Axalta Coating Systems Ltd. announced its financial results for the third quarter ended Sept. 30, 2020.
Third Quarter 2020 Consolidated Financial Results
Third-quarter net sales of $1,026.9 million decreased 7.2 percent year-over-year, including a 0.1 percent foreign currency benefit, driven by 6 percent lower volumes and 1.4 percent lower average price and product mix.
Lower volumes across all end-markets were driven by ongoing COVID-19 related macroeconomic impacts, though volumes improved considerably through the quarter and exceeded earlier expectations due to faster recovery pacing in key end-markets.
Performance Coatings recorded a 5.7 percent net sales decline, including nearly flat Industrial net sales versus the prior-year quarter, while the Refinish net sales decline of 9 percent showed strong recovery ahead of expectations.
The 10.2 percent net sales decline for Transportation Coatings benefited from faster than expected recovery in Light Vehicle production, most notably in North America and China.
Axalta posted 1.4 percent headwinds in year-over-year price and product mix, still impacted by abnormal product mix given substantial product and geographic mix differences from the prior year given overall volume declines.
Income from operations for Q3 2020 totaled $141.7 million versus $123 million in Q3 2019. Net income to common shareholders was $82.5 million for the quarter compared with $65.5 million in Q3 2019, and diluted earnings per share were $0.35 compared with $0.28 in Q3 2019.
The increases were primarily driven by lower operating expenses inclusive of cost actions taken this year in response to COVID-19 and favorable variable input costs, offset partly by lower global net sales across all end-markets.
Additionally, income from operations was negatively impacted by termination charges of $35.7 million associated with the company's recently announced restructuring plan which compares to a $29.2 million charge in Q3 2019.
Adjusted EBIT of $210.4 million for the third quarter compared with $191.2 million in Q3 2019. Adjusted diluted EPS of $0.59 compared with $0.52 in Q3 2019.
These results were driven by lower operating expenses inclusive of cost actions initiated in response to COVID-19 and lower variable input costs, partly offset by lower global net sales across all end-markets.
"Although economic impacts from the coronavirus pandemic persisted across our business in the period, we were very pleased to see rapidly improving demand, and the effectiveness of our cost management programs has continued to help offset volume impacts. We are proud to report stronger, and actually record-setting, operating earnings metrics thanks to the success we have had as a coordinated global team in responding to these considerable end-market demand challenges," said Robert W. Bryant, Axalta's president and CEO.
"Axalta saw ongoing demand recovery across all business lines and regions during the third quarter, and our team executed well on cost actions to deliver a result that surpassed expectations set in July. The global team produced year-over-year temporary operating cost savings of approximately $50 million in the quarter. Our operating results showcase the resilience of Axalta's coatings businesses, which have provided superior service for customers throughout 2020. We also made good progress with structural cost savings, including ongoing Axalta Way incremental savings on track to meet our goal for the year, and early contributions from our recently announced incremental COVID-driven restructuring actions," he continued.
"In addition to meeting delivery requirements throughout the pandemic, we have also enjoyed new business gains during the period from existing and new customers as we continue to commercialize new products from our innovation pipeline and drive overall execution of our organic growth plan. I remain thankful to work with a team of such dedicated professionals who continue to demonstrate the Axalta Way and prove that devotion to customer satisfaction produces results," Bryant added.
Performance Coatings Results
Performance Coatings third-quarter net sales were $682.7 million, a decrease of 5.7 percent year-over-year.
Constant currency organic net sales decreased 6.9 percent in the period, driven by a 4.5 percent volume decline primarily from Refinish, as well as a 2.4 percent decrease in average price and product mix, including impacts from both end-markets.
Foreign exchange was a 1.1 percent tailwind and M&A benefits were modest in the period.
Refinish net sales decreased 9 percent to $401.7 million in Q3 2020 with high single-digit volume decreases, including demand impact from ongoing reduced global vehicle traffic, as well as low single-digit average price and product mix decline contribution due to differences in product mix.
Refinish continued to recover during the third quarter along with further improvement in global passenger miles driven, largely correlated locally with reduced COVID-19 restrictions.
Industrial net sales decreased 0.4 percent to $281 million, including essentially flat volumes coupled with modestly reduced average price and product mix globally.
