PPG INDUSTRIES INC quarterly report, Q2 FY2012

PPG Industries, Inc. 2012 Second-Quarter Form 10-Q Summary

Business Context and Reporting Period

PPG Industries, Inc. 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 six months ended June 30, 2012, compared with the corresponding 2011 periods. Results are affected by foreign-exchange headwinds, weak European demand, restructuring, environmental remediation, acquisitions, and the proposed separation of the commodity chemicals business.

Key Financial Metrics

Metric	Three months ended June 30, 2012	Three months ended June 30, 2011	Six months ended June 30, 2012	Six months ended June 30, 2011
Net sales	$3,955 million	$3,986 million	$7,707 million	$7,519 million
Income before taxes	$527 million	$500 million	$578 million	$851 million
Net income attributable to PPG	$362 million	$340 million	$375 million	$568 million
Diluted EPS	$2.34	$2.12	$2.42	$3.52
Cash from operating activities	Not separately provided	Not separately provided	$434 million	$252 million

Second-quarter net income attributable to PPG increased 6% and diluted EPS increased 10%. Approximate second-quarter net margin was 9.2%, compared with 8.5% in the prior-year quarter; approximate pretax margin was 13.3%, compared with 12.5%. First-half net income declined 34% and diluted EPS declined 31%, primarily because of the $208 million restructuring charge and $159 million environmental remediation charge recorded in 2012, together with the absence of the prior-year acquisition gain.

Management reported adjusted diluted EPS of $2.36 for the second quarter and $4.17 for the first six months, excluding specified nonrecurring items. These are non-GAAP measures and should not be viewed as substitutes for GAAP results.

Cash Flow, Liquidity, Debt and Balance Sheet

Cash and cash equivalents were $1.017 billion at June 30, 2012, down from $1.457 billion at December 31, 2011. Cash and short-term investments totaled approximately $1.2 billion.
Operating cash flow was $434 million in the first half, compared with $252 million in the prior-year period. Investing cash use was $430 million, including capital spending, acquisitions, escrow deposits and short-term investment purchases. Financing cash use was $443 million.
Capital spending was $146 million year to date. Management expected 2012 capital spending of approximately 2.5% to 3.5% of sales.
Short-term debt and current maturities were $647 million, and long-term debt was $2.964 billion at June 30, 2012. Total reported debt was approximately $3.611 billion, excluding any separate interpretation of capital leases.
The $600 million of 5.75% notes due in 2013 was reclassified to current debt. Management intended to issue debt after the forward-starting swaps expired in the third quarter to help refinance part of those notes.
The debt-to-total-debt-and-PPG-equity ratio was 51%, compared with 53% at December 31, 2011. Long-term debt had a carrying value of $3.537 billion and fair value of $4.126 billion at June 30, 2012.
Operating working capital increased to $3.246 billion, or 20.5% of sales, from 19.5% at December 31, 2011, reflecting higher receivables and seasonal inventory buildup.
PPG paid $177 million in dividends during the first half. It repurchased $92 million of stock in the first quarter and none under the public repurchase program in the second quarter.

