PPG INDUSTRIES INC quarterly report, Q3 FY2019

PPG Industries, Inc. — Form 10-Q Summary

Business context and reporting period

PPG is a global coatings and specialty materials manufacturer operating through two reportable segments: Performance Coatings and Industrial Coatings. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.

Key financial metrics

Metric	Q3 2019	Q3 2018	9M 2019	9M 2018
Net sales	$3,826 million	$3,817 million	$11,474 million	$11,729 million
Income before taxes	$481 million	$451 million	$1,263 million	$1,351 million
Net income attributable to PPG	$367 million	$378 million	$951 million	$1,083 million
Income from continuing operations attributable to PPG	$366 million	$368 million	$948 million	$1,067 million
Diluted EPS from continuing operations	$1.54	$1.51	$3.98	$4.32
Reported effective tax rate	22.7%	17.5%	23.5%	20.0%
Adjusted diluted EPS from continuing operations	$1.67	$1.45	$4.90	$4.75

Q3 cost of sales declined to 57.0% of sales from 59.0% in the prior-year quarter, while SG&A increased to 23.2% from 22.7%. For the nine-month period, cost of sales was 57.0% of sales versus 58.1%, while SG&A was 23.6% versus 23.2%.

Performance Coatings Q3 sales increased 1.0% to $2,313 million and segment income increased 14.8% to $380 million.
Industrial Coatings Q3 sales decreased 1.0% to $1,513 million, while segment income increased 21.9% to $206 million.
Nine-month segment income increased 6.1% for Performance Coatings and 4.4% for Industrial Coatings despite lower sales.
Operating cash flow was $1,271 million for the first nine months, including $1,275 million from continuing operations, compared with $667 million and $687 million, respectively, in 2018.
Capital expenditures were $224 million and cash spending on acquisitions was $564 million during the first nine months.

Liquidity, debt and capital allocation

Cash and short-term investments totaled approximately $1.5 billion at September 30, 2019, compared with $1.0 billion at December 31, 2018.
Total debt consisted of $639 million of short-term debt and current maturities and $4,885 million of long-term debt. Including finance leases, long-term debt carrying value was approximately $5.5 billion.
PPG issued $600 million of notes in August 2019, with net proceeds of $595 million: $300 million of 2.4% notes due 2024 and $300 million of 2.8% notes due 2029.
The amended revolving credit facility provides $2.2 billion of unsecured capacity through August 2024; no borrowings or commercial paper were outstanding at September 30, 2019.
Total indebtedness to total capitalization was 49% under the credit agreement. Debt, including finance leases, represented 51% of debt plus equity.
PPG paid $347 million in dividends and repurchased $175 million of common stock during the first nine months. The quarterly dividend was $0.51 per share.

Material changes versus the prior comparable period

Q3 sales were essentially flat, rising 0.2%, while nine-month sales declined 2.2%. Price increases and acquired sales offset lower volumes and unfavorable currency translation.
Foreign currency translation reduced Q3 sales by approximately $80 million and nine-month sales by approximately $370 million.
Q3 income before taxes increased 6.7%, but net income attributable to PPG declined 2.9%, primarily reflecting higher income taxes and the absence of the prior-year discontinued-operations benefit.
Nine-month income before taxes decreased 6.5%, reported continuing-operations diluted EPS declined 7.9%, and reported net income attributable to PPG declined 12.2%. Adjusted diluted EPS increased 3.2%.
PPG adopted the new lease accounting standard in 2019, recognizing $742 million of operating lease right-of-use assets and $750 million of operating lease liabilities at September 30, 2019. Management stated that adoption did not materially affect pretax income or cash flows.
PPG completed acquisitions of Whitford, Hemmelrath and Dexmet in 2019. The filing states that the pro forma impact of each acquisition was not significant.

Guidance, outlook, risks and unusual items

Management expects fourth-quarter sales to be seasonally lower than Q3. Industry demand was expected to remain similar to Q3, with continued softness in global automotive and industrial production.
Expected fourth-quarter acquisition-related sales were approximately $20 million for Performance Coatings and $75 million for Industrial Coatings. Currency translation was expected to reduce fourth-quarter sales by approximately $40 million and $30 million, respectively, based on then-current exchange rates.
Management expected a fourth-quarter adjusted effective tax rate of approximately 24% and a full-year 2019 adjusted effective tax rate between 23% and 24%.
PPG initiated a $184 million 2019 restructuring program, with most actions expected to be completed by the end of 2020 and the remainder by 2022. Expected annualized savings at completion were approximately $125 million; 2019 restructuring savings were expected to total $75 million to $85 million.
Environmental remediation reserves totaled $293 million, including $150 million for New Jersey Chrome. PPG recorded $75 million of environmental remediation charges and incurred $57 million of related cash outlays in the first nine months.
Unreserved environmental losses estimated to be reasonably possible were $100 million to $200 million. The company also maintained approximately $180 million of reserves for asbestos-related claims and reported approximately 675 open and active asbestos claims.
A proposed $25 million securities class-action settlement had been preliminarily approved, with insurance coverage recorded as an offsetting asset. Final court approval was pending as of the filing.
PPG settled the SEC accounting investigation through a cease-and-desist order imposing no financial penalty. The company continued to cooperate with the SEC investigation relating to the accounting matters; the U.S. Attorney’s Office had informed PPG that it would not pursue action against the company.
Principal risks include weak automotive and industrial demand, raw-material costs, the ability to recover margins through pricing, foreign exchange, restructuring execution, acquisition integration, environmental liabilities and litigation.

Most important facts for investors to verify

Reconcile reported versus adjusted EPS, particularly the effects of restructuring and environmental charges.
Assess whether pricing and cost savings can continue to offset volume declines, inflation and currency headwinds.
Monitor automotive OEM, industrial production and architectural coatings demand, including customer shutdowns and inventory levels.
Track execution and cash costs of the 2019 restructuring program and realization of projected savings.
Review debt maturities, the 49% indebtedness-to-capitalization covenant measure and the effect of additional acquisition financing.
Evaluate changes in environmental and asbestos reserves, remediation estimates and related cash outlays.
Confirm final approval and insurance reimbursement for the proposed securities class-action settlement.
Consider that interim results may not be indicative of full-year performance and that adjusted measures are non-GAAP metrics.