PPG Industries, Inc. — First Quarter 2014 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2014, compared with the prior-year quarter. PPG reported three segments: Performance Coatings, Industrial Coatings and Glass. Prior periods were recast for discontinued operations and the new segment structure.
On March 31, 2014, PPG sold its 51% interest in Transitions Optical and its wholly owned sunlens business to Essilor. The transaction materially affected reported earnings, cash and balance-sheet comparisons.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $3,636 million | $3,108 million | Up 17% |
| Income from continuing operations | $283 million | $197 million | Up 44% |
| Income from continuing operations attributable to PPG | $277 million | $191 million | Up 45% |
| Net income attributable to PPG | $1,262 million | $2,410 million | Down 48% |
| Diluted EPS from continuing operations | $1.97 | $1.29 | Up 53% |
| Total diluted EPS | $8.97 | $16.31 | Down 45% |
| Cash from operating activities | $163 million | $(89) million | Improved $252 million |
| Cash from continuing operating activities | $130 million | $(132) million | Improved $262 million |
| Capital expenditures | $103 million | $63 million | Up $40 million |
Gross margin, based on sales less cost of sales before depreciation and amortization, was approximately 42.5% versus 40.1% in the prior-year quarter. Selling, general and administrative expense was 24.8% of sales versus 24.0%. The continuing-operations effective tax rate was 23.9%, compared with 18.3%.
At March 31, 2014, cash and cash equivalents were $2.559 billion and short-term investments were $480 million. Total debt was approximately $3.392 billion, consisting of $19 million of short-term debt and $3.373 billion of long-term debt. Long-term debt had a carrying value of $3.344 billion and fair value of $3.726 billion. The quarterly dividend was $0.61 per share.
Material changes versus the prior comparable period
- Sales increased primarily from acquired businesses, particularly the North American architectural coatings acquisition, which contributed approximately 12% sales growth; volumes increased 5% and pricing increased 1%.
- Performance Coatings sales increased 27% to $2.007 billion and segment income increased 29% to $248 million.
- Industrial Coatings sales increased 7% to $1.363 billion and segment income increased 17% to $231 million.
- Glass sales increased 4% to $266 million, while segment income decreased 20% to $4 million because of $12 million of higher scheduled maintenance costs and higher energy costs.
- Continuing-operations income benefited from higher volumes, restructuring-related productivity, cost synergies and share repurchases. Average diluted shares decreased to 140.7 million from 147.7 million.
- Cash increased by $1.443 billion during the quarter, primarily because of proceeds from the Essilor transaction. PPG received $1.735 billion of gross proceeds, or approximately $1.5 billion after tax.
- PPG repurchased 1.052 million shares for $200 million during the quarter. Approximately 1.191 million shares remained authorized for repurchase at March 31, 2014.
Guidance, outlook, risks and unusual items
- Management expected the 2014 ongoing effective tax rate to be 23.5% to 24.5%.
- 2014 capital spending was expected to be $500 million to $600 million. Management intended to deploy $3.0 billion to $4.0 billion of incremental cash during 2014 and 2015 through acquisitions, share repurchases and other earnings-accretive investments.
- Management expected continued global growth in the second quarter, although performance would vary by geography and industry. It anticipated continued favorable trends in aerospace, refinish, automotive OEM and several industrial markets, with mixed European recovery and continued weakness in Asian marine new-build activity.
- Management expected Glass results to improve seasonally, with lower remaining maintenance costs and stronger fiber-glass demand, although natural gas costs were expected to remain above the prior year.
- The Essilor divestiture generated a $1.468 billion pretax gain and $946 million after-tax gain. Discontinued operations also included $55 million of pretax transaction-related expenses, post-closing adjustments and contingencies. Discontinued operations contributed $1.018 billion after tax, including the gain, versus $2.248 billion in the prior-year quarter, which included the $2.192 billion gain from the 2013 commodity chemicals separation.
- PPG had a $1.018 billion asbestos settlement liability, of which $769 million was current and $249 million non-current. The proposed settlement remained subject to appellate proceedings and conditions precedent. PPG’s reserve for asbestos claims not covered by the channeling injunction was $162 million.
- Environmental remediation reserves were $273 million, including $168 million related to New Jersey Chrome. Management identified reasonably possible but unreserved environmental losses of approximately $100 million to $200 million. Expected environmental cash outlays were approximately $100 million for the remainder of 2014 and approximately $100 million in 2015.
- Other risks include raw-material costs and availability, foreign exchange, global economic conditions, acquisition integration and synergies, restructuring execution, tax-rate changes, environmental regulation, litigation and the outcome of the asbestos proceedings.
Most important facts for an investor to verify
- Whether continuing-operations earnings and cash generation sustain the Q1 improvement after excluding acquisition benefits, divestiture effects and other unusual items.
- The final cash proceeds and post-closing adjustments associated with the Essilor transaction.
- The timing and ultimate funding requirements of the asbestos settlement, including the remaining appeals and potential retained claims.
- Whether the $273 million environmental reserve, particularly the New Jersey Chrome estimate, is adequate as remediation plans and groundwater information develop.
- Execution of the North American architectural coatings integration and realization of expected synergies.
- Progress toward the stated $500 million to $600 million capital-spending plan and $3.0 billion to $4.0 billion cash-deployment objective.
- Segment trends in European architectural and industrial markets, Asian marine coatings, automotive OEM demand and Glass maintenance and energy costs.