10.17.13
PPG Industries reported third quarter 2013 net sales of $4 billion, up 17 percent versus the prior year. Third quarter 2013 reported net income from continuing operations was $220 million, or $1.52 per diluted share, and adjusted net income from continuing operations was $353 million, or $2.44 per diluted share. Third quarter 2012 reported net income and earnings per diluted share from continuing operations were $288 million and $1.86, respectively. There were no nonrecurring charges in the prior-year quarter.
Third quarter 2013 adjusted net income excludes after-tax charges of $73 million, or 50 cents per diluted share, for previously announced business restructuring; $56 million, or 39 cents per diluted share, due to an increase in a legacy environmental reserve; and $4 million, or 3 cents per diluted share, for acquisition-related expenses. A Regulation G Reconciliation of third quarter 2013 adjusted net income and earnings per diluted share to reported net income and earnings per diluted share is included below.
Third quarter 2013 reported and adjusted net income include lower pension expenses resulting from a reorganization of certain company pension plans, which occurred as a part of recently completed separation activities of the former commodity chemicals business. These changes resulted in a catch-up benefit recorded in the third quarter of about $9 million pretax, $6 million after tax, or a total of 4 cents per diluted share, which relates to the first half 2013 reporting periods. This benefit will recur, adding about $4 million to pretax income each quarter going forward.
“We continued to deliver record financial performance in the third quarter as positive impacts from our cash deployment and our strong operating focus were coupled with a broader improvement in market conditions,” said Charles E. Bunch, PPG chairman and chief executive officer. “Aerospace and automotive OEM coatings remained PPG’s most consistent growth drivers, with many other businesses contributing to the overall sales and earnings growth.
“In comparison with recent quarters, year-over-year sales volume trends improved in each major region during the quarter, including some initial signs of stability in Europe,” Bunch said. “We continued our cost-reduction actions and benefited from these improving demand trends, which helped us deliver record third quarter earnings in each major region.
“Performance within the North American architectural coatings business acquired from AkzoNobel continued to improve, and we remained aggressive in capturing our targeted synergies,” Bunch said. “Within the six months following the transaction closing, we already realized, on a run-rate basis, more than 50 percent of the targeted $200 million of acquisition synergies. While there remains considerable work ahead, I am pleased with the team’s excellent progress to date.”
Looking ahead, Bunch said, “We expect to continue to benefit from the gradual growth in global demand trends. The fourth quarter is seasonally slower than the third quarter in many of our end-use markets, especially architectural coatings. We are expecting a larger magnitude of sequential seasonality this year as architectural coatings now represents a larger proportion of our revenues following our April acquisition.
“Regarding regional trends, we expect the U.S. economy will continue to grow in a measured manner supported by increasing demand in many markets we supply,” Bunch said. “Emerging-region growth is expected to continue but remain inconsistent by end-use market and country. In Europe, where our volumes are still down about 20 percent versus pre-recession levels, demand appears to be stabilizing and we remain poised to benefit from any volume improvement given the actions we have taken there to substantially reduce our ongoing cost structure.
“Lastly, we ended the quarter with a strong balance sheet and cash position, with additional free cash flow expected in the fourth quarter, which is typically our strongest cash-generation quarter seasonally. We remain focused, yet disciplined, on timely cash deployment for earnings accretion. We have repurchased about $325 million of PPG stock in the first nine months of this year, and we are increasing our targeted full-year share repurchase level toward the higher end of the previously communicated range of $500 million to $750 million, as we continue our heritage of returning cash to shareholders,” Bunch concluded.
The company today reported year-to-date cash from continuing operations of about $1.3 billion, approximately 25 percent ahead of the prior-year total. In addition, cash and short-term investments totaled about $2.2 billion as of Sept. 30, 2013, up from $2.0 billion at the end of the third quarter 2012.
Reporting segment financial results:
Performance Coatings segment net sales for the quarter were $1.6 billion, up 34 percent, or $409 million, versus the prior year due primarily to the addition of sales from acquired businesses. Segment volumes, excluding acquisitions, declined 2 percent, as the impact of lower marine new-build industry demand in Asia offset growth in all other businesses. Currency translation reduced sales by 1 percent. Aerospace net sales advanced more than 10 percent as continued strong end-use market demand gains were supplemented by sales from acquired businesses. Automotive refinish net sales grew, aided by strong emerging-region volume growth that offset negative currency impacts and a modest volume decline in Europe. North American architectural coatings net sales, excluding acquisitions, were up mid-single-digit percentages, reflecting consistently higher market demand. Segment earnings improved $49 million, or 24 percent, to $252 million as a result of acquired businesses’ earnings and lower costs that stemmed from business restructuring actions and ongoing cost management.
