrease compared to the corresponding prior year quarter.
Transportation Coatings Results
The Transportation Coatings segment produced net sales of $425.6 million in the second quarter, a decrease of 1.7% versus second quarter 2016. Constant currency net sales were down 0.7% year-over-year, driven by a 2.0% increase in volumes and 1.4% acquisition contribution, offset by a 1.0% unfavorable foreign currency translation impact and by 4.1% lower average selling prices.
Light Vehicle net sales decreased 2.9% year-over-year (decreased 2.1% excluding foreign currency translation and including low single digit acquisition contribution), with modest growth in most regions offset by pricing concessions across all regions and weaker net sales from EMEA this quarter due to Axalta’s specific customer mix in the region. Commercial Vehicle net sales increased 3.0% versus last year (increased 4.3% excluding foreign currency translation), driven by stabilized heavy truck production in North America as well as more stable demand from non-truck customers served.
The Transportation Coatings segment generated Adjusted EBITDA of $80.4 million in Q2 2017, a decrease of 15.6% compared to the second quarter of 2016, with positive organic volume contribution offset by negative impact from lower selling prices at targeted Light Vehicle customers and moderate ongoing operating expense increases to support planned growth. Segment Adjusted EBITDA margin of 18.9% in Q2 2017 compared with 22.0% in the prior year quarter.
Balance Sheet and Cash Flow Highlights
We ended the quarter with cash and cash equivalents of $482.1 million. Our net debt was $3.4 billion as of June 30, 2017. This compared to $2.9 billion as of the end of the first quarter, with incremental borrowings of approximately $460 million in USD Term Loans used to fund the three acquisitions that closed in the second quarter. In connection with the incremental Term Loan borrowings, we also refinanced the existing USD Term Loans, with resulting annualized savings of approximately $7.7 million on the new borrowing cost of LIBOR plus 200 basis points, a 50 basis point improvement while also extending maturities.
Second quarter operating cash flow was $98.8 million versus $199.3 million in the corresponding quarter of 2016, reflecting higher working capital use due mainly to timing within the quarter. Free cash flow, calculated as operating cash flow less capital expenditures, totaled $73.7 million based on capital expenditures of $25.1 million.
2017 Guidance Update
“In spite of uneven demand and some pricing concessions with certain customers during second quarter, we are working actively to address sources of pressure and deliver strong financial results. As some shortfalls in second quarter are not expected to be recovered, we are adjusting our financial guidance outlook, which also incorporates some benefit from our recent acquisitions,” said Robert W. Bryant, Axalta’s Executive Vice President and Chief Financial Officer. “Our existing business restructuring initiatives have been coupled with incremental pricing and cost actions to adjust for changes in certain customer requirements over the last quarter. We are encouraged that the business climate remains generally stable and believe that broadly supportive end-customer demand, together with our specific actions, will help us to deliver our revised full year targets.”
We are updating our outlook for the full year 2017 as follows, inclusive of the recently closed acquisitions:
Net sales growth of 7-8% as-reported; 8-9% ex-FX, including acquisition contribution of 6-7%
Adjusted EBITDA of $940-970 million
Interest expense of ~$150 million
Income tax rate, as adjusted, of 22-24%
Free cash flow of $440-480 million
Capital expenditures of ~$130 million
Depreciation and amortization of ~$350 million
Diluted shares outstanding of 246-249 million
2016 Adoption of Share-based Compensation Expense Accounting Standard
During the three months ended December 31, 2016, Axalta adopted ASU 2016-09, which addresses, among other items, the accounting for income taxes, calculations on diluted weighted average shares outstanding, and cash flow presentation relating to share-based compensation. The adoption resulted in the recasting of previously issued quarterly financial statements, including an increase to net income attributable to Axalta by $3.2 million and $4.4 million for the three and six months ended June 30, 2016. The impact of adoption also increased Axalta's dilutive shares by 1.9 million and 1.8 million shares for the three and six months ended June 30, 2016.
