PPG Industries, Inc. — 2020 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
PPG is a global coatings and specialty materials manufacturer reporting two segments: Performance Coatings and Industrial Coatings. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. Results were materially affected by the COVID-19 pandemic, reduced global economic activity, customer shutdowns and foreign-currency movements.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $3,685 million | $3,826 million | $10,077 million | $11,474 million |
| Income before income taxes | $572 million | $481 million | $1,017 million | $1,263 million |
| Net income attributable to PPG | $442 million | $367 million | $787 million | $951 million |
| Diluted EPS from continuing operations | $1.86 | $1.54 | $3.30 | $3.98 |
| Operating cash flow from continuing operations | Not separately provided | Not separately provided | $1,163 million | $1,275 million |
| Cost of sales as a percentage of sales | 55.0% | 57.0% | 55.9% | 57.0% |
| SG&A as a percentage of sales | 22.7% | 23.2% | 24.9% | 23.6% |
Q3 adjusted diluted EPS was $1.93 versus $1.67 in the prior-year quarter. Nine-month adjusted diluted EPS was $4.11 versus $4.90 in 2019. Adjusted measures exclude specified restructuring, COVID-19 credit-loss, environmental, natural-disaster and debt-extinguishment items, as applicable.
- Liquidity: Cash and cash equivalents were $2,008 million and short-term investments were $87 million at September 30, 2020, totaling approximately $2.1 billion.
- Debt: Current debt and the current portion of long-term debt were $675 million; long-term debt was $4,828 million. The remaining $500 million under the 364-day term loan is payable April 13, 2021. Total indebtedness to total capitalization was 48%, below the applicable 60% covenant limit.
- Cash uses: Nine-month capital expenditures were $170 million, acquisition spending was $45 million, and dividends paid were $368 million. No shares were repurchased during the third quarter.
- Dividend: Dividends per common share were $0.54 in Q3 2020 versus $0.51 in Q3 2019.
Material Changes Versus the Prior Comparable Period
- Q3 sales declined 3.7%, driven by a 5% volume decline, partly offset by 1% higher selling prices. Nine-month sales declined 12.2%, reflecting a 13% volume decline and 2% unfavorable currency translation, partly offset by pricing and acquisition-related sales.
- Q3 income before taxes increased 18.9% and diluted EPS from continuing operations increased 20.8%, primarily because cost mitigation, pricing and restructuring savings more than offset lower volumes.
- Nine-month income before taxes declined 19.5% and diluted EPS declined 17.1%, reflecting the pandemic-related volume reduction, unfavorable currency effects and special items.
- Q3 Performance Coatings sales decreased 2.7% to $2,251 million, while segment income increased 12.1% to $426 million. Q3 Industrial Coatings sales decreased 5.2% to $1,434 million, while segment income increased 22.8% to $253 million.
- For the first nine months, Performance Coatings sales declined 7.6% and segment income declined 3.8%. Industrial Coatings sales declined 18.9% and segment income declined 29.0%.
- Cash from operating activities from continuing operations declined $112 million year over year, principally due to lower income and higher restructuring payments.
- Cash and short-term investments increased from approximately $1.3 billion at December 31, 2019 to approximately $2.1 billion at September 30, 2020. PPG repaid $1.0 billion of its term loan in September using cash on hand.
Guidance, Outlook, Risks and Unusual Items
- Management expected the Q4 2020 effective tax rate to be 18% to 21%, including potential favorable discrete items, and full-year 2020 effective tax rate guidance was 21% to 23%.
- 2020 capital spending was expected to be $325 million to $350 million. Remaining mandatory non-U.S. pension contributions were expected to be $5 million to $10 million.
- The 2020 restructuring program carries a pretax charge of approximately $176 million and is expected to generate $160 million to $170 million of annualized savings by completion in 2021. Total restructuring savings were expected to be $100 million to $110 million in 2020.
- Hurricane Laura caused $8 million of Q3 earnings impact and approximately $7 million of estimated lost revenue. A subsequent hurricane caused another early-October shutdown; management expected Q4 sales to be affected by a similar amount to Q3 from the weather-related disruptions.
- Performance Coatings expected year-over-year sales to decline by a mid-single-digit percentage, with sharper declines in commercial aerospace. Industrial Coatings expected Q4 demand to improve modestly sequentially but remain below prior-year levels, with sales down by a low-single-digit percentage.
- COVID-19 remains the principal uncertainty, with potential effects on demand, customer and supplier operations, production, liquidity and financial results. PPG had a $47 million trade-receivable credit-loss allowance at September 30, including $25 million remaining for future COVID-19-related matters.
- Goodwill and indefinite-lived intangible-asset testing identified no impairment trigger as of September 30, 2020, but management will continue monitoring pandemic-related changes in assumptions.
- PPG had approximately 600 open and active asbestos-related claims and reserves of approximately $190 million for non-channelled asbestos liabilities. Environmental reserves totaled $289 million, including $99 million for New Jersey Chrome. Additional reasonably possible, unreserved environmental losses were estimated at $100 million to $200 million.
- Outstanding letters of credit and surety bonds totaled $137 million, with guarantees of $9 million. Management did not expect litigation, environmental matters or guarantees, in aggregate, to materially affect financial position or liquidity, although individual-period earnings impacts could be material.
Investor Verification Checklist
- Verify the pace and durability of volume recovery, particularly in aerospace, automotive refinish, automotive OEM, protective and marine coatings.
- Assess whether restructuring savings offset persistent pandemic-related volume, pricing and foreign-currency pressures.
- Review the April 2021 maturity of the remaining $500 million term loan and the Company’s refinancing or repayment capacity.
- Monitor cash conversion, working capital, capital spending and dividend sustainability as pandemic conditions evolve.
- Track Hurricane Laura and subsequent hurricane effects, including any additional insurance recoveries or impairment charges.
- Evaluate changes in asbestos, environmental and other litigation reserves, especially the New Jersey Chrome remediation estimate.
- Reconcile reported GAAP results with management’s adjusted EPS and adjusted tax-rate measures, which are non-GAAP and exclude material items.