PPG Industries, Inc. — 2016 Q3 Form 10-Q Summary
Business context and reporting period
PPG Industries, Inc. reported unaudited results for the three and nine months ended September 30, 2016. The company operates primarily through Performance Coatings, Industrial Coatings and Glass. The former flat glass business was classified as discontinued operations and was sold on October 1, 2016. The European fiber glass business was also sold on October 1, 2016, and the PFG fiber glass joint ventures were expected to be sold by year-end 2016.
Financial performance and key metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $3,789 million | $3,725 million | $11,254 million | $11,214 million |
| Income from continuing operations attributable to PPG | $(201) million | $415 million | $487 million | $1,043 million |
| Net income attributable to PPG | $(184) million | $433 million | $533 million | $1,092 million |
| Diluted EPS from continuing operations | $(0.75) | $1.52 | $1.81 | $3.80 |
| Adjusted diluted EPS from continuing operations | $1.56 | $1.54 | $4.62 | $4.27 |
| Operating cash flow from continuing operations | Not separately provided for the quarter | Not separately provided for the quarter | $667 million | $933 million |
- Q3 sales increased 1.7%, driven by approximately 2% higher volumes and 2% sales from acquisitions, partly offset by 2% unfavorable currency translation.
- Nine-month sales increased 0.4%; acquisitions and volume growth offset approximately $290 million of unfavorable foreign currency translation.
- Q3 cost of sales was $2,081 million, or 54.9% of sales, compared with 55.0% in the prior-year quarter. Nine-month cost of sales was 54.2% of sales versus 55.4%.
- Q3 SG&A was $899 million, or 23.7% of sales, versus 23.5% in the prior-year quarter. Nine-month SG&A was 24.4% of sales versus 24.2%.
- Reported Q3 results included a $968 million pretax, non-cash pension settlement charge. The related tax benefit was $352 million. Excluding this charge, adjusted Q3 continuing-operations EPS was $1.56.
- Segment income was $629 million in Q3 and $1,922 million for nine months, compared with $626 million and $1,824 million, respectively, in the prior-year periods.
- Performance Coatings Q3 sales declined 0.8% to $2,223 million and segment income declined 2.9% to $368 million. Industrial Coatings sales rose 6.1% to $1,437 million and segment income rose 3.3% to $249 million. Glass sales declined 1.5% to $129 million while segment income doubled to $12 million.
- Cash and short-term investments totaled approximately $1.0 billion at September 30, 2016, versus approximately $1.5 billion at December 31, 2015.
- Total debt, including capital leases, was approximately $4.4 billion, including $652 million of short-term debt and current maturities and $3,752 million of long-term debt. The total debt-to-capital ratio was 47%, compared with 46% at year-end 2015.
- PPG paid $309 million of dividends and repurchased approximately $400 million of common stock during the first nine months. The quarterly dividend was increased 11% to $0.40 per share.
Material changes versus the prior comparable period
- Reported profitability fell sharply because of the Q3 pension settlement charge; adjusted operating performance improved modestly. Adjusted nine-month EPS increased 8.2% to $4.62.
- Operating cash flow from continuing operations declined $266 million year over year, principally because of the $813 million cash funding of the Pittsburgh Corning asbestos settlement trust.
- PPG completed the $306 million acquisition of MetoKote on July 1, 2016. Pro forma impact on sales and results was not significant.
- PPG transferred approximately $1.6 billion of U.S. pension obligations and approximately $200 million of Canadian pension obligations to insurers through annuity contracts, reducing future pension obligations but generating substantial non-cash settlement charges.
- The company reduced its restructuring reserve from $87 million at December 31, 2015 to $42 million at September 30, 2016; the restructuring program was expected to be substantially completed by year-end 2016.
- PPG funded the Pittsburgh Corning asbestos trust with $764 million of cash, PPG stock and related assets, eliminating its present and future cash payment obligations to that trust. Separate asbestos liabilities and litigation exposure remain.
Guidance, outlook, commentary and risks
- Management expected Q4 sales to decline sequentially because of normal seasonality across the coatings and glass businesses.
- Management expected continued unfavorable foreign currency translation, particularly from the Mexican peso and British pound.
- Performance Coatings outlook included continued growth in automotive refinish and aerospace, modest U.S. and Canadian architectural coatings demand, weakness in EMEA architectural coatings and very weak marine demand.
- Industrial Coatings expected modest automotive OEM growth, continued packaging-coatings volume growth and generally consistent industrial end-market trends, with approximately $45 million of Q4 acquisition-related sales.
- Capital spending for 2016 was expected to be 3.0% to 3.5% of full-year sales. Additional U.S. pension contributions of approximately $125 million were expected in Q4 2016 and the first half of 2017, with additional non-U.S. contributions of $5 million to $15 million in Q4 2016.
- PPG expected to deploy at least $650 million in Q4 2016 toward acquisitions and share repurchases, within a combined 2015–2016 cash deployment target of $2.0 billion to $2.5 billion.
- Key risks include global economic weakness, raw-material costs and availability, foreign-exchange movements, acquisition integration and synergies, restructuring execution, tax-rate changes, environmental regulation, litigation and unpredictable asbestos claims.
- Environmental reserves totaled $209 million at September 30, 2016, including $112 million for New Jersey Chrome. Additional reasonably possible but unreserved environmental losses were estimated at $75 million to $200 million.
- PPG had approximately 260 active asbestos premises claims and retained a $162 million reserve for asbestos claims not channeled to the trust. Management stated that aggregate litigation and environmental outcomes were not expected to materially affect financial position or liquidity, but individual periods could be materially affected.
Most important facts for investors to verify
- Separate recurring operating performance from the $968 million pension settlement charge and other adjustment items; reconcile reported and adjusted EPS.
- Assess the sustainability of cash generation after the $813 million asbestos funding, planned pension contributions, dividends, buybacks and acquisition spending.
- Monitor near-term debt maturities, including the $250 million BTM term loan due March 2017 and the $250 million BNP term loan due May 2017.
- Confirm the financial impact and closing status of the flat glass, European fiber glass and PFG joint-venture divestitures.
- Evaluate remaining asbestos, environmental and foreign-tax contingencies, including the $75 million to $200 million reasonably possible unreserved environmental exposure.
- Review the effect of currency movements and regional demand weakness, particularly in EMEA architectural coatings, marine markets, Latin America and certain U.S. industrial markets.