PPG Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2014, compared with the corresponding 2013 periods. PPG operated through Performance Coatings, Industrial Coatings and Glass segments. Prior periods were recast for discontinued operations following the March 31, 2014 sale of the Transitions Optical joint venture and sunlens business.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $4,082 million | $3,883 million | $7,718 million | $6,991 million |
| Income from continuing operations | $399 million | $324 million | $682 million | $521 million |
| Net income attributable to PPG | $386 million | $341 million | $1,648 million | $2,751 million |
| Diluted EPS from continuing operations | $2.80 | $2.19 | $4.77 | $3.47 |
| Diluted EPS | $2.75 | $2.35 | $11.74 | $18.76 |
| Cash from operating activities | Not separately provided | Not separately provided | $401 million total; $512 million continuing operations | $494 million total; $419 million continuing operations |
- Q2 sales increased 5%, driven by 3% volume growth, 1% pricing and 1% favorable currency translation. Six-month sales increased 10%, including approximately 5% from acquired businesses, 4% from volume and 1% from pricing.
- Q2 income from continuing operations before tax was $524 million versus $422 million; the continuing-operations pretax margin was approximately 12.8% versus 10.9%.
- Q2 diluted continuing-operations EPS rose 28% to $2.80. Adjusted continuing-operations EPS, excluding acquisition costs and a U.S. pension settlement charge, was $2.83 versus $2.28.
- Segment income increased in Q2 by 15% for Performance Coatings to $373 million, 18% for Industrial Coatings to $257 million and 38% for Glass to $11 million.
- Cash and short-term investments totaled approximately $2.9 billion at June 30, 2014, compared with $1.7 billion at December 31, 2013. Cash increased primarily from the $1.735 billion gross proceeds from the Essilor transaction.
- Total debt was approximately $3.4 billion, including current and long-term debt. The debt-to-total-debt-and-PPG-equity ratio was 35%, versus 41% at year-end 2013.
- Six-month capital expenditures were $232 million. Dividends paid were $177 million and share repurchases totaled $300 million. The quarterly dividend was $0.67 per share.
Material changes versus the prior comparable period
- The Essilor divestiture generated a $1.468 billion after-tax? No: the filing reports a $1.468 billion pre-tax gain and $946 million after-tax gain in discontinued operations. Six-month discontinued operations attributable to PPG were $978 million versus $2.242 billion in 2013, which included the $2.192 billion gain from the commodity chemicals separation.
- Continuing-operations earnings improved materially, supported by volume growth, pricing, manufacturing efficiencies, restructuring benefits, acquisition synergies and share repurchases.
- Cost of sales as a percentage of sales declined to 56.5% in Q2 from 58.3%; six-month cost of sales declined to 57% from 59%. SG&A rose to 24.1% of sales in Q2 from 23.8% and to 24.4% for six months from 23.9%.
- The effective tax rate from continuing operations increased to 23.9% for both Q2 and the first six months, compared with 23.2% and 21.4%, respectively, in the prior-year periods.
- PPG announced a $2.3 billion agreement to acquire Comex, subject to regulatory approvals and customary closing conditions. Homax and Masterwork transactions closed in July 2014; their collective purchase price was approximately $140 million.
- PPG agreed in July 2014 to sell substantially all assets of its Mt. Zion, Illinois glass facility; closing was expected in the third quarter.
Guidance, outlook, risks and unusual items
- Management expected a seasonally slower third quarter but generally consistent global expansion, continued earnings leverage from geographic diversity and structural cost reductions, and further cash deployment for acquisitions and share repurchases.
- Management expected a full-year 2014 adjusted effective tax rate of 23.5% to 24.5% and capital spending of $500 million to $600 million.
- PPG planned to deploy $3.0 billion to $4.0 billion during 2014 and 2015 combined on earnings-accretive acquisitions and share repurchases.
- PPG had a $1.044 billion asbestos settlement obligation at June 30, 2014, consisting of $792 million current and $252 million noncurrent. The settlement remained subject to final court approval and exhaustion of appeals; PPG also retained liability for certain non-channelled and premises claims.
- Environmental reserves totaled $268 million, including $164 million for New Jersey Chrome. Management expected environmental cash outlays of $75 million to $85 million for the remainder of 2014, $80 million to $100 million in 2015 and $15 million to $30 million annually through 2018. Additional reasonably possible unreserved environmental losses were estimated at $100 million to $200 million.
- Other risks include raw-material costs and availability, foreign exchange, global economic conditions, acquisition integration and synergies, tax-rate changes, environmental regulation, litigation and the timing or failure of the Comex transaction.
- The filing states that disclosure controls were effective and that there were no material changes to internal control over financial reporting.
Facts investors should verify
- Final regulatory approval, closing timing, financing and expected synergies for the Comex acquisition.
- Status of appeals and the effective date of the asbestos settlement, including required cash, stock and insurance contributions.
- Progress, timing and cost assumptions for New Jersey Chrome and other environmental remediation.
- Whether volume growth, pricing and manufacturing efficiencies offset transportation, energy and other cost inflation.
- Cash deployment, share repurchase pace, leverage and liquidity after acquisitions and capital spending.
- Revenue recognition implications of new accounting guidance effective after 2016; the filing states that the impact was still under assessment.