PPG recently reported first quarter 2020 net sales of about $3.4 billion, down approximately 7% versus the prior year. Selling prices increased more than 1%. Sales volumes were down 8% versus the prior year, in aggregate, including an estimated impact of the COVID-19 pandemic of $225 million, or about 6%. Unfavorable foreign currency translation impacted net sales by more than 2%, or about $75 million, and acquisition-related sales, net of divestitures, added about 2% to sales growth.
First quarter 2020 reported net income was $243 million, or $1.02 per diluted share, and adjusted net income was $282 million, or $1.19 per diluted share. First quarter 2019 reported net income was $312 million, or $1.31 per diluted share, and adjusted net income was $330 million, or $1.38 per diluted share. Adjusted 2020 figures exclude an after-tax increase in allowance for doubtful accounts of $0.10 relating to an increase in bad debt reserves associated with COVID-19, along with other adjustments. For the first quarter 2020, the reported and adjusted effective tax rates were both about 22%, as expected. The first quarter 2019 reported and adjusted effective tax rates were approximately 24%. Reconciliations of the reported to adjusted figures are included below.
“Our first quarter results reflect a sudden and wide-ranging deterioration in global demand during the month of March and the impacts of the economic shutdown in China during February. As the COVID-19 pandemic spread, we prioritized and remained focused on protecting our people, customers and all of our stakeholders,” said Michael McGarry, PPG chairman and CEO. “I could not be more proud of our employees around the world who have worked tirelessly to help keep each other safe and healthy throughout this unprecedented time in the history of our company. I commend their dedication to safely operating our facilities, labs, stores and distribution centers in order to provide our customers with the essential products and services they count on. Given the breadth of the COVID crisis, we are increasing and accelerating our charitable contributions around the world.”
“From a financial perspective, our businesses through early March, with the exception of those in China, were mostly performing at or above the financial targets we had set at the outset of the year, and we were pacing toward low-double-digit percentage EPS growth. We had solid performance in our global architectural and packaging coatings businesses and continued growth in the aerospace coatings business. In the last two weeks of March, however, many of our larger original equipment manufacturer (OEM) customers were forced to shut down; a number of architectural paint stores in certain countries were mandated to close; and miles driven and flown throughout the world fell sharply as many countries imposed stay-at-home mandates.
“We have taken immediate and broad steps to adapt to the current business climate, including decisive cost actions and an increased focus on cash generation and liquidity. These include announced salary reductions for senior leaders, shutdowns of some manufacturing and distribution operations, temporary employee furloughs at the most severely demand-impacted businesses, reduced spending across all businesses and functions, and deferred capital expenditures. In addition, we continued to execute our previously announced restructuring programs, achieving about $20 million of savings in the first quarter. We are accelerating other initiatives and now expect to achieve higher restructuring savings of $80 to $90 million for the full year. We are continuing to assess and manage through the crisis, and will determine if further cost or restructuring actions are warranted.
“Looking ahead,” McGarry added, “we expect customer demand levels to remain severely impacted, with significant declines continuing in the automotive OEM, automotive refinish and aerospace coatings businesses. In certain other businesses, including packaging coatings, do-it-yourself (DIY) architectural coatings, long-cycle protective coatings and military products, demand has only been modestly impacted by crisis. Also, our operations in China are now fully operational, and regional economic activity is returning toward pre-crisis levels. We remain focused on prudently managing our cash and balance sheet. We ended the quarter with about $1.9 billion of cash on hand and have continued to optimize our overall liquidity. Finally, I am very confident in the skills and experience of our global team as we navigate effectively through this challenging time and look to emerge from the crisis stronger.”
First Quarter 2020 Reportable Segment Financial Results
Performance Coatings segment first quarter net sales were about $2.0 billion, down $100 million, or nearly 5%, versus the prior year. Net sales in constant currencies decreased by about 3%. Selling prices increased by more than 2%, and acquisition-related sales added about 1%, or approximately $20 million, primarily from the Dexmet, Texstars and ICR acquisitions. These gains were more than offset by lower sales volumes of 6%, or about $125 million, and unfavorable foreign currency translation of 2%, or more than $40 million. The impacts from the COVID-19 pandemic lowered sales volumes by an estimated $90 million.