Revision of Prior Year Financial Statements
During the three months ended June 30, 2017, as part of Axalta’s efforts to analyze the impact of the 2018 U.S. GAAP accounting adoption of the new Revenue Recognition standard, Axalta identified and corrected errors that affected previously-issued consolidated financial statements. Axalta determined that these corrections were immaterial to the previously-issued financial statements; however, given the significance of the cumulative adjustments on the financial results for the three and six months ended June 30, 2017, we have revised certain amounts in the condensed consolidated financial statements, as discussed further below.
Axalta recognizes revenue from the sale of products to its customers when risk of loss and ownership of the product transfers to the customer. Ownership transfers either upon shipment of the product or when the product is delivered to the customer. In regards to Axalta’s Refinish end-market, risk of loss passes upon the sale to its distribution customers. Subsequent to the sale to distribution customers, when distribution customers sell the products to collision repair body shops, additional rebates or further pricing concessions can be given. Axalta previously recorded these additional rebates and pricing concessions at the time of sale from the distributor to the collision repair body shops. Axalta has concluded those rebates and pricing concessions should have been estimated and recorded as a reduction to net sales upon the sale to our distribution customers.
Axalta has corrected the errors in the timing of revenue recognition by estimating those additional rebates and pricing concessions at the time of sale to distribution customers and reducing net sales by $1.5 million ($1.0 million after tax) and increasing net sales by $0.1 million ($0.0 million after tax) for the three and six months ended June 30, 2016, respectively. The cumulative impacts on the condensed consolidated balance sheet at December 31, 2016 were increases of $22.4 million, $3.1 million, $8.3 million and $11.0 million to other accrued liabilities, goodwill, other assets and accumulated deficit, respectively. These corrections did not have a material impact on the 2017 condensed consolidated financial statements.
Second Quarter Consolidated Financial Results
Net sales of $1,088.5 million for the second quarter of 2017 increased 2.3%, including 1.5% in unfavorable foreign currency translation impact. Constant currency net sales increased 3.8% in the period, driven by 6.5% in acquisition contribution, partly offset by 0.3% lower volumes and 2.4% lower average selling prices. Slightly lower organic net sales were driven by impacts in Latin America, North America, and EMEA, while Asia Pacific continued to show growth.
Net loss attributable to Axalta was $20.8 million for the second quarter of 2017 compared with net income attributable to Axalta of $50.7 million in Q2 2016. The decrease was primarily driven by losses resulting from the deconsolidation of our Venezuelan operations as well as financing charges related to our Term Loan refinancing during the quarter. Adjusted net income of $75.4 million for the second quarter of 2017 decreased from $83.7 million in Q2 2016.
The deconsolidation of our Venezuelan operations came as a result of a lack of exchangeability between the Venezuelan bolivar and the U.S. dollar coupled with our financial outlook for the foreseeable future. This lack of exchangeability restricted our Venezuelan subsidiary's ability to pay dividends or settle intercompany obligations, which limited our ability to realize the benefits of our Venezuelan operations. In accordance with the applicable accounting guidance, we have deconsolidated our Venezuela operations and will account for our investment at cost going forward. Our cost investment is now valued at $0 at June 30, 2017 which has resulted in a pre-tax charge of $70.9 million for the three months ended June 30, 2017. We will no longer report the consolidated results of our Venezuelan operations.
Adjusted EBITDA of $227.2 million for the second quarter compared with $251.1 million in Q2 2016. This result was led by the impact of lower average pricing, and also included slightly lower volume driven by Latin America and EMEA, modest variable cost pressure and negative foreign currency translation. These factors were offset in part by savings from our operating improvement initiatives.
“Axalta continued to grow the business overall in the second quarter with net sales up 3.8% on a constant currency basis, including closing several notable acquisitions and posting organic growth in key areas of the business as planned,” said Charles W. Shaver, Axalta’s Chairman and Chief Executive Officer. “Both the Industrial and Commercial Vehicle end-markets saw solid mid-single digit organic growth through new account penetration and recovering underlying demand in key regions. Still, our overall net sales and Adjusted EBITDA results were impacted by softness this quarter, particularly in April, due to a mix of specific customer demand, some light vehicle pricing concessions and uneven demand by region in several of our end-markets,” Mr. Shaver said.