Material Changes Versus the Prior Comparable Period

Second-quarter sales declined 1% as 5% unfavorable currency translation and lower commodity chemicals and glass pricing offset 2% higher pricing, 2% acquisition contribution and flat volumes.
First-half sales increased 3%, driven by 3% pricing, 1% volume growth and 2% acquisitions, partly offset by 3% unfavorable currency translation. U.S. volumes grew more than 5%, while European volumes declined 5%.
Second-quarter segment income increased in Industrial Coatings to $143 million from $115 million, Architectural Coatings–EMEA to $64 million from $50 million, and Optical and Specialty Materials to $95 million from $90 million. Performance Coatings was flat at $204 million, Commodity Chemicals was flat at $106 million, and Glass declined to $23 million from $29 million.
First-half segment income increased to $1.178 billion from $1.074 billion before legacy, restructuring, acquisition, corporate and financing items. Industrial Coatings, Architectural Coatings–EMEA and Optical and Specialty Materials improved, while Glass declined materially.
PPG completed acquisitions of Dyrup and Colpisa and other coatings acquisitions. Total acquisition cost was $207 million, including $122 million of assumed debt. Dyrup contributed European architectural coatings capacity but European demand remained weak.
PPG recorded a $208 million restructuring charge, including $160 million of severance and other costs, $53 million of asset write-offs and a $5 million net pension curtailment gain. The plan affected approximately 1,959 employees, with $125 million remaining in the restructuring reserve at June 30.
PPG recorded a $159 million environmental remediation charge in the first half, primarily related to former chromium operations and associated New Jersey sites. Environmental reserves increased to $368 million from $226 million at year-end 2011.
The effective tax rate was approximately 24.9% in the second quarter and 22.7% for the first half, versus 25.6% and approximately 26%, respectively, in the comparable periods.

Guidance, Outlook, Risks and Unusual Items

Management expected European demand to remain weak in the third quarter, with continued but inconsistent growth in North America and Asia. Currency translation was expected to remain unfavorable.
Restructuring actions were expected to generate $40 million to $50 million of pretax savings in the second half of 2012 and approximately $140 million of annualized savings after completion.
Management expected higher pricing and lower commodity input costs to offset the coatings input-cost inflation experienced in the first half. Third-quarter results were expected to face normal seasonal weakness.
PPG announced on July 19, 2012, after quarter-end, definitive agreements to separate and merge its commodity chemicals business with Georgia Gulf in a proposed Reverse Morris Trust transaction. The transaction value was approximately $2.1 billion, including $900 million of cash to PPG, approximately $95 million of assumed debt, approximately $87 million of minority interest and approximately $1.0 billion of stock to PPG shareholders. Closing was expected in late 2012 or early 2013, subject to shareholder, regulatory, tax and other approvals.
Upon closing the transaction, the commodity chemicals business would be reported as discontinued operations. PPG incurred $4 million of pretax transaction costs during the first half and stated that the transaction should strengthen its cash position and support acquisitions, organic investment, debt repayment and share repurchases.
Asbestos obligations under the proposed settlement totaled $873 million at June 30, 2012, including $642 million current and $231 million noncurrent. The settlement remained subject to confirmation and appellate proceedings. PPG also maintained a $162 million reserve for asbestos claims not expected to be channeled to the trust.
Environmental remediation cash outlays were expected to average approximately $100 million annually through 2014 and $10 million to $30 million annually in 2015 and 2016. Reasonably possible unreserved environmental losses were estimated at $100 million to $275 million.
Other principal risks include raw-material prices and availability, foreign exchange, European and global economic conditions, acquisition integration, achievement of restructuring savings, environmental regulation, litigation, asbestos claims, and completion and integration of the Georgia Gulf transaction.
PPG stated that its disclosure controls were effective. A new SAP enterprise resource planning system was implemented in portions of the Commodity Chemicals, Silicas and Optical Products businesses, with post-implementation control reviews continuing.

Most Important Facts for an Investor to Verify

Whether the Georgia Gulf separation and merger closed on the anticipated timetable and on the disclosed economic terms.
Whether restructuring savings reached the projected $40 million to $50 million in the second half of 2012 and the approximately $140 million annual run rate.
European demand, foreign-exchange effects, coatings pricing, raw-material inflation and segment-level volume trends.
Actual environmental remediation spending and whether New Jersey Chrome estimates require further charges beyond the $368 million reserve.
Status, confirmation and funding requirements of the asbestos settlement, including the $873 million recorded obligation and retained asbestos claims.
Ability to refinance the $600 million of notes due in 2013 while maintaining liquidity, dividends, capital spending and acquisition capacity.
Reconciliation of reported GAAP earnings with management’s adjusted EPS, particularly the restructuring, environmental, acquisition and transaction-related exclusions.