PPG's 4Q EPS Meets, Profit Up

Zacks

Coatings giant PPG Industries Inc (PPG) met earnings expectations in the fourth quarter of 2012 while continued momentum across automotive OEM and aerospace markets helped it to post better-than-expected sales in the quarter.

The company posted earnings of $1.53 a share in the fourth quarter, excluding one-time charges, which matched the Zacks Consensus Estimate. The adjusted earnings exclude charges (of $11 million) associated with acquisitions and the spin off of the company’s commodity chemicals business to Georgia Gulf Corp. (GGC) for $2.1 billion.

Profit (as reported) rose roughly 5% year over year to $227 million or $1.46 a share, aided by the savings from the Pennsylvania-based company’s cost containment and restructuring measures.

For full-year 2012, profit fell 14% year over year to $941 million or $6.06 per share. Adjusted earnings for the year were $7.94 per share, just ahead of the Zacks Consensus Estimate of $7.93.

Separately, the company said that it is in talks with Essilor International regarding the future of their joint venture, Transitions Optical. PPG Industries holds a 51% stake in the joint venture with Essilor owning the balance. The company hinted that the ongoing discussions may lead to a structural change in the joint venture or possible stake sale.  

Shares of PPG Industries, which gained 59% last year, fell 1.5% in pre-market trading.

Revenues

Revenues rose 3.7% year over year to $3,648 million, beating the Zacks Consensus Estimate of $3,589 million. PPG Industries saw growth across all business segments except the Glass division in the quarter.

Unfavorable currency exchange translation weighed on sales. The company’s North American automotive OEM coatings business recorded strong growth in the quarter.

Revenues for the full year were $15,200 million, up 2% year over year, beating the Zacks Consensus Estimate of $15,143 million.

Segment Analysis

Revenues from the Performance Coatings division edged up 1% year over year to $1.2 billion in the fourth quarter. Strength across aerospace, automotive refinish and architectural coatings markets aided the division’s sales. Acquisitions provided marginal benefit.

Industrial Coatings segment sales jumped 9% year over year to $1.1 billion driven by strong volume growth in the automotive OEM coatings business. Weakness in Europe was more than offset by volume gains across North America and emerging markets. Demand in the industrial coatings business was mixed in the quarter.

Revenues from the Architectural Coatings (Europe, Middle East and Africa) division rose 4% to $465 million as contributions of Dyrup acquisition and better pricing more than offset unfavorable currency exchange impact and lower sales volume.

Optical and Specialty Materials sales rose 5% to $272 million in the quarter as gain in optical products led to higher volumes. The division benefited from customer inventory build-ups associated with the February 2013 launch of Generation VII TRANSITIONS lenses.

Revenues from the Commodity Chemicals segment inched up 2% to $405 million on account of higher caustic pricing and improved volume.

Sales from the Glass segment, however, slipped 6% to $241 million as lower fiber glass volume and pricing offset an increase in flat glass sales.

Balance Sheet

The company exited 2012 with cash and cash equivalents and short-term investments of roughly $2.4 billion, up 60% year over year. Total debt increased 9% year over year to around $4 billion. Operating cash flow for the year was roughly $1.8 billion, up 25% year over year.

Acquisition/Spin off

The company, in July 2012, agreed to split its commodity chemicals unit and merge it with Georgia Gulf. The deal value of roughly $2.1 billion includes $95 million of debt. The transaction is expected to consummate in late January 2013. PPG Industries expects to incur additional charges associated with the deal in first-quarter 2013.

Moreover, the company, in December 2012, struck a deal with AkzoNobel, N.V., to buy the latter’s North American architectural coatings business for $1.05 billion. The transaction is expected to close in second-quarter 2013.

Outlook and Recommendation

Moving ahead, the company envisions mixed economic trends in 2013 with continued strong growth in North America, improvements in Asia and persistent weakness in Europe.  It will continue to execute restructuring measures, which are expected to fetch cost savings of $70 million-$80 million this year. Moreover, the company will continue to implement the appropriate pricing strategy to offset higher input costs.

PPG Industries has a diversified base of products and markets, and looks to grow its businesses strategically along with controlling costs. However, the European market is expected to remain under pressure and raw material inflation and currency headwinds remains concerns for the company.

PPG Industries, which competes with DuPont Performance Coatings segment of DuPont (DD), retains a short-term Zacks Rank #3 (Hold). Currently, we have a long-term Neutral recommendation on the stock.

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