PPG (NYSE:PPG) has reported fourth quarter 2016 net sales of $3.5 billion, down more than 1 percent versus the prior year.
Sales in local currencies increased by more than 1 percent aided by sales volume growth approaching 2 percent year-over-year. The net impact from business portfolio actions contributed less than 1 percent to sales growth as acquisition-related sales increases modestly exceeded the absence of sales from the divested European fiber glass business. These aggregate net sales gains were more than offset by unfavorable foreign currency translation which reduced net sales by about 3 percent, or approximately $100 million.
Fourth quarter 2016 reported net income from continuing operations was $77 million, or 29 cents per diluted share. Adjusted net income from continuing operations was $313 million, or $1.19 per diluted share. Adjusted net income excludes after-tax charges totaling $236 million, or 90 cents per diluted share. These after-tax charges include: $146 million for business restructuring; $51 million for increases to legacy environmental reserves; $23 million for tax true-ups related to asbestos settlement funding; $5 million for a premium on the early retirement of debt; and $44 million for the loss on the sale of the European fiber glass business offset by a $33 million net gain on the disposals of ownership interests in business affiliates. For the fourth quarter 2016, the effective tax rate was 42.1 percent and the adjusted effective tax rate was 24.5 percent.
Fourth quarter 2015 reported net income from continuing operations was $295 million, or $1.09 per diluted share. Fourth quarter 2015 adjusted net income from continuing operations was $313 million, or $1.16 per diluted share and excluded an after-tax charge for transaction-related costs of $11 million, or 4 cents per diluted share, and an equity affiliate debt-refinancing charge of $7 million, or 3 cents per diluted share. The effective tax rate was 23.3 percent for the fourth quarter 2015, and the adjusted effective tax rate for the quarter was 24.2 percent.
Financial results from the divested flat glass business are presented as discontinued operations for all periods, including a fourth quarter 2016 gain of $1.01 per diluted share from the business divestiture. Historical financial results of the divested fiber glass businesses are included in the Glass segment.
“We delivered fourth quarter and full-year adjusted earnings-per-diluted-share growth despite modest and uneven global economic growth and the impact of significant unfavorable foreign currency translation,” said Michael H. McGarry, PPG chairman and chief executive officer. “We achieved these milestones due to improving sales volumes, continued aggressive cost management and ongoing earnings-accretive focused cash deployment.
“For the fourth quarter, our adjusted earnings per diluted share increased by 3 percent, aided by coatings volume growth of nearly 2 percent and despite significant currency translation headwinds,” McGarry said. “We achieved our highest volume growth in emerging regions, and by segment our Industrial Coatings grew global volumes by 5 percent with each business unit realizing similar growth rates. Global sales volumes declined less than 1 percent in Performance Coatings, as automotive refinish and architectural coatings growth was more than offset by lower protective and marine coatings demand stemming from further weakness in marine ship builds.
“For the full year, in addition to 7 percent adjusted earnings-per-share growth, we completed a variety of strategic actions to strengthen our company,” McGarry said. “These actions included continued business portfolio optimization through several acquisitions and divestitures and further minimization of legacy risk as we fully funded the Pittsburgh Corning asbestos trust and completed the annuitization of a large portion of U.S. and Canadian pension obligations. Additionally, we continued to invest in new product development and increased our spending focused on improving our organic growth results.
“Also, we delivered on our cash deployment commitments, achieving the upper end of our communicated two-year range,” McGarry said. “In 2015 and 2016 combined, we deployed more than $2.5 billion on acquisitions and share repurchases, including $650 million of share repurchases during the fourth quarter 2016. Our continued strong cash generation supported our cash deployment and growth investments for the full year, and our year-end cash and liquidity position provides us with continued financial flexibility going forward.
“As we begin 2017, we are operating in an uncertain and evolving macroeconomic and regulatory environment,” McGarry continued. “We expect improved momentum in overall global economic growth, including gradually improving growth rates in developed regions and continuing but uneven growth in emerging regions,” McGarry said.
“However, the timeline for this growth improvement remains uncertain, so we are aggressively managing all elements within our control and recently initiated a new business restructuring program targeting $125 million in annual savings,” McGarry said. “Additionally, we will continue our growth investments and we have announced targeted selling-price increases to combat recent inflationary cost pressures. Finally, we anticipate deploying an additional $2.5 billion to $3.5 billion of cash on acquisitions and share repurchases in years 2017 and 2018 combined, as we remain focused on shareholder value creation,” McGarry concluded.
PPG reported today the following full-year 2016 approximate uses of cash: capital spending of $400 million, dividends paid of $415 million, acquisitions of $350 million, and share repurchases of $1.05 billion. For the years 2015 and 2016 combined, the company deployed more than $2.5 billion of cash for acquisitions and share repurchases, achieving the top end of the previously communicated range. In April 2016, the company raised the per-share dividend by 11 percent. PPG has paid annual dividends for 117 consecutive years, including 45 consecutive years of increased annual payouts.
