PPG Industries, Inc. 2013 Form 10-K Summary
Business context and reporting period
PPG manufactures and distributes coatings, optical and specialty materials, and glass products through five reportable segments: Performance Coatings, Industrial Coatings, Architectural Coatings–EMEA, Optical and Specialty Materials, and Glass. The filing covers the fiscal year ended December 31, 2013; fourth-quarter information is included in the filing but this is an annual Form 10-K.
PPG completed the separation of its commodity chemicals business into Axiall on January 28, 2013, and acquired Akzo Nobel’s North American architectural coatings business on April 1, 2013. The acquired business contributed approximately $1.2 billion of 2013 sales from the acquisition date.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $15,108 million | $13,512 million | Up 12% |
| Income from continuing operations | $1,156 million | $836 million | Up 38% |
| Net income attributable to PPG | $3,231 million | $941 million | Up materially, primarily from discontinued operations |
| Diluted EPS | $22.27 | $6.06 | Up materially |
| Diluted EPS from continuing operations | $7.13 | $4.69 | Up 52% |
| Cash from continuing operating activities | $1,809 million | $1,576 million | Up 15% |
Cost of sales declined to 57.2% of sales from 58.5%, implying an improvement in gross margin to approximately 42.8% from 41.5%. Selling, general and administrative expense increased to 24.5% of sales from 23.7%, reflecting acquired-business distribution costs and overhead inflation. The reported continuing-operations effective tax rate was 22.4%, compared with 20.9% in 2012; the adjusted rate excluding specified unusual items was 24.3%.
Fourth-quarter 2013 net sales were $3,702 million, compared with $3,243 million in the prior-year quarter. Net income attributable to PPG from continuing operations was $254 million, or $1.78 diluted EPS, compared with $191 million, or $1.23 diluted EPS, in fourth-quarter 2012.
Segment results
| Segment | 2013 sales | 2013 segment income | Change in segment income |
|---|---|---|---|
| Performance Coatings | $5,872 million | $858 million | Up 15% |
| Industrial Coatings | $4,845 million | $724 million | Up 23% |
| Architectural Coatings–EMEA | $2,062 million | $184 million | Up 27% |
| Optical and Specialty Materials | $1,262 million | $368 million | Up 6% |
| Glass | $1,067 million | $56 million | Down 11% |
Aggregate sales volume was approximately flat excluding acquisitions. North American and Latin American volumes increased nearly 3%, European volumes declined 4%, and marine new-build demand remained weak. Automotive OEM coatings volumes grew 10%, exceeding estimated global automotive production growth of approximately 3%.
Cash flow, liquidity, debt and capital allocation
- Cash and cash equivalents were $1,116 million and short-term investments were $629 million at year-end, totaling approximately $1.745 billion.
- Total debt including capital leases was $3,376 million, down from $3,971 million. Debt represented 41% of total debt and equity, compared with 50% in 2012.
- PPG repaid $600 million of 5.75% notes in March 2013 and had no borrowings under its $1.2 billion unsecured revolving credit facility at year-end. The facility can be increased by up to $300 million subject to conditions.
- Capital expenditures were $515 million, while acquisition spending was $983 million. Capital spending excluding acquisitions is expected to be $500 million to $600 million in 2014.
- PPG repurchased 5.7 million shares for approximately $1.0 billion in 2013 and paid $345 million in dividends. Approximately 2.2 million shares remained available under the repurchase authorization at year-end.
- Operating working capital decreased to $2.678 billion from $2.878 billion; operating working capital as a percentage of annualized fourth-quarter sales improved to 18.1% from 19.7%.
Material changes versus the prior comparable period
- Net sales growth was driven primarily by acquisitions, particularly the North American architectural coatings acquisition, while organic volume was flat.
- Continuing-operations earnings benefited from acquired businesses, restructuring savings, lower manufacturing and overhead costs, and reduced share count.
- The commodity chemicals separation generated a $2.2 billion pretax gain, reported in discontinued operations. Discontinued operations contributed $2.197 billion after tax in 2013, compared with $228 million in 2012.
- PPG recorded a $98 million restructuring charge in 2013, targeting approximately $100 million of annual savings. The company expected $75 million to $90 million of savings from this program in 2014.
- Environmental remediation charges were $108 million in 2013, including an $89 million adjustment related primarily to the former New Jersey chromium manufacturing site, versus $166 million in 2012.
- The company’s pension and other postretirement benefit liabilities declined following the commodity chemicals separation, plan reorganization, and favorable actuarial changes. Cash contributions to defined benefit plans were $174 million in 2013.
Guidance, outlook, risks and unusual items
Management expected modest global growth in 2014, with the broadest growth in the United States, solid growth in selected emerging markets, and stabilization but continued fragility in Europe. Coatings raw material prices were expected to increase modestly. The expected ongoing 2014 tax rate was 24.5% to 25.5%, and pension contributions were expected to be approximately $10 million to $25 million.
Management announced plans to deploy $3.0 billion to $4.0 billion of incremental cash over 18 to 24 months beginning in January 2014, supported by expected strong free cash flow and approximately $1.5 billion of after-tax proceeds from the pending sale of Transitions Optical to Essilor. The transaction, announced in 2013, had an enterprise value of approximately $3.4 billion and remained subject to regulatory approval and other closing conditions at year-end. PPG expected to account for Transitions Optical as discontinued operations after approval.
- Environmental remediation reserves were $310 million at year-end, with additional reasonably possible unreserved environmental losses estimated at $100 million to $200 million.
- The proposed asbestos settlement was not yet effective because appeals remained possible. The recorded asbestos settlement obligation was $1.008 billion, including $763 million current and $245 million noncurrent.
- PPG faces risks from raw-material availability and pricing, energy costs, foreign exchange, global economic weakness, competition, regulatory compliance, environmental matters, litigation, cybersecurity, and acquisition integration.
- Glass results faced higher natural gas and transportation costs; a scheduled flat-glass tank maintenance project was expected to reduce first-quarter 2014 segment income by approximately $10 million.
- Management stated that financial statements and internal controls were effective, although the recently acquired Akzo Nobel business, representing approximately 5% of consolidated assets and 8% of revenue, was excluded from the 2013 internal-control assessment as permitted for recently acquired businesses.
Most important facts for investors to verify
- Separate recurring continuing-operations performance from the $2.2 billion discontinued-operations gain and the pending Transitions Optical divestiture.
- Verify the sustainability of acquisition-related growth, restructuring savings, and the planned $3.0 billion to $4.0 billion cash deployment.
- Review the final closing, regulatory approvals, proceeds, and accounting treatment of the Transitions Optical transaction.
- Assess exposure to New Jersey Chrome remediation, the $100 million to $200 million of unreserved environmental contingencies, and the asbestos settlement appeals and funding date.
- Monitor raw-material and energy inflation, European demand, marine new-build weakness, foreign exchange, and the Glass segment’s operating recovery.
- Reconcile debt, contractual obligations, liquidity, pension funding, dividends, and share repurchases against projected cash flow and acquisition spending.