PPG INDUSTRIES INC annual report, FY2022

PPG Industries, Inc. — 2022 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2022. The filing is an annual report rather than a standalone fourth-quarter filing, although fourth-quarter trends and year-end balances are discussed. PPG manufactures and distributes paints, coatings and specialty materials through two reportable segments: Performance Coatings and Industrial Coatings, with operations in more than 70 countries.

Financial Performance and Position

Metric	2022	2021	Change
Net sales	$17.652 billion	$16.802 billion	+5.1%
Income before income taxes	$1.381 billion	$1.815 billion	-23.9%
Income from continuing operations attributable to PPG	$1.028 billion	$1.420 billion	-27.6%
Diluted EPS from continuing operations	$4.33	$5.93	-27.0%
Net income attributable to PPG	$1.026 billion	$1.439 billion	-28.7%
Cash from operating activities	$963 million	$1.562 billion	-38.3%
Cash and short-term investments	$1.154 billion	$1.072 billion	+7.6%

Margins: Cost of sales increased to 62.9% of sales from 61.2%, implying a gross margin of approximately 37.1% versus 38.8%. Income before taxes represented approximately 7.8% of sales, compared with 10.8% in 2021. Net income attributable to PPG represented approximately 5.8% of sales, compared with 8.6%.

Performance Coatings: Sales of $10.694 billion, up 3.5%; segment income of $1.399 billion, down 6.2%. Segment income margin was approximately 13.1%.
Industrial Coatings: Sales of $6.958 billion, up 7.6%; segment income of $643 million, down 5.4%. Segment income margin was approximately 9.2%.
Sales growth was driven principally by an 11% increase in selling prices and 3% acquisition-related growth, partly offset by 5% unfavorable foreign-currency translation, 3% lower volumes and divestiture-related and Russia-related reductions.
Research and development costs were $470 million, or 2.7% of sales. Sustainable products represented 39% of total sales.

Cash Flow, Debt and Liquidity

Operating cash flow declined primarily because of increased working capital requirements. Operating working capital rose to $2.830 billion, or 16.9% of annualized fourth-quarter sales, from $2.298 billion, or 13.7%.
Capital expenditures were $518 million, compared with $371 million in 2021. Acquisitions used $114 million, versus $2.137 billion in 2021, largely reflecting the prior-year Tikkurila acquisition.
Dividends paid were $570 million, and share repurchases totaled $190 million for approximately 1.5 million shares. Approximately $1.1 billion remained under the repurchase authorization at year-end.
Total debt was $6.806 billion, including $303 million due within one year; long-term debt was $6.503 billion. Debt declined modestly from $6.575 billion at year-end 2021.
PPG issued approximately $1.116 billion of debt in 2022, including euro-denominated notes, and repaid $300 million under its term loan. No commercial paper was outstanding at year-end.
The company had a $2.2 billion unsecured revolving credit facility with no borrowings outstanding. The debt covenant total-indebtedness-to-total-capitalization ratio was 49%, below the generally applicable 60% limit.
Management stated that cash on hand, operating cash flow and capital-market access should be sufficient to fund operations, capital spending, acquisitions, dividends, debt service, pension contributions and share repurchases.

Material Changes Versus 2021

Pricing actions increased sales but did not fully offset raw-material, energy, logistics, wage and manufacturing-cost inflation. PPG reported operating-cost increases of more than $1 billion year over year.
Volume declines and unfavorable currency translation reduced results, particularly in Europe and China. Latin America delivered strong growth, while U.S. and Canada sales increased 10.6%; EMEA increased 0.4%; Asia Pacific declined 5.1%; and Latin America increased 16.0%.
Interest expense increased to $167 million from $121 million because of higher interest rates and somewhat higher debt levels.
Impairment and related charges increased to $245 million from $21 million, primarily reflecting the wind-down of Russian operations. The company recorded $290 million of Russia-related charges and subsequently recognized $63 million of recoveries.
2021 included unusual benefits not repeated in 2022, including a $133 million asbestos reserve reduction, a $50 million pension settlement charge, legal-settlement income and a $34 million gain on the sale of a production facility.
Accrued environmental reserves declined to $217 million from $282 million, while cash outlays for environmental remediation increased to $78 million from $56 million.
The company approved additional restructuring actions in 2022. Restructuring savings were approximately $65 million in 2022, with at least $60 million expected in 2023.

Guidance, Outlook and Key Risks

Management expected softer and uneven global economic activity in 2023, with continued weakness in Europe, pressure on U.S. architectural coatings from higher interest rates, and gradual improvement in China as pandemic restrictions eased.
For the first quarter of 2023, aggregate sales volumes were expected to decline by a mid-single-digit percentage year over year in both reportable segments. Raw-material costs were expected to rise by a low-single-digit percentage year over year, with inflationary pressure expected to lessen as the year progressed.
Management expected continued recovery in automotive refinish, automotive OEM and aerospace coatings, while aerospace volumes remained below pre-pandemic levels at year-end 2022.
Expected 2023 effective tax rate was 22% to 24%; capital expenditures were expected to be $500 million to $550 million; environmental remediation cash outlays were expected to be $40 million to $60 million; and pension contributions were expected to be $10 million to $20 million.
Principal risks include raw-material availability and pricing, energy and logistics costs, foreign-currency volatility, economic weakness, inflation, the war in Ukraine and Russia-related exit actions, COVID-19 disruptions, supply-chain interruptions, competitive pricing pressure, acquisitions and integration, environmental regulation, litigation including asbestos claims, tax audits, pensions and cybersecurity.
Environmental reserves were $217 million, with additional reasonably possible but unreserved environmental losses estimated at approximately $100 million to $200 million. Management did not expect these matters to materially affect financial position or liquidity, although individual-period earnings could be materially affected.
Asbestos reserves were $51 million at December 31, 2022. Management considered the reserve sufficient based on current information, but acknowledged substantial uncertainty regarding future claims, litigation outcomes, insurance coverage and legal developments.

Important Facts for Investors to Verify

Reconcile reported and adjusted earnings: 2022 adjusted diluted EPS from continuing operations was $6.05 versus reported GAAP EPS of $4.33, with the difference driven by impairment, amortization, restructuring and transaction-related items.
Assess whether pricing gains can continue to offset raw-material, energy, labor and logistics inflation without further volume erosion.
Monitor working-capital normalization and conversion of earnings into operating cash flow after the 38.3% cash-flow decline.
Review debt maturities, including $303 million due in 2023, $1.396 billion in 2024 and $959 million in 2025, and the company’s planned balance between acquisitions, debt reduction and shareholder returns.
Track the outcome of the Russia wind-down or potential sale and any additional impairment or restructuring charges.
Evaluate environmental, asbestos and other litigation contingencies against the disclosed reserves and the $100 million to $200 million of reasonably possible unreserved environmental losses.
Confirm the durability of expected 2023 volume recovery in China, aerospace, automotive OEM and automotive refinish markets, as well as the effect of higher interest rates on architectural coatings demand.
Note that PricewaterhouseCoopers issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; the filing identified quantitative goodwill impairment testing as a critical audit matter.