PPG Industries, Inc. — 2011 Q3 Form 10-Q Summary
Business context and reporting period
PPG is a multinational manufacturer operating through six reportable segments: Performance Coatings, Industrial Coatings, Architectural Coatings—EMEA, Optical and Specialty Materials, Commodity Chemicals, and Glass. This unaudited report covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $3,849 million | $3,460 million | $11,368 million | $10,044 million |
| Income before taxes | $462 million | $386 million | $1,313 million | $1,004 million |
| Net income attributable to PPG | $311 million | $262 million | $879 million | $564 million |
| Diluted EPS | $1.96 | $1.58 | $5.48 | $3.39 |
| Cash from operating activities | Not separately provided | Not separately provided | $777 million | $698 million |
Net income margin was approximately 8.1% in Q3 2011 versus 7.6% in Q3 2010, and approximately 7.7% for the first nine months versus 5.6% in the prior-year period. Cost of sales remained 61% of sales in both Q3 and the nine-month periods. SG&A declined to 20.9% of sales in Q3 from 21.4% and to 21.4% for the first nine months from 22.0%.
- Liquidity: Cash and cash equivalents were $1,301 million and short-term investments were $37 million at September 30, 2011, compared with combined liquidity of approximately $2.0 billion at December 31, 2010.
- Debt: Short-term and current debt totaled $102 million and long-term debt totaled $3,590 million. Total debt declined from approximately $4.1 billion at year-end 2010, primarily after repayment of a $400 million unsecured term loan in June 2011.
- Cash deployment: Nine-month investing cash flow was $494 million, including $235 million of capital spending, $56 million of acquisitions, $724 million of short-term investment maturities, and $168 million received from Pittsburgh Glass Works. Financing cash outflows were $1,270 million, including $633 million of share repurchases and $268 million of dividends.
- Working capital: Operating working capital was $3,094 million, or 20.1% of annualized sales, versus 21.3% at September 30, 2010 and 19.2% at December 31, 2010.
- Capital returns: The quarterly dividend was $0.57 per share. PPG repurchased $633 million of stock during the first nine months and authorized an additional 10 million-share repurchase program in October 2011.
Material changes versus the prior comparable period
- Q3 sales increased 11%, driven primarily by more than $200 million of price increases and approximately $150 million of favorable currency translation. Volumes were broadly flat, with acquisitions contributing approximately 1%.
- For the first nine months, sales increased 13%, with approximately 6% from pricing, 3% from volume, and the balance primarily from currency translation.
- Q3 segment earnings increased in Performance Coatings to $190 million, Industrial Coatings to $101 million, Architectural Coatings—EMEA to $53 million, and Optical and Specialty Materials to $93 million. Commodity Chemicals increased to $104 million, while Glass declined to $23 million from $32 million.
- Commodity Chemicals benefited from higher pricing but experienced planned and unplanned production outages, lower volumes, and higher maintenance costs. Glass was adversely affected by fiber-glass maintenance downtime and lower capacity utilization.
- Interest expense increased to $51 million in Q3 and $159 million for the nine months, primarily due to the $1 billion debt issuance in November 2010.
- The nine-month effective tax rate declined to approximately 26% from approximately 35% in 2010. The 2010 period included an $85 million, or $0.51 per share, one-time charge from a U.S. healthcare-law change affecting retiree medical tax benefits.
- Other comprehensive income attributable to PPG was a $70 million loss in Q3, principally due to a $410 million after-tax currency translation loss, compared with $585 million of income in Q3 2010.
Guidance, outlook, commentary, risks and unusual items
- Management expected fourth-quarter macroeconomic and regional trends to remain generally consistent with Q3, with normal seasonality and flattening raw-material inflation. Additional pricing actions were being implemented to offset inflation.
- Management described the fourth quarter as typically the strongest cash-generation quarter and intended to use cash flow and liquidity for acquisitions and share repurchases, while monitoring global economic conditions.
- Capital spending for 2011 was expected to be approximately 2% to 3% of sales. Dyrup was expected to close in early January 2012; the announced Colpisa acquisition had not yet closed.
- Environmental reserves were $242 million at September 30, 2011, with expected 2011 remediation cash outlays of approximately $60 million to $70 million and expected annual outlays of $50 million to $70 million through 2014. Additional reasonably possible, unreserved environmental losses were estimated at $200 million to $400 million.
- The proposed Pittsburgh Corning asbestos plan had not become effective. PPG carried an asbestos settlement obligation of $812 million, including $575 million current and $237 million noncurrent, and retained a $162 million reserve for asbestos claims not expected to be channeled to the trust. The Bankruptcy Court had denied confirmation of the plan, and amended plan provisions were scheduled for consideration on November 30, 2011.
- PPG recorded a $9 million net acquisition-related benefit for the Equa-Chlor acquisition, primarily a bargain-purchase gain. This was identified as unusual and non-recurring.
- Principal risks include raw-material cost and availability, pricing pressure, foreign-exchange movements, global and construction-market weakness, production disruptions, acquisition integration, environmental regulation, asbestos and other litigation, and changing tax laws.
- Management stated that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether pricing actions continue to offset raw-material inflation, particularly in coatings businesses.
- The operational and financial effects of production outages and maintenance requirements in Commodity Chemicals and Glass.
- The timing and final terms of the Pittsburgh Corning asbestos plan, including PPG’s funding obligations and retained claims exposure.
- Environmental remediation costs, regulatory approvals, and the potential for losses above recorded reserves.
- The sustainability of cash generation after share repurchases, dividends, acquisitions, pension contributions, capital spending, and debt service.
- The closing and integration of Dyrup, Colpisa, and other acquisitions, including achievement of expected benefits.
- Foreign-currency effects on sales, earnings, comprehensive income, and reported net assets.