Aerospace coatings sales volumes were down a low-single-digit percentage for the quarter, as volumes were higher through the first two months of the quarter, but declined in March due to customer production shutdowns and softening commercial aftermarket demand. Net sales for automotive refinish coatings were down a low-teen-percentage as higher selling prices and acquisition-related sales were more than offset by lower sales volumes, reflecting a sharp decline in global miles driven. Year-over-year net sales, excluding the impact of currency and acquisitions (organic sales) in architectural coatings – Americas and Asia-Pacific, were up a low-single-digit percentage, with differences by channel and region. Organic sales in the Mexican PPG Comex business grew by a mid-single-digit percentage, and U.S. and Canada DIY sales volumes were higher by a mid-single-digit percentage. Sales volumes in the protective and marine coatings business were down a low-single-digit percentage driven by lower sales volumes in China related to mandated shutdowns. Architectural coatings – Europe, Middle East and Africa (EMEA) organic sales decreased by a low-single-digit percentage, as positive trends in the first two months of the quarter were more than offset by lower demand in southern Europe where various countries mandated the closures of retail paint stores in March.
Segment income for the first quarter was $272 million, down $25 million, or about 8%, year-over-year, including unfavorable foreign currency translation impacts of $7 million. Segment income was impacted by lower sales volumes related to the pandemic and unfavorable foreign currency exchange translation partially offset by higher selling prices, execution of cost-mitigation efforts and restructuring initiatives. The segment earnings impact of the COVID-19 pandemic is estimated to be $35 million, excluding foreign currency translation.
Industrial Coatings segment first quarter net sales were about $1.4 billion, down about $145 million, or nearly 10%, versus the prior-year period. Acquisition-related sales of approximately $60 million added about 4% to net sales, primarily from Whitford and Hemmelrath. Selling prices were modestly higher in the quarter. Unfavorable foreign currency translation lowered net sales by about $35 million, or 2%, versus the prior year. Sales volumes declined by 11%, mostly the result of the sharp demand decline stemming from the COVID-19 pandemic. The impact of the pandemic lowered segment sales volumes by an estimated $135 million.
Automotive OEM coatings sales volumes decreased by a high-teen percentage year-over-year, driven by the significant downturn in global automotive industry production rates. For the industrial coatings business, net sales decreased by a mid-single-digit percentage due to lower industrial production in most regions related to customer shutdowns, partly offset by acquisition-related sales. Packaging coatings organic sales decreased by a low-single-digit percentage year-over-year, as modestly higher selling prices were offset by lower sales volumes stemming from pandemic-related China customer shutdowns. Packaging coatings sales volumes were higher in the U.S., Canada and Latin America regions.
Segment income for the first quarter was $181 million, down $37 million, or about 17%, year-over-year, including an unfavorable foreign currency translation impact of about $5 million. Segment income was also impacted by lower sales volumes due to customer shutdowns related to the pandemic, partially offset by cost-mitigation actions, restructuring cost savings, and modestly higher selling prices. The segment earnings impact of the COVID-19 pandemic is estimated to be $55 million, excluding foreign currency translation.
First quarter 2020 earnings per share includes an estimated unfavorable commercial impact from the effects of the COVID-19 pandemic of approximately $0.35. From a reporting segment basis, the impact was higher in the Industrial Coatings segment as company sales in China are weighted more toward that segment. Separately, the company excluded from adjusted earnings per diluted share, an incremental reserve for an increase in allowance for doubtful accounts of $0.10, relating to an increase in global bad debt reserves associated with the pandemic.
The company ended 2019 with approximately $1.3 billion of cash and short-term investments. The company has since completed a variety of strategic actions to bolster financial flexibility. In mid-March, the company borrowed $800 million from its revolving credit facility, reflecting an abundance of caution and the anticipated uncertainty in the debt capital markets. The company ended March with $1.9 billion of cash and short-term investments. Subsequently, in April, the company entered into a $1.5 billion 364-day credit facility and utilized a portion of the proceeds to fully repay the revolver borrowing, with remaining proceeds supplementing cash. The company’s $2.2 billion revolving credit facility is currently undrawn.
In addition, today the company reported:
• The company anticipates that second quarter aggregate sales volumes will be down 30% to 35%, differing by business and region, and presuming that demand begins to improve in June.
• Corporate expenses are expected to be $45 to $50 million in the second quarter. They were about $60 million in the first quarter.
• Net interest expense is expected to be $35 to $40 million in the second quarter based on the additional borrowings.
• The company’s global effective tax rate is expected to be in the range of 22% to 24% for the second quarter of 2020.
• Due to the heightened level of uncertainty over global economic demand, the company is withdrawing all of its previously communicated full year sales and earnings guidance.
