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PPG > SEC Filings for PPG > Form 10-Q on 24-Apr-2014All Recent SEC Filings

Show all filings for PPG INDUSTRIES INC

Form 10-Q for PPG INDUSTRIES INC


24-Apr-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Discontinued Operations
On March 31, 2014, the Company completed the sale of its 51% ownership interest in its Transitions Optical joint venture and 100% of its sunlens business to Essilor International (Compagnie Generale D'Optique) SA ("Essilor"). The results of operations and cash flows of these businesses for the quarter ended March 31, 2014 and the net gain on the sale are reported as results from discontinued operations for the quarter ending March 31, 2014. For prior periods presented, the results of operations and cash flows of these businesses have been reclassified from continuing operations and presented as results from discontinued operations.
On January 28, 2013, PPG completed the separation of its commodity chemicals business and the merger of the subsidiary holding the PPG commodity chemicals business with a subsidiary of the Georgia Gulf Corporation. The combined company formed by uniting Georgia Gulf with PPG's former commodity chemicals business is named Axiall Corporation. PPG holds no ownership interest in Axiall. The results of operations and cash flows of the commodity chemicals business for the month of January 2013 and the net gain from the separation are presented as results from discontinued operations.
See Note 4, "Discontinued Operations" in Item 1 - Financial Statements, for additional information relating to these transactions.
Performance in First Quarter of 2014 Compared to First Quarter of 2013 Performance Overview
Net sales increased $528 million, or 17% from the first quarter of 2013, to $3,636 million primarily due to sales from acquired businesses (12%), higher sales volumes (5%) and higher selling prices (1%). Total first quarter net sales from continuing operations of $3,636 million were up 17% versus the previous year's $3,108 million. Acquired businesses added about $360 million, or 12%, in the quarter, related primarily to the North American architectural coatings acquisition. Year-over-year volumes grew by 5% versus the prior year's quarter. All three reportable business segments achieved higher year-over-year volumes. Pricing advanced 1% in aggregate, with a focus on countering wage, transportation and energy cost inflation. Currency translation was a slight negative, with results mixed greatly by region. Versus the prior year, the Euro strengthened against the U.S. dollar, but many other currencies, primary in emerging regions, weakened against the dollar.
Aggregate global coatings segment volumes improved 5%, representing the company's largest year-over-year volume gain in three years. Volumes in each major region continued to improve versus recent quarters. Volumes grew 7% in the United States and Canada in comparison to the prior year. Year-over-year volume trends also improved considerably in comparison with the prior sequential quarter. Despite negative weather impacts, most businesses delivered higher volumes in the region as economic conditions remain solid. Year-over-year European volume performance continued a multi-quarter improvement trend, advancing 4%, and reflecting the early stages of economic recovery in the region. The volume results were mixed by industry and country and region, with automotive OEM and architectural coatings-EMEA delivering the highest growth, the latter of which benefited from favorable painting weather in the quarter. Emerging-region volume grew by 2%. Volume results were also mixed by country and industry. Higher automotive OEM and industrial coatings demand aided performance in Asia, including China and Latin America. Asian marine new-build volumes remained negative, although the decline was modest versus previous quarters as the market is demonstrating continued signs of stability at a lower activity level. Excluding the marine new-build business, emerging region volumes grew by 4%, a pace of growth consistent with recent quarters.
Cost of sales, exclusive of depreciation and amortization, increased $229 million, or 12% from the first quarter of 2013, to $2,091 million primarily due to the inclusion of cost of sales from acquired businesses partially offset by lower manufacturing costs. Cost of sales as a percentage of sales decreased to 57.5% in the first quarter of 2014 from 59.9% in the first quarter of 2013. Selling, general and administrative expenses increased $154 million, or 21% from the first quarter of 2013, to $900 million primarily due to the inclusion of acquired businesses and overhead cost inflation partly offset by the impact of our continued focus on increased productivity and efficiency, including impacts from restructuring actions. Selling, general and administrative expenses as a percentage of sales increased slightly to 24.8% in the first quarter of 2014 from 24.0% in the first quarter of 2013 primarily due to the addition of acquired businesses which have higher distribution related costs.


