01.30.20
Axalta Coating Systems Ltd. announced its financial results for the fourth quarter and full year ended Dec. 31, 2019.
Fourth Quarter Consolidated Financial Results
Net sales of $1,098.4 million for the fourth quarter decreased 5.8 percent, including 1.3 percent negative foreign currency translation impact and a two percent impact from the sale of a consolidated Joint Venture interest in Q2 2019.
Constant currency organic net sales decreased 2.5 percent in the period, with 2.5 percent higher average selling prices and product mix with contribution from both segments, offset by a 5 percent volume decrease. Net sales reflected volume weakness in both Performance and Transportation Coatings, although the Refinish end-market remained a stable offset, with net sales growth of 3.5 percent ex-FX.
Income from operations decreased to $108.7 million for the fourth quarter from $127.8 million in Q4 2018, driven principally by lower volume, headwind from incentive compensation expense, costs associated with the on-going strategic review as well as modest ongoing foreign exchange headwinds and charges of $17.7 million primarily related to the abandonment of engineering work for aspects of the company’s China footprint project which has been adjusted due to evolving market conditions. This was partially offset primarily by improvement in overall price and product mix in the period, as well as by contribution from reduced variable costs.
Adjusted EBIT increased to $173.5 million for the fourth quarter from $170.8 million in Q4 2018, driven principally by improvement in overall price and product mix in the period, coupled with contribution from reduced variable costs and slightly lower operating expenditures, inclusive of a headwind from incentive compensation expense. This was offset in part by lower volume as well as modest ongoing foreign exchange headwinds. Adjusted EBIT margin increased 110 basis points for the quarter to 15.8 percent from the prior year period.
"Axalta finished 2019 with strong operating execution and financial performance, capping a solid year overall despite a backdrop of uneven demand in many markets we serve,” said Robert W. Bryant, Axalta CEO and president. “In the fourth quarter, we generated record free cash flow, expanded operating margins, and continued to strengthen our balance sheet. Despite some incremental volume headwinds during the fourth quarter, we mostly offset this with progress in price and mix enhancement as well as with aggressive cost control. Our solid quarterly results reflected our keen focus on execution and success in commercializing new products across multiple business lines."
Full Year Consolidated Financial Results
Net sales of $4,482.2 million for 2019 decreased 4.6 percent, including three percent negative foreign currency translation impact and a 1.1 percent impact from the sale of a JV interest in Q2 2019. Constant currency organic net sales decreased 0.5 percent in the period, driven by 3.7 percent lower volume from both segments, partially offset by 3.2 percent higher average selling prices and product mix with contribution from both segments. The Refinish end-market remained a stable offset with net sales growth of 3.3 percent ex-FX.
Income from operations increased 10.4 percent to $488.2 million for 2019 from $442.1 million in 2018, driven principally by an improvement in overall price and product mix in the period, lower year-over-year expense for employee-related severance, and lower step-up depreciation and amortization expense. This was partly offset by lower volume, increased variable costs and modest ongoing foreign exchange headwinds, as well as modestly increased operating expense inclusive of lower net stock-based and incentive compensation expense. Income from operations also includes costs associated with the ongoing strategic review and $17.7 million of charges primarily related to the China footprint project.
Adjusted EBIT increased 4.7 percent to $706 million for 2019 from $674.5 million in 2018, driven principally by improvement in overall price and product mix in the period and somewhat lower operating expenditures inclusive of lower net stock-based and incentive compensation expense. This was offset in part by lower volumes, increased variable costs as well as ongoing foreign exchange headwinds. Adjusted EBIT margin for the year increased 140 basis points to 15.8 percent.
"In 2019, Axalta made great progress; we introduced over 250 new products, and we continued to offset substantial input cost inflation from the last several years with necessary pricing actions and ongoing productivity enhancement,” Bryant said. “This enabled us to hit many of our primary goals and targets for the year, including noticeably exceeding our free cash flow goal, posting expanded operating margins despite slightly lower volumes, and also meeting objectives for both Adjusted EBIT and Adjusted Diluted EPS. We also finished the year with notably lower balance sheet net leverage at 3x.
"We continue to see mixed demand across our end-markets for 2020, but still expect to produce ongoing earnings and cash flow growth, coupled with an opportunity for demand recovery if trade friction eases. Performance Coatings should benefit from the anchor of stable Refinish demand, and we target innovation-led growth in our Industrial end-market,” Bryant continued.
“Transportation Coatings faces some known headwinds in each end-market but we see the potential for stabilizing demand for global Light Vehicle as encouraging. We expect ongoing market outgrowth through product innovation and our differentiated services offerings, and remain focused on driving unique value for our customers every day,” Bryant added. “Our key goals for 2020 include continued new business wins in core markets, execution to ongoing margin recovery, and optimization of our financial returns through capital allocation discipline and strong free cash flow generation. Axalta's review of strategic alternatives is also ongoing. We do not have news on that front to share with you, but we will provide updates as warranted."
