PPG Industries, Inc. — Form 10-Q Summary
Business context and reporting period
PPG is a global coatings and specialty materials manufacturer operating through two reportable segments: Performance Coatings and Industrial Coatings. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $3,826 million | $3,817 million | $11,474 million | $11,729 million |
| Income before taxes | $481 million | $451 million | $1,263 million | $1,351 million |
| Net income attributable to PPG | $367 million | $378 million | $951 million | $1,083 million |
| Income from continuing operations attributable to PPG | $366 million | $368 million | $948 million | $1,067 million |
| Diluted EPS from continuing operations | $1.54 | $1.51 | $3.98 | $4.32 |
| Reported effective tax rate | 22.7% | 17.5% | 23.5% | 20.0% |
| Adjusted diluted EPS from continuing operations | $1.67 | $1.45 | $4.90 | $4.75 |
Q3 cost of sales declined to 57.0% of sales from 59.0% in the prior-year quarter, while SG&A increased to 23.2% from 22.7%. For the nine-month period, cost of sales was 57.0% of sales versus 58.1%, while SG&A was 23.6% versus 23.2%.
- Performance Coatings Q3 sales increased 1.0% to $2,313 million and segment income increased 14.8% to $380 million.
- Industrial Coatings Q3 sales decreased 1.0% to $1,513 million, while segment income increased 21.9% to $206 million.
- Nine-month segment income increased 6.1% for Performance Coatings and 4.4% for Industrial Coatings despite lower sales.
- Operating cash flow was $1,271 million for the first nine months, including $1,275 million from continuing operations, compared with $667 million and $687 million, respectively, in 2018.
- Capital expenditures were $224 million and cash spending on acquisitions was $564 million during the first nine months.
Liquidity, debt and capital allocation
- Cash and short-term investments totaled approximately $1.5 billion at September 30, 2019, compared with $1.0 billion at December 31, 2018.
- Total debt consisted of $639 million of short-term debt and current maturities and $4,885 million of long-term debt. Including finance leases, long-term debt carrying value was approximately $5.5 billion.
- PPG issued $600 million of notes in August 2019, with net proceeds of $595 million: $300 million of 2.4% notes due 2024 and $300 million of 2.8% notes due 2029.
- The amended revolving credit facility provides $2.2 billion of unsecured capacity through August 2024; no borrowings or commercial paper were outstanding at September 30, 2019.
- Total indebtedness to total capitalization was 49% under the credit agreement. Debt, including finance leases, represented 51% of debt plus equity.
- PPG paid $347 million in dividends and repurchased $175 million of common stock during the first nine months. The quarterly dividend was $0.51 per share.
Material changes versus the prior comparable period
- Q3 sales were essentially flat, rising 0.2%, while nine-month sales declined 2.2%. Price increases and acquired sales offset lower volumes and unfavorable currency translation.
- Foreign currency translation reduced Q3 sales by approximately $80 million and nine-month sales by approximately $370 million.
- Q3 income before taxes increased 6.7%, but net income attributable to PPG declined 2.9%, primarily reflecting higher income taxes and the absence of the prior-year discontinued-operations benefit.
- Nine-month income before taxes decreased 6.5%, reported continuing-operations diluted EPS declined 7.9%, and reported net income attributable to PPG declined 12.2%. Adjusted diluted EPS increased 3.2%.
- PPG adopted the new lease accounting standard in 2019, recognizing $742 million of operating lease right-of-use assets and $750 million of operating lease liabilities at September 30, 2019. Management stated that adoption did not materially affect pretax income or cash flows.
- PPG completed acquisitions of Whitford, Hemmelrath and Dexmet in 2019. The filing states that the pro forma impact of each acquisition was not significant.
Guidance, outlook, risks and unusual items
- Management expects fourth-quarter sales to be seasonally lower than Q3. Industry demand was expected to remain similar to Q3, with continued softness in global automotive and industrial production.
- Expected fourth-quarter acquisition-related sales were approximately $20 million for Performance Coatings and $75 million for Industrial Coatings. Currency translation was expected to reduce fourth-quarter sales by approximately $40 million and $30 million, respectively, based on then-current exchange rates.
- Management expected a fourth-quarter adjusted effective tax rate of approximately 24% and a full-year 2019 adjusted effective tax rate between 23% and 24%.
- PPG initiated a $184 million 2019 restructuring program, with most actions expected to be completed by the end of 2020 and the remainder by 2022. Expected annualized savings at completion were approximately $125 million; 2019 restructuring savings were expected to total $75 million to $85 million.
- Environmental remediation reserves totaled $293 million, including $150 million for New Jersey Chrome. PPG recorded $75 million of environmental remediation charges and incurred $57 million of related cash outlays in the first nine months.
- Unreserved environmental losses estimated to be reasonably possible were $100 million to $200 million. The company also maintained approximately $180 million of reserves for asbestos-related claims and reported approximately 675 open and active asbestos claims.
- A proposed $25 million securities class-action settlement had been preliminarily approved, with insurance coverage recorded as an offsetting asset. Final court approval was pending as of the filing.
- PPG settled the SEC accounting investigation through a cease-and-desist order imposing no financial penalty. The company continued to cooperate with the SEC investigation relating to the accounting matters; the U.S. Attorney’s Office had informed PPG that it would not pursue action against the company.
- Principal risks include weak automotive and industrial demand, raw-material costs, the ability to recover margins through pricing, foreign exchange, restructuring execution, acquisition integration, environmental liabilities and litigation.
Most important facts for investors to verify
- Reconcile reported versus adjusted EPS, particularly the effects of restructuring and environmental charges.
- Assess whether pricing and cost savings can continue to offset volume declines, inflation and currency headwinds.
- Monitor automotive OEM, industrial production and architectural coatings demand, including customer shutdowns and inventory levels.
- Track execution and cash costs of the 2019 restructuring program and realization of projected savings.
- Review debt maturities, the 49% indebtedness-to-capitalization covenant measure and the effect of additional acquisition financing.
- Evaluate changes in environmental and asbestos reserves, remediation estimates and related cash outlays.
- Confirm final approval and insurance reimbursement for the proposed securities class-action settlement.
- Consider that interim results may not be indicative of full-year performance and that adjusted measures are non-GAAP metrics.