Axalta Coating Systems Ltd. announced its financial results for the second quarter ended June 30, 2020, and provided an update regarding the ongoing impact of the coronavirus (COVID-19) pandemic on its business, employees, customers, and shareholders and related mitigation actions taken and planned. The company also announced the initiation of a global restructuring of its business to better position Axalta for sustained growth.
Second Quarter 2020 Consolidated Financial Results
Second quarter net sales of $652.7 million decreased 43.6 percent year-over-year, including a 2.8 percent negative foreign currency impact and 1.1 percent negative year-over-year impact from the sale of a China JV interest in Q2 2019.
Constant currency organic net sales decreased 39.7 percent in the period, driven by 39.2 percent lower volumes and 0.5 percent lower average price and product mix.
Lower volumes across all businesses were driven by COVID-19 impacts, though results improved sequentially in each month following a bottom in April, which was led by Transportation customer site shutdowns globally (excluding China) with gradual reopenings starting in May and lower operating rates of Performance Coatings customers.
Transportation Coatings saw continued year-over-year price and product mix improvement, while Performance Coatings declined in the period due to unfavorable product mix in Refinish.
Loss from operations for Q2 2020 totaled $64.5 million compared with income of $157.9 million in Q2 2019. Net loss to common shareholders was $82.8 million for the quarter compared with income of $98.4 million in Q2 2019, and diluted loss per share was $0.35 compared with diluted EPS of $0.42 in Q2 2019.
The decreases were primarily driven by volume decline impacts, COVID-19 related accounting charges of $45 million primarily associated with fixed costs at underutilized manufacturing sites recognized as a period expense, as well as the impacts of severance, impairments, and strategic review-related charges of $24.6 million in Q2 2020 versus $2.3 million in Q2 2019.
These impacts were partially offset by lower operating expenses inclusive of cost actions initiated in late March in response to COVID-19, and by slightly favorable variable input costs.
Adjusted EBIT of $(11.6) million for the second quarter compared with $197.4 million in Q2 2019. Adjusted diluted EPS of $(0.15) compared with $0.52 in Q2 2019.
These results were driven by lower global volumes across all end-markets and COVID-19 related accounting charges, partly offset by lower operating expenses inclusive of cost actions initiated in late March in response to COVID-19, and slightly lower variable input costs.
"We continue to be impacted by the coronavirus pandemic across our business, and we remain focused on operating safely while protecting the health and well-being of our employees, customers, and communities where we live and work," Axalta president and CEO Robert W. Bryant said. "The impact on customer demand related to COVID-19 continues to gradually improve month-to-month, but there remain significant challenges and uncertainties around the timing and shape of the recovery. Given this, we remain committed to managing with agility to ensure we mitigate risk and control costs as effectively as possible."
In May, Axalta announced initial actions taken to counter COVID-19-related customer demand impacts across the business, including reductions in discretionary and other SG&A costs with a target of $100 million in savings to be realized during 2020.
"We are proud that the second quarter benefited substantially from our proactive management philosophy and key actions implemented, allowing June results to return to profitability with volumes only partially recovered during the month," Bryant said. "Axalta was able to reduce operating costs during the quarter by approximately $75 million, exceeding earlier expectations, and we now expect to beat our prior target for the full year and to generate at least $130 million in total cost savings.
"The nature of customer demand impacts during the quarter made the period uniquely challenging, including muted demand within Performance Coatings as well as prolonged customer shutdowns in Transportation Coatings, driving the recognition of fixed costs in the period due to underutilization of manufacturing sites," Bryant continued. "Nonetheless, our businesses have demonstrated resilience and emerged from the period fully intact, while customers have continued to experience Axalta's dedication to service, as they have come to expect from an industry leader. I can't thank our team enough for their dedication to fulfilling critical customer needs, and for the many examples we have seen of the Axalta team responding to the unique challenges of this period."
Performance Coatings Results
Performance Coatings second quarter net sales were $482.1 million, a decrease of 36.3 percent year-over-year. Constant currency organic net sales decreased 32.3 percent in the period before the net negative M&A-related impact of 1.6 percent from the China powder JV sale in Q2 2019, and 2.4 percent from negative foreign currency translation.
Drivers of the constant-currency organic decline included a 29.7 percent volume decline derived from both end-markets, as well as a 2.6 percent decrease in average price and product mix primarily from the Refinish end-market.
Refinish net sales declined 41.4 percent to $261.9 million in Q2 2020 (decreased 38.7 percent excluding foreign currency) with lower volume including demand impact from COVID-19 which substantially reduced global traffic volumes, as well as reduced average price and product mix contribution principally from a change in product mix.
Industrial net sales decreased 28.8 percent to $220.2 million (decreased 23.2 percent excluding foreign currency and M&A-related impacts), including volume declines over 20 percent but with largely stable average price and product mix globally. Industrial sub-businesses including wood, powder, and energy solutions have all seen demand improve notably in June.
The Performance Coatings segment generated Adjusted EBIT of $1.5 million in the second quarter compared with $127.6 million in Q2 2019. The decline, principally from negative impacts of lower volume, accounting charges related to COVID-19 impacts, lower price and product mix, and foreign exchange, was partially offset by lower operating expenses and modestly lower variable costs.