Industrial sub-businesses including wood, coil, and energy solutions saw increased net sales for the third quarter, while all end businesses and regions saw net sales increase year-over-year in September.
The Performance Coatings segment generated an Adjusted EBIT of $133.9 million in the third quarter compared with $124.9 million in Q3 2019, with associated margins of 19.6 percent and 17.3 percent, respectively. The increase included benefits from lower operating expenses and lower variable costs, offset in part by lower volume and price and product mix impacts.
Transportation Coatings Results
Transportation Coatings net sales were $344.2 million in Q3 2020, a decrease of 10.2 percent year-over-year, including a 1.6 percent negative currency translation impact.
Constant currency net sales declined 8.6 percent in the period, driven by a 9 percent decrease in volume offset partly by a 0.4 percent higher average price and product mix.
Light Vehicle net sales decreased 6.6 percent to $276.3 million year-over-year (decreased 5 percent excluding foreign currency headwinds), driven by lower global automotive production persisting through the period and modest foreign exchange and price and product mix headwinds.
Encouragingly, Axalta's Light Vehicle net sales were up year-over-year during September on improving sequential recovery, including notable strength in North America as well as ongoing recovery in China.
Commercial Vehicle net sales decreased 22.5 percent to $67.9 million from Q3 2019 (decreased 20.8 percent excluding foreign currency), also driven by global customer production rate declines.
Average price and product mix was a moderate offsetting tailwind in the period, similar to the second quarter. While Commercial Vehicle net sales remain pressured, recent new truck order trends have strengthened and global truck production forecast revisions for 2020 have shown better recovery for several months now.
The Transportation Coatings segment generated an Adjusted EBIT of $48.5 million in Q3 2020 compared with $37.2 million in Q3 2019, with associated margins of 14.1 percent and 9.7 percent, respectively.
This result was driven principally by lower operating costs and reduced variable costs as well as modest price and product mix effects, offset partly by the impact of lower volume and moderate foreign exchange headwinds.
Balance Sheet and Cash Flow Highlights
Axalta ended the third quarter with cash and cash equivalents of $1.3 billion. Its debt, net of cash, was $2.7 billion as of Sept. 30, 2020, compared with $2.8 billion as of Dec. 31, 2019.
Axalta's net debt to trailing 12 month Adjusted EBITDA ratio was 3.7x at quarter end versus 4x as of June 30, 2020. Axalta ended the quarter with over $1.7 billion in available liquidity and we ended Q3 2020 with an Adjusted EBITDA to interest expense coverage ratio of 4.9x.
Third quarter total operating cash flow was $233.4 million versus $221 million in Q3 2019, reflecting stronger operating income in the period. Free cash flow totaled $223.3 million compared with $198.1 million in Q3 2019, including lower capital expenditures in the period totaling $13.8 million versus $26.7 million in the prior year quarter.
"It was gratifying to see not only strong operating profit during the third quarter but also very good cash flow conversion, resulting in a terrific outcome for our balance sheet position, particularly when compared to expectations in the spring," said Sean Lannon, Axalta's CFO. "Third quarter results benefited from approximately $50 million in cost savings as well as ~$60 million in incremental cash flows versus our January guidance as we benefited from reduced capital expenditures and actions to drive working capital savings. We continue to expect approximately $195 million of in-year 2020 cost savings from ongoing cost savings programs. Regarding our Q4 and full year guidance, we expect Q4 to have less benefit from temporary cost savings, as well as assumed weaker mix within Performance Coatings in the period. We're also mindful that COVID-19 and other macroeconomic factors could negatively affect the outlook versus the stabilizing demand environment we saw in Q3."
Full Year 2020 Financial Guidance Update
- Net sales: Expected to be down ~18 percent compared to 2019 including -2 percent FX and M&A impact;
- Q4 net sales: Expected to be down ~6-8 percent compared to Q4 2019;
- Adjusted EBIT: $495-515 million;
- Adjusted diluted EPS: $1.15-1.20;
- Interest expense: ~$155 million;
- Diluted shares outstanding: ~236 million;
- Free cash flow: $280-310 million; including $90 million capex;
- Tax rate: ~20-21 percent
