PPG Industries, Inc. — Q2 2015 Form 10-Q Summary
Business context and reporting period
PPG is a multinational manufacturer organized into Performance Coatings, Industrial Coatings and Glass segments. This unaudited report covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. Historical share and per-share amounts reflect the two-for-one stock split completed in June 2015.
Financial performance and key metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|
| Net sales | $4,100 million | $4,082 million | $7,762 million | $7,718 million |
| Income from continuing operations | $342 million | $399 million | $668 million | $682 million |
| Net income attributable to PPG | $337 million | $386 million | $659 million | $1,648 million |
| Diluted EPS from continuing operations | $1.23 | $1.40 | $2.39 | $2.38 |
| Cash from operating activities | Not separately provided | Not separately provided | $186 million | $512 million |
- Q2 sales increased approximately 1%, with acquired businesses contributing approximately 7% and volumes approximately 1%; foreign-exchange translation reduced sales by $318 million, or approximately 8%.
- Q2 reported diluted EPS included a $0.39 restructuring impact and $0.05 of transaction-related costs. Adjusted diluted EPS was $1.67 versus $1.42 in the prior-year quarter.
- Six-month adjusted diluted EPS was $2.85 versus $2.41 in the prior-year period.
- Cost of sales was 56% of sales in both quarters and improved to 56% from 57% for the six-month periods. SG&A was 23% of sales in Q2 2015 versus 24% in Q2 2014.
- The reported effective tax rate was 24.3% for both the quarter and six-month period, compared with 23.9% in the comparable 2014 periods. Management expects an adjusted full-year 2015 rate of 24.0% to 25.0%.
Segments and material changes
| Segment | Q2 2015 sales | Q2 2015 segment income | Change in segment income |
|---|
| Performance Coatings | $2,410 million | $411 million | Up $38 million, or 10% |
| Industrial Coatings | $1,411 million | $260 million | Up $3 million, or 1% |
| Glass | $279 million | $37 million | Up $26 million |
- Performance Coatings benefited from Comex and other acquisitions, modestly higher pricing and lower manufacturing costs, partly offset by approximately $25 million of adverse currency effects.
- Industrial Coatings sales declined 3% because currency effects more than offset 2% volume growth; automotive OEM and packaging coatings were key growth areas.
- Glass sales declined 3%, but income improved substantially from favorable product mix, lower manufacturing costs and the absence of certain prior-year maintenance costs.
- PPG recorded a $140 million pretax restructuring charge in Q2, approximately 85% of which represented employee severance and other cash costs. The program affected approximately 1,853 employees and is expected to be substantially completed in 2016.
- Management expects the restructuring program to generate $100 million to $105 million of pretax annual savings by 2017, including $15 million to $20 million of partial-year savings in 2015.
- The Comex acquisition generated approximately $218 million of Q2 sales and $433 million for the first six months. PPG also acquired Revocoat and Consorcio Latinoamericano; Cuming Microwave was acquired on July 1, 2015.
Cash flow, debt and liquidity
- Cash and short-term investments totaled approximately $1.2 billion at June 30, 2015.
- Six-month operating cash flow from continuing operations declined to $186 million from $512 million, primarily due to $283 million of voluntary pension contributions and higher working capital, including Comex-related working capital.
- Capital expenditures were $162 million for the first six months; full-year capital spending is expected at 3.5% to 4.0% of sales.
- PPG issued €1.2 billion of notes in March 2015, generating approximately $1.24 billion of net proceeds, and repaid €300 million of notes for approximately $336 million in June.
- Long-term debt was $4.222 billion at June 30, 2015, compared with $3.544 billion at December 31, 2014; short-term debt and current maturities were $293 million.
- The ratio of total debt to total debt plus PPG shareholders’ equity was 47%, compared with 44% at year-end 2014.
- PPG paid $189 million of dividends and repurchased $351 million of stock during the first six months. Management expects to deploy $1.5 billion to $2.5 billion for acquisitions and repurchases during 2015 and 2016 combined.
Outlook, risks and unusual items
- Management expects global growth to continue but remain uneven. It anticipates less significant adverse currency translation effects in the second half of 2015 based on current exchange rates.
- Third-quarter expectations include seasonal sales declines in Performance Coatings, continued local-currency growth in protective and marine coatings, packaging-coatings growth, improving automotive demand and approximately $220 million to $240 million of acquisition-related Performance Coatings sales.
- Key risks include foreign-exchange volatility, uneven global and regional demand, raw-material costs and availability, acquisition integration and synergies, restructuring execution, tax-rate changes, environmental regulation and litigation.
- PPG had $1.085 billion of asbestos settlement liabilities at June 30, 2015, consisting of $840 million current and $245 million noncurrent. The proposed settlement remains subject to appellate proceedings and other conditions; PPG expects aggregate pretax cash payments of approximately $825 million through 2023 if it becomes effective.
- Environmental reserves totaled $267 million, including $160 million for New Jersey Chrome. Management identified reasonably possible but unreserved environmental losses of $75 million to $200 million.
- PPG expects environmental cash outlays of $35 million to $45 million in the remainder of 2015, $60 million to $80 million in 2016 and $25 million to $45 million annually from 2017 through 2019.
- Non-U.S.-dollar borrowings totaled $2.2 billion. A specified weakening of the U.S. dollar would have produced approximately $249 million of unrealized translation losses on those borrowings as of June 30, 2015.
Important facts for investors to verify
- Whether restructuring savings are realized on schedule and offset the $140 million charge and related cash costs.
- The final outcome and funding date of the asbestos bankruptcy plan, including potential retained non-PC claims.
- Progress, cost changes and regulatory developments for New Jersey Chrome and other environmental remediation.
- Cash conversion and working-capital performance following the Comex acquisition and the large pension contributions.
- Foreign-exchange effects, particularly the exposure associated with European operations and Euro-denominated debt.
- Whether planned acquisition and share-repurchase spending remains consistent with leverage, liquidity and debt-service requirements.