Performance Coatings Fourth Quarter Results
Performance Coatings net sales were $729.7 million in Q4 2019, a decrease of four percent year-over-year including 1.2 percent unfavorable foreign currency impact and a 3.1 percent impact from the sale of a consolidated JV interest in Q2 2019. Constant currency organic net sales increased 0.3 percent, driven by 3 percent higher average selling price and mix benefits, offset in part by a volume decrease of 2.7 percent.
Net sales in the Refinish end-market increased 2.3 percent in Q4 2019 (increased 3.5 percent excluding foreign currency translation), driven by price and mix benefits from all regions and essentially flat volumes overall, though the North America region reported renewed volume growth. Industrial end-market net sales decreased 13.3 percent in the fourth quarter (decreased 12.2 percent excluding foreign currency translation), including a 7.7 percent impact from the consolidated JV interest sale. Industrial organic volume decreased in the mid-single digits due to macroeconomic demand softness primarily in EMEA and the Americas, offset by low single digit increases in average price and product mix.
The Performance Coatings segment generated Adjusted EBIT of $118 million in the fourth quarter, a 6.8 percent year-over-year increase, driven by positive price and mix contribution and slightly lower variable costs, offset partly by headwinds from lower volume and to a lesser extent by foreign exchange and operating cost impacts. Adjusted EBIT margin of 16.2 percent in Q4 2019 reflected a 170 basis point increase compared to the corresponding prior year quarter.
Transportation Coatings Fourth Quarter Results
The Transportation Coatings segment reported net sales of $368.7 million in Q4 2019, a decrease of 9.2 percent versus Q4 2018, including a 1.5 percent impact from foreign exchange translation. Constant currency net sales decreased 7.7 percent year-over-year, driven by a 9.2 percent decrease in volumes, offset partly by 1.5 percent higher average selling price and mix benefits.
Light Vehicle net sales decreased 8.3 percent year-over-year (decreased 6.7 percent excluding foreign currency translation), impacted by lower sales across all regions consistent with global automotive production trends and including an impact from a customer strike in North America in 2H 2019. Commercial Vehicle net sales decreased 12.3 percent versus Q4 2018 (decreased 11.2 percent excluding foreign currency translation), driven by lower production rates across all regions for trucks as well as certain non-truck product categories.
The Transportation Coatings segment generated Adjusted EBIT of $25.6 million in Q4 2019, a decrease of 1.5 percent compared to Q4 2018, with lower volume essentially offset by price and product mix benefit, coupled with moderate variable cost and operating expense tailwinds. Segment Adjusted EBIT margin expansion of 50 basis points to 6.9 percent was driven by price realization, partially offset by decreased volumes.
Balance Sheet and Cash Flow Highlights
Axalta ended the year with cash and cash equivalents of $1,017.5 million. Its net debt was $2.8 billion as of year-end, compared to $3.2 billion as of Dec. 31, 2018, driven by higher cash balances. Net debt to Adjusted EBITDA was 3x at year-end versus 3.4x as of Dec. 31, 2018.
There were no share repurchases during the fourth quarter. Subsequent to year-end, Axalta prepaid $300 million of its Term Loan debt utilizing excess cash on its balance sheet.
Cash flow from operations was $283.3 million in Q4 2019 compared to $250.6 million in Q4 2018. Free cash flow totaled $248.4 million after capital expenditures of $38.6 million, an improvement versus $220.2 million after capital expenditures of $33.9 million in the prior year fourth quarter. The increase was driven primarily by improved working capital outcomes for the period compared to the prior year, and includes approximately $26 million in cash payments associated with employee retention as well as advisory fees associated with the ongoing review of strategic alternatives.
"In 2019, Axalta continued to execute well operationally, and we met key financial objectives for both earnings and cash flow targets, while also improving the balance sheet. This was all accomplished within a challenging backdrop for general industrial and automotive-related markets," said Sean M. Lannon, Axalta's senior VP and CFO. "Strong cash flow generation, reflecting solid operating and working capital execution, enabled us to finish the year with considerably reduced net leverage despite share repurchases completed in the first half. We also increased profit margins for the year despite volume headwinds as we continued to prioritize price recapture in the face of input inflation from the past several years. For 2020, we expect to maintain this operating and financial discipline and target modest potential margin upside in a continued subdued volume environment. In conjunction with our productivity focus, this should enable an avenue for margin expansion in the coming year, as well as strong free cash flow."
2020 Guidance
Fourth Quarter Consolidated Financial Results
Net sales of $1,098.4 million for the fourth quarter decreased 5.8 percent, including 1.3 percent negative foreign currency translation impact and a two percent impact from the sale of a consolidated Joint Venture interest in Q2 2019.
