PPG INDUSTRIES INC quarterly report, Q3 FY2015

PPG Industries, Inc. — 2015 Q3 Form 10-Q Summary

Business context and reporting period

PPG Industries is a multinational manufacturer of coatings, specialty materials and glass products, organized into Performance Coatings, Industrial Coatings and Glass reportable segments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2015, compared primarily with the corresponding 2014 periods.

Reported results reflect the November 2014 acquisition of Comex and several smaller 2015 acquisitions. Historical per-share data reflect PPG’s June 2015 two-for-one stock split. The 2014 sale of the Transitions Optical joint venture and sunlens business is presented as discontinued operations.

Financial performance and key metrics

($ millions, except per-share amounts)	Q3 2015	Q3 2014	9M 2015	9M 2014
Net sales	$3,872	$3,935	$11,634	$11,653
Income from continuing operations	$439	$383	$1,107	$1,065
Net income attributable to PPG	$433	$371	$1,092	$2,019
Diluted EPS from continuing operations	$1.59	$1.35	$3.97	$3.74
Diluted EPS attributable to PPG	$1.59	$1.33	$3.98	$7.21
Dividends per common share	$0.36	$0.34	$1.05	$0.98

Q3 sales declined 2%, primarily from an 8% foreign-exchange headwind and approximately 1% lower volume, partly offset by 7% growth from acquisitions. Acquired businesses contributed approximately $256 million of sales.
Q3 income from continuing operations increased 15%; diluted continuing-operations EPS increased 18%. Net income attributable to PPG increased 17%.
Q3 pretax income was $581 million versus $499 million. The reported effective tax rate was 24.4% versus 23.2%.
Q3 cost of sales declined to 56% of sales from 57%, while SG&A declined to 23% from 24%. Approximate net margin attributable to PPG was 11.2% in Q3 2015 versus 9.4% in Q3 2014.
For the first nine months, sales were essentially flat, while income from continuing operations increased 4% and diluted continuing-operations EPS increased 6%. The prior-year nine-month net income included approximately $972 million attributable to PPG from the Transitions Optical and sunlens divestiture, making reported net income comparisons not representative of ongoing operations.
Segment Q3 sales and income were: Performance Coatings $2,240 million and $379 million; Industrial Coatings $1,354 million and $241 million; and Glass $278 million and $32 million. Performance Coatings income increased 10%, Industrial Coatings income was approximately flat, and Glass income declined 3%.

Cash flow, liquidity and capital structure

Cash from operating activities was $986 million for the first nine months of 2015, down from $1,037 million in total operating cash flow in 2014 and from $1,244 million from continuing operations, primarily because of substantially higher pension contributions.
Capital expenditures were $266 million; acquisition spending was $248 million on the cash-flow statement, with total acquisition spending disclosed at $274 million net of cash acquired and other adjustments.
PPG repurchased $501 million of stock and paid $287 million of common-stock dividends during the first nine months. The company repurchased 1.5 million shares in Q3 under its $2 billion authorization; 13.3 million shares remained available at September 30.
Cash and cash equivalents were $1,015 million and short-term investments were $399 million at September 30, 2015, or approximately $1.4 billion combined, compared with approximately $1.2 billion at year-end 2014.
Current assets were $7.3 billion versus current liabilities of $4.8 billion. Total debt comprised $302 million of short-term and current maturities and $4.25 billion of long-term debt. Total debt to debt plus PPG shareholders’ equity was 47%, versus 44% at December 31, 2014.
PPG issued €1.2 billion of notes in March 2015, generating approximately $1.24 billion of net proceeds, and repaid $336 million of maturing €300 million notes in June.
Operating working capital increased to $2.678 billion, or 17.3% of sales, from $2.454 billion, or 16.5%, at year-end 2014. Days sales outstanding increased to 58 days from 54 days at December 31, 2014.