Transportation Coatings Results
Transportation Coatings net sales were $170.6 million in Q2 2020, a decrease of 57.4 percent year-over-year, including a 3.7 percent negative currency translation impact. Constant currency net sales declined 53.7 percent in the period, driven by a 57.2 percent decrease in volume, offset partially by a 3.5 percent higher average price and product mix.
Light Vehicle net sales decreased 58.7 percent to $126.3 million year-over-year (decreased 54.9 percent excluding foreign currency), driven largely by lower global automotive production resulting from the COVID-19 pandemic, and modest foreign exchange headwinds, offset partially by improved price and product mix. Commercial Vehicle net sales decreased 53.2 percent to $44.3 million from Q2 2019 (decreased 50.1 percent excluding foreign currency), also driven by global customer production rate declines resulting from COVID-19. Average price and product mix was a moderate offsetting tailwind in the period.
The Transportation Coatings segment generated an Adjusted EBIT loss of $39.3 million in Q2 2020 compared with income of $40.4 million in Q2 2019, driven principally by the impact of lower volume and accounting charges related to COVID-19 impacts, offset partly by lower operating costs and positive price and product mix.
Balance Sheet and Cash Flow Highlights
Axalta ended the quarter with cash and cash equivalents of $1.1 billion.
Axalta’s debt, net of cash, was $2.9 billion as of June 30, 2020, which compared with $2.8 billion as of Dec. 31, 2019. Axalta’s net debt to trailing 12 month Adjusted EBITDA ratio was 4x at quarter end.
Axalta ended the quarter with approximately $1.5 billion in available liquidity, including $361 million of capacity under the company’s undrawn revolver and the proceeds from the June issuance of $500 million in aggregate principal amount of 4.750 percent senior unsecured notes due 2027.
Axalta has no affirmative financial covenants on its current outstanding indebtedness, and it ended Q2 with an Adjusted EBITDA to interest expense coverage ratio of 4.7x.
Second quarter total use of operating cash flow was $1.7 million versus $126.7 million of cash generated in Q2 2019, reflecting reduced operating income during the period, including COVID-19 impacts on the business, offset in part by improved working capital and reduced cash outflows related to customer investments in the period.
Free cash flow totaled a use of $17.8 million compared to $103.7 million provided in the prior year second quarter, including lower capital expenditures in the period totaling $19.7 million versus $26.7 million in second quarter 2019.
"Despite unprecedented customer demand disruption due to the pandemic and associated reduced operating rates during the second quarter, our initial actions to adjust our cost structure and maximize cash flow globally have helped stabilize Axalta's overall financial profile," said Sean Lannon, Axalta's CFO. "Second quarter results benefited from approximately $75 million in cost savings as well as $70 million in incremental cash flows versus our prior plan from reduced capital expenditures and actions to drive working capital savings. We now expect to see combined savings in 2020 from COVID-related cost and cash flow actions in excess of $270 million, with remaining amounts to benefit the third quarter somewhat more than the fourth quarter."
Global Restructuring Announced
Axalta also announced that it is initiating a global restructuring of its business to better align the company's cost structure in light of current economic pressures and to position Axalta for sustained growth.
The restructuring is expected to result in a net 5 percent reduction of Axalta's global workforce, or approximately 550 employees globally, with the potential for additional reductions from Europe, subject to works council consultations and local legal requirements.
The 5 percent reduction in Axalta's workforce should be completed over 24 months and generate savings of approximately $50 million, with $40 million expected by the end of 2021. The Company expects to incur cash costs of $55-65 million inclusive of capital expenditures, with $25-30 million of the total expected for the remainder of 2020.
"Given the significant customer demand headwinds we are facing due to COVID-19, we have made the difficult decision to undertake a global restructuring to address the continued effects of the pandemic and further improve our cost structure," Bryant said. "As part of this process, we are streamlining our workforce to align with current and expected future customer demand and to enable Axalta to be cost-competitive in the markets in which we compete. Through Axalta Way, coupled with the insights gleaned through the strategic review process, we believe we have the tools to transform our business for sustained profitable growth for the benefit of all stakeholders.
"Beyond these immediate restructuring actions, we are actively planning incremental steps to further reduce expenses and increase our speed and agility to market. We plan to move forward vigorously to position Axalta for ongoing profitable growth across the markets we serve."
Axalta anticipates approximately $195 million of in-year 2020 cost savings from the restructuring actions announced today and previously planned actions. This includes $55 million from the company's ongoing Axalta Way savings, approximately $10 million of incremental restructuring savings, and the $130 million in temporary cost savings discussed above.
"I want to thank all members of the Axalta team for their dedication and resilience through this dynamic and challenging period amid the COVID-19 pandemic. We truly believe that the actions taken with this restructuring will help make Axalta a stronger competitor with substantial future growth opportunities as we recover from the current downturn," Bryant said.
Financial Guidance Update
Forecast visibility remains limited, but we are updating discrete guidance elements as follows:
- Q3 net sales: Expected to be down ~15-20 percent compared to Q3 2019 including 1 percent negative impact from FX;
- FY diluted shares: ~236 million;
- FY capex: ~$80 million (50 percent lower than January guidance);
- FY interest expense: ~$150 million
