PHILADELPHIA--(BUSINESS WIRE)--Axalta Coating Systems Ltd. (NYSE:AXTA), a leading global coatings company, announced its financial results for the third quarter ended September 30, 2017.
Third Quarter Consolidated Financial Results
Net sales of $1,091.8 million for the third quarter of 2017 increased 7.0%, including 1.9% in favorable foreign currency translation contribution. Constant currency net sales increased 5.1% in the period, driven by 9.7% in acquisition contribution, offset by 3.9% lower volumes and 0.7% lower average selling prices. The lower organic net sales were driven by distributor working capital adjustments in North America Performance Coatings, impacts from recent natural disasters as well as lower volume comparisons from Latin America, including the effect of the deconsolidation of Venezuela operating results.
Net income attributable to Axalta was $54.9 million for the third quarter of 2017 compared with a net loss attributable to Axalta of $6.6 million in Q3 2016. The increase was primarily driven by the absence this year of debt extinguishment and financing-related costs incurred in 2016. Adjusted net income of $65.0 million for the third quarter of 2017 decreased from $81.6 million in Q3 2016 due largely to lower volumes in North America and higher raw material costs.
Adjusted EBITDA of $209.5 million for the third quarter compared with $230.4 million in Q3 2016. This result was driven by lower volumes principally in Performance Coatings, higher raw material costs, and lower selling prices within the Transportation Coatings segment. These factors were offset in part by savings from our operating improvement initiatives and by the contribution of recent acquisitions.
“As communicated in early October, Axalta's third quarter was materially impacted by a combination of factors unrelated to end-market demand conditions, which remain broadly stable since last quarter. Impacts to the quarter included Performance Coatings distributor working capital adjustments, raw material price-cost pressure, and the impact of recent natural disasters,” said Charles W. Shaver, Axalta’s Chairman and Chief Executive Officer. “We believe that these impacts are transitory, and we expect improved financial performance beginning in the fourth quarter, assuming continued broadly stable market conditions,” Mr. Shaver said.
“We believe Performance Coatings results should reflect stable end-market patterns looking ahead, while we continue to make broader headway in offsetting input cost pressure via a combination of pricing adjustments and doubling down on cost and productivity levers beginning immediately,” Mr. Shaver added. “These steps give us reasonable confidence that the issues impacting performance in 2017 are predominately transitional as opposed to structural.”
“We remain encouraged by both supportive market conditions and ongoing progress in terms of core volume growth across many end-markets we serve. We have seen strong organic volume growth in Industrial, and ongoing positive organic contribution from Commercial Vehicle year-to-date. While Refinish and Light Vehicle results have been clearly more mixed, given specific issues we have noted, our overall share remains stable and growing in key target markets,” Mr. Shaver noted.
Performance Coatings Results
Performance Coatings net sales were $693.5 million in Q3 2017, an increase of 12.5% year-over-year including 2.1% favorable foreign currency contribution. Constant currency net sales increased 10.4%, driven by a 16.1% acquisition contribution, and 0.9% higher average selling prices, offset by a 6.6% decrease in organic volumes.
Net sales in our Refinish end-market decreased 8.4% in Q3 2017 (decreased 10.6% excluding foreign currency translation), led by the impact of lower volumes from distributor working capital adjustments and the deconsolidation of our Venezuela operations in Q2 2017. Industrial end-market net sales increased 61.4% in the third quarter (increased 59.5% excluding foreign currency translation) and double digits before acquisition contribution.
The Performance Coatings segment generated Adjusted EBITDA of $135.1 million in the third quarter, a 7.3% year-over-year decrease. Negative impact from organic volumes, coupled with variable cost headwinds, were partially offset by solid acquisition contribution. Segment Adjusted EBITDA margin of 19.5% in Q3 2017 reflected a 410 basis point decrease compared to the corresponding prior year quarter.
Transportation Coatings Results
The Transportation Coatings segment produced net sales of $398.3 million in Q3 2017, a decrease of 1.4% versus third quarter 2016. Constant currency net sales were down 2.8% year-over-year, driven by 3.0% lower average selling prices partially offset by a 0.2% increase in volumes.
