PPG Industries, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
PPG is a multinational coatings and specialty materials manufacturer with two reportable segments: Performance Coatings and Industrial Coatings. This unaudited quarterly report covers the three months ended March 31, 2020, compared primarily with the three months ended March 31, 2019. Results were materially affected by the COVID-19 pandemic, including shutdowns in China and customer and retail closures beginning in March.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $3.377 billion | $3.624 billion | Down 6.8% |
| Income before income taxes | $319 million | $419 million | Down 23.9% |
| Net income attributable to PPG | $243 million | $312 million | Down 22.1% |
| Diluted EPS | $1.02 | $1.31 | Down 22.1% |
| Adjusted diluted EPS | $1.19 | $1.38 | Down 13.8% |
| Effective tax rate | 22.3% | 24.3% | Down 2.0 percentage points |
| Cash used in operating activities | $159 million | $66 million | Use increased $93 million |
| Capital expenditures | $37 million | $47 million | Down $10 million |
| Dividends paid | $120 million | $113 million | Up $7 million |
Cost of sales declined 8.0% to $1.908 billion, and cost of sales as a percentage of sales improved to 56.5% from 57.2%. SG&A increased 1.8% to $905 million, with SG&A as a percentage of sales rising to 26.8% from 24.5%, partly because of a $30 million COVID-19-related allowance for doubtful accounts. Net income margin was approximately 7.2%, versus approximately 8.6% in the prior-year quarter.
- Performance Coatings: Sales of $2.008 billion, down 4.7%; segment income of $272 million, down 8.4%.
- Industrial Coatings: Sales of $1.369 billion, down 9.7%; segment income of $181 million, down 17.0%.
- Liquidity: Cash and short-term investments totaled approximately $1.936 billion at March 31, 2020, compared with $1.273 billion at December 31, 2019.
- Debt: Current debt and the current portion of long-term debt were $1.456 billion, and long-term debt was $4.751 billion. The company reported a total-indebtedness-to-total-capitalization ratio of 53%, below its 60% covenant limit.
Material changes versus the prior comparable period
- Sales volumes declined approximately 8%, while unfavorable currency translation reduced sales by approximately 2%; higher selling prices and acquisition-related sales provided partial offsets.
- Asia Pacific sales declined 21.3%, compared with declines of 3.6% in the United States and Canada, 4.8% in EMEA, and 3.6% in Latin America.
- COVID-19 reduced estimated first-quarter net sales by approximately $225 million and diluted EPS by approximately $0.35, according to management.
- PPG recorded a $30 million allowance for expected trade-receivable credit losses related to COVID-19.
- Other comprehensive loss was $702 million, primarily due to foreign-currency translation, compared with other comprehensive income of $75 million in Q1 2019. Total PPG shareholders’ equity fell to $4.723 billion from $5.284 billion at December 31, 2019.
- Cash used in operations increased to $159 million, driven by lower earnings and working-capital requirements, including increased inventories.
- PPG completed acquisitions of Alpha Coating Technologies and ICR during the quarter; their pro forma impact was not significant.
- No shares were repurchased during the quarter under the existing $2.5 billion authorization.
Guidance, outlook, management commentary, and unusual items
- PPG withdrew all previously communicated full-year 2020 sales and earnings guidance because of uncertainty surrounding global economic demand.
- Management expects second-quarter sales volumes to decline 30% to 35%, assuming demand begins improving in June. Automotive OEM, automotive refinish, aerospace, and certain architectural coatings businesses are expected to be most affected.
- Expected second-quarter segment sales declines are 25% to 35% for Performance Coatings and approximately 30% to 35% for Industrial Coatings.
- Management implemented salary reductions for senior leaders, temporary furloughs, manufacturing and distribution shutdowns, spending reductions, and deferred non-essential capital expenditures. It reported approximately $20 million of restructuring savings in the quarter.
- Full-year 2020 capital spending was expected to be $200 million to $250 million, and total restructuring savings were expected to be $80 million to $90 million.
- PPG borrowed $800 million under its revolving credit facility in March. On April 14, 2020, it borrowed $1.5 billion under a 364-day term loan and used part of the proceeds to repay the $800 million revolver borrowing. The term loan matures April 13, 2021 and includes a 60% indebtedness-to-capitalization covenant.
- Management expects the full-year adjusted effective tax rate to be 22% to 24% and mandatory non-U.S. pension contributions of $10 million to $15 million during the remaining nine months of 2020.
- Restructuring expense was $7 million, environmental remediation charges were $11 million, and business restructuring-related costs included in the segment reconciliation were $13 million. Adjusted diluted EPS excluded the after-tax effects of COVID-19 credit-loss provisions, restructuring-related costs, and environmental remediation charges.
- Environmental reserves totaled $299 million, including $116 million for New Jersey Chrome. Additional reasonably possible but unreserved environmental losses were estimated at $100 million to $200 million.
- Approximately 530 open and active asbestos-related claims were reported, with approximately $190 million reserved for non-channeled asbestos liabilities. PPG also disclosed shareholder derivative actions and other litigation but stated that aggregate outcomes are not expected to materially affect financial position or liquidity.
Important facts for investors to verify
- Whether COVID-19-related volume declines and customer shutdowns persisted beyond the first quarter and whether the company achieved its projected second-quarter recovery assumptions.
- The adequacy of the $50 million allowance for credit losses at March 31, 2020, including the $30 million COVID-19-related provision.
- Liquidity, refinancing, and covenant compliance through the April 2021 maturity of the $1.5 billion term loan and the repayment timing of other short-term borrowings.
- Progress toward restructuring savings and the effect of cost reductions, furloughs, and deferred capital spending on operations.
- Future foreign-exchange effects, particularly the significant first-quarter translation loss and PPG’s exposure to non-U.S.-dollar debt.
- Changes in asbestos, environmental, litigation, and insurance exposures, including the New Jersey Chrome remediation program and the $100 million to $200 million of reasonably possible unreserved environmental losses.
- Whether the company’s stated 22% to 24% adjusted effective tax-rate range and $200 million to $250 million capital-spending expectation remain achievable.