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Mixed 3Q for PPG Industries

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Coatings giant PPG Industries (PPG - Free Report) beat earnings expectations in third-quarter 2012 although currency headwinds dented its sales in the quarter. The company posted earnings of $2.24 a share, excluding one-time charges, which topped the Zacks Consensus Estimate of $2.21. The adjusted earnings exclude charges (of $9 million) associated with the company’s move to divest its commodity chemicals business to Georgia Gulf Corp. for $2.1 billion.

Profit (as reported) rose 9% year over year to $339 million or $2.18 a share, aided by the Pennsylvania-based company’s cost containment measures.

Shares of PPG Industries, which are up roughly 40% so far this year, were inactive in pre-market trading.


Revenues edged down 0.1% year over year to $3,845 million, missing the Zacks Consensus Estimate of $3,904 million. Sales were impacted by unfavorable currency exchange translation. PPG Industries saw mixed results across its end markets in the quarter with its North American automotive OEM coatings business recording strong growth.

Segment Highlights

The Performance Coatings division recorded sales of roughly $1.2 billion, a 0.2% year over year growth. Better selling prices and synergies from acquisitions were masked by lower volume and currency translation impact. Within this segment, revenues from aerospace, automotive refinish and architectural coatings businesses rose in the quarter. Volumes increased modestly in the U.S. while declining in all other regions.

Revenues from the Industrial Coatings segment increased 5% year over year to $1.1 billion helped by higher volume and improved pricing. Strong growth in volume in the automotive OEM coatings business was witnessed despite softness in Europe. Volume in the industrial coatings business fell in the quarter.

The Architectural Coatings (Europe, Middle East and Africa) division saw a 2% decline in sales to $564 million as contributions of Dyrup acquisition was more than offset by unfavorable currency exchange impact. The company witnessed a low single-digit decline in volume in this segment.

Optical and Specialty Materials sales slipped 9% year over year to $282 million in the quarter due to the currency impact and lower volume. The division was hit by sluggish Optical consumer growth.

Revenues from the Commodity Chemicals segment fell 2% to $437 million on account of lower chlorine pricing. Sales from the Glass segment dipped 4% to $262 million as lower pricing and negative currency impact offset an increase in flat glass volumes.
Balance Sheet

The company exited the quarter with cash and cash equivalents and short-term investments of roughly $2 billion, up 50% year over year. Total debt increased 8% year over year to around $4 billion.

Spin off of Chemical Unit

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.

Under the deal, the company’s shareholders will receive 50.5% of the shares of the merged entity while Georgia Gulf shareholders owning the balance. The shareholders of PPG Industries will get $1 billion in Georgia Gulf shares. The transaction is expected to consummate in early 2013. PPG Industries expects to incur additional charges associated with the deal in fourth-quarter 2012.

Outlook and Recommendation

Moving ahead, the company expects a seasonally slower fourth quarter and foresees growth in North America supported by continued momentum across automotive OEM and aerospace markets. It will continue to execute the restructuring measures, which are expected to fetch cost savings of $40 million-$50 million in the second half of 2012. Moreover, the company will continue to implement the appropriate pricing strategy to offset higher input costs.

PPG recently agreed to buy industrial coatings company Spraylat Corp. for undisclosed price. The acquisition, which is expected to close later this year, will boost the company’s position in major end markets including automotive parts and architectural powder coatings.

PPG Industries’ strategy of diversifying its business across various products and geographies has come in handy in testing times. However, raw material inflation remains a concern for the company.

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

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