“We have assessed our performance and believe Axalta remains on sound footing to achieve our longer-term strategic and financial goals in spite of some shortfalls in the period, and we are making adjustments with the objective of better performance in the remainder of 2017,” Mr. Shaver added. “Key steps are being taken moving forward to implement price increases to offset key input inflation and accelerate cost actions to help deliver our revised 2017 profit outlook.”
“We are encouraged that the broader demand outlook remains stable across our businesses. We see supportive end-market conditions in Refinish, stable overall automotive production for Light Vehicle in spite of some expected pullback in North America this year, and recovering conditions across Commercial Vehicle markets. Our focus remains squarely on managing our customer exposure and adding new accounts, working to offset cost inflation pressures while executing on Axalta Way productivity, and continuing to integrate our recently closed acquisitions. We believe we are set up to show stronger performance from the combination of these efforts in the second half of the year,” Mr. Shaver noted.
Performance Coatings Results
Performance Coatings net sales were $662.9 million in Q2 2017, an increase of 5.1% year-over-year including a 1.8% unfavorable foreign currency translation impact. Constant currency net sales increased 6.9%, driven by a 10.0% acquisition contribution, offset by a 1.9% decrease in volumes, 1.2% lower average selling prices, and 1.8% unfavorable foreign currency translation impact. Net sales in our Refinish end-market decreased 5.8% in Q2 2017 (decreased 4.3% excluding foreign currency translation), led by the impact of lower volumes from Latin America and EMEA as well as pricing pressure from selling channel consolidation in North America. Industrial end-market net sales increased 31.9% in the second quarter (increased 34.4% excluding foreign currency translation and mid-single digits before acquisition contribution).
The Performance Coatings segment generated Adjusted EBITDA of $146.8 million in the second quarter, a 5.8% year-over-year decrease. Negative impact from organic volumes and pricing, coupled with headwinds from variable costs particularly in certain Industrial end-markets, and modest foreign exchange impacts, were partially offset by acquisition volume contribution. Segment Adjusted EBITDA margin of 22.1% in Q2 2017 reflected a 260 basis point decrease compared to the corresponding prior year quarter.
Transportation Coatings Results
The Transportation Coatings segment produced net sales of $425.6 million in the second quarter, a decrease of 1.7% versus second quarter 2016. Constant currency net sales were down 0.7% year-over-year, driven by a 2.0% increase in volumes and 1.4% acquisition contribution, offset by a 1.0% unfavorable foreign currency translation impact and by 4.1% lower average selling prices.
Light Vehicle net sales decreased 2.9% year-over-year (decreased 2.1% excluding foreign currency translation and including low single digit acquisition contribution), with modest growth in most regions offset by pricing concessions across all regions and weaker net sales from EMEA this quarter due to Axalta’s specific customer mix in the region. Commercial Vehicle net sales increased 3.0% versus last year (increased 4.3% excluding foreign currency translation), driven by stabilized heavy truck production in North America as well as more stable demand from non-truck customers served.
The Transportation Coatings segment generated Adjusted EBITDA of $80.4 million in Q2 2017, a decrease of 15.6% compared to the second quarter of 2016, with positive organic volume contribution offset by negative impact from lower selling prices at targeted Light Vehicle customers and moderate ongoing operating expense increases to support planned growth. Segment Adjusted EBITDA margin of 18.9% in Q2 2017 compared with 22.0% in the prior year quarter.
Balance Sheet and Cash Flow Highlights
We ended the quarter with cash and cash equivalents of $482.1 million. Our net debt was $3.4 billion as of June 30, 2017. This compared to $2.9 billion as of the end of the first quarter, with incremental borrowings of approximately $460 million in USD Term Loans used to fund the three acquisitions that closed in the second quarter. In connection with the incremental Term Loan borrowings, we also refinanced the existing USD Term Loans, with resulting annualized savings of approximately $7.7 million on the new borrowing cost of LIBOR plus 200 basis points, a 50 basis point improvement while also extending maturities.
