First Quarter 2020 Highlights:
- Net sales of $983.5 million decreased 12.1% year-over-year (decreased 8.5% ex-FX and M&A impacts)
- Income from operations of $65.1 million versus $98.6 million in Q1 2019; Adjusted EBIT of $132.7 million decreased 7.8% from Q1 2019 while margins increased 60 basis points
- Diluted EPS of $0.22 compared with $0.18 in Q1 2019; Adjusted diluted EPS of $0.31 decreased 8.8% from Q1 2019
- Cash flow used for operations improved $57.1 million compared to Q1 2019
- Strong balance sheet ending at 3.1x net leverage with over $1 billion in total liquidity available as of March 31, 2020
- Taking all appropriate actions to meet customer demand while ensuring the safety of our employees, customers, and communities, inclusive of pro-active steps to contribute to our communities
- Net sales, Adjusted EBIT and Adjusted diluted EPS includes an estimated unfavorable impact from the COVID-19 pandemic of $90 million, $40 million, and $0.13, respectively
- Customer demand dislocation expected to impact net sales significantly in April and May; expect net sales to decline ~50% versus the same period in 2019
- Lower volume partially mitigated by Axalta’s variable cost structure and proactive cost control actions; anticipate over $100 million in savings associated with downturn-related actions as well as over $125 million in additional cash flow measures in 2020
Axalta Coating Systems Ltd. (NYSE:AXTA) (“Axalta”), a leading global coatings company, announced its financial results for the first quarter ended March 31, 2020 and provided an update regarding the impact of the coronavirus (COVID-19) pandemic on its business, employees, customers, and shareholders as well as Axalta’s current and planned management of such impacts.
Robert W. Bryant, Axalta’s President and CEO, commented, “Our hearts go out to all those affected by the coronavirus globally and specifically in the local communities where our employees and customers live, work, and raise their families. We continue to focus first of protecting their health, safety and well-being. In support of designated essential customer activities, our manufacturing sites continue to meet customer demand with operating procedures implemented to maintain social distancing and increased sanitizing procedures. Our supply chain remains stable, and we are mitigating potential risks in close coordination with our suppliers. Nonetheless, there have been notable demand impacts in countries impacted by COVID-19, with the majority of our customers experiencing demand declines, with the possibility of a phased recovery beginning gradually in coming weeks.”
Axalta’s management has taken and continues to take immediate actions to address COVID-19 related demand impacts. These included significant reductions in discretionary costs, as well as elimination of temporary labor, employee furloughs, and work hour reductions across our businesses. Axalta has also instituted temporary salary reductions for eligible employees globally including a 20% salary reduction for senior management and a 20% reduction in the cash compensation for our Board of Directors. In addition, the company is focused on maximizing cash flow and liquidity and has reduced capital expenditures versus prior plans as well as taking further steps to drive working capital efficiency during this period.
Bryant commented, “This is an unprecedented business climate, and Axalta is taking aggressive steps to adjust our cost structure in real time with expected demand changes to ensure that we preserve our balance sheet strength and ultimately emerge from this crisis in a position of strength. In our response planning, we have considered our employees needs, the long-term health of the business, maximizing long-term shareholder value, and the requirements of our diverse customer base.”
Bryant continued, “Axalta is structurally well positioned to adjust to demand disruptions given our highly variable cost structure, the actions we are taking to incrementally adjust fixed costs, and our strong balance sheet. We have previously noted that we entered this demand downturn with a strong liquidity position, and this remains the case today.”
“We are also very proud to be working in support of our employees and communities in the direct effort to mitigate the coronavirus spread. Since March, we have been working to support the safety, health, and well-being of hospital professionals, first responders, and our employees,” said Robert Bryant. “We are putting our manufacturing capabilities and supply inventories to work in order to offer products that will make a difference where they are needed most. These efforts include the production of thousands of gallons of hand sanitizer at many of our global sites to be donated to local hospitals and first responders. They also include the donation of personal protective equipment (PPE) such as N95 face masks, coveralls and seat covers to hospitals and medical professionals in numerous countries where we operate.”
