PPG Industries, Inc. — Q1 2012 Form 10-Q Summary
Business context and reporting period
PPG Industries is a multinational manufacturer of coatings, optical and specialty materials, commodity chemicals and glass products. This unaudited quarterly report covers the three months ended March 31, 2012, compared with the three months ended March 31, 2011. PPG reported six segments: Performance Coatings, Industrial Coatings, Architectural Coatings—EMEA, Optical and Specialty Materials, Commodity Chemicals and Glass.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $3,752 million | $3,533 million | Up 6% |
| Income before taxes | $51 million | $351 million | Down $300 million |
| Net income attributable to PPG | $13 million | $228 million | Down $215 million |
| Diluted EPS | $0.08 | $1.40 | Down $1.32 |
| Dividends per common share | $0.57 | $0.55 | Up $0.02 |
| Cash used in operating activities | $2 million | $156 million | Improved by $154 million |
Cost of sales declined to 59% of sales from 60% in the prior-year quarter. Selling, general and administrative expense was 22.7% of sales versus 22.6%. The reported net margin was approximately 0.3%, compared with approximately 6.5% in Q1 2011. Management presented adjusted net income of $279 million, or $1.81 diluted EPS, excluding after-tax charges related to restructuring, environmental remediation and acquisitions; these are non-GAAP measures.
Segment income increased to $543 million from $480 million. Performance Coatings income rose to $160 million from $139 million, Industrial Coatings to $150 million from $116 million, Architectural Coatings—EMEA to $16 million from $12 million, Optical and Specialty Materials to $109 million from $90 million, and Commodity Chemicals to $100 million from $97 million. Glass income declined to $8 million from $26 million.
Liquidity, debt and capital allocation
- Cash and short-term investments totaled approximately $1.0 billion at March 31, 2012, compared with $1.5 billion at December 31, 2011. Cash and cash equivalents were $978 million.
- Total debt, including capital leases, represented 53% of total debt plus PPG shareholders’ equity, unchanged from year-end 2011.
- Current debt increased to $669 million from $108 million, primarily because $600 million of 5.75% notes due in 2013 were reclassified as current. Long-term debt was $2,988 million versus $3,574 million at year-end.
- Operating cash flow was approximately break-even. Investing cash outflow was $181 million, including $68 million of capital spending, $44 million of acquisition cash outflow, escrow activity and derivative settlements. Financing cash outflow was $312 million.
- PPG paid $87 million of common dividends and repurchased approximately 1 million shares for $92 million. Approximately 8 million shares remained available under the repurchase authorization.
- Operating working capital increased to $3,241 million, or 21.6% of annualized sales, from $2,739 million, or 19.5%, at December 31, 2011. The increase reflected higher receivables and inventory, including coatings inventory built ahead of the summer paint season.
Material changes versus the prior comparable period
- Sales growth reflected 4% higher pricing, 2% from acquisitions and approximately 1% higher volume, partly offset by unfavorable currency translation. U.S. coatings and emerging-market demand improved, while European coatings volumes declined.
- PPG recorded a $208 million business restructuring charge, including $160 million of severance and other costs and $53 million of asset write-offs. The plan affects approximately 1,959 employees and is expected to generate $40 million to $50 million of pretax savings in 2012 and an annual run rate of approximately $140 million after completion.
- Other charges increased to $171 million from $32 million, primarily because of a $159 million environmental remediation charge, including $145 million related to New Jersey Chrome sites.
- The effective tax rate was zero versus approximately 26% in Q1 2011. Tax benefits associated with environmental remediation and restructuring charges offset tax expense on ongoing earnings.
- PPG completed two coatings acquisitions. Dyrup A/S and Colpisa businesses had total purchase consideration of approximately $202 million, including $120 million of assumed debt. Dyrup and Colpisa contributed to sales but acquisition-related inventory step-up costs reduced earnings.
- Currency translation increased consolidated net assets by $133 million from December 31, 2011, but the stronger U.S. dollar reduced Q1 pretax earnings by approximately $4 million year over year.
Guidance, outlook, commentary and unusual items
Management expected second-quarter U.S. growth rates to remain similar to Q1, emerging-market growth to accelerate with higher Chinese industrial activity, and European demand to remain muted. Restructuring actions were expected to produce global cost savings of $40 million to $50 million in the second half of 2012. Management also expected capital spending for full-year 2012 to be approximately 2.5% to 3.5% of sales.
Key operating risks included raw-material inflation, foreign exchange volatility, weak European demand, economic and political conditions in international markets, acquisition integration, competition, tax-rate fluctuations and the ability to realize restructuring savings. Management expected environmental remediation charges of $10 million to $20 million during the remaining three quarters of 2012 and cash outlays of approximately $100 million annually through 2014, followed by $10 million to $30 million annually in 2015 and 2016.
Environmental reserves totaled $379 million at March 31, 2012, including $265 million for New Jersey Chrome, compared with $226 million at year-end 2011. Additional reasonably possible but unreserved environmental losses were estimated at $100 million to $275 million.
The proposed asbestos settlement remained subject to bankruptcy-court confirmation and appeals. If effective, PPG would contribute approximately $825 million in cash over time, transfer specified shares or their cash equivalent and relinquish its equity interest in Pittsburgh Corning. The recorded asbestos settlement obligation was $854 million, comprising $610 million current and $244 million noncurrent.
PPG also had an ongoing RS Cogen take-or-pay commitment with an estimated maximum exposure to loss of $262 million at March 31, 2012, outstanding letters of credit and surety bonds of $128 million, and guarantees of $85 million. Management stated that losses related to the guarantees were not considered likely.
Most important facts for investors to verify
- Whether the $208 million restructuring program delivers the projected $40 million to $50 million of 2012 savings and approximately $140 million annual run-rate savings.
- Updates to New Jersey Chrome remediation estimates, environmental reserves, cash spending and the $100 million to $275 million range of reasonably possible unreserved losses.
- The status and ultimate funding requirements of the proposed asbestos settlement, including potential appeals and retained non-PC asbestos claims.
- Whether operating working capital normalizes from 21.6% of annualized sales and whether cash generation supports dividends, repurchases, acquisitions and debt maturities.
- The refinancing plan for $600 million of notes due in March 2013 and the impact of the $400 million forward-starting swaps expiring in Q3 2012.
- European demand, raw-material inflation, foreign exchange effects and the integration and profitability of Dyrup and Colpisa.
- The sustainability of reported segment earnings after excluding restructuring, environmental and acquisition-related charges.