PPG Industries, Inc. — Form 10-Q Summary
Business context and reporting period
PPG is a global coatings manufacturer operating through Performance Coatings and Industrial Coatings. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $4,691 million | $4,359 million | $8,999 million | $8,240 million |
| Income before taxes | $566 million | $593 million | $644 million | $1,092 million |
| Net income attributable to PPG | $441 million | $431 million | $459 million | $809 million |
| Diluted EPS | $1.85 | $1.80 | $1.93 | $3.38 |
| Adjusted diluted EPS | $1.81 | $1.94 | $3.18 | $3.82 |
| Operating cash flow | Not separately provided | Not separately provided | $(136) million | $581 million |
Q2 sales increased 7.6%, driven by higher selling prices and acquisition-related sales, partly offset by lower volumes and unfavorable currency translation. Six-month sales increased 9.2%. Cost of sales increased faster than sales, rising 12.4% in the quarter and 16.3% year to date, primarily because of raw-material, energy, logistics and wage inflation. The filing does not provide a single consolidated operating-margin measure, but the cost trends indicate significant margin pressure.
- Performance Coatings Q2 sales rose 6.5% to $2,929 million, while segment income declined 1.8% to $446 million.
- Industrial Coatings Q2 sales rose 9.4% to $1,762 million, while segment income declined 17.9% to $156 million.
- Cash and short-term investments totaled approximately $1.0 billion at June 30, 2022, including $931 million of cash and cash equivalents and $61 million of short-term investments.
- Total debt was approximately $7.1 billion, including $325 million of short-term debt and current maturities and $6.8 billion of long-term debt. The debt-to-total-capitalization covenant measure was 51% versus a generally applicable limit of 60%.
- PPG had no borrowings under its $2.2 billion revolving credit facility and no commercial paper outstanding at June 30, 2022.
- Capital expenditures were $264 million through June 30; full-year 2022 capital spending was expected to be approximately $450 million.
- PPG paid $279 million in common-stock dividends and repurchased $175 million of treasury stock during the first six months.
Material changes versus the prior comparable period
- Six-month pretax income declined $448 million, and diluted EPS declined $1.45, primarily reflecting Russia-related impairment and other charges, inflation, lower volumes, and currency effects.
- Six-month operating cash flow changed from an inflow of $581 million to an outflow of $136 million. The decline was principally caused by increased working-capital investment, including higher receivables and inventories.
- In the first quarter, PPG recorded $290 million of Russia-related impairment and other charges, including $201 million of long-lived-asset impairments and $89 million of other related charges. In Q2, the company recognized $60 million of income from collecting previously reserved receivables and recovering previously written-down inventory.
- Net sales increased across the United States and Canada and Latin America, while Asia Pacific sales declined 5.6% in Q2. Europe remained affected by geopolitical uncertainty and weaker demand.
- PPG issued euro-denominated notes in May 2022 with aggregate principal of €1.0 billion and net proceeds of $1.061 billion, and privately placed an additional €50 million note in March 2022.
- Accumulated other comprehensive loss increased to $2.922 billion from $2.750 billion at year-end 2021, primarily because of unfavorable foreign-currency translation.
Guidance, outlook, risks and unusual items
Management expected supply-chain and manufacturing disruptions to gradually improve, but key input availability was expected to remain tight. Selling prices were expected to increase sequentially. For the third quarter, Performance Coatings volumes were expected to be flat to down low-single digits, while Industrial Coatings volumes were expected to increase by a low-single-digit percentage. Segment margins were expected to improve sequentially in Industrial Coatings.
- The company was winding down most Russian operations and evaluating a possible sale or controlled withdrawal. Russia represented approximately 1% of consolidated net sales.
- Management expected about $70 million of third-quarter sales impact from divestitures and Russian-business activity in Performance Coatings and about $20 million in Industrial Coatings.
- Raw-material, energy, labor and logistics inflation, customer demand, semiconductor shortages, COVID-19 restrictions in China, the Ukraine war, foreign-exchange movements and the ability to recover price increases were significant risks.
- Restructuring savings were approximately $15 million in Q2; full-year savings were expected to be at least $65 million, with approximately $150 million of restructuring cash outlays expected in 2022.
- Environmental reserves totaled $247 million at June 30, 2022, with reasonably possible but unreserved environmental losses estimated at $100 million to $200 million.
- Asbestos-related reserves were $52 million. Management stated that litigation, environmental and asbestos matters were not expected to materially affect consolidated financial position or liquidity, although period-specific earnings impacts remain possible.
- Environmental remediation cash outlays were $47 million in the first six months, with projected remaining-2022 outlays of $40 million to $60 million.
- Disclosure controls were assessed as effective, with no material changes to internal control over financial reporting.
Investor verification points
- Verify whether pricing actions continue to offset raw-material, energy and logistics inflation and whether segment margins recover as projected.
- Monitor working-capital requirements, particularly receivables and inventories, and the pace of conversion back to positive operating cash flow.
- Track the final disposition and continuing financial effects of the Russian operations wind-down.
- Review debt maturities, euro-denominated exposure, covenant headroom and the effect of currency movements on debt and comprehensive income.
- Assess the reasonableness of environmental, asbestos and other litigation reserves, including the $100 million to $200 million of reasonably possible unreserved environmental losses.
- Reconcile GAAP EPS with adjusted EPS and separately assess the recurring effect of acquisition amortization, restructuring, transaction costs and Russia-related items.