PPG Industries, Inc. 2021 Q2 Form 10-Q Summary
Business context and reporting period
PPG is a multinational coatings and specialty materials manufacturer operating through Performance Coatings and Industrial Coatings. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared primarily with the corresponding 2020 periods.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $4.359 billion | $3.015 billion | $8.240 billion | $6.392 billion |
| Income before taxes | $593 million | $126 million | $1.092 billion | $445 million |
| Net income attributable to PPG | $431 million | $102 million | $809 million | $345 million |
| Diluted EPS | $1.80 | $0.43 | $3.38 | $1.45 |
| Operating cash flow | Not separately provided | Not separately provided | $581 million | $322 million |
Q2 net sales increased 44.6%, while six-month sales increased 28.9%. Q2 cost of sales rose to 60.3% of sales from 56.5%; SG&A declined to 21.9% of sales from 25.4%. The reported Q2 effective tax rate was 27.0%, versus 23.0% in the prior year; adjusted Q2 EPS was $1.94. The six-month reported effective tax rate was 25.1%, and adjusted EPS was $3.82.
At June 30, 2021, cash and cash equivalents were $1.195 billion and short-term investments were $110 million. Current assets were $7.446 billion against current liabilities of $5.488 billion. Short-term and current debt totaled $770 million, and long-term debt was $6.387 billion, or approximately $7.157 billion in total debt. The company reported a total-indebtedness-to-total-capitalization ratio of 50%.
Six-month investing cash outflows included $2.126 billion for acquisitions and $142 million of capital expenditures. Financing cash inflows included $699 million of term-loan proceeds and $692 million of net proceeds from the March 2021 notes issuance. Cash dividends paid were $256 million, and cash declined by $631 million to $1.195 billion during the first six months.
Material changes versus the prior comparable period
- Sales growth reflected higher volumes, acquisitions, favorable foreign currency translation and higher selling prices. Q2 contributions were approximately 24% from volume, 11% from acquisitions, 6% from currency and 4% from pricing.
- Performance Coatings Q2 sales increased 32.9% to $2.749 billion and segment income increased 25.4% to $454 million.
- Industrial Coatings Q2 sales increased 70.2% to $1.610 billion and segment income increased to $190 million from $34 million, benefiting from recovery in automotive and industrial production.
- PPG completed its acquisition of approximately 97.3% of Tikkurila for an aggregate purchase price of $1.7 billion, net of cash acquired. It also acquired Wörwag, Cetelon Lackfabrik and VersaFlex.
- Goodwill increased to $6.233 billion from $5.102 billion at December 31, 2020, primarily due to acquisitions. Identifiable intangible assets increased to $3.024 billion from $2.351 billion.
- Operating cash flow increased from $322 million to $581 million for the six-month period, but working-capital investment increased materially, including a $480 million use of cash from receivables and a $280 million use from inventories.
- Debt increased substantially to fund acquisitions. Commercial paper outstanding was $800 million at June 30, 2021, compared with $250 million at year-end 2020.
Guidance, outlook, risks and unusual items
- Management expects 2021 capital spending of $425 million to $450 million and mandatory non-U.S. pension contributions of $10 million to $15 million during the remaining six months.
- Management expects a full-year 2021 effective tax rate of 22% to 24% and a third-quarter rate of 21% to 23%, including potential favorable discrete items.
- Raw-material and transportation costs, supply disruptions and logistics costs are expected to increase in the third quarter. Management expects second-half 2021 raw-material and logistics inflation to exceed the benefit of pricing, with improvement anticipated in the first half of 2022.
- Performance Coatings faces continued supply disruptions, particularly in U.S. architectural coatings and traffic solutions. Industrial Coatings expects third-quarter sales volumes to increase at a low-single-digit rate year over year, including supply-disruption effects.
- Restructuring programs are expected to generate at least $135 million of savings in 2021. The 2020 program is expected to produce annualized savings of $160 million to $170 million once fully implemented.
- Reported results included acquisition-related amortization and costs, environmental remediation charges, natural-disaster expenses, restructuring-related items, a $22 million U.K. tax-rate charge, a $14 million release of COVID-19 credit-loss reserves and $22 million of legal-settlement income.
- Environmental reserves totaled $314 million, including $107 million for New Jersey Chrome. Additional reasonably possible but unreserved environmental losses were estimated at $100 million to $200 million. Projected environmental cash outlays were $60 million to $80 million for the remainder of 2021 and $20 million to $50 million annually during 2022 through 2025.
- PPG reported approximately 810 open and active asbestos-related claims and maintained approximately $190 million of reserves for claims outside the Pittsburgh Corning trust structure. Management stated that litigation and environmental outcomes are not expected to materially affect consolidated financial position or liquidity, although they could materially affect results in a particular period.
- Key risks include raw-material availability and inflation, pricing execution, supply-chain disruptions, COVID-19 recovery, acquisition integration, foreign exchange, environmental and asbestos liabilities, litigation, tax changes and economic conditions.
Most important facts for investors to verify
- Whether pricing actions can offset rapidly rising raw-material, transportation and logistics costs.
- The integration, valuation and earnings contribution of Tikkurila and the other 2021 acquisitions.
- Working-capital trends, particularly receivables and inventories, and their effect on cash conversion.
- Debt reduction plans, covenant headroom and refinancing needs given the increase in commercial paper and acquisition-related borrowings.
- The timing and ultimate cost of environmental remediation, asbestos claims and other contingencies.
- Whether restructuring savings and projected capital spending support the company’s longer-term margin and cash-flow objectives.