PPG Industries 2020 Q2 Form 10-Q Summary
Business context and reporting period
PPG Industries 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 six months ended June 30, 2020, compared with the corresponding 2019 periods. Results were significantly affected by COVID-19, customer shutdowns, reduced mobility, lower industrial production and unfavorable foreign currency translation.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $3,015 million | $4,024 million | $6,392 million | $7,648 million |
| Income before taxes | $126 million | $363 million | $445 million | $782 million |
| Net income attributable to PPG | $102 million | $272 million | $345 million | $584 million |
| Continuing-operations diluted EPS | $0.42 | $1.13 | $1.44 | $2.44 |
| Operating cash flow | Not separately provided | Not separately provided | $322 million | $482 million |
- Q2 sales declined 25.1%, driven by a 24% volume decline and 3% unfavorable currency translation, partly offset by 2% higher selling prices.
- Q2 net income attributable to PPG fell 62.5%; continuing-operations diluted EPS declined 62.8%. Net income margin was approximately 3.4%, compared with 6.8% in Q2 2019.
- Six-month sales declined 16.4%, while continuing-operations diluted EPS declined 41.0%.
- Q2 segment margins were approximately 13%, supported by about $170 million of interim cost savings and more than $20 million of structural savings.
- Cash from operating activities was $322 million for the first six months, including $321 million from continuing operations, down from $482 million in the prior-year period.
- Capital expenditures were $92 million and acquisition spending was $45 million during the first six months. Dividends paid were $241 million.
- Cash and cash equivalents were $2.252 billion at June 30, 2020, versus $1.216 billion at December 31, 2019; cash and short-term investments totaled approximately $2.3 billion.
- Total debt included $1.688 billion of short-term debt and current maturities and $4.613 billion of long-term debt. Debt-to-total-capitalization under the applicable credit agreements was 53%, below the 60% covenant limit.
- PPG issued $300 million of 2.55% notes due 2030, entered into a $1.5 billion 364-day term loan maturing April 13, 2021, and redeemed $500 million of notes due November 2020.
Material changes versus the prior comparable period
- Performance Coatings Q2 sales decreased 14.9% to $2.069 billion and segment income decreased 14.8% to $362 million. Architectural DIY demand was strong, but automotive refinish, aerospace and professional architectural channels were weaker.
- Industrial Coatings Q2 sales decreased 40.7% to $946 million and segment income decreased 85.5% to $34 million, primarily because automotive OEM production and industrial customer activity were sharply reduced.
- SG&A declined 18.0% in Q2 to $766 million due to cost mitigation, although SG&A as a percentage of sales increased to 25.4% from 23.2%.
- Cost of sales declined 25.6%; cost of sales as a percentage of sales improved modestly to 56.5% from 56.9%.
- PPG recorded a $176 million pretax restructuring charge in Q2 and established a $30 million allowance for potential COVID-19-related credit losses in the first quarter.
- Operating working capital increased to $2.383 billion from $2.215 billion at year-end 2019, and operating working capital as a percentage of sales increased to 19.8% from 15.1%.
- No shares were repurchased during Q2. The remaining authorization was 14,240,585 shares as of June 30, 2020.
Guidance, outlook, risks and unusual items
- Management expected Q3 Performance Coatings sales to decline 8% to 14% year over year, with sharper declines in aerospace and refinish coatings.
- Management expected Q3 Industrial Coatings sales to decline approximately 10% to 15% year over year, although sequential demand was expected to improve.
- Full-year 2020 effective tax rate guidance was 22% to 24%; Q3 guidance was 23% to 25%.
- Total 2020 restructuring savings were expected to be $100 million to $110 million. The 2020 restructuring program was expected to generate $160 million to $170 million of annualized savings by completion in 2021.
- 2020 capital spending was expected to be approximately $300 million. Remaining mandatory non-U.S. pension contributions were expected to be $5 million to $10 million.
- COVID-19 created material uncertainty regarding demand, customer and supplier operations, supply availability, distribution channels, global economic activity and liquidity. Management could not reasonably estimate the ultimate financial impact.
- PPG had approximately 500 open and active asbestos-related claims and reserves of approximately $190 million for non-channeled asbestos liabilities. Environmental reserves totaled $291 million, including $108 million for New Jersey Chrome; reasonably possible unreserved environmental losses were estimated at $100 million to $200 million.
- Other matters included shareholder derivative litigation, environmental claims, lead-paint litigation, a $25 million securities class-action settlement covered by insurance, and outstanding letters of credit and surety bonds of $134 million plus guarantees of $9 million.
- Goodwill and indefinite-lived intangible assets were evaluated for COVID-19-related impairment indicators; no triggering event was identified as of June 30, 2020, but future impairment remains possible if assumptions deteriorate.
Most important facts for investors to verify
- Whether volume recovery, particularly in automotive OEM, aerospace and refinish coatings, offsets continued pandemic-related weakness.
- Whether the announced restructuring programs deliver the targeted savings and whether implementation costs, severance and delays increase.
- PPG’s ability to maintain cash generation and liquidity while addressing debt maturities, the April 2021 term loan maturity, dividends and capital spending.
- Changes in COVID-19-related credit losses, working capital, customer shutdowns and demand by region and end market.
- Potential changes to asbestos, environmental and other litigation reserves, especially the New Jersey Chrome remediation estimate.
- Foreign currency exposure, including the impact of the $2.3 billion of non-U.S.-dollar borrowings and related hedging instruments.
- The reconciliation and comparability of management’s non-GAAP adjusted EPS and adjusted tax-rate measures to U.S. GAAP results.