PPG Industries, Inc. 2016 Form 10-K Summary
Business context and reporting period
PPG manufactures and distributes coatings and specialty materials through Performance Coatings, Industrial Coatings and Glass. The filing covers the fiscal year ended December 31, 2016. Historical results were recast to present the flat glass business as discontinued operations following its October 2016 divestiture.
PPG operated approximately 140 manufacturing facilities in 40 countries and employed approximately 47,000 people. Approximately 60% of sales were generated outside the United States.
Financial performance and liquidity
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $14.751 billion | $14.766 billion | (0.1%) |
| Income from continuing operations attributable to PPG | $564 million | $1.338 billion | (58%) |
| Diluted EPS from continuing operations | $2.11 | $4.89 | (57%) |
| Adjusted diluted EPS | $5.82 | $5.43 | +7% |
| Cash from operating activities, continuing operations | $1.241 billion | $1.735 billion | (29%) |
| Capital expenditures | $402 million | $454 million | (11%) |
| Cash and short-term investments | $1.863 billion | $1.455 billion | +$408 million |
- Cost of sales declined to $8.063 billion, or 54.7% of sales, from 55.6% in 2015. Selling, general and administrative expense increased to $3.662 billion, or 24.8% of sales.
- Income before income taxes was $827 million, compared with $1.783 billion in 2015. The reported effective tax rate increased to 29.1% from 23.8%; the adjusted rate was 24.5%.
- Total net income attributable to PPG was $877 million, including $313 million from discontinued operations. Reported net income benefited from the flat glass divestiture gain.
- Segment sales and income were: Performance Coatings sales of $8.580 billion and segment income of $1.314 billion; Industrial Coatings sales of $5.690 billion and income of $1.042 billion; and Glass sales of $481 million and income of $53 million.
- Operating working capital declined to $2.050 billion from $2.260 billion, and declined to 14.7% of sales from 15.9%.
- Total debt, including capital leases, was approximately $4.416 billion. The debt-to-total-debt-and-equity ratio was 47%, compared with 46% in 2015. PPG had no borrowings outstanding under its $1.8 billion unsecured revolving credit facility.
Material changes versus the prior comparable period
- Foreign currency translation reduced 2016 sales by approximately $400 million and income before taxes by approximately $70 million, primarily because of the stronger U.S. dollar.
- Acquired businesses contributed approximately $275 million of sales, while underlying sales volumes increased approximately 1% excluding acquisitions.
- Performance Coatings sales declined 2%, but segment income increased 1% and margin expanded by 40 basis points. Industrial Coatings sales increased 4% and segment income increased 6%, with margin expanding by 30 basis points. Glass sales declined 8% following divestitures, while segment income increased 39%.
- PPG recorded a $968 million pretax pension settlement charge after transferring approximately $1.8 billion of U.S. and Canadian pension obligations and assets to insurers.
- A $197 million pretax restructuring charge was recorded, including approximately $140 million of cash severance and related costs and nearly $60 million of asset write-downs. The program is expected to reduce approximately 1,700 positions and generate approximately $125 million of annual savings when fully implemented.
- PPG fully funded its Pittsburgh Corning asbestos trust obligations. Cash outflows totaled $813 million, and the company reported no remaining liability for the trust.
- PPG paid $1.050 billion to repurchase 10.7 million shares and paid $414 million in dividends. The annual per-share dividend increased 11% to $1.56.
- PPG completed approximately $349 million of acquisitions, including MetoKote, and received approximately $1.1 billion from divestitures, including the flat glass business.
Guidance, outlook, commentary and risks
- Management expected modestly improved global economic growth in 2017, with continued but uneven growth by region and end market. Growth was expected in automotive OEM, industrial and packaging coatings, while marine shipbuilding and some automotive markets remained weak.
- 2017 coatings raw-material prices were expected to increase modestly, with selling prices expected to remain generally flat. Capital expenditures were expected at approximately 2.5% to 3.0% of sales.
- Based on mid-January 2017 exchange rates, management expected 2017 currency translation to reduce sales by approximately $375 million to $425 million and pretax income by approximately $70 million to $90 million.
- Management expected 2017 interest expense, net of interest income, to increase by approximately $5 million to $10 million and the effective tax rate to range from 24.5% to 25.5%.
- PPG announced a combined 2017–2018 target of $2.5 billion to $3.5 billion for acquisitions and share repurchases and expected continued strong free cash generation.
- Key risks include raw-material cost and availability, foreign currency volatility, uneven global demand, intense competition, acquisition integration, environmental regulation and remediation, litigation including asbestos claims, tax-law changes, cybersecurity incidents and operational disruptions.
- Environmental reserves totaled $285 million at year-end, with reasonably possible unreserved environmental losses estimated at $100 million to $200 million. Environmental cash outlays were expected to be $50 million to $70 million in 2017.
- Approximately 750 open and active asbestos-related claims remained outside the Pittsburgh Corning trust structure. PPG had established approximately $180 million of reserves for non-trust asbestos claims.
Important facts for investors to verify
- Reconcile reported continuing-operations EPS of $2.11 with adjusted EPS of $5.82 and assess the sustainability of the adjustments, particularly the pension, restructuring, environmental and asbestos-related items.
- Evaluate the cash-flow impact and completion timing of the restructuring program, including the expected $125 million of annual savings.
- Monitor foreign-exchange effects, raw-material inflation and the company’s ability to recover costs through pricing.
- Review debt maturities, including approximately $530 million due in 2017 and $614 million due in 2019, as well as the 47% debt-to-capital ratio.
- Assess remaining environmental and non-trust asbestos exposures, including the $100 million to $200 million range of reasonably possible unreserved environmental losses.
- Confirm the effect of divestitures and discontinued operations on year-over-year revenue, earnings and segment comparability.
- Track acquisition integration, the MetoKote contribution, future share repurchases and the combined 2017–2018 capital deployment target.