PPG Industries Inc. said sales for the second quarter held steady at just under $4 billion, but the company reported another record-high earnings quarter as net income rose 7% from the same period a year earlier, to $365 million.
In a separate blockbuster announcement, PPG announced an agreement to separate its commodity chemicals business and merge the business with Georgia Gulf Corp., a North American manufacturer of chlorovinyls and aromatics and maker of vinyl-based building and home-improvement products. The deal is valued at $2.1 billion.
|Charles E. Bunch|
PPG chairman and CEO
PPG said the move will create “a leading global chemicals and building-products company with a broad portfolio of downstream products and approximately $5 billion in revenues.”
PPG’s commodity chemicals business is a global producer of chlorine, caustic soda and related chemicals for use in applications such as chemical manufacturing, pulp and paper production, water treatment, plastics production and agricultural products, with manufacturing facilities in the U.S., Canada and Taiwan.
PPG Chairman and CEO Charles E. Bunch said the deal represents “another major step in our strategic transformation into a more focused coatings and specialty products company. This is a unique opportunity to create significant value for PPG shareholders and to share in synergies that would not be available to PPG’s commodity chemicals business on its own.”
Earnings Hit New High Despite Uneven Regional Results
“In the second quarter, PPG delivered the highest quarterly earnings per share in company history as a result of continued execution, strong cost discipline and effective cash deployment,” Bunch said.
“These record earnings were achieved despite significantly weaker European and Latin American currency exchange rates and growth that varied by region and end-use market.”
Sales for the quarter were $3.955 billion, off less than 1% from $3.986 billion in 2011. Net income was up from $340 million a year earlier.
For the first half, sales were $7.707 billion, up from $7.519 billion in the first half of 2011. First-half net income was $375 million, down from $568 million a year earlier. First-half 2012 net-income results were impacted by one-time charges in the first quarter of more than $250 million for restructuring, $99 million for environmental-remediation charges related to a former chrome plant, and $4 million for business acquisition-related costs. First-quarter 2011 net income included no one-time charges, the company said.
Second-quarter 2012 results include after-tax charges of $3 million for costs related to the company’s announced agreement to separate its commodity chemicals business and merge it with Georgia Gulf Corp. or its subsidiary. The company anticipates additional separation costs in the second half of 2012. There were no nonrecurring charges in the second quarter 2011.
Bunch said the negative currency impacts reduced overall sales by 5% and resulted in a negative 10 cents per-share earnings impact versus the second quarter 2011.
“Overall, our sales in local currencies grew in the quarter, led by continued strong organic growth in North America,” Bunch said. “Business in emerging regions also expanded, but results were mixed by end-use market.
“Organic growth in North America and emerging regions was comparable to first-quarter performance; however, these gains were partly offset by a further, fairly broad step-down in European demand. These regional variations were evident in nearly all our global businesses, which resulted in an overall flattening of our worldwide volume growth rate.
“Aerospace and automotive manufacturing remained our strongest end-use markets, delivering excellent growth, and recent acquisitions aided sales and earnings results,” he said.
For the company’s Performance Coatings segment, sales for the quarter were $1.2 billion, up 1% from the second quarter of 2011, as the negative impact of currency translations was offset by higher selling prices. Segment earnings of $204 million were level with the prior-year quarter.
U.S. architectural coatings sales were seasonally stronger than the first quarter and improved by mid-single-digit percentages over a difficult prior-year comparison period that included channel stocking for the new OLYMPIC® ONE product, the company said.
The aerospace business delivered strong growth in all regions. Protective and marine coatings volumes were mixed, with gains in protective coatings offset by lower marine demand. Automotive refinish volumes declined due to lower European demand and customer destocking.
First-half sales for the Performance Coatings segment were $2.4 billion, up from $2.3 billion in 2011. Segment income was $364 million compared to $343 million in the prior-year period.
For the Industrial Coatings segment, first-quarter sales were $1.1 billion, an increase of $24 million, or 2%, from the prior-year period. Segment volumes rose more than 20% in the U.S., driven by strong automotive OEM coatings sales.Growth in emerging regions continued but was mixed by end-use market.
First-half sales for the Industrial Coatings segment were $1.1 billion, up from $1.07 billion in 2011. Segment income was $293 million compared to $343 million in the prior-year period.
For the Architectural Coatings—EMEA (Europe, Middle East and Africa) segment, first-quarter sales of $601 million were down $10 million, or 2%, from the prior year due to lower volumes, partly offset by price gains. Currency translation negatively impacted sales by 10% but was offset by sales from the Dyrup acquisition completed in January 2012.
Despite mid-single-digit segment volume declines, segment earnings rose $14 million from the prior year’s second quarter, to $64 million, aided by acquisition performance and continued cost-management actions, the company said.
First-half sales for the Architectural Coatings—EMEA segment were $601 million, off from $611 million a year earlier. Segment income was $80 million, up from $62 million in 2011.
Bunch said the company will continue to “aggressively implement” a previously announced restructuring program, primarily focused on addressing the “challenging” business conditions in Europe. Targeted savings from these programs are between $40 million and $50 million in the second half of the year.
“We expect growth in North America and Asia to continue, but to remain inconsistent by end-use market,” Bunch said. “Also, we continued to be impacted by coatings input cost inflation, with inflation rates this quarter similar to the first quarter. We expect to offset the negative effects of this inflation in the second half of the year with selectively higher pricing and lower commodity input costs.”
Details of Chemicals Deal with Georgia Gulf
PPG said that under terms of the merger of its commodity chemicals business with Georgia Gulf, it will form a new company by separating its commodity chemicals business through a spinoff or split-off, and then immediately merging the business with Georgia Gulf or a Georgia Gulf subsidiary in a Reverse Morris Trust transaction.
The merger will result in PPG shareholders receiving approximately 50.5% of the shares of the merged company, with existing Georgia Gulf shareholders owning approximately 49.5% of the newly merged company.
The transaction value of approximately $2.1 billion consists of $900 million of cash to be paid to PPG, approximately $95 million of assumed debt, about $87 million of minority interest, and Georgia Gulf shares to be received by PPG shareholders valued at $1.0 billion based on Georgia Gulf’s closing stock price on July 18.
In the transaction, PPG will transfer related environmental liabilities, pension assets and liabilities and other post-employment benefits (OPEB) obligations to The Newly Merged Company.
Following completion of the transaction, which is expected to occur in late 2012 or early 2013, the combined company is expected to have annual revenues of approximately $5 billion and be the third-largest chlor-alkali producer and second-largest vinyl chloride monomer producer in North America, PPG said.
“This transaction creates a global industry leader with substantial opportunities for long-term growth and enhanced shareholder value,” said Paul Carrico, president and CEO of Georgia Gulf.
“The combined company will be a leading integrated chemicals and building-products company that we believe will benefit from significant integration and scale, a broad portfolio of downstream products, as well as the regional advantage of low-cost North American natural gas.
Bunch added: “This further strengthens PPG’s already strong cash position and will provide us the opportunity to increase cash deployed for earnings-accretive activities such as acquisitions, organic growth initiatives, debt repayment and PPG share repurchases.”