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Coatings giant PPG Industries (PPG - Analyst Report) topped earnings expectations in the second quarter of 2013 riding on solid performance of its coatings business, cost reduction measures and recent acquisitions. Healthy momentum across North America and Asia was somewhat masked by sustained weakness in Europe.

Barring one-time items, the Pittsburgh-based company posted earnings from continuing operations of $2.45 a share in the quarter, which beat the Zacks Consensus Estimate by 11 cents. The adjusted earnings exclude acquisition charges.

Profit from continued operation, as reported, shot up 15% to $341 million or $2.35 per share from $297 million or $1.92 per share a year ago. However, on a consolidated basis (including discontinued operation), profit dipped 6%.

Revenues rose 16% year over year to $4,095 million, yet missed the Zacks Consensus Estimate of $4,115 million. Solid results in the coatings business was driven by sales gains across automotive OEM coatings, automotive refinish and aerospace. However, the architectural coatings business was the weakest link in the quarter.

The second quarter numbers incorporated the results of the North American architectural coatings business of Dutch paints company AkzoNobel, N.V. (AKZOY) which PPG Industries acquired on Apr 1, 2013. The acquired business logged sales of $475 million and generated a mid single-digit percentage earnings return on sales in the reported quarter, modestly ahead of the company’s expectations.

PPG Industries, in Jan 2013, spun off its commodity chemicals business to Georgia Gulf Corp., now known as Axiall Corporation (AXLL - Snapshot Report), for $2.1 billion. The business has been reported as discontinued operation.

Separately, the company’s Board approved a $102 million restructuring program. Shares of PPG Industries, which are up roughly 16% so far this year, were inactive in pre-market trading.

Segment Review

Revenues from the Performance Coatings division surged 36% year over year to $1.7 billion in the quarter as gains from acquisitions more than offset a decline in volumes. Strength across aerospace and automotive refinish, was somewhat marred by weakness in U.S. architectural coatings.

Sales from the Industrial Coatings segment went up 13% to $1.2 billion driven by volume gains in the automotive OEM coatings business and contributions from acquisitions. Demand in the industrial coatings business was mixed in the quarter with strong gains in emerging regions and North America was partly offset by weakness in Europe.

Revenues from the Architectural Coatings (Europe, Middle East and Africa) division fell 5% to $571 million on lower volumes. Sustained economic weakness led to lower demand in the region.

Optical and Specialty Materials sales rose 4% to $326 million in the quarter on volumes gains across optical products and silicas.

Sales from the Glass segment fell roughly 1% to $269 million as lower volumes for both fiber and flat glass more than offset better flat glass pricing.

Financials

PPG Industries’ cash and cash equivalents climbed 22% year over year to roughly $1.2 billion at the end of the reported quarter. Total debt fell 6% year over year to around $3.4 billion.

Restructuring

PPG Industries' Board cleared a new $102 million business restructuring program focused on achieving cost synergies associated with the North American architectural coatings business takeover. The company expects to achieve $200 million in annual synergies from the buyout within the first three full years.

The restructuring program will also include actions for businesses grappling with challenging market conditions, especially protective and marine coatings and certain European businesses such as architectural coatings and fiber glass. Charges associated with such move (cash charges of roughly $97 million and non-cash charges of around $5 million) will be incorporated in PPG Industries’ third quarter results.  

Outlook

Moving ahead, PPG Industries envisions sustained earnings momentum in the third quarter driven by similar factors that aided results in the first half, including prudent cost management. The company will remain focused on analyzing cash-deployment opportunities with a focus on boosting earnings.

PPG Industries has a diversified base of products and markets, and looks to grow its businesses strategically along with controlling costs. However, the company remains challenged by a weak European market and a still sluggish architectural coatings business.

PPG Industries currently holds a short-term Zacks Rank #2 (Buy).

Cytec Industries Inc. (CYT - Snapshot Report), which also belongs to the chemical industry, retains a Zacks Rank #1 (Strong Buy).

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