PPG Industries Inc. — Form 10-Q Summary
Business context and reporting period
PPG Industries is a global manufacturer of paints, coatings, sealants and specialty materials, operating through Performance Coatings and Industrial Coatings. This unaudited Form 10-Q covers the three months ended March 31, 2021, compared with the first quarter of 2020. Results were affected by the continuing COVID-19 recovery, acquisitions, foreign currency movements, raw-material inflation and weather-related disruptions.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $3.881 billion | $3.377 billion | 14.9% increase |
| Income before income taxes | $499 million | $319 million | 56.4% increase |
| Net income attributable to PPG | $378 million | $243 million | 55.6% increase |
| Diluted EPS | $1.58 | $1.02 | 54.9% increase |
| Adjusted diluted EPS | $1.88 | $1.31 | 43.5% increase |
| Effective tax rate | 22.8% | 22.3% | 50 basis points higher |
| Operating cash flow | $(23) million | $(159) million | $136 million improvement |
| Capital expenditures | $80 million | $37 million | Increase |
| Dividends paid | $128 million | $120 million | Increase |
Cost of sales increased 17.0% to $2.232 billion, causing the cost-of-sales ratio to rise to 57.5% from 56.5%. SG&A declined 1.5% to $891 million, reducing SG&A as a percentage of sales to 23.0% from 26.8%. Reported net margin was approximately 9.7%, compared with approximately 7.2% in the prior-year quarter.
- Performance Coatings: Sales of $2.319 billion, up 15.5%; segment income of $386 million, up 41.9%.
- Industrial Coatings: Sales of $1.562 billion, up 14.1%; segment income of $245 million, up 35.4%.
- Sales growth reflected higher volumes of 7%, favorable foreign currency translation of 3%, acquisition-related sales of 3% and higher selling prices of 2%.
- Cash and short-term investments totaled approximately $1.9 billion at March 31, 2021.
- Total debt was approximately $6.2 billion, including $881 million of short-term debt and current maturities and $5.336 billion of long-term debt. The defined total-indebtedness-to-total-capitalization ratio was 48%.
Material changes versus the prior comparable period
- Both reportable segments benefited from volume recovery, cost-mitigation actions and restructuring savings. Raw-material inflation partially offset these benefits.
- Performance Coatings benefited from acquisitions, stronger architectural coatings demand and improved automotive refinish demand. Aerospace coatings volumes remained nearly 30% below the prior-year period because of weak commercial aviation activity.
- Industrial Coatings benefited from recovering global industrial production, strong China automotive demand and higher packaging-coatings volumes. Semiconductor shortages constrained some automotive production in the United States.
- PPG completed the VersaFlex acquisition in February 2021 and incurred $24 million of acquisition-related costs. It owned 9.32% of Tikkurila at quarter-end and expected the tender-offer transaction to close in the second quarter, subject to customary conditions. The Wörwag acquisition was also expected to close in the second quarter.
- PPG issued $700 million of 1.200% notes due 2026, receiving $692 million net of discounts and fees, and repaid the remaining $400 million balance of its 2020 term loan.
- Operating working capital increased to $2.292 billion from $1.998 billion at December 31, 2020. Operating working capital as a percentage of annualized sales increased to 14.8% from 13.3% at year-end.
- Comprehensive income attributable to PPG was $247 million, compared with a $449 million loss in the prior-year quarter, primarily reflecting a much smaller foreign-currency translation loss.
Guidance, outlook, risks and unusual items
- Management expected second-quarter sales volumes to benefit from easier year-over-year comparisons, but raw-material and logistics inflation was expected to create an unfavorable net impact despite selling-price increases.
- Supply disruptions were expected to modestly affect second-quarter sales, particularly in architectural coatings. Based on recent exchange rates, foreign currency translation was expected to benefit second-quarter sales and earnings by approximately $130 million and $20 million, respectively, across the two segments.
- PPG expected a second-quarter effective tax rate of 23% to 24%, including potential favorable discrete items.
- Full-year 2021 capital spending was expected to be approximately $450 million. Mandatory non-U.S. pension contributions for the remaining nine months were expected to be $10 million to $15 million.
- Management expected at least $120 million of restructuring savings in 2021 and estimated annualized savings of $160 million to $170 million from the 2020 program once completed.
- Unusual Q1 pretax items included $16 million of environmental remediation charges, $12 million of expenses related to hurricanes and a winter storm, $24 million of acquisition-related costs and $4 million of net restructuring-related costs. These items, together with acquisition-related amortization, reduced reported diluted EPS relative to adjusted diluted EPS.
- Environmental reserves totaled $310 million at March 31, 2021, including $114 million for New Jersey Chrome. Management estimated reasonably possible but unreserved environmental losses of $100 million to $200 million. Projected environmental cash outlays were $70 million to $90 million for the remainder of 2021 and $20 million to $50 million annually during 2022–2025.
- PPG had approximately 1,190 open and active asbestos-related claims and reserves of approximately $190 million for claims not covered by the Pittsburgh Corning trust. Management stated that aggregate litigation outcomes were not expected to materially affect financial position or liquidity, although individual periods could be materially affected.
- Principal risks include COVID-19 recovery conditions, raw-material availability and pricing, the ability to obtain price increases and recover margins, customer inventory levels, acquisition integration, foreign exchange, environmental obligations, litigation and regulatory developments.
- Management stated that cash, operating cash flow and access to capital markets should be sufficient to fund operations, acquisitions, capital spending, dividends, debt service, pensions and other obligations.
Most important facts for investors to verify
- Whether selling-price increases offset accelerating raw-material and logistics inflation and preserve segment margins.
- The timing, financing and integration results of the Tikkurila and Wörwag acquisitions, in addition to VersaFlex.
- Conversion of reported earnings into cash, given Q1 operating cash flow was negative and working capital increased.
- Debt growth, commercial paper borrowings of $550 million, covenant compliance and the effect of acquisition financing on leverage.
- Progress and ultimate cost of New Jersey Chrome and other environmental remediation, including the $100 million to $200 million range of reasonably possible unreserved exposure.
- Trends in aerospace coatings, automotive production, semiconductor-related supply constraints and COVID-19-sensitive end markets.
- The adequacy of asbestos reserves and insurance recoveries, and the outcome of remaining environmental, lead-paint and other litigation.