PPG Industries Inc. — Q1 2022 Form 10-Q Summary
Business Context and Reporting Period
PPG is a multinational coatings and specialty materials manufacturer with two reportable segments: Performance Coatings and Industrial Coatings. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $4.308 billion | $3.881 billion | Up 11.0% |
| Income before income taxes | $78 million | $499 million | Down $421 million |
| Net income attributable to PPG | $18 million | $378 million | Down $360 million |
| Diluted earnings per share | $0.08 | $1.58 | Down 94.9% |
| Adjusted diluted EPS | $1.37 | $1.88 | Down 27.1% |
| Cash used in operating activities | $304 million | $23 million | Higher use of $281 million |
| Capital expenditures | $194 million | $80 million | Up $114 million |
| Cash and short-term investments | Approximately $1.0 billion | Approximately $1.1 billion at December 31, 2021 | Down approximately $0.1 billion |
Reported gross profitability and operating margins were pressured by raw-material cost inflation, supply constraints and lower volumes; the filing does not provide a single consolidated operating-margin percentage. Segment income was $459 million, compared with $631 million in the prior-year quarter. Performance Coatings segment income was $319 million versus $386 million, while Industrial Coatings segment income was $140 million versus $245 million.
At March 31, 2022, total debt consisted of $319 million of short-term debt and current maturities plus $6.834 billion of long-term debt. Commercial paper borrowings were $1.0 billion, and $1.4 billion remained outstanding under the term loan used in connection with the Tikkurila acquisition. PPG had no borrowings under its $2.2 billion revolving credit facility. Total indebtedness to total capitalization was 51%, below the applicable 60% covenant threshold.
Material Changes Versus the Prior Comparable Period
- Sales increased $427 million, driven by approximately 10% higher selling prices and 7% acquisition-related sales, partly offset by 3% lower volumes and 3% unfavorable currency translation.
- Cost of sales increased 20.9%, exceeding sales growth, primarily because of raw-material inflation and costs from acquired businesses.
- Sales volumes declined because of supply constraints, raw-material availability issues and semiconductor shortages, despite strong underlying demand in many end markets.
- Performance Coatings sales increased 10.8%; Industrial Coatings sales increased 11.3%. Both segments experienced significant income declines due primarily to inflation and lower volumes.
- Operating working capital increased to $2.757 billion, or 16.0% of annualized sales, from $2.292 billion, or 14.8%, at March 31, 2021.
- Cash flow from operations deteriorated primarily because of unfavorable working-capital changes, including increases in receivables and inventories.
Guidance, Outlook, Risks and Unusual Items
- PPG recorded $290 million of impairment and other related charges following Russia’s invasion of Ukraine and the wind-down of most Russian operations. The charges included $201 million of long-lived asset impairments and $89 million of reserves for receivables, inventories and other current assets.
- Russia represented approximately 1% of PPG’s sales in both Q1 2022 and full-year 2021. Management stated that the company ceased sales to Russian state-owned entities and would make no new investments in Russia.
- Adjusted EPS declined to $1.37, primarily because price increases did not fully offset raw-material inflation and lower volumes. The reported effective tax rate was 70.5%, while the adjusted effective tax rate was 22.6%.
- Management expected the Q2 2022 effective tax rate to be between 23% and 24%.
- For Q2, Performance Coatings volumes were expected to decline at a mid-single-digit percentage rate year over year, and Industrial Coatings volumes at a low-single-digit rate. Expected pressures included supply disruptions, raw-material shortages, COVID-19 restrictions in China and the war in Ukraine. PPG expected sequential margin improvement in Industrial Coatings.
- PPG expected 2022 capital spending of $500 million to $525 million, restructuring savings of at least $70 million and restructuring-related cash outlays of approximately $170 million.
- Environmental reserves totaled $262 million at March 31, 2022, with reasonably possible but unreserved environmental losses estimated at $100 million to $200 million. Asbestos-related reserves totaled $52 million.
- Management stated that cash, operating cash flow, capital-market access and the revolving credit facility should be sufficient to fund operations, capital spending, acquisitions, dividends, debt service, pension contributions and share repurchases.
- Key risks include raw-material, energy, labor and logistics inflation; supply-chain disruptions; the ability to obtain price increases and recover margins; geopolitical events; COVID-19 effects; foreign-exchange movements; acquisition integration; environmental obligations; and litigation.
Most Important Facts for Investors to Verify
- Whether price increases and cost-reduction actions offset raw-material inflation and restore segment margins.
- The duration and financial impact of supply constraints, semiconductor shortages, China-related restrictions and the Russia/Ukraine conflict.
- Future cash conversion, particularly receivables and inventory levels after the $304 million Q1 operating cash outflow.
- Debt maturities, commercial-paper refinancing and compliance with the 60% leverage covenant.
- The ultimate costs of restructuring, environmental remediation, asbestos claims and other litigation.
- Whether the $290 million Russia-related impairment and related reserves represent the full expected exposure or require further charges.
- The company’s non-GAAP adjusted EPS and margin reconciliations, including the effects of acquisitions, amortization and restructuring items.