Industrial Coatings segment net sales for the quarter were $1.2 billion, advancing about 10 percent, or $109 million, versus the prior year due to higher volumes and modest acquisition-related gains. Volumes in automotive original equipment manufacturer (OEM) coatings grew by about 10 percent globally, with each major region delivering growth on a comparable scale. Global industrial coatings business unit volumes improved mid-single-digit percentages and volume trends improved in all regions in comparison with the first half of 2013. Global packaging coatings volumes grew modestly. Segment earnings for the quarter were $181 million, up 18 percent as a result of higher volumes and continued cost management.
Architectural Coatings – EMEA (Europe, Middle East and Africa) segment net sales for the quarter were $571 million, up $7 million, or 1 percent, versus the prior year as lower volumes offset favorable foreign currency translation. For the third quarter volumes declined by 4 percent year over year, which was a significant improvement versus the first half 2013 when volumes declined 10 percent year over year. Despite the lower volumes, segment earnings of $73 million represented growth of $17 million, or 30 percent, versus the prior year, aided by aggressive discretionary cost-management actions and lower costs, including benefits from prior restructuring actions. Currency translation contributed $2 million to segment earnings.
Third quarter 2013 Optical and Specialty Materials segment net sales were $313 million, up $31 million, or 11 percent, versus the prior year. Optical products net sales improved by low-double-digit percentages as volumes were aided by solid market trends and initial customer inventory stocking ahead of the TRANSITIONS(R) Generation VII product introduction in North America scheduled for early January 2014. Prior-year optical products results were tempered by customer inventory destocking, which aided the current-year comparative results. Silicas net sales improved by high-single-digit percentages on continued global strength in end-use market demand. Segment earnings of $88 million were up 16 percent versus the prior year as a result of the sales improvement.
Glass segment net sales were $278 million for the quarter, up $16 million year over year. Volumes grew modestly in both fiber glass and flat glass, reversing a negative trend from earlier in the year. Pricing also improved in flat glass. Segment earnings were $21 million, a decrease of $3 million from the prior-year quarter. The positive earnings impact from improved sales was offset by reduced equity and international licensing earnings and the negative impact of inflation, including higher transportation and natural gas unit costs.
Third quarter 2013 adjusted net income excludes after-tax charges of $73 million, or 50 cents per diluted share, for previously announced business restructuring; $56 million, or 39 cents per diluted share, due to an increase in a legacy environmental reserve; and $4 million, or 3 cents per diluted share, for acquisition-related expenses. A Regulation G Reconciliation of third quarter 2013 adjusted net income and earnings per diluted share to reported net income and earnings per diluted share is included below.
Third quarter 2013 reported and adjusted net income include lower pension expenses resulting from a reorganization of certain company pension plans, which occurred as a part of recently completed separation activities of the former commodity chemicals business. These changes resulted in a catch-up benefit recorded in the third quarter of about $9 million pretax, $6 million after tax, or a total of 4 cents per diluted share, which relates to the first half 2013 reporting periods. This benefit will recur, adding about $4 million to pretax income each quarter going forward.
“We continued to deliver record financial performance in the third quarter as positive impacts from our cash deployment and our strong operating focus were coupled with a broader improvement in market conditions,” said Charles E. Bunch, PPG chairman and chief executive officer. “Aerospace and automotive OEM coatings remained PPG’s most consistent growth drivers, with many other businesses contributing to the overall sales and earnings growth.
“In comparison with recent quarters, year-over-year sales volume trends improved in each major region during the quarter, including some initial signs of stability in Europe,” Bunch said. “We continued our cost-reduction actions and benefited from these improving demand trends, which helped us deliver record third quarter earnings in each major region.
“Performance within the North American architectural coatings business acquired from AkzoNobel continued to improve, and we remained aggressive in capturing our targeted synergies,” Bunch said. “Within the six months following the transaction closing, we already realized, on a run-rate basis, more than 50 percent of the targeted $200 million of acquisition synergies. While there remains considerable work ahead, I am pleased with the team’s excellent progress to date.”
