Axalta Coating Systems Ltd. (NYSE:AXTA) (“Axalta”), a leading global coatings company, announced its financial results for the fourth quarter and full year ended December 31, 2021.
Fourth Quarter 2021 Highlights
- Net sales of $1,137.2 million increased 5.8% year-over-year; ongoing Performance Coatings growth including fifth consecutive quarter of year-over-year Industrial end-market growth, partly offset by continued OEM production constraints from supply shortages in Mobility Coatings
- Income from operations of $94.7 million versus $163.2 million in Q4 2020; Adjusted EBIT of $121.0 million compared with $205.4 million in Q4 2020 resulting from substantial cost inflation impact in addition to Mobility volume headwinds
- Diluted EPS of $0.23 versus $0.30 in Q4 2020; Adjusted diluted EPS of $0.30 versus $0.58 in Q4 2020
- Cash flow from operations was $268.6 million compared to $278.4 million in Q4 2020
- Completed share repurchases totaling $30.0 million
Full Year 2021 Highlights
- Net sales of $4,416.2 million, increased 18.2% year-over-year; solid recovery from 2020 pandemic volume impacts, partially offset by Mobility Coatings semiconductor constraints impacting customer production
- Income from operations of $462.4 million versus $305.5 million in 2020; Adjusted EBIT of $623.2 million increased 16.1% versus 2020 despite substantial cost inflation
- Diluted EPS of $1.14 versus $0.52 in 2020; Adjusted diluted EPS of $1.67 increased 25.6% from $1.33 in 2020
- Cash flow from operations was $558.6 million compared to $509.3 million in 2020
- Disciplined capital allocation including share repurchases totaling $243.7 million and M&A investments of $649.0 million
Fourth Quarter 2021 Consolidated Financial Results
Fourth quarter net sales of $1,137.2 million increased 5.8% year-over-year inclusive of a 1.2% foreign currency headwind, driven by 3.6% higher average price and product mix and a 3.9% M&A contribution. Performance Coatings recorded a 14.2% net sales increase, including double-digit growth rates from both the Refinish and Industrial end-markets. The 10.1% net sales decrease for Mobility Coatings included a 14.4% decrease from Light Vehicle due to continued OEM customer production constraints from ongoing semiconductor chip and other supply chain shortages. This was partly offset by solid 7.6% net sales growth from Commercial Vehicle given supportive demand and customer production rates despite moderate supply chain issues also impacting that end-market. Substantial price and product mix realization of 3.6% within both Performance Coatings and Mobility Coatings came from pricing adjustments implemented to offset broad-based inflationary pressure, while product mix was a moderate headwind for the period. Net sales were also broadly constrained during the fourth quarter by limitations in availability for key raw materials due to both supply availability and transportation bottlenecks seen during the period.
Income from operations for Q4 2021 totaled $94.7 million versus $163.2 million in Q4 2020. Net income to common shareholders was $53.2 million for the quarter compared with $69.7 million in 2020, and diluted earnings per share was $0.23 compared with $0.30 in Q4 2020. Results were significantly impacted by lower volumes from Mobility Coatings, substantial variable cost inflation, and other cost inflation in logistics, labor, and energy from the prior year quarter, and the lapse of certain temporary cost reductions from the prior year period. Partly offsetting this result was continued demand strength driving strong organic growth within Performance Coatings, pricing and acquisition contributions. Net income to common shareholders also benefited by approximately $42.9 million, net of tax, from the combined impacts of gains on the sales of facilities in the quarter as well as lower debt extinguishment and retention costs, and the release of unrecognized tax benefits offset by increased acquisition-related costs.