Outlook Includes Key Cost Reductions and Elements to Conserve Cash
Considering inputs from a range of sources, and including early results from April, we currently estimate that the most severe demand impacts to our business will occur in April and May. While forecasts are challenging even near-term in this climate, we anticipate that net sales for the combined months of April and May will likely fall ~50% compared to the same prior year two-month period. We expect additional demand impact beyond this time frame, but for now anticipate an improving trajectory over the remainder of the year.
As noted earlier, we are actively and aggressively pursuing fixed cost reductions to offset the immediate effect of volume declines. In aggregate, we have identified and are pursuing total downturn-related cost savings that we believe will be at least $100 million, with savings that began to accrue in late March. These actions are independent of structural savings goals associated with Axalta Way, which also continues on track.
In order to maximize our balance sheet strength, Axalta is focused on cash generation to offset decremental impacts from reduced volumes. Incremental sources of cash flow from reduced capital expenditures and continued working capital efficiencies are expected to total at least $125 million during 2020. In aggregate, we expect to deliver over $225 million in cash flow from the cost measures underway. These actions will be subject to periodic revision depending on the pace of recovery.
Balance Sheet and Cash Flow Highlights
Axalta ended the quarter with cash and cash equivalents of $657.2 million. Our debt, net of cash, was $2.9 billion as of March 31, 2020, which compared with $2.8 billion as of December 31, 2019. Our net debt to trailing twelve month Adjusted EBITDA ratio was 3.1x at quarter end. Axalta ended the quarter with over $1 billion in available liquidity, including $361 million of capacity under our undrawn revolver. We have no affirmative financial covenants on our current outstanding indebtedness, and we ended Q1 with an Adjusted EBITDA to interest expense coverage ratio of 5.9x.
First quarter total operating cash flow was a use of $0.8 million versus a use of $57.9 million in Q1 2019, reflecting a substantial working capital improvement versus the prior year inclusive of lower customer investments as well as substantially reduced accounts receivable. Free cash flow totaled a use of $19.8 million compared to a use of $74.9 million in the prior year first quarter, despite slightly higher capital expenditures totaling $22.7 million versus $20.5 million in the prior year quarter.
“The first quarter was clearly impacted by significant demand disruptions that we believe resulted from COVID-19, but we took early actions to adjust our cost structure and maximize cash flow to coincide with customer demand declines in each region” said Sean Lannon, Axalta’s Chief Financial Officer. “We continue to execute on planned actions with a keen focus on maximizing balance sheet strength and liquidity to avoid more substantial impacts near-term while also positioning the company to take advantage of recovery when that happens.”
First Quarter 2020 Consolidated Financial Results
First quarter net sales of $983.5 million decreased 12.1% year-over-year, including a 2.1% negative foreign currency impact and negative 1.5% year-over-year impact from the sale of a China JV interest in Q2 2019. Constant currency organic net sales decreased 8.5% in the period, driven by 10.3% lower volumes offset partly by 1.8% higher average price and product mix from all regions and both segments. Transportation Coatings saw price and product mix stability versus the prior year, while Performance Coatings posted low single digit price and product mix improvement. Lower volumes were driven by notable declines in China due to COVID-19 impacts, while other regions also saw declines in volume, largely coming from March COVID-19 related impacts.
Income from operations for the first quarter totaled $65.1 million compared with $98.6 million in Q1 2019. The decrease was primarily driven by volume decline impacts as well as the impacts of severance and strategic review-related charges of $31.6 million in Q2 2020 versus $7.1 million in Q1 2019 primarily associated with a China joint venture disposition. These impacts were partially offset by the benefit of higher average price and product mix and by lower variable input costs as well as lower operating expense inclusive of lower compensation expense.
Adjusted EBIT of $132.7 million for the first quarter decreased 7.8% versus $143.9 million in Q1 2019. Adjusted diluted EPS of $0.31 decreased 8.8% from Q1 2019. These results were driven by lower volumes across all end-markets and negative foreign currency translation impacts, partly offset by higher average price and product mix, lower variable input costs, and from improved productivity savings and lower compensation expense.
