PPG Industries Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
PPG is a global manufacturer of coatings and related products, operating through Performance Coatings and Industrial Coatings. This filing covers the unaudited three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $4.380 billion | $4.308 billion | 1.7% increase |
| Income before income taxes | $353 million | $78 million | $275 million increase |
| Net income attributable to PPG | $264 million | $18 million | $246 million increase |
| Diluted EPS | $1.11 | $0.08 | Increase |
| Adjusted diluted EPS | $1.82 | $1.37 | 32.8% increase |
| Effective tax rate | 22.7% | 70.5% | Decrease |
| Cash from operating activities | $85 million | $(304) million | $389 million improvement |
| Capital expenditures | $120 million | $194 million | Decrease |
Performance Coatings generated sales of $2.628 billion and segment income of $395 million, compared with $2.570 billion and $319 million, respectively, in the prior-year quarter. Industrial Coatings generated sales of $1.752 billion and segment income of $240 million, compared with $1.738 billion and $140 million.
Cash and short-term investments totaled $1.482 billion at March 31, 2023, compared with $1.154 billion at December 31, 2022. Cash and cash equivalents were $1.426 billion. Total debt comprised $209 million of short-term debt and current maturities and $7.082 billion of long-term debt. Commercial paper borrowings outstanding were $638 million, versus none at December 31, 2022. The company reported a 49% total-indebtedness-to-total-capitalization ratio and compliance with its debt covenants.
PPG paid $146 million in common-stock dividends and made no share repurchases during the quarter. Total current assets were $8.193 billion and total current liabilities were $4.868 billion at March 31, 2023.
Material changes versus the prior comparable period
- Sales growth was driven by approximately 8% higher selling prices, partially offset by approximately 3% lower volumes, 2% unfavorable foreign-currency translation and 1% of divestiture and Russia-related effects.
- Income benefited from price increases, lower costs associated with reduced volumes and the absence of the $290 million Russia-related impairment and other charges recorded in Q1 2022.
- Q1 2023 included a $190 million non-cash pension settlement charge related to group annuity contracts transferring $309 million of U.S. pension obligations to insurers.
- Interest expense increased $29 million, primarily because of higher interest rates on variable-rate debt. Interest income increased $16 million because of higher rates.
- Operating cash flow improved to $85 million, although receivables increased $277 million and inventories increased $308 million during the quarter.
- Operating working capital increased to $3.217 billion, or 18.4% of annualized sales, from 16.0% at March 31, 2022.
- Other comprehensive income included $264 million of favorable foreign-currency translation adjustments and $139 million related to pension and other postretirement benefits.
Guidance, outlook, commentary and risks
- For Q2 2023, management expects European demand to stabilize at levels below those before the Ukraine war and expects China’s economic activity to improve modestly.
- Performance Coatings Q2 sales volumes are expected to be flat to up low-single digits year over year. Industrial Coatings volumes are expected to decline by a low-single-digit percentage, although automotive OEM volumes are expected to increase.
- Q2 sales are expected to be reduced by approximately $20 million from divestitures and the Russia business wind-down. Management expects positive pricing to continue, although some 2022 price increases will begin to anniversary.
- PPG expects 2023 capital spending of $500 million to $550 million, restructuring savings of at least $60 million and restructuring cash outlays of approximately $100 million.
- An April 12, 2023 subsequent event established a €500 million term loan, with a potential additional €250 million capacity; PPG subsequently borrowed €500 million. The loan matures April 10, 2026.
- PPG continues to wind down most Russian operations and is evaluating a sale or controlled withdrawal. Russia represented approximately 1% of net sales in both Q1 2023 and full-year 2022.
- Key risks include weaker global demand, geopolitical conditions, raw-material, energy, labor and logistics costs, pricing execution, foreign-exchange movements, interest rates, restructuring execution, acquisition integration, environmental obligations, asbestos claims and other litigation.
- Environmental reserves totaled $211 million, including $53 million for New Jersey Chrome matters. Management identified reasonably possible but unreserved environmental losses of approximately $100 million to $200 million.
Important facts for investors to verify
- Whether pricing actions continue to offset lower volumes and cost inflation as prior-year price increases anniversary.
- The pace of demand recovery in China and stabilization in Europe, including the effects of the Russia wind-down.
- Working-capital usage, particularly the increase in receivables and inventories, and its effect on operating cash flow.
- Variable-rate debt exposure, commercial paper refinancing and the effect of higher interest rates on future earnings and cash flow.
- Execution of restructuring programs, expected savings and approximately $100 million of planned 2023 cash outlays.
- The sustainability of reported earnings after excluding the $190 million pension settlement charge, acquisition-related amortization and other unusual items.
- Potential changes in environmental, asbestos and other litigation liabilities, including the disclosed $100 million to $200 million of reasonably possible unreserved environmental losses.