PPG Industries, Inc. — 2011 Form 10-K Summary
Business context and reporting period
PPG is a global manufacturer of coatings, optical and specialty materials, commodity chemicals and glass. Its six reportable segments are Performance Coatings, Industrial Coatings, Architectural Coatings—EMEA, Optical and Specialty Materials, Commodity Chemicals and Glass. This Form 10-K covers the fiscal year ended December 31, 2011; fourth-quarter information is included but the filing is an annual report, not a standalone quarterly filing.
PPG operated 128 manufacturing facilities in 45 countries, employed approximately 38,400 people at year-end and generated approximately 58% of sales outside the United States.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $14,885 million | $13,423 million | Up 11% |
| Income before income taxes | $1,597 million | $1,295 million | Up 23% |
| Net income attributable to PPG | $1,095 million | $769 million | Up 42% |
| Diluted EPS | $6.87 | $4.63 | Up 48% |
| Cash from operating activities | $1,436 million | $1,310 million | Up 10% |
| Cost of sales as a percentage of sales | 61.0% | 61.2% | Improved 20 basis points |
| Effective tax rate | 24.1% | 32.0% | Improved substantially |
Sales growth reflected approximately 2% higher volume, 5% higher selling prices, foreign currency translation and acquisitions. Selling, general and administrative expenses increased to $3,234 million from $2,979 million, but declined to 21.7% of sales from 22.2%.
Coatings raw-material costs increased approximately 10% to 12%, creating about $440 million of incremental cost in 2011. Pricing actions substantially offset, but did not fully recover, the inflationary impact in the coatings businesses. Natural-gas unit costs in the United States declined 15%, while ethylene costs increased substantially.
Segment results
| Segment | 2011 sales | 2011 segment income | 2010 segment income |
|---|---|---|---|
| Performance Coatings | $4,626 million | $673 million | $661 million |
| Industrial Coatings | $4,158 million | $438 million | $378 million |
| Architectural Coatings—EMEA | $2,104 million | $123 million | $113 million |
| Optical and Specialty Materials | $1,204 million | $326 million | $307 million |
| Commodity Chemicals | $1,732 million | $370 million | $189 million |
| Glass | $1,061 million | $97 million | $74 million |
Commodity Chemicals produced the largest segment-income improvement, benefiting from higher pricing, stronger demand and the Equa-Chlor acquisition. Industrial Coatings benefited from volume growth and lower manufacturing costs. Performance Coatings and Architectural Coatings—EMEA remained exposed to raw-material inflation. Optical and Specialty Materials was affected by Thailand flooding, including a fourth-quarter force majeure declaration, but management reported operations had largely normalized by year-end.
Cash flow, liquidity, debt and capital allocation
- Cash and cash equivalents were $1,457 million at December 31, 2011, compared with $1,341 million in 2010. Short-term investments were $25 million versus $637 million.
- Operating working capital increased to $2,739 million from $2,595 million, or 19.5% of annualized fourth-quarter sales versus 19.2%.
- Capital spending was $390 million, excluding acquisitions; total capital spending including acquisitions was $446 million.
- PPG paid $355 million in dividends and repurchased 10.2 million shares for $858 million during 2011. Shares outstanding declined to approximately 151.9 million from 160.4 million.
- Total debt, including capital leases, was approximately $3,649 million. Long-term debt was $3,574 million, and the company repaid a $400 million term loan in June 2011.
- PPG had no borrowings under its $1.2 billion unsecured revolving credit facility at year-end. The facility expires August 5, 2013 and includes a total-debt-to-capitalization covenant of 60%; reported debt was 43% under the covenant definition.
- Contractual obligations totaled $6,992 million, excluding the separate proposed asbestos settlement obligations of $956 million.
Material changes versus the prior comparable period
- Sales and earnings increased materially as the global industrial recovery continued, although fourth-quarter volumes were flat as customers reduced inventories and became more cautious.
- Net income attributable to PPG increased by $326 million, while diluted EPS benefited from both higher earnings and share repurchases.
- The effective tax rate fell primarily because of tax planning, geographic earnings mix, a $12 million favorable tax audit settlement and the absence of the $85 million 2010 charge related to U.S. healthcare legislation.
- Operating cash flow improved despite a $212 million working-capital investment associated with sales growth.
- Debt declined following repayment of the $400 million term loan, while interest expense increased by $21 million because of the 2010 $1 billion notes issuance.
- Environmental remediation reserves declined to $226 million from $272 million, but environmental cash outlays increased to $59 million from $34 million.
- PPG completed the Equa-Chlor acquisition in 2011 and completed the Dyrup and Colpisa acquisitions in January 2012 for a combined cost, including assumed debt, of $193 million.
Guidance, outlook, commentary and risks
- Management expected overall 2012 demand to be higher than 2011, with stronger North American activity, continued but more erratic emerging-market growth and mild European contraction in early 2012.
- Additional 2012 pricing actions were planned to recover coatings margin lost to raw-material inflation. Full-year raw-material pricing remained difficult to forecast.
- Management expected 2012 capital spending of $450 million to $550 million, pension contributions of approximately $130 million to $150 million, and an ongoing tax rate of approximately 25% to 26%.
- PPG expected to spend $250 million to $500 million on share repurchases in 2012 and targeted year-end cash and short-term investments below $1 billion after acquisitions and other capital deployment.
- Major operating risks include raw-material and energy-price volatility, supply disruptions, foreign-exchange movements, uneven global demand, European weakness, construction-market softness, customer destocking and business interruptions.
- Environmental reserves may require adjustment as investigations and remediation plans progress, particularly at New Jersey Chrome and the Calcasieu River Estuary. Management estimated reasonably possible unreserved environmental losses of $200 million to $400 million.
- PPG’s proposed asbestos settlement remained subject to bankruptcy-court approval and appeals. If effective, PPG would contribute approximately $825 million in cash over time plus stock and other assets; failure of the settlement could expose PPG to renewed asbestos litigation.
- The Natrium, West Virginia mercury-cell and boiler operations faced regulatory uncertainty. Potential boiler-related capital improvements at Natrium were estimated at $15 million to $20 million.
- Pension and other postretirement obligations were significant: the pension funded-status deficit was $951 million and the other-postretirement-benefit liability was $1,394 million at year-end.
Most important facts for an investor to verify
- Whether pricing actions continue to offset coatings raw-material inflation and whether segment margins improve in 2012.
- The timing, approval status and ultimate cash and stock funding requirements of the proposed asbestos settlement.
- Updates to New Jersey Chrome, Calcasieu River Estuary and other environmental remediation reserves and cash outlays.
- Execution and financing effects of the Dyrup and Colpisa acquisitions and any additional 2012 acquisitions.
- Debt maturities, including approximately $600 million of notes due in 2013, and the planned refinancing strategy.
- The effect of pension discount rates, asset returns and required contributions on future earnings and cash flow.
- Actual fourth-quarter and subsequent demand trends, particularly customer destocking, European activity, marine coatings and construction-related markets.
- The filing’s audited financial statements and internal-control report, both of which received unqualified opinions from Deloitte & Touche LLP.