Constant currency organic net sales decreased 2.5 percent in the period, with 2.5 percent higher average selling prices and product mix with contribution from both segments, offset by a 5 percent volume decrease. Net sales reflected volume weakness in both Performance and Transportation Coatings, although the Refinish end-market remained a stable offset, with net sales growth of 3.5 percent ex-FX.
Income from operations decreased to $108.7 million for the fourth quarter from $127.8 million in Q4 2018, driven principally by lower volume, headwind from incentive compensation expense, costs associated with the on-going strategic review as well as modest ongoing foreign exchange headwinds and charges of $17.7 million primarily related to the abandonment of engineering work for aspects of the company’s China footprint project which has been adjusted due to evolving market conditions. This was partially offset primarily by improvement in overall price and product mix in the period, as well as by contribution from reduced variable costs.
Adjusted EBIT increased to $173.5 million for the fourth quarter from $170.8 million in Q4 2018, driven principally by improvement in overall price and product mix in the period, coupled with contribution from reduced variable costs and slightly lower operating expenditures, inclusive of a headwind from incentive compensation expense. This was offset in part by lower volume as well as modest ongoing foreign exchange headwinds. Adjusted EBIT margin increased 110 basis points for the quarter to 15.8 percent from the prior year period.
"Axalta finished 2019 with strong operating execution and financial performance, capping a solid year overall despite a backdrop of uneven demand in many markets we serve,” said Robert W. Bryant, Axalta CEO and president. “In the fourth quarter, we generated record free cash flow, expanded operating margins, and continued to strengthen our balance sheet. Despite some incremental volume headwinds during the fourth quarter, we mostly offset this with progress in price and mix enhancement as well as with aggressive cost control. Our solid quarterly results reflected our keen focus on execution and success in commercializing new products across multiple business lines."
Full Year Consolidated Financial Results
Net sales of $4,482.2 million for 2019 decreased 4.6 percent, including three percent negative foreign currency translation impact and a 1.1 percent impact from the sale of a JV interest in Q2 2019. Constant currency organic net sales decreased 0.5 percent in the period, driven by 3.7 percent lower volume from both segments, partially offset by 3.2 percent higher average selling prices and product mix with contribution from both segments. The Refinish end-market remained a stable offset with net sales growth of 3.3 percent ex-FX.
Income from operations increased 10.4 percent to $488.2 million for 2019 from $442.1 million in 2018, driven principally by an improvement in overall price and product mix in the period, lower year-over-year expense for employee-related severance, and lower step-up depreciation and amortization expense. This was partly offset by lower volume, increased variable costs and modest ongoing foreign exchange headwinds, as well as modestly increased operating expense inclusive of lower net stock-based and incentive compensation expense. Income from operations also includes costs associated with the ongoing strategic review and $17.7 million of charges primarily related to the China footprint project.
Adjusted EBIT increased 4.7 percent to $706 million for 2019 from $674.5 million in 2018, driven principally by improvement in overall price and product mix in the period and somewhat lower operating expenditures inclusive of lower net stock-based and incentive compensation expense. This was offset in part by lower volumes, increased variable costs as well as ongoing foreign exchange headwinds. Adjusted EBIT margin for the year increased 140 basis points to 15.8 percent.
"In 2019, Axalta made great progress; we introduced over 250 new products, and we continued to offset substantial input cost inflation from the last several years with necessary pricing actions and ongoing productivity enhancement,” Bryant said. “This enabled us to hit many of our primary goals and targets for the year, including noticeably exceeding our free cash flow goal, posting expanded operating margins despite slightly lower volumes, and also meeting objectives for both Adjusted EBIT and Adjusted Diluted EPS. We also finished the year with notably lower balance sheet net leverage at 3x.
"We continue to see mixed demand across our end-markets for 2020, but still expect to produce ongoing earnings and cash flow growth, coupled with an opportunity for demand recovery if trade friction eases. Performance Coatings should benefit from the anchor of stable Refinish demand, and we target innovation-led growth in our Industrial end-market,” Bryant continued.
“Transportation Coatings faces some known headwinds in each end-market but we see the potential for stabilizing demand for global Light Vehicle as encouraging. We expect ongoing market outgrowth through product innovation and our differentiated services offerings, and remain focused on driving unique value for our customers every day,” Bryant added. “Our key goals for 2020 include continued new business wins in core markets, execution to ongoing margin recovery, and optimization of our financial returns through capital allocation discipline and strong free cash flow generation. Axalta's review of strategic alternatives is also ongoing. We do not have news on that front to share with you, but we will provide updates as warranted."