Light Vehicle net sales decreased 3.6% year-over-year (decreased 4.9% excluding foreign currency translation), largely impacted by lower sales in North America including effects of recent natural disasters and other customer specific factors causing lower than market volume production in the period. Commercial Vehicle net sales increased 6.7% versus last year (increased 5.2% excluding foreign currency translation), driven by stabilized heavy truck production in North America, strength in Asia Pacific as well as growth from non-truck customers.
The Transportation Coatings segment generated Adjusted EBITDA of $74.4 million in Q3 2017, a decrease of 12.2% compared to the third quarter of 2016, with somewhat lower operating expense benefit and modest foreign exchange benefit more than offset by the impact from lower selling prices at targeted Light Vehicle customers and increased variable cost pressure. Segment Adjusted EBITDA margin of 18.7% in Q3 2017 compared with 21.0% in the prior year quarter.
Balance Sheet and Cash Flow Highlights
We ended the quarter with cash and cash equivalents of $588.9 million. Our net debt was $3.3 billion as of September 30, 2017. This compared to $3.4 billion as of the end of the second quarter, driven by higher cash balances.
Third quarter operating cash flow was $212.3 million versus $145.3 million in the corresponding quarter of 2016, reflecting stronger working capital performance in the period. Free cash flow, calculated as operating cash flow less capital expenditures, totaled $182.5 million including capital expenditures of $29.8 million.
“In spite of notable third quarter impacts to our financial results, we remain confident in the underlying earnings power of the business and look forward to demonstrating this in coming periods,” said Robert W. Bryant, Axalta’s Executive Vice President and Chief Financial Officer. “We continue to expect stronger results in Q4 driven by a combination of more normal Performance Coatings volumes, recovery from recent natural disaster-related disruptions, and ongoing progress in pricing initiatives as well as clear focus on incrementally reducing our cost structure. We further see benefits from these drivers to 2018 operating results, which helps give us further confidence as we look out into next year. Our initial expectation is that 2018 Adjusted EBITDA growth should be achievable in the double digits, in part reflecting the lower 2017 comparison as well as more normal operating trends in our preliminary budgeting process.”
2017 Guidance Update
We are reiterating our outlook for the full year 2017 as follows:
- Net sales growth of 6-7% assuming neutral FX impact and driven largely by acquisition contribution
- Adjusted EBITDA of $870-900 million
- Interest expense of ~$150 million
- Income tax rate, as adjusted, of 22-24%
- Free cash flow of $360-400 million
- Capital expenditures of ~$130 million
- Depreciation and amortization of ~$350 million
- Diluted shares outstanding of ~246 million
2016 Adoption of Share-based Compensation Expense Accounting Standard
During the three months ended December 31, 2016, Axalta adopted ASU 2016-09, which addresses, among other items, the accounting for income taxes, calculations on diluted weighted average shares outstanding, and cash flow presentation relating to share-based compensation. The adoption resulted in the recasting of previously issued quarterly financial statements, including an increase to net income attributable to Axalta by $6.4 million and $10.8 million for the three and nine months ended September 30, 2016. The impact of adoption also increased Axalta's dilutive shares by 0.0 million and 1.8 million shares for the three and nine months ended September 30, 2016.
Revision of Prior Year Financial Statements
During the three months ended June 30, 2017, as part of Axalta’s efforts to analyze the impact of the 2018 U.S. GAAP accounting adoption of the new Revenue Recognition standard, Axalta identified and corrected errors that affected previously-issued consolidated financial statements. Axalta determined that these corrections were immaterial to the previously-issued financial statements; however, given the significance of the cumulative adjustments on the financial results for the three and six months ended June 30, 2017, we revised certain amounts in the previously issued condensed consolidated financial statements, including revisions to the condensed consolidated statement of operations for the three and nine months ended September 30, 2016, as discussed further below.
Axalta has corrected the errors in the timing of revenue recognition by estimating those additional rebates and pricing concessions at the time of sale to distribution customers and reducing net sales by $2.8 million ($2.3 million after tax) and $2.7 million ($2.3 million after tax) for the three and nine months ended September 30, 2016, respectively. These corrections did not have a material impact on the 2017 condensed consolidated financial statements.
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 13,300 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 axaltacoatingsystems.com and follow us @axalta on Twitter.
