PPG INDUSTRIES INC quarterly report, Q3 FY2022

PPG Industries Inc. — Q3 2022 Form 10-Q Summary

Business context and reporting period

PPG is a multinational coatings manufacturer operating through two reportable segments: Performance Coatings and Industrial Coatings. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.

Key financial metrics

Metric	Q3 2022	Q3 2021	9M 2022	9M 2021
Net sales	$4,468 million	$4,372 million	$13,467 million	$12,612 million
Income before taxes	$418 million	$441 million	$1,062 million	$1,533 million
Net income attributable to PPG	$329 million	$344 million	$788 million	$1,153 million
Diluted EPS	$1.39	$1.43	$3.32	$4.81
Adjusted diluted EPS	$1.66	$1.69	$4.84	$5.51
Operating cash flow	Not separately provided for the quarter	Not separately provided for the quarter	$376 million	$1,106 million

Q3 pretax margin was approximately 9.4%, compared with 10.1% in the prior-year quarter; net margin attributable to PPG was approximately 7.4%, compared with 7.9%. Nine-month pretax margin was approximately 7.9%, compared with 12.2%; net margin was approximately 5.9%, compared with 9.1%.

Q3 sales increased 2.2%, driven by approximately 12% higher selling prices, partly offset by a 6% unfavorable currency impact, 3% lower volumes, and divestiture and Russia-related reductions.
Nine-month sales increased 6.8%, including approximately 11% higher selling prices and 3% acquisition-related sales, partly offset by currency and volume declines.
Performance Coatings Q3 sales declined 1.9% to $2,705 million and segment income declined 11.3% to $362 million.
Industrial Coatings Q3 sales increased 9.2% to $1,763 million and segment income increased 37.1% to $192 million. Nine-month segment income declined 15.1% to $488 million.
Cash and short-term investments totaled approximately $1.1 billion at September 30, 2022. Cash flow was constrained by working-capital investment, including higher receivables and inventories.
Capital expenditures were $368 million through nine months; full-year 2022 capital spending was expected to be $450 million to $500 million.
Long-term debt was $6,478 million, with $314 million of short-term debt and current maturities. Total debt carrying value, including current amounts, was approximately $6.8 billion.
PPG had no borrowings under its $2.2 billion revolving credit facility and reported a 50% total-indebtedness-to-total-capitalization ratio versus a 60% covenant limit.

Material changes versus the prior comparable period

Profitability declined despite pricing actions because raw-material, energy, logistics, wage and manufacturing costs increased, while volumes weakened.
Nine-month income before taxes fell $471 million, and diluted EPS fell $1.49, primarily reflecting Russia-related impairment and other charges, inflation, lower volumes, currency effects and higher interest expense.
PPG recorded $230 million of net impairment and other related charges through nine months, primarily associated with winding down Russian operations. A $60 million second-quarter recovery partially offset first-quarter charges.
Interest expense increased 25.3% through nine months, reflecting higher rates on variable-rate debt.
Operating cash flow decreased $730 million, primarily because of increased working capital. Operating working capital rose to $2,994 million, or 16.8% of sales, from $2,298 million, or 13.7%, at December 31, 2021.
In May 2022, PPG issued euro-denominated notes with aggregate net proceeds of approximately $1.061 billion. It also repaid $100 million under its term-loan facility during Q3.
The U.S. dollar’s appreciation reduced consolidated net assets by approximately $527 million from year-end 2021 and adversely affected nine-month pretax income by approximately $71 million through translation.

Guidance, outlook, commentary and risks

Management expected fourth-quarter demand to remain soft in Europe and global architectural do-it-yourself markets, with economic activity also slowing in China.
Fourth-quarter aggregate sales volumes were expected to decline by a mid-single-digit percentage year over year. Selling prices were expected to be approximately 18% higher on a two-year stacked basis for Performance Coatings and more than 20% higher for Industrial Coatings.
Fourth-quarter divestiture and Russia-related sales reductions were estimated at approximately $50 million for Performance Coatings and $25 million for Industrial Coatings.
PPG approved a restructuring plan in Q3 targeting approximately $70 million of annualized savings when fully implemented. Management expected at least $60 million of total restructuring savings in 2022 and approximately $115 million of 2022 cash outlays for the actions.
Key risks include raw-material and energy inflation, supply constraints, logistics costs, foreign-exchange volatility, geopolitical uncertainty, the Russia wind-down, COVID-19 restrictions, semiconductor shortages, weaker European and Chinese demand, execution of price increases and restructuring programs, acquisitions and integration, environmental obligations, asbestos claims and litigation.
Environmental reserves totaled $225 million at September 30, 2022, with additional reasonably possible but unreserved environmental losses estimated at $100 million to $200 million.
Asbestos-related reserves were $52 million. Management stated that litigation outcomes are unpredictable but does not expect aggregate claims to materially affect financial position or liquidity.
Management stated that cash, operating cash flow and access to capital markets should be sufficient to fund operations, capital spending, acquisitions, dividends, debt service, pensions and share repurchases.

Most important facts for investors to verify

Whether pricing actions continue to offset inflation and whether margin recovery materializes as input costs moderate.
The pace and ultimate cost of the Russia exit or potential sale of the Russian business.
Working-capital conversion and the recovery of operating cash flow after the significant nine-month decline.
Debt maturity timing, variable-rate exposure and the effect of further interest-rate increases.
Progress toward the stated restructuring savings and the related cash outlays.
Exposure to environmental, asbestos and other litigation contingencies, including the $100 million to $200 million of reasonably possible unreserved environmental losses.
Fourth-quarter volume trends in Europe, China, automotive, industrial and architectural coatings.
The sustainability of the dividend and capital-allocation plans amid lower earnings and cash flow.