Robert W. Bryant, Axalta’s President and CEO, commented, “Axalta’s fourth quarter results underscored strong continued operating execution during 2021. The business produced strong cash flow and managed well through a challenging environment marked by extensive cost inflation and supply chain headwinds, and also recent pandemic-driven labor constraints impacting Axalta and customer production sites. We continue to take active steps to offset these headwinds by implementing pricing and cost actions, though, exiting the year, a gap remains between cost inflation and realized offsets. As such, we are implementing additional price actions as required to offset cost increases across our enterprise. Our current expectation is that, in aggregate, remaining uncovered inflation from 2021 as well as incremental inflation expected this year will be offset fully during the course of 2022.”
Mr. Bryant continued, “Axalta continues to enjoy strong demand across nearly every business line, though strong underlying consumer demand in Mobility Coatings continues to be unmet due to OEM customer production disruptions. Persistent global supply chain constraints have impacted volumes across the business, especially in the Light Vehicle end-market with semiconductors, while raw material availability has also limited volumes while driving further cost inflation across both segments. We are encouraged at early improvement in chip availability within automotive during the fourth quarter and remain optimistic that 2022 could see a solid rebound in light vehicle production, which, when coupled with strong consumer demand, has the potential to drive a multi-year recovery.”
Full Year Consolidated Financial Results
Net sales of $4,416.2 million for 2021 increased 18.2%, including a 1.8% foreign currency benefit and a 1.9% M&A contribution compared with 2020. Constant currency organic net sales increased 14.5% in the period over 2020, driven by 10.5% higher volume as a result of recovery from COVID-19 impacts and 4.0% higher average price and product mix, with positive contribution from both segments. Despite reported net sales growth from 2020, volumes in Light Vehicle were significantly impacted during 2021 by customer supply chain constraints, and Light Vehicle net sales for the year were 16.2% below 2019 levels.
Income from operations increased 51.4% to $462.4 million for 2021 from $305.5 million in 2020. Net income to common shareholders was $263.9 million for the year compared with $121.6 million in 2020, and diluted earnings per share was $1.14 compared with $0.52 in 2020. These results were driven principally by volume recovery from COVID-19 impacts during 2020, partly offset by impacts from supply chain challenges. Profit drivers included tailwinds from price and product mix, positive M&A contribution, and foreign exchange translation benefit, partly offset by notably higher variable costs which increased ~15% for the full year, and also other inflation in costs from logistics, labor, and energy. Net income to common shareholders also benefited by approximately $51.5 million, net of tax, from the combined impacts of gains on the sales of facilities, lower costs in the current year related to our strategic review, debt extinguishments, retention costs and employee-related severance costs offset by increased acquisition-related costs and the net unfavorable impact.of discrete tax items.
Mr. Bryant commented, “2021 was a year that began with strong overall demand and pandemic recovery tailwinds but which quickly ran into macro roadblocks from cost inflation and supply constraints. Despite these factors, Axalta’s execution was strong, and the company delivered an increase in operating earnings and also robust overall cash flow. This was highlighted by excellent ongoing organic growth coming from the portfolio of businesses in our Industrial end-market and by excellent traction seen in achieving pricing offsets to inflationary cost pressures. Our focus on growth and on shareholder value are witnessed in these results and further through our execution of substantial value-creating capital deployment during the year via both share buybacks and two acquisitions.”
“For 2022, we expect a year of continued solid end-market demand, and anticipate potential stabilized raw material cost inflation after the first quarter of 2022, which is expected to also be a peak quarter for inflation rates despite expectations for low double digit inflation to be recorded this year,” Mr. Bryant stated. “Our key 2022 objectives include focus on organic growth across all business lines, continuing to integrate and drive growth from our recently closed acquisitions, and effective excess capital deployment through share repurchases and additional acquisitions.”
2030 Sustainability Goals Announced
On January 25, 2022, Axalta announced its commitment to an absolute reduction of 50% of Scope 1 and 2 greenhouse gas (GHG) emissions by 2030, on its way to becoming carbon neutral in its operations by 2040. In addition, the company has made 10 new sustainability commitments for 2030. Key among these is the commitment to produce sustainability benefits from 80% of Axalta’s new technology and innovation developments.
Robert Bryant commented, “Along with our pursuit of growth and value creation, we are very excited to announce our commitment to building a more sustainable future and to share our 2030 Sustainability Goals, which are detailed in full at axalta.com/sustainability. Aligned with these new goals, we have rolled out a new strategic ESG construct. Structured under three pillars – Planet Solutions, Business Solutions, and People Solutions – this construct will guide us from a strategic, customer partnership, and employee engagement perspective. We’re excited to work with our people, our customers, and other global stakeholders on this journey toward a more sustainable future. We look forward to sharing our progress on these goals over time, which we view as a key piece of our commitment to developing value at Axalta for all stakeholders,” Mr. Bryant concluded.
Performance Coatings Fourth Quarter Results
Performance Coatings fourth quarter net sales were $804.0 million, an increase of 14.2% year-over-year. Constant currency net sales saw 9.6% year-over-year organic growth in the period as both end-markets provided strong contributions to a 5.0% segment volume increase and a 4.6% price and product mix benefit. M&A, which included a full quarter contribution from the U-POL acquisition that closed in mid-September 2021, added 6.0% to segment net sales in the period. Foreign exchange in the fourth quarter was a 1.4% year-over-year headwind led by the Euro.
Refinish net sales increased 12.8% year-over-year to $470.9 million in Q4 2021, including a 4.5% year-over-year volume increase as stabilized global traffic supported stronger customer demand in the period. Despite the ongoing recovery, volumes remained below 2019 pre-pandemic levels by high single digits in the fourth quarter. Incremental traffic recovery over the next year coupled with ongoing new product rollouts is anticipated to drive continued growth in Refinish net sales. Average price and product mix increased low single digits in the period, including moderate mix headwinds, to counteract rising variable cost inflation. The U-POL acquisition contributed 8.1% to overall net sales growth for Refinish in the period.
Industrial net sales increased 16.3% to $333.1 million, including strong mid-single digit volume growth coupled with high single digit increases in average price and product mix, largely from improved pricing to offset variable cost inflation. Net sales increased substantially in all Industrial end-businesses and nearly all regions. Despite this strong result, constrained raw material availability also continued during the period and moderately impacted net sales volumes, primarily in North America and EMEA.
The Performance Coatings segment generated Adjusted EBIT of $99.7 million in the fourth quarter compared with $129.5 million in Q4 2020, with associated margins of 12.4% and 18.4%, respectively. This result was led by continued volume as well as positive price and product mix, which was more than offset by increases in variable cost inflation and a step down in temporary cost savings versus the prior year period.
Mobility Coatings Fourth Quarter Results
Mobility Coatings net sales were $333.2 million in Q4 2021, a decrease of 10.1% year-over-year, including a 0.8% currency translation headwind. Constant currency net sales decreased 9.3% year-over-year, driven by a 11.0% decrease in volume, including notable customer supply constraint impacts, offset partially by a 1.7% price-mix improvement inclusive of moderate mix headwinds.
Light Vehicle net sales decreased 14.4% to $254.9 million year-over-year (decreased 13.7% excluding foreign currency headwinds), driven by continued customer supply constraints, which improved moderately in the fourth quarter and contributed to a sequential improvement in net sales volumes of 11.5%. Axalta estimates that total impact from customer supply constraints during Q4 was approximately $65 million, with automotive production for the full year reduced by approximately 9.6 million vehicles versus initial forecasts. Production impacts from supply chain constraints are expected to abate somewhat during the course of 2022, and Axalta is assuming an ~8.5% increase in 2022 automotive production on average across its customer base, aligned with industry forecasts.
Commercial Vehicle net sales increased 7.6% to $78.3 million versus Q4 2020 (increased 8.4% excluding foreign currency), driven by ongoing global production rate stability versus the prior year quarter and supported by strong continued global demand across most vehicle end-businesses served, especially in truck and recreational vehicle. Average price and product mix was a moderate tailwind in the period driven by pricing improvement implemented to offset inflation. Overall Commercial Vehicle demand remains healthy, with new truck backlogs remaining historically strong and supporting strong ongoing production rates globally, excluding China.
The Mobility Coatings segment recorded an Adjusted EBIT loss of $3.5 million in Q4 2021 compared with Adjusted EBIT of $47.9 million in Q4 2020. This result was driven by substantial global volume headwinds in Light Vehicle, coupled with continued variable cost and reduced operating expense tailwinds due to lower temporary cost savings than those seen in the prior-year quarter, offset slightly by tailwinds in average price and product mix.
Balance Sheet and Cash Flow Highlights
Axalta ended the year with cash and cash equivalents of $840.6 million and total liquidity of approximately $1.4 billion. Our net debt to trailing twelve month (“LTM”) Adjusted EBITDA ratio was 3.5x at year end and consistent with the September 30, 2021 level, driven by stronger cash balances despite completed share repurchases, offset by moderately lower LTM Adjusted EBITDA. Axalta ended the year with an Adjusted EBITDA to interest expense coverage ratio of 6.3x.
Fourth quarter total operating cash flow was $268.6 million versus $278.4 million in Q4 2020, reflecting solid underlying operating performance despite persistent raw material inflation and overall focus on driving cash flow. Free cash flow totaled $249.4 million compared with $256.0 million in Q4 2020, including lower capital expenditures in the period totaling $22.9 million versus $25.9 million in the prior year quarter. Investing activities also increased in the fourth quarter with the sales of multiple properties, which cumulatively benefited cash balances by $25.4 million during the fourth quarter. We repurchased 1.0 million shares of our common stock during the fourth quarter for total consideration of $30.0 million at an average price of $30.94 per share, bringing repurchases under our program for 2021 to a total of $243.7 million at an average price of $29.58 per share.
“The fourth quarter demonstrated strong operating execution and excellent cash conversion in the context of challenged operating earnings due to supply chain issues. We are proud of the team’s continued focus, which enabled mitigation of cost inflation headwinds during the course of 2021 and allowed us to finish the year with a strong foundation for continued recovery during 2022,” said Sean Lannon, Axalta’s Chief Financial Officer. “In 2022, we plan to focus intently on closing the price-cost gap with ongoing pricing actions, while driving our organic growth goals and maintaining vigilance around strong capital returns on our investments. Capital allocation will continue to target shareholder value creation with both opportunistic share repurchases and disciplined M&A, and we believe Axalta remains on track to deliver our 2024 earnings targets.”
Q1 2022 Guidance
- Net Sales: ~+5% including ~(3)% FX, ~4% M&A benefit; anticipated price of mid- to high-single digits
- Performance Coatings: high single digits growth (ex-FX and M&A)
- Mobility Coatings: high single digits contraction (ex-FX and M&A)
- Adjusted EBIT: $100-120 million
- D&A: ~$81 million; including ~$24 million of step-up D&A
- Interest Expense: ~$32 million
- Tax Rate: 22-24%
- Adjusted Diluted EPS: $0.22-$0.29; including $0.02 FX headwind
- Expected raw material inflation of ~25-27% versus Q1 2021
Full Year 2022 Commentary
- Performance Coatings growth expected from continued Refinish recovery, continued robust organic growth within Industrial Coatings
- Global auto production expected to improve; Mobility Coatings growth solidly ahead of global production levels
- Modest FX headwinds expected driven largely by the Euro and Real
- Raw material inflation expected at low double digits, inclusive of oil price at $85 per barrel (Brent); peak inflation is expected to occur in Q1 2022
- Price-mix anticipated to offset cumulative raw material inflation within 2022
- Adjusted EBIT expected to show strong growth versus 2021 on strong volumes and ramping of pricing, offset partially by continued inflationary pressure which is expected to moderate in 2H 2022
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