PPG INDUSTRIES INC annual report, FY2014

PPG Industries, Inc. — 2014 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2014. PPG manufactures and distributes coatings, specialty materials and glass through Performance Coatings, Industrial Coatings and Glass segments. Approximately 59% of sales were generated outside the United States.

Key Financial Metrics

Metric	2014	2013	Change
Net sales	$15,360 million	$14,265 million	+8%
Income from continuing operations	$1,157 million	$973 million	+19%
Net income attributable to PPG	$2,102 million	$3,231 million	-35%
Diluted EPS from continuing operations	$8.10	$6.55	+24%
Total diluted EPS	$15.03	$22.27	-33%
Cash from continuing operations	$1,807 million	$1,562 million	+16%
Cash and cash equivalents	$686 million	$1,116 million	-$430 million

Cost of sales declined to 57.2% of sales from 58.3%; selling, general and administrative expense was 24.5% of sales versus 24.4%.
Segment income increased 16% for Performance Coatings to $1,205 million, 15% for Industrial Coatings to $951 million and $25 million for Glass to $81 million.
Year-end total debt, including capital leases, was approximately $3.9 billion; debt-to-total-debt-and-equity increased to 44% from 41%. The company had a $1.5 billion unsecured revolving facility with no borrowings outstanding.
Operating working capital declined to $2,454 million from $2,643 million, and operating working capital as a percentage of sales improved to 16.5% from 17.8%.
Capital expenditures were $587 million; acquisition spending was $2,113 million. Dividends paid were $361 million and share repurchases totaled $750 million.

Material Changes Versus 2013

Sales growth reflected approximately 4% from acquisitions, 3% from higher volumes and 1% from pricing. Excluding acquisitions, global volumes increased approximately 3.5%.
PPG acquired Comex in November 2014 for approximately $1.98 billion net of cash acquired and assumed and repaid $280 million of debt. Comex contributed approximately $175 million of 2014 sales and expanded the architectural coatings business in Mexico and Central America.
PPG sold its Transitions Optical joint venture interest and optical sunlens business to Essilor in March 2014 for $1.735 billion of pre-tax cash proceeds. The transaction produced a $1.468 billion pre-tax gain and $1.002 billion of discontinued-operations income, including tax effects.
Fourth-quarter debt refinancing generated a $317 million pre-tax charge, including redemption premiums, derivative losses and unamortized fees. Management expects approximately $55 million of lower net interest expense in 2015.
Environmental remediation charges increased to $144 million from $108 million, primarily due to the New Jersey Chrome sites. The 2013 restructuring charge of $98 million did not recur in 2014.
All three operating segments delivered earnings growth of at least 15%, while diluted continuing-operations EPS benefited from approximately 3.8 million shares repurchased during 2014.

Cash Flow, Liquidity and Outlook

Cash from continuing operations was $1.807 billion. Total cash flow was affected by $2.113 billion of acquisitions, $750 million of share repurchases, $361 million of dividends and debt-refinancing cash payments.
Management expects cash on hand, operating cash flow and available debt capacity to fund operations, capital spending, acquisitions, dividends, debt service, pensions, share repurchases and asbestos obligations.
For 2015, management expects ongoing effective tax rate of 24% to 25%, capital spending excluding acquisitions of approximately 3.5% to 4.0% of sales, and continued strong free cash flow.
Based on mid-January 2015 exchange rates, management estimated that currency translation could reduce 2015 sales by $650 million to $750 million and earnings by $65 million to $75 million; subsequent currency weakness could increase the impact.
Management expects pension and other postretirement benefit costs to rise by approximately $60 million to $65 million in 2015, with mandatory non-U.S. pension contributions of approximately $10 million to $20 million.
PPG completed substantially all Akzo Nobel synergy actions and reached the targeted $200 million annual run-rate savings one year ahead of schedule, with approximately $20 million of incremental savings expected in 2015.

Risks, Contingencies and Unusual Items

Raw materials, including resins, pigments and titanium dioxide, generally represent 70% to 80% of coatings cost of goods sold excluding depreciation and amortization. Price volatility, supply interruptions and chemical regulations could pressure margins or product availability.
Environmental reserves were $317 million at December 31, 2014, including $211 million for New Jersey Chrome. Additional reasonably possible, unreserved environmental losses were estimated at $75 million to $200 million. Expected environmental cash outlays were $130 million to $150 million in 2015.
The proposed asbestos settlement remained subject to appellate proceedings. The recorded asbestos settlement obligation was $1.080 billion, with aggregate future cash payments of approximately $825 million plus stock or cash related to 1,388,889 PPG shares. The settlement was not effective until specified conditions and final court approval were satisfied.
PPG retained liability for certain non-channelled asbestos claims and premises claims. The filing states that approximately 320 premises claims were active, with approximately 110 in active litigation.
PPG disclosed a foreign tax matter involving a notice seeking approximately $70 million of interest related to a 2009 intercompany dividend; the company disputed the assertion.
Other significant risks include foreign currency movements, uneven global demand, competition, acquisition integration, litigation, environmental regulation, pension assumptions, business disruptions and information-technology security.
Comprehensive income declined because of foreign-currency translation losses and pension-related adjustments. No goodwill or indefinite-lived intangible asset impairment was recorded in 2014.

Investor Verification Checklist

Verify the sustainability of continuing-operations earnings growth after excluding the $317 million refinancing charge, environmental charges, transaction costs, asset-disposition gains and favorable tax ruling.
Assess Comex integration, expected synergies, Mexico and Central America demand, and the preliminary allocation of goodwill and intangible assets.
Review currency sensitivity, especially the projected 2015 sales and earnings effects from a stronger U.S. dollar.
Monitor the asbestos settlement appeals, Funding Effective Date and future cash and stock contributions.
Reconcile reported EPS with discontinued-operations gains, particularly the Transitions Optical and sunlens divestiture.
Evaluate New Jersey Chrome remediation estimates, regulatory milestones, reserve adequacy and future cash outlays.
Review leverage, commercial paper reliance, debt maturities, refinancing benefits and compliance with the 60% total-indebtedness-to-total-capitalization covenant.
Confirm the effect of pension discount rates, mortality assumptions and expected returns on 2015 benefit expense and funding requirements.