Material changes versus the prior comparable period

Foreign currency translation reduced Q3 sales by approximately $310 million and segment income by approximately $45 million. For the first nine months, the corresponding impacts were approximately $887 million and $103 million.
Lower manufacturing costs, cost management, acquisitions and reduced interest expense more than offset currency pressure and weaker volumes in selected markets.
Interest expense net of interest income declined 38% in Q3 and 39% for the first nine months, reflecting the prior refinancing.
Other charges declined sharply because Q3 2015 did not include the $138 million environmental remediation charge recorded in Q3 2014. Other income also declined because Q3 2014 included a $22 million asset-disposition gain and a $94 million equity-affiliate gain.
PPG recorded a $140 million pretax restructuring charge in Q2 2015, including approximately $121 million of severance and other costs and $19 million of asset write-offs. The program affected approximately 1,853 employees, with 1,043 still reflected in the reserve at September 30.
The restructuring program is expected to be substantially completed in 2016 and to generate annual pretax savings of $100 million to $105 million by 2017, including $15 million to $20 million of partial-year savings in 2015.

Guidance, outlook, risks and unusual items

Management expected Q4 volume growth to resume, supported by global economic expansion, reduced customer inventory management, acquisition contributions and restructuring and integration synergies. Foreign-exchange pressure was expected to moderate somewhat based on then-current rates.
Management expected the full-year adjusted 2015 effective tax rate to be 24.0% to 25.0% and total 2015 capital spending of approximately 3.0% of sales, below the previously communicated 3.5% to 4.0% range.
PPG expected to deploy $2.0 billion to $2.5 billion for acquisitions and share repurchases over 2015 and 2016 combined.
PPG expected additional mandatory non-U.S. pension contributions of approximately $5 million to $10 million in Q4 2015. It expected 2015 pension and other postretirement benefit cost of approximately $170 million.
The proposed asbestos settlement remained subject to appellate review. If effective, PPG would contribute approximately $825 million of pretax cash through 2023, plus stock or cash and other assets. The recorded asbestos settlement liability totaled approximately $1.0 billion at September 30, 2015, including $765 million current and $248 million non-current.
PPG retained exposure to certain non-channelled asbestos claims and premises claims. Approximately 290 active premises claims were disclosed, with approximately 115 in active state-court litigation. Management stated that aggregate litigation outcomes were not expected to materially affect financial position or liquidity, although individual periods could be materially affected.
Environmental reserves totaled $252 million, including $148 million for New Jersey Chrome. Management disclosed reasonably possible but unreserved environmental losses of $75 million to $200 million. Expected environmental cash outlays were $15 million to $25 million for the remainder of 2015, $40 million to $60 million in 2016 and $25 million to $45 million annually from 2017 through 2019.
Other risks include foreign-exchange volatility, global economic and end-market weakness, raw-material costs and availability, acquisition integration, realization of restructuring savings, tax changes, environmental regulation, litigation, customer inventory management and operating disruptions. A foreign tax authority was seeking approximately $70 million of interest related to a 2009 intercompany dividend; PPG disputed the assessment.
Non-U.S.-dollar borrowings totaled approximately $2.2 billion. A 10% weakening of the U.S. dollar against European currencies would have produced an estimated $252 million translation loss on those borrowings at September 30, 2015.

Important facts for investors to verify

Reconcile reported earnings with adjusted earnings, particularly the $140 million restructuring charge, pension settlement costs and transaction-related costs.
Track whether the forecast Q4 volume recovery and expected restructuring, acquisition and integration synergies are realized.
Assess the sustainability of cash generation after pension contributions, acquisitions, share repurchases, dividends, debt service and potential asbestos funding.
Monitor the asbestos appeals and the timing and amount of any required settlement funding.
Review New Jersey Chrome remediation progress, reserve adequacy and the disclosed $75 million to $200 million range of reasonably possible unreserved environmental losses.
Evaluate exposure to foreign currency, especially given the increased Euro-denominated debt and substantial accumulated foreign-currency translation losses.
Consider the effect of discontinued operations and divestiture gains when comparing 2015 results with 2014.