PPG Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. The financial statements are unaudited. Results for the former commodity chemicals business have been reclassified to discontinued operations following its January 28, 2013 separation and merger into Axiall Corporation.
Business Context and Reporting Period
PPG is a multinational coatings, optical and specialty materials, and glass manufacturer. Reportable segments are Performance Coatings, Industrial Coatings, Architectural Coatings—EMEA, Optical and Specialty Materials, and Glass.
PPG completed the $957 million acquisition of AkzoNobel’s North American architectural coatings business on April 1, 2013, and acquired Deft, a specialty aerospace coatings business, in May 2013. PPG also agreed to sell its 51% interest in Transitions Optical to Essilor for approximately $1.73 billion pretax, subject to regulatory and other closing conditions.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | First 9 Months 2013 | First 9 Months 2012 |
|---|---|---|---|---|
| Net sales | $3,980 million | $3,408 million | $11,406 million | $10,269 million |
| Income from continuing operations attributable to PPG | $220 million | $288 million | $780 million | $535 million |
| Net income attributable to PPG | $226 million | $339 million | $2,977 million | $714 million |
| Diluted EPS from continuing operations | $1.52 | $1.86 | $5.34 | $3.46 |
| Diluted EPS including discontinued operations | $1.56 | $2.18 | $20.39 | $4.61 |
| Cash from operating activities | Not separately provided | Not separately provided | $1,282 million | $1,039 million |
Q3 sales increased 17%, principally from acquisitions, higher volumes, pricing, and favorable currency translation. Excluding acquisitions, volume increased approximately 2%. Cost of sales declined to 56.2% of sales from 58.2%; SG&A increased to 24.2% of sales from 22.9%. Continuing-operations pretax margin was approximately 7.8% in Q3 2013 versus 11.8% in Q3 2012, reflecting restructuring and environmental charges.
For the first nine months, sales increased 11%, while continuing-operations income attributable to PPG increased 46%. Reported net income was substantially affected by the $2.2 billion after-tax gain from the commodity chemicals separation.
- Liquidity: Cash and short-term investments totaled approximately $2.2 billion at September 30, 2013, including cash of $1.562 billion and short-term investments of $687 million.
- Debt: Long-term debt was $3.368 billion; current debt was $27 million. PPG repaid $600 million of notes at maturity in March 2013. Debt represented 39% of total debt plus PPG shareholders’ equity, compared with 50% at December 31, 2012.
- Capital allocation: Nine-month capital expenditures were $259 million; dividends paid were $259 million; share repurchases were $320 million. Management expected 2013 repurchases toward the high end of the previously communicated $500 million to $750 million range.
- Working capital: Operating working capital was $3.012 billion, or 18.9% of sales, compared with 21.1% at September 30, 2012.
- Margins and tax: The Q3 effective tax rate on continuing operations was 19%, compared with 23% in the prior-year quarter. The nine-month rate was 22%, compared with 20% in 2012.
Material Changes Versus Prior Comparable Period
- Performance Coatings sales rose 34% in Q3 to $1.619 billion, primarily from the AkzoNobel acquisition; segment income rose 24% to $252 million.
- Industrial Coatings sales rose 10% to $1.199 billion and segment income rose to $181 million from $153 million, supported by volume growth, particularly in automotive OEM coatings.
- Architectural Coatings—EMEA sales increased 1% in Q3 despite a 4% volume decline; segment income increased to $73 million from $56 million due to cost management.
- Optical and Specialty Materials sales increased 11% and segment income increased to $88 million from $76 million, aided by optical product demand and customer stocking ahead of the TRANSITIONS Generation VII launch.
- Glass sales increased 6%, but segment income declined to $21 million from $24 million because of input-cost inflation and lower equity and licensing earnings.
- PPG recorded a $98 million restructuring charge in Q3, expected to affect approximately 1,436 employees, primarily to achieve acquisition-related cost synergies. The remaining restructuring reserve was $87 million at September 30.
- Environmental charges were $92 million in Q3, including an $89 million increase to the New Jersey Chrome remediation reserve. Total environmental reserves were $344 million at September 30, compared with $332 million at December 31, 2012.
- Average diluted shares declined to 144.9 million in Q3 from 155.5 million, reflecting the exchange of 10.8 million PPG shares in the commodity chemicals transaction and share repurchases.
Guidance, Outlook, Risks and Unusual Items
Management expects gradual improvement in global demand, continued measured U.S. growth, inconsistent emerging-market growth, and stabilization in Europe. The fourth quarter is seasonally weaker, particularly for architectural coatings, and seasonality is expected to be more pronounced because of the AkzoNobel acquisition. Management expected additional fourth-quarter free cash flow and anticipated 2013 capital spending of approximately 2% to 3% of sales.
Environmental remediation remains a significant contingency. PPG reported $100 million to $200 million of reasonably possible but unreserved environmental losses. Expected environmental cash outlays were approximately $25 million for the remainder of 2013, $100 million annually in 2014 and 2015, and $10 million to $30 million annually from 2016 through 2018. The New Jersey Chrome cleanup schedule was extended to December 1, 2015.
The proposed asbestos settlement remained subject to appeals and conditions precedent. PPG’s recorded asbestos obligation was $974 million, including $732 million current and $242 million noncurrent. Under the settlement, PPG expects aggregate cash payments of approximately $825 million through 2023, plus the transfer of PPG shares or equivalent cash. If the settlement is not implemented, asbestos claims could become materially more unpredictable.
Other risks include raw-material and energy costs, foreign exchange, global economic weakness, competition, acquisition integration and synergy realization, environmental regulation, tax changes, litigation, and the planned Transitions Optical divestiture. Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Closing date, regulatory approval, final consideration, and discontinued-operations accounting for the Transitions Optical transaction.
- Progress and final cost estimates for New Jersey Chrome remediation, including the $100 million to $200 million unreserved exposure.
- Status of appeals and effective date of the asbestos settlement and related funding requirements.
- Realization of the $98 million restructuring plan and projected synergies from the AkzoNobel acquisition.
- Fourth-quarter seasonality and demand trends in architectural coatings, Europe, marine coatings, and Glass.
- Whether reported earnings improvements persist after excluding the commodity chemicals divestiture gain and other unusual items.
- Final purchase-price allocation and post-closing adjustments for the AkzoNobel acquisition.