PPG Industries, Inc. — 2014 Q3 Form 10-Q Summary
Business context and reporting period
PPG Industries is a global coatings, specialty materials and glass manufacturer. This unaudited Form 10-Q covers the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods. Results were recast to present the Transitions Optical and sunlens businesses as discontinued operations following their sale to Essilor on March 31, 2014.
Effective in 2014, PPG reports three segments: Performance Coatings, Industrial Coatings and Glass.
Financial performance and key metrics
| Metric | Q3 2014 | Q3 2013 | Change |
|---|---|---|---|
| Net sales | $3,935 million | $3,774 million | +4% |
| Income from continuing operations | $383 million | $207 million | +85% |
| Net income attributable to PPG | $371 million | $226 million | +64% |
| Diluted EPS from continuing operations | $2.70 | $1.41 | +91% |
| Diluted EPS | $2.66 | $1.56 | +71% |
| Dividends per share | $0.67 | $0.61 | +10% |
- Q3 continuing-operations net margin was approximately 9.7%, compared with approximately 5.5% in Q3 2013. Reported results included a $138 million environmental reserve increase and $116 million of gains on asset dispositions.
- Adjusted Q3 continuing-operations net income was $394 million, or $2.82 per diluted share, compared with $336 million, or $2.32 per share, in the prior-year quarter.
- Sales growth reflected 3% higher volumes and 1% higher selling prices. All three segments reported higher volumes, led by North America and Asia.
- Performance Coatings sales increased 3% to $2,257 million and segment income increased 6% to $345 million.
- Industrial Coatings sales increased 7% to $1,395 million and segment income increased 17% to $240 million.
- Glass sales increased 2% to $283 million and segment income increased to $33 million from $21 million.
| Metric | Nine months 2014 | Nine months 2013 | Change |
|---|---|---|---|
| Net sales | $11,653 million | $10,765 million | +8% |
| Income from continuing operations | $1,065 million | $728 million | +46% |
| Net income attributable to PPG | $2,019 million | $2,977 million | -32% |
| Diluted EPS from continuing operations | $7.47 | $4.88 | +53% |
| Diluted EPS | $14.41 | $20.39 | -29% |
- Nine-month continuing-operations net margin was approximately 9.1%, compared with approximately 6.8% in 2013.
- Nine-month adjusted continuing-operations net income was $1,071 million, or $7.63 per diluted share, compared with $874 million, or $5.98 per share.
- The decline in total net income and EPS reflects the $2.2 billion after-tax-equivalent gain from the 2013 separation of the commodity chemicals business, which was included in prior-year discontinued operations. The 2014 period includes a $946 million after-tax gain from the Essilor transaction.
Cash flow, liquidity and capital structure
- Cash from operating activities was $1,037 million for the first nine months of 2014, including $1,244 million from continuing operations, compared with $1,282 million and $1,144 million, respectively, in 2013.
- Cash and cash equivalents were $2,468 million at September 30, 2014, compared with $1,116 million at December 31, 2013. Cash and short-term investments totaled approximately $3.0 billion.
- The increase in cash primarily reflected $1.735 billion of gross proceeds from the Essilor divestiture.
- Capital expenditures were $358 million through September 30; full-year 2014 capital spending guidance was $500 million to $600 million.
- PPG repurchased $450 million of stock, paid $269 million of dividends and repaid $37 million of acquired debt during the first nine months.
- Total debt was approximately $3.35 billion, consisting of $394 million of short-term debt and current maturities and $2.954 billion of long-term debt. The debt-to-total-debt-and-PPG-equity ratio declined to 35% from 41% at December 31, 2013.
- Management stated that cash, operating cash flow and available debt capacity should be sufficient to fund operations, capital spending, acquisitions, dividends, debt service, asbestos obligations and share repurchases.
Material changes versus the prior comparable period
- Operating performance improved across all three segments, supported by volume growth, pricing, manufacturing improvements, acquisitions and synergies from the North American architectural coatings acquisition.
- SG&A increased 3% in Q3 and 9% year to date, primarily from acquisitions and overhead inflation. Cost of sales remained 57% of sales in Q3 and improved to 57% from 58% year to date.
- The reported Q3 effective tax rate on continuing operations increased to 23.2% from 16.2%; the nine-month rate increased to 23.7% from 20.0%. PPG cited the absence of a 2013 tax-law benefit and the impact of unusual items.
- Foreign currency translation reduced equity by $234 million from year-end and generated a $294 million Q3 other comprehensive loss from currency translation.
- PPG completed the sale of substantially all assets of its former Mt. Zion, Illinois flat glass facility and recognized a $22 million pretax gain. PPG also recognized a $94 million pretax share of an equity affiliate’s gain from selling its insurance and services business.
- PPG increased its New Jersey Chrome environmental reserve by $136 million in Q3, bringing total environmental reserves to $375 million at September 30.
Guidance, outlook, risks and unusual items
- PPG expected its adjusted full-year 2014 effective tax rate to be 23.5% to 24.5%.
- Management expected Q4 to be seasonally slower than Q3 and anticipated foreign currency translation to negatively affect year-over-year results based on prevailing exchange rates.
- PPG expected the $2.3 billion Comex acquisition to close in Q4 2014, subject to regulatory approval and customary conditions. Including Comex, management expected 2014–2015 acquisition and repurchase spending to be at or above the high end of its previously communicated $3.0 billion to $4.0 billion range.
- PPG expected environmental remediation cash outlays of $40 million to $50 million for the remainder of 2014, $130 million to $150 million in 2015, $60 million to $80 million in 2016 and $25 million to $45 million annually in 2017 and 2018.
- The asbestos settlement remained subject to final appellate resolution. PPG’s recorded obligation was $1.028 billion, with $773 million current and $255 million non-current. The company expected to contribute approximately $825 million in pretax cash over time, plus shares or cash tied to 1,388,889 PPG shares.
- At September 30, 2014, the District Court had affirmed the asbestos plan; remaining objectors could appeal to the Third Circuit by October 30, 2014 and potentially seek Supreme Court review.
- PPG disclosed a foreign tax authority claim seeking approximately $70 million of interest related to a 2009 intercompany dividend. The notice was not a formal assessment, and PPG disagreed with the assertion.
- Other risks include raw-material costs and availability, foreign exchange, global economic conditions, competition, acquisition integration and synergies, environmental regulation, litigation and failure to close or realize benefits from Comex.
Most important facts for investors to verify
- Whether the Comex acquisition closed on expected terms and the resulting purchase accounting, debt and integration effects.
- The final status and funding date of the asbestos settlement, including any appeals and the treatment of retained non-PC-related claims.
- Changes to New Jersey Chrome remediation estimates, reserve adequacy and actual cash outlays.
- Underlying recurring earnings excluding environmental charges, asset-disposition gains, pension settlements and other unusual items.
- Fourth-quarter and full-year effects of foreign exchange, seasonality, raw-material inflation and demand trends in Europe, automotive, architectural coatings and glass.
- Cash deployment priorities, including Comex funding, share repurchases, dividends, capital expenditures and leverage.