PPG INDUSTRIES INC quarterly report, Q2 FY2016

PPG Industries, Inc. — Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2016. The unaudited financial statements cover continuing operations and are prepared under U.S. GAAP. PPG is a multinational coatings, materials and glass manufacturer with Performance Coatings, Industrial Coatings and Glass reportable segments.

Financial performance

Metric	Q2 2016	Q2 2015	6M 2016	6M 2015
Net sales	$4,064 million	$4,100 million	$7,736 million	$7,762 million
Income from continuing operations	$376 million	$342 million	$730 million	$668 million
Net income attributable to PPG	$370 million	$337 million	$717 million	$659 million
Diluted EPS from continuing operations	$1.37	$1.23	$2.66	$2.39
Operating cash flow	Not separately provided	Not separately provided	$(25) million	$186 million

Q2 sales declined 0.9%; six-month sales declined 0.3%. Foreign currency translation reduced Q2 sales by approximately $92 million and six-month sales by approximately $230 million, partly offset by acquisitions and volume growth.
Cost of sales as a percentage of sales improved to 53.9% in Q2 from 55.7%, and to 54.3% for the six months from 56.0%, reflecting lower manufacturing costs and restructuring savings.
Q2 income before taxes increased to $673 million from $452 million. The six-month figure increased to $1,144 million from $882 million.
Reported effective tax rates were 44.1% for Q2 and 36.2% for the six months, versus 24.3% in each 2015 comparable period. The increase primarily reflected a $128 million net tax charge related to funding the Pittsburgh Corning asbestos settlement trust.
Adjusted diluted EPS, excluding specified unusual items, was $1.85 in Q2 versus $1.67 and $3.16 for the six months versus $2.85. These are non-GAAP measures.

Segment results

Segment	Q2 sales	Q2 segment income	Change in income	6M sales	6M segment income
Performance Coatings	$2,338 million	$428 million	+4.1%	$4,377 million	$707 million
Industrial Coatings	$1,444 million	$292 million	+12.3%	$2,816 million	$557 million
Glass	$282 million	$43 million	+16.2%	$543 million	$71 million

Performance Coatings sales were pressured by currency and lower volumes, particularly in architectural, protective and marine coatings, but income benefited from acquisitions and cost management. Industrial Coatings benefited from acquisitions, volume growth, packaging coatings and restructuring savings. Glass income improved despite lower volumes and the Fresno facility outage, supported by pricing and cost control.

Cash flow, liquidity and capital structure

Cash and short-term investments totaled approximately $1.7 billion at June 30, 2016, versus $1.5 billion at December 31, 2015. Cash and cash equivalents were $1.605 billion.
Six-month operating cash flow was $(25) million, primarily due to the $813 million asbestos trust funding and higher cash taxes, partly offset by improved working capital and lower pension contributions.
Capital expenditures were $168 million; acquisitions, net of cash acquired, were $10 million. Total capital spending, including acquisitions, was $178 million.
PPG paid $203 million of dividends and repurchased $150 million of common stock during the first six months. The quarterly dividend was increased 11% to $0.40 per share in April 2016. No shares were repurchased in Q2 under the current program.
Short-term debt and current maturities were $686 million, and long-term debt was $4.426 billion at June 30. PPG entered into two $250 million term loans in May 2016, maturing in March and May 2017.
Total debt to debt plus PPG shareholders’ equity was 49%, compared with 46% at December 31, 2015. Management stated that cash, operating cash flow and available borrowing capacity should fund operations, capital spending, acquisitions, dividends, debt service, repurchases and pensions.

Material changes and unusual items

PPG funded the Pittsburgh Corning asbestos settlement trust on June 9, 2016 with $764 million of cash, including prepaid future obligations, 2,777,778 PPG shares and its interest in Pittsburgh Corning Europe. The transaction eliminated the recorded current and long-term asbestos settlement liabilities, while PPG retained a $162 million reserve for claims not covered by the channeling injunction.
PPG sold its Pittsburgh Glass Works minority interest for $41 million and recorded a $20 million pretax gain in Q2.
PPG classified the European fiber glass business as held for sale, with $148 million of assets and $57 million of liabilities reclassified at June 30.
After quarter-end, PPG signed an agreement to sell its flat glass manufacturing and glass coatings operations to Vitro for approximately $750 million of gross cash proceeds. The transaction was expected to close by year-end 2016; flat glass results were expected to become discontinued operations beginning in Q3.
PPG agreed to acquire MetoKote Corporation, a coatings services business with approximately $200 million of 2015 sales. The acquisition closed July 1, 2016.
PPG entered into pension annuity agreements expected to transfer approximately $1.6 billion of projected benefit obligations covering approximately 13,200 U.S. retirees. Subject to closing conditions, PPG expected a Q3 2016 non-cash pension settlement charge of approximately $500 million to $600 million after tax.

Outlook, risks and contingencies

Management expected Q3 sales to be modestly lower sequentially due to normal seasonality, with unfavorable currency translation continuing. It expected continued strength in automotive refinish, aerospace, packaging coatings and industrial end markets, but ongoing weakness in marine coatings and certain architectural markets.
Expected 2016 capital spending was 3.0% to 3.5% of sales. PPG expected $20 million to $25 million of mandatory non-U.S. pension contributions during the remaining six months of 2016 and approximately $175 million of pension-plan contributions in 2016 and 2017 combined.
Management expected combined acquisitions and share repurchases for 2015 and 2016 of $2.0 billion to $2.5 billion; approximately $1.6 billion had been deployed through the filing date, including MetoKote.
Principal risks include foreign exchange volatility, raw-material costs and availability, global economic and political conditions, competition, acquisition integration, restructuring execution, tax-rate changes, environmental regulation, business disruptions and litigation.
Environmental reserves totaled $218 million at June 30, including $121 million for New Jersey Chrome. Additional reasonably possible but unreserved environmental losses were estimated at $75 million to $200 million.
PPG disclosed approximately $2.3 billion of non-U.S.-dollar borrowings. Specified adverse currency movements would have produced approximately $285 million of unrealized translation losses at June 30.
PPG stated that litigation outcomes, including asbestos-related claims, are inherently unpredictable but were not expected to have a material aggregate effect on financial position or liquidity. Approximately 250 active premises asbestos claims remained, and non-PC-related claims remain PPG’s responsibility.

Investor verification points

Verify the final closing, proceeds and discontinued-operations treatment for the flat glass and European fiber glass divestitures.
Monitor completion of the pension annuity transaction and the expected $500 million to $600 million after-tax settlement charge.
Assess the effect of asbestos funding on 2016 cash taxes, liquidity and remaining retained-claim exposure.
Reconcile reported EPS with management’s non-GAAP adjusted EPS and the unusual tax, asset write-down, transaction and divestiture items.
Track short-term debt maturities, term-loan refinancing, foreign currency exposure and the company’s planned acquisition and share-repurchase spending.
Review developments in environmental remediation, asbestos premises claims, the foreign tax matter and other litigation contingencies.