PPG INDUSTRIES INC quarterly report, Q3 FY2021

PPG Industries, Inc. — Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2021; comparative periods ended September 30, 2020. The interim financial statements are unaudited and prepared under U.S. GAAP.

Business context

PPG is a global coatings and specialty materials manufacturer operating through two reportable segments: Performance Coatings and Industrial Coatings. The company completed the acquisition of Tikkurila in June 2021 and also acquired Wörwag, Cetelon Lackfabrik and VersaFlex during 2021.

Key financial metrics

Metric	Q3 2021	Q3 2020	9M 2021	9M 2020
Net sales	$4.372 billion	$3.685 billion	$12.612 billion	$10.077 billion
Income before taxes	$441 million	$572 million	$1.533 billion	$1.017 billion
Net income attributable to PPG	$344 million	$442 million	$1.153 billion	$787 million
Diluted EPS	$1.43	$1.86	$4.81	$3.30
Operating cash flow from continuing operations	Not separately provided	Not separately provided	$1.106 billion	$1.163 billion

Q3 sales increased 18.6%, driven by acquisitions, higher selling prices and favorable currency translation, partly offset by a 2% volume decline.
Q3 cost of sales rose 34.9% to $2.733 billion; cost of sales increased to 62.5% of sales from 55.0%. SG&A increased 13.6% to $950 million, but declined to 21.7% of sales from 22.7%.
Q3 reported effective tax rate was 21.8%; adjusted rate was 22.1%. Management expected an approximately 20% effective tax rate for Q4 2021.
Adjusted Q3 diluted EPS was $1.69 versus $2.03 in the prior-year quarter, primarily reflecting lower volumes, raw-material inflation and supply disruptions.
For the first nine months, adjusted diluted EPS increased to $5.51 from $4.43, as 2020 results were more heavily affected by the pandemic.
Performance Coatings Q3 sales increased 22.5% to $2.758 billion, while segment income decreased 4.2% to $408 million.
Industrial Coatings Q3 sales increased 12.6% to $1.614 billion, while segment income fell 44.7% to $140 million, largely due to automotive production disruptions and raw-material inflation.

Liquidity, debt and capital allocation

Cash and short-term investments were $1.304 billion at September 30, 2021, compared with $1.922 billion at December 31, 2020.
Cash from operations was $1.106 billion for the first nine months, down $57 million year over year, primarily because of unfavorable working-capital changes.
Capital expenditures were $220 million and acquisition spending, net of cash acquired, was $2.137 billion. Total capital spending, including acquisitions, was $2.357 billion.
Total debt, including current and long-term debt, was approximately $6.796 billion at September 30, 2021, compared with $5.749 billion at year-end 2020. Long-term debt carrying value was $6.780 billion, excluding short-term borrowings and finance leases.
PPG borrowed $700 million under a new $2.0 billion term loan facility to finance the Tikkurila acquisition and issued $700 million of 1.200% notes due 2026, generating $692 million of net proceeds.
No amounts were outstanding under the $2.2 billion revolving credit facility. Total indebtedness to total capitalization was 49%, below the applicable 60% covenant threshold, or 65% during the specified acquisition-related period.
Commercial paper outstanding increased to $625 million from $250 million at December 31, 2020.
PPG paid $396 million in common-stock dividends during the first nine months. The quarterly dividend was $0.59 per share versus $0.54 in the prior-year quarter. No shares were repurchased during Q3; $2.5 billion remained authorized, with 10.6 million shares available for repurchase.

Material changes versus the prior comparable period

Revenue growth was strong, but reported Q3 profitability and diluted EPS declined because raw-material and logistics inflation exceeded realized price increases, while volumes were constrained by supply shortages and semiconductor-related automotive production cuts.
First-nine-month revenue increased 25.2% and reported diluted EPS increased 45.8%, benefiting from acquisitions and recovery from pandemic-affected 2020 demand.
Q3 included a $21 million impairment charge related to planned sales of entities in smaller, non-strategic countries and a $34 million gain on the sale of a production facility.
First-nine-month results included $81 million of acquisition-related costs, $126 million of acquisition-related amortization, $26 million of environmental remediation charges, a $22 million U.K. tax charge, and $22 million of income from legal settlements.
Accumulated other comprehensive loss increased to $2.871 billion from $2.599 billion, primarily due to foreign-currency translation losses.
Receivables and inventories increased substantially, contributing to higher operating working capital of $2.671 billion, or 15.3% of annualized sales, versus 13.3% at year-end 2020.

Outlook, risks and unusual items

Management expected Q4 raw-material inflation and supply disruptions to remain elevated. Performance Coatings volumes were expected to decline at a low-single-digit rate, while Industrial Coatings volumes were expected to decline at a mid-teen percentage rate versus Q4 2020.
Further selling-price increases were secured or planned, and restructuring and cost-savings initiatives continued. Management expected at least $135 million of restructuring savings in 2021 and annualized savings of approximately $160 million to $170 million from the 2020 program and $125 million from the 2019 program when fully implemented.
Capital spending for 2021 was expected to be approximately $400 million. PPG expected $5 million to $10 million of mandatory pension contributions during the remaining three months of 2021 and planned to evaluate debt reduction and stock repurchases.
Key risks include raw-material availability and pricing, the ability to recover margins through price increases, semiconductor shortages, customer inventory levels, COVID-19 effects, acquisition integration, foreign exchange, tax and regulatory changes, environmental liabilities and litigation.
Environmental reserves totaled $301 million, including $94 million for New Jersey Chrome. Additional reasonably possible but unreserved environmental losses were estimated at $100 million to $200 million.
PPG reported approximately 700 open and active asbestos-related claims and held approximately $190 million of reserves for asbestos liabilities not channeled to the Pittsburgh Corning trust.
The company had $174 million of letters of credit and surety bonds and $4 million of guarantees outstanding. Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting.

Important facts for investors to verify

Whether planned price increases can offset continuing raw-material, logistics and labor inflation.
The duration and financial impact of semiconductor shortages and other supply disruptions on automotive OEM volumes.
Integration progress, final purchase-price accounting and realized synergies from Tikkurila and other acquisitions.
Cash conversion and working-capital requirements, particularly the sharp increases in receivables and inventories.
Debt reduction plans, refinancing requirements and compliance with leverage covenants.
The ultimate cost and timing of environmental remediation, asbestos claims and other litigation contingencies.
Whether forecast restructuring savings and projected 2021 capital spending are achieved.