Business Context and Reporting Period
PPG Industries, Inc. filed this Form 10-K for the fiscal year ended December 31, 2015. PPG manufactures and distributes coatings, specialty materials and glass products through three reportable segments: Performance Coatings, Industrial Coatings and Glass. The filing was signed February 18, 2016.
Fourth-quarter 2015 net sales were $3.696 billion and diluted earnings per share from continuing operations were $1.16. The filing primarily reports full-year results.
Key Financial Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $15.330 billion | $15.360 billion | (0.2%) |
| Income before income taxes | $1.882 billion | $1.416 billion | +$466 million |
| Income from continuing operations attributable to PPG | $1.405 billion | $1.133 billion | +24.0% |
| Diluted EPS, continuing operations | $5.14 | $4.05 | +26.9% |
| Effective tax rate | 24.2% | 18.3% | +5.9 percentage points |
| Cash from operating activities | $1.837 billion | $1.807 billion | +1.7% |
| Capital expenditures | $476 million | $587 million | (18.9%) |
| Acquisitions, net of cash acquired | $320 million | $2.113 billion | (84.9%) |
- Cost of sales, excluding depreciation and amortization, declined 2.3% to $8.591 billion; cost of sales declined to 56.0% of sales from 57.2%.
- Selling, general and administrative expense declined 2.1% to $3.679 billion, or 24.0% of sales.
- Adjusted income from continuing operations was $1.555 billion and adjusted diluted EPS was $5.69, excluding specified restructuring, transaction, pension and affiliate-refinancing charges.
- Cash and cash equivalents were $1.311 billion and short-term investments were $144 million at year-end, totaling $1.455 billion.
- Operating working capital declined to $2.341 billion from $2.454 billion, and operating working capital as a percentage of sales declined to 15.8% from 16.5%.
- Total debt, including capital leases, was approximately $4.326 billion; the debt-to-total-debt-and-equity ratio was 46%, compared with 44% in 2014. PPG also had a $1.8 billion unsecured revolving credit facility with no borrowings outstanding.
- PPG paid $383 million in dividends, increased its per-share dividend 7%, and repurchased approximately $751 million of common stock, or 7.0 million shares.
Segment Results and Material Changes
| Segment | 2015 Sales | 2015 Segment Income | Year-over-Year Change |
|---|---|---|---|
| Performance Coatings | $8.765 billion | $1.302 billion | Sales +0.8%; income +8.0% |
| Industrial Coatings | $5.476 billion | $985 million | Sales (1.4%); income +3.6% |
| Glass | $1.089 billion | $137 million | Sales (1.9%); income +69.1% |
- Net sales were essentially flat because 7% unfavorable foreign-currency translation offset 6% growth from acquisitions and 1% higher volumes. Currency translation reduced sales by approximately $1.1 billion and pretax income by approximately $120 million.
- Performance Coatings benefited from acquisitions, including Comex, lower manufacturing costs and modestly higher prices. These benefits were partly offset by currency and lower volumes in certain architectural coatings markets.
- Industrial Coatings experienced higher volumes across all regions, particularly automotive OEM, packaging coatings, Asia-Pacific and EMEA, but currency and lower prices reduced reported sales.
- Glass segment income improved substantially from favorable product mix, lower manufacturing costs and reduced flat-glass capacity, despite lower reported sales. The Fresno, California facility experienced manufacturing issues and was scheduled for a major repair in the first quarter of 2016.
- PPG recorded a $140 million pretax restructuring charge in 2015, including approximately 1,853 affected employees and an $87 million year-end restructuring reserve. Management expects approximately $105 million of annual pretax savings by 2017, including approximately $20 million realized in 2015.
- Interest expense, net of interest income, declined to $86 million from $137 million, primarily because of the 2014 debt refinancing. The 2014 comparison included a $317 million debt-refinancing charge, which did not recur in 2015.
- PPG completed several bolt-on acquisitions in 2015, including Revocoat, IVC Industrial Coatings, Cuming Microwave, Consorcio Latinoamericano, Sealants Europe and the remaining interest in Chemfil Canada.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2016 volume growth to improve across regions, with continued moderate growth in Europe and most U.S. end markets, while emerging-market conditions would remain mixed.
- For 2016, management expected acquisition-related first-quarter sales contributions of $25 million to $30 million in Performance Coatings and $80 million to $90 million in Industrial Coatings.
- Management expected 2016 foreign-currency translation to reduce sales by approximately $550 million to $600 million and pretax income by approximately $70 million to $80 million based on mid-January 2016 exchange rates; the filing cautioned that currency volatility could change these estimates.
- Management expected 2016 adjusted effective tax rate of 24.5% to 25.5%, interest expense approximately $20 million above 2015, and additional restructuring savings of $60 million to $70 million.
- Raw materials, particularly resins, pigments and titanium dioxide, represented approximately 70% to 80% of cost of goods sold in most coatings formulations. Supply availability, prices, energy costs and currency movements remain significant margin risks.
- Environmental remediation reserves were $233 million at year-end, including $133 million for the New Jersey Chrome sites. Additional reasonably possible but unreserved environmental losses were estimated at $75 million to $200 million.
- The proposed Pittsburgh Corning asbestos settlement remained subject to closing conditions at year-end. PPG had recorded a $1.048 billion settlement obligation and expected the Funding Effective Date in the first half of 2016, with approximately $825 million of aggregate cash payments and 2,777,778 PPG shares or equivalent cash to be contributed.
- PPG identified risks from global economic conditions, competition, acquisitions and integration, foreign exchange, environmental and chemical regulations, litigation, tax changes, pensions, cybersecurity and business disruptions.
- Defined benefit pension expense increased to $173 million from $123 million, and PPG contributed $289 million to defined benefit plans in 2015. Management expected 2016 defined benefit expense to decline by approximately $20 million to $25 million because of a methodology change.
Important Facts for Investors to Verify
- Reconcile reported and adjusted earnings, particularly the $140 million restructuring charge and other nonrecurring items.
- Review the sensitivity of sales, earnings and accumulated other comprehensive loss to foreign-currency movements.
- Assess the timing, funding requirements and final conditions of the asbestos settlement, including retained non-PC asbestos and premises claims.
- Evaluate environmental reserves and the $75 million to $200 million range of reasonably possible unreserved exposure.
- Confirm debt maturities, the 46% debt-to-total-debt-and-equity ratio, commercial paper reliance and available revolving-credit capacity.
- Monitor whether restructuring savings, Comex revenue synergies and additional acquisition benefits are realized as projected.
- Review the Fresno glass-facility repair, pension funding requirements and raw-material pricing trends for potential effects on 2016 margins and cash flow.