Axalta Coating Systems Ltd. announced its financial results for the first quarter ended March 31, 2021.
First quarter net sales of $1,063.6 million increased 8.1% year-over-year, including a 3.2% foreign currency benefit, driven by 4.6% higher volumes and 0.3% higher average price and product mix.
Volume growth across all end markets was driven by ongoing recovery from pandemic-related macroeconomic impacts. Price and product mix increased a modest 0.3% year-over-year, including positive pricing with slightly negative product mix effects largely from geographic and end-business mix differences.
Performance Coatings recorded a 9.2% net sales increase, including double-digit Industrial end-market growth and a rebound in Refinish from Q1 2020, which was notably higher in China by 90.4%.
The 6.1% net sales increase for Mobility Coatings also benefited from Light Vehicle production comparisons in China, which saw pandemic impacts in the prior year quarter, offset partly by volume impacts from the ongoing semiconductor chip and other material shortages.
Income from operations for Q1 2021 totaled $52.6 million versus $65.1 million in Q1 2020. Net income to common shareholders was $15.2 million for the quarter compared with $52.2 million in Q1 2020, and diluted earnings per share were $0.06 compared with $0.22 in Q1 2020.
The current year results included a charge for the Mobility Coatings operational matter of $94.4 million partially offset by continued net sales recovery combined with lower operating expenses, including benefits from incremental structural as well as temporary cost savings continued from the 2020 COVID-19-related response actions.
The operational matter, which was disclosed in our Annual Report on Form 10-K for the year ended Dec. 31, 2020, occurred during a discrete period in the fourth quarter of 2020 at certain North America Mobility Coatings customer manufacturing sites.
The actual costs for this matter, which will be described in greater detail in Axalta's Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, could be materially lower or greater than the $94.4 million.
Prior year results also included a $50.5 million one-time tax benefit associated with an intra-entity transfer of certain intellectual property assets.
"We are pleased to report excellent first quarter net sales, adjusted profit, and cash flow metrics, which were generated despite ongoing demand challenges in select business lines," said Robert W. Bryant, Axalta's president and CEO. "We reported year-over-year growth from all end-markets in the quarter, which was particularly gratifying given ongoing headwinds from global Refinish, supply chain shortages related to severe weather in the U.S., and the semiconductor chip shortages impacting Light Vehicle production globally. Results were supported by strong demand conditions in global industrial coatings markets, and we expect ongoing market and demand stability for the balance of 2021.
"Axalta is committed to driving organic growth as well as inorganic growth. We closed our first M&A deal in China in April. The Anhui Shengran acquisition substantially boosts our Energy Solutions business presence in China and helps enable sustainable infrastructure development, including electric vehicles and wind energy, among other markets," Bryant continued. "We remain very focused on operating execution and are pleased that we had great progress on many ongoing productivity projects. This is evidenced by strong margin results in the period, including a 370 basis point increase for Adjusted EBIT margins to 17.2% versus the first quarter of 2020. This improvement included a benefit from improved volumes, particularly in Asia Pacific, coupled with the ongoing execution of our structural cost savings programs. We also saw continued benefit from temporary savings continued from last year, a portion of which may remain out of our cost structure for some time."
"Axalta's success rests, as always, in innovation and efficient commercialization of new products. We are pleased that we continued our robust investment across all businesses throughout the pandemic, and in the first quarter, we introduced many new products that we believe are set to produce growth over the coming years. Each of these factors - innovation, growth, and execution together with the dedication of our global team - are the pillars of our current and expected success. Finally, I'd like to thank all Axalta employees for their ongoing commitment to serve Axalta's customers and support each other and our communities during the ongoing pandemic," Bryant concluded.
Performance Coatings Results
Performance Coatings first quarter net sales were $707.3 million, an increase of 9.2% year-over-year. Constant currency net sales increased 5.0% in the period, driven by a 6.2% volume increase with strong contributions from both end-markets, offset partly by a 1.2% decrease in average price and product mix, with a greater portion of that impact coming from Industrial. Foreign exchange was a 4.2% tailwind led by the stronger Euro and Chinese Renminbi offset partly by the Brazilian Real versus the prior year first quarter.
Refinish net sales increased 8.5% year-over-year to $399.0 million in Q1 2021 with mid-single-digit volume increases despite ongoing demand impacts from lower global vehicle traffic. Volume benefited from recovery in China compared to pandemic-impacted levels seen in the prior year quarter. Volume growth was partially offset by slightly lower average price and product mix due to differences in geographic and product mix. Based on our March 2021 results, Axalta is seeing notable demand recovery in line with total global vaccination progress.
