PPG Industries Inc. — Form 10-Q Summary
Business context and reporting period
PPG is a multinational coatings manufacturer with two reportable segments: Performance Coatings and Industrial Coatings. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net sales | $4,644 million | $4,468 million | $13,896 million | $13,467 million |
| Income before taxes | $557 million | $418 million | $1,556 million | $1,062 million |
| Net income attributable to PPG | $426 million | $329 million | $1,180 million | $788 million |
| Diluted EPS | $1.79 | $1.39 | $4.97 | $3.32 |
| Adjusted diluted EPS | $2.07 | $1.66 | $6.15 | $4.84 |
| Cash from operations | Not separately provided | Not separately provided | $1,513 million | $376 million |
- Q3 sales increased 3.9%; nine-month sales increased 3.2%. Higher selling prices and favorable currency translation offset lower volumes.
- Q3 net margin was approximately 9.2%, compared with 7.4% in the prior-year quarter. Nine-month net margin was approximately 8.5%, compared with 5.9%.
- Q3 income before taxes increased primarily because of price realization and moderating raw-material costs. SG&A rose 12.5% due mainly to wage inflation and higher incentive compensation.
- Performance Coatings sales rose 6.5% in Q3 and segment income rose 24.9%. Industrial Coatings sales were essentially flat, while segment income increased 28.1%.
- Cash and short-term investments totaled approximately $1.3 billion at September 30, 2023. Cash increased to $1,218 million from $1,099 million at December 31, 2022.
- Operating cash flow benefited from higher earnings and favorable working-capital changes. Capital expenditures were $381 million through nine months; full-year 2023 capital spending is expected to be approximately $575 million.
- Total debt, including current and long-term portions, was approximately $6.2 billion at September 30, 2023, compared with $6.8 billion at year-end 2022. Total indebtedness to total capitalization was 43%, below the applicable 60% covenant limit.
- PPG had no borrowings under its $2.3 billion revolving credit facility and no commercial paper outstanding. The facility was extended through July 2028.
- PPG paid $445 million in common-stock dividends during the first nine months and paid a quarterly dividend of $0.65 per share. No shares were repurchased during Q3; approximately 8.6 million shares remained available under the repurchase program.
Material changes versus the prior comparable period
- Reported Q3 net income increased 29.5%, and diluted EPS increased 28.8%. Nine-month net income increased 49.7%, and diluted EPS increased 49.7%.
- Nine-month operating cash flow increased by $1,137 million to $1,513 million.
- Cost of sales decreased despite inflationary pressures, reflecting lower volumes and moderating raw-material costs. SG&A increased due to wage and other cost inflation.
- Interest expense increased $18 million in Q3 and $76 million year to date because of higher rates on variable-rate debt; interest income also increased due to higher rates.
- The 2023 results include a $190 million non-cash pension settlement charge related to group annuity contracts. The 2022 period included $230 million of Russia-related impairment and other charges; no comparable impairment charges were recorded in 2023.
- PPG borrowed €500 million under a new term loan in April 2023 and repaid $800 million under its prior term loan agreement. A $300 million 3.2% note matured and was repaid in March 2023.
Outlook, commentary, risks and unusual items
- Management expects Q4 Performance Coatings organic sales to increase by a low-single-digit percentage year over year, with aerospace coatings and PPG Comex remaining robust. European architectural demand and global architectural DIY demand are expected to remain weak.
- Management expects Q4 Industrial Coatings organic sales to decrease by a low-single-digit percentage, reflecting continued softness in global industrial production, packaging coatings and specialty coatings. Automotive build rates and retail activity are expected to remain solid.
- U.S. automotive labor actions had a minor Q3 impact, but prolonged actions could create additional sales and earnings pressure in Q4.
- Restructuring savings were approximately $15 million in Q3; full-year savings are expected to be at least $60 million, with 2023 restructuring cash outlays expected at $60 million to $70 million.
- PPG divested its legacy industrial Russian operations during Q3 and continues to evaluate options for exiting its remaining Russia business. Russia represented approximately 1% of consolidated sales.
- Environmental reserves totaled $204 million, including $48 million for the former New Jersey Chrome site. Additional unreserved environmental losses considered reasonably possible were estimated at $100 million to $200 million.
- Asbestos-related reserves totaled $48 million. Management believes current reserves are sufficient for current and estimable future claims, but outcomes remain uncertain.
- Key risks include global industrial weakness, raw-material and logistics costs, foreign exchange, interest rates, geopolitical conditions, restructuring execution, acquisition integration, environmental liabilities, asbestos and other litigation, and changing tax or regulatory requirements.
Important facts for investors to verify
- Whether price increases continue to offset volume weakness as prior-year pricing gains begin to anniversary in Q4.
- The pace of recovery in aerospace, automotive OEM and PPG Comex demand versus weakness in architectural DIY, packaging and general industrial markets.
- The sustainability of improved operating cash flow and the effect of receivables, inventories and supplier-finance activity on working capital.
- Future interest expense and refinancing requirements, particularly as variable rates remain elevated and debt maturities approach.
- The timing and cost of PPG’s remaining Russia exit, environmental remediation, asbestos claims and other contingencies.
- Whether projected restructuring savings and approximately $575 million of full-year capital spending are achieved without reducing operating capacity or growth investment.