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The effective tax rate on pre-tax earnings from continuing operations for the quarter ended March 31, 2014 was 24% compared to 18% in the first quarter of 2013. The increase is primarily due to an after-tax benefit of $10 million for the retroactive impact of U.S. tax law changes that were enacted in early 2013 and included in the first quarter 2013 effective tax rate. We expect our ongoing tax rate in 2014 to be in the range of 23.5% to 24.5%. Because of the differences in the tax rates in the countries in which we operate, a shift in the geographic mix of earnings will impact our overall ongoing tax rate. See the Regulation G reconciliation below for details of PPG's adjusted effective tax rate from continuing operations.
Diluted earnings-per-share for the three months ended March 31, 2014 were $8.97, comprised of net income from continuing operations of $1.97 and discontinued operations, net of tax of $7.00. These diluted earnings per share from continuing operations compare to $1.29 in the first quarter of 2013. The increase in diluted earnings-per-share from continuing operations was aided by the benefits of prior cash deployment, as the achievement of targeted synergies has combined with the implementation of our restructuring plans. Also, the Company is benefiting from shares repurchased in 2013 as well as the over one million shares of stock repurchased during the first quarter of 2014. Looking to the second quarter, the Company anticipates global growth to continue, but it will not be uniform across geographies or industries. PPG remains well-positioned with a balanced coatings portfolio, both regionally and by industry, providing broad growth opportunities while minimizing the impact of any individual fluctuations.
Regulation G Reconciliation - Results from Operations PPG believes investors' understanding of the Company's operating performance is enhanced by the disclosure of net income before income taxes, PPG's effective income tax rate, tax expense, net income from continuing operations and earnings per diluted share adjusted for nonrecurring charges. PPG's management considers this information useful in providing insight into the Company's ongoing operating performance because it excludes the impact of items that cannot reasonably be expected to recur on an ongoing basis. PPG's management considers this information useful in providing insight into the company's ongoing operating performance because it excludes the impact of items that cannot reasonably be expected to recur on an ongoing basis. Income before income taxes, the effective tax rate, tax expense, net income from continuing operations and earnings per diluted share adjusted for these items are not recognized financial measures determined in accordance with U.S. generally accepted accounting principles ("GAAP") and should not be considered a substitute for income before income taxes, the effective tax rate, tax expense, net income from continuing operations or earnings per diluted share or other financial measures as computed in accordance with U.S. GAAP. In addition, adjusted income before income taxes, adjusted effective tax rate, adjusted tax expense, adjusted net income from continuing operations and adjusted earnings per diluted share from continuing operations may not be comparable to similarly titled measures as reported by other companies.
The effective tax rate from continuing operations is reconciled to the adjusted effective tax rate from continuing operations below:

Three months ended March 31, 2014
                                                        Income Before                       Effective Tax
 (Millions, except per share amounts)                   Income Taxes        Tax Expense         Rate
Effective tax rate, continuing operations             $           372     $          89         23.9 %
Includes:
Charges related to business acquisitions                            3                 1         37.6 %
Adjusted effective tax rate, continuing operations,
excluding certain charges                             $           375     $          90         24.0 %


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Three months ended March 31, 2013
                                                        Income Before                       Effective Tax
 (Millions, except per share amounts)                   Income Taxes        Tax Expense         Rate
Effective tax rate, continuing operations             $           241     $          44         18.3 %
Includes:
Legacy pension costs                                               18                 5         26.7 %
Environmental remediation costs                                    12                 4         37.4 %
Charges related to business acquisitions                            6                 1         26.0 %
Retroactive benefit of U.S. tax law change                                           10
Adjusted effective tax rate, continuing operations,
excluding certain charges                             $           277     $          64         23.1 %

Net income (attributable to PPG) and earnings-per-share - assuming dilution (attributable to PPG) are reconciled to adjusted net income (attributable to PPG) and adjusted earnings-per-share - assuming dilution below:

Three Months ended March 31, 2014             Continuing Operations
(Millions, except per share amounts)          Net Income         EPS
Net income (attributable to PPG)                       $277     $1.97
Net income (attributable to PPG) includes:
Acquisition-related costs                                 2      0.01
Adjusted net income                                    $279     $1.98