Net income to common shareholders was $52.2 million for the quarter compared with $43.4 million in Q1 2019 and diluted EPS was $0.22 compared with $0.18 in Q1 2019. Q1 2020 results were favorably impacted by discrete tax benefits of $35.2 million, net. The primary driver was a $50.5 million one-time tax benefit associated with an intra-entity transfer of certain intellectual property assets. These benefits were largely offset by the impacts of severance and strategic review-related charges of $31.6 million in Q1 2020 ($27.5 million after-tax), compared with $7.1 million ($6.7 million after-tax) in Q1 2019 primarily associated with a China joint venture disposition.
“Axalta’s first quarter results clearly reflected some impact from the COVID-19 pandemic, notably in China through much of the quarter and also from other regions largely beginning in March,” said Robert W. Bryant. “While challenging to isolate these impacts, we estimate approximately $90 million in net sales impact and $40 million in Adjusted EBIT impact from the virus effects relative to our business plan going into the year. January and February results, prior to the COVID-19 impact, were tracking in line with expectations.”
Mr. Bryant continued, “As we announced on March 31, we also concluded our strategic review and have actively refocused our energy entirely on managing through the COVID-19 pandemic. We are confident in our long-term growth opportunity as a business and look forward to elaborating on that opportunity in more detail once we get beyond the pandemic.”
Finally, we have taken incremental restructuring charges of $18.5 million during the first quarter. The savings associated with these charges are anticipated to contribute meaningfully to our planned 2020 Axalta Way savings goals.
Performance Coatings Results
Performance Coatings first quarter net sales were $647.7 million, a decrease of 9.2% year-over-year. Constant currency organic net sales decreased 5.0% in the period before the net negative M&A-related impact of 2.3% from the China powder JV sale in Q2 2019, and 1.9% from negative foreign currency translation. Drivers of the constant currency organic decline included a 7.5% volume decline derived from both end-markets, offset partly by a 2.5% increase in average price and product mix from both end-markets.
Refinish net sales declined 9.3% to $367.8 million in Q1 2020 (decreased 7.0% excluding foreign currency) with lower volume globally believed due largely to the COVID-19 pandemic, offset in part by strong average price and product mix contribution. Industrial net sales decreased 9.1% to $279.9 million (decreased 2.4% excluding foreign currency and M&A-related impacts), including low single digit volume declines offset in part by positive average price and product mix improvement globally. Overall industrial end-market sales were largely flat in China despite COVID-19 impacts to the Chinese economy, and net sales benefited from year-over-year growth in sub-businesses, including wood, coil, and energy solutions.
The Performance Coatings segment generated Adjusted EBIT of $79.4 million in the first quarter, a 1.0% year-over-year increase. The drop through negative impacts of lower volume and foreign exchange were offset by positive price and product mix, lower operating expenses, and variable cost tailwinds. First quarter segment Adjusted EBIT margin of 12.3% improved 130 basis points from 11.0% in the prior year as price and product mix and productivity benefits more than offset volume decline impacts.
Transportation Coatings Results
Transportation Coatings net sales were $335.8 million in Q1 2020, a decrease of 17.3% year-over-year, including a 2.6% negative currency translation impact. Constant currency net sales declined 14.7% in the period, driven by a 15.2% decrease in volume, offset partially by 0.5% higher average price and product mix.
Light Vehicle net sales decreased 17.7% to $260.1 million year-over-year (decreased 14.9% excluding foreign currency), driven largely by lower global automotive production, including COVID-19 impacts and modest foreign exchange headwinds. Commercial Vehicle net sales decreased 16.0% to $75.7 million from Q1 2019 (decreased 14.0% excluding foreign currency), also driven by global customer production rate declines that we believe were further exacerbated by COVID-19. Average price and product mix was a modest tailwind in the period.
Transportation Coatings generated Adjusted EBIT of $25.8 million in Q1 2020, a decrease of 24.6% versus Q1 2019, driven by lower volume impact offset to a large degree by lower operating costs, positive price and mix and initial benefits from lower variable input costs. Segment Adjusted EBIT margin of 7.7% in Q1 2020 compared with 8.4% in Q1 2019, a 70 basis point decrement due largely to volume impacts highlighted above.
Financial Guidance Update
Given limited current forecast visibility, we are not offering full year 2020 guidance, other than those discrete elements below:
- Net sales: April and May expected to be down by ~50% compared to the same prior year two-month period
- Diluted shares: ~237 million
- Capex: ~$80 million (50% lower than January guidance)
- Interest expense: ~$140 million
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