PPG INDUSTRIES INC quarterly report, Q3 FY2012

PPG Industries, Inc. — Form 10-Q Summary

Business context and reporting period

PPG is a multinational manufacturer organized into 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 nine months ended September 30, 2012, compared with the corresponding 2011 periods.

Financial performance and key metrics

Metric	Q3 2012	Q3 2011	9M 2012	9M 2011
Net sales	$3,845 million	$3,849 million	$11,552 million	$11,368 million
Income before taxes	$486 million	$462 million	$1,064 million	$1,313 million
Net income attributable to PPG	$339 million	$311 million	$714 million	$879 million
Diluted EPS	$2.18	$1.96	$4.61	$5.48
Operating cash flow	Not separately provided	Not separately provided	$1,039 million	$777 million

Q3 net sales were essentially flat year over year. Pricing and acquisitions offset unfavorable currency translation, while volumes were slightly higher overall.
Q3 net income increased 9%, and diluted EPS increased 11%. The effective tax rate was approximately 25%, compared with 26% in Q3 2011. Q3 net margin was approximately 8.8%, compared with 8.1% in the prior-year quarter.
First-nine-month sales increased 2%, but reported net income declined 19% because of restructuring and environmental charges and other unusual items. Nine-month net margin was approximately 6.2%, compared with 7.7% in 2011.
Management reported adjusted diluted EPS of $2.24 for Q3 and $6.42 for the first nine months, excluding specified nonrecurring costs. These are non-GAAP measures.
Q3 segment income increased to $606 million from $564 million. Industrial Coatings increased $52 million, Performance Coatings increased $13 million, and Architectural Coatings—EMEA increased $3 million. Optical and Specialty Materials declined $17 million, Commodity Chemicals declined $10 million, and Glass increased $1 million.

Liquidity, cash flow, debt and capital resources

Cash and short-term investments totaled approximately $2.0 billion at September 30, 2012, versus $1.5 billion at December 31, 2011. The balance sheet reported $1,392 million of cash and cash equivalents and $619 million of short-term investments.
Operating cash flow for the first nine months was $1,039 million, up from $777 million. Investing cash flow was negative $876 million, principally reflecting purchases of short-term investments, capital spending and acquisitions. Financing cash flow was negative $241 million.
Total debt included $636 million of short-term debt and current maturities and $3,365 million of long-term debt. PPG’s debt-to-total-debt-and-PPG-shareholders’-equity ratio was 51% at September 30, compared with 53% at December 31, 2011.
PPG issued $400 million of 2.70% notes due 2022, receiving $397 million net of costs. Proceeds were intended to repay part of the $600 million of 5.75% notes due March 2013.
PPG entered into a new five-year, $1.2 billion unsecured revolving credit facility with no outstanding borrowings at September 30, 2012. The facility may be increased by up to $300 million subject to conditions.
Capital spending was $226 million year to date; 2012 capital spending was expected to be approximately 2% to 2.5% of sales. Dividends paid were $267 million, and the quarterly dividend was $0.59 per share.
Operating working capital increased to $3,247 million, or 21.1% of sales, from $2,739 million, or 19.5%, at December 31, 2011. Days sales outstanding increased to 65 days.

Material changes versus the prior comparable period

Reported nine-month earnings were reduced by a $208 million business restructuring charge and a $159 million environmental remediation charge, primarily associated with former chromium sites in New Jersey.
Other charges increased to $214 million from $60 million, while other earnings declined to $111 million from $143 million.
The restructuring program is intended to reduce staffing and close or consolidate facilities, primarily in Europe and in architectural coatings and corporate functions. PPG expects pretax savings of approximately $40 million to $50 million in the second half of 2012 and an annual run rate of approximately $140 million after completion in 2013.
PPG completed three coatings-related acquisitions, including Dyrup and Colpisa, with total acquisition costs of $207 million, including assumed debt of $122 million.
PPG’s commodity chemicals separation and merger transaction with Georgia Gulf was announced in July 2012. The proposed transaction value was approximately $2.4 billion, including $900 million of cash to PPG, approximately $180 million of assumed debt and minority interests, and approximately $1.3 billion of shares in the combined company.
PPG incurred $13 million of pretax transaction costs during the first nine months. The commodity chemicals business was expected to be reported as discontinued operations when the transaction closes.

Outlook, management commentary and risks

Management expected a seasonally slower fourth quarter, particularly in architectural coatings, while anticipating measured North American growth and continued strength in automotive OEM and aerospace markets.
European demand remained weak, although the rate of volume decline improved in the third quarter. Currency translation was expected to remain unfavorable but less adverse than in recent quarters.
Optical and Specialty Materials faced continued customer inventory management and destocking ahead of a planned next-generation Transitions product launch in Europe in early 2013.
Commodity Chemicals and Glass were expected to experience seasonal demand declines, lower operating rates, and continued weakness in certain end markets.
Environmental reserves totaled $350 million at September 30, 2012, including $239 million related to New Jersey Chrome and $62 million related to the Calcasieu River estuary and three operating chemical sites. Management expected environmental cash outlays of approximately $40 million in the fourth quarter of 2012 and approximately $100 million annually through 2014.
Additional reasonably possible but unreserved environmental losses were estimated at $100 million to $275 million. Management noted that future costs could change based on remediation technology, regulatory developments, site investigations and remedy approvals.
The asbestos settlement remained subject to final approval of the amended Pittsburgh Corning bankruptcy plan and possible appeals. The recorded asbestos obligation was $888 million, consisting of $654 million current and $234 million noncurrent, while PPG’s proposed aggregate cash contribution was approximately $825 million plus shares or cash and other assets.
Risks include global economic weakness, raw-material costs and availability, foreign-exchange volatility, competition, execution of restructuring and acquisitions, environmental regulation, litigation, asbestos claims, and failure to complete the Georgia Gulf transaction or obtain anticipated tax treatment and approvals.

Most important facts for an investor to verify

Whether the Georgia Gulf transaction closed on the expected early-2013 schedule, received tax rulings and regulatory approvals, and produced the anticipated cash proceeds and ownership interests.
Actual fourth-quarter and 2013 savings from the restructuring program compared with the stated $140 million annual run-rate target.
Progress, final scope and cost of New Jersey Chrome and other environmental remediation, including whether the $100 million to $275 million reasonably possible exposure changes.
Status and ultimate funding requirements of the Pittsburgh Corning asbestos settlement and any retained non-PC asbestos claims.
Refinancing or repayment of the $600 million notes due March 2013 and the effect of related debt costs and maturities on liquidity.
Working-capital trends, particularly receivables, inventories and days sales outstanding, which increased during the period.
Demand recovery in Europe, optical products, consumer electronics, marine coatings, commodity chemicals and glass, together with the effects of currency and raw-material prices.