Three Months ended March 31, 2013             Continuing Operations
(Millions, except per share amounts)          Net Income        EPS
Net income (attributable to PPG)                     $191      $1.29
Net income (attributable to PPG) includes:
Legacy pension and environmental costs                 21       0.14
Acquisition-related costs                               5       0.03
Retroactive benefit of U.S. tax law change            (10 )    (0.07 )
Adjusted net income                                  $207      $1.39

Performance of Reportable Business Segments In the first quarter of 2014, PPG changed its reportable business segment structure from the five segments of Performance Coatings, Industrial Coatings, Architectural Coatings - Europe, Middle East and Africa (EMEA), Optical and Specialty Materials and Glass to three segments. The three reportable business segments and their respective businesses are as follows:
• Performance Coatings - aerospace, architectural coatings Americas and Asia-Pacific, architectural coatings - EMEA, automotive refinish, and protective and marine coatings

• Industrial Coatings - automotive OEM coatings, industrial coatings, packaging coatings, and specialty coatings and materials

• Glass - fiber glass and flat glass

Performance Coatings
Performance Coatings net sales increased $429 million, or 27%, from the first quarter of 2013, to $2,007 million primarily due to net sales from the North American architectural coatings acquisition. Segment volumes, excluding acquisitions, advanced 3% as year-over-year volume trends improved in all major regions, with the largest gains achieved in Europe. Volume performance in each region also improved sequentially versus the fourth quarter. Strong segment income contributions were realized on the improved volumes, stemming from the lower cost base of the businesses.


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Architectural coatings EMEA was the primary contributor to higher net sales in Europe, as volumes improved mid-single digit percentages aided by partial demand recovery and favorable weather conditions, and in comparison with weak prior year levels. Despite the improvement, activity remained inconsistent within the region as demand in certain countries remained at depressed levels. End-market recovery is expected to continue in the coming quarters, but remain mixed by individual country.
The aerospace and refinish businesses both delivered higher volumes in each major region. Demand trends in the overall aerospace industry continued to remain favorable globally. Refinish growth was supported by increasing emerging region activity and partial demand recovery in Europe. Both businesses are expected to experience continued positive trends in the second quarter. Protective and marine net sales grew in the quarter primarily due to increased sales of PPG protective coatings products which are sold through the acquired North American architectural stores. The protective coatings gains were offset by continued weakness in Asian marine new-build activity, although the marine new-build market stabilized as first quarter sales remained consistent with recent quarters.
Excluding the positive acquisition-related impacts, North American architectural coatings net sales grew modestly versus solid prior year results. Inclement weather tempered painting activity in the region, and year-over-year results were mixed by architectural distribution channel. The national retail channel improved slightly. Same store sales for company-owned stores also improved, including the benefit from a price increase that was implemented in the quarter. However, this price benefit was partly offset by lower sales to independent distributors. Overall North American architectural coatings market conditions are expected to remain favorable, despite limited evidence of a uniform recovery in non-residential construction.
The acquired North American architectural coatings business's sales were approximately $350 million, delivering a mid-single digit percent return on sales, which is a notable improvement from the prior year pre-acquisition results. First quarter segment income increased $56 million, or 29% from the first quarter of 2013, to $248 million primarily due to the increase in organic net sales and income from business acquisitions. The improved segment income was a result of further realization of cost synergies, with additional synergies expected to be achieved in future quarters. PPG completed the North American architectural coatings acquisition on April 1, 2013, so the financial results of this acquisition will no longer be classified as acquisition related beginning with the second quarter 2014.
Industrial Coatings
Industrial Coatings segment net sales increased $89 million, or 7% from the first quarter of 2013, to $1,363 million primarily due to volume growth. First quarter segment income increased $33 million, or 17% from the first quarter of 2013, to $231 million also primarily due to volume growth. PPG's global automotive OEM business grew net sales by 10% year-over-year, continuing a multi-quarter trend of outperforming global industry growth which was about four percent in the quarter. PPG continues to benefit from adoption of new technologies and ongoing focus on customer service and customer process improvement initiatives. Industry growth is projected to continue in the second quarter, with more modest growth rates in Europe and North America. We anticipate our results will continue to pace ahead of the industry. Growth accelerated in the industrial coatings business versus recent quarters, aided by continued North American and emerging region strength, while European demand remained slightly negative year-over-year. Packaging coatings demand also remained weaker in Europe, but generally stable in the remaining regions. Specialty coatings and materials net sales grew year-over-year aided by improved volumes in precipitated silicas and Teslin®, electronics and optical materials. Demand in the overall general industrial markets PPG supplies is expected to grow in the second quarter, including further recovery in Europe and continued emerging region gains. North American end-markets continue to exhibit the most consistent growth patterns across these businesses. Glass
First quarter net sales for the Glass segment increased $10 million, or 4% from the first quarter of 2013, to $266 million primarily due to higher volumes in fiber glass, with continued demand improvement resulting in low inventories of certain products. Volumes in flat glass were mixed with higher residential-related volumes and mixed U.S. geographic results in non-residential construction, partly due to inclement weather. Flat glass pricing was higher year-over-year. Segment income decreased $1 million, or 20% from the first quarter 2013, to $4 million as the benefit of improved volumes was more than offset by $12 million of higher maintenance costs stemming from scheduled projects. Higher natural gas-based energy costs were also a negative factor in the income comparison.
Looking ahead, segment sales typically improve seasonally versus the first quarter. Global fiber glass demand is expected to remain strong, including improved conditions in Europe. Flat glass demand is also anticipated to improve, contributing to increased sales from higher pricing. Remaining maintenance project costs are expected to decrease


