PPG Industries, Inc. — Form 10-Q Summary
Business Context and Reporting Period
PPG Industries is a multinational manufacturer of coatings, specialty materials and glass products. Its reportable segments are Performance Coatings, Industrial Coatings and Glass. This unaudited Form 10-Q covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015. Results reflect the retroactive two-for-one stock split completed in June 2015.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $3.672 billion | $3.662 billion | +0.3% |
| Income before income taxes | $471 million | $430 million | +9.5% |
| Net income attributable to PPG | $347 million | $322 million | +7.8% |
| Diluted EPS from continuing operations | $1.29 | $1.16 | +11.2% |
| Effective tax rate | 24.8% | 24.2% | +0.6 percentage points |
| Operating cash flow | $59 million | $(429) million | Improved by $488 million |
| Capital expenditures | $77 million | $72 million | +$5 million |
| Dividends paid | $96 million | $91 million | +$5 million |
| Share repurchases | $150 million | $200 million | $(50) million |
Cost of sales declined 2.5% to $2.013 billion, reducing cost of sales as a percentage of revenue to 54.8% from 56.4%. Selling, general and administrative expense increased 0.5% to $919 million and remained 25.0% of sales. Adjusted continuing-operations EPS was $1.31, compared with $1.18 in the prior-year quarter, excluding transaction-related costs and an asset write-down.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $909 million at March 31, 2016, compared with $1.311 billion at December 31, 2015. Cash and short-term investments totaled approximately $1.0 billion.
- Total debt, including capital leases, was approximately $4.3 billion; long-term debt was $4.226 billion and current debt was $38 million. The total debt-to-capitalization ratio was 45%, compared with 46% at year-end 2015.
- PPG repaid $250 million of 1.9% notes that matured in January 2016 using cash on hand.
- Operating working capital increased to $2.601 billion, or 17.7% of annualized sales, from $2.341 billion, or 15.8%, at December 31, 2015. Days sales outstanding increased to 61 days from 54 days at year-end.
- Management stated that cash, operating cash flow and available borrowing capacity should be sufficient to fund operations, capital spending, acquisitions, dividends, debt service, asbestos obligations, repurchases and pension contributions.
Material Changes Versus the Prior Comparable Period
- Revenue was essentially flat because acquisitions contributed approximately 3% and volumes increased approximately 1%, offset by approximately 4% unfavorable foreign currency translation.
- Performance Coatings sales declined 0.8% to $2.039 billion, while segment income increased 6.5% to $279 million.
- Industrial Coatings sales increased 2.4% to $1.372 billion, and segment income increased 8.6% to $265 million.
- Glass sales declined 2.2% to $261 million, and segment income declined 6.7% to $28 million, primarily because of lower volumes and $8 million of repair-related costs for a scheduled Fresno facility outage.
- Interest expense, net of interest income, increased to $24 million from $18 million, primarily because of the Euro-denominated debt issued in March 2015 and lower interest income.
- Operating cash flow improved substantially because the prior-year period included a $250 million voluntary U.S. pension contribution; working capital also improved year over year.
- Net income benefited from lower diluted share count following share repurchases in 2015 and the first quarter of 2016.
- Other comprehensive income was $56 million, compared with a $198 million loss in the prior-year quarter, primarily reflecting the change in foreign currency translation effects.
Guidance, Outlook, Risks and Unusual Items
- Management expected second-quarter sales to increase sequentially because of normal seasonality, while unfavorable foreign currency translation was expected to remain significant.
- Performance Coatings management expected continued European volume growth, positive protective-coatings trends, further marine-coatings weakness, modest aerospace improvement and continued automotive-refinish growth.
- Industrial Coatings management expected improving automotive OEM and general industrial trends and continued growth in packaging-coatings technologies.
- Glass management expected stronger second-quarter flat-glass demand, additional $4 million of Fresno facility start-up costs and continued lower equity earnings from Asian joint ventures.
- Full-year 2016 capital spending was expected to be 3.0% to 3.5% of sales. Mandatory non-U.S. pension contributions were expected to be $30 million to $35 million during the remainder of 2016.
- PPG expected to deploy $2.0 billion to $2.5 billion for acquisitions and share repurchases across 2015 and 2016 combined; approximately $1.3 billion had been deployed by the filing date.
- The Pittsburgh Corning asbestos reorganization plan was expected to become effective and receive initial funding in the second quarter of 2016. PPG recorded an asbestos settlement liability of approximately $1.1 billion, including $831 million current and $255 million non-current. PPG expected aggregate pre-tax cash payments of approximately $825 million through 2023, plus transfer of specified shares or their cash equivalent and other assets.
- PPG reported approximately $227 million of environmental reserves, including $126 million for New Jersey Chrome. Reasonably possible but unreserved environmental losses were estimated at $75 million to $200 million.
- PPG disclosed approximately $70 million of disputed interest related to a foreign tax matter involving a 2009 intercompany dividend.
- Other disclosed contingencies included asbestos, environmental, product liability, contract, patent and regulatory matters. Management stated that aggregate litigation and environmental outcomes were not expected to materially affect financial position or liquidity, although individual-period earnings could be affected.
- Market risk remained significant: non-U.S.-dollar borrowings totaled approximately $2.2 billion, and specified currency depreciation scenarios would have produced estimated unrealized translation losses of approximately $254 million.
- The company identified risks relating to global economic conditions, raw-material costs and availability, foreign exchange, acquisitions and integration, restructuring savings, tax rates, environmental regulation and litigation.
Most Important Facts for Investors to Verify
- Whether the asbestos plan became effective and the timing and amount of PPG’s initial trust funding after March 31, 2016.
- Subsequent changes in asbestos liabilities, retained non-PC claims and insurance coverage.
- Second-quarter and full-year effects of foreign currency movements, particularly the Euro, Mexican peso and other emerging-market currencies.
- Whether the expected cost savings and acquisition synergies offset integration costs and continued restructuring activity.
- Progress at the Fresno glass facility and the effect of scheduled outages and start-up costs on Glass segment earnings.
- Working-capital trends, particularly receivables, inventories and days sales outstanding, given the increase in operating working capital.
- Cash deployment for acquisitions, share repurchases, dividends, pension contributions and asbestos obligations relative to available liquidity.
- Changes in environmental reserves and the range of reasonably possible unreserved environmental losses.
- PPG’s accounting assessments and eventual adoption impacts for new revenue-recognition, share-based-payment and lease standards.