PPG Industries, Inc. — 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 Form 10-Q covers the three and six months ended June 30, 2011, compared with the corresponding 2010 periods.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $3,986 million | $3,458 million | $7,519 million | $6,584 million |
| Income before taxes | $500 million | $412 million | $851 million | $618 million |
| Net income attributable to PPG | $340 million | $272 million | $568 million | $302 million |
| Diluted EPS | $2.12 | $1.63 | $3.52 | $1.81 |
| Cash from operating activities | Not separately provided | Not separately provided | $252 million | $367 million |
Q2 sales increased 15%, driven by 2% volume growth, 6% higher selling prices and favorable foreign currency translation. Six-month sales increased 14%, comprising 4% volume growth, 6% pricing and favorable currency translation. Approximate pretax margins were 12.5% in Q2 2011 versus 11.9% in Q2 2010, and 11.3% for the first six months of 2011 versus 9.4% in the prior-year period.
Q2 cost of sales increased to $2,417 million, or approximately 60.6% of sales, from $2,076 million, or approximately 60.0%. For the first six months, cost of sales was approximately 60.4% of sales versus 61.0% in 2010. Selling, general and administrative expense declined to 20.8% of Q2 sales from 21.5% and to 21.6% of six-month sales from 22.4%.
Cash and short-term investments totaled approximately $1.25 billion at June 30, 2011, down from approximately $2.0 billion at December 31, 2010. Cash from operations declined to $252 million from $367 million, primarily reflecting increased receivables and inventories. Operating working capital increased to $3,197 million, or 20.0% of sales, from $2,595 million, or 19.2%, at year-end 2010.
Total debt consisted of $111 million of short-term debt and current maturities and $3,613 million of long-term debt. PPG repaid a $400 million unsecured term loan in June 2011. The ratio of total debt, including capital leases, to total debt and equity was 48% at June 30, 2011, compared with 53% at December 31, 2010. Management stated that operating cash flow and debt capacity were expected to fund operations, capital spending, acquisitions, dividends, debt service, proposed asbestos payments, share repurchases and pension contributions.
- Capital spending excluding acquisitions was $134 million in the first six months; full-year 2011 capital spending was expected at 2.5% to 3.5% of sales.
- Acquisition spending was $52 million, including the Equa-Chlor acquisition.
- PPG received $168 million from Pittsburgh Glass Works, comprising repayment of notes receivable and a return of capital.
- Dividends paid were $178 million and share repurchases were $383 million in the first six months. Approximately 5 million shares remained under the repurchase authorization.
Material changes versus the prior comparable period
- Net income attributable to PPG increased 25% in Q2 and 88% for the first six months. Diluted EPS increased 30% in Q2 and 95% for the first six months, aided by higher earnings and fewer shares outstanding.
- Commodity Chemicals segment earnings increased from $53 million to $106 million in Q2 and from $56 million to $203 million for the first six months, primarily because of higher pricing.
- Glass segment earnings increased from $16 million to $29 million in Q2 and from $13 million to $55 million for the first six months.
- Performance Coatings earnings increased 7% in Q2 and 8% for the first six months; Industrial Coatings earnings increased 3% and 8%, respectively.
- Architectural Coatings—EMEA earnings were flat in Q2 and only slightly positive for the first six months, including a $9 million charge related to a U.K. DIY customer bankruptcy.
- Interest expense increased to $55 million in Q2 and $108 million for the first six months, reflecting the $1 billion debt issuance in November 2010.
- The six-month 2010 comparison included an $85 million after-tax charge, or $0.51 per diluted share, from a U.S. tax-law change affecting retiree medical benefits. This charge did not recur in 2011.
- Q2 2011 included a $9 million net acquisition-related benefit, primarily a bargain purchase gain from Equa-Chlor. The gain was considered unusual and non-recurring.
Guidance, outlook, risks and unusual items
Management expected the global economic recovery to continue at an uneven pace. The outlook cited further recovery in automotive OEM production, continued aerospace and emerging-market growth, additional pricing actions to offset raw-material inflation, and continued aggressive cost management. Management expected favorable price trends in Commodity Chemicals, seasonally slower third-quarter conditions in several businesses and recovery of Japan-related automotive production curtailments primarily in the fourth quarter.
Raw-material inflation remained a significant risk, particularly for coatings, where pricing had not fully offset cost increases in all businesses. Other principal risks include global economic and political conditions, competition, raw-material availability and pricing, foreign exchange, tax-law changes, environmental regulation, integration of acquisitions, business disruptions and litigation.
The proposed asbestos settlement remained subject to bankruptcy-court confirmation and appeals. The Bankruptcy Court denied confirmation of the third amended Pittsburgh Corning reorganization plan on June 16, 2011, while the parties considered potential amendments. If ultimately effective, PPG would contribute approximately $825 million in cash through 2023, along with specified stock and other assets. The recorded asbestos settlement obligation was $837 million at June 30, 2011, including $603 million current and $234 million noncurrent, and PPG retained a $162 million reserve for claims not expected to be channeled to the trust.
Environmental remediation reserves were $252 million at June 30, 2011, including $145 million related to the former Jersey City chromium plant. Management estimated reasonably possible unreserved environmental losses of $200 million to $400 million, unchanged from prior disclosure, and expected approximately $80 million of environmental cash outlays in 2011 and $50 million to $70 million annually through 2014.
PPG had outstanding letters of credit and surety bonds of $110 million and guarantees of $105 million. Management did not believe losses related to the guarantees were likely. The company reported no material changes in risk factors from its 2010 Form 10-K, and disclosure controls and internal control over financial reporting were reported effective.
Most important facts for investors to verify
- Whether pricing actions continue to offset raw-material inflation, especially in the coatings businesses.
- The timing and outcome of amendments, confirmation and appeals related to the Pittsburgh Corning asbestos reorganization plan and the resulting funding obligations.
- Cash conversion, working-capital levels and liquidity after the decline in operating cash flow and cash investments during the first half.
- Automotive OEM production recovery following Japan-related supply disruptions and the effect on Industrial Coatings and related businesses.
- Progress, cost estimates and regulatory approvals for Jersey City chromium and Calcasieu River environmental remediation.
- The sustainability of the unusually strong Commodity Chemicals and Glass earnings improvement.
- The timing and terms of anticipated bolt-on acquisitions and their integration results.