Performance Coatings Fourth Quarter Results
Performance Coatings net sales were $729.7 million in Q4 2019, a decrease of four percent year-over-year including 1.2 percent unfavorable foreign currency impact and a 3.1 percent impact from the sale of a consolidated JV interest in Q2 2019. Constant currency organic net sales increased 0.3 percent, driven by 3 percent higher average selling price and mix benefits, offset in part by a volume decrease of 2.7 percent.
Net sales in the Refinish end-market increased 2.3 percent in Q4 2019 (increased 3.5 percent excluding foreign currency translation), driven by price and mix benefits from all regions and essentially flat volumes overall, though the North America region reported renewed volume growth. Industrial end-market net sales decreased 13.3 percent in the fourth quarter (decreased 12.2 percent excluding foreign currency translation), including a 7.7 percent impact from the consolidated JV interest sale. Industrial organic volume decreased in the mid-single digits due to macroeconomic demand softness primarily in EMEA and the Americas, offset by low single digit increases in average price and product mix.
The Performance Coatings segment generated Adjusted EBIT of $118 million in the fourth quarter, a 6.8 percent year-over-year increase, driven by positive price and mix contribution and slightly lower variable costs, offset partly by headwinds from lower volume and to a lesser extent by foreign exchange and operating cost impacts. Adjusted EBIT margin of 16.2 percent in Q4 2019 reflected a 170 basis point increase compared to the corresponding prior year quarter.
Transportation Coatings Fourth Quarter Results
The Transportation Coatings segment reported net sales of $368.7 million in Q4 2019, a decrease of 9.2 percent versus Q4 2018, including a 1.5 percent impact from foreign exchange translation. Constant currency net sales decreased 7.7 percent year-over-year, driven by a 9.2 percent decrease in volumes, offset partly by 1.5 percent higher average selling price and mix benefits.
Light Vehicle net sales decreased 8.3 percent year-over-year (decreased 6.7 percent excluding foreign currency translation), impacted by lower sales across all regions consistent with global automotive production trends and including an impact from a customer strike in North America in 2H 2019. Commercial Vehicle net sales decreased 12.3 percent versus Q4 2018 (decreased 11.2 percent excluding foreign currency translation), driven by lower production rates across all regions for trucks as well as certain non-truck product categories.
The Transportation Coatings segment generated Adjusted EBIT of $25.6 million in Q4 2019, a decrease of 1.5 percent compared to Q4 2018, with lower volume essentially offset by price and product mix benefit, coupled with moderate variable cost and operating expense tailwinds. Segment Adjusted EBIT margin expansion of 50 basis points to 6.9 percent was driven by price realization, partially offset by decreased volumes.
Balance Sheet and Cash Flow Highlights
Axalta ended the year with cash and cash equivalents of $1,017.5 million. Its net debt was $2.8 billion as of year-end, compared to $3.2 billion as of Dec. 31, 2018, driven by higher cash balances. Net debt to Adjusted EBITDA was 3x at year-end versus 3.4x as of Dec. 31, 2018.
There were no share repurchases during the fourth quarter. Subsequent to year-end, Axalta prepaid $300 million of its Term Loan debt utilizing excess cash on its balance sheet.
Cash flow from operations was $283.3 million in Q4 2019 compared to $250.6 million in Q4 2018. Free cash flow totaled $248.4 million after capital expenditures of $38.6 million, an improvement versus $220.2 million after capital expenditures of $33.9 million in the prior year fourth quarter. The increase was driven primarily by improved working capital outcomes for the period compared to the prior year, and includes approximately $26 million in cash payments associated with employee retention as well as advisory fees associated with the ongoing review of strategic alternatives.
"In 2019, Axalta continued to execute well operationally, and we met key financial objectives for both earnings and cash flow targets, while also improving the balance sheet. This was all accomplished within a challenging backdrop for general industrial and automotive-related markets," said Sean M. Lannon, Axalta's senior VP and CFO. "Strong cash flow generation, reflecting solid operating and working capital execution, enabled us to finish the year with considerably reduced net leverage despite share repurchases completed in the first half. We also increased profit margins for the year despite volume headwinds as we continued to prioritize price recapture in the face of input inflation from the past several years. For 2020, we expect to maintain this operating and financial discipline and target modest potential margin upside in a continued subdued volume environment. In conjunction with our productivity focus, this should enable an avenue for margin expansion in the coming year, as well as strong free cash flow."
2020 Guidance
- Net sales growth of ~0-1 percent;
- Net sales, ex-FX, ex-M&A growth of ~1-2 percent;
- Adjusted EBIT of $710-750 million;
- Adjusted diluted EPS range of $1.85-20;
- Depreciation and amortization of ~$330 million, inclusive of ~$7 million accelerated depreciation from Belgium site closure;
- Income tax rate, as adjusted, of ~22 percent;
- Diluted shares outstanding of ~237 million;
- Capital expenditures of ~$160 million;
- Free cash flow of $450-490 million