Looking ahead, Bunch said, “We expect to continue to benefit from the gradual growth in global demand trends. The fourth quarter is seasonally slower than the third quarter in many of our end-use markets, especially architectural coatings. We are expecting a larger magnitude of sequential seasonality this year as architectural coatings now represents a larger proportion of our revenues following our April acquisition.
“Regarding regional trends, we expect the U.S. economy will continue to grow in a measured manner supported by increasing demand in many markets we supply,” Bunch said. “Emerging-region growth is expected to continue but remain inconsistent by end-use market and country. In Europe, where our volumes are still down about 20 percent versus pre-recession levels, demand appears to be stabilizing and we remain poised to benefit from any volume improvement given the actions we have taken there to substantially reduce our ongoing cost structure.
“Lastly, we ended the quarter with a strong balance sheet and cash position, with additional free cash flow expected in the fourth quarter, which is typically our strongest cash-generation quarter seasonally. We remain focused, yet disciplined, on timely cash deployment for earnings accretion. We have repurchased about $325 million of PPG stock in the first nine months of this year, and we are increasing our targeted full-year share repurchase level toward the higher end of the previously communicated range of $500 million to $750 million, as we continue our heritage of returning cash to shareholders,” Bunch concluded.
The company today reported year-to-date cash from continuing operations of about $1.3 billion, approximately 25 percent ahead of the prior-year total. In addition, cash and short-term investments totaled about $2.2 billion as of Sept. 30, 2013, up from $2.0 billion at the end of the third quarter 2012.
Reporting segment financial results:
Performance Coatings segment net sales for the quarter were $1.6 billion, up 34 percent, or $409 million, versus the prior year due primarily to the addition of sales from acquired businesses. Segment volumes, excluding acquisitions, declined 2 percent, as the impact of lower marine new-build industry demand in Asia offset growth in all other businesses. Currency translation reduced sales by 1 percent. Aerospace net sales advanced more than 10 percent as continued strong end-use market demand gains were supplemented by sales from acquired businesses. Automotive refinish net sales grew, aided by strong emerging-region volume growth that offset negative currency impacts and a modest volume decline in Europe. North American architectural coatings net sales, excluding acquisitions, were up mid-single-digit percentages, reflecting consistently higher market demand. Segment earnings improved $49 million, or 24 percent, to $252 million as a result of acquired businesses’ earnings and lower costs that stemmed from business restructuring actions and ongoing cost management.
Industrial Coatings segment net sales for the quarter were $1.2 billion, advancing about 10 percent, or $109 million, versus the prior year due to higher volumes and modest acquisition-related gains. Volumes in automotive original equipment manufacturer (OEM) coatings grew by about 10 percent globally, with each major region delivering growth on a comparable scale. Global industrial coatings business unit volumes improved mid-single-digit percentages and volume trends improved in all regions in comparison with the first half of 2013. Global packaging coatings volumes grew modestly. Segment earnings for the quarter were $181 million, up 18 percent as a result of higher volumes and continued cost management.
Architectural Coatings – EMEA (Europe, Middle East and Africa) segment net sales for the quarter were $571 million, up $7 million, or 1 percent, versus the prior year as lower volumes offset favorable foreign currency translation. For the third quarter volumes declined by 4 percent year over year, which was a significant improvement versus the first half 2013 when volumes declined 10 percent year over year. Despite the lower volumes, segment earnings of $73 million represented growth of $17 million, or 30 percent, versus the prior year, aided by aggressive discretionary cost-management actions and lower costs, including benefits from prior restructuring actions. Currency translation contributed $2 million to segment earnings.
Third quarter 2013 Optical and Specialty Materials segment net sales were $313 million, up $31 million, or 11 percent, versus the prior year. Optical products net sales improved by low-double-digit percentages as volumes were aided by solid market trends and initial customer inventory stocking ahead of the TRANSITIONS(R) Generation VII product introduction in North America scheduled for early January 2014. Prior-year optical products results were tempered by customer inventory destocking, which aided the current-year comparative results. Silicas net sales improved by high-single-digit percentages on continued global strength in end-use market demand. Segment earnings of $88 million were up 16 percent versus the prior year as a result of the sales improvement.
Glass segment net sales were $278 million for the quarter, up $16 million year over year. Volumes grew modestly in both fiber glass and flat glass, reversing a negative trend from earlier in the year. Pricing also improved in flat glass. Segment earnings were $21 million, a decrease of $3 million from the prior-year quarter. The positive earnings impact from improved sales was offset by reduced equity and international licensing earnings and the negative impact of inflation, including higher transportation and natural gas unit costs.