For the full year 2016, the company generated over $1.2 billion in cash from operations, a decrease versus the prior year primarily due to the full funding of the Pittsburgh Corning asbestos trust, which exceeded $800 million pre-tax. Operating working capital ratios improved by 120 basis points year-over-year, as the company has averaged a more than 100 basis point annual improvement in this metric the past four years. Cash and short-term investments totaled approximately $1.9 billion, and the company had $1.9 billion remaining on its current share-repurchase authorization at year-end 2016.
Fourth Quarter 2016 Reportable Segment Financial Results
•Performance Coatings segment net sales in the fourth quarter were $1.98 billion, down $80 million, or less than 4 percent, versus the prior year. Sales volumes were down less than 1 percent, with acquisition-related sales providing a minimal benefit. Unfavorable foreign currency translation reduced segment sales by about 3 percent, or about $70 million.
Automotive refinish sales grew organically by a low-single-digit percentage, led by increased demand in Europe. Aerospace sales in local currencies were consistent with the prior year, as industry demand growth remains modest. Protective and marine coatings sales volumes declined by a low-double-digit percentage year-over-year as growth in protective coatings was more than offset by further weakness in shipbuilding activity in Asia Pacific. Architectural coatings – Europe, Middle East and Africa sales volumes were in line with the prior year, with growth in Europe offset by lower demand in Africa. Architectural coatings – Americas and Asia Pacific sales volumes improved by a low-single-digit percentage versus the prior year. Sales volume growth continued in the U.S. and Canada company-owned stores network but was offset by weakness in the independent dealer channel and national retail accounts, and Mexican growth continued despite strong growth in the prior-year comparable period.
Performance Coatings segment income for the fourth quarter 2016 was $239 million, down about 4 percent, or $11 million, versus the prior year, including unfavorable foreign currency translation of about $15 million driven primarily by the Mexican peso, the euro and the British pound. The favorable impact from continued cost management more than offset the unfavorable impact from modestly lower sales volumes.
•Industrial Coatings segment net sales for the fourth quarter were $1.44 billion, up $66 million, or nearly 5 percent, compared to the previous year, despite unfavorable foreign currency translation of more than 2 percent, or approximately $30 million. Sales volumes grew by about 5 percent, led by strong emerging-region growth in all businesses. Acquisition-related sales added approximately 3 percent, or about $40 million.
Automotive original equipment manufacturer coatings sales volumes grew by a mid-single-digit percentage versus the prior year, consistent with global industry growth rates. General industrial coatings and specialty coatings and materials aggregate sales volumes also grew by a mid-single-digit percentage, outpacing global industrial production growth for the fourth consecutive quarter. Packaging coatings sales volumes grew by a mid- to high-single-digit percentage due to ongoing adoption of PPG’s new can coating technologies and despite strong growth in the prior-year comparable period.
Fourth quarter Industrial Coatings segment income of $236 million was down $4 million, or less than 2 percent, versus the prior year. Segment income benefited from higher sales volumes and lower manufacturing costs. Acquisition-related income also contributed to higher segment income, but at an expected margin level that is currently below the segment’s average margin. These increases to segment income were offset by higher transportation and logistics costs required to meet increasing customer demand in Asia Pacific, and unfavorable foreign currency translation of about $10 million driven primarily by the Chinese yuan, the euro and the Mexican peso.
•Glass segment net sales for the fourth quarter were $80 million, down $41 million, or 34 percent, year-over-year primarily due to the divestiture of the European fiber glass business. Sales volumes for the remaining North American fiber glass business were down approximately 3 percent due to the weaker demand for wind-energy-related products, partly offset by growth in the construction end-use market. Segment income for the quarter was $12 million, up $1 million versus the prior-year period due to significant cost-management efforts and despite the absence of the divested fiber glass business and joint ventures.
Fourth quarter financial results for the Glass segment consist only of PPG’s North American fiber glass operations. The sale of the European fiber glass business was finalized Oct. 1, 2016, and the sale of PPG’s ownership interest in its two Asian fiber glass joint ventures was finalized Nov. 18, 2016.
•Corporate expenses for the fourth quarter were $45 million, down $12 million versus the prior year reflecting lower expense for performance-based compensation. Expenses for the quarter include $8 million pre-tax, or $5 million after-tax, for a premium on the early retirement of debt that was included in nonrecurring items.
Full-Year 2016 Financial Results
Full-year 2016 net sales from continuing operations were $14.8 billion, consistent with the prior year including an unfavorable foreign currency translation impact of nearly 3 percent, or approximately $400 million. Sales volume growth of 1 percent versus the prior year was supplemented by acquisition-related sales growth of nearly 2 percent, net of sales divested with the European fiber glass business.
The company’s 2016 full-year reported net income from continuing operations was $564 million, or $2.11 per diluted share, versus $1.34 billion, or $4.89 per diluted share, in 2015. Full-year 2016 adjusted net income from continuing operations was $1.55 billion, or $5.82 per diluted share, versus $1.49 billion, or $5.43 per diluted share, in 2015, representing an adjusted-earnings-per-diluted-share increase of 7 percent. In 2016, foreign currency translation unfavorably impacted pre-tax income by approximately $70 million. The effective tax rate from continuing operations was 29.1 percent for 2016, versus 23.8 percent for 2015, and the adjusted effective tax rate from continuing operations was 24.5 percent for 2016, versus 24.1 percent for 2015.