PPG Industries, Inc. — 2012 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012. The filing is an annual report, with unaudited quarterly information included. PPG operated six reportable segments: Performance Coatings, Industrial Coatings, Architectural Coatings—EMEA, Optical and Specialty Materials, Commodity Chemicals and Glass.
Business Context and Reporting Period
PPG is a global manufacturer of coatings, optical and specialty materials, commodity chemicals and glass products. Approximately 57% of 2012 sales were generated outside the United States. The company’s results were affected by uneven global economic conditions, weak European demand, raw-material inflation and foreign-currency translation.
On January 28, 2013, after the reporting period, PPG completed the separation of its Commodity Chemicals business and its merger with Georgia Gulf, forming Axiall Corporation. PPG received $900 million in cash and distributed approximately 35.2 million Axiall shares to participating PPG shareholders. PPG retained no ownership interest in Axiall.
Financial Performance and Key Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $15,200 million | $14,885 million | +2% |
| Income before income taxes | $1,402 million | $1,597 million | Down $195 million |
| Net income attributable to PPG | $941 million | $1,095 million | Down $154 million |
| Diluted EPS | $6.06 | $6.87 | Down $0.81 |
| Adjusted diluted EPS | $7.94 | Not clearly provided in the filing text | Not directly comparable |
| Cash from operating activities | $1,787 million | $1,436 million | +24% |
| Capital spending, excluding acquisitions | $411 million | $390 million | +5% |
| Dividends paid | $358 million | $355 million | +1% |
Net profit margin was approximately 6.2% in 2012, compared with approximately 7.4% in 2011. Cost of sales declined to 59.7% of sales from 61.0%, while selling, general and administrative expense was 21.9% of sales compared with 21.7%.
Reported 2012 earnings included $208 million of pretax restructuring charges, $159 million of environmental remediation charges, $26 million of separation and acquisition-related costs and $6 million of Dyrup and Colpisa acquisition costs. Excluding these items, adjusted net income was $1,230 million and adjusted diluted EPS was $7.94.
Segment Results
| Segment | 2012 Sales | 2012 Segment Income | 2011 Segment Income |
|---|---|---|---|
| Performance Coatings | $4,752 million | $744 million | $673 million |
| Industrial Coatings | $4,379 million | $590 million | $438 million |
| Architectural Coatings—EMEA | $2,147 million | $145 million | $123 million |
| Optical and Specialty Materials | $1,202 million | $348 million | $326 million |
| Commodity Chemicals | $1,688 million | $372 million | $370 million |
| Glass | $1,032 million | $63 million | $97 million |
Performance was strongest in Industrial Coatings, where higher pricing, volume growth and manufacturing savings drove a $152 million increase in segment income. Glass earnings declined because of lower pricing, cost inflation and weaker fiber-glass demand. European volumes declined 4%, while North American volumes grew nearly 5%.
Cash Flow, Liquidity and Debt
- Cash and cash equivalents totaled $1,306 million at December 31, 2012; short-term investments totaled $1,087 million, for approximately $2.4 billion of cash and short-term investments.
- Operating working capital was $2,878 million, or 19.7% of annualized fourth-quarter sales, compared with $2,739 million and 19.5% in 2011.
- Total debt, including capital leases, was approximately $3,971 million at year-end, including $603 million due within one year. The debt-to-total-capital ratio was 50%, compared with 53% in 2011.
- PPG had no borrowings outstanding under its $1.2 billion unsecured revolving credit facility and could increase the facility by up to an additional $300 million, subject to conditions.
- The company reported compliance with its debt covenants; total indebtedness was 42% of covenant-defined total capitalization versus a 60% maximum.
- 2013 contractual obligations totaled $1,275 million, including $600 million of long-term debt maturities, $171 million of operating leases, $173 million of interest payments and $77 million of estimated pension contributions.
Material Changes Versus the Prior Comparable Period
- Sales increased 2%, primarily from higher selling prices, modest volume growth and acquisitions, partly offset by a 3% unfavorable currency impact.
- Reported net income and diluted EPS declined because of restructuring and environmental charges and lower pretax income, despite higher operating cash flow and lower average diluted shares.
- Raw-material inflation continued, particularly for titanium dioxide, although input-price pressure moderated during the second half of 2012. Coatings raw-material costs increased nearly $725 million over the three years ended December 31, 2012.
- PPG recorded a $208 million restructuring charge. The program produced approximately $50 million of pretax savings in the second half of 2012, with expected annual run-rate savings of approximately $140 million after completion in 2013.
- Environmental remediation reserves increased to $332 million from $226 million, principally because of a $145 million charge related to the New Jersey Chrome sites.
- PPG completed the acquisitions of Dyrup, Colpisa and Spraylat and incurred total 2012 acquisition costs of $288 million, including assumed debt.
- PPG repurchased approximately 1 million shares for $92 million in 2012. Approximately 8 million shares remained available under the repurchase authorization at year-end.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2013 coatings raw-material prices to be broadly flat with year-end 2012 levels early in the year, but stated that full-year pricing could not be projected reliably.
- PPG expected its ongoing 2013 tax rate to be approximately 23.5% to 24.5% and pension and other postretirement benefit costs to decline by roughly $40 million.
- 2013 capital spending, excluding acquisitions, was expected to range from $350 million to $450 million. Share repurchases were expected to range from $500 million to $750 million.
- North America was viewed as the strongest regional growth opportunity, supported by construction, automotive, aerospace and industrial activity. The Eurozone was expected to remain subdued, with continuing downside risk.
- PPG agreed to acquire Akzo Nobel’s North American architectural coatings business for approximately $1.05 billion. The transaction was expected to close in the first half of 2013; Canadian competition clearance and Investment Canada Act approval remained pending at the filing date.
- Environmental remediation remains a significant contingency. In addition to the $332 million reserve, reasonably possible unreserved environmental losses were estimated at $100 million to $275 million. Management expected approximately $100 million of annual remediation cash outlays through 2015.
- The proposed asbestos settlement carried an obligation of approximately $920 million at December 31, 2012, consisting of $683 million current and $237 million noncurrent. The settlement remained subject to bankruptcy-court confirmation and appeals, and PPG had no payment obligation until the defined Funding Effective Date.
- Other key risks include raw-material availability and pricing, foreign exchange, global economic weakness, environmental and chemical regulations, litigation, acquisition integration, business disruptions and pension assumptions.
- Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Facts an Investor Should Verify
- Post-year-end separation: Verify the accounting treatment, transaction gain, cash proceeds and share exchange effects of the January 2013 Axiall transaction, including discontinued-operations presentation.
- Akzo Nobel acquisition: Verify closing status, regulatory approvals, purchase price, financing and integration costs.
- Environmental liabilities: Review the New Jersey Chrome remediation plan, reserve adequacy, future cash outlays and the $100 million–$275 million unreserved exposure.
- Asbestos settlement: Verify court approval, the Funding Effective Date, required cash and stock contributions and potential retained claims if the settlement is not implemented.
- Underlying earnings: Reconcile reported EPS of $6.06 with adjusted EPS of $7.94 and assess whether restructuring savings offset raw-material inflation.
- Liquidity and capital allocation: Verify repayment of the $600 million notes due in March 2013, subsequent share repurchases, acquisitions, dividends and the use of the $900 million separation proceeds.