Second quarter operating cash flow was $98.8 million versus $199.3 million in the corresponding quarter of 2016, reflecting higher working capital use due mainly to timing within the quarter. Free cash flow, calculated as operating cash flow less capital expenditures, totaled $73.7 million based on capital expenditures of $25.1 million.
2017 Guidance Update
“In spite of uneven demand and some pricing concessions with certain customers during second quarter, we are working actively to address sources of pressure and deliver strong financial results. As some shortfalls in second quarter are not expected to be recovered, we are adjusting our financial guidance outlook, which also incorporates some benefit from our recent acquisitions,” said Robert W. Bryant, Axalta’s Executive Vice President and Chief Financial Officer. “Our existing business restructuring initiatives have been coupled with incremental pricing and cost actions to adjust for changes in certain customer requirements over the last quarter. We are encouraged that the business climate remains generally stable and believe that broadly supportive end-customer demand, together with our specific actions, will help us to deliver our revised full year targets.”
We are updating our outlook for the full year 2017 as follows, inclusive of the recently closed acquisitions:
Net sales growth of 7-8% as-reported; 8-9% ex-FX, including acquisition contribution of 6-7%
Adjusted EBITDA of $940-970 million
Interest expense of ~$150 million
Income tax rate, as adjusted, of 22-24%
Free cash flow of $440-480 million
Capital expenditures of ~$130 million
Depreciation and amortization of ~$350 million
Diluted shares outstanding of 246-249 million
2016 Adoption of Share-based Compensation Expense Accounting Standard
During the three months ended December 31, 2016, Axalta adopted ASU 2016-09, which addresses, among other items, the accounting for income taxes, calculations on diluted weighted average shares outstanding, and cash flow presentation relating to share-based compensation. The adoption resulted in the recasting of previously issued quarterly financial statements, including an increase to net income attributable to Axalta by $3.2 million and $4.4 million for the three and six months ended June 30, 2016. The impact of adoption also increased Axalta's dilutive shares by 1.9 million and 1.8 million shares for the three and six months ended June 30, 2016.
Revision of Prior Year Financial Statements
During the three months ended June 30, 2017, as part of Axalta’s efforts to analyze the impact of the 2018 U.S. GAAP accounting adoption of the new Revenue Recognition standard, Axalta identified and corrected errors that affected previously-issued consolidated financial statements. Axalta determined that these corrections were immaterial to the previously-issued financial statements; however, given the significance of the cumulative adjustments on the financial results for the three and six months ended June 30, 2017, we have revised certain amounts in the condensed consolidated financial statements, as discussed further below.
Axalta recognizes revenue from the sale of products to its customers when risk of loss and ownership of the product transfers to the customer. Ownership transfers either upon shipment of the product or when the product is delivered to the customer. In regards to Axalta’s Refinish end-market, risk of loss passes upon the sale to its distribution customers. Subsequent to the sale to distribution customers, when distribution customers sell the products to collision repair body shops, additional rebates or further pricing concessions can be given. Axalta previously recorded these additional rebates and pricing concessions at the time of sale from the distributor to the collision repair body shops. Axalta has concluded those rebates and pricing concessions should have been estimated and recorded as a reduction to net sales upon the sale to our distribution customers.
Axalta has corrected the errors in the timing of revenue recognition by estimating those additional rebates and pricing concessions at the time of sale to distribution customers and reducing net sales by $1.5 million ($1.0 million after tax) and increasing net sales by $0.1 million ($0.0 million after tax) for the three and six months ended June 30, 2016, respectively. The cumulative impacts on the condensed consolidated balance sheet at December 31, 2016 were increases of $22.4 million, $3.1 million, $8.3 million and $11.0 million to other accrued liabilities, goodwill, other assets and accumulated deficit, respectively. These corrections did not have a material impact on the 2017 condensed consolidated financial statements.