Industrial net sales increased 10.1% to $308.3 million, including high single-digit volume growth offset moderately by lower average price and product mix, which was driven principally by mix differences in the period. Net sales were up strongly in all Industrial end-businesses during the first quarter, with notable strength in Energy Solutions, Powder Coatings and General Industrial.
The Performance Coatings segment generated Adjusted EBIT of $117.2 million in the first quarter compared with $79.4 million in Q1 2020, with associated margins of 16.6% and 12.3%, respectively. The increase was primarily driven by benefits from lower operating expenses and continued net sales recovery.
Mobility Coatings Results
Mobility Coatings net sales were $356.3 million in Q1 2021, an increase of 6.1% year-over-year, including a 1.5% positive currency translation benefit. Constant currency net sales increased 4.6% in the period, driven by 3.1% higher average price and product mix and a 1.5% increase in volume.
Light Vehicle net sales increased 7.2% to $278.9 million year-over-year (increased 5.4% excluding foreign currency tailwinds), driven by customer and product mix in EMEA, higher global automotive production in Asia Pacific, and FX tailwinds in the period. Axalta's Light Vehicle net sales increased year-over-year during March in all regions, despite the impact from the semiconductor chip and other material shortages in the period.
Commercial Vehicle net sales increased 2.2% to $77.4 million versus Q1 2020 (increased 2.1% excluding foreign currency), driven by stable global production rates in the period versus last year's first quarter.
Average price and product mix was a slight headwind in the period. The rebound and overall strength in Commercial Vehicle net sales remain well supported by very strong new truck order trends, particularly in North America.
The Mobility Coatings segment generated Adjusted EBIT of $39.2 million in Q1 2021 compared with $25.8 million in Q1 2020, with associated margins of 11.0% and 7.7%, respectively. This result was driven principally by improved price and product mix effects as well as lower operating costs.
Balance Sheet and Cash Flow Highlights
Axalta ended the first quarter with cash and cash equivalents of $1.3 billion. Its net debt to trailing 12-month Adjusted EBITDA ratio was 3.2x at quarter end versus 3.3x as of Dec. 31, 2020. Axalta ended the quarter with over $1.6 billion in available liquidity, and it ended Q1 2021 with an Adjusted EBITDA to interest expense coverage ratio of 5.5x.
First quarter total operating cash flow was $39.6 million versus $0.8 million in Q1 2020, reflecting stronger underlying operating performance. Free cash flow totaled $11.3 million compared with a use of $19.8 million in Q1 2020, including higher capital expenditures in the period totaling $31.8 million versus $22.7 million in the prior year quarter.
Axalta repurchased 2.3 million shares of its common stock under our share repurchase program during the first quarter for total consideration of $63.6 million and an average price of $27.94 per share.
"Axalta's first quarter strength, with record adjusted profit for a first quarter and excellent free cash flow for what is historically our seasonally weakest quarter, serves as a testament to our continued focus," CFO Sean Lannon said. "We had strong execution in the face of multiple headwinds in the period, including U.S. raw material challenges after the winter storms and the ongoing semiconductor chip shortage that continues to impact our OEM customers. Most notably, the strong performance included Refinish volume growth despite lingering COVID-19 headwinds. First quarter results benefited from continued cost savings across the company, including ongoing execution of our structural Axalta Way programs and with some continued benefit from temporary savings slightly above our original expectations for the period.
"Regarding our full year guidance, we expect to see steady demand improvement sequentially in Refinish in the coming quarters. This is anticipated to come with largely stable and growing net sales from our other businesses during the balance of the year, though some delay in sales from Q2 is expected in Mobility due to supply chain disruption and customer component shortages," he continued. "While we will see rising input inflation effects beginning in the second quarter, we also expect to work hard to pass on most of that inflation through price increases. Likewise, some headwinds from lower year-over-year temporary cost savings should be offset by our expected volume recovery.
"With expected strength in free cash flow for the year and our strong ongoing cash position, we anticipate ongoing deployment of capital to both M&A as well as share repurchases during the rest of 2021. Our Board recently approved a $625 million increase in our share repurchase program, and we now have the authorization to deploy ~$800 million towards share repurchases in future periods," Lannon added.
