PPG Industries, Inc. — Form 10-Q Summary
Business Context and Reporting Period
PPG Industries, Inc. is a multinational manufacturer operating through Performance Coatings, Industrial Coatings and Glass reportable segments. This unaudited Form 10-Q covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014. Results include the November 2014 acquisition of Comex. The 2014 sale of Transitions Optical and the sunlens business is reported as discontinued operations.
Financial Performance and Position
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $3,662 million | $3,636 million |
| Income from continuing operations | $326 million | $283 million |
| Net income attributable to PPG | $322 million | $1,262 million |
| Diluted EPS from continuing operations | $2.33 | $1.97 |
| Diluted EPS, total | $2.34 | $8.97 |
| Effective tax rate | 24.2% | 23.9% |
| Cash from operating activities | $(429) million | $163 million |
- Sales increased 1%, primarily from approximately $235 million of acquired-business sales and 1% volume growth, partly offset by a $260 million adverse currency translation impact.
- Income from continuing operations increased 15%; diluted continuing-operations EPS increased 18% to $2.33.
- Segment income rose to $536 million from $483 million. Performance Coatings income increased to $262 million, Industrial Coatings to $244 million and Glass to $30 million.
- Cost of sales declined to 56% of sales from 58%; selling, general and administrative expense remained 25% of sales.
- Operating cash flow was negatively affected by $276 million of voluntary pension contributions and $253 million of higher working capital investment.
- Capital expenditures were $72 million. Share repurchases totaled $200 million, dividends paid were $91 million, and the quarterly dividend was $0.67 per pre-split share.
- Cash and short-term investments totaled approximately $1.2 billion at March 31, 2015. Cash and cash equivalents were $735 million.
- Short-term and current debt was $621 million and long-term debt was $4.023 billion. The debt-to-total-debt-and-PPG-equity ratio increased to 48% from 44% at December 31, 2014.
- PPG issued €1.2 billion of notes in March 2015, generating approximately $1.24 billion of net proceeds, primarily to repay borrowings and for general corporate purposes.
Material Changes Versus the Prior Comparable Period
- Reported total net income and EPS declined sharply because Q1 2014 included a $1.468 billion pretax gain from the sale of Transitions Optical and the sunlens business. Q1 2015 discontinued-operations income was only $1 million versus $1.018 billion in Q1 2014.
- Continuing-operations profitability improved despite currency pressure, supported by acquisitions, lower manufacturing costs, share repurchases and lower net interest expense.
- Net interest expense declined 49% to $18 million, primarily due to the 2014 debt refinancing.
- Foreign exchange translation reduced sales by approximately 7% and segment income by approximately $27 million. The stronger U.S. dollar also reduced consolidated net assets by $267 million during the quarter.
- Goodwill declined to $3.541 billion from $3.801 billion, primarily because of $205 million of currency translation effects and a $55 million Comex purchase-accounting adjustment.
- Operating working capital increased to $2.718 billion, or 18.6% of annualized sales, from 16.5% at December 31, 2014.
- PPG repurchased 862,846 shares during the quarter under its $2 billion authorization; 4.795 million shares remained available at March 31, 2015.
Guidance, Outlook, Risks and Unusual Items
- Management expected stronger global economic growth, including a resumption of European growth and higher U.S. growth, while maintaining a focus on cost management and acquisition synergies.
- Management projected a full-year 2015 adjusted effective tax rate of 24% to 25%.
- Based on then-current exchange rates, management expected an unfavorable 2015 currency impact of approximately $1.1 billion to $1.2 billion on sales and $110 million to $120 million on earnings; further currency weakness could increase the impact.
- An April 2015 restructuring plan is expected to generate a pretax charge of $135 million to $140 million in Q2 2015, affect approximately 1,700 employees and produce full-year pretax savings of $100 million to $105 million by 2017. Approximately 85% of the charge is expected to be cash-related.
- PPG expected 2015 capital spending of 3.5% to 4.0% of full-year sales and mandatory non-U.S. pension contributions of $10 million to $20 million. It also planned to deploy $1.5 billion to $2.5 billion for acquisitions and share repurchases during 2015 and 2016 combined.
- PPG expected environmental-remediation cash outlays of $95 million to $115 million for the remainder of 2015, $60 million to $80 million in 2016 and $25 million to $45 million annually from 2017 through 2019.
- Environmental reserves totaled $287 million, including $179 million for New Jersey Chrome. Management identified additional reasonably possible, unreserved environmental losses of $75 million to $200 million.
- The asbestos settlement liability totaled approximately $1.1 billion, comprising $813 million current and $263 million noncurrent. The related bankruptcy plan remained subject to appellate review; the Third Circuit appeal was pending.
- PPG reported a foreign tax assessment involving approximately $70 million of interest and stated that it would vigorously defend the matter.
- Other risks include foreign exchange volatility, raw-material costs, economic and political conditions, acquisition integration, restructuring execution, environmental regulation and litigation. Management stated that controls and procedures were effective and that no material changes to internal control occurred during the quarter.
- On April 16, 2015, the board approved a two-for-one stock split, effective June 12, 2015 after the quarterly dividend. Historical per-share data will be retroactively adjusted in future filings.
Important Facts for Investors to Verify
- Whether currency headwinds and the projected $110 million to $120 million earnings impact materialize during the remainder of 2015.
- The timing and ultimate cost of the $135 million to $140 million restructuring program and whether projected savings are achieved.
- The status and effective date of the asbestos bankruptcy plan, including PPG’s approximately $825 million scheduled cash contribution and retained non-PC asbestos exposure.
- Changes in leverage, liquidity and cash deployment following the €1.2 billion debt issuance, share repurchases and planned acquisitions.
- Updates to New Jersey Chrome remediation estimates, environmental cash outlays and the $75 million to $200 million range of reasonably possible unreserved environmental losses.
- Comex integration, sales growth and expected contribution from the Revocoat acquisition completed April 1, 2015.
- The outcome of the approximately $70 million foreign tax assessment and other litigation, insurance-coverage disputes and contingencies.
- Comparability of future per-share results after the approved two-for-one stock split.