PPG INDUSTRIES INC quarterly report, Q2 FY2013

PPG Industries, Inc. — Form 10-Q Summary

Business Context and Reporting Period

Unaudited results for the quarter and six months ended June 30, 2013. PPG is a global coatings, optical and specialty materials, and glass manufacturer. The commodity chemicals business was separated and merged with Georgia Gulf’s subsidiary on January 28, 2013, forming Axiall Corporation; PPG retained no ownership interest. Prior periods were reclassified to present that business as discontinued operations.

Key Financial Metrics

Metric	Q2 2013	Q2 2012	Six Months 2013	Six Months 2012
Net sales	$4,095 million	$3,528 million	$7,426 million	$6,861 million
Income from continuing operations	$371 million	$328 million	$625 million	$312 million
Net income attributable to PPG	$341 million	$362 million	$2,751 million	$375 million
Diluted EPS from continuing operations	$2.35	$1.92	$3.82	$1.60
Diluted EPS including discontinued operations	$2.35	$2.34	$18.76	$2.42
Dividends per share	$0.61	$0.59	$1.20	$1.16

Q2 sales increased 16%; six-month sales increased 8%. Acquisitions contributed approximately 15% of Q2 sales growth and 9% of six-month sales growth.
Q2 cost of sales was 57.2% of sales versus 58.6% in the prior year; six-month cost of sales was 57.8% versus 58.5%.
Approximate Q2 gross margin was 42.8%, compared with 41.4% in Q2 2012. Continuing-operations net margin was approximately 9.1% versus 9.3%; the comparison is affected by acquisition-related costs and other items.
Six-month cash from operating activities was $494 million, including $490 million from continuing operations, compared with $434 million and $322 million, respectively, in the prior year.
Six-month capital spending was $155 million. Acquisition spending was $975 million, including $957 million for the North American architectural coatings business acquired from Akzo Nobel.
Cash and cash equivalents were $1.243 billion at June 30, 2013; cash plus short-term investments totaled approximately $1.8 billion, compared with $2.4 billion at December 31, 2012.
Total debt was approximately $3.4 billion, including $24 million of current debt and $3.355 billion of long-term debt. PPG repaid $600 million of notes at maturity in March 2013.
The ratio of debt to total debt plus PPG shareholders’ equity was 40% at June 30, 2013, compared with 50% at December 31, 2012.

Material Changes Versus Prior Comparable Period

Performance Coatings sales rose 36% in Q2 to $1.688 billion, primarily from acquisitions; segment income increased to $255 million from $204 million.
Industrial Coatings sales increased 13% to $1.241 billion and segment income increased to $191 million from $143 million, supported by higher volumes and cost management.
Architectural Coatings–EMEA sales declined 5% to $571 million because of weak European demand, while segment income increased to $69 million from $64 million.
Optical and Specialty Materials sales increased 4% to $326 million, with segment income broadly stable at $96 million.
Glass sales declined 1% to $269 million and segment income fell to $8 million from $23 million because of weaker volumes, inflation, lower utilization and lower equity earnings.
Six-month continuing-operations income increased substantially, partly because 2012 included $208 million of restructuring charges and $159 million of environmental remediation charges, while 2013 included no restructuring charge and $12 million of environmental remediation charges in the income statement.
Six-month 2013 net income includes a $2.192 billion after-tax gain from the separation and merger of the commodity chemicals business. This gain makes reported total earnings and EPS non-comparable with ordinary operating performance.
Weighted-average shares declined to 145.0 million in the first half of 2013 from 153.0 million, primarily because 10.8 million PPG shares were tendered in the Axiall exchange offer and approximately 1 million shares were repurchased.

Guidance, Outlook, Commentary and Unusual Items

Management expects the third quarter to be seasonally slower than the second quarter but anticipates continuation of many factors supporting year-to-date earnings growth.
European demand remains weak, particularly in architectural coatings, while North American and many Asia-Pacific markets are generally more supportive. Marine new-build, glass, fiber glass and certain construction-related markets remain challenging.
On July 17, 2013, the board approved a $102 million pretax restructuring program, expected to be recorded in the third quarter. The program targets acquisition synergies and other weak businesses, affects approximately 1,200 employees, and is expected to be completed by the end of 2014.
Management expects 2013 capital spending of approximately 2% to 3% of sales and believes operating cash flow, debt capacity and cash and short-term investments will fund operations, capital spending, acquisitions, dividends, debt service, asbestos obligations, share repurchases and pension contributions.
PPG expects approximately $77 million of mandatory non-U.S. pension contributions in 2013, of which $28 million had been paid by June 30. No mandatory or voluntary U.S. defined-benefit contribution was expected for 2013.
Environmental reserves totaled $281 million at June 30, including $175 million for New Jersey Chrome. Reasonably possible unreserved environmental losses were estimated at $100 million to $235 million.
PPG expects environmental remediation charges of $10 million to $15 million during the remainder of 2013 and cash outlays of approximately $50 million during that period. New Jersey Chrome’s cleanup schedule was extended to December 1, 2015.
The asbestos settlement remained subject to appeals and conditions precedent. The recorded asbestos obligation was $942 million, comprising $703 million current and $239 million non-current; the settlement would require approximately $825 million of cash payments through 2023 plus shares or cash equivalent to 1,388,889 PPG shares.
On July 28, 2013, PPG agreed to sell its 51% interest in Transitions Optical to Essilor for approximately $1.73 billion pretax cash, subject to adjustments and regulatory approval. Closing was expected in the first half of 2014, after which PPG expected to classify the business as discontinued operations.
Key risks include raw-material and energy costs, weak international markets, foreign-exchange movements, acquisition integration and synergy realization, restructuring execution, environmental obligations, asbestos litigation and regulatory or antitrust matters.

Important Facts for Investors to Verify

Separate recurring operating performance from the $2.192 billion discontinued-operations gain and from acquisition, restructuring, environmental, pension and tax items.
Confirm the timing, accounting treatment and proceeds of the Transitions Optical divestiture, including regulatory approvals and any subsequent discontinued-operations presentation.
Track the $102 million restructuring charge, employee reductions, cash spending and realized acquisition synergies.
Monitor the asbestos plan’s appeals, funding effective date, required payments and potential retained non-PC and premises claims.
Assess the adequacy of environmental reserves and the potential $100 million to $235 million of reasonably possible unreserved exposure.
Evaluate whether cash generation and liquidity remain sufficient after acquisitions, dividends, repurchases, debt service, pension contributions and contingent obligations.
Review segment trends, particularly continued European weakness, marine and glass-market conditions, and the sustainability of cost savings and pricing benefits.