PPG Industries, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2017. The unaudited results cover PPG’s continuing operations; the flat glass business sold in October 2016 is presented as discontinued operations for the comparable 2016 period. PPG is a multinational coatings, specialty materials and fiber-glass manufacturer, with reportable segments of Performance Coatings, Industrial Coatings and Glass.
Financial Results and Liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $3.569 billion | $3.544 billion | +0.7% |
| Income before income taxes | $448 million | $456 million | -1.8% |
| Income from continuing operations attributable to PPG | $334 million | $337 million | -0.9% |
| Diluted EPS from continuing operations | $1.29 | $1.25 | +3.2% |
| Adjusted diluted EPS | $1.35 | $1.27 | +6.3% |
| Effective tax rate | 24.3% | 24.6% | Down 0.3 percentage points |
| Cash from operating activities | $9 million | $79 million | Continuing operations down from $54 million |
Net income attributable to PPG was $334 million, or $1.29 per diluted share, compared with $347 million, or $1.29 per diluted share, in the prior-year quarter, which included $10 million of discontinued-operation income.
Cost of sales increased 2.6% to $1.969 billion and represented 55.2% of sales versus 54.2% in the prior year. SG&A declined 1.1% to $896 million and improved to 25.1% of sales from 25.6%. The filing does not provide a consolidated GAAP operating margin.
Cash and short-term investments totaled approximately $1.4 billion at March 31, 2017, down from approximately $1.9 billion at December 31, 2016. Cash declined primarily because of working-capital investment, acquisitions, capital expenditures, dividends and share repurchases.
Total debt, including capital leases, was approximately $4.4 billion based on the disclosed carrying values, comprising $604 million of current debt and $3.817 billion of long-term debt on the balance sheet. The debt-to-capital ratio was 46%, compared with 47% at year-end 2016. Management stated that cash, operating cash flow and available borrowing capacity should fund operations, capital spending, acquisitions, dividends, debt service, repurchases and pension contributions.
Segment Performance and Changes Versus Prior Year
| Segment | Q1 2017 Sales | Sales Change | Q1 2017 Segment Income | Income Change |
|---|---|---|---|---|
| Performance Coatings | $2.017 billion | -1.1% | $285 million | +2.2% |
| Industrial Coatings | $1.469 billion | +7.1% | $273 million | +3.0% |
| Glass | $83 million | -37.6% | $9 million | -35.7% |
- Consolidated sales benefited from 2% higher volumes and approximately $25 million of acquired-business sales, offset by approximately $65 million of unfavorable currency translation.
- Performance Coatings benefited from pricing, acquisitions, lower SG&A and restructuring savings, but faced currency pressure, higher raw-material costs and weakness in marine coatings.
- Industrial Coatings benefited from higher volumes, acquisitions and restructuring savings. MetoKote contributed approximately $60 million of sales, while pricing pressure, raw-material inflation, logistics costs and currency reduced profitability.
- Glass results declined primarily because of the absence of divested European fiber-glass operations and Asian joint-venture results. The remaining North American fiber-glass business improved its cost structure.
- EPS benefited from share repurchases, including 1.6 million shares repurchased in the first quarter at an average price of $101.49. Dividends paid were $103 million, and the quarterly dividend was $0.40 per share versus $0.36.
Cash Flow, Capital Allocation and Other Material Items
- Operating cash flow from continuing operations was only $9 million, down $45 million from the prior-year period, primarily because of higher working capital. Receivables and inventories used $302 million and $153 million of cash, respectively.
- Capital expenditures were $64 million; acquisitions, net of cash acquired, used $61 million. Total capital spending for 2017 is expected to be 2.5% to 3.0% of full-year sales.
- The 2016 restructuring program is expected to reduce approximately 1,700 positions, with substantially all actions completed by the first quarter of 2018. Expected annual savings are approximately $125 million when fully implemented; $40 million to $50 million is expected in 2017.
- PPG recorded a $22 million pretax pension settlement charge, or $14 million after tax, following approximately $40 million of lump-sum payments to certain retirees. Additional payments could trigger another settlement charge.
- A change to Medicare-eligible retiree medical benefits reduced the postretirement benefit obligation by $306 million and is expected to reduce annual postretirement benefit expense by $54 million for five years.
- PPG completed acquisitions of DEUTEK S.A. and certain Futian assets during the quarter. It subsequently paid $100 million on April 11, 2017 for a 40% interest in Taiwan Chlorine Industries.
- PPG had proposed acquiring AkzoNobel for approximately €26.9 billion, including assumed net debt and minority interests, but AkzoNobel rejected the proposals. No agreement had been reached, and completion was uncertain.
Guidance, Outlook and Risks
Management expected higher sequential second-quarter sales because of normal seasonality. It anticipated continued growth in automotive refinish, aerospace, protective coatings, industrial coatings and packaging coatings, but ongoing weakness in marine coatings and certain automotive and architectural markets. Pricing actions were expected to address higher raw-material costs, while unfavorable currency translation was expected to remain a significant headwind.
Second-quarter acquisition-related sales were expected to be approximately $20 million to $30 million in Performance Coatings and $60 million to $70 million in Industrial Coatings. Higher Asian logistics costs were expected to continue into the second quarter.
Management expected the 2017 full-year effective tax rate to be higher than in 2016 because of a greater earnings mix in higher-tax jurisdictions. Mandatory non-U.S. pension contributions of $20 million to $30 million were expected during the remainder of 2017.
- Material exposures include raw-material prices and availability, foreign-exchange movements, global economic and political conditions, competition, acquisition integration, realization of restructuring savings, environmental regulation and litigation.
- PPG reported approximately 650 open and active asbestos-related claims and maintained approximately $180 million of reserves for asbestos liabilities not channeled to the asbestos trust.
- Environmental reserves totaled $279 million, including $158 million for New Jersey Chrome remediation. Additional reasonably possible but unreserved environmental losses were estimated at $100 million to $200 million.
- Outstanding letters of credit and surety bonds were $172 million, and guarantees were $12 million. Management did not believe losses related to the guarantees were likely.
- A 10% weakening of the U.S. dollar against European currencies and a 20% weakening against Asian and South American currencies would have produced approximately $345 million of unrealized translation losses on non-U.S.-dollar borrowings.
Important Facts for Investors to Verify
- Whether pricing actions offset raw-material inflation and whether currency headwinds persist or moderate.
- The pace and durability of restructuring savings, including the expected $40 million to $50 million of 2017 savings.
- Working-capital trends and whether operating cash flow recovers from the unusually low $9 million first-quarter level.
- Acquisition performance, integration costs and the effect of the Taiwan Chlorine Industries investment and other acquisitions.
- The status and potential financial impact of the proposed AkzoNobel transaction, which was not agreed as of the filing.
- Future asbestos, environmental and pension cash requirements, including possible additional pension settlement charges.
- The effects of the flat-glass and other divestitures on year-over-year segment comparisons.