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segment income by $3 million versus the prior year. Natural gas costs are expected to moderate versus the first quarter based on current pricing, but still be higher year-over-year.
Liquidity and Capital Resources
PPG ended the quarter with cash and short-term investments of $3.0 billion, an increase of $1.3 billion from December 31, 2013, primarily due to the receipt of $1.735 billion in gross cash proceeds in connection with the closing of the sale of its ownership interest the Transitions Optical and sunlens businesses (See Note 4).
Cash from continuing operating activities for the three months ended March 31, 2014 was $130 million compared to cash used for continuing operations $132 million for the comparable period of 2013. The change was primarily due to improved working capital and higher income from continuing operations. Other sources and uses of cash during the three months ended March 31, 2014 included:
• Capital expenditures from continuing operations, excluding acquisitions, were $103 million, or about 3% of sales. Anticipated 2014 capital spending is expected to be in the range of $500 million to $600 million.

• Cash dividends paid totaled $85 million.

• Cash paid for share repurchases totaled $200 million.

We believe that our cash and short term investments on hand, cash from operations and the Company's available debt capacity will continue to be sufficient to fund operating activities, capital spending, including acquisitions, dividend payments, debt service, amounts due under the proposed asbestos settlement, share repurchases and contributions to pension plans. We intend to deploy our cash in a timely, disciplined manner with a continued emphasis on incremental earnings accretion initiatives, including additional acquisitions and share repurchases. We intend to deploy between $3.0 billion to $4.0 billion of incremental cash over the 2014 and 2015 calendar years. The ratio of total debt, including capital leases, to total debt and PPG shareholders' equity was 36% at March 31, 2014 and 41% at December 31, 2013. Operating Working Capital is a subset of total working capital and represents
(1) trade receivables - net of the allowance for doubtful accounts plus
(2) inventories on a first-in, first-out ("FIFO") basis less (3) trade creditors' liabilities. We believe Operating Working Capital represents the key components of working capital under the operating control of our businesses. A key metric we use to measure improvement in our working capital management is Operating Working Capital as a percentage of sales (current quarter sales annualized).

                                                                      Dec. 31        March 31,
(Millions, except percentages)                    March 31, 2014        2013            2013
Trade Receivables, Net                                  $2,669         $2,449          $2,594
Inventories, FIFO                                        2,114          2,019           1,895
Trade Creditors' Liabilities                             2,029          1,790           1,652
Operating Working Capital                               $2,754         $2,678   (a)    $2,837   (a)
Operating Working Capital as a % of Sales                 18.9 %         18.1 %          21.3 %


(a) Inclusive of amounts related to PPG's interest in the Transitions Optical joint venture and sunlens businesses that were sold on March 31, 2014.

The increase in operating working capital elements was primarily due to an increase in trade receivables in the first quarter 2014 compared with the fourth quarter 2013 and a FIFO inventory build in our coatings businesses in advance of the summer paint season. Days sales outstanding at March 31, 2014 were 60 days, which was a five day increase from December 31, 2013 and a three day decrease over March 31, 2013 (both comparisons exclude sales and receivables of the former Transitions Optical and sunlens businesses). Currency
From December 31, 2013 to March 31, 2014, the U.S. dollar weakened against certain of the the currencies in countries in which PPG operates while strengthening against others. As a result, consolidated net assets at March 31, 2014 increased by $16 million compared to December 31, 2013.


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New Accounting Standards
See Note 2, "New Accounting Standards," to the accompanying condensed consolidated financial statements for further details on recently issued accounting guidance.
Commitments and Contingent Liabilities, including Environmental Matters

PPG is involved in a number of lawsuits and claims, both actual and potential, including some that it has asserted against others, in which substantial monetary damages are sought. See Part II, Item 1, "Legal Proceedings" of this Form 10-Q and Note 16, "Commitments and Contingent Liabilities," to the accompanying condensed consolidated financial statements for a description of certain of these lawsuits, including a description of the proposed asbestos settlement.

As discussed in Part II, Item 1 and Note 16, although the result of any future litigation of such lawsuits and claims is inherently unpredictable, management believes that, in the aggregate, the outcome of all lawsuits and claims involving PPG, including asbestos-related claims in the event the proposed asbestos settlement described in Note 16 does not become effective, will not have a material effect on PPG's consolidated financial position or liquidity; however, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized.
As also discussed in Note 16, PPG has significant reserves for environmental contingencies. As of March 31, 2014 and December 31, 2013, PPG had reserves for environmental contingencies totaling $273 million and $310 million, respectively, of which $105 million was classified as a current liability at both balance sheet dates. Pre-tax charges against income from continuing operations for environmental remediation costs totaled $2 million and $13 million, respectively, for the three months ended March 31, 2014 and 2013, and are included in "Other charges" in the accompanying condensed consolidated statement of income. Included in the 2013 environmental remediation expense is a charge of $12 million for remediation costs at a legacy chemical manufacturing site. Cash outlays related to all environmental remediation aggregated $39 million and $23 million, respectively, for the three months ended March 31, 2014 and 2013.
The Company continues to analyze, assess and remediate the environmental issues associated with New Jersey Chrome. There are currently no amounts for groundwater remediation in our environmental reserves as of March 31, 2014. Information will continue to be generated from the ongoing groundwater remedial investigation activities related to New Jersey Chrome and will be incorporated into a final draft remedial action work plan for groundwater expected to be submitted to NJDEP in 2014.

Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company. Management's Discussion and Analysis and other sections of this Quarterly Report contain forward-looking statements that reflect the Company's current views with respect to future events and financial performance.
You can identify forward-looking statements by the fact that they do not relate strictly to current or historic facts. Forward-looking statements are identified by the use of the words "aim," "believe," "expect," "anticipate," "intend," "estimate," "project," "outlook," "forecast" and other expressions that indicate future events and trends. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward looking statement, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our reports to the Securities and Exchange Commission. Also, note the following cautionary statements. Many factors could cause actual results to differ materially from the Company's forward-looking statements. Such factors include global economic conditions, increasing price and product competition by foreign and domestic competitors, fluctuations in cost and availability of raw materials, the ability to maintain favorable supplier relationships and arrangements, the realization of anticipated cost savings from restructuring initiatives, difficulties in integrating acquired businesses and achieving expected synergies therefrom, economic and political conditions in international markets, the ability to penetrate existing, developing and emerging foreign and domestic markets, foreign exchange rates and fluctuations in such rates, fluctuations in tax rates, the impact of future legislation, the impact of environmental regulations, unexpected business disruptions and the unpredictability of existing and possible future litigation, including litigation that could result if the proposed asbestos settlement does not become effective. However, it is not possible to predict or identify all such factors.


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While the list of factors presented here and in the Company's Form 10-K for the year ended December 31, 2013 under the caption "Item 1A Risk Factors" are . . .

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