PPG Industries, Inc. — Q1 2013 Form 10-Q Summary
Business context and reporting period
PPG filed its unaudited quarterly report for the three months ended March 31, 2013. Following completion of the January 28, 2013 separation and merger of its commodity chemicals business with Georgia Gulf’s business, the former commodity chemicals operations are reported as discontinued operations. PPG’s continuing operations comprise Performance Coatings, Industrial Coatings, Architectural Coatings–EMEA, Optical and Specialty Materials, and Glass.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $3.331 billion | $3.333 billion | Essentially flat |
| Income from continuing operations attributable to PPG | $219 million | $(50) million | Improved $269 million |
| Net income attributable to PPG | $2.410 billion | $13 million | Primarily reflects transaction gain |
| Diluted EPS | $16.31 | $0.08 | Includes $14.83 from discontinued operations |
| Adjusted diluted EPS from continuing operations | $1.58 | $1.41 | Improved $0.17 |
| Cash used in operating activities | $89 million | $2 million | Higher use of cash |
| Cash and cash equivalents | $2.021 billion | $978 million at Q1 2012 end | Up $715 million from Dec. 31, 2012 |
Continuing-operations pretax income was $318 million versus a $47 million pretax loss in the prior-year quarter. The effective tax rate on continuing-operations pretax income was approximately 20%, compared with a 66% tax benefit in Q1 2012. Adjusted diluted EPS excludes acquisition-related costs, legacy pension settlements, environmental remediation charges, and a $10 million after-tax benefit from retroactive U.S. tax law changes.
Segment income increased to $474 million from $443 million. Segment income margins were approximately 14.2% of sales in Q1 2013 and 13.3% in Q1 2012. Selling, general and administrative expense declined to $797 million, or 23.9% of sales, from $823 million, or 24.7% of sales.
At March 31, 2013, total debt was approximately $3.4 billion, consisting of $48 million of current debt and $3.353 billion of long-term debt. PPG repaid $600 million of 5.75% notes in March. Cash and short-term investments totaled approximately $2.4 billion. The debt-to-total-debt-and-PPG-equity ratio was 42%, compared with 50% at December 31, 2012.
Material changes versus the prior comparable period
- Net sales were broadly unchanged: pricing increased sales approximately 1%, acquisitions added approximately 2%, and volumes declined approximately 3%.
- Continuing-operations earnings benefited from lower environmental and restructuring charges, cost discipline, restructuring savings, and lower SG&A.
- Other charges declined to $25 million from $170 million, primarily because Q1 2012 included approximately $159 million of environmental remediation charges.
- The former commodity chemicals business generated $108 million of discontinued-operation sales in January 2013 versus $419 million for the comparable 2012 period. The separation produced a $2.192 billion pretax gain and $2.191 billion of after-tax discontinued-operation income.
- PPG’s share count declined following the exchange offer, which accepted approximately 10.8 million PPG shares, and Q1 repurchases of approximately 1.0 million shares.
- Operating cash flow was pressured by increases in receivables and inventories. Continuing-operations operating cash flow was $(93) million versus $(20) million in Q1 2012.
Segment performance
| Segment | Q1 2013 sales | Q1 2013 income | Year-over-year commentary |
|---|---|---|---|
| Performance Coatings | $1.124 billion | $172 million | Sales down 2%; income up $12 million |
| Industrial Coatings | $1.183 billion | $178 million | Sales up 10%; income up $28 million |
| Architectural Coatings–EMEA | $454 million | $20 million | Sales down 12%; income up $4 million |
| Optical and Specialty Materials | $314 million | $99 million | Sales down 6%; income down $10 million |
| Glass | $256 million | $5 million | Sales flat; income down $3 million |
Guidance, outlook, risks, and unusual items
- Management expected positive economic momentum in the United States and Asia to continue, while Europe was expected to remain challenging with limited near-term improvement.
- Management expected earnings growth to continue through geographic and end-market diversity, restructuring benefits, and cost management.
- On April 1, 2013, PPG completed its $948 million acquisition of Akzo Nobel’s North American architectural coatings business. The acquired business had approximately $1.5 billion of 2012 sales and was expected to be included in Performance Coatings beginning April 1.
- Capital spending was expected to be approximately 2% to 2.5% of 2013 sales. Mandatory non-U.S. pension contributions were expected to be approximately $77 million, with $15 million contributed by March 31.
- Environmental reserves totaled $297 million at March 31, including $201 million related to New Jersey Chrome. Management expected $10 million to $25 million of additional pretax environmental charges during the remainder of 2013 and approximately $80 million of environmental cash outlays.
- Reasonably possible but unreserved environmental losses were estimated at $100 million to $235 million.
- The proposed asbestos settlement remained subject to bankruptcy-court approval and appeals. The recorded asbestos settlement obligation was $920 million, including $680 million current and $240 million noncurrent. PPG also retained a $162 million reserve for claims not expected to be channeled to the asbestos trust.
- Other risks included raw-material costs and availability, foreign exchange, economic weakness in Europe, integration of acquisitions, restructuring execution, environmental regulation, litigation, and the unresolved future structure of the Transitions Optical joint venture.
Important facts for investors to verify
- Separate recurring continuing-operations performance from the $2.2 billion discontinued-operation gain.
- Track the financial impact, integration progress, and funding of the Akzo Nobel North American architectural coatings acquisition.
- Monitor volume trends, particularly in Europe, automotive-related markets, optical products, and fiber glass.
- Reconcile operating cash flow with reported earnings and assess working-capital normalization after the seasonal inventory build.
- Follow New Jersey Chrome remediation estimates, environmental cash requirements, and the $100 million to $235 million unreserved exposure.
- Monitor confirmation and appeals of the asbestos reorganization plan and the timing of PPG’s required contributions.
- Assess the outcome of discussions with Essilor regarding Transitions Optical.