PPG INDUSTRIES INC quarterly report, Q2 FY2023

PPG Industries, Inc. — Q2 2023 Form 10-Q Summary

Business context and reporting period

PPG is a global coatings and specialty materials manufacturer reporting two segments: Performance Coatings and Industrial Coatings. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the same periods in 2022. Results are affected by seasonality and may not indicate full-year performance.

Financial performance and liquidity

Metric	Q2 2023	Q2 2022	Six months 2023	Six months 2022
Net sales	$4.872 billion	$4.691 billion	$9.252 billion	$8.999 billion
Income before taxes	$646 million	$566 million	$999 million	$644 million
Net income attributable to PPG	$490 million	$441 million	$754 million	$459 million
Diluted EPS	$2.06	$1.85	$3.18	$1.93
Adjusted diluted EPS	$2.25	$1.81	$4.08	$3.18
Cash from operating activities	Not separately provided	Not separately provided	$621 million	$(136) million

Q2 pretax margin was approximately 13.3%, compared with 12.1% in the prior-year quarter; net margin was approximately 10.1%, compared with 9.4%.
Six-month effective tax rate was 22.9%, versus 26.9% in 2022. The prior-year rate included the tax effects of Russia-related impairment and other charges.
Performance Coatings Q2 sales rose 3.8% to $3.041 billion and segment income increased 20.4% to $537 million.
Industrial Coatings Q2 sales rose 3.9% to $1.831 billion and segment income increased 60.3% to $250 million.
Cash and short-term investments totaled approximately $1.3 billion at June 30, 2023. Total current assets were $8.068 billion and current liabilities were $5.416 billion.
Total debt, including current and long-term debt, was approximately $6.908 billion at June 30, 2023, compared with $6.816 billion at December 31, 2022. Debt fair value was $6.492 billion, excluding specified short-term borrowings and finance leases.
Total indebtedness to total capitalization was 46%, below the 60% covenant limit. PPG had no borrowings under its $2.2 billion revolving credit facility and remained in compliance with its debt covenants.
Six-month investing cash outflows were $290 million, including $242 million of capital expenditures and $106 million for acquisitions. Full-year 2023 capital spending is expected to be $500 million to $550 million.
Six-month financing cash outflows were $266 million, including $292 million of common-stock dividends and debt repayments. The quarterly dividend was $0.62 per share.

Material changes versus the prior comparable period

Q2 sales increased 3.9%, driven by 6% higher selling prices, partly offset by a 2% volume decline. Six-month sales increased 2.8%, with pricing and acquisitions partly offset by lower volumes, unfavorable currency, divestitures and the Russia wind-down.
Cost of sales declined 3.0% in Q2 and 3.4% for the six-month period, primarily from lower volumes and moderating raw-material costs.
Selling, general and administrative expense increased 8.9% in Q2, reflecting wage inflation and higher performance-based compensation, partly offset by restructuring savings.
Net interest expense increased because of higher interest rates, although interest income also rose on higher cash yields.
Six-month operating cash flow improved by $757 million from the prior year, primarily because of higher earnings and more favorable working-capital changes.
PPG recorded a noncash $190 million pension settlement charge in Q1 2023 after transferring certain U.S. pension obligations to insurers. Excluding this and other specified items, six-month adjusted diluted EPS was $4.08 versus $3.18.
2022 included Russia-related impairment and other charges, while no impairment charges were recorded in 2023. PPG continues to evaluate options to exit or withdraw from Russia; Russia represented approximately 1% of sales.
PPG entered into a €500 million term loan in April 2023, repaid $200 million of its existing term loan in Q2, and had $100 million of commercial paper outstanding at June 30, 2023.

Guidance, outlook, commentary and risks

Management expects aggregate organic sales in Q3 to increase by a low-single-digit percentage in Performance Coatings and decrease by a low-single-digit percentage in Industrial Coatings versus Q3 2022.
European demand is expected to stabilize at levels below those before the Ukraine war. Global industrial production is expected to remain subdued, with modest sequential improvement in China.
Raw-material and transportation availability is expected to normalize near pre-pandemic levels. Pricing benefits are expected to continue, although some 2022 price increases will begin to anniversary in Q3.
Management expects at least $60 million of restructuring savings in 2023 and approximately $100 million of restructuring-related cash outlays.
Expected full-year 2023 net periodic pension cost is approximately $220 million, including the $190 million settlement charge; other postretirement benefit cost is expected to be approximately $25 million.
Key risks include weaker European and global industrial demand, geopolitical developments, raw-material, energy, labor and logistics costs, foreign-exchange movements, interest rates, customer and company inventory levels, execution of price increases and restructuring savings, acquisition integration, environmental obligations, asbestos claims and other litigation.
Environmental reserves totaled $215 million at June 30, 2023, with additional reasonably possible but unreserved environmental losses estimated at $100 million to $200 million. Asbestos reserves totaled $49 million.
Management believes litigation and environmental matters will not materially affect consolidated financial position or liquidity, but charges could materially affect results in a particular period.

Most important facts for investors to verify

Whether pricing can continue to offset volume declines as prior-year price increases anniversary.
Progress in recovering industrial, packaging and specialty-coatings demand, particularly in Europe, China and other soft manufacturing markets.
Cash conversion and working-capital trends; operating working capital was 17.9% of annualized sales at June 30, 2023, up from 16.4% a year earlier.
Debt maturities, variable-rate exposure and the effect of higher interest rates on future earnings and cash flow.
Achievement of the $60 million restructuring-savings target and the timing of approximately $100 million of related cash outlays.
Potential changes in environmental, asbestos and other litigation liabilities, including the $100 million to $200 million range of reasonably possible unreserved environmental losses.
The outcome and timing of PPG’s potential Russia exit or controlled withdrawal.