PPG Industries, Inc. — Form 10-Q Summary
Business context and reporting period
PPG Industries is a global coatings and specialty materials manufacturer with two reportable segments: Performance Coatings and Industrial Coatings. This unaudited Form 10-Q covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. The company reported 236.1 million common shares outstanding at March 31, 2019.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $3.624 billion | $3.781 billion | Down 4.2% |
| Income before income taxes | $419 million | $421 million | Down $2 million |
| Income from continuing operations attributable to PPG | $312 million | $328 million | Down $16 million |
| Net income attributable to PPG | $312 million | $334 million | Down $22 million |
| Diluted EPS from continuing operations | $1.31 | $1.31 | Flat |
| Effective tax rate | 24.3% | 20.7% | Up 3.6 percentage points |
| Cash used by operating activities | $66 million | $228 million | Improved by $162 million |
Net income attributable to PPG represented approximately 8.6% of sales, compared with approximately 8.8% in the prior-year quarter. Cost of sales declined 5.0% to $2.073 billion, and cost of sales as a percentage of sales improved to 57.2% from 57.7%. SG&A declined 1.9% to $889 million, but increased to 24.5% of sales from 24.0%.
- Performance Coatings sales were $2.108 billion, down 2.4%; segment income increased 6.1% to $297 million.
- Industrial Coatings sales were $1.516 billion, down 6.5%; segment income decreased 8.8% to $218 million.
- Capital expenditures were $47 million and cash spending on acquisitions was $57 million.
- PPG paid $113 million in dividends and repurchased $175 million of common stock, representing 1.6 million shares.
- Cash and short-term investments totaled approximately $839 million at March 31, 2019, including $784 million of cash and cash equivalents and $55 million of short-term investments.
- Total debt, including finance leases, was approximately $5.9 billion based on reported current and long-term debt balances and lease obligations. Debt represented 52% of total debt and equity.
- Operating lease right-of-use assets and liabilities of $726 million and $734 million, respectively, were recognized following adoption of the new lease standard.
Material changes versus the prior comparable period
- Sales declined primarily because of approximately 4% unfavorable foreign currency translation and 3% lower volumes. These effects were partly offset by 3% higher selling prices and modest acquisition-related sales.
- Foreign currency translation reduced sales by approximately $160 million and reduced pretax income by approximately $18 million.
- Performance Coatings benefited from pricing and cost management, aerospace volume growth exceeding 10%, and stronger protective and marine coatings volumes, despite lower architectural coatings and automotive refinish volumes.
- Industrial Coatings was pressured by lower automotive OEM production, softer industrial demand, lower volumes, raw material and logistics inflation, and foreign currency effects.
- Environmental remediation charges fell to $16 million from $34 million. The 2019 quarter included a $10 million charge to increase a legacy environmental reserve.
- PPG recorded $7 million of acquisition-related costs, $4 million of costs associated with ongoing accounting investigations, $6 million of accelerated depreciation and other restructuring costs, and a $3 million release of restructuring reserves.
- The tax rate increased primarily because Q1 2018 benefited from $15 million of discrete tax items, while Q1 2019 included approximately $2 million of discrete items.
- PPG adopted the lease accounting standard effective January 1, 2019, adding operating lease assets and liabilities to the balance sheet without a material effect on pretax income or cash flows.
- PPG completed the Whitford acquisition on March 1, 2019. The Hemmelrath automotive coatings acquisition closed on April 16, 2019, after the quarter-end; management did not expect a significant pro forma impact.
Guidance, outlook, risks and unusual items
- Management expects the full-year 2019 adjusted effective tax rate to be between 23% and 25%.
- Total 2019 capital spending is expected to be approximately 2.5% to 3.0% of full-year sales.
- Mandatory non-U.S. pension contributions of $15 million to $25 million are expected during the remaining nine months of 2019.
- Restructuring savings from the 2016 and 2018 programs are expected to be $60 million to $70 million in 2019. The company expects to achieve the 2018 program’s targeted annualized savings of $125 million in 2019.
- Second-quarter conditions were expected to include continued, though more moderate, raw material and logistics inflation, volatile industrial demand, unfavorable currency translation, softer global automotive demand, and lower architectural coatings volumes associated with prior customer assortment changes.
- Expected second-quarter acquisition-related sales were approximately $15 million from the SEM acquisition in Performance Coatings and approximately $80 million from Whitford and Hemmelrath in Industrial Coatings.
- Environmental reserves totaled $266 million at March 31, 2019, including $137 million for New Jersey Chrome. Unreserved reasonably possible environmental losses were estimated at $100 million to $200 million.
- PPG had approximately 460 open and active asbestos-related claims and maintained approximately $180 million of reserves for asbestos liabilities not covered by the Pittsburgh Corning trust channeling injunction.
- PPG is cooperating with ongoing SEC and U.S. Attorney investigations relating to accounting matters. A securities class action filed in 2018 remains pending; the company considers it without merit.
- Management states that cash, operating cash flow and access to capital markets should be sufficient to fund operations, capital spending, acquisitions, dividends, debt service, share repurchases, pension contributions and contractual obligations.
- Key risks include raw material and logistics costs, pricing execution, foreign exchange, global economic and industrial demand, customer inventory levels, acquisition integration, restructuring savings, environmental liabilities, litigation, investigations, tax changes and internal control or accounting matters.
Important facts for investors to verify
- Reconcile reported and adjusted earnings, including the effect of environmental, restructuring, acquisition-related and accounting investigation costs.
- Assess whether pricing increases can offset raw material and logistics inflation and restore Industrial Coatings margins.
- Monitor working capital: operating working capital increased to $2.607 billion, or 18.0% of annualized sales, from 15.3% at December 31, 2018.
- Evaluate leverage, refinancing needs and exposure to variable interest rates and foreign currency movements.
- Track the integration and contribution of Whitford and Hemmelrath, including the post-quarter-end Hemmelrath acquisition.
- Review developments in the SEC and U.S. Attorney investigations, securities litigation, asbestos claims and environmental remediation matters.
- Verify the sustainability of restructuring savings, share repurchases and dividend payments given negative first-quarter operating cash flow.