PPG Industries, Inc. — Q1 2011 Form 10-Q Summary
Business Context and Reporting Period
PPG Industries is a multinational manufacturer operating through six reportable segments: Performance Coatings, Industrial Coatings, Architectural Coatings–EMEA, Optical and Specialty Materials, Commodity Chemicals, and Glass. This unaudited report covers the three months ended March 31, 2011, compared with the three months ended March 31, 2010. The filing was signed May 2, 2011.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $3,533 million | $3,126 million | +13% |
| Income before income taxes | $351 million | $206 million | +$145 million |
| Net income attributable to PPG | $228 million | $30 million | +$198 million |
| Diluted earnings per share | $1.40 | $0.18 | +$1.22 |
| Dividends per share | $0.55 | $0.54 | +$0.01 |
| Cash used in operating activities | $156 million | $54 million | Higher use of cash |
| Capital spending | $54 million | $45 million | +$9 million |
| Cash and cash equivalents at period-end | $796 million | $689 million | Compared with prior-year period-end |
Net margin was approximately 6.5% in Q1 2011 versus approximately 1.0% in Q1 2010. Cost of sales declined to approximately 60% of sales from 62%, while selling, general and administrative expense declined to 22.6% of sales from 23.3%. The effective tax rate was approximately 26%, compared with approximately 71% in Q1 2010.
At March 31, 2011, cash and short-term investments totaled approximately $1.4 billion. Total debt, including current maturities, was approximately $4.1 billion, and the ratio of total debt to total debt and equity was 52%, compared with 53% at December 31, 2010. Long-term debt had a carrying value of $4.034 billion and a fair value of $4.358 billion.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected approximately 6% higher volumes, 6% higher selling prices, and the remainder from favorable foreign currency translation. All reporting segments and major geographic regions reported higher volumes.
- Segment income increased to $480 million from $321 million. Commodity Chemicals improved to $97 million from $3 million, and Glass improved to $26 million from a $3 million loss.
- Performance Coatings segment income increased to $139 million from $127 million; Industrial Coatings increased to $116 million from $101 million; Architectural Coatings–EMEA increased to $12 million from $11 million; and Optical and Specialty Materials increased to $90 million from $82 million.
- Interest expense increased to $53 million from $45 million, primarily due to the $1 billion debt issuance in November 2010.
- Operating cash flow worsened because of seasonal working-capital increases and pension contributions of approximately $101 million, compared with $20 million in the prior-year quarter.
- The Q1 2010 results included an $85 million after-tax charge, or $0.51 per share, from a change in U.S. tax law affecting the deductibility of retiree medical costs. No comparable charge occurred in Q1 2011.
- PPG repurchased 3.2 million shares for approximately $283 million during the quarter. More than 6 million shares remained available under the repurchase authorization at March 31, 2011.
Guidance, Outlook, Commentary, and Risks
- Management expected current economic trends to continue into Q2 2011, which is typically the company’s strongest seasonal quarter.
- Additional pricing actions were planned across the businesses to offset persistent raw-material inflation, particularly in coatings. Management also emphasized cost control, operational excellence, and raw-material substitution.
- Industrial Coatings sales were expected to be negatively affected by Japan earthquake and tsunami-related automotive supply-chain disruptions, with estimated Q2 sales impact of 3% to 6%. Management expected some production recovery in Q3 and most of the recovery in Q4.
- Commodity Chemicals planned higher pricing, but scheduled Q2 downtime was expected to reduce production by approximately 15,000 tons and increase maintenance costs.
- 2011 capital spending was expected to remain between 2.5% and 3.5% of sales. PPG expected to repay a $400 million term loan in Q2 2011 using cash on hand and anticipated several small to mid-sized bolt-on acquisitions during the following six to nine months.
- PPG expected mandatory contributions to non-U.S. pension plans of approximately $75 million in 2011, with $51 million contributed by March 31. The company had no mandatory U.S. defined-benefit contribution for 2011 but made a voluntary $50 million contribution in January.
- The proposed asbestos settlement remained subject to final court approval and appeals. The recorded asbestos obligation was $840 million, including $594 million current and $246 million noncurrent. If implemented, PPG would make approximately $825 million of cash payments through 2023 and transfer specified stock or cash and other assets to the trust.
- Environmental remediation reserves totaled $264 million. Additional reasonably possible but unreserved environmental losses were estimated at $200 million to $400 million. Expected environmental cash outlays were approximately $90 million in 2011 and $50 million to $70 million annually through 2014.
- Other risks included raw-material availability and pricing, global economic conditions, foreign exchange, acquisitions and integration, environmental regulation, litigation, tax-law changes, and business disruptions. Management stated that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether price increases continue to offset raw-material inflation, especially in the coatings businesses.
- The magnitude and timing of automotive production disruption and recovery following the Japan earthquake and tsunami.
- Operating cash-flow conversion as seasonal working-capital needs normalize and pension contributions decline.
- Liquidity after the planned $400 million term-loan repayment, share repurchases, acquisitions, dividends, and potential asbestos funding.
- Final approval and effective date of the proposed asbestos settlement, including the treatment of non-PC-related asbestos claims.
- Changes in environmental remediation estimates, particularly for the New Jersey chromium sites and Calcasieu River Estuary.
- Progress toward planned acquisitions and whether leverage remains consistent with management’s stated capital-allocation priorities.