Axalta Releases First Quarter 2019 Results

PHILADELPHIA, April 24, 2019 /PRNewswire/ -- Axalta Coating Systems Ltd. (NYSE: AXTA) ("Axalta"), a leading global coatings company, announced its financial results for the first quarter ended March 31, 2019.

First Quarter 2019 Consolidated Financial Results

First quarter net sales of $1,119.3 million decreased 4.5% year-over-year including 4.8% negative foreign currency impacts. Constant currency net sales increased 0.3% in the period, driven by 2.1% higher average price and product mix and modest acquisition contribution, offset partly by 2.1% lower organic volumes. First quarter net sales growth ex-FX was driven by modest growth from the Americas seen in higher price and product mix and growth in Commercial Vehicle end-markets, partially offset by lower net sales from Asia Pacific, given ongoing volume pressure from China in Transportation Coatings.

Income from operations for the first quarter totaled $98.6 million, down 17.8% from $120.0 million in Q1 2018. This was driven by lower reported net sales including negative foreign currency effects, and continued headwinds from year-over-year variable cost inflation. The quarter was also impacted by $6.1 million in accelerated depreciation charges associated with our anticipated Belgium plant closure and a $5.2 million loss on an anticipated sale of a 60% owned powder coatings joint venture in China.

Adjusted EBIT of $143.9 million for the first quarter decreased 9.3% versus $158.6 million in Q1 2018. This result was driven by substantial year-over-year variable cost inflation impacts, negative impacts from foreign currency, and headwinds from lower volumes primarily in Light Vehicle, offset in part by strong contribution from higher average price and product mix and from improved overall productivity.

"First quarter results met our previously provided guidance, and were produced despite several headwinds, including notably higher raw material costs and a substantial swing in foreign exchange impacts versus first quarter 2018," said Robert W. Bryant, Axalta's Chief Executive Officer. "Our Performance Coatings segment saw strong ongoing price and mix improvement, more than offsetting slightly negative volumes in the quarter. In Transportation Coatings, we saw a modest increase in average prices while product mix had a decremental impact in the quarter. Light Vehicle volume also saw pressure from slower global production rates, notably from double digit declines in China versus the prior year quarter. Our focus on productivity also contributed to lower overall operating costs for the first quarter."

Performance Coatings Results

Performance Coatings first quarter net sales were $713.3 million, a decrease of 2.4% year-over-year including a 4.8% negative currency impact. Constant currency net sales increased 2.4% in the period, driven by 1.9% organic sales growth which was primarily the result of improved average price and mix. Acquisitions contributed 0.5% to net sales growth.

Refinish end-market net sales decreased 2.1% to $405.5 million in Q1 2019 (increased 3.5% excluding foreign currency) with strong average price and mix contribution offset partly by lower volume, which in North America resulted largely from moderate distributor channel inventory reduction. Industrial end-market net sales decreased 2.8% to $307.8 million (increased 1.0% excluding foreign currency), including positive pricing across all regions offset partly by modest organic volume declines from EMEA and to a lesser extent in Asia Pacific.

The Performance Coatings segment generated Adjusted EBIT of $78.6 million in the first quarter, a 3.4% year-over-year increase. Positive price and product mix and a very modest acquisition contribution were offset partly by impact from raw material inflation, volume declines and foreign exchange headwinds. First quarter segment Adjusted EBIT margin of 11.0% improved from 10.4% in the prior year as price and product mix more than offset ongoing raw material headwinds.

Transportation Coatings Results

Transportation Coatings net sales were $406.0 million in Q1 2019, a decrease of 7.9% year-over-year, including a 4.8% negative currency impact.  Constant currency net sales decreased 3.1% in the period including a 3.3% decrease in volume, offset by 0.2% higher average price and product mix effect.

Light Vehicle net sales decreased 10.6% to $315.9 million year-over-year (decreased 5.4% excluding foreign currency), driven by lower volumes and foreign exchange impacts, offset by moderately higher average price and product mix. Overall average pricing remained positive in the period, offset partially by negative product mix effects. Commercial Vehicle net sales increased 2.6% to $90.1 million from Q1 2018 (increased 6.6% excluding foreign currency), including stronger volumes led by North America and largely stable markets globally. Average price and product mix were essentially flat.

Transportation Coatings generated Adjusted EBIT of $34.2 million in Q1 2019, a decrease of 24.0% versus Q1 2018, driven by the impact from raw material inflation as well as lower volume, while average price and product mix were a slight positive offset. Segment Adjusted EBIT margin of 8.4% in Q1 2019 compared with 10.2% in Q1 2018.

Balance Sheet and Cash Flow Highlights

We ended the quarter with cash and cash equivalents of $501.1 million. Our debt, net of cash, was $3.4 billion as of March 31, 2019, which compared with $3.2 billion as of year-end 2018. This was driven by the first quarter use of operating cash flow, as well as share repurchases made in the period. Our net debt to trailing twelve month Adjusted EBITDA ratio was 3.6x at quarter end. Axalta repurchased 2.5 million shares of its common stock in the first quarter of 2019 for total consideration of $65.8 million.

First quarter operating cash flow totaled a use of $57.9 million versus a use of $21.0 million in the corresponding quarter of 2018, reflecting lower operating income and modest working capital headwinds partially due to timing of collections. Free cash flow totaled a use of $74.9 million compared to use of $60.5 million in the first quarter of 2018.

"Axalta's first quarter included strong overall operating performance, meeting our outlined guidance from late January," said Sean Lannon, Axalta's Chief Financial Officer. "We are pleased that operating and financial performance remains on track for our full year expectation, and we remain focused on achieving our goals despite Q1 headwinds seen in foreign currency as well as incremental volume pressures from our Industrial and Light Vehicle end-markets. We are also focused on achieving continued incremental pricing offsets to variable input inflation, while driving productivity across the enterprise via Axalta Way initiatives."

2019 Reporting Changes
Beginning on January 1, 2019, we adopted ASU 2016-02, "Leases", which requires, among other items, lessees to identify arrangements that should be accounted for as leases and generally recognize for operating and finance leases with terms exceeding twelve months, a right-of-use asset and lease liability on the balance sheet. There were no material impacts to the condensed consolidated statement of operations or statement of cash flows related to the adoption.

The adoption impacted the following line items within the unaudited condensed consolidated balance sheet as of March 31, 2019. There are no impacts to prior period financial information related to the change in the accounting for leases.

Beginning with the first quarter 2019, we changed our primary performance metrics to Adjusted EBIT and Adjusted EPS from Adjusted EBITDA. Reconciliations are provided for Adjusted EBIT and Adjusted EPS as well as Adjusted EBITDA to the most directly comparable financial measures calculated in accordance with US GAAP.

Reclassifications and Revisions

During the three months ended March 31, 2019, we revised the presentation of the unaudited Condensed Consolidated Statements of Operations to reclassify Other revenue into Net sales. Other revenue consists primarily of consulting, other service revenue and royalty income and is not considered material to the financial statements.

During the three months ended March 31, 2019, Axalta identified and corrected an error related to the classification of the purchase of an additional financial interest in a consolidated joint venture within our consolidated statement of cash flows. This correction increased cash used for investing activities and reduced cash used for financing activities by $26.9 million, respectively.

2019 Guidance Update

We are updating our previous outlook for the full year 2019 as follows:

• Net sales growth of ~0-1% as-reported; ~1-2% ex-FX; includes impact of anticipated Q2 2019 sale of Asia Pacific joint venture
• Adjusted EBIT of $675-725 million ⁽¹⁾
• Adjusted EPS range of $1.68-1.88 ⁽¹⁾
• Adjusted EBITDA of $950-1,000 million
• Interest expense of ~$165 million
• Income tax rate, as adjusted, of 20-22%
• Free cash flow range of $430-470 million
• Capital expenditures of ~$160 million
• Depreciation and amortization of ~$375 million
• Diluted shares outstanding of ~238 million

(1) Adjusted to exclude ~$115 million pre-tax (~$90 million after-tax) incremental step-up depreciation and amortization associated with the acquisition of DuPont Performance Coatings by Axalta

Conference Call Information

As previously announced, Axalta will hold a conference call to discuss its first quarter 2019 financial results on Wednesday, April 24th, at 8:00 a.m. ET. The U.S. dial-in phone number for the conference call is (877) 407-0784 and the international dial-in number is +1 (201) 689-8560. A live webcast of the conference call will also be available online at www.axalta.com/investorcall. For those unable to participate in the conference call, a replay will be available through May 1, 2019. The U.S. replay dial-in phone number is (844) 512-2921 and the international replay dial-in number is +1 (412) 317-6671. The replay passcode is 1368 9966.

Cautionary Statement Concerning Forward-Looking Statements

This release may contain certain forward-looking statements regarding Axalta and its subsidiaries including our 2019 full year outlook, which includes net sales growth, currency effects, acquisition or divestment impacts, Adjusted EBIT, Adjusted EPS, Adjusted EBITDA, interest expense, income tax rate, as adjusted, free cash flow, capital expenditures, depreciation and amortization, and diluted shares outstanding. All of these statements are based on management's expectations as well as estimates and assumptions prepared by management that, although they believe to be reasonable, are inherently uncertain. These statements involve risks and uncertainties, including, but not limited to, economic, competitive, governmental and technological factors outside of Axalta's control that may cause its business, industry, strategy, financing activities or actual results to differ materially. More information on potential factors that could affect Axalta's financial results is available in the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" section within Axalta's most recent annual report on Form 10-K, and in other documents that we have filed with, or furnished to, the U.S. Securities and Exchange Commission. Axalta undertakes no obligation to update or revise any of the forward-looking statements contained herein, whether as a result of new information, future events or otherwise.

Non-GAAP Financial Measures

The historical financial information included in this presentation includes financial information that is not presented in accordance with generally accepted accounting principles in the United States ("GAAP"), including constant currency net sales growth, income tax rate, as adjusted, EBIT, Adjusted EBIT, EBITDA, Adjusted EBITDA, Adjusted EPS, free cash flow, net debt and Adjusted net income. Management uses these non-GAAP financial measures in the analysis of our financial and operating performance because they assist in the evaluation of underlying trends in our business. Adjusted EBITDA, Adjusted EBIT and Adjusted EPS consist of EBITDA, EBIT and Diluted EPS, respectively, adjusted for (i) certain non-cash items included within net income, (ii) certain items Axalta does not believe are indicative of ongoing operating performance or (iii) certain nonrecurring, unusual or infrequent items that have not occurred within the last two years or we believe are not reasonably likely to recur within the next two years. We believe that making such adjustments provides investors meaningful information to understand our operating results and ability to analyze financial and business trends on a period-to-period basis. Adjusted net income shows the adjusted value of net income (loss) attributable to controlling interests after removing the items that are determined by management to be items that we do not consider indicative of our ongoing operating performance or unusual or nonrecurring in nature. Our use of the terms constant currency net sales growth, income tax rate, as adjusted, EBIT, Adjusted EBIT, EBITDA, Adjusted EBITDA, Adjusted EPS, free cash flow, net debt and Adjusted net income may differ from that of others in our industry. Constant currency net sales growth, income tax rate, as adjusted, EBIT, Adjusted EBIT, EBITDA, Adjusted EBITDA, Adjusted EPS, free cash flow, net debt and Adjusted net income should not be considered as alternatives to net sales, net income (loss), income (loss) before operations or any other performance measures derived in accordance with GAAP as measures of operating performance or operating cash flows or as measures of liquidity. Constant currency net sales growth, income tax rate, as adjusted, EBIT, Adjusted EBIT, EBITDA, Adjusted EBITDA, Adjusted EPS, free cash flow, net debt and Adjusted net income have important limitations as analytical tools and should be considered in conjunction with, and not as substitutes for, our results as reported under GAAP. This presentation includes a reconciliation of certain non-GAAP financial measures with the most directly comparable financial measures calculated in accordance with GAAP. Axalta does not provide a reconciliation for non-GAAP estimates for constant currency net sales growth, Adjusted EBIT, Adjusted EBITDA, Adjusted EPS, income tax rate, as adjusted, or free cash flow on a forward-looking basis because the information necessary to calculate a meaningful or accurate estimation of reconciling items is not available without unreasonable effort. For example, such reconciling items include the impact of foreign currency exchange gains or losses, gains or losses that are unusual or nonrecurring in nature, as well as discrete taxable events. We cannot estimate or project these items and they may have a substantial and unpredictable impact on our US GAAP results.

Constant Currency

Constant currency or ex-FX percentages are calculated by excluding the change in average exchange rates between the current and comparable period by currency denomination exposure of the comparable period amount.

Segment Financial Measures

The primary measure of segment operating performance is Adjusted EBIT, which is a key metric that is used by management to evaluate business performance in comparison to budgets, forecasts and prior year financial results, providing a measure that management believes reflects Axalta's core operating performance. As we do not measure segment operating performance based on net income, a reconciliation of this non-GAAP financial measure with the most directly comparable financial measure calculated in accordance with GAAP is not available.

About Axalta Coating Systems

Axalta is a global leader in the coatings industry, providing customers with innovative, colorful, beautiful and sustainable coatings solutions. From light vehicles, commercial vehicles and refinish applications to electric motors, building facades and other industrial applications, our coatings are designed to prevent corrosion, increase productivity and enhance durability. With more than 150 years of experience in the coatings industry, the 14,000 people of Axalta continue to find ways to serve our more than 100,000 customers in 130 countries better every day with the finest coatings, application systems and technology. For more information, visit axalta.com and follow us @axalta on Twitter.

The following table reconciles income from operations to adjusted EBIT for the periods presented (in millions):

The following table reconciles net income to adjusted net income for the periods presented (in millions, except per share data):

The following table reconciles cash provided by operating activities to free cash flow for the periods presented (in millions):

The following table reconciles net income to EBITDA and adjusted EBITDA for the periods presented (in millions):

Contact
Christopher Mecray
D +1 215 255 7970
Christopher.Mecray@axalta.com

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SOURCE Axalta